Greenhill & Co., Inc.

Good day and welcome to the Greenhill third quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Patrick Suenholz, Director of Investor Relations.

Please go ahead. Thank you. Good afternoon and thank you all for joining us today. for Greenhill's third quarter 2022 financial results conference call. I'm Patrick Suenholtz, 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. 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.

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 is 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 three to four 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 activity 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 three 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 sales 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 two 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. 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 two factors. One is our improving operating performance and getting investors to recognize that, and two is 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 a restricted stock that vested. 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 stocks 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 a 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.