Houlihan Lokey, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan-Loki Second Quarter Fiscal Year 2021 Earnings Conference Call. At this time, our 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, October 29, 2020. I would now like to turn the call over to Christopher Crane, Houlihan-Loki's General Counsel.

Thank you, Operator, and hello, everyone. By now, everyone should have access to our second 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 conditions. We encourage investors to review our regulatory filings, including the Form 10-Q for the quarter ended September 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 gap 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 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 second quarter fiscal 2021 earnings call. We have successfully been working primarily from home now for a little over seven months, and our firm has been blessed with very few cases of COVID-19. This pandemic has had a terrible effect on families around the world, and we continue to do everything we can as individuals and as a firm to help. We've engineered our business and personal work styles as best as we can in order to provide a safe and successful work environment for our employees, clients, and shareholders. Notwithstanding the ongoing challenges, the firm produced solid quarterly results. Our second quarter fiscal 2021 revenues were $276 million, slightly up from last year and significantly improved from the $211 million reported in the first quarter. Our adjusted earnings per share were 75 cents, up 7% from last year, and a major improvement from the 56 cents reported in the first quarter. Our second quarter benefited from a significant increase in closings and financial restructuring, very strong capital markets, and an improving M&A and valuation market. Currently, the overall economic environment is very conducive to our balanced business model. Our financial restructuring results are at record levels, and we expect to experience elevated levels for some time. Meanwhile, the favorable interest rate environment and stable asset valuations over the last few months have prompted strategic firms and sponsors to reenter the M&A marketplace. This has led to improved deal closings versus Q1, but more importantly, to a substantial increase in new business activity, which should have a positive impact on subsequent quarters. Temporary in our outlook, We still have concerns about the pandemic's ongoing influence on world economies, the uncertainty in the U.S. elections, and the ultimate outcome of Brexit. That being said, today we feel more confident about our business prospects than earlier this year. Our financial restructuring business reported $125 million in quarterly revenues and $214 million for the first six months of our fiscal year. We have more mandates today than we did during the Great Recession, but there are only a limited number of mega-sized restructurings relative to then. We have closed a record 59 deals year-to-date, and the number of active assignments is at record levels. New business activity remains at elevated levels, but the pace of new business in the second quarter slowed from the toward pace exhibited at the outset of the pandemic. As I mentioned on our last call, we expect short-term restructuring results to be lower than originally anticipated at the outset of the pandemic, but we expect that we will experience elevated levels of restructuring revenues for longer than originally anticipated. Our corporate finance business has dramatically improved from the first quarter. In the second quarter, we reported 108 million in revenues versus 88 million in the first quarter. Consistent with revenue growth, we closed 53 deals in the second quarter versus 35 deals in the first quarter. Furthermore, this quarter, we experienced a record level of new business activity. However, it will take some time for this new business to translate into revenues. New business activity is being generated from both corporate and private equity clients. Business is also fairly diversified across our industry groups. Many of the transactions we previously described as on hold are now active again, and the number of new inquiries has accelerated since mid-summer. As mentioned earlier, there are still several macroeconomic factors that may eventually have an impact on close rates for our new engagements. Our financial and valuation advisory business is experiencing many of the same favorable trends as corporate finance. Revenues in the second quarter were $42 million versus $35 million in the first quarter and up from $40 million in the same period last year. The number of quarterly fee events, average fee size, and revenues per MV are now similar to last year's results. Our portfolio valuation segment continues to exhibit strong growth, and we are experiencing improvement in our transaction opinion business as well. Turning to our acquisition activity, in August we closed on our previously announced acquisition of MVP Capital, and they are off to a great start. We continue to be in active dialogue with several potential acquisition targets. However, the intensity of our discussions has tempered since the last quarter. The rebound in global M&A activity over the last several months has encouraged some firms to remain independent and other firms to increase their valuation expectations to levels we believe are unsupported. That being said, our acquisition strategy has always been to be patient, and to find the right firms for the right reasons at the right price. In closing, we have experienced significant changes in the overall business environment, from the positive outlook at the start of this calendar year to the pessimistic outlook this spring to the rapidly improving market that exists today. We welcome change and in most instances may thrive in it. Our commitment to shareholders and employees is that we will continue to build our balanced business model to mitigate the effects of volatility and results. And with that, I'll turn the call over to Lindsey. Thank you, Scott.

Revenues in corporate finance were 108 million for the quarter, compared to 156 million in the same period last year. Lower revenues were the result of a declining number of closed transactions, as well as a slight decrease in our average transaction fee on closed deals. Financial restructuring had a strong second quarter, delivering 125 million in revenues, a 62% increase from the same period last year. Higher transaction volume and higher monthly retainer fees drove the increase in revenues. We closed 30 transactions compared to 17 in the same period last year, and the increase in retainer fees is a result of a significant increase in the number of current engagements driven by the pandemic. In financial and valuation advisory, revenues were $42 million for the quarter compared to $40 million for the same period last year. We had 539 fee events during the quarter compared to 523 in the same period last year. Overall, FCA saw improving results across its service lines with portfolio valuation leading the way, which contributed to solid quarterly results. Turning to expenses, our adjusted compensation expenses were $175 million for the second quarter versus $165 million for the same period last year. We had one adjustment this quarter for deferred payments related to certain acquisitions. Our adjusted compensation ratio was 63.5% for the quarter, which is above our long-term target for adjusted compensation ratio of between 60.5 and 61.5%. Our year-to-date compensation ratio is 63.1%, which reflects a reasonable proxy for the balance of the year. This increase in compensation expense ratio over our targeted range is primarily a result of our estimate that reimbursable expenses for fiscal 2021 will be significantly lower than last year's. Our compensation expense ratio is tied to gross revenues, which is calculated as fee revenues plus reimbursable expenses. While we pay compensation based on fee revenues, our compensation expense ratio increased to account for the lower reimbursable expenses incurred as a result of the COVID pandemic. Our adjusted non-comp expenses were $29 million for the quarter versus $44 million for the same period last year, a decline of 35%. This resulted in an adjusted non-compensation expense ratio of 10.4% versus 16.2% in the same quarter last year. This decline is a direct result of lower travel, meals, and entertainment expenses, and lower marketing, office-related, and other operating expenses, all reduced due to the stay-at-home orders implemented because of the pandemic. We expect to continue to see significantly reduced non-compensation expenses in these two categories, at least through the balance of the fiscal year. This quarter, we adjusted three items out of our non-compensation expenses. $1.3 million in acquisition-related costs for our acquisition of MVP capital, $900,000 in acquisition-related amortization, and $700,000 in Oracle ERP implementation costs, which we successfully rolled out this quarter. The new Oracle ERP system replaces a 20-year-old system and represents the backbone of our financial and accounting system. Our adjusted other income and expense decreased for the quarter to income of approximately $200,000 versus income of $1.1 million in the same period last year. This was primarily a result of lower interest earned on our cash and investment balances. Our adjusted effective tax rate for the quarter was 27.3% compared to 28.4% during the same period last year. The adjusted effective tax rate is at the lower end of our long-term target range of between 27 and 29%. driven by a significant decline in non-tax deductible items, such as entertainment and certain other expenses. As a result, we expect our adjusted tax rate for fiscal 2021 to be closer to 27%. According to the balance sheet and uses of cash, as of the quarter end, we had $600 million of unrestricted cash and equivalents and investment securities, which includes the cash raise and equity offering in May. As a reminder, a portion of this cash is earmarked to cover accrued but unpaid bonuses for fiscal 2021 and our deferred cash bonuses for fiscal 2020, which will be paid in November. Also in this past quarter, we repurchased approximately 402,000 shares at an average price of $57.72 per share as part of our share repurchase program. And finally, we are pleased to announce that we're paying a dividend of 33 cents per share Payable on December 15th to shareholders of records as of December 2nd. And with that, operator, you can open the line for questions.