Greenhill & Co., Inc.

Good day, everyone, and welcome to the Greenhill fourth quarter and full year 2022 earnings conference call. All participants will be in a 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 and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Patrick Suenholtz. Sir, please go ahead. Thank you.

Good afternoon, and thank you all for joining us today for Greenhill's fourth quarter 2022 financial results conference call. I am 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 revenue was $95.8 million for the fourth quarter and $258.5 million for the year. And our earnings per share was 95 cents for the quarter and 15 cents for the year. Consistent with my commentary on the last couple of quarterly calls, our largest fees for 2022 all landed late in the year. And as a result, our second half revenue was more than double that of our first half. Yet our revenue outcome fell short of our even higher expectations as a slower pace of deal completions meant many more transaction processes carried over to the new year than we expected. In recent years, we've seen particularly strong transaction completions in our fourth quarters, such that our backlog was somewhat depleted at the start of the next year, resulting in a weak first half revenue. Between the projects we carried into 2023, expectations for an improving operating environment as interest rate hikes wind down, and the likelihood of improved advisory activity and restructuring as well as M&A, we expect a considerably stronger first half than we've seen the last few years. as well as a return to higher revenue and more typical profit margins for the full year ahead. Clearly, the market environment today remains challenging, but our predominantly public company client base remains ready, willing, and able to pursue strategic opportunities. And we are less reliant than many of our peers on financial sponsors, the technology sector, or other areas that have been most impacted by recent market conditions. With respect to where our 2022 revenue came from, the key sectors were industrials and telecom infrastructure. Those sectors should remain active, and we expect to see increased activity in energy, healthcare, mining, and other sectors in the year ahead. We saw good diversity of 2022 revenue in a geographic sense, with Canada, France, and Spain all important contributors. Australia made a solid contribution and carried a strong backlog into the new year. It is worth noting that our 2022 revenue was negatively impacted by the fact that non-dollar currencies have been unusually weak, particularly in the second half of the year when many of our larger overseas fees were booked. Already, there has been a meaningful recovery in those currencies, and if the dollar declines further, we will further benefit as overseas fees translate into more dollar revenue. By type of advice, we saw less financing and restructuring work in 2022, but expect both those areas to be more active in the year ahead given relatively weak economic conditions and challenging credit markets. In our private capital advisory business, we've been in building mode the last couple of years, but we entered 2023 with an attractive backlog of primary fundraising assignments, and our secondary transaction business has remained active globally. We continue to focus on our key strategic initiative of expanding our coverage of financial sponsors to supplement our historic public company client base. Sponsors are able to use every service we provide, from M&A to financing, restructuring, and fundraising. and expanding our financing advisory business principally to help sponsors as well as other clients access the direct lending market remains a key objective as well. Across our businesses, we are aiming for 2023 to be a significant recruiting year. We announced one new managing director recruit today, and we are in dialogue with many interesting potential recruits principally in the U.S. market across key sectors where we want to expand. We also continue to develop our own talent as evidenced by the four managing director promotions referenced in our press release. Turning to our costs, our compensation expense for the quarter was $44.5 million and for the year to date was $179.8 million. The quarterly and annual figures were both lower than last year in absolute terms, but the resulting compensation ratio was higher than normal given our revenue outcomes. An important objective for 2023 is to bring our compensation ratio back down to our target range. Our non-compensation costs were $18.3 million for the quarter and $58.1 million for the year, a bit higher than last year given a loss on foreign currency movements, a somewhat unusual professional fee paid to a co-advisor, increased travel expenses, and carrying two London leases while we built up some new space there. Looking ahead to 2023, we should not incur the kind of duplicative rent we have had the last few years as we built out new locations for our two largest offices. We likewise do not expect to see the other various unusual items again. Our balance sheet at year-end remained in good shape with $104.3 million in cash. Our term loan balance remains at $271.9 million. Our loan matures in April 2024, and so we will look to optimize the timing of refinancing in coming months. In the next quarter or two, we expect the trailing four-quarter metrics that the credit markets focus on will have moved to a much improved place, and we are hopeful that credit market conditions will have continued to evolve to a more favorable place by then, too, so that we can achieve highly attractive terms just as we did in our two prior financings. We expect to deleverage significantly over the next few years, starting in 2023, given that the cost of our dividend is modest and the liquidity of our stock is such that the potential for further significant share repurchases is limited. During the fourth quarter, we repurchased a little over a million shares and share equivalents for a cost of about $9.5 million. And for the year, we repurchased almost 3 million shares for a cost of about $40 million. For 2023 through next January, our board authorized the repurchase of an additional $30 million of stock and stock equivalents, which should be largely sufficient to offset equity grants to employees. Our board also declared a quarterly dividend of 10 cents per share, consistent with recent quarters. This is a good place to note that in our press release, we speak of a transition in our CFO position. Hal Rodriguez will, after more than 20 years with us, shortly move to a part-time advisor position as he prepares for retirement, and Mark Lasky will step into his CFO role. Mark has been with us for 10 years, and before that spent 12 years in finance roles at Goldman Sachs, so he is well prepared for this role. And Hal will continue to be around to help as needed. I will close with a brief note that our stock performance in 2022 was heavily impacted by the fact that, by a very narrow margin, in the spring we slipped out of the primary small cap indexes. Based on our current market capitalization and the current metrics for those indexes, we are on track to be readmitted in 2023, and a strong start to this year would obviously make that even more likely. With that, I'm happy to take any questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. Once again, to ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. Our first question today comes from Devin Ryan from JMP Securities. Please go ahead with your questions.

Hey, good afternoon, Scott and Patrick. How are you guys? Great. How are you doing? Doing well. Maybe starting on Scott, your comments just for an expectation for improving operating backdrop for 2023. I guess, what are you seeing in the environment or any signs that may be making you feel a bit better about how this year is starting relative to 2022? I appreciate you're coming into the year with a better backlog, but what you're seeing to make you feel better just around the tone of activity? And then if you can, just weave in a little bit of geographic perspective around that would be helpful. Thanks.

Okay, sure. Good questions. Look, I put it this way. We felt like we were quite busy in the latter half of last year. The only kind of constraint we felt like we had against this was things just sort of taking longer to get done than perhaps they normally do. So there's not a feeling that any of the things we perhaps thought at one point were going to close in December have died. It's really just things are taking a bit longer to get done. So that's an encouraging sign. Look, I'd also say that, you know, whereas a year ago, I think everybody was incredibly optimistic, right? That was before the Ukraine invasion and higher inflation and interest rates and all the rest. If you look at where we are now, you know, we're kind of at probably very recently a sort of peak pessimism in some senses in the market. But clearly, you know, rates are now starting to to come down on the long end inflation starting to come down. And you know, the companies we talked to look, they're going to still be cautious, they know that it's going to be a challenging operating environment for them in their own businesses through 2023. But I feel like people can now see to the other side, they can see a peaking in and the Fed's interest rate hikes. And, and I think there's an increasing sense that to the extent there's a recession, it's not going to be a long one or a deep one. So You know, frankly, I think it could turn out to be in some ways the opposite of last year. I mean, last year the market was very, very optimistic in January, and it turned out to be a very difficult year. This year the market was probably very, very pessimistic in January, and it could be the year of a bounce back.

Great. Just on capital markets. return and deployment. So I appreciate the focus this year is more on debt pay down. I think that makes sense. But you still have a relatively large repurchase authorization. So I guess, like, is there any way to add some context around the ability to return capital through buybacks? And maybe what would shift that interest maybe more towards buybacks is just a lower stock price? Or are you pretty set on the debt pay down?

I think where we are, really the focus on the refocus kind of on debt pay down is more a function of the constraints on buying back shares than it is on the desire to buy back shares. So as you'll know, there are trading volume limitations on how any company can buy back shares. And we've frankly bought back so many that we're now finding there's a pretty limited amount left that we can buy at any given time. So when we throw out as the new authorization for kind of the next 12 months of $30 million, we think that's going to be not only about offset any shares that are vesting for employees, but at least as important. We think that's about all we'd be able to do anyway. So what we're saying is a dividend in absolute dollar cost is quite modest. Share repurchase, we've kind of pushed that about as far as we can, at least for now. You know, obviously if liquidity picks up and trading volume picks up and the share price picks up, then obviously you can, you will have the ability to buy back more. But as we sit here today, we kind of come by default to thinking that what we should focus on in the next year or two is deleveraging.

Yeah, okay, good color. Just last one, just thinking about kind of growth opportunity. If you can just maybe give us a couple of maybe the biggest priorities as you look in your business today. where you feel like you really want to lean in investment or where you're most excited about the ability to grow over the next couple of years?

Sure. I think it's our focus. I mean, we have a lot of recruiting dialogues going right now. I mean, it's a good market for recruiting talent. And I don't mean people who lost their jobs on Wall Street, but people who are who have been through a tough year wherever they are and are considering a move most often from a big bank to a firm like ours. Our main focus is definitely the U.S. I didn't answer your question actually earlier. You asked the second part of the question about geographic focus. We probably see the most near-term upside in the U.S., although I think the commodity-focused markets of Australia and Canada we are also quite positive on for the year ahead. Given that and given the fact that the U.S. market has proven really more resilient than the other markets in recent years, our recruiting will be, I think, mostly focused in the U.S. I think it will be mostly focused in M&A and mostly in people who add to our industry sector capabilities. In that regard, probably our biggest gaps in terms of where we have the most white space, I would say, are healthcare and TMT. But I would also say that the industrial space, which has been, you know, a really good one for us in the area that we're the most built out already, you know, we think just kind of given the strength we have in that sector that there are some additional subsectors that we're not in today that we should pursue because it kind of fills out the industrial portfolio in terms of coverage. So that's kind of how we are focusing our recruiting efforts today.

Okay, great. Thanks, Scott. I appreciate it. I'll leave it there. Thank you.

And our next question comes from Matt Moon from KBW. Please go ahead with your questions.

Hi, good afternoon. Thank you for taking my questions.

Sure.

So just looking at the quarterly comps that came in over the course of the year on compensation specifically, It looked like the nominal amount was relatively stable and consistent over the course of the year. I appreciate that obviously this will be dependent upon the revenue environment, but should we think about that quarterly run rate kind of in the low to mid $40 million range on a quarterly basis being a decent floor as it relates to compensation as we look to the first several quarters of 2023?

You know, I wouldn't want to be too specific on that because, as you said, compensation really is a function of revenue. And secondly, I would throw out that it's also to some degree a function of recruiting. And, you know, the higher the revenue is, the higher comp will be, the more successful we are in doing a lot of recruiting. And again, last year was a relatively quiet year for us in recruiting. We made some really important recruits, but not as long a list as normal. you know, obviously there's some cost that goes with that as well. But, you know, I would take our history, including this year, as a bit of a guide, but obviously in terms of absolute numbers, but clearly, you know, we want to both increase the revenue by quite a lot and we want to see our comp ratio go back to its target range. So, you know, I think that's really about all I can, all the guidance I can give on that right now.

Okay, great. And then in your prepared remarks, and I think in your press releases as well, you cited delays, I guess, towards the end of the year in terms of elongated timelines till deal closure. I guess, is there any kind of common thread and through line that drove those delays and pushback? And is it fair to assume from your comments that we still should anticipate these deals to close relatively soon and kind of into the into the first half of 2023. Just kind of curious on both the factors and the expected time of those elongated timelines.

Okay, good question. Look, the factors, I think, in what is obviously a very volatile market is a little bit of everything. I mean, I think regulators are not succeeding in blocking a lot of deals, but they certainly, I think, around the world have been a little bit slower to sort of approve deals and let them flow through. So that's one factor. I think you know, the difficulty of getting financing is going to slow down some deals. But, you know, if you're creative and determined, companies and sponsors are finding ways to get things done. And then just the incredible volatility in markets, whether it's currencies, which would have been extraordinary volatile, or the stock market, you know, it makes it more complicated to sort of have that final negotiation and set a price and get people to sign the contract. So I think all those are factors in and things taking a bit longer than usual to get done toward the latter part of last year. But, yeah, look, I'm encouraged by the fact that I don't feel like really anything we were working on toward the – anything of significance as we were working on toward the end of the year died. I think it's just a matter of things taking, you know, a bit longer to get to the finish line than we probably would have guessed in, you know, in the fall.

Got it. Uh, and then the last one for me, it's just more of a clarifying question as it relates to the non-comp side. Uh, it sounds like you, you had some one offs in there that, um, uh, you did highlight as it relates to the build out of the London office, as well as, um, it sounds like a co-advisory fee in there as well. Just curious if you could quantify any of those impacts as it relates to the 2022 non-comp base that you don't really expect to recur in 2023, as we look to our models.

I mean, what I would say for non-comp, for your modeling purposes, I think in our investor presentation, we continue to show our target, I think, $55 to $60 million, which is what it has been, and we did fall in that range this year. And the reason we didn't change that, I mean, clearly, we think a bunch of these kind of one-offs won't happen again, certainly, but won't have duplicative rent of a major office again for a while, having just had that. But we think that there will clearly be more travel as M&A activity picks up, and that's all going to kind of net out to a number probably very similar in 2023 to what we had in 2022 and 2021, for that matter. We've managed those costs pretty well. We've had some one-offs that were maybe offset by less travel. Now the travel is coming back, and some of the one-offs are going away. So we're kind of – In a total non-com cost basis, we've been pretty much treading water for a while, which I think is a positive thing.

Okay, great. Thanks, guys.

All right.

Thank you. All right. Our next question comes from James Yarrow from Goldman Sachs. Please go ahead with your question.

Hey, Scott. Thanks for taking my questions. Maybe we could just start on the strategic versus sponsor dichotomy. Maybe you just weigh up the strength of the dialogue across those two different groups of buyers and the differences between them.

Sure. I think clearly we're still in a market where strategics are the more active group. Obviously, a lot of them are investment grade. A lot of them have strong balance sheets. A lot of them have a fair amount of cash resources. So they're able to act. And frankly, right now, they're probably seeing less competition from the financial sponsor role than they might ordinarily. So we're more optimistic near-term about that. I'd say medium-term, though, we remain very, very focused on growing our financial sponsor business for the simple reason that that group still has an extraordinary amount of dry powder. They haven't put a lot of it to work just recently. They would like to see credit markets get a bit better before they really amp up that spending. And when that happens, I'm sure they will amp up that spending. But right now we're a little more optimistic on the strategic side, and frankly that's obviously near term a positive for us because we have historically been a firm that skews more to that client base than to the sponsor base, even though one of our objectives is to start to balance those two out a little bit more.

Okay, that makes sense. Maybe if you could just contextualize the strengths. of your restructuring business in the past quarter and what you see ahead? And then perhaps within the restructuring business, what parts are you seeing strength in? Is it debtor side, creditor side, traditional structuring, or liability management?

Okay, those are good questions, actually, because last year was an unusually quiet year. for us in restructuring. Obviously, it was a difficult financing environment, but yet for most of the year, you know, credit markets were really quite good, and there were a very low default rate. I'm sure you've seen statistics on that, and so there was just, frankly, very little activity. Not that we didn't do any, but it was not a really exciting part of our business last year. I would say toward the end of the year, we started seeing a significant pickup in opportunities. I would say that most of the activity is in what I would call classic restructuring, like companies that are in some degree of distress, not necessarily Chapter 11 style, but some degree of distress. By sector, I think it's pretty eclectic. We're still in an economy where I think corporate profits are quite good in most places, but there are pockets of companies out there that are exposed to higher commodity prices or higher interest rates or foreign currency movements, and so it's kind of an eclectic mix of opportunities. I would say there's not a lot of household names that are out there doing restructuring right now, but there's a big world of mid-cap opportunities, and we're seeing more of those come our way.

Okay, that's clear. Just to follow up there, You talked a little bit about the credit markets being open at the beginning of last year and that slowing or keeping the lid on restructuring opportunities. Obviously, we've seen those markets open up a little bit through the beginning of this year. So is that a potential headwind to the restructuring business? And I recognize your M&A business is far larger than restructuring, so that's probably a positive. But just how do we think about the impact on the restructuring business if financing markets continue to improve?

Yeah. Look, I think financing markets, I do expect, frankly, that they will continue to improve. But I mean, they've got a long way to go to get back to being kind of available for everybody. So I think credit markets will be discerning, what I would call discerning, for a good while. And I think there will be more sponsors and companies that will be able to get financing. But there are going to be many that won't be able to. I mean, certainly, you look at how quiet the leveraged loan market has been. I mean, that is starting to open, but it's opening not to everybody. So I think, you know, frankly, my expectation and, of course, my hope for 2023 is I think there will be considerably more restructuring type opportunities than there were in 2022. But I also think we're going to have a better M&A market off a relatively low base. And, you know, obviously, that would be the Goldilocks scenario for us and many of our peers. And, you know, I think If you just look at the way the markets are evolving, I think that that's a real possibility.

Okay, thanks for taking my questions.

Okay, thank you. And that was our last question. I appreciate everybody dialing in, and we look forward to speaking to you again next quarter, if not before.

And, ladies and gentlemen, with that, we'll conclude today's call and presentation. We thank you for joining. You may now disconnect your lines.