Greenhill & Co., Inc.

Hello, and welcome to the Greenhill & Company, Inc. Second Quarter 2022 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please seek the one conference specialist for 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 1 on your touch-tone phone. To withdraw your question, please press star, then 2. Please note, today's event is being recorded. I now turn the conference over to Patrick Soonholtz. Mr. Soonholtz, please go ahead.

Thank you. Good afternoon and thank you all for joining us today for Greenhill's second quarter 2022 financial results conference call. I am Patrick Soonholtz, 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 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. We 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 have a high level of client engagement, but in revenue terms had a light second quarter and first half given a relative lack of large transaction completions. Our revenue for the quarter was $36 million and for the first half was $81.5 million. Our backlog continues to suggest that this year is likely to play out very much like the three years before it when we had a weak first half followed by a better second half and particularly a strong fourth quarter resulting in a respectable full year outcome. While many of our competitors have spoken of a more challenging second half environment, our firm is of a size where our revenue is not closely tied to the ups and downs of the global M&A market. Indeed, it is noteworthy that in the past three years, we generated 79% more revenue in the second half than we did in the first half, and our backlog suggests another strong finish to 2022. Meanwhile, we continue to remain disciplined on expenses, with our year-to-date operating costs only slightly higher than last year. If revenue materializes as we expect, this should be another year of generating strong cash flow, which we will continue to direct towards share repurchases so long as our market valuation remains attractive. As to where we see revenue coming from, recent economic and market developments are impacting our expected sources of revenue in varying ways. By sector, we expect relatively good performances in consumer, energy, mining, and telecom infrastructure. By region, we expect significant improvement in Europe relative to a weak performance last year, and we expect a second year of strong performances in Australia and Canada given higher commodity prices. By type of advice, the restructuring business is relatively quiet given low default rates. Financing advisory is slower given tighter credit markets, but M&A remains active even if overall global deal activity is well below last year's level. While our historic focus on M&A advice for public companies is serving us well this year, we remain committed to the three strategic initiatives I have spoken of frequently in recent quarters. First is expanding our coverage of financial sponsors. That client type is one that can make use of all of our services from M&A to financing and restructuring, to capital raising and secondary sales of fund limited partner interest. We believe we made good progress on this initiative over the past 18 months. Second is winning more financing advisory roles. This activity is highly complementary to our restructuring advisory business for companies that are in financial distress. We made some progress in this area last year but believe that the tremendous growth in the direct lending market creates a very large opportunity worth pursuing. Third is our private capital advisory business, where in the past 18 months we've built out a global team to raise primary capital for private funds of many types, including private equity, infrastructure, credit, and others. That team is already in the market with a number of high-quality fund offerings, and we expect that area to be a significant contributor to firm revenue in years to come. At the same time, we continue to develop the secondary aspect of this business globally. Turning to our costs, our compensation expense for the quarter was $43.2 million and for the first half was $90 million, slightly higher than last year primarily as a result of higher salary levels in our industry. The year-to-date compensation ratio is well above normal given our relatively low revenue. But just as we did in the past few years, we expect to bring that ratio down toward our target range for the full year as more revenue materializes in the second half. Our non-compensation costs were up about $1 million in the quarter versus last year, but for the year to date are just slightly below last year's level. Our balance sheet remains in good shape with $64.5 million in cash at mid-year despite the fact that most of our revenue should come in the second half. Our terminal imbalance remains at $271.9 million. It's worth noting that a few years ago, we comfortably carried debt in an amount $100 million greater than the current level, so obviously we've paid down quite a lot of that debt in the past couple of years, and we remain committed to a strong credit profile. The remaining balance of our loan matures in April 2024, and we aim to refinance that well in advance of maturity, most likely in the first half of next year. During the quarter, we repurchased 851,000 shares and share equivalents at an aggregate cost of $10.4 million. Year-to-date, we repurchased 1.9 million shares and share equivalents at a total cost of $30.2 million. We had $44.6 million of remaining share repurchase authority as of the quarter end. We continue to see our shares as significantly undervalued relative to our proven ability to generate strong cash flow in a wide variety of market conditions. Separately, our Board declared a dividend of 10 cents per share consistent with last quarter. In closing, I note that we added another managing director just this past week. She's a longtime credit Swiss banker who was most recently at Solomon Partners. She will focus primarily on telecom infrastructure, one of our key sectors, as well as some media clients. We currently have 80 managing directors worldwide, and we remain focused on recruiting additional talent. Given the state of the markets and some of the challenges faced by our large bank competitors, we are expecting 2023 to be a big recruiting year for us. With that, I'm happy to take any questions.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please hold while we assemble our roster. And the first question comes from Devin Ryan with JMP Securities.

Hey, good afternoon, Scott and Patrick. How are you guys?

Hey, Devin.

Good, good, thanks.

Good. So... Scott, in terms of the outlook, I mean, it sounds pretty similar, I think, to probably the same point we were at, you know, last year and the year before, just in terms of kind of what the first half looked like relative to, you know, some optimism around the back half. Obviously, you know, the environment's a lot more challenging today more broadly than it probably was the last couple of years. There's more uncertainty. But can you maybe just characterize a little bit more, you know, around that optimism for the back half of the year? You know, I guess what I'm trying to figure out is, Do you have a lot of visibility into kind of what's already been announced and just deals that should be closing? Obviously, things can change, but just that deals that are announced, they close on their normal schedule and that gets you there. Or do we still need to see maybe a tightening of bid-ask spread from private deals at some point in the back half of the year to be able to kind of get to that end result of a solid year and a really strong back half?

You know, I think you're right, Devin, that where we are is really quite similar to where we were each of the last three years when we had quite a similar outcome. Weak first half, very strong fourth quarter, better third quarter along the way. And, you know, if you go back to 2020, I mean, the world didn't exactly look great in July of 2020, right? We were kind of just getting through the first wave of the pandemic and so on. But, you know, regardless of what the market situation is or economic situation, you know, by August 1st, I mean, you've you kind of know what's going to happen for the year. You can be sure not all of the things on your list are going to happen, but it's not like a lot of new major things are going to come out of the woodwork and go from assignment to announcement to completion in sort of under five months. I mean, that can happen a little bit, but not very often. So, in other words, I do have a lot of visibility, as you said, You never know exactly which ones will close, which ones will get approvals in time, which ones will complete as expected in terms of how a process plays out, but of course we probability weight everything as we think about our backlog as well, so we try to factor that in. But in short, when I make the comments I make, it's with a very specific list of key transactions, then of course a very, very long list of smaller ones that are factored into that calculation.

Okay, that's great, Keller. Thanks, Scott. And if you can, can you give us just a little bit more flavor around the different geographies of the firm and kind of where, you know, maybe you're seeing business pick up versus, you know, the opposite? You know, is it consistent across geographies or are there anywhere that are kind of, you know, the outlook's looking better or worse?

You know, I feel like this year might be more balanced than a lot of recent years have. And last year was very quiet for us in Europe. And this year, it's not going to be probably a great year in Europe by any stretch, but it's going to be considerably better than it was last year. Australia and Canada did well last year. I think a lot of that maybe is on the back of increasing commodity prices, which helps those economies more than it does most others. So You know, business is quite good in both of those. And, you know, in the U.S., there's really, you know, there's not a lot of, you know, great pockets of huge strength or of great weakness. I mean, it's kind of a, I think it's a year when we're going to see fairly broad participation across our regions and across our sectors. But, you know, but obviously with the normal variations within offices or within teams or so on as to people who, you know, really had quite a strong year and others less so.

Yeah. Got it. Okay, if I can just squeeze one more quick one in on the buyback. So here you're loud and clear on the share price and kind of how you guys are thinking about it. How should we think about capacity for buybacks, particularly related to kind of expectations that you should have a much better second half than first half? So you bought back 850,000 shares in the second quarter, but, you know, it was a thought process. It's a stock work. in a similar ballpark that your kind of capacity builds pretty materially into the back half, or anything else you can share? I know you don't want to completely give away the intentions here, but just love any more perspective on how you're thinking about the ability to buy back stock.

Well, look, we're always trying to strike a balance, as I alluded to in my written remarks, between maintaining a strong credit profile and buying back shares opportunistically whenever we think the share price is attractive. So, you know, if the rest of the year plays out as We expect it will, and hopefully there's some credibility that comes from the fact that we've made similar pronouncements three years in a row, and it did play out that way. We'll have significant capacity relative to the ability to even buy back shares. As you know, there are limitations on daily buying and things like that, so there's kind of a limit to what you can get done. But I think our ability to, you know, go into the market and do that, you know, if the year plays out as hoped is, you know, should not be a problem.

Yeah. Okay. Terrific.

I'll leave it there. Thanks so much, Scott. Okay. Thanks, Devin.

Thank you. And the next question comes from Michael Brown with KBW.

Great. Hi, Scott. Hi, Patrick. Hey, Michael. So I guess, Scott, I'm just trying to dig in a little on your guidance on the second half here. And so if you could maybe put a finer point on that. Is it fair to expect profitability here in the second half? I know you don't have great visibility, but I guess what I'm trying to think about is in each of the prior three years that you referenced, you were actually able to get to full-year profitability. Obviously, market conditions could certainly

impact how that plays out here into the second half but what are your thoughts on me that full-year profitability or even narrowing in on just the second half and how you're thinking about profitability there you know I'm not sure I can be much more specific than to say that you know the way it looks to us sitting looking at our pipeline of announced deals and deals that are kind of behind the scenes veneering announcement and and and so on that it looks very much like the last three years. And you can look at those three years and those three years when, you know, had pretty weak performance in the first half, really quite substantial performance and profitability in the second half and netted out to, you know, to a good place all three of those years. There are no guarantees in life. And, you know, as I said in answer to a prior question, you know, you never know until, you know, a deal is closed that it's going to close. But, Based on past experience, we're expecting an evolution of the year to be very similar to the past three.

Okay, and then I was just looking at your cash levels, and that looks like it's the lowest it's been since 2017 when the leverage recap began. I just wanted to check, how low can that comfortably run, and do you think this is probably the trough? for the year, and I guess I just, I suppose I still struggle with the question, why not pay down the debt faster, just given the rising rate environment now, versus doing the share buybacks?

Well, as I was saying earlier, we want to strike a balance between maintaining a strong credit profile, which certainly we think we have. We've paid down more than 100 million of debt from our recapitalization transaction, our refinancing of that two, three years ago, so that's a lot of debt pay down. But at the same time, what we want to do, what's good for shareholders and when the stock is at a level where we think it's really undervalued, we're going to buy back stock. So we're striking a balance between those two. And I think our, you know, our balance sheet's in reasonable shape with far less debt than what we had when rates were a lot lower. And, you know, at this moment, I think you tip the balance more toward buying back shares and, you our view changes on the debt, we'll flip the dial back toward more debt repayment. But I think for us, in our view, we're striking the right balance between those two right now.

Okay. Understood. I will leave it there. Thanks, Scott.

Okay.

Thanks, Michael.

Thank you. And the next question comes from James Yarrow with Goldman Sachs.

Hi, Scott. Thanks for taking my questions. Just quickly on the – the comp ratio here. So as a result of your fixed junior banker comp and guarantees for the hires you've made recently, maybe you could just help us think about what the absolute level of fixed costs are on a quarterly basis just to help us model the comp ratio.

That's probably too detailed a question for me to try to answer off the top of my head. I think I mean, I think if you look at how our – and the minimum is not, you know, in some ways that relevant anyway. You need to be competitive in terms of compensation, and certainly we have been in recent years and intend to be going forward as well. So, I mean, the comp ratio certainly is out of whack relative to where we would like it to be for the year to date, but the same thing was true in the three prior years. And in each of those cases, we got back to right around our target range, and that's absolutely our objective for the second half of this year as well.

Okay, that makes a lot of sense. The other one that I just wanted to ask about is on the non-comp side. How normalized is the level you're at this quarter, and do you expect the impact of more travel for senior bankers to put upward pressure on the non-comp expense from here in the back half?

I don't expect a lot of pressure on that, certainly not in the back half. I don't think they're going to – I mean, pet travel has picked up, certainly, even in our second quarter already. I don't expect it to maybe move a lot more in the very near term. And, you know, there was some other noise within the non-comp. I mean, you know, it wasn't that long ago we were building out of New York, new New York headquarters, and therefore carried two lease costs for some period of time. Right now we're doing that in London where we're building out. new space. So, you know, our non-comp, frankly, this year is even a little bit elevated relative to what it would be on kind of a normal run rate basis. So I'd expect next year's non-comp number to be very similar to this year's. And, you know, as we grow and as travel returns fully to normal, which probably will never be back to what it was in 2019, you know, it may tick up a little bit from there. But I don't expect a lot of near-term pressure.

Great. Thanks for taking my questions.

Okay. Thank you. I think that's our last question, so thank you all for joining, and we look forward to speaking to you again next quarter.

Thank you. This does conclude today's teleconference. Thank you for attending today's presentation.