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Greenhill & Co. (NYSE:GHL)
Q4 2019 Earnings Call
Feb 04, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

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

Patrick Suehnholz -- Head of Investor Relations

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's fourth-quarter 2019 financial results conference call. I'm Patrick Suehnholz, Greenhill's head of investor relations. Joining me on the call today 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 fourth-quarter revenue of $106.7 million, an operating margin of 39% and net income of $1.05 per share. For the full year, we had revenue of $301 million, an operating margin of 15% and net income of $0.45 per share. Our quarterly revenue was up 20%, and earnings per share was up 133% from the same period last year.

For the full year, our revenue was down 14%, and earnings per share was down 68%. In sum, we had a strong finish to the year, resulting in respectable full-year results on the top and bottom line, all consistent with our commentary on the past couple of quarterly investor calls. While industry data shows a decline in global transaction activity versus the prior year, and almost all of our competitors have reported declines in advisory revenue, the primary driver in our reduced revenue for the year was that lower revenue in Europe more than offset increases in revenue in North America, Australia and the rest of the world. By type of advice, we benefited from significant improvement in restructuring advisory revenue relative to recent years as our recently enlarged team gained increasing traction throughout the year.

Our capital advisory team had another strong performance though fell short of the prior year's record revenue level. And in M&A, results were relatively strong nearly everywhere other than in Europe. By industry sector, we had good results in consumer products, financial services and media, offset by weaker results in energy, healthcare and technology. With respect to costs, our compensation ratio for the year was 59%, slightly above our target level as a result of lower revenue for the year.

For the quarter, the compensation ratio was an unusually low 42% in order to offset unusually high ratios in the first two quarters of the year. Our management objective, as always, is to achieve a reasonable compensation ratio on a full-year basis while also ensuring that our team is appropriately compensated at competitive levels relative to their individual performance. Our non-compensation operating expenses for the quarter were $21 million, which was $3.7 million higher than the same period last year due to some foreign currency-related losses compared to gains the prior year along with a charge for an uncollectible account receivable from a client in financial difficulty. For the year, our non-compensation operating costs were very similar to last year as the above-mentioned unusual costs were in aggregate about the same size of the unusual cost the prior year when we incurred an accounting charge related to the earnout on our acquisition of Cogent.

We continue to monitor non-compensation expenses closely and are hopeful to achieve a lower annual level in dollar terms in 2020. Our interest expense for the quarter was somewhat lower than for the same period last year as the incremental cost of an increased level of borrowing was more than offset by the impact of lower market interest rate and a lower coupon premium on our debt following our favorable refinancing early in 2019. We expect our interest expense to continue to decline going forward. Our effective tax rate was 33% for the quarter and 40% for the year.

Our tax rates for both periods were negatively impacted by the fact that we had a significantly lower than typical portion of our revenue and profit in lower tax rate jurisdictions, particularly the U.K., and a higher than typical portion of our revenue and profit in higher tax jurisdictions, particularly Australia and Brazil. Our rate for the year was also negatively impacted by an unfavorable difference between the grant price and market price on vesting restricted stock units. We continue to expect a rate generally in the mid-20% range going forward. In terms of capital returns, we've continued to aggressively repurchase shares given our view that the market is underestimating our earnings potential as well as the fact that our stock trades at a valuation multiple below that of our peers and far below its typical historic valuation multiple level.

During the quarter, we purchased 1.5 million shares and share equivalents at an average price of $15.98 per share. For the full year, we purchased 3.8 million shares and share equivalents at an average price of $18.04 per share. For 2020, our Board has authorized $60 million in purchases of shares and share equivalents, which compares to $69 million we spent for such purchases during 2019. In the quarter to date, we have repurchased 345,723 shares of common stock at an average price of $16.47 per share for $5.7 million in total, meaning we have repurchase authority of $54.3 million left for the remainder of the year.

We also declared a quarterly dividend for the quarter of $0.05 per share. We ended the year with cash of $114 million and debt of $365.6 million, meaning we had net debt of $251.6 million. As of yesterday, our cash balance was up to $133.9 million despite the incremental share repurchases in January with the debt amount unchanged. Our required principal payment obligations are modest until maturity of our debt in 2024.

But based on our business outlook, as described below, we are aiming for significant deleveraging during 2020 alongside the additional share repurchases referred to above. We enter 2020 with a favorable outlook across all of our businesses. The environment for M&A activity currently feels positive across the regions that performed well for us in 2019, and our current book of assignments in Europe indicates the potential for a very substantial rebound in revenue there this year. In restructuring advisory, we ended 2019 with a much improved level of monthly retainer fees and a much larger backlog of assignments that should get to completion during 2020.

Recent tightening of credit availability and increasing cost for borrowers with weaker credit ratings should also be a positive factor for this business. In capital advisory, the continued growth of pools of private equity capital and the increased market liquidity available to chief investment officers that are invested in those funds should result in a continuing favorable operating environment for that business as well. I'll close with a few words on our strategy. We remain focused on building a business with increasingly diversified revenue streams and greater aggregate revenue.

That was the purpose of our acquisition of capital advisory specialist Cogent Partners almost five years ago, that was the purpose of the recent expansion of our restructuring advisory team, that was the purpose of last year's expansion in Singapore and France, and that is the purpose of our continuing recruitment of M&A specialists across various industry sectors. Recruiting will continue to be key to our growth plans as well the continued development of talent internally. In the past year, we added a net five client-facing managing directors, such that we have 79 today, and we increased our total professional headcount by 11%. We have all the tools needed to continue to successfully implement our strategy.

Our culture makes our firm a great place to work, leading to both recruiting success and very high retention rates for strong performers. Our brand for high-quality and independent advice has been built over decades of client service, and our team collectively owns 48% of the economic value of our firm through common stock and restricted stock and is, thereby, highly incentivized to generate strong results and create value for all shareholders. Now I'm happy to take any questions.

Questions & Answers:


Operator

[Operator instructions] The first question comes from Devin Ryan from JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Good. Congratulations on a nice end of the year. A couple of questions. I guess, first one, so I heard your comments on Europe, and I'm curious, just to unpack that a little bit, is the recovery, you feel like, a function of just it was a low bar in 2019? Or is Europe feeling actually quite strong on an absolute basis? And any more context you can provide around what you're seeing in hearing in Europe as well would be appreciated.

Scott Bok -- Chairman and Chief Executive Officer

Yes. Sure. I think there are two things going on with our business in Europe. One is that, as always, it's somewhat random when the specific deal closings end up falling.

So we had a very good year in Europe in 2018, we had a very weak year in Europe in 2019, and that really largely has to do with just the timing of various transactions we've been working on. We expect '20, as I said, 2020 to look very substantially better than last year. And really, in any absolute terms, any way you want to look at it, we're really quite optimistic about Europe. Apart from that, kind of just the general randomness of when our clients end up transacting, there clearly is a better environment in Europe.

I think having Brexit, at least to some degree, resolved after, well, it turned out to be many years of uncertainty. On top of that, having the U.K. election, which looks like it could have a wide range of outcomes a few months ago, certainly having what I would call a business-friendly outcome to it. So I think there are some really fundamental reasons why business should get better in Europe, but I think even on top of that, it was just an unusually quiet year for us.

And I think regardless of the environment in Europe, I expected a very substantial rebound in 2020.

Devin Ryan -- JMP Securities -- Analyst

Got it. That's helpful. Thanks, Scott. And then just a follow-up.

The comment about the market underestimating kind of the earnings potential. When I look at consensus for 2020, it's about $1.70. And that would represent a reasonably good year for Greenhill just if you go back over the past handful. So I'm kind of curious how you guys think about earnings potential and if there's a year that would point to kind of revenues that you would say kind of represents kind of a normalized level or kind of the right level to think about.

Just any more context there would be helpful.

Scott Bok -- Chairman and Chief Executive Officer

I mean I can't be more specific and pointing at the specific numbers, of course. But look, I would say I don't think there's really any past period to look back to. I mean what's changed about the way our firm has evolved in the last a couple of years, really, is that, number one, we've got this very substantial capital advisory business, which we didn't have, obviously, until we acquired it almost five years ago. That's proven to be a really strong and reliable performer for us over five years.

I think, secondly, we always had a presence in restructuring, but it was a very small business for us. We, starting about 18 or 20 months ago, we really dramatically increased the size of that group. And by the time we got to the fourth quarter of 2019, it was clear that was going to be a really significant third revenue generator for us alongside M&A and capital advisory. And then lastly, if you just look at the kind of the regional variations in M&A, it's been a relatively quiet period for some years in Europe relative to the U.S., and last year was a particularly quiet year for us.

But I think if you assume that you're going to have something that's a little more representative across the regions of what the teams are capable of there, then, look, there's a lot of upside in terms of how M&A would look on a global basis versus last year, and then you add to that a growing restructuring business and what's been a proven contributor in capital advisory, and we add that off to being pretty optimistic about our future here.

Devin Ryan -- JMP Securities -- Analyst

Got it. So just to maybe say it a different way, if I think about kind of the revenue potential, you have more MDs today than you've had in the past? Is the view that there's more revenue potential in the firm today than historically? Or am I not catching that right?

Scott Bok -- Chairman and Chief Executive Officer

No. I would say definitely. I mean, historically, we've never had a really substantial size restructuring team. I think in Europe, we've never had a stronger team there, notwithstanding that last year was a difficult year.

I think the team in terms of breadth and depth is better than it was even in the precrisis years, for sure, and we've got the capital advisory business as well. So we've got lots of other initiatives to improve things. And certainly, we've upgraded as every firm in our business does every single year in terms of trying to put the best team on the field that you can each year. But yes, I think the potential of this firm is certainly greater than it has been historically, which is why I don't point to any given year and say, yes, that's the year we want to emulate.

The years we want to emulate are better than anything you've seen for the last decade by a meaningful margin.

Devin Ryan -- JMP Securities -- Analyst

OK. Great. Thanks Scott. I'll hop back in the queue.

Scott Bok -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Michael Brown from KBW. Please go ahead.

Michael Brown -- KBW -- Analyst

Good evening, guys. Scott, if you could just first start on the revenue result this quarter, just wanted to get a little bit more color on kind of the areas of strength by region and by type. It sounds like it was a good contribution from the non-M&A advisory businesses. And then it would also be helpful if there was any pull-forward activity this quarter just as we kind of think about modeling for the next quarter.

Scott Bok -- Chairman and Chief Executive Officer

Sure. Let's start with the last part of the question because it's really the easiest. There was nothing material that was pulled forward in an accounting sense or even in a sort of things accelerating and getting done more quickly. I mean, frankly, there were times in the quarter we actually expected it to do materially better, but deals get delayed.

That always happens in our business. And but there certainly was nothing pulled forward, perhaps, to some degree, the opposite. In terms of where we did well, clearly, expectations were lower. And if you look at the database that I know some of our analysts like to look at, they were very substantially lower than what reality was.

And I think it really came from all three businesses. I think capital advisory had a good, very good year but also a very good fourth quarter. The restructuring business, which we invested a lot in, as I said, about 18 months ago had a performance that just got steadily better throughout the year and by the fourth quarter was very significantly better than where it had been at the beginning of the year. But also in M&A, again, outside of Europe, it was quite good.

And I think in some places where maybe the databases aren't quite as good, it's sort of monitoring things. We had a good, our best year ever in Brazil, and a lot of that fell in the fourth quarter. We had our best year in many years in Australia, and a lot of that sort of fell in the last half of the year. And as I said, we did reasonably well in the U.S.

and other markets also, really just with the one outlier on the negative side being Europe. So it was pretty much across the board, and I think a whole bunch of things that added up to a number that was quite a bit better than what most were expecting.

Michael Brown -- KBW -- Analyst

OK. And just a follow-up on that, how much of your revenues, and I guess just maybe the recent quarters, have been from some non-M&A advisory businesses just from Cogent and from restructuring? I know it probably changes quarter-to-quarter, but if you kind of gave a range on that, that would be helpful.

Scott Bok -- Chairman and Chief Executive Officer

I don't really want to go into more detail than that. I mean one of our competitors used to break out restructuring advisory unlike anybody does. So I guess Houlihan Lokey still does because, for them, it's such a large part of their the firm. But I think the other ones, the more M&A-oriented firms, I think have not done that for the reason that we've never done it, which is that it's very hard to draw the line between an M&A deal and a restructuring deal.

There's just so much overlap between those areas where you have industry specialists, managing directors in the M&A side who are helping win business and do business and restructuring. So it's hard to say. I mean we do break out capital advisory, and that number has been north of $50 million for three years in a row in terms of the revenue level there and the secondary business we acquired five years ago. And in restructuring, I can say it's certainly significant, and it's becoming more significant as we speak.

I think 2020 will be, there's material upside relative to 2019 for them, but it's hard to quantify any further than we do already.

Michael Brown -- KBW -- Analyst

Thanks. And just one last one from me. Just wanted to dive into the MD headcount. So last quarter, you ended with 79 MDs.

This quarter, it looks like you promoted five, and you're at 79 MDs currently. So is the delta there just retirement driven? And then as you think about 2020, are you still targeting? I think your target is about 10, plus or minus, net additions at any given year?

Scott Bok -- Chairman and Chief Executive Officer

Yes. Yes, I would say the target is roughly the same. I mean what happened in the fourth quarter in terms of sort of accounting for pluses and minuses and managing directors mostly was the number of people moving from managing director to senior advisor status, which is not a retirement move, but it's maybe a later-in-the-career move. So there's no one, I can honestly say for all of 2019 and '18, that was a voluntary departure that had a material impact or material potential impact on our firm.

So we've done a really remarkable job of retaining our best talent. And as people do get later in their career though, some people will move to a little bit different status of senior advisor, and that's really what you saw at year-end just because the new class of folks got promoted to managing director.

Michael Brown -- KBW -- Analyst

Thank you for taking my questions.

Scott Bok -- Chairman and Chief Executive Officer

OK. Thank you.

Operator

The next question comes from Jeff Harte from Piper Sandler. Please go ahead.

Jeff Harte -- Piper Sandler -- Analyst

Good afternoon. A couple for me. One, kind of just clean-up-wise, non-comp expense, if we kind of take this quarter, is $21 million; and back out the two items you broke out, it gets us to like $18.5 million. Is that kind of a reasonable base to build off of going forward?

Scott Bok -- Chairman and Chief Executive Officer

Yes. I think that's pretty reasonable. We have, like a lot of firms who have taken a close look at all that stuff, in this year, we had, some years, you have a little bit of sort of foreign currency gains. Some years, some losses.

This year, a flip from a gain to a loss. And we had something that's very unusual for us, one situation involving a reserve on a receivable, for a receivable, which might, in the end, get, who knows, may end up getting paid, but we try to be conservative on that sort of thing. So I think if you take those out, you're at a pretty good base for what we expect going forward.

Jeff Harte -- Piper Sandler -- Analyst

OK. And you had mentioned kind of capital advisory or the capital markets kind of having a strong quarter. And I know we're kind of used to looking at Cogent and kind of being guided, so it used to be close to $40 million a year of revenues. Can you resize that secondary business at all for us? Is it still kind of similar to the size it was or has become meaningfully bigger?

Scott Bok -- Chairman and Chief Executive Officer

No, it's definitely become meaningfully bigger. I mean I would say the first, we bought it, again, going back to sort of the way we structured the earnout that we originally put on the deal, we bought it on the basis that it would turn out to be an attractive transaction for us and they would get their earnout payment if they achieved about $40 million a year revenue run rate. For the first two years, they got about as close to that as you can possibly get without quite getting it. In the next two years, it essentially went north of $50 million then north of $60 million and last year sort of settled back to the low 50s again.

So certainly, if you look at the last three years, you would say that's no longer a $40 million revenue year business. Of course, all businesses are cyclical and can be impacted in any given year, but the recent data would suggest that we now hope for that to be a comfortably $50 million-plus business for us.

Jeff Harte -- Piper Sandler -- Analyst

OK. And kind of looking at the revenue outlook for 2020. When we look at kind of the visible transaction pipeline, which admittedly can be a dangerous past time, but if we kind of take out, really, the largest transaction that, at least, the companies don't think will close until early part of next year, we're looking at a pipeline that from a historic perspective looks weaker than it's been in a while. Can you kind of help walk me through what we're missing here? Is it invisible stuff? Is it non-U.S.

stuff? Is it stuff to be announced? Because your outlook kind of tone sounds more optimistic than, at least, what we can see from the outside.

Scott Bok -- Chairman and Chief Executive Officer

Yes. And look, and I guess that was really the case for Q3 and Q4 as well, especially Q4 when expectations were so much lower than the reality. Look, I think it's a lot of things. I think there certainly are a lot of things we're working on that we have strong expectations for announcements that will lead to transactions this year.

We, as I said, are expecting another good year in capital advisory. We're expecting to continue to build momentum in restructuring. And we are seeing a more kind of diverse geographic contribution from some of the markets where the databases aren't quite as good at picking up all the transactions that get announced that may not make The Wall Street Journal or something, but they're important in whatever region of the world they're in. So it's a lot of little things and, hopefully, a few big things sprinkled in there that lead us to be reasonably optimistic.

Obviously, there's a long year ahead, so we'll see how it plays out, but we feel very good about the book of assignments that we're working right now.

Jeff Harte -- Piper Sandler -- Analyst

OK. Thank you.

Scott Bok -- Chairman and Chief Executive Officer

OK. Thank you.

Operator

The next question comes from Richard Ramsden from Goldman Sachs. Please go ahead.

James Yaro -- Goldman Sachs -- Analyst

Thanks. This is James Yaro filling in for Richard. The first question is, I guess, the tone around this call as well as for the peers this earnings season has been focused on Europe on the M&A front. Is there any dialogue that you've heard? Or can you talk about the client dialogue in the U.S.

M&A environment, especially in light of the fact that the industry data for January has been significantly worse? And obviously, understanding that doesn't necessarily reflect your business.

Scott Bok -- Chairman and Chief Executive Officer

Yes. Yes. I think the reason we and perhaps others speak of Europe more than the U.S. is, it has been a reasonably good environment in the U.S.

for some years now, and we, at least, continue to feel, as I think a lot of our peers do, that it continues to be a pretty favorable environment in the U.S. We've got low interest rates, certainly, ready available, availability of credit for most companies. You've got relatively high share prices, a pretty good economy and reasonable growth rates and all those things that probably generally suggests a pretty good M&A market. I think the reason I highlight a bit more and perhaps some others do Europe is really just the change there where it's been a long period post-financial crisis of weaker activity there than in the U.S.

There have been all kinds of good reasons for that, including Brexit and elections and slower growth and all that, but if you look at this particular moment, when it seems like some of those uncertainties were taken away, and then I look into our own backlog of assignments, it just feels like there's a material change in Europe. Whereas in the U.S., it's maybe a continuation of what's a pretty good market. Now as to the first month of the year, I take your point that activity looks pretty anemic. It did last year as well, and I don't know why this has occurred two years in a row.

But last year, if you looked at the data for January or even January and February, it looked like it was going to be a dreadful year. By the time we got all the way to the year-end, it looked like M&A activity was down more like 10%, really not that different at all from the prior year. But things really ramped as the year went on. And so I wouldn't draw, all I'm saying is I wouldn't draw any conclusions, positive or negative, from a month of activity in the M&A market.

Certainly, what we're seeing in the U.S. and increasingly in Europe is a pretty good environment for deal activity.

James Yaro -- Goldman Sachs -- Analyst

Got it. That makes sense. Were there any significant pull-forwards of deals in this quarter?

Scott Bok -- Chairman and Chief Executive Officer

No.

James Yaro -- Goldman Sachs -- Analyst

OK. And then the final cleanup one is, in the past, you've given the interest income number for the quarter. I know it wasn't in this release. Is there any way you could size that for the quarter?

Scott Bok -- Chairman and Chief Executive Officer

I would just call it trivial, really. We've tried over the years, I mean we used to, many years ago, be in the investment business in a pretty big way. And then for years, we broke out investment income, and then later, we changed it to interest income. I mean we're actually have become, over time, a very simple business.

And in today's very low interest rate world, interest income is really trivial for us. So we decided it was easiest to just have one line of revenue. We don't really have, in some ways, different lines of business. Yes, M&A restructuring and capital advisory are all somewhat different, but they're all advisory and they all overlap with each other in various ways.

So we just consolidated on the one simple line.

James Yaro -- Goldman Sachs -- Analyst

Got it. Makes sense. Thanks a lot.

Scott Bok -- Chairman and Chief Executive Officer

OK. Thank you. And thanks, everybody, for calling in, and we'll speak to you next quarter.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Patrick Suehnholz -- Head of Investor Relations

Scott Bok -- Chairman and Chief Executive Officer

Devin Ryan -- JMP Securities -- Analyst

Michael Brown -- KBW -- Analyst

Jeff Harte -- Piper Sandler -- Analyst

James Yaro -- Goldman Sachs -- Analyst

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