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Greenhill & Co. (NYSE:GHL)
Q2 2019 Earnings Call
Jul 31, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Greenhill second-quarter 2019 earnings call and webcast. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Patrick Suehnholz, director of investor relations.

Please go ahead.

Patrick Suehnholz -- Director of Investor Relations

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's second-quarter 2019 financial results conference call. I am Patrick Suehnholz, Greenhill's head of investor relations. And joining me today on the call is Scott Bok, 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 a 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 Bok.

Scott Bok -- Chairman and Chief Executive Officer

Thank you, Patrick. We reported second-quarter revenue of $56.1 million and a loss of $0.53 per share. For the first half, we had revenue of $107.3 million and a loss of $1.16 per share. The low level of revenue was a function of a generally slow start to the year in terms of global M&A activity, a lack of large transaction completions throughout -- during this period and particular weakness in the European M&A revenue.

We had at a respectable performance in U.S. M&A, improved performances in Australia and Latin America and continued strength in our capital advisory business globally, but those weren't enough to offset the very low level of activity in European M&A. While there was clearly a slow start to the year in terms of deal activity, by late in the first quarter, equity markets had rebounded to near peak levels, and financing markets had reopened. And accordingly, during the second quarter, we benefited from a significant rebound in terms of announced M&A transactions.

Specifically, during the second quarter, we were involved in 21 M&A announcements of the kind we typically list on our website, which is around the high end of our quarterly range for M&A announcements in recent years. And among that group were substantial transactions in the U.S., Australia and Canada. The improved pace of M&A deal activity has continued for us in the third quarter, and we see current market conditions as good in most of the places we operate. Given this rebound in announced deal activity in the likelihood that an unusually large portion of our major key events for the year will fall on the second half, we continue to expect a solid revenue performance for the full year.

In particular, we see the potential for increased full-year revenue from our corporate clients in North America, Australia and Latin America as well as the continued strong performance from our capital advisory business globally. While European corporate advisory revenue will be lower for us this year, last year's record performance demonstrated the strength of our franchise in that market, and we expect that strength to again become evident later this year and going forward. Taking a longer-term view, we have high confidence that our significant recent investments and increased headcount for various sectors like energy, industrial and insurance, continued geographic expansion as we are doing in Singapore and the scaling up of our restructuring team give us the potential to achieve substantially higher levels of revenue than we did last year or will this year. In addition to the benefits of an upgraded and expanded team, we believe the broader trends in transaction activity will be a tailwind for our business going forward.

European M&A has been relatively depressed for a full decade now for a variety of fairly obvious reasons, but we believe it will eventually rebound toward its prefinancial crisis level relative to the U.S. market. Our restructuring business has been relatively slow for some time given highly accommodating credit markets, but that cycle will inevitably turn as economic growth slows. In contrast, the U.S.

M&A market has been fairly robust, but we believe the challenge of creating top line growth, the impact of technological disruption in almost every industry and the rise of shareholder activism will continue to drive corporate transaction activity. And last week, capital advisory transaction activity has been growing for some time, and it is widely believed that major market participants in that area that significant growth will continue. If we are right about the long-term revenue opportunity for us, then with both the operating leverage inherent in our business model and the financial leverage that we incur to fund our large ongoing share repurchase plan, that higher revenue should have a magnified impact on earnings, cash flow and shareholder value. Turning back to our current performance.

Apart from the shortfall in revenue, our other financial line items were broadly consistent with those of last year. Our compensation costs for the year to date in absolute dollars were slightly lower than those of last year but resulted in a much higher-than-usual compensation ratio given the lower revenue level. Our noncompensation operating expenses, excluding accounting adjustments relating to the earnout in our 2015 Cogent acquisition, were almost identical to last year, but again, the cost ratio was significantly higher as a result of the lower revenue level. Both cost ratios should return to their historic range of more typical revenue levels.

Our interest expense for the quarter reflects our recent refinancing, which resulted in a $4.8 million charge for the write-off of financing costs related to our refinancing but provides us with a somewhat larger term loan with more flexible terms and reduced interest rates going forward. The cost of that floating rate debt will decline further with lower interest rates as the Federal Reserve's action today signals as well as with the scheduled principal paydown that starts this quarter. Our effective tax rate was 25% for the quarter and 24% for the half, and we expect a rate in the mid-20% range going forward. In terms of capital returns, during the second quarter, we purchased 319,536 shares and share equivalents through open-market purchases and via tax withholding on restricted stock that vested during the quarter.

Together, these repurchases were at an average price of $16.83 per share. We also declared a dividend of $0.05 per share. Since the quarter ended, we repurchased an additional 411,991 shares of common stock in the open market at an average price of $14.58 per share. Accordingly, we have $64 million of share repurchase authority remaining under the terms of our recent refinancing, in addition to ongoing purchases of share equivalents via tax withholding on vesting RSUs.

Under the terms of our financing, that share repurchase authority could grow next year and beyond. Note that we have intentionally held back on the share repurchases that were contemplated in our recent refinancing, thinking that the market might overreact to our slow start to the year and give us the opportunity to buy shares at more attractive prices, which should benefit all of our ongoing shareholders. We see our current share price as highly attractive, and we'll continue to be opportunistic as to how we use our share repurchase authority. We ended the quarter with cash of $109.7 million and term loan debt of $375 million, which means our net debt was $265.3 million.

As of yesterday, our current cash balance was $105.6 million. I'll end with a brief update on recruiting. Including one recruit in the second quarter and the year to date, we've announced the recruitment of six managing directors. Together, this group will help us open a Singapore office to cover M&A clients from Southeast Asia, enhance our efforts in the restructuring and shareholder advisory areas and extend our industry sector expertise in the building products, industrial and insurance areas.

Earlier this year, we also entered a strategic alliance with the Israeli firm Goren Capital to serve that market. Including announced recruits, we have currently had 80 client-facing MDs globally, and we expect to add one or more additional recruits in the near term followed by some internal promotions at year-end. Now we're happy to take any questions.

Questions & Answers:


Operator

[Operator instructions] Our first question today will come from Devin Ryan of JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Great. Good afternoon, Scott. How are you?

Scott Bok -- Chairman and Chief Executive Officer

I'm doing well. Thanks.

Devin Ryan -- JMP Securities -- Analyst

Maybe start here, I'd like to expand a little bit on the expectations for the back half of the year. From your website, it looks like there's about 25 deals that had been announced over the past three months since May, so we can see what kind of business is accelerated. But I heard your comments expecting a solid revenue performance in the whole year and then profitability in the back half. Is there an implication there that the firm wouldn't be profitable on the full year? Or could you have a solid revenue performance and still not be profitable? I'm just trying to think about kind of what the implication is there.

Scott Bok -- Chairman and Chief Executive Officer

I don't think I was trying to imply anything particular about profitability. I think if we get to what solid revenue result, which, again, is our expectation for a full year, we would expect our cost ratios to go to the kind of the range they normally got when we have a solid total revenue result, and obviously, that leads to profitability. So as always in our business and maybe especially this year, the quarters, frankly, are not something that one should focus on too much. I think for the overall year, we continue to expect a good total revenue outcome, and that has the implication that it always has for cost and profitability.

Devin Ryan -- JMP Securities -- Analyst

OK. Great. That's helpful. And then in terms of just this recent kind of snapback in activity that you're seeing kind of heading into the back half of the year, what's driving that? Is that just the kind of recovery in equity markets and risk asset? Or is there something else going on in Europe? Or I'm curious why it's such a different environment today than it was four, five months ago.

Scott Bok -- Chairman and Chief Executive Officer

Well, I think if you just look at the broader industry statistics putting up aside, I mean, I think we were sort of impacted by those statistics. But as I was watching global industrywide M&A activity for January and February, I mean, it looked positively horrific. I mean almost like you thought there's a mistake on the data tables your team was putting together, let alone cast the level of last year, then suddenly March looked quite a bit better than that, and April, a lot better than that, and May and June sort of back to normal. So I think we just had a period of real disruption in markets in November, December where there was a lack of high-yield financing.

There was a steep drop in the stock market. It sounds like it fell by some huge percentage, but it fell off real quickly, more than 10%. And I think that clearly had the impact. Sound like clients said to us, OK, we're putting things on hold.

But when you look at the aggregate statistics, you see that, in fact, people did kind of pause at that moment. And then with -- frankly, with the Federal Reserve reversing course, I don't mean what they did today but some months ago, you saw stock markets kind of go back to the higher end of the range, and you saw credit markets reopened, including our own refinancing, which was a very good one in terms of the terms we were able to get, and M&A has followed. So it feels stocks today like -- yes, and the last month, frankly, the business has been quite good in most parts of the world. I think it's still definitely slower than one would hope in Europe.

Obviously, you've got Brexit issues and the change of government in the U.K. and so on that can have an impact on that. But there -- we're going to do better in Europe in the second half than we did in the first half as well. And all the other places we operate, it feels like a reasonably good M&A market right now.

Devin Ryan -- JMP Securities -- Analyst

OK. Great. Thanks, Scott. And then just last one for me on the buyback, clearly, wide activity.

And I guess, I get the thought process that you want to have some dry powder, except there's an immediate reaction on the quarter, but at the same time, the stock kind of was drifting lower and was at relatively low level for much of the quarter and well below kind of where you've been buying it previously. So I'm just trying to think about whether there's other considerations there. And then, to the extent you do think it's a stronger back half and then maybe the stock starts to act better, so should we be thinking that you're still -- do you think it's quite compelling and maybe look at prior repurchase prices is kind of some guide post of your appetite? Or how should we think about that?

Scott Bok -- Chairman and Chief Executive Officer

I think the only reason we sort of held back is that the deal we came through, and by the way, some people we respect from the outside sort of said that same thing, is that sentiment had turned very negative on the -- our little factor of M&A advisors, and that it had -- in light of a weak first quarter, had turned very negative on us. And we thought why fight the tape and sort of spend our remaining money buying back shares when it seems like the prices is declining? And so we -- and it did get to very attractive levels. But part of that was during the sort of the close period where you can't be tweaking your repurchase plan, but oh, you're going to wait until the window reopens, so we held back. And of course, we've got a long history now of 18 months coming in and out of the market.

And I think, overall, we've done a good job of getting good value for our shareholders, and we're going to continue to do that with the funds we have left, which is actually enough to buy back like 20% of our stock. So it's quite a lot. So we'll be thoughtful about how we do that. And obviously, there are liquidity constraints, so it's not like you can sort of accelerate things even if you wanted to in any particular moment.

You've got to be patient about it. And again, I think we've done a pretty good job so far for our long-term holders, and we're going to continue to work at that.

Devin Ryan -- JMP Securities -- Analyst

Great. Thanks, Scott.

Operator

Our next question will come from Jim Mitchell with Buckingham Research. Please go ahead.

Jim Mitchell -- Buckingham Research -- Analyst

Good afternoon, Scott. Maybe just to follow up on Devin's question there on the buyback. You have $110 million of cash at the end of the quarter. I guess a little bit less now.

Besides the liquidity in the stock, obviously, do you have any constraints from putting that cash to work? I assume if you get -- as profitability improves in the second half, cash flow will improve as well in the second half. Is there anything in terms of minimum levels of cash or under the new debt covenants or anything like that, that would prevent you from being aggressive in using that remaining 70 -- or $64 million or whatever is left?

Scott Bok -- Chairman and Chief Executive Officer

Well, there are definitely no debt covenants that would impact us. That's kind of the nature of the loan facility we have where we don't really have covenants like that. All there really is in terms of restraint is just prudence. It's to do what's the right thing that balances your desire to sort of be ready for any difficult paths that might arrive like happened in January and February and also balance -- on the other hand, balancing, you're trying to get as many shares in at the lowest price that you possibly can.

So there's nothing too much more to it than that. And look, we've also had to be mindful of the fact that in times when we -- over the last 18 months, when we regret buying back shares, we have to read research or Ford saying they spend almost all the money. Now it's -- now that means to sell. And then we've had other peers that were doing the exact opposite.

As we get written about it, oh, they're not spending the money, there must be something wrong. Well, we're going to -- thank you for laughing at that because that's absolutely true. So we're trying to strike that right balance and get to a good outcome without, obviously, signaling to the world and people who want to play things, trades like that exactly what we're going to in advance.

Jim Mitchell -- Buckingham Research -- Analyst

OK. Fair enough. And given the expectation for -- I think you used the term solid full-year revenue expectation, obviously, you're not going to be probably more specific than that. But when we think about the comp ratio and we look back when you had recently good revenue years, the comp ratio has been kind of in the mid-50s -- I mean, mid-50s to 60.

Is that a doable range given your expectation around revenue? I'm -- I mean, I don't know if you can narrow it more that. But can you get below 60, I guess, would be the question.

Scott Bok -- Chairman and Chief Executive Officer

Yes. I wouldn't want to get more specific because I -- that's just getting more specific on sort of forecasting revenue, and you know how hard that is to do in a business like ours. But we feel good about the second half. Certainly, our objective is to get to the range you've talked about, which is our historic range, and so it's kind of what I alluded to in the call script that I just went through at the beginning here.

But I wouldn't want to get more specific about sort of probability if we can do that and at what pace and so on. So we'll just kind of leave the comments where I -- with what I said.

Jim Mitchell -- Buckingham Research -- Analyst

Fair enough. Thanks for taking my questions.

Operator

Our next question will come from Michael Brown with KBW. Please go ahead.

Michael Brown -- KBW -- Analyst

Hi. Good evening. So yes, I just wanted to start off by maybe trying from a different angle on kind of diving into the back half commentary a little bit. I mean given the improvement that you're seeing in activity and we're seeing publicly, is it kind of possible that revenues can be up year over year relative to last year just based on your expectations as they stand today? Thank you.

Scott Bok -- Chairman and Chief Executive Officer

Sure. I understand the question, but we really can't get more specific than we did. I mean you'll understand that this business, if you have, particularly, a significant fee that -- and I'm not even thinking of any one in particular, but it can happen any quarter, any year where it might get to the point where you're completing -- booking it end of December, and it might get delayed another three weeks, and suddenly, you're booking in January. It makes very little difference to the firm overall, to the cash flow, to the reputation, the credentials and all the rest.

But obviously, it can have a big impact on the quarter. So I can't get more specific than to say that certainly, our -- we're hopeful and expecting a strong finish to the year that would lead to a solid results overall. But we can't get more specific than that.

Michael Brown -- KBW -- Analyst

OK. Fair enough. Just one follow-up there. So I mean, as you just alluded to, results tend to be very lumpy in the advisory business.

But last year, you guys showed such considerable consistency quarter-to-quarter in your revenues, and this year, by contrast, has been a challenging start. So I think investors are just more interested in seeing consistent results going forward. So kind of what are you doing with your business mix to kind of mitigate some of the kind of boom and bust quarter-to-quarter, if you will? And just interested to hear some additional color there. Thanks.

Scott Bok -- Chairman and Chief Executive Officer

Yes. Look, I think if somebody wants quarterly consistency, I think they should look at investing in the consumer products industry, toothpaste or Coca-Cola or something like that. I mean the reality is that just like no one has a clue what the big bank's trading revenue is going to be at any given quarter. Unfortunately, it's largely the same for the advisory business.

So we're -- what we're focused on is -- because your question -- I understand that the rollover, which I think is a good one, we are focused on creating more annual consistency. Last year, where we have four quarters with -- whereas the difference between the best and the worst was about $2 million with a complete aberration, that's way extreme in 24 years of doing this consistency within a quarter. And this year, frankly, may turn out to be the opposite. It may be one of the least consistent across the year and signifies absolutely nothing about the business.

So what we're trying to get to is more annual consistency, and that's why we guided on the capital advisory business, which is on a great steady form of business that's different -- tied to different trends in M&A. That's why we built up our restructuring team quite a lot because that's obviously can sometimes become cyclical to M&A. That's why we've gotten into more different geographic regions because sometimes one area can be very active, and another area very inactive. Like certainly, we've -- for example, this year with Europe wider and Australia more active, for example.

So we're doing all those things to try to smooth things out year to year. But I think to try to do that on a quarterly basis, I think, is probably just really not possible in this industry. That's not to say you're always going to have the wide swings that we will likely have this year. But sometimes that's going to happen when you just have as we did this year where it kind of looks like all your biggest fee events are going to fall into one particular period.

It's going to make that period look pretty good and the other periods look pretty bad.

Michael Brown -- KBW -- Analyst

Thanks. And just one follow-up. You just mentioned the restructuring business, obviously, saw the key hire you guys made this quarter. And was just interested to hear your thoughts with the fed's rate cut announcement today.

How does that kind of impact your outlook for the restructuring business going forward? And do you kind of continue -- expect to continue to invest there and growing going forward?

Scott Bok -- Chairman and Chief Executive Officer

I'd say a couple of things. One, I'm probably more optimistic about the M&A-oriented activities than the restructuring-oriented activities simply because financing looks like it's going to be cheap and available, and stock prices look pretty robust, and so that's generally a good thing. But I think notwithstanding that, we've gone from having a very small restructuring presence to a much bigger one, and what we're seeing literally right now is that team getting involved in more situations that will over time build a larger revenue stream for us. And I think that's almost apart from what happens in the economy.

Obviously, if we get a setback and a recession in the economy, that stream of revenue could become much more significant. But I think even if it does and even if we're kind of in the world we're in right now, we feel like the investments we've made to make that team bigger are gonna pay off later this year and next year. And so we're very pleased that we made that effort, and we're going to get continue to build on that.

Michael Brown -- KBW -- Analyst

Thank you for taking my questions.

Scott Bok -- Chairman and Chief Executive Officer

OK. Thank you. And I think that's the last question that we have. So thanks, everybody, for joining.

And we'll speak to you again next quarter.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Patrick Suehnholz -- Director of Investor Relations

Scott Bok -- Chairman and Chief Executive Officer

Devin Ryan -- JMP Securities -- Analyst

Jim Mitchell -- Buckingham Research -- Analyst

Michael Brown -- KBW -- Analyst

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