Houlihan Lokey, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Houlihan's low-key first quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, July 28, 2020. I would now turn the call over to Mr. Christopher Crane. Houlihan Loki's General Counsel. Thank you. You may begin.

Thank you, operator, and hello, everyone. By now, everyone should have access to our first quarter fiscal year 2021 earnings release, which can be found on the Houlihan Loki website at www.hl.com in the investor relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should, or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and therefore, you should exercise caution when interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-Q for the quarter ended June 30, 2020, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures. which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the HL.com website. Hosting the call today, we have Scott Beiser, Houlihan Loki's Chief Executive Officer and and Lindsay Alley, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call to questions. With that, I'll turn the call over to Scott.

Thank you, Christopher. Welcome everyone to our first quarter fiscal 2021 earnings call. The last few months have been unusual times. We feel compassion for the millions of people around the world affected by COVID-19, and we are hopeful for successful treatments and a vaccine in the months ahead. I would like to offer our sincere appreciation to those who are working on the front lines to battle this disease and to all of you doing your part to keep yourself and others safe and healthy. Also, we are coming to understand with greater clarity the horrible injustices suffered by many of our fellow human beings, but we are hopeful true positive change can come about in America and abroad. Everyone at our firm understands we need to be part of the solution. We are making a concerted effort to continually improve diversity, inclusion, and equality of opportunity within our organization, and we are increasing our involvement in our local communities to improve the quality of life for all. I will now turn from the vital issues affecting our society and our fellow citizens to our business results. The current business environment continues to exhibit very tough near-term challenges, but also shows signs of significant opportunities in the mid and long term. Our first quarter fiscal 2021 revenues were $211 million, down 16% versus our first quarter last year. Our adjusted earnings per share were $0.56, also down 16% compared with the same quarter last year. Notwithstanding our performance in the first quarter and recognizing the continued short-term headwinds, our financial position is strong and our mid-term and long-term outlook remains positive. As I mentioned on our last quarterly earnings call, our balanced business model is working as it was designed. The severe and abrupt dislocation caused by the pandemic has negatively impacted revenues in our M&A business, not unlike other downturns. At the same time, the opportunities for us in financial restructuring have expanded significantly. However, as has been the case through other periods of financial change and disruption, the near-term impact on our M&A business has occurred faster than the anticipated growth in financial restructuring revenues. We believe growth in our restructuring revenues will become more evident over time as we work through the significant opportunities that currently exist and will continue to expand as the result of this pandemic. I'll start by summarizing the challenges we are facing and then move on to our opportunities. By any measure, M&A globally and in the U.S., large cap and mid cap, strategic and financial, analyzed by volume or deal count is down and down by a lot. During our first quarter, we had a number of deals that died, an even larger number that were put on hold, and we experienced a much slower pace in M&A new business activity. This quarter, we closed 43% fewer corporate finance transactions compared to the same quarter last year, and new business activity levels in the quarter were down almost 50% versus the same quarter last year. In previous recessions, we have experienced dramatic declines in M&A activity, but never one as abrupt as the one we experienced during our first quarter. Today, capital markets are strong, and the stock market has held up well. However, the continued pressure to stay at home the risk of a second shutdown and an uncertain U.S. election outcome loom over the M&A market. Mitigating these concerns is the fact that the number of deals on hold versus the number of deals that died is more favorable than in previous downturns. We believe this reflects the market's view of a temporary pause in M&A activity versus a prolonged disruption. Notwithstanding the rather dramatic reduction in M&A activity over the past few months, over the last 30 days, we begin to see some green shoots to recovery in the M&A marketplace. The equity markets have effectively regained their lost value and are trading generally flat from calendar year end. Interest rates remain at historically low levels. The debt markets are liquid and lending for buyouts is gradually returning. The number of financial sponsor pitches we are participating in is nearing pre-COVID levels. and the prospects of higher corporate and individual tax rates in the U.S. are starting to positively influence M&A activity. Although we've experienced a decline in M&A activity, our capital markets business has been busy. We've closed a number of transactions across industries for companies seeking more flexible capital and for companies who intend to use capital to be opportunistic in this market environment. Overall, the size of our average mandate and our average fee in capital markets is larger than pre-COVID. Furthermore, as expected in current conditions, with less plentiful capital, corporate and financial sponsors are more highly valuing the role of a capital market advisor, which bodes well for the long-term future of this business. Overall, our financial and valuation advisory business is holding up well. While revenues were down somewhat in the first quarter versus the same period last year, new business activity has stabilized since the trough in the stock market earlier this year. Our portfolio valuation, transaction advisory, and corporate valuation advisory service lines are up year over year, while our transaction and fund opinion service lines are lower. Historically, our valuation business segment has experienced single-digit declines in its annual revenues during a business downturn. Our financial restructuring business has benefited substantially from current market conditions. At the outset of the COVID crisis, new business activity increased immediately as many firms across multiple industries were plunged into crisis mode. As government intervention in the bond market stabilized many situations, our outlook for restructuring has changed since our last earnings call. 90 days ago, we would have anticipated a much steeper rise in bankruptcies, but over a shorter timeframe. Today, we expect that the overall business environment for many firms may be worse than first anticipated, but their ultimate need to restructure may take place over a longer period of time. Currently, we are working on more assignments than ever before, and we have a pipeline of developing situations that we believe will translate into engagements over the relative near term. As a reminder, it can take several quarters or years to complete a restructuring assignment. While we have had record first quarter revenues in financial restructuring and we have seen a considerable increase in the monthly fee component of restructuring assignments, we expect the majority of our current financial restructuring transaction fees to be recognized as we move towards the latter part of this fiscal year and in subsequent years. Turning to our acquisition activity, in June we announced the acquisition of MVP Capital. MVP provides investment banking services to telecommunication firms. Their business has remained stable during the pandemic as infrastructure investment in telecom is as important as ever. As we all sit here in a Zoom connected world, it seems fairly clear that all of us are benefiting from the rollout of 5G technology. The combination of our two firms better positions us to serve our collective client base during this important technological transition. We expect this transaction to close in August, and we're excited about welcoming our new partners to the firm. Consistent with our historically acquisitive business model, strong business performance, and a recent equity offering, we're in active dialogue with a number of companies interested in combining with our firm. To date, the most promising opportunities are in the U.S. and Europe. Certain firms provide sector expertise where we are underweighted, while other firms we are looking at would expand coverage in current industry verticals. Generally speaking, several of our most active dialogues are with firms larger than our previous acquisitions. We don't expect to close on every transaction, and we may not close on any of them, but overall, we are quite pleased with the quality of firms we are talking to. In closing, we expect more uncertainty in the economy and our financial results in the short term until we get more clarity in the resolution of of COVID and the upcoming US elections. However, we are as confident as ever in our balanced business model, the talent and perseverance of our employees, and the advice we are giving our clients. Regardless of the length of this pandemic or the severity of the aftermath, we believe that as with previous cycles, we will come out of this a much stronger and even better positioned firm than when we went in. And with that, I'll turn the call over to Lindsey.