Houlihan Lokey, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan-Loki Second Quarter Fiscal Year 2025 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, October 30, 2024. I will now turn the call over to the company. Thank you, Operator, and hello, everyone.

I now Everyone should have access to our second quarter fiscal year 2025 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. There are numerous risk certainties 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 September 30, 2024, 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 Adelson, Houlihan Loki's Chief Executive Officer, and Lindsay Alley, Chief Financial Officer. They will provide some opening remarks, and then we will open the call to questions. And with that, I'll turn the call over to Scott.

Thank you, Christopher, and welcome everyone to our second quarter fiscal 2025 earnings call. We ended the quarter with revenues of $575 million and adjusted earnings per share of $1.46. Revenues were up 23% and adjusted earnings per share were up 32% compared to the same period last year. We are pleased with our results for the quarter and we enter the second half of the year with momentum across all three of our business lines. Corporate finance continues to benefit from improvements in the M&A markets, and we expect the second half of the year to follow this trend. Financial restructuring had a strong second quarter as it continues to benefit from record leverage and still elevated interest rates. And our financial and valuation advisory group experienced growth in our market neutral services, as well as developing demand for those service lines affected by an improving M&A environment. While we are optimistic about the second half of our fiscal year, we recognize the challenges posed by the current macro environment. Interest rates, though lower than their recent peaks, remain high. and it may take time to feel the effects of lower interest rates on our clients' financial performance. Geopolitical volatility, particularly the potential for a wider conflict in the Middle East and Ukraine and the U.S. presidential elections, all add layers of complexity to our outlook. Despite these risks, we continue to experience a steady upward trajectory for markets and the business environment. Corporate finance produced $364 million in revenues for the quarter, representing a 29% increase over last year's second quarter. Key metrics for our corporate finance business continue to improve, and new business generation remains strong. Since Labor Day, we have seen an increasing number of companies choosing to go to market, a trend we expect to continue. While this trajectory of deals coming to market is positive, we continue to experience longer timelines to close these transactions. So, while transaction velocity is improving, it is doing so at a slower pace than in previous recoveries. Additionally, within corporate finance, our capital markets business performed very well in the quarter, bolstered by strength in private capital and the successful integration of our Triago acquisition. Financial restructuring produced $132 million in revenues for the second quarter, a 15% increase versus the second quarter last year, reinforcing our view that the restructuring markets remain elevated. New business activity was particularly strong, driven by a combination of large cap and middle market opportunities. This heightened activity is expected to benefit our restructuring business well into fiscal 2026. Additionally, as market conditions continue to improve, we are prepared for some restructuring activity to turn into healthy refinancing activity, which we are well positioned to execute on behalf of our clients. Financial and valuation advisory produced $79 million in revenue for the second quarter, a 12% increase versus the second quarter last year. Performance continues to be driven by our non-cyclical business quarterly portfolio valuation. We observed an uptick in new business generation in the first half of the year compared to the same period last year, and demand for our M&A-related services is starting to rebound. Regarding acquisitions, we recently announced the closing of our acquisition of Pretania Solutions. Pretania is a tech-enabled valuation platform based in the UK specializing in structured products. Pretania will be integrated into our financial and valuation advisory business and will complement our highly successful portfolio valuation group. We send a warm welcome to all our new colleagues joining as a result of this transaction. During the quarter, we announced the acquisition of Waller Helms, which will significantly expand the depth and breadth of our financial services industry group, especially in the insurance and wealth management sectors, areas that are highly active for private equity. This acquisition will create new synergies and strengthen our coverage of these sectors with 48 new financial professionals, including 13 managing directors. The acquisition is on track to close by the end of the calendar year. Separately, we hired three new managing directors this quarter as we continue to take advantage of an active hiring market, particularly in corporate finance. Our outlook for the second half of fiscal 2025 remains positive. We continue to reap the benefits of a balanced and highly diversified business model. The improving M&A sentiment, strong capital markets, and sustained strength in our restructuring business are all encouraging indicators. With the most talented workforce in our history, we are diligently working to capitalize on the market's recovery as it unfolds. With that, I'll turn the call over to you, Lindsay.

Thank you, Scott. Revenues in corporate finance were $364 million for the quarter, up 29% compared to the same quarter last year. We closed 131 transactions this quarter, up from 117 in the same period last year, and our average transaction fee also increased. The natural restructuring revenues were $132 million for the quarter, a 15% increase versus the same period last year. We closed 33 transactions this quarter compared to 31 in the same quarter last year, and our average transaction fee on closed deals also increased. As we've mentioned in the past, revenues in our financial restructuring business can be lumpy quarter to quarter, and this quarter benefited from some larger transactions. For financial and valuation advisory, revenues were $79 million for the quarter, a 12% increase from the same period last year. We had 903 fee events during the quarter compared to 852 in the same period last year. Turning to expenses, our adjusted compensation expenses were $354 million for the quarter versus $287 million for the same quarter last year. Our only adjustment was $7 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the second quarter in both fiscal 2025 and 2024 was 61.5%, and we expect to maintain our long-term target of 61.5% for this ratio. Our adjusted non-compensation expenses were $81 million for the quarter, an increase of 7% over the same period last year. This resulted in an adjusted non-compensation expense ratio of 14.1% for the quarter compared to 16.1% for the same period last year. On a per-employee basis, our adjusted non-compensation expense was $31,000 this quarter versus $29,000 for the same quarter last year. For the quarter, we adjusted out of non-compensation expenses $2.1 million in non-cash acquisition-related amortization. We also had an adjustment of approximately $700,000 pertaining to professional fees associated with streamlining our global organizational structure, referred to as Project Solo. Our adjusted other income and expense produced income of approximately $5.4 million versus income of approximately $2.5 million in the same period last year. The improvement in this category was primarily due to a net increase in interest income. Our adjusted effective tax rate for the quarter was 31.3%, compared to 28.4% for the same quarter last year. The increase in our effective tax rate was primarily a result of increased state taxes and increased taxes due to foreign operations. Our long-term target range for our adjusted effective tax rate is between 28 and 30%, and we expect fiscal 2025 to end up at the high end of that range. Turning to the balance sheet, as of quarter end, we had approximately $748 million of unrestricted cash and equivalents and investment securities. As a reminder, we will pay our deferred cash bonuses related to fiscal year 2024 in November, which will reduce our balance sheet cash. With that, operator, we can open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause for just a moment to assemble our roster. And our first question today comes from James Yarrow with Goldman Sachs. Please go ahead.

Good afternoon, and thanks for taking my questions. Maybe just starting on corporate finance, which obviously had best-in-class trends both year-on-year and quarter-on-quarter. As you think about the outlook from here, in the near term, is there any risk of less-than-normal seasonality in the calendar fourth quarter? And then longer term, we should think about the trajectory from here. Is there anything in your view that could catalyze a notable acceleration other than perhaps the election?

Good question, as always. Thank you. I think if you look at it, it's very consistent with what we have been talking about. Things have been improving month over month, quarter over quarter, and it's really all been about what's been the velocity of that improvement in corporate finance. And I think we've just continued to see it improving. Obviously, we've in our statements recognize there are a number of external factors that could affect that at least which positive or negatively would be the election but also so um In spite of that, we do continue to see things going to market on a more regular basis and things moving along. But as we said, it is still an elongated period to close. That part, while getting shorter, is still not in the normal range yet.

That's very helpful. Thank you, Scott. Maybe just quickly on the Britannia Solutions transaction. Anything more that you could just add on the strategic rationale, maybe where the business operates, potential synergies that you see, and anything else that we should be thinking about to help us understand the transaction?

Yeah, happy to do that. Really are pleased about this new opportunity. I mean, it is an addition to our portfolio valuation business, which we think is a really wonderful business. It is much more tech-enabled than the bulk of our portfolio valuation businesses, although we do have components of it that are similar. We just believe that they have really superior technology, and we are excited about the opportunity to deploy that initially within our portfolio valuation area, and we believe there may be opportunities that will be applicable in other areas over time.

You know, their benefit to that business is it's UK based, but a lot of their clients are focused on non US geographies. And so it is a kind of a nice step in growing that business or continuing to grow that business outside the US.

Thank you so much.

And our next question today comes from Brennan Hawkin with UBS. Please go ahead.

Hi, thanks for taking my questions. I'd like to follow up maybe on that last point on PSL. So this is the first FVA deal I think that we've seen. So, you know, helpful to get that fleshed out a little bit. It sounds like this is going to be sitting in largely that recurring portion of the FVA. Is that right? And pro forma for this deal, what percentage of that FVA revenue do you expect to be recurring? Yeah.

Thanks for the question, and the answer is yes, you are correct. That is where it will sit, and that it is the recurring portion of the revenue, and that is another reason we do like it quite a bit. It is not going to materially change our results. It's not at that scale today, but we believe that it will

um contribute over time in a more meaningful fashion and to answer your somewhat subtle question brennan it will continue to be a recurring business similar to the way it was prior to the transaction thank you for picking up on the subject um

Okay, Scott, I think you also had some comments in your prepared remarks around restructuring and that it's looking good and will continue to look good likely into 2026. But also you touched on something that I wanted to ask about actually, which was the idea that some of those restructuring mandates that the bankers have been working on are probably going to be showing up in capital markets revenues because you guys book based on product. So is that right? And if we adjust for that, Um, you know, would you be continuing to see restructuring growth here this year? You know, just because that's probably a better indication around where the strength of the business and the resilience of the business.

I think the, the operative word there was could be right. I mean, I think you may be reading a little too much into that. We are continue to see. strong activity in restructuring in the quarter. And that will have, as you know, due to the timeframe of it, that will continue on into the future. We'll see the benefits of that. It is just a general statement that as we get later in a cycle, we recognize that there is the possibility of that occurring. It is not a statement that there's something in particular that's happening or happening more regularly or anything like that.

okay got it um so so the outlook on restructuring and your expectations even though you came in above that range that sort of average range aren't changing for the year is it just it was a correct timing okay correct it was a good good quarter which is good you know it continues to give us confidence in it sustaining at the elevated levels that's been out yeah i'd say that the

only other thing that we mentioned is you know the activity levels this quarter were strong and and that bodes well for our thesis that this is kind of higher and longer um higher for longer for the restructuring activity basically higher yeah or the restructuring yeah okay thanks so much our next question today comes from aiden hall with kbw please go ahead

Thanks. Good afternoon, everyone. Noted in your prepared remarks, Scott, the capital markets business performed well with strength in private capital, also the integration of the Triago transaction. Just wondering if there's any update as to how we should be thinking about the contribution of this business to the corporate finance line, just given the recent additions?

Yeah, look, I think we continue to sort of suggest to the market that you should think of that business as between 15% and 20% of our corporate finance revenues in any given year. You know, the capital markets business over the last couple of years has done quite well. We are starting to see momentum in the M&A business, as Scott suggested. And so, you know, depending on how fast the M&A business recovers, you're still seeing still likely looking at that range that we've sort of always told to the market.

Okay. Got it. I appreciate the color there. Maybe just to follow up on PSL, I understand kind of the specialty is in structured credit there. Maybe how is this technology being utilized across other asset classes or verticals? And maybe you could just touch on a little more granular, the opportunity and kind of integrating that to the broader platform.

Yeah, I mean, it is an area that we think there will be applicability over time. And I think that it's really too early for us to get into any details on how we really think that it will play out. But we recognize that that is an area of our business that already utilizes a meaningful amount of technology. And we think this is particularly good technology and will only be added into what we are already doing.

Thank you for taking my questions.

And our next question today comes from Devin Ryan with Citizens JMP. Please go ahead.

Hey guys, this is Alex Jenkins filling in for Devin Ryan. Congrats on a nice quarter. I guess just to start on the NB headcount, over the last four quarters or so, obviously went down a little bit this quarter, but you've basically been growing it in low single digits. Maybe you could just touch on the environment and competitive dynamics and how we should think about framing out senior talent going forward over the next year or so.

I think that when you think about MD headcount from our perspective, it's a couple of things. It is obviously our annual process of promoting people. That's one piece of it. We are fairly regularly and certainly right now in the market looking to acquire additional individuals. And we do that, as we stated in the quarter, hiring three new people. And then we have the acquisitions. Now, as we've said before, we also do have some number of people both in acquisitions and other ways that don't wind up being as good a fit as in some cases we might have hoped, but that number winds up netting over time. But overall, it has been a growing number.

Okay. All right. I appreciate that. And then maybe a follow-up, hopefully this is the last question that you have to answer on the election, but obviously you work with a lot of small businesses. Can you speak to their sentiment as we head into this election, what might happen once we get past Election Day, and just generally what are the puts and takes of these two administrations as it relates to activity for your business? Thank you.

Thank you. You could well bet that there's individuals on both sides of that equation that believe in each side of the set of possibilities will be beneficial to them. And I think that what we really have seen is people continuing to move forward. on transactions and deploying capital and kind of regardless no longer waiting if you will to to see what's going to happen and i think that that is you're seeing that both in our results and our statements about things to continue to move forward yeah i mean just to add that i think you know in the mid cap space we tend not to have the same

regulatory pressures on our transactions that a lot of our publicly traded peers in the bulge bracket have um and so that is a big topic in this election that really doesn't have an impact on us the other is we're highly diversified across industry so you know healthcare may be benefited from you know xyz winning the election and industrials the other the other person And so we're, I think, diversified enough across industry where there's not one theme underlying what's better for us if someone wins. And then I think third is for us, probably what happens to capital gains is probably the most important topic to a lot of our clients because we do deal with a lot of entrepreneurs. And I think at the minimum, people think the government's going to be split. And so, you know, the idea of movement and capital gains is probably not a huge risk coming into this election. So kind of mix all that in a bowl.

And that's kind of what we're thinking about the election. The other thing I would add to what Lindsay said, we also have a geographic axis. Yeah, right. And so obviously we sitting here in the United States are very fixated on our election. But it's a big world out there.

Sure. That makes sense. Thank you guys for that call. I appreciate it.

And our next question today comes from Brendan O'Brien with Wolf Research. Please go ahead.

Good afternoon, and thank you for taking my questions. I guess to start, I just want to touch on, you know, capital allocation. You guys have done quite a few deals over the past year or two. I just want to get a sense as to what the acquisition pipeline is looking like today. whether there is any need to take a bit of a breather here to focus on integrating all the deals that you've done recently and how that is influencing your thinking around capital return and buybacks.

Yeah, I mean, I'll let Lindsay take the buyback piece, but the in We are always in dialogue. As we have stated before, this is a part of our strategy, and we will continue to do acquisitions. When they come in, when they hit, it's lumpy, to use a term that Lindsay used earlier. And so while there have been a few recently in short order, that doesn't mean that it will continue at that pace. But we are constantly looking when we find things that we think are a good fit and will be beneficial to the organization and our shareholders, we will continue to work on doing them. And so that process will continue.

Yeah. And in terms of thinking of the overall pipeline of M&A, the fact that we've had sort of three deals here in the last six months or eight months, either announced or closed, hasn't affected the pipeline. It's as kind of robust as it's been for years, frankly. In terms of capital allocation, I don't think our position has changed any. You know, we – our dividend is our priority, and I'd say acquisitions is second, and then maintaining share balance would be third. And I think we've done a pretty good job on all three. You know, we haven't been in the open market making share repurchases, but we also have quite a few withhold to cover acquisitions. um transactions that we do throughout the year and the big one being in in may and so we've generally kept our share account flat um without having to go to open market and i think frankly we like to keep that flexibility on our balance sheet as these acquisitions uh as these acquisitions come about that's great and for my follow-up i wanted to touch on sponsors from the data that i can see it's pretty apparent that there's been a bifurcation in default rate and liability

default rates and liability management activity between corporate and sponsor-backed companies, with sponsor defaults and liability management activity continuing to increase as corporate default rates have moderated. How much has the stress among sponsor portfolio companies been a headwind to activity, and do we need to see these pressures abate before sponsor M&A activity hits normalized levels?

I don't disagree with some of your sentiments. That has not been something that there has been a driver there. You've got to remember, most sponsors that we deal with have a number of portfolio companies, and that may be a problem for an individual partner in that fund who is running that particular deal, but the entire portfolio effect of that private equity firm, they're not still focused on one particular, if you will, sick balance sheet that they're keeping from managing and growing and exiting their successful operations. So, I mean, I think that you're, that's not something that I would say we have seen.

Great. Thank you for taking my questions. Of course. Thanks, Brendan.

Again, if you have a question, please press star and then one. And our next question today comes from Kenneth Worthington with JP Morgan. Please go ahead.

Hi, this is Alex Bernstein on for Ken. Thanks so much for taking our question. Wanted to double-click on restructuring. I know you mentioned that some of the processes were taking longer to close. This quarter was strong in part due to the timing and that your pipeline going ahead continues to look attractive. I wanted to help us think through the different interest rate environment. Obviously, we've had a significant rise in rates over the past handful of years, and that's starting to abate and continuing to abate. Wanted to get your thoughts on how that impacts the rate cycle that is, the types of restructuring opportunities you're seeing, and as the pipeline continues to build today, do those building blocks look different than they did, say, 18 or 12 months ago? Thanks so much.

Yeah, I want to make sure the clarifying or your understanding might do it. So I'm talking about elongated time frame that is really relating predominantly to corporate finance business more on the healthy side. I believe your question is relating to the restructuring business and interest rates. Am I understanding your question correctly?

That's right, thank you.

Yeah, and I think it is. We are still in an elevated. interest rate environment. And I think that this quarter and the activity levels that we have seen and continue to see are an indication that there are still a number of sick balance sheets out there that need to be dealt with in some form or another. And we expect that to continue, as we've stated, for the foreseeable future.

Thanks. And just maybe one more, thinking about the capital markets business and how that continues to grow. To start this year, there's, of course, a pretty significant wave of refinancing activity in the market broadly. To some extent, much of that was driven by the fact that the public markets were largely closed on the debt side. You had a lot of private credit funding that was going on to balance sheets at more expensive rates. And then a lot of that was flowing through and changing to the public markets in the past handful of quarter. Does that elevated level of activity impact what you're seeing in the capital markets business? And how are you looking at that going forward as that looks to be making its way through the system now, broad market-wise?

Yeah, I mean, we have, we believe, the largest private capital solutions group out there, and we have been very fortunate that that group has been busy, continues to be busy. Private capital, obviously, as asset classes continue to grow significantly, and we have benefited from that growth clearly, and that's not something that we see subsiding anytime soon.

And just given our average transaction size, you know, the public markets opening up isn't having a huge impact on our private capital business. Remember, we're primarily in the middle market, and that middle market, the option of sort of the public markets are, you know, generally not available to them. It's just too small. And so, you know, we welcome the public markets opening and even the bank markets opening, but we don't think that has a huge impact on our private capital business.

Makes sense. I expected that was the case. Thanks again. Appreciate it.

That concludes our question and answer session. I would like to turn the conference back over to Scott Adelson for any closing remarks.

I want to thank you all for participating in our second quarter fiscal 2025 earnings call. We look forward to updating everyone on our progress when we discuss our third quarter results for fiscal 2025 this coming winter. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.