Greenhill & Co., Inc.

Good day, and welcome to the Greenhill & Company first quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Patrick Steuernholz, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's first quarter 2022 financial results conference call. I am Patrick Steuernholz, Greenhill's Head of Investor Relations, and joining me on the call today is Scott Bach, 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 Bach.

Thank you, Patrick. We've continued to see a high level of client activity, and our pipeline is strong, but we had a light first quarter in revenue terms, given relatively few significant transaction completions. Our revenue for the quarter was $45.4 million. Our backlog suggests that this year is likely to play out like the last few, where quarterly revenue ranged from the $40 million to the $140 million. Annual revenue was weighted to the second half, and by year end, we had achieved a respectable full year outcome. For this year, we expect another increase in full-year revenue despite what looks so far like reduced transaction activity in the global market relative to last year. Meanwhile, we continue to remain disciplined on our expenses. That should lead to another year of strong cash flow. Investors may recall that last year we spent $100 million on debt repayment and share repurchases. This year, we plan to focus primarily on share repurchases for so long as we believe, as we do currently, that our stock is significantly undervalued. Now I will go into a little more detail on each of the points I just summarized. In terms of client activity and revenue, recent changes in the economic and market environment should increase opportunities for us in some areas while reducing them elsewhere. The war in Ukraine may be dampening deal activity in Europe, although we still expect an increase in revenue from that market compared to what was a quiet year for us there in 2021. Offsetting that, higher commodity prices should result in more deal activity in Australia and Canada and with energy and mining companies everywhere. And higher interest rates and lower market valuations should lead to more acquisitions by strategic buyers with strong balance sheets while perhaps reducing M&A activity by financial sponsors. With respect to financings, less accommodating credit markets will likely reduce overall activity but should force more borrowers to access the direct lending market for their borrowing needs. In sum, at this point, it looks like 2022 for us will be a year where our historic focus on M&A advice for our historic public client base of public companies will be central to our success. At the same time, we remain focused on our three recent strategic initiatives that I spoke of frequently last year. First is expanding our coverage of financial sponsors. We made good progress on that last year and have an important new managing director hire in this area joining us shortly who will help us build on that. Second is winning more financing advisory roles. We also made good progress on that last year and we believe that increasingly challenging credit markets will drive more clients to the direct lending market where we can both provide access and advice. Third is our private capital advisory business where over the course of last year we built out a global capital raising team for private funds of many types including private equity, infrastructure, credit and others. That team already has a long list of funds in the market seeking to raise capital and we expect it to become a significant ongoing contributor to firm revenue in the next couple of quarters. Meanwhile, we continue to develop the secondary aspect of this business, and we have an important senior recruit set to join us in that area soon. Including him and the other senior recruit I just mentioned, we currently have 80 managing directors. Turning to our costs, our compensation expense for the quarter at $46.8 million was slightly lower than last year's in absolute terms. Obviously, the compensation ratio was higher given the lower revenue outcomes. But just as we did the past few years, we expect to bring that ratio down into our target range for the full year as increasing revenue materializes in the next few quarters. Our non-compensation expense was also slightly lower than was the case last year and at the low end of our target range, which is pleasing given that we are starting to see increased client travel as the pandemic winds down. Our balance sheet is strong with $83.3 million of cash at quarter end, which is usually our seasonal low point in terms of cash given the timing of bonus payments and employee stock vesting. Our debt is unchanged from last quarter at $272 million, and after repaying significant debt last year, we will continue to pause further repayments in order to ensure appropriate liquidity in our loan, which we plan to refinance in coming quarters. We've repurchased $19.8 million worth of shares and share equivalents during the quarter, and we have just under $55 million of share repurchase capacity remaining. We aim to use that authority just as we did last year, given the pause on debt repayment. With that, I'm happy to take any questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Devin Ryan at JMP Securities. Please go ahead.

Hey, great. Good afternoon, Scott and Patrick. How are you? Good. How are you? Doing well. I guess I want to dig in a little bit more around the outlook here and obviously expectations for another year of growth against a pretty choppy backdrop for markets and for M&A more broadly. So that would potentially make Green Hill an outlier on the year, at least based on expectations in the market. And so you spoke to kind of a changing, I guess, mix relative to maybe what we were looking at heading into the year. How much visibility do you have into that? Clearly, I think you're hitting on some of the sectors that would make sense, will be more active. But is that already in the backlog or is that just where the conversations are picking up? And then is there kind of a timing dynamic here where just given the volatile markets, it's going to take time to kind of reset price expectations on kind of the negative side and the positive side. And so that then gets you to the back half waiting for the year, if you will.

Well, I think based on a lot of years of doing this, I would say that unless an assignment is pretty far advanced by April or May, If it's a large one, you're probably not gonna get it done this year. So when I'm speaking about how we expect the year to play out, I'm definitely speaking to things that we're very actively involved on right now. So in that sense, there is reasonable visibility. Now, which deals actually get to agreement and completion and so on, obviously there's always uncertainty around that. But when I look at the whole backlog and focus on things that have enough momentum and enough progress to date, that they can get done this year. I mean, that's kind of what leads to my confidence. And, you know, I'd also point out that, you know, last year the market for sort of M&A activity grew very substantially, and our revenue grew very modestly. You know, this year I think we can kind of maybe reverse some of that by, I think, quite likely having higher revenue in what will quite likely be a smaller market. So, you know, a firm of our size, that's going to happen sometimes where you may have a year of sort of underperformance relative to the market is because, you know, your clients, your deals didn't get done or, you know, last year we talked a lot about having a very high volume of deals but not that many big deals. You know, we think this year kind of is more likely to revert to more the norm for us, which is, you know, skewing maybe toward larger things with larger fees in the public company realm. So that's kind of in the mix of my comments as well.

Got it. Okay. Very helpful, Scott. Thanks. And then in terms of just the backdrop for new talent, so when things are really active, it seems like it's maybe hard to pull people away from their current firm. But when things slow a bit for the industry, maybe more people are open to having a conversation or moving. And so I'm curious kind of particularly if you feel like you're going to have another growth year. how those conversations are going and just what the expectation is this year in terms of ability to really move that senior banker headcount higher.

You know, I alluded obviously to two senior hires, both of which are, you know, signed up for quite some time now, but will be announced right when they join us very, very soon. So we do have some and obviously a number of other dialogues going on. I think It's interesting how quickly the dynamic in the market can change. I think if you looked in January of the year just a few months ago, I think most bankers at big banks were coming off a fabulous year driven by tremendous SPAC issuance and other IPOs and a huge year for leverage lending and wondering why would it not be another fabulous year in 2022. I think that outlook is rapidly changing. you know, the SPAC boom seems to be essentially over. IPOs are way off. Leveraged lending is way off. And I suspect that as the year wears on and then into the beginning part of next year, you know, life at the big banks, which felt, I think, pretty attractive last year, is going to feel much less so. And so I think there are always people who leave for one-off reasons. We've got a couple, you know, as I said, already signed up to join us that are in that category, and many others will sort of follow in that kind of serendipitous category. But I think the trend of more people wanting to get out of big banks will sort of revert to the norm, which has pretty significant interest in that as this year wears on and the reality of a different capital markets environment sets in.

Yeah, okay, great. If I can just squeeze one more in here. Sure. You know, I know with the prior earnings update, you talked about Europe kind of reverting or the hope that would after kind of a slower 2021. And you're kind of reiterating that, I guess, here today as well. I'm curious, kind of, you know, Europe is obviously, you know, there's maybe even more uncertainty, you know, the closer you get to Ukraine and Ukraine. I'm curious what the drivers are in Europe right now. Is it idiosyncratic to Green Hill? Does it feel like it is? Or is there something specific that you would point to that makes you feel better? I guess maybe just a low bar from last year, if that's just what it is. But I'm curious if there's any other color you can provide there.

I would say my confidence there as part of the overall outlook for the firm is driven probably more than anything by just a low bar from last year and a certain number of things that have you know, strong strategic rationales and we'll get done. So the team over there in all five offices in Europe is actually very busy right now. But I think you'd clearly have to say that the better markets in the world for M&A are the U.S. and then the ones that are actually helped by higher commodity prices like Australia and Canada. You know, Europe, clearly, there's got to be uncertainty with a war on the eastern part of Europe and, you know, and the impact on energy prices there and all that. You know, here in America, of course, we're We're much more balanced on energy. It's going to cost some companies, but other American companies are going to make a lot of money as a result of that. So I think it'll be a better year for us in Europe, but I think you'd have to be realistic and say that your biggest opportunity this year is sort of U.S., Canada, Australia, and Europe. You just hope to make some progress, and eventually they'll get past the issues of the war. They'll certainly get past the energy issues, and things will revert more to the normal over there.

Yeah, makes sense.

Okay, well, thanks for the update, Scott. I appreciate it. Okay, thank you, Devin.

And, ladies and gentlemen, our next question comes from James Yarrow at Goldman Sachs. Please go ahead.

Hey, Scott. Thanks for taking my questions. Perhaps you could just contextualize the strength of the restructuring business this quarter and to what extent it contributed to results and then what your longer-term outlook for the business is in light of the potentially weakening economic backdrop?

Sure. I would not say that the year to date has been a particularly strong one for restructuring. I suspect you'll hear that from most of our competitors or maybe an outlier here or there that maybe had some long-term deals that kind of came to completion in the quarter, maybe will still come to completion. But the default rate in the credit market is still very, very low. I think within, if I think about that part of our business, which I think of as both financing and restructuring, I think the bigger opportunity is on the financing side. The direct credit market keeps growing. Those players are often displacing banks and financings for M&A deals or refinancing of existing debt. So I think that's probably where the bigger opportunity is right now. I do think as the year goes on, restructuring activity will pick up. I don't have much doubt about that, given that higher inflation, higher commodity prices, higher interest rates, tighter credit markets, I mean, that has to take companies that are on the margin and put them into, you know, at least fearing a default and needing to do some sort of restructuring of the balance sheet. So, in other words, not a big contributor, maybe kind of the pure classic restructuring to the first half of our year, but probably bigger in the second half, and I would suspect much bigger next year.

Okay. So if I just turn to your non-comp expenses, they did come in, you know, better, at least I think relative to our expectations on the T&E side, they did come down on the T&E side quarter on quarter. How was, you know, that particular part of non-comp affected by Omicron, and would you expect that to drive you know, the non-comp expenses higher over the course of the year if people are traveling more?

I think probably we'll see a little bit more as time goes on. I mean, clearly, I think we nor anybody else are really back to normal business travel, but it has picked up a fair amount. Undoubtedly, Omicron impacted that, you know, right around the end of the year and coming out of the holiday period and stuff when infection rates were still quite high in a lot of places. But You know, we have people flying across the Atlantic now for meetings and people, of course, flying around the U.S. and around Europe for meetings. So, you know, we've already seen a fair amount of the recovery from the pandemic, but undoubtedly we'll see a bit more of that in the quarters to come. I hope we do.

Okay. And then just one last one, just about the debt refinancing that you had touched on. Is there any more color you could just add in terms of, you know, whether you would expect to add additional leverage? take the interest rate down or both or sort of any other just, you know, color around that potential debt refinancing later in the year?

I mean, all we want to do is just be opportunistic and take advantage of whatever the right opportunities are. And, you know, and obviously the credit markets were wide open until Ukraine invasion, and then they kind of briefly quieted. And now we think for companies like ours, it's very much open again. So, you know, we'll figure out the right moment to do that we will certainly hope for better terms and more flexibility in different ways. Exactly what amount we refinance, we'll have to see just depending on where the market is and what we think the opportunity is for cash at that time. So really no decision made, and we'll just look at the market circumstances and our own circumstances when the time comes.

Okay, thank you so much for taking my questions.

Okay, thanks, James.

Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. Our next question comes from Michael Brown at KBW. Please go ahead.

Great. Thank you, operator. Hi, Scott. How are you? Good. How are you? Good. Just to follow up, I guess, on the debt question there, most of my other questions have been asked and answered. When I'm thinking about the approach to the debt here, it sounds like you guys are kind of pausing the – or you basically said that you're pausing the debt repayment and favoring the buybacks here at these current valuations. I certainly understand that. But as we're facing a rising rate environment, why not aim to reduce that debt more, reduce the interest expense burden and – or at least have a bit more of a balance between maybe paying down that debt faster and also buying back stock here. Just curious about your thoughts there.

Sure. Well, obviously last year we did that. We've repaid a lot of debt. That was kind of our primary focus. Our debt started after our latest refinancing at $350 million. It's down about $270 million. So we have repaid quite a lot of debt. We understand that as you go to refinance from time to time, that having enough liquidity in the market, that you've got holders who can buy and sell, that that makes it easier to do that. So we think it makes sense, as we said in our last call a quarter ago, to sort of pause with the debt at this level. Interest expense is not a significant burden for us. I mean, it's been a trivial one, really, on an after-tax basis when interest rates were sitting as low as they were for a while. It's going to be a bit higher now, but still not all that meaningful. So we want to have a strong balance sheet. I feel like we do have a strong balance sheet, but we really want to be opportunistic in terms of what's the best capital structure for the firm at any given moment. And I think our shares are, at least from our perspective, a very attractive buying opportunity at the moment. So I think the marginal dollar, which last year went toward debt repayment, And now we have that down to quite a bit lower level that I think this year clearly the marginal dollar goes to buying back stock. And we'll be doing that, you know, quite enthusiastically as long as we're anywhere near where we are right now.

Okay, understood. And just one more for me. I did not see it in the press release, the managing director had count. Apologies if I missed it or perhaps it's in your presentation and I didn't see that. But Can you just let us know where that currently stands? And if you have it in front of you, how many MDs do you currently have in the capital advisory business and also the restructuring business? I'm just curious where that currently stands.

Okay. I mentioned just on the script, I think it may have been left out of the press release. I can't remember if we put that in normally or not. But we have 80 managing directors, including the two that I've referred to that are that are signed up but not quite here yet. In the capital advisory business, we have about nine or 10 managing directors. In the financing and restructuring business, we have about eight fully dedicated kind of real specialists. Obviously, they work with all of our sector specialists and things like that as well. But for the people who really know the ins and outs of the bankruptcy code and how to restructure debt and how to raise You know, new financing, it's, you know, call it about roughly 10 in that whole area and roughly 10 in the private capital advisory business. And then the other 60, obviously, would be pretty much, you know, probably a majority of those would be sector-focused. They do probably think of themselves more as M&A bankers, but when, you know, times are tough in whatever sector they're in, they become restructuring bankers and And then, of course, there are some kind of people who are very much sort of M&A generalists and don't specialize by a sector but play an important execution role and business development role across sectors.

Okay, great. Thanks for that, Scott. And if you had to say where the hiring is mainly focused on these days, is it really on those sector MDs and the M&A generalists?

I would say yes, particularly the sector MDs and particularly in the U.S. I think those would be the main focus. We've added some people in not too distant past in Europe and in Australia, but I think our focus right now, just given where I think the biggest opportunity is, is probably in the U.S. and probably in those sector bankers, in part because we built out so much of the capital advisory team last year and And that's up to a good level right now in terms of the capabilities. So the sector specialists who have the ability to swing back and forth between M&A and restructuring, depending on the economic environment, are probably the ones we're most excited to add near term.

Okay, great. Thank you for taking my questions.

Okay, thank you, and thanks, everybody, for dialing in. That completes our questions, and we look forward to talking to you in next quarter.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.