Greenhill & Co., Inc.

Thank you. Good afternoon and thank you all for joining us today for Greenhill's third quarter 2020 financial results conference call.

I'm Patrick Suehnholz, Greenhill's Head of Investor Relations. And 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.

Thank you, Patrick. We reported third quarter revenue of $56 million and a loss per share of $0.49.

For the year-to-date, we had revenue of $170.9 million and a loss per share of $1.69. Revenue for the year-to-date was down 12% compared to last year.

In short, for the year-to-date, significantly increased restructuring revenue has not been sufficient to overcome significant declines in M&A and capital advisory revenue. However, consistent with our comments last quarter, based on the expected timing of various M&A and restructuring projects, we expect a particularly strong fourth quarter resulting in a respectable revenue outcome and a net profit for the full-year.

Before I go into more detail on our results and outlook, I will provide you a brief update on our operations during the pandemic. In summary, we’ve continued to function well operationally maintaining close client relationships, built new relationships and provide the same high quality advise we’ve always offered.

Many of our offers are reopened to some degree, but regardless of how long it takes to get everyone back into offices, we’re fully prepared to continue for as long as necessary in a hybrid work model as we advise clients on addressing challenges and pursuing opportunities created by the pandemic. Now I will provide a bit more detail on our results and outlook.

As noted on recent quarterly calls, we saw big increase in restructuring activity as the pandemic took hold and we were well-positioned to take advantage of that, given the significant and well timed expansion of our restructuring team over the 2 years prior to that. Based on our expectation regarding various restructuring completions.

We expect that by the time our full year results are recorded, it will be clear that restructuring is now a major contributor to our firm's revenue and provides a valuable hedge against periods of economic weakness and reduced M&A activity. Given continuing financial distress in many industries, we expect restructuring to continue to be a major revenue contributor for at least 2021 and likely beyond.

While the decline in M&A activity in the early part of the pandemic more than offset the benefits from increased restructuring activity, the third quarter saw a sharp increase in M&A activity, particularly in the many sectors that have not been adversely affected by the pandemic. We therefore expect M&A to be a solid contributor to our full year results alongside restructuring.

Furthermore, based on the pace of new assignments at our firm and the fact that overall M&A activity this year was far below historic levels, particularly relative to total stock market capitalizations, we expect the increased level of M&A activity to continue. This is obviously important for us as M&A continues to be by far the largest part of our firm.

By region, the U.S. will be a major contributor to full year results given that it is where the bulk of our restructuring activity is located.

Europe has a smaller restructuring opportunity than the U.S., but will be a major contributor to M&A revenue. Deal activity in Europe has been depressed relative to the U.S.

for several years, but we are hopeful that what we are seeing is the beginning of a strong rebound. Other regions will likely make a reduced contribution this year, but we are seeing signs of a M&A rebound across all markets.

Turning to expenses, our compensation ratio for the year-to-date are significantly higher than normal, but we expect to bring that down by year end as a result of higher revenue. Our non-compensation costs are materially lower for the year-to-date and we expect that to continue until the pandemic is behind us.

Even then we expect to see some expense savings relative to historic levels. In other costs, our expense -- interest expense has continued to decline as a result of last year's refinancing and recent declines in interest rates as well as from some reduction in debt levels.

Our tax rate is not meaningful for the year-to-date, given a loss, but we expect for the full year that it will be at or slightly below the mid 20% range we have indicated for the last few years. I will close with a few comments, summing up our strategy.

With respect to revenue, we aim to increase productivity by managing our senior banker and supporting professional headcounts, such that we have more resources and high fee areas like M&A and restructuring in the most important markets and less resources in lower fee areas. We've had some personnel departures that will help with the latter part of that equation.

And we have a robust recruiting pipeline that will help on the former part of that equation. With respect to costs, we've taken the opportunity to reduce costs where appropriate and possible and we'll continue to do so.

One example is that the rent cost of our New York headquarters will be materially lower starting next year, plus, of course, our interest expense will continue to decline as we pay down debt. With respect to capital management.

Our primary focus is on accelerating debt repayment. And if this year ends, as we expect, we will make progress in this regard early in the new year.

Alongside accelerated debt repayment, we also expect to resume prudent share repurchases early in the new year in part by means of tax withholding on the vesting of restricted stock. Our team collectively owns about half the economics of our firm through stock and restricted stock.

As a result, we have a powerful incentive to implement the foregoing strategy, such that we substantially enhanced long-term shareholder value for the benefit of external and internal shareholders. With that, I'm happy to take any questions.

Great. Hi, Scott.

Hi, Patrick. How are you guys?

Good. How are you, Devin?

Doing well. I guess, first question on -- that the commentary around the fourth quarter.

It sounds like it should be, obviously, quite a strong revenue quarter is the implication. And to drill into the restructuring piece, is it fair to think that the fourth quarter is really the first quarter where the pandemic -- restructuring activity is going to be hitting?

And is that tight -- is the fourth quarter kind of an aberrational quarter for restructuring, or as you look in 2021, are those the types of quarters that we should expect just based on how the backlog had built? I don't know if you can give any more flavor for that, but what I'm trying to just think about kind of the step function in the potential restructure relative to what it's been contributing through the first three quarters of this year.

Okay. Good question.

I'll try to help a little bit on that. Although it's, of course, it's always hard to quantify too much or forecast too much, of course.

Look, we came into this year with a certainly a smaller restructuring pipeline than most of our peer firms would have had. Most of our peer firms had much, much bigger groups.

We were just in the process of ramping up starting in 2018, very heavily through 2019, building up a team, building up a backlog. And so what we're going to see in terms of restructuring contribution this year is going to very heavily fall on the fourth quarter, and it's going to be very heavily stuffed that the opportunities that developed in the early days of the pandemic.

So I do think, of course, those opportunities are going to stretch out. I mean, clearly with what's going on with the virus and further economic lockdowns and slow return to things like travel and areas like that, I mean, clearly there's going to be a prolonged impact of that pandemic.

And I think the kind of the message I'd like to convey in response to your question is that, we just have a kind of a newly expanded team as a really kind of right around just the time this pandemic really, really hit. And so we didn't have as big a backlog probably as most of our peers did coming into the pandemic.

And so, if you think about how long it takes, even for a pretty fast paced restructuring to get to the completion line. I mean, a lot of those things, we -- those opportunities we won in the early days of the pandemic, many of them -- a little bit of closure in Q3, a lot more in Q4, certainly significant amounts will roll over into next year.

And then I think very importantly, going forward, we now have for over a year now in place a significantly expanded team. So I think, for us, the kind of the run rate, if you will, of restructuring, there really should be a step function change from where it was say certainly two years ago, even a year ago.

And you'll start to see the real benefit of that, I think, in the next quarter or two.

Okay, terrific. Yes, I was just really getting at just to make sure that the fourth quarter wasn't exhausting the current backlog, which it doesn't sound like it is.

Okay, great. And then just a second question around, just headcount, senior banker headcount, obviously taking a little bit of a step back here, you mentioned kind of shifting where you're focusing.

I guess, where have you pulled back a bit? And then if you look at the pipeline today, where are you going to be leaning in?

So if you think about 2021, where are the opportunities? And when we look at the compensation line, is there any additional compensation in there just tied to headcount reduction?

So maybe it's a bit higher just trying to think about the nuance for the comp ratio. I know there's not too much to read into it because of the revenue quarter, but just trying to kind of think through since there was another step down.

Yes. Look, I think we -- for example, we’re pulling back from areas of M&A where we think there's just not nearly the fee opportunities.

Certainly Brazil was a great example of that. I mean, we were there for a number of years maybe between what happened with that currency they are getting crushed and valuations of assets getting crushed.

There just isn't the opportunity to earn fees that are going to get you to the kind of productivity level that you want. So that's one example.

In capital advisory where we're definitely going through a bit of an evolution, we've been in that business for several years where really kind of an unchanged focus in Europe and in Asia, which is probably the fastest growing part of that business. In the U.S., I think we'd -- we probably had ended up with two big top heavy concentration of resources when you probably would ideally have the team be -- maybe a very similar size, but somewhat different shape to go after that business.

And I think also to evolve the way that business -- what that business pursues away from the sort of the standards secondary transactions where an endowment or a pension fund is selling a block of private equity interest to a secondary fund to doing more complex, general partner restructuring type transactions, where you're working with private equity funds to meet their objectives. And so I think there's some evolution, both in terms of the shape of the org chart and in terms of what business you're going after there to again ramp up the productivity to the level we want it to be at.

Okay. Terrific.

I will leave it there and hop back in the queue. Let someone else ask.

Thanks guys.

Thank you. Yes.

Hey, good afternoon guys.

Hey, Jeff.

A couple from me. When we look at, at least the visible closings or the things we can see for the third quarter, it appears especially from some of the website stuff, that there were a number of closings kind of in the last couple of days, and maybe even the first day of the fourth quarter.

Did that have any impact as far as revenues being kind of pushed forward in the next quarter or kind of pulled back into this quarter?

I don't think there was. I mean, there's nothing actually that springs to mind of any materiality.

So, I think there were probably were some things we thought would get done in the third quarter that are -- we're ending up in the fourth quarter. But directionally, I think what I've said today is very consistent with what I said last quarter, which was we thought the third quarter would be better, but that the real strong quarter that would get us to the result we want for the full year would be really -- a very heavy fourth quarter.

And that's -- that continues to be the case. So yes, some things moved around a little bit, but certainly no material pull forward of revenue, if anything, some things that we thought might get done in the third quarter ended up slipping into the fourth.

Okay. And you mentioned M&A conversations or least kind of things appearing to be coming back pretty, pretty strongly.

We've heard that from others as well. I guess historically I'm used to thinking of you guys as being more on kind of large deals and that implies kind of cross border deals.

So, I mean, are you kind of seeing that pickup in your traditional areas of strength as well? It kind of seems that the pandemic that maybe cross border has been kind of sluggish.

I would say, yes. What we're seeing, I mean, we’re -- I feel like we're seeing and I know others have said very similarly, a real kind of across the board pick up in M&A dialogues and that involves a lot of public companies, that involve certainly a lot of private equity as well.

And it does actually involve larger transactions and cross border transactions. I know that sort of seems like, a difficult thing to do in an era where it's not so easy physically to cross a border to do due diligence or meet management, or have a contract negotiation.

But people are finding a way to get it done, or at least to get offers rolling. So I think, at least from the indications we see right now, I actually think 2021 could end up being really a very busy year of M&A, not just for our firm, but I think the whole market, but I think we'll -- we should be well-positioned to participate fully in that.

And to see that, kind of manifest itself in the way it typically has for us, which is public company deals and larger deals with a heavy component of cross border.

Okay. And looking at comp expense, it seems like it kind of touches down around $46 million, $47 million in recent quarters.

Is there any kind of a dollar floor we should think of? And I guess I'm trying to get my mind around if revenues get quite a bit better next year, how much comp kind of flexibility could there be as far as driving those revenues down to the bottom line?

Look, I think there is -- we -- the first three quarters is kind of a misleading one, really to look at the comp ratio. I think when you -- when we get to the end of the year, you'll say, okay, at least I think you'll say, okay, this was a pandemic impacted year, clearly that had an impact on revenue.

The firm came into the year 2020 with a very positive outlook and COVID came along and sort of created a bit of an air pocket and pushed some things back. But I think we'll get to a -- what you'll think is a kind of a reasonable place for a comp ratio for the year.

And then I think, next year and beyond, it should be returning back to kind of a more normal sort of level. And that implies a lot of comp leverage, a lot of operating leverage in the sense that just going from a very elevated comp ratio back to a normal comp ratio means, really dramatic impact of higher revenue, which we again are kind of expecting to see in the fourth quarter and certainly hopeful to see next year as well.

Okay. Thank you.

Okay. Thanks a lot, Jeff.

Great. Thank you for taking my questions.

Scott, I wanted to ask about the capital advisory business. So you touched on that a little bit in your -- in Q&A already, but I wanted to ask about some of the, I guess, financial implications of those departures.

So, one, from a revenue perspective, I was looking at one of your investor presentations and that business contributed about $50 million of revenues in 2017, '18 and '19. So I guess, one, where do we -- where can you kind of offset that revenue headwind?

It sounds like it's going to be the restructuring business next year, but just interested to hear, how you'll kind of overcome that headwind. Two, is there any deferred comp benefit that we should see or contemplate in our fourth quarter numbers?

Is there kind of a clawback component there? And then, three, can you just give us a view into the margin for that business?

It sounds like you mentioned it was somewhat top heavy. Perhaps, it wasn't all that efficient of a business, but just some color there would be interesting as well.

Sure. Okay.

To put it in perspective, I would say that business as a whole, for the time we owned it and we bought it, of course, as a fully functioning already fairly old business, so it was up to a normal run rate. It average right just kind of added just under $10 million a year -- a month.

I'm sorry, a quarter, $10 million a quarter, $40 million a year. The 50, what, I'm not sure if your numbers are quite right for the last few.

We did have some higher and had some lower this year, much lower just because the pandemic impacted that business so heavily. But I would think of that historically as a $40 million a year revenue business.

I would say, it was somewhat top heavy. It also is a little more sort of regulatory costs and things like that.

It's a little bit different than our other advisory businesses. So I think if you thought of that as maybe a 20% margin business, i.e., a couple million dollars of pre-tax income per quarter.

And again, what happened with some people leaving, it really has an impact of this in the -- in Europe hasn’t impacted us in Asia. So you're talking about we lost people who contributed some portion of $2 million a quarter in pre-tax income.

So certainly not the end of the world. As I said, I do think we over time evolved to having frankly, too many people at the senior end.

And sometimes that's not the best way to maximize revenue relative to more of a -- kind of a normal shape org chart, where you've got more supporting people helping to drive the business. So we'll evolve that business in a few ways.

I think trying to make it more efficient than it has been and it's very natural by the way after an acquisition that once you get through the whole contractually committed period, an earn out period, you end up doing some restructuring. And I -- my goal as we get through that is to end up with a little more efficient team, a little less top heavy team and a team also that is focused more on sort of the more complex end of the transaction spectrum, as opposed to, almost entirely on kind of more straightforward secondary transactions.

So I don't know how much -- I don't expect all that much of an impact based on where the business is today in terms of income. And as I said, we will rebuild and restructure there as necessary.

And at the same time kind of unrelated really, we have a pretty robust pipeline of M&A candidates and what I think of as the best, highest fee markets that we'll be looking at in coming months as well.

And just about -- was there -- is there any deferred comp?

Oh, yes. And there will be.

Yes. And -- yes, and they're all, of course there always is some of that when people leave.

So yes, that will be one of the things that get thrown into the mix in the fourth quarter, not something necessarily that was expected, but it is -- that's why there's just so little impact, I think in terms of near-term earnings is that you do get the benefit of some clawback and between increased revenue and that, that all gets thrown in the mix in terms of where I think comp ratio ends up for the year and I've commented on that already.

Got it. Thank you.

And then on -- to switch gears on Europe, you mentioned that as kind of a scenario that sounded pretty favorable in your prepared remarks. And we've certainly seen that there -- the M&A market recovered there a little bit earlier than the U.S., and it's been pretty active.

How are you thinking about the activity though recently? I guess, have you seen any impact in the last couple of weeks from the lockdowns there in certain markets, or is it just that everyone's understands that this is going to come up and they've learned how to work virtually and get deals done.

And this is just an operating environment that everyone's adapted to, and it's not going to be a major headwind, or have you seen a little bit of a pause at all?

My belief as we sit here today and interacting very regularly, of course, with my European colleagues is that I don't think we're going to get a further setback like we obviously did in the spring time. I think the -- that sort of the severity of the lockdown that we had in the spring, which clearly created a pause everywhere.

I think the lockdowns by governments are likely to be either more limited, well, more limited, neither in either duration or in terms of extent. And on top of that, I think private equity funds, public companies, et cetera, have all learned better how you do transactions in this kind of constrained environment.

So I do think that we certainly have seen a very pleasing pickup in European M&A activity. And I don't think the recent news is going to set that back too badly simply because I think governments have realized that there's just a limit to how long they can shut down or how tightly they can shut down without doing really irreparable damage to economy.

So I think the bit of a rebound we started to see, I'm pretty hopeful we'll continue to see play out.

Okay, great. And just one more from me.

On the hiring side of the business here, what areas are you kind of targeting? Could you just put a little finer point on where you're seeing the best growth opportunities?

And then, two, where are you kind of -- where do you see the best opportunity to bring in talent externally? And is it -- is the fourth quarter typically when that happens, or is that typically more like a first or second quarter event next year when you have the most success hiring externally?

I think the industry has evolved to the point where it tends to be a bit of a year round task to recruit that it used to that people got paid their bonuses in January and February, and they move jobs in February and March and April. I think it's become a little more evenly distributed throughout the year.

I mean, obviously this year the pandemic set things back where people really couldn't kind of get face-to-face and meet new candidates or have them meet and even if they know -- some of you to meet the rest of your team and so on. So I think it's a little bit spread out.

But this year, I would probably think, and maybe most years there's probably more recruiting sort of late first quarter, at least recruiting that you see that it becomes public, maybe late first quarter, in second quarter once people have sort of been paid their bonuses and are thinking of moving somewhere else. So I think that's probably in terms of timing.

And where I see the most -- where I have the most interest and maybe where we have interest is what's driving, what we're seeing is the parts of M&A that are the most favorably impacted by the pandemic. And that's things like consumer, some parts of media, some parts of health care, some parts of telecom and tech infrastructure and things like that.

So -- and of course those are areas that are -- have had the benefit of favorable growth going even well before the pandemic, but it's just been accelerated by the pandemic. So that's kind of where I think we have the most interest and see the most opportunity right now.

Okay. Yes.

That makes sense. Thanks for taking my questions, Scott.

Okay. Thanks a lot.

Hey, it's James Yaro filling in for Richard. Thanks for taking my questions.

So maybe the first one, just on the capital raising business. You've talked about the departures and the impact on revenue in that business, but maybe you could just talk about the forward trajectory and -- we've heard pretty positive commentary on the recovery in that business from some of the peers this earning season.

I don't necessarily want to forecast an individual business, but I would say that there are many aspects of that business, I think is the important thing to understand really there. There is fund raising, doing primary fund placement to raise money for private equities.

We are not in that business. Some funds -- some firms are.

And I'm not that familiar, but I can imagine that private equity is growing and perhaps there's more of that coming. And then there's kind of more sort of straightforward secondary transactions where one fund sells a portfolio of investments, they don't want to own any more to another fund and that we were -- and are very active.

And then there's a third business, which we've spent some -- had some success in, but we really are trying to focus to do a lot more is in the area of secondary transactions that also involve the fund that manages the capital where you're kind of changing, maybe you're prolonging the fund, maybe you're rolling investments that are fairly long held already into a new longer term vehicle or something like that. So they tend to be very tailored, very complex.

And, frankly, just like in the M&A and restructuring world, the more complicated the things are that you work on tends to be the higher fees that you end up earning. So we want to do more of that.

And I think -- look, I think probably all three parts of that business got hit pretty hard in the pandemic. And I think there's just been -- and now there's been as much volatility on the way up as there was on the way down.

So I don't know how quickly all that will come back. Certainly we're not seeing as robust a rebound in that as we are, say, in M&A over in the last several weeks, you can suddenly feel that MA is really much, much more active in terms of corporate dialogues.

And I wouldn't say we quite feel that on the capital advisory side, but clearly there's some pickup there post pandemic.

Got it. That makes sense.

And then you talked about extremely robust restructuring for 4Q '20 and a strong revenue backdrop generally for the coming quarter. So maybe just on the restructuring side, are you expecting a step down versus the 4Q '20 level, but activity will still remain elevated or are we really expecting to see the strength in 4Q !20, continuing at the same level of strength into 2021?

Well, I think you have to -- with restructuring even more, frankly, on M&A, you have to measure, maybe if you're in my position, running a business, the level of new opportunities you're winning and sort of how busy and active your team is. What you can predict is when those things are going to reach completion.

So there's -- just like M&A, its always going to be a lumpy business and you're going to have some quarters where more completions fall than others. And it's going to look like you're doing terrifically well one quarter and less so another quarter.

But I think in terms of the more fundamental question, the only part where you really can try to control is, how many assignments we win. We feel good about that for -- certainly for the medium term in the sense that we think given the pressures of a second wave in the pandemic, it feels like some of the industries that have been really hurt by the pandemic are going to continue to be hurt.

And we think there's going to be kind of a target rich environment in terms of restructuring opportunities. And we think we now have a team and a set of credentials and the scale necessary to win our share of those.

So I think we can -- what I'm saying is I think the sort of the stuff flowing into the pipeline feels like it's going to continue in a very positive way for a good long time. How and when that stuff gets across finish lines and triggers completion fees, that that's just going to ebb and flow as it always does.

That's really helpful. Thanks a lot.

Okay. Thank you.

And I think that was our last question. So I thank everybody for dialing in and we'll speak again in about 3 months.

Thank you.