Letter to Our Shareholders
Dear Clients, Stockholders and Colleagues,
Greenhill is a leading independent advisory firm. Our objective is to provide high quality, unconflicted advice to corporations, partnerships, institutions and governments globally on a wide range of transactions, including mergers & acquisitions (“M&A”), restructuring, financing, capital raising and other important financial transactions. Over 23 years we have developed a brand that is highly respected by senior decision makers around the world. And we have grown to significant scale, with a large and expanding group of client-facing Managing Directors supported by a large, highly skilled group of other professionals. Our team now includes senior bankers who have deep expertise in nearly every industry sector and every type of strategic financial advice, in each of the major markets around the world.
We are proud that our Firm has achieved a long list of "firsts" among the many major independent advisory firms that have been established over the past few decades. We were the first to broaden our business from an initial focus on M&A advisory to restructuring advisory, where we advise in bankruptcies and similar situations, and later to capital advisory, where we advise major institutional investors around the world as they buy and sell interests in private equity and other alternative assets. We were also first in many aspects of our geographic expansion: the first to open in London, in Frankfurt, in Canada, in Japan, and in Australia. Fifteen years ago we were also the first of many to do an initial public offering, with the objective of creating a permanent ownership structure that would allow us to recruit, reward and retain successive generations of talent over many years.
We believe the Firm we operate today is unique among its competitors. First, we are entirely focused on advisory work for clients, so we avoid the conflicts of interests that can arise from other business activities or other products to be cross-sold to clients. Second, we are a truly global firm, having generated nearly half of our cumulative historic revenue from clients based outside the U.S. and with a heavy focus on executing complex cross-border transactions. Third, we have an unusually collegial culture, where our teams work seamlessly across sectors, regions and advisory specialties in order to help clients achieve their goals. Lastly, we have a long history of financial success: we have had an attractive pre-tax operating profit margin every year of our history but one, and over time we have paid out many times our current market capitalization in dividends and share repurchases.
Review of 2018 Performance
2018 was an outstanding year for our Firm. Our revenue increased by 47% (the greatest percentage increase among any of our large or small competitors), we produced an attractive 23% pre-tax operating profit margin, and our earnings per share were 51% above where the analyst consensus expectation stood at the beginning of the year. We achieved several records during the year:
- Record number of fee paying clients and record number of $1+ million revenue clients
- Record number of corporate advisory (primarily M&A) transactions
- Record number of capital advisory transactions, as well as record transaction volume
- Record Canadian revenue
- Record European revenue in local currency terms (second best in US$ terms)
- Record total advisory revenue in local currency terms (second best in US$ terms)
Importantly, we believe we have significant potential for further improvement in performance going forward. While the results for the Firm as a whole in 2018 were excellent, much of our success emanated from a few of our businesses. Our Firm embodies numerous overlapping groups that focus on different regions, industry sectors and types of advice, and in 2018 financial results for many of those were well below both their historic peaks and their current potential. In addition, 2018 was also a year of important strategic investment by our Firm, which provides the potential for further growth going forward. Over the course of the year we recruited a record number of Managing Directors to the Firm, almost none of whom had sufficient time to contribute meaningfully to our results for what was their first partial year. And we executed a major expansion of our restructuring advisory team that included adding Managing Directors in both New York and London along with numerous supporting professionals, which is another investment we expect to create value over the medium to longer term.
Update on Our Recapitalization Plan
As our longtime stockholders will recall, in September of 2017 we announced a recapitalization plan pursuant to which we borrowed $350 million in term loans, repaid our existing debt and sought to repurchase up to $285 million of our stock. As part of the plan we were pleased to receive our first credit ratings: a BB from Standard & Poor's and an equivalent Ba2 from Moody's. We believe these ratings are indicative of the strength, breadth and resilience of the business we have built. Given the increased level of debt we were taking on, we substantially reduced our quarterly dividend in order to focus our future cash flow on debt repayment. The goals of this plan were to improve tax efficiency, reduce cost of capital, increase earnings per share and increase employee alignment with outside shareholders by increasing their economic ownership of the Firm.
We are pleased to report that we have made great progress in implementing our recapitalization plan. Including some modest additional share repurchases early in 2019, we had completed 92% of our $285 million share repurchase plan as of the end of January. The shares have been purchased at an average purchase price of $22.52 per share, and we are pleased to have essentially completed the repurchase of such a large portion of our outstanding shares at what we believe is a very attractive price. As a result of the repurchases, our management and employees now own more than 40% of the equity of our Firm (including their restricted stock units as well as common stock), which closely aligns their interests with those of our outside investors.
We have already begun to repay the initial debt we took on to fund the repurchase, and plan to further deleverage over time, while also hoping to make room for additional opportunistic share repurchases, as well as dividend increases as our leverage declines.
The Strategic Plan Going Forward
Our strong 2018 results suggest that our recapitalization plan acted as a catalyst for a new and exciting chapter in Greenhill’s history. Clearly we plan to maintain what is unique and effective about our business: our “pure advisory” focus that keeps us fully aligned with clients, our global approach that makes us an ideal advisor for large and complex cross border transactions, and our strong culture of collegiality and excellence that allows us to attract and retain outstanding employees at all levels. However, we also want to find ways over time to generate more revenue growth from more diverse sources. Given the inherent operating leverage in our business model (derived from a fairly stable non-compensation cost base), and the financial leverage created by our recapitalization plan, higher revenue would result in substantially higher earnings. And by increasing the diversity of our revenue sources, we should be able to reduce the volatility of our results over time, resulting in a more attractive valuation for our shares.
We will seek to increase our revenue by recruiting and developing talent in all areas. In M&A, that means enhancing the breadth and depth of our industry sector expertise, especially in the large U.S. market. For Financing & Restructuring Advisory, it means further expanding an already enlarged team so that this business can provide a greater counterbalance in periods when economic developments lead to a decline in M&A activity at the same time the need for restructuring expertise rises. In Capital Advisory, it means looking to build on the historic and continuing success of the business (Cogent Partners) that we acquired 4 years ago.
Outlook for the Future
While ours will always be a business where quarterly and even annual results can vary widely as a result of economic and market factors or simply the random timing of transaction announcements and completions, we are hopeful about the future. We provide a service (advising on large and complex transactions) that is highly valued and highly remunerated by clients. We have built a strong global brand in the eyes of boards of directors and senior executives who need those services. And we have developed a strong culture that allows us to attract and retain talented professionals, who in turn help us further enhance our brand by providing sound and unconflicted advice.
The current environment for our services appears favorable. While there was a challenging period of heightened market volatility late in 2018, at the end of the year the U.S. Federal Reserve signaled a more accommodative monetary policy, and that quickly led to a reopening of credit markets and a sharp rebound in equity valuations. Together, those two factors should lead to increased transaction activity over time. Relative to history, 2018 was a good year, but transaction activity appears to be well short of a typical cyclical peak. That is particularly true in Europe, where we have a long history and strong brand (and in 2018 had record results).
In closing, it is worth noting that at our upcoming annual meeting our founder, Bob Greenhill, will transition to the title Founder and Senior Chairman, and our CEO, Scott Bok, will add the title Chairman. This subtle move is not a significant change. Bob is an icon in our industry, with a distinguished M&A advisory career going back to the 1970s and culminating with the founding of our Firm in 1996. He continues to be actively involved at the Firm. While our legal form is corporate, we have always thought of our business as a partnership that is managed by a group of senior colleagues around the world, and nothing about that will change.
We are grateful to our clients for their trust, to our employees for their steadfast efforts and to our stockholders for believing in our strategy and its potential for creation of value. We will do our utmost to realize that potential in 2019 and beyond.
Robert F. Greenhill Scott L. Bok
Chairman Chief Executive Officer