Greenhill & Co, Inc. (NYSE:GHL) Q3 2022 Earnings Conference Call November 2, 2022 4:30 PM ET
Company Participants
Patrick Suehnholz – Head of Investor Relations
Scott Bok – Chairman and Chief Executive Officer
Conference Call Participants
Devin Ryan – JMP Securities
Michael Brown – Keefe, Bruyette, & Woods, Inc.
James Yaro – Goldman Sachs
Operator
Good day, and welcome to the Greenhill Third Quarter 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Patrick Suehnholz, Director of Investor Relations. Please go ahead.
Patrick Suehnholz
Thank you. Good afternoon, and thank you all for joining us today for Greenhill’s Third Quarter 2022 Financial Results Conference Call. I am Patrick Suehnholz, Greenhill’s Head of Investor Relations. And joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.
Today’s call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm’s control and are subject to known and unknown risks, uncertainties and assumptions. The firm’s actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm’s future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made.
I would now like to turn the call over to Scott Bok.
Scott Bok
Thank you, Patrick. Our firm produced solid third quarter results, consistent with our commentary on the last couple of earnings calls, despite what was obviously a difficult transaction environment. Our revenue for the quarter was $81.1 million and for the year-to-date was $162.6 million. As I said last quarter, our firm is of a size where our revenue was not necessarily closely tied to the ups and downs of the global M&A market. And this year, for random reasons, all of our largest fees look set to land in the last 3 to 4 months of the year. As a result, despite unfavorable credit and equity markets, our expectations of a strong second half and a respectable full year revenue outcome remain in place. Meanwhile, we continue to remain disciplined on expenses and our year-to-date operating expenses are almost identical to those of last year. If revenue continues to materialize as we expect, this should be another year of solid cash flow generation for the firm.
As to where we see revenue coming from, we have seen a particularly strong level of activity in industrials and telecom infrastructure, with most other sectors also set to make a reasonable contribution. By region, we are seeing an improved contribution from Europe and a second year of strong performances in Australia and Canada, given the higher commodity prices that benefit those markets.
In total, it looks like about 40% of our revenue this year will come from clients based outside the U.S., which is about average for us in recent years and positive in the face of very weak currencies outside the U.S. By type of advice, our M&A business will be the dominant producer this year, but we have recently seen restructuring activities start to ramp up fairly quickly given challenging credit markets.
Looking ahead to next year, we expect to see a substantial increase in restructuring activity and related revenue. In addition, business conditions for M&A should continue to be favorable in Australia and Canada. And in the U.S., we believe the well-capitalized public companies that have always constituted a large part of our client base will also continue to be active in strategic M&A.
Lastly, we expect the recent buildup of our private capital advisory team to pay significant dividends next year in terms of increased fees for primary fundraising as well as secondary transactions.
Apart from our day-to-day work of winning and executing assignments in all areas, we continue to focus on the 3 strategic initiatives of which I have frequently spoken. One is expanding our coverage of financial sponsors to supplement our historic public company client base, a second is developing our business of advising on financing transactions, and the third is expanding our private capital advisory business focused on raising money for various types of private equity funds and handling sale transactions for investors in those funds.
Apart from those particular initiatives, we aim to increase our scale in most areas of our business. And in that regard, we expect a strong recruiting year in 2023, given the challenges that investment banking groups at the large banks are facing. We have many active recruiting dialogues in progress right now.
Turning to our costs. Our compensation expense for the quarter was $45.3 million and for the year-to-date was $135.3 million, in both cases, very similar to last year. We brought our compensation ratio for the year lower in the third quarter, and we aim to do the same in the fourth quarter, consistent with what we have done in the past few years.
Our non-compensation costs were $12.9 million for the quarter and $39.8 million for the year-to-date, a bit lower than last year, despite increasing travel expenses and carrying 2 London leases while we build out some new space there.
Our balance sheet at quarter end remained in good shape with $64.3 million in cash and significantly increased receivables. As our pipeline continued to come to fruition, we were up to a cash balance of $85.7 million by the end of October. Our term loan balance remains at $271.9 million, and the remaining balance of our loan matures in April 2024.
We will look to optimize the timing of a refinancing in coming months relative to 2 factors: One is our improving operating performance and getting investors to recognize that, and two was the evolution of credit market conditions to a more favorable place.
Our Board declared a dividend of $0.10 a share, consistent with last quarter. During the quarter, we repurchased only a token amount of share equivalents in connection with the restricted stock divested. Essentially, we were pausing to be sure that our revenue expectations, which were well ahead of market expectations, would come to fruition. Once that was certain, we recently reentered the market for share repurchases. As of October 31, we had $43.3 million of share repurchase authority remaining. Given the regulatory limitations around share repurchases, we won’t get to nearly the full use of that authorization this calendar year, but we will do what we can as we continue to see our shares as highly undervalued.
Our stock was at $20 not long before Ukraine was invaded and market sentiment turned negative. A very significant factor in its decline this year is the fact that, by a very narrow margin in the spring, we slipped out of the primary small-cap stock indexes. One firm that covers our stock put out a research piece saying that the average stock across all sectors that fell out of those indexes underperformed by 50%. Obviously, that is particularly painful in the down stock market like we are experiencing this year. But on the other hand, if we perform as we expect to do, we ought to be able to find our way back into those indexes and retrace much of the ground we lost this year. That is our objective, and we know that the first step toward that objective is delivering solid financial results well ahead of expectations as we are today. Importantly, we believe we are well positioned to do that again next quarter and into next year.
And with that, I’m happy to take any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Devin Ryan from JMP Securities.
Devin Ryan
Scott and Patrick, so I guess, first off, if you can tell us how much revenue fell into 3Q just from the first week or so of 4Q, that would be helpful. And then it sounds like, Scott, your full year outlook very similar to kind of what we heard a few months ago. I know the market has been volatile, at least equity prices and risk assets along that point. But is that the right, I guess, takeaway? And then just with some of the recent maybe improvement in risk assets in recent weeks even, are you seeing any improvement in M&A conditions relative to where we’ve been? Or I’m just curious kind of what things feel like at the very moment today relative to what’s been obviously a very difficult year for the industry.
Scott Bok
Sure. On your first question, to be frank, we don’t calculate what our revenue would have been under different accounting that wasn’t — I think, went out of practice 4, 5 years ago. So I can’t really answer that.
We — in terms of outlook, though, I would say, yes, our kind of expectations for the year are really pretty much unchanged from 3 or 6 months ago. We had a certain group of things in the pipeline that we’re progressing along. We don’t typically get involved in too many sort of highly leveraged, high-risk situations of the kind that might have fallen out of bed in a tougher credit market. So most of our things seem to have been progressing through Q3, and I think we’ll continue to progress through Q4.
So our outlook for the year is really not much different than it was 3 or 6 months ago. Of course, where exactly you come out is just going to depend on the final timing at the end of the year and which deals fall into this year and which fall into next year.
As for the third part of your question about what — has anything changed even in very, very recent weeks, I would say not. I mean, I think we are hopeful that we’re setting up for a year next year when restructuring will be quite active after having been very, very quiet for a lot of 2022 because the default rate was so low. So we’re hopeful restructuring will be quite active. But we’re also hopeful that M&A will be quite active. And we feel like while some companies, of course, will struggle in what may be a recessionary environment, many other companies, particularly the better capitalized public companies that make up a lot of our client base, I don’t think will be dissuaded from doing M&A. So we’re hopeful that we’ve got a little bit of a Goldilocks scenario, where both our M&A and our restructuring teams can stay very active throughout the year ahead.
Devin Ryan
Okay. Great. And I guess the follow-up there is obviously, I guess, taking that outlook, that would imply that Greenhill’s probably set to have a better year than most of the public peers and maybe at the very upper end of the range. And so kind of contrasting that against the stock price that you talked about. So just thinking about kind of capacity for buybacks and the balance that you talked about, and obviously, I know what you want to do on the debt side. It sounds like your cash balances are up from quarter end. I think you said $87 million. So just like how we should think about capacity? You still have to pay bonuses and still want to have some dry powder and be balanced. So any kind of thoughts around how active you can be just to take advantage of a low price relative to what sounds like maybe a more constructive outlook that’s being reflected.
Scott Bok
Yes, I would agree that for us, this looks like it could be, in comparison versus last year, a better year than for most other firms. Now we didn’t have the huge increase. Last year, our business just tends to be more steady year-to-year, frankly. So we didn’t get a big run up last year, but it doesn’t look like we’re going to get a big decline this year like some firms may see.
As for buybacks, I think really, the relevant limitation is just going to be the regulations around how much you can buy back based on daily trading volume and buying on downticks and things like that. So I think we feel like we’ve got the capacity to buy all the shares that we’re allowed to buy, but there’s — frankly, there’s a limit to how much that is. Obviously, it can change a little bit if volume picks up, which would be great. So I would expect we’ll be in the market buying back shares. But again, at the current share price, some of the trading volume, there will be a limit to how much we can actually buy in before we speak again 3 months from now.
Operator
[Operator Instructions] The next question comes from Mike Brown from KBW.
Michael Brown
Great. Hi, Scott and Patrick. So I wanted to narrow in on the comp line here. So I know comp ratio is always a bit of a moving target. But if we focus on the comp dollars, as you think about the fourth quarter here, does 3Q — perhaps the right way to think about what — like is kind of the right run rate for the fourth quarter as we think about a full year comp expense. And then maybe the fourth quarter comes in better, then obviously, the comp expense could flex up from there. But do you think 3Q is a good base to work from when we think about modeling comp expense here?
Scott Bok
I’m not sure I can help you too much on that. It really is a function of revenue. I mean, if you look at our results the last couple of years, where we had particularly strong fourth quarters, we ended up with a very low quarterly comp ratio as we worked toward getting to the — what we felt was the right full year comp ratio. So at the higher end of revenue possibilities, it’s going to be a lower comp ratio, which we try to work toward a target for the full year that we like. At a lower end of revenue outcomes, we’re going to have less ability to do that. So we’re just going to have to see how things play out. But we took the year-to-date comp ratio down some in the third quarter. And our hope and expectation and certainly, what we did the last couple of years is to take it down meaningfully further in the fourth quarter. Exactly how much further we can will just depend on where the revenue ultimately comes out.
Michael Brown
Okay. Great. And on the restructuring side, it sounds like you’re certainly expecting a better 2023 as activity there continues to ramp up. Can you just expand on a little bit of what you’re seeing at the moment right now in terms of how the mandates are progressing? And then if you — I understand you don’t have a crystal ball here, but if you think about next year in terms of when the revenue production from that segment starts to pick up, is that probably more second half weighted? Or do we start to see some of that flowing through in the first half?
Scott Bok
I think — first of all, for much of 2022, there really was a very, very low default rate given that credit markets were so strong. And so there was a very low level of restructuring activity. We have, just in recent weeks, last few months maybe started to see the number of opportunities that we’re invited to pitch for or just win based on a relationship. It’s really starting to trend up. So I think we’ll see — we’ve already seen a meaningful uptick in monthly retainers. We expect there will be more of that by year-end.
But realistically, if you’re asking, when do you think the sort of success fees, the larger completion fees start to fall, yes, that’s probably more like a second half phenomenon in next year. The first half with hopefully much more in terms of multi-retainers, but — and certainly some success fees on the transactions that are quicker. But when you’re talking about things like going through bankruptcy and so on, that takes time. And so it’s probably more of a second half phenomenon where that will really kick in.
Operator
The next question comes from James Yaro from Goldman Sachs.
James Yaro
It’s James Yaro. Thanks for taking my questions, Scott. Maybe if we could just touch on the rate backdrop, I really have 2 questions here. The first is, is there an absolute level of rates that you think would prevent some of the M&A activity and particularly on the sponsor side from occurring? Or do you think the market has just got into place, which have digested the higher rate environment. And then as a sort of corollary given your international exposure in your European SKU, is the strong dollar or something that’s catalyzing activity on the continent at all?
Scott Bok
Both good questions. I think the market can handle higher rates. The M&A market, that is, can handle higher rates to where they are and where they’re likely to go. I think it’s more an issue of credit availability that will drive how much sponsor M&A there’s going to be. You’ve seen a couple of deals. We think we’ll see others, including some where involved, and that will be of meaningful size. But I think in the near term, financial sponsors are going to have to over-equitize a lot of deals and maybe look to refinance them with more debt later or they’re going to have to go out and find the debt in sort of unconventional places perhaps to help them get transactions done.
So I’m more optimistic about sort of public company M&A than I am about sponsor M&A, but I do think there will be determined sponsors who will still get through creative means, get transactions done.
On the dollar that — I’m glad you raised that because we actually think that could be a significant driver, is that if you look at where the pound is, where the euro is, where the Australian dollar is, we actually do think there will be a fair amount of acquisition activity, particularly from the U.S., maybe also some take privates within those markets that will be driven by the fact that we really have kind of the cheapest currencies in a generation in many cases.
And that — between that and kind of our U.S. public companies and some of the markets that are smaller, but I think still well positioned like Canada and Australia, we’re reasonably optimistic about. I’m going to think it’s going to be a record year or something like that, like last year was for overall M&A activity, but we feel like 2023 could hold up pretty well. And if you add to that a much increased restructuring activity, I think there’s some reasons for a lack of pessimism, if not even some optimism for next year.
James Yaro
Understood. That’s really clear. I just wanted to touch on some of the — just your plans around the debt and in terms of plans to restructure that or refinance that? And then how you’re thinking about paying down the debt from here? You obviously have a flat cash balance quarter-on-quarter, obviously, a pretty small buyback. But how do you think about juxtaposing the buybacks versus that the maturity is coming closer in 2024 for that debt?
Scott Bok
Yes. Well, we still have 18 months left on the debt. And so what we want to do, which I think we did very effectively for our original financing and then for the refinancing we did of that, we really want to optimize our timing to get the best terms we can. And that’s both in terms of rate, but also importantly, in terms of flexibility and your ability to use cash flow for things like dividends and buybacks. So we’re not in a huge hurry to get something done. We’d rather get something done that’s the right outcome for us. So we will be monitoring credit conditions closely.
But the other factor, as I noted in my remarks is really our own performance. I mean the market expectations were very low for us this quarter, and including a loss, instead we have a significant profit. We’re obviously continue to be quite hopeful for how the full year will turn out for us.
And so we think number one, getting the market perspective sort of more in line with our own internal view as to what our performance looks like. And then number two, at some point in here, we think credit market conditions will stabilize and even improve. I mean, they always do eventually. And if we can get the stars to align on those two things, stronger performance, a more accurate view of that performance and a bit better conditions, that’s the moment we’ll seize.
And fortunately, in the world of refinancing, especially if you’ve been a multi-time issuer like we have, when you’re ready to pull the trigger, you can move very, very quickly. So we don’t need a huge amount of preplanning for that. We’re just going to watch closely and grab the optimal time when it comes.
Scott Bok
And thank you all for dialing in. I think that’s our last question, and we look forward to speaking to you again in a few months.
Operator
Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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