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, restructuring, financing, capital raising and other important financial transactions. Over 22 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 more than 70 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 from an initial focus on M&A to restructuring advisory work and later to capital advisory work, where we advise major institutional investors around the world as they buy and sell interests in private equity and real estate 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. Fourteen 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 had the highest pre-tax profit margin among our independent advisor peer group in 7 of the past 10 years, and over time we have paid out many times our current market capitalization in dividends and share repurchases.
Review of 2017 Performance
While 2016 was an outstanding year for our Firm in all respects, 2017 was an unusually difficult year for us. For example, in 2016 we achieved the highest percentage growth in advisory revenues of any of our competitors (large or small), but in 2017 we experienced a sharp decline in revenue. This decline was simply a function of fewer assignments that resulted in large transaction completions during that year. The decline was most pronounced in corporate advisory work for clients in Europe, where we have a long history of great success, but was also evident in other markets outside the U.S. The reduced level of revenue resulted in a much lower level of profitability than we have achieved historically. However, while we are certainly not satisfied with our 2017 financial performance, it is worth noting that there were positive developments during the year as well: we had a record revenue year in our capital advisory business, we opened a new office with a strong team in Madrid, and we recruited 9 highly qualified Managing Directors in total to join our Firm in various offices around the world. Importantly, toward the end of the year the pace of transaction announcements picked up, suggesting that we should see a meaningful rebound in performance, back toward the levels we have enjoyed historically, in 2018.
Our Recapitalization Plan
During the course of 2017 we came to believe that the stock market was overreacting to a single year's atypical results, and thus decided to seek creative ways to significantly enhance our potential for the creation of shareholder value going forward. Accordingly, 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 those 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. In furtherance of that last objective, both our Chairman and our Chief Executive Officer purchased $10 million of common stock in order to further increase their ownership and alignment with outside shareholders. While our share repurchase plan is far from complete, we have made substantial progress toward our goal, and have seen our share price rebound considerably since we announced our plan.
The Strategic Plan Going Forward
We see the recapitalization as a catalyst for a new and exciting chapter in Greenhill's history. For certain, we will retain the core elements of our business: staying with a "pure advisory" focus so we remain fully aligned with clients, continuing our global approach and maintaining our strong culture of collegiality and excellence. At the same time, we are using this event as an opportunity to review every aspect of our business with a view toward enhancing the productivity of our team and building greater scale, particularly in markets that we believe have the greatest revenue potential.
In M&A, that means enhancing the breadth and depth of our industry sector expertise, primarily in the large U.S. market. For Financing & Restructuring Advisory, it means significantly expanding an already strong team so that this business can provide a larger 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 3 years ago.
Outlook for 2018
We believe that our 2017 results were an aberration in comparison to an otherwise consistently strong history of performance. In fact, we believe we have the potential to do better in each of our 3 core business areas and in each region in which we operate. The fact that the economic and transaction environment in 2018 seems positive across most regions provides a favorable backdrop to our efforts. In order to speed up the pace of our rebound in financial results we have been working to exit the lower productivity members of our team while, at the same time recruiting additional senior bankers who we believe have strong potential for high productivity. In net terms, we intend to increase the scale of our Firm in the areas with the greatest potential, which should further enhance our total revenue and overall profitability going forward. The substantial cut in the U.S. corporate tax rate at the beginning of this year will amplify the earnings and cash flow benefits of whatever performance improvements we can achieve. And our large ongoing share repurchase program will leverage the upside potential for both our outside shareholders and our team.
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 2018 and beyond.
Robert F. Greenhill Scott L. Bok
Chairman Chief Executive Officer