Greenhill & Co. (GHL) Q1 2020 Earnings Call Transcript

Greenhill & Co. (GHL)
Q1 2020 Earnings Call
Apr 30, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Greenhill first quarter's earnings conference call. [Operator instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Patrick Suehnholz, director of investor relations. Please go ahead, sir.

Patrick Suehnholz -- Director of Investor Relations

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's first quarter 2020 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 first quarter revenue of $67.1 million, an operating loss of $2.7 million and a loss per share of $0.40. The revenue figure was 31% higher than last year's figure, but significantly lower than what our outlook indicated a quarter ago. The negative earnings per share figure was exacerbated by two factors: an unusually low tax rate; and the fact that our basic shares rather than fully diluted shares are used to calculate EPS in a loss scenario.

Our fully diluted share count is 3.1 million higher than our basic shares outstanding figure. Before I go into more detail on our results and our outlook, I want to provide an update on our operations since the COVID-19 virus started impacting normal operations. I'm very pleased to report that while our 17 office locations have essentially been closed for some weeks, our team has continued to serve clients very effectively from their various remote locations. Our senior bankers have remained in close contact with clients, and the rest of our team has helped them deliver work product that is consistent with what we produce when everyone is working from their offices.

As a result, we've won many new assignments in the recent weeks and have seen existing assignments progress to the point where deals are getting signed and closed. I've been very pleased with how well we are functioning and how much client engagement we've been able to maintain. Now I will provide some more detail on our results as well as comment on our outlook in light of the continuing health crisis and related impact on the global economy and financial markets. In terms of first quarter revenue, we saw significant improvement in European M&A and U.S.

restructuring advisory retainers, which offset weakness in other parts of our business. We saw previously announced M&A transactions generally progressed to completion as planned, and we expect that to continue to generally be the case. However, the health crisis had a significant negative impact on earlier stage transaction processes for both M&A and capital advisory, and that negatively impacted our results. Here's how we see the revenue outlook for each of our businesses.

Clearly, the best news is in our Restructuring Advisory business. As our shareholders know, we began a major expansion of this business just over two years ago, and that is paying dividends now. As previously reported, as a result of our expansion, we saw significant improvement in our restructuring business last year and had a particularly strong finish to the year. We came into this year expecting to see another significant annual increase in revenue for this business.

Over the past several weeks, our outlook for that business has further improved, such that our multi-retainer fees are running at the highest they've ever been. And we expect that further opportunities will continue to arise in that business given current economic conditions. As a result of both increased retainers and the completion fees that will ultimately follow, this business should be a very important contributor to our total revenue over the next several quarters. In our M&A business, we entered the year with a reasonably attractive backlog and particularly expected a strong year in Europe.

Our announced transaction backlog has either closed or remained in place, and we continue to expect a much improved year in Europe. While earlier stage transactions in process have, in many cases, been delayed, in recent weeks, we've been surprised at how many new M&A assignments we've won around the world in spite of adverse economic and market conditions. But we recognize that it will take time for these to develop and to announce and then complete the transactions. Once there is some more clarity as to how and when the closed down parts of the global economy will reopen, our medium-term expectation is that the crisis will turn out to be a catalyst for forced sales, opportunistic purchases and continued consolidation across most industries.

In our capital advisory business, the recent sharp market decline immediately impacted transaction activity. However, once alternative investment funds provide new valuations that marks down levels, we expect that many institutions will want to make adjustments to their portfolio allocations, given recent market moves that will have meaningfully impacted those allocations. Sales of private equity investments in the secondary market should be an important tool in getting back to targeted allocations and our large global team and leading market share position us well to advise on those. Something for our revenue expectations.

We see the first half of this year as soft, though still adequate to meet our quarterly operating needs. In the second half, we expect substantial improvement in all our businesses as our announced M&A transactions progress toward completion, restructuring revenue continues to grow and institutions pursue capital advisory transactions in order to reallocate their portfolios based on reduced market valuations. Looking ahead to 2021, we expect further improvement in restructuring advisory, given the long time table from engagement to completion that is involved in most assignments of that type. M&A and capital advisory activity should also return to a more normal pace by then, assuming some stabilization of markets and the economy over the next several months.

Turning to the cost side of our business. The absolute dollar cost of compensation was up 21% versus last year, somewhat higher than last year's annual increase in professional headcount. As a result of a relatively low revenue level, we ended up with an unusually high quarterly compensation ratio. As always, our focus is on the annual compensation ratio.

And as we did last year, we will aim to bring that ratio down significantly by year-end. Offsetting some of the compensation cost increase, we had significantly lower non-compensation operating costs in the quarter, partly as a result of proactive steps we've taken and partly as a result of constraints on travel. We plan to continue to closely monitor such costs with the objective of improving the efficiency of our business model on a long-term basis. As one element of that cash savings, starting next year, we will begin spending less in our New York office space relative to what we have been paying, but we will have some months of overlap in rent expense on our current and future New York office spaces during the current year.

We believe there are many other sources of potential savings in non-compensation costs as well. Our interest expense for the quarter declined as a result of the refinancing we did a year ago and the recent cuts in interest rates, and that expense should fall further in the current quarter due to some debt reduction and lower rates. Our tax rate for the quarter was unusually low as a result of the accounting treatment on the vesting restricted stock. Adjusting for that accounting issue, our effective tax rate for the quarter would have been 22%, which is in line with our general expectation for the year.

That rate benefited relative to last year from higher earnings in the United Kingdom, which has a lower tax rate than the U.S. In terms of capital return, prior to recent market volatility, we purchased about 1.1 million shares and share equivalents during the quarter. And we also declared our usual quarterly dividend of $0.05 per share. We ended the quarter with $79.7 million in cash and term loan debt of $350 million following the repayment of most of our debt repayment obligations for the year.

Our remaining principal payment obligation for the year is $3.1 million due at year end. For the foreseeable future, our primary focus has shifted to further debt repayment rather than share repurchases in light of market uncertainty. In closing, I reiterate that we are in a challenging time and recognize there is more uncertainty than usual as a result of the current health crisis. But I also reiterate that I'm very pleased with how our firm is performing.

The well-timed expansion of our restructuring business on top of our acquisition of our capital advisory business more than five years ago, has given us a far more diversified business than we had during the financial crisis 10 years ago. Given the sharp downturn in the global economy, the countercyclical benefits of our restructuring business are materializing very quickly. And we were fortunate to end the year with a reasonably attractive M&A backlog that happened to be away from the sectors that have been most negatively impacted by recent events. Our strategy is unchanged.

We continue to believe in the virtues of a purely advisory business. We've succeeded in creating a more diversified advisory business and are working to move further in that direction, particularly by further expanding our restructuring business. We've always run a fairly lean business in terms of cost and we aim to be even more disciplined going forward. The fact that our headcount growth was fairly modest in recent years should serve us well in the current market.

We will continue to be disciplined in that regard as well, while still making important strategic senior hires like we did during this quarter. With that, I'm happy to take any questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Today's first question comes from Devin Ryan at JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Great. Good afternoon, Scott and Patrick, I guess first question just on the advanced payments on the term loan facility. I guess what drove that? Why do that with the cash here? Just any thoughts around the driver of that would be helpful.

Scott Bok -- Chairman and Chief Executive Officer

Well, we did that, first of all, before all the virus publicity and then the impact on the economy and so on. And we did it for the very simple reason that we just felt we had excess cash. And so why leave cash sitting on our balance sheet, earning effectively no interest versus just giving it to the lenders a bit early and saving the interest expense on that. So it was really nothing other than a sort of an interest rate arbitrage and just kind of a bit of a prepayment related to that.

There's really not much more to it than that.

Devin Ryan -- JMP Securities -- Analyst

Got it. OK. That's helpful. And then with respect to some of the new business that you are winning, I mean I'm assuming that probably the conversations with clients have shifted, I mean so maybe the types of deals are changing.

Is that fair? Or is this really just kind of a continuation of conversations and just in sectors where deals are getting announced in sectors that maybe have been less effective? I'm just trying to think about some of the acceleration in certain areas that you've noted, and what's driving that?

Scott Bok -- Chairman and Chief Executive Officer

I would say that we felt like we had a lot of attractive early stage assignments coming into the COVID-19 crisis. And we don't really feel like any of that's going away. I mean things clearly have slowed down in a number of cases. But we don't — we feel like that sort of inventory is still out there to be picked up as things stabilize.

I think separate from that, we've had quite a lot of inquiry into kind of different types of transactions. Many are probably directly or indirectly driven by the crisis. It's companies looking at acquisition targets that suddenly are a lot cheaper than they used to be. There's a feeling that maybe some targets are going to be interested given the kind of the healthcare and maybe being part of a bigger, stronger company, a better balance sheet.

Clearly, large companies seem to be doing a bit better than small and midsize in the current crisis. So we think that's going to drive a fair amount of M&A activity, not in the next 30 days, but certainly over the next year or two as people come out of this crisis.

Devin Ryan -- JMP Securities -- Analyst

Got it. And then just last one around the secondary advisory business, the old Cogent business. So I'm assuming ou probably saw some slowdown there in the near-term just as you're waiting for an update on private equity portfolio marks, maybe you need a quarter or two. I mean how does that business tend to shift when you have market dislocations, how quickly can it come back? And in some ways, that would — I actually think that there may be more to do now that there's been maybe a little bit of dislocation that creates a desire for LPs to shift assets around or shift investments around and maybe more interest from buyers as well.

So I'm just kind of curious how to think about the cadence of that business as the year progresses to the extent we start to stabilize here a bit in the markets?

Scott Bok -- Chairman and Chief Executive Officer

Sure. I mean every downturn, of course, is a little bit different. But I think you're thinking about it the way we are. I mean, clearly, important to remember, that business mostly happens on the last day of a quarter.

I mean people may agree things all quarter long, but when you actually close the transaction and the the new limited partner buys and the old limited partner and it's transferred on the general partners' books in terms of who owns the stake and whatever private equity fund it is. That usually happens on the last day of the quarter. So if you have a big negative event that drives market values sharply lower, even if it's more than halfway through an existing quarter, it can have quite an impact on how much activity actually closes that quarter end. And clearly, that's what we saw this time.

And I think things will be fairly quiet until new March 31 valuations and all those funds come out. Those usually come out, I would say, maybe on average late, late May, some a bit earlier, some a bit later, but something like that. And we do feel like once that happens, that there actually will be a lot of activity that will be catalyzed by the crisis itself. I mean if you look at — it's been much publicized, the huge impact on university endowments and not just endowments, but whole universities.

Repaying room and board. Struggling to make money in their hospitals when they kind of retooled to be ready for COVID-19. At certain schools, the cost of losing all your athletic audience revenue. So there are all kinds of reasons that universities think about other types of not-for-profit institutions that have been impacted.

And then even just your general pension fund out there. I mean, the denominator, the total asset pool has shrunk pretty dramatically over the last three months. And yet the private equity, not just investments, but the commitments that they've made in regard to funds that they are limited partners in. Those are unchanged.

Those commitments are still sitting there. So our sense is that a lot of big institutional investors are going to think that they've got either too much private equity or the wrong kind of private equity and people will want to reallocate those portfolios. And we think there's scope for potentially quite a lot of that in the second half of the year, which is why I made the comments I did about sort of first versus second half in that business.

Devin Ryan -- JMP Securities -- Analyst

OK. Terrific. All right. I'll leave it there.

Thank you, Scott. And I'll hop back in the queue.

Operator

And our next question today comes from Michael Brown at KBW. Please go ahead.

Michael Brown -- KBW -- Analyst

Scott and Patrick, yes, I wanted to just kind of parse through your commentary and the outlook a little bit. So appreciate the color on the restructuring environment. You mentioned that those revenues, it sounds like it will start to come through — the completion aspect will start to come through in the next few quarters. And I mean that appears a little bit more optimistic, specifically to the timing than what we've heard from peers.

It sounds like most are kind of talking more about a 12-month lag on those completion fees. So can you just help me square that? Is it that there are certain types of activity that will close more meaningfully sooner? Appreciate that. Thanks.

Scott Bok -- Chairman and Chief Executive Officer

Sure. Certainly, I would agree. As I noted, that restructuring is going to have long time tables. And there's obviously no one standard time table, but it can be six, nine, 12, 15, 18 months, in some cases.

I think what's different from us than most peers is that their business in 2019 was probably relatively flat versus 2018. I mean 2019 was not a big year of restructuring activity. However, for us, we had just stepped up in a really substantial way, the size of our restructuring team. And so 2019 was a year of significantly increased restructuring activity for us.

And we entered 2020 with a substantially greater backlog than we had certainly a year prior to that, and even more large compared to two or three years prior to that. So I think unlike peers, we sort of came into this year thinking we were going to see a substantial increase in restructuring revenue for things that we worked on over the course of last year. And we, of course, had no idea COVID-19 was coming or that there was going to be a whole raft of additional restructuring projects that would ramp up pretty rapidly the retainer fees we're seeing. So when I talk about sort of completion fees in the first half of this year in restructuring, those are things that relate to work that we mostly did last year.

The things we've been hired on in the last five weeks, some of those, I would expect, will get to completion later this year and a fair number of the them undoubtedly will get to completion next year, which is why I think that even though we'll have, I think, substantial improvement in restructuring this year, I think next year, 2021 will be even better just because probably from this point forward, sitting here on May, around May 1, almost every new piece of business we win, it's probably going to be something that closes next year. So that's the difference really. It's that totally apart from COVID-19, we just had a very substantial increase in the size of our team and that led to a lot more business last year and now COVID-19 is just adding further to that.

Michael Brown -- KBW -- Analyst

Great. I appreciate the clarification there. So on the expectation for the second half to be stronger, any way to kind of parse through what kind of magnitude is it you're expecting there? And kind of how the quarterly trajectory could kind of play out from here. I understand that it's very uncertain times.

But just trying to understand, is it just a function of a very, very, very weak second quarter and kind of a return to more normal revenue environment in the second half? Or how should we think about it?

Scott Bok -- Chairman and Chief Executive Officer

I mean, I see the first — I see just kind of the year really in two halves. And I didn't say we expect a very, very, to quote you, weak second quarter. But it's — and I think I've given about as much guidance as really I can give. But what I did try to do is say, for each of our three businesses, there are reasons to believe, and of course, there's all kinds of uncertainty in the world, but there are reasons to believe today that each of the three should do materially better in the second half than the first half for three completely different reasons.

One, is that on the M&A side, we have some large transactions working their way through the pipeline. Hopefully, those get done. Secondly, almost anything that develops in M&A as the market sort of reawakens in coming weeks or few months it's clearly going to generate second half rather than first half revenue. So that's the M&A business.

On the capital advisory side, it's really just as I answered to the question just before you, that the first half, you kind of hit an air pocket when people say, wait a minute, I don't want to transact based on those net asset values that the private equity fund published, let's wait for the March 31 data that will come in May. So my guess is at least that we'll see quite a lot more of that in the second half. And restructuring is more of just kind of a big cyclical trend where our quarterly kind of retainer fees that we collect were quite a lot higher in Q1 than they were in Q4. We expect there'll be quite a lot higher than that in Q2 and probably quite a lot higher than that in Q3 and then in Q4.

So that's building the on the retainer side, but then the completion fees will clearly start to kind of some of the more recent transactions will kick in later this year as well. So it's hard to quantify all that, of course, but just directionally, in each of the three, there's a pretty good reason for thinking that the second half should look quite a lot different than the first half on the revenue side.

Michael Brown -- KBW -- Analyst

OK. If I can just shift gears and get one more in here. On the comp ratio, it was elevated this quarter, and you kind of gave some color on that, but I wanted to get a little bit more information there. So it ran at 81% this year and above last year's first quarter levels.

I guess, last year, it looked like you were essentially accruing, assuming kind of an improvement throughout the year. How should we think about what the elevated comp ratio in comp dollars have implied for this first quarter? And I guess why not — why run it so high in the first quarter if you expect it to come down throughout the year? Is there some contractual reasons behind that? And given kind of the challenging revenue environment, what gives you confidence that you'll be able to really bring it down given the revenue environment? It could be very challenging from here.

Scott Bok -- Chairman and Chief Executive Officer

Yes. Yes. Well, I mean just as a starting point, the comp ratio, look, it's high, no question, but it was higher last year's first quarter. That was 88%.

This quarter, obviously, was 81%. There's a lot of factors that go into where compensation is, the amount of headcount you've grown, the people that you've brought on, any commitments you've made to particular individuals, your expectation of what you're going to need to pay to be competitive and to continue to develop the business. So it's hard to give too much more color on that. But look, I would look back to last year as at least one scenario, certainly the scenario we are aiming for.

We ended the year with a very reasonable compensation ratio. I mean, I said it all year, last year that that's where we were going to aim for and where we hope to end up. And in fact, we did, at the end, end up very, very close to our our target annual compensation ratio. So we're going to try to do that again, and frankly, what gives me a fair degree of confidence that we can at least head in that direction is what I just said about sort of first half versus second half revenues.

And again, it's not just one of the businesses. It really feels like all three should be in a significantly different position in the second half than the first. And that ought to give us a fair amount of flexibility to bring that ratio down exactly like we did last year.

Michael Brown -- KBW -- Analyst

Thank you. Appreciate that.

Operator

And today's final question comes from Richard Ramsden of Goldman Sachs. Please go ahead.

James Yaro -- Goldman Sachs -- Analyst

Hey. This is James Yaro filling in for Richard. The first one is, obviously, you've seen a lot of strong growth in the restructuring business recently. Is there any way you could characterize the size of the business either today or perhaps before the coronavirus began to affect the environment? Just so we can sort of understand the durability of total revenue, in particular in light of the decline in M&A revenue.

Scott Bok -- Chairman and Chief Executive Officer

It's probably hard to do that, to be honest. I mean, look, it's going to be a quite significant percentage of our total revenue in 2020, but I actually think it's going to be for the long-term as well. As I said, we didn't know COVID-19 was coming and all the terrible impact on capital markets and so many companies' revenue and the impact on their balance sheets and so on. But we were already expecting a quite substantial percentage increase in restructuring revenue this year, and then it would grow in 2020 to become quite a significant part of the overall firm.

Clearly, our view of 2020 revenue and further of 2021 revenue in that area is even greater. So I mean, I think let me put it this way, if it's maybe of some help. A lot of the analysts will look at the various firms like ours and sort of try to quantify sometimes how much of the revenue was M&A, and how much is non-M&A and other activities like restructuring. And I think historically, we were on the end of the spectrum that was very far over toward pure M&A.

It's not all we did, but certainly, we were very heavily weighted toward that. I think we have moved to the point where certainly, I would feel like we're in the middle of that pack and maybe even given the capital advisory acquisition we did as well as the restructuring, maybe even moving toward the high end of our peer group in terms of how diversified we are relative to a pure M&A business. And that's just directional. Obviously, it's going to ebb and flow as times go to good times or bad.

And clearly, we're in a period where not for all companies, by any means, but certainly in some sectors, there's going to be a lot of challenges in dealing with balance sheets given the reduced revenue. And so I think for the next, I would think, really even 2-plus years, we're going to see restructuring be a really important part of our firm's total revenue, just like you're going to see for some of our more diversified peers.

James Yaro -- Goldman Sachs -- Analyst

Got it. That's actually super helpful way of contextualizing it. Maybe you could talk about how your capital return priorities have changed in light of the weaker macro environment. And if this crisis goes on for a more prolonged period of time, are there any actions that you would potentially consider to protect your cash balances?

Scott Bok -- Chairman and Chief Executive Officer

I don't see the need for anything in particular. I mean, had you posited for me the scenario that we're now in some months ago, what do you think life will be like if all of your offices close and you can't meet with clients and M&A activity plummets and so on. I mean, I probably would have had a pretty sober view of what the future might hold. But now that we're sort of six or 8 weeks into that, and I can see the flow of restructuring come in.

I can see that M&A is not completely gone away by any stretch. There are old things that slowed down a little bit, but are still there, a lot of new things that are developing. Frankly, I'm not overly concerned about our ability to continue to operate even if things stay difficult longer than I think they will. So we took the prudent step, I think, of saying, all right, let's just put a pause on further share repurchases given that there is undoubtedly a lot of uncertainty right now.

We can always come back to that later if it's appropriate, but likely not for the very near term, and let's do take a closer look at costs and things like that. And certainly, that's something we have done some of and what we will do more of. And I think between that and sort of the diversified revenue stream, we've got, it certainly feels like we're comfortable to get through this whole thing. And the kind of the switching from a share repurchase focus to a balance sheet strengthening focus is just one small step to further bolster our case in case things turn out to be more difficult than what I'm expecting right now.

James Yaro -- Goldman Sachs -- Analyst

Understood. And then I guess related to that, how has the recruiting environment changed over the past few months? And now that you are seeing better activity and you feel like things are actually stronger than you might have expected if I had posited this to you a few months ago. Are there opportunities to hire senior bankers? Is that something that you're looking into as well?

Scott Bok -- Chairman and Chief Executive Officer

Yes. We actually are. We hired a couple of senior bankers full-time type and then a couple of other senior advisors who are more part-time roles. In the first quarter, we are actually in dialogue with some others.

It's a little different than normally. We're talking by video and so on. I've actually been speaking to somebody else all morning. So new candidates continue to materialize.

And kind of old dialogues, in some cases, getting rekindled. So I don't think this is going to be a huge recruiting year, but I do think we've added some really important talent, and I think we're going to add some more important talent certainly over the course of the rest of the year.

James Yaro -- Goldman Sachs -- Analyst

OK. Thanks a lot. All right.

Operator

And our next question today comes from Dallas Hunt of LPL Financial. Please go ahead.

Dallas Hunt -- LPL Financial -- Analyst

Guys, I really like the strategy you guys have of focusing on the advisory. I had a question about — just wondering how you guys are — if you have specific goals on how much debt reduction you want to get this year?

Scott Bok -- Chairman and Chief Executive Officer

I wouldn't, as much as possible, is probably the short answer. But I wouldn't want to try to quantify it. I mean really, our focus this year is just on having a reasonably good year in a really tough environment. And the way I look at it is if in the first half, which obviously is very severely impacted by COVID-19, if we can generate even in that tough six months enough revenue to run our business and if we can position ourselves during that period to hopefully have a much stronger second half after that, then I'm going to consider it a victory in what's probably the biggest financial and business crisis certainly of my career.

And we'll see where we are at the end of the year. And obviously, we have our seasonal needs. They tend to be highest at the beginning of the year and then decline over the course of that year, and we'll do what we can on on further paying down debt over time. But the main focus is let's just prove this business can perform.

Even under some pretty extreme circumstances, and we feel like the first several weeks of these extreme circumstances is where we've been proving that.

Dallas Hunt -- LPL Financial -- Analyst

Thanks, guys.

Scott Bok -- Chairman and Chief Executive Officer

OK. Thanks everybody else for dialing in. I think that's our last question, and we look forward to speaking to you all again soon. Goodbye.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Patrick Suehnholz -- Director of Investor Relations

Scott Bok -- Chairman and Chief Executive Officer

Devin Ryan -- JMP Securities -- Analyst

Michael Brown -- KBW -- Analyst

James Yaro -- Goldman Sachs -- Analyst

Dallas Hunt -- LPL Financial -- Analyst

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