Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey Second Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Please note that this conference call is being recorded today, October 29, 2020. I would now like to turn the call over to Christopher Crane, Houlihan Lokey's General Counsel.
Thank you, operator, and hello, everyone. By now, everyone should have access to our Q2 fiscal year 2021 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward looking statements. These forward looking statements, which are usually identified by use of words such as will, expect, anticipate, should or other similar phrases are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and therefore, you should exercise caution when interpreting and relying on them.
We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10 Q for the quarter ended September 30, 20 20, when it is filed with the SEC. During today's call, we will discuss non GAAP financial measures, which we believe be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website.
Hosting the call today, we have Scott Beiser, Houlihan Lokey's Chief Executive Officer and Lindsay Alley, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call to questions. With that, I'll turn the call over to Scott.
Thank you, Christopher. Welcome everyone to our Q2 fiscal 2021 earnings call. This pandemic has had a terrible effect on families around the world, This pandemic has had a terrible effect on families around the world and we continue to do everything we can as individuals and as a firm to help. We have engineered our business and personal work styles as best as we can in order to provide a safe and successful work environment for our employees, clients and shareholders. Notwithstanding the ongoing challenges, the firm produced solid quarterly results.
Our Q2 fiscal 2021 revenues were $276,000,000 slightly up from last year and significantly improved from the $211,000,000 reported in the Q1. Our adjusted earnings per share were 0 point 7 $5 up 7% from last year and a major improvement from the $0.56 reported in the Q1. The 2nd quarter benefited from a significant increase in closings and financial restructuring, very strong capital markets and an improving M and A and valuation market. Currently, the overall economic environment is very conducive to our balanced business model. Our financial restructuring results are at record levels and we expect to experience elevated levels for some time.
Meanwhile, the favorable interest rate environment and stable asset valuations over the last few months have prompted strategic firms and sponsors to reenter the M and A marketplace. This has led to improved deal closings versus Q1, but more importantly to a substantial increase in new business activity, which should have a positive impact on subsequent quarters. Tempering our outlook, we still have concerns about the pandemic's ongoing influence on world economies, the uncertainty in the U. S. Elections and the ultimate outcome of Brexit.
That being said, today we feel more confident about our business prospects than earlier this year. Our Financial Restructuring business reported $125,000,000 in quarterly revenues and $214,000,000 for the 1st 6 months of our fiscal year. We have more mandates today than we did during the Great Recession, but there are only a limited number of mega size restructurings relative to them. We have closed a record 59 deals year to date and the number of active assignments is at record levels. New business activity remains at elevated levels, but the pace of new business in the 2nd quarter slowed from the torrid pace exhibited at the outset of the pandemic.
As I mentioned on our last call, we expect short term restructuring results to be lower than originally anticipated at the outset of the pandemic, but we expect that we will experience elevated levels of restructuring revenues for longer than originally anticipated. Our corporate finance business has dramatically improved from the Q1. In the 2nd quarter, we reported $108,000,000 in revenues versus $88,000,000 in the Q1. Consistent with revenue growth, we closed 53 deals in the 2nd quarter versus 35 deals in the 1st quarter. Furthermore, this quarter, we experienced a record level of new business activity.
However, it will take some time for this new business to translate into revenues. New business activity is being generated from both corporate and private equity clients. Business is also fairly diversified across our industry groups. Many of the transactions we previously described as on hold are now active again and the number of new inquiries has accelerated since mid summer. As mentioned earlier, there are still several macroeconomic factors that may eventually have an impact on close rates for our new engagements.
Our financial and valuation advisory business is experiencing many of the same favorable trends as corporate finance. Revenues in the second quarter were 42,000,000 versus $35,000,000 in the Q1 and up from $40,000,000 in the same period last year. The number of quarterly fee events, average fee size and revenues per MD are now similar to last year's results. Our portfolio valuation segment continues to exhibit strong growth and we are experiencing improvement in our transaction opinion business as well. Turning to our acquisition activity, in August we closed on our previously announced acquisition of MVP Capital and they are off to a great start.
We continue to be in active dialogue with several potential acquisition targets. However, the intensity of our discussions has tempered since last quarter. The rebound in global M and A activity over the last several months has encouraged some firms to remain independent and other firms to increase their valuation expectations to levels we believe are unsupported. That being said, our acquisition strategy has always been to be patient and to find the right firms for the right reasons at the right price. In closing, we have experienced significant changes in the overall business environment from the positive outlook at the start of this calendar year, the pessimistic outlook this spring, to the rapidly improving market that exists today.
We welcome change and in most instances may thrive in it. Our commitment to shareholders and employees is that we will continue to build our balanced business model to mitigate the effects of volatility and results. And with that, I'll turn the call over to Lindsey.
Thank you, Scott. Revenues in Corporate Finance were $108,000,000 for the quarter compared to $156,000,000 for the same period last year. Lower revenues were a result of a decline in the number of closed transactions as well as a slight decrease in our average transaction fee on closed deals. Financial Restructuring had a strong second quarter, delivering $125,000,000 in revenues, a 62% increase from the same period last year. Higher transaction volume and higher monthly retainer fees drove the increase in revenues.
We closed 30 transactions compared to 17 in the same period last year and the increase in retainer fees is a result of a significant increase in the number of current engagements driven by the pandemic. In Financial and Valuation Advisory, revenues were $42,000,000 for the quarter compared to $40,000,000 for the same period last year. We had 539 fee events during the quarter compared to 523 in the same period last year. Overall, FCA saw improving results across its service lines with portfolio valuation leading the way, which contributed to solid quarterly results. Turning to expenses.
Our adjusted compensation expenses were $175,000,000 for the 2nd quarter versus $165,000,000 for the same period last year. We had one adjustment this quarter for deferred payments related to certain acquisitions. Our adjusted compensation ratio was 63.5 percent for the quarter, which is above our long term target for adjusted compensation ratio of between 60.5% 61.5%. Our year to date compensation ratio is 63.1%, which reflects a reasonable proxy for the balance of the year. This increase in competition expense ratio over our targeted range is primarily a result of our estimate that reimbursable expenses for fiscal 2021 will be significantly lower than last year's.
Our compensation expense ratio is tied to gross revenues, which is calculated as fee revenues plus reimbursable expenses. While we pay compensation based on fee revenues, our compensation expense ratio increased to account for the lower reimbursable expenses incurred as a result of the COVID pandemic. Our adjusted non comp expenses were $29,000,000 for the quarter versus $44,000,000 for the same period last year, a decline of 35%. This resulted in an adjusted non compensation expense ratio of 10.4% versus 16.2% in the same quarter last year. This decline is a direct result of lower travel, meals and entertainment expenses and lower marketing, office related and other operating expenses, all reduced due to the stay at home orders implemented because of the pandemic.
We expect to continue to see significantly reduced non compensation expenses in these two categories at least through the balance of the fiscal year. This quarter, we adjusted 3 items out of our non compensation expenses. $1,300,000 in acquisition related costs for our acquisition of MVP Capital, dollars 900,000 in acquisition related amortization and $700,000 in Oracle ERP implementation costs, which we successfully rolled out this quarter. The new Oracle ERP system is a 20 year old system and represents the backbone of our financial and accounting system. Our adjusted other income and expense decreased for the quarter approximately $200,000 versus income of $1,100,000 in the same period last year.
This was primarily a result of lower interest earned on our cash and investment balances. Our adjusted effective tax rate for the quarter was 27.3% compared to 28.4% during the same period last year. The adjusted effective tax rate is at the lower end of our long term target range of between 27% 29%, driven by a significant decline in non tax deductible items such as meals and entertainment and certain other expenses. As a result, we expect our adjusted tax rate for fiscal 2021 to be closer to 27%. Turning to the balance sheet and uses of cash.
As of the quarter end, we had $600,000,000 of unrestricted cash and equivalents and investment securities, which includes the cash raise in our equity offering in May. As a reminder, a portion of this cash is earmarked to cover accrued but unpaid bonuses for fiscal 2021 and our deferred cash bonuses for fiscal 2020, which will be paid in November. Also in this past quarter, we repurchased approximately 402,000 shares at an average price of $57.72 per share as part of our share repurchase program. And finally, we are pleased to announce that we are paying a dividend of $0.33 per share, payable on December 15 to shareholders of record as of December 2. And with that, operator, we can open the line for questions.
Thank We'll take our first question today from Manan Gosalia with Morgan Stanley.
Hi, good afternoon. You spoke last quarter about the fact that the number of deals on hold versus the number of deals that were being terminated is sort of more favorable in the cycle than prior downturns. I was wondering with the uptick in revenues this quarter, how much of the activity that's come through is, deal closings from pending deals that were already on the cards pre COVID versus, how much of it is new activity that announced and closed during the quarter?
So we don't track necessarily specifically what's sort of pre COVID versus what is transactions that have been announced and closed within the same year. I'm sure we could go back and find that information. I think you can assume though that some of the transactions that are in our revenues in Corporate Finance were transactions that have previously been put on hold. The M and A process is a 9 month process or so. So new transactions that have come up post March 31, some of them have closed, but the majority of them will likely close assuming all goes well in quarters 34.
So a big chunk of that 108 is our transactions that were in place pre COVID that would likely put on hold and have kind of reconstituted.
Great. And just a clarification on the comp ratio. Should we look at your year to date comp ratio and then take that going forward for the rest of the year? Or were you suggesting that full year comp ratio would come closer to 63.5? Percent?
And if you can quantify the impact on the comp ratio from the lower reimbursable expenses?
Yes. So we're estimating reimbursable expenses and we've been relatively conservative in our estimates. So I prefer not to share that number with you. But with respect to how you should model it, and I mentioned it in my notes, I think our year to date kind of 63.1%, 63% is how we're thinking about it for the balance of the year in terms of the target.
Great. Thanks.
The 63.5% was merely a catch up from the Q1.
Got it. Thanks.
Next we'll hear from Devin Ryan with GMP Securities.
Good afternoon, guys.
Okay, Devin.
Just first question here on the new commentary on some of the And then I know that when you issued the 3,000,000 shares earlier in the year, some of that cash was pegged towards acquisition. So I'm just curious if kind of those deals, as we kind of move along here look like they're not happening, do you increase or are you thinking about increasing buyback or returning some of that through dividend? Or do you like operating with having that additional buffer of flexibility to the extent something else comes along beyond these specific situations?
So I think when we raised the capital back in May, we always viewed this as probably a one to 2 year time horizon in terms of finding and ultimately closing on transactions and not a 1 to 2 quarter, which is really where we are relative to the main time period. We are still in active dialogue with a handful of companies, as we mentioned on the call. I think some of the conversations that we had several months ago have maybe slipped away. They may come back for the reasons that I stated. So we're maybe a little the timing, as you said, has probably been elongated a bit.
And ultimately, our view is that we will still find attractive acquisitions. But if we don't deploy the capital, then we would use it through a buyback or a special dividend. Eventually, we will not hold on to significant amount of excess capital if that's what happens down the road.
Okay. Appreciate the color. And then just a follow-up on the capital advisory, I guess, contribution, if you will. Obviously, there's been a lot of activity in the market and you guys have a little bit of a differentiated business there as well. I'm curious if there's any way to frame out how that business has trended any parameters you can put around in terms of contribution and then just expectations for the outlook there as well?
It's still a very important part of our business, housed primarily in our corporate finance area. It's still growing. We tend to do much more on the debt capital side than the equity capital side. And in the early days of the pandemic, you might call it some form of rescue type of financing that was needed and it seems to be evolving now into financing still for some companies that have some difficulties, but in many cases, it's now turning into capital to assist in transactions and growth avenues that various companies might have and we continue to believe very strongly that it will be a growing part of our total business.
Okay, great. I'll leave it there. Thank you, guys.
Thanks, Devin. Thanks, Don.
Richard Ramsden with Goldman Sachs has our next question.
Hey, thanks. It's James Yaro filling in for Richard Ramsden. Thanks for taking my question.
So the first one is, how are
you thinking about the impact of the accelerating COVID cases and mounting number of shutdowns in Europe? And do you expect this to impact either the revenue pipeline? And is this perhaps one of the factors impacting the ability to acquire firms in that part of the world?
Look, I think, none of us have, by any means, a crystal ball on where we're going with all of the pandemic. For a while, it looked like Europe was improving much faster than the U. S. Maybe in the last couple of weeks, it's reversed its case. I think a couple of things.
1, generally speaking, financiers, investors, companies, we're all figuring out how to live in this environment. So we clearly have seen, as I think our peers have as well, an improved marketplace. On the other hand, I think there's still volatility to come that could slow down deals, could be another incremental bump to performance in the restructuring group over time. I don't think that there is some magic time period that we know exactly when all this will end. So activity is clearly increasing, but we do expect there will continue to be some bumps in the road.
And that's part of our commentary on why we think potentially the timing on closing of deals, even ones that we have reengaged on are brand new, may take a little longer than what we saw pre COVID just because it may not be a smooth sailing between today and the closeout of the pandemic.
That makes a lot of sense. And then just more of a cleanup question, which is,
you obviously had a little bit
of an off cycle increase in your dividend relative to when you have historically increased the dividend in prior years. Is this more just a catch up from the fact that you didn't increase it 6 months ago and we should think about the timing of future increases to be more at the beginning of your fiscal year or is there some other shift in the capital return priorities?
Yes, I think historically, you would have found us analyzing and making a change if Board wanted to make a change in their dividend probably in our May cycle. We happen to do it this time in our July cycle. And I think it was just recognizing the newness of the pandemic in May. It just didn't seem the right time to raise dividends. We clearly felt much better about the economy, our business model, etcetera, comes July, and we've continued to feel better about it.
So typically, you're right, I would say the May time period is normally when we look at it. And this particular year, we decided to just kind of delay that decision for a quarter.
Understood. Thanks a lot.
Thank you.
Next, we'll hear from Brennan Hawken with UBS.
Hey, good afternoon. How are you, Scott? Hey, Brennan.
Quick one on following up on
that question on Europe actually, but narrowly focusing it a bit to the restructuring side of things. We saw sort of a head fake where it looked like Europe had things more under control and then with the resurging virus there and now lockdowns, interested whether or not you saw any shift in the velocity of restructuring activity or mandates, whether you saw that step back in the region result in any increased activity and whether or not that would lead you to expect a similar thing to happen if we should experience such things in other parts of the world?
Yes. I think the you really wanted to map out a monthly or weekly new engagements timeline, which none of us look at it in that fine tune of a time period. But if we did, I don't think much of that difference in statistics has to do with whether Europe was opening up, closing down or what might happen in the rest of the world. I think what we found is that there's still a certain percentage of businesses across the globe whose business models that once worked, will not work or are going to need to be meaningfully modified going forward. Some of these companies have been able to be helped out because they were able to raise some debt money, lesser extent equity money and effectively putting on additional debt in a company whose business model still needs to be altered is not a long term solution.
It may be a short term solution. So I think we're going to see some waves of incremental restructuring business down the pipe as well. But I don't like I said, I don't think particular changes week by week or month by month had been influenced per se by what's happening in shutdowns. I think that probably has more impact short term on our Corporate Finance business and less impact on the restructuring business.
Okay. And then when you think about the composition of restructuring revenue, can you give us a rough idea of what how it breaks down as far as retainers for success fees and such? Is there a way you could give a rough indication of that composition?
Yes, Brian, it's a good question. We don't disclose that. I mean, I think we disclosed before kind of what our breakdown of debtor versus creditor is, but we haven't gotten into specifics regarding retainer fees. And probably prefer to keep it like that.
Okay. Let me try and get at it a different way then, Lindsey. I'll take a mulligan on that one. How about
I know there's
a lot of volatility in the restructuring line. When we think about it from a modeling perspective, should this past quarter's results be a reasonable jumping off point for when we think about it from here? Or is there still too much quarter to quarter volatility for that? Or there a reason to believe that the restructuring this quarter was particularly robust and maybe might not necessarily be repeated in the near term?
Yes. I would say that I would normally say that it's there's too much volatility to use this quarter as a proxy of what Q3 or Q4 might look like. Having said that, we did take on a number of cases in Q1 and those cases have started to close and will continue to close into Q3 and Q4. So we do expect continued elevated quarters in Q3 and Q4, but that volatility of a $10,000,000 $15,000,000 $20,000,000 engagement is still there. So you're not going to see anywhere near the same growth profile and restructuring that you're going to see in Corporate Finance coming out of a shock to the system like you saw in Q1.
So yes, but I'd like caution you to look at it as, hey, I got growth in restructuring coming up in Q3s and Q4. I don't think it's going to look like that, but you are going to see elevated over previous years.
And Brennan, I might add, pre pandemic, we probably range quarter by quarter in restructuring between $50,000,000 $100,000,000 and that's just kind of the normal quarterly troughs and valleys you have. I think you still have that kind of dynamic post pandemic. It's just we're at higher troughs and higher peaks than we saw before. Okay. Thanks for that color.
We'll now hear from Ken Worthington with JPMorgan.
Hi, No good conference call can exist without a political question. So with politics coming into play here, in terms of corporate finance, do higher capital gains and dividend taxes for the wealthy threaten or enhance the middle market M and A business? And maybe how might a big round of stimulus impact either the timing or the magnitude of restructuring business, maybe not at all? And then any thoughts if there's a change in the political environment, how that might flow through in any way through the valuation business?
Thanks.
Well, absolutely no difficulty in answering those questions. And then maybe taking a reverse order. I think on the valuation side, depending upon the outcome of the elections, we could see a decent amount of increase in the in our 3rd fiscal quarter in terms of certain kind of estate and tax planning work, if people think actual tax rates will change in 2021 and beyond, because you can actually start that work in the next week or 2. Long term, if there are changes in tax rates, usually that is good for valuation just because when there's changes, people will have different strategies. So I think they're either neutral or positive in terms of changes in the tax code and the outcome of the elections.
On the corporate finance side, we have talked for several quarters that there would be some amount of companies who might want to accelerate and purposely try to close a transaction by December 31. At this juncture, it's impractical for anybody to hire us with 2 months to go and say get it closed by December 31. Maybe even in the last quarter, it was pretty hard to do that. We have some amount of transactions we think have been motivated by potential changes in the tax code, elections, etcetera, but actually probably not as many as we thought there would be. So I'm not sure there's going to be as much of a change there.
I think actually the pandemic ability for people to figure out how to work remotely, which business plans are working or not working has much more positive or negative influence on our corporate finance business at this juncture than what happens in the elections and tax rates. And in terms of the stimulus, I think the stimulus would clearly help M and A activity. I'm not sure once again the stimulus will meaningfully help companies not go into restructuring that otherwise need to go into restructuring. This still comes down to if you have a business plan that no longer works in today's economy, you can funnel a lot of money out there and it may delay things, but it's not going to completely get somebody out of the woods. So we think about it all the time.
We're talking to our clients and prospects about it all the time. None of us are smart enough to know what's going to happen or even if we knew the outcome what will happen post that outcome. And so we do the best we can in planning. And I guess those would be some of my thoughts in terms of your politically charged questions on multiple product lines.
Awesome. Great. Thank you very much.
Our final question will come from Steven Chubak with Wolfe Research.
It's Brandon fully interested in. Hi, John. So I guess first question is pertaining to like the difference in recovery between Europe and U. S, European deal activity seems to be largely driven by middle market, where U. S.
Has been driven more so by large deal activity. I guess, how are your in the middle market?
I think let's start with U. S. I think the U. S. Middle market M and A business is really cooking.
It's as Scott mentioned in his comments, we are seeing as much activity as we've ever seen. Now that activity is new engagements and new engagements takes months to complete. And so you won't see the revenues in this activity for a couple of quarters at least. But it is a very, very good M and A market right now and especially in the middle market. And that's really driven not just by private equity coming back into the picture, but also corporate and strategic.
So you're seeing some pretty well known names transact at the much higher levels in the large cap space, but there is a lot of activity going on in the middle market and we're benefiting from it as we should. I think with respect to Europe, it's not a dissimilar comment. We are seeing pretty good activity in Europe. It's unclear to us as of now how the recent shutdowns and the recent spikes are going to affect that. It may and it may significantly.
But prior to really the last couple of weeks, the U. S. And the European markets were both quite active really since the beginning of June, I mean, sorry, beginning of September.
Great. And I guess one follow-up on the privates. How much of it do you feel like is pull forward in the case of increase in the capital gains tax and how much of it do you feel is actually sustainable?
I think we missed maybe the first half of your question. Can you just repeat it?
Sorry. In terms of private that you just mentioned, obviously, there's a lot of discussion around raising capital gains tax. So I guess how much of that activity do you feel like is pull forward and how much do you feel like is sustainable?
As I think I said earlier, I think the whole motivation to get a deal done sooner versus later and kind of your pull forward question, been relatively minor to the overall scheme of our firm. Just as it's not been a giant rush, I wouldn't describe it as a material part of things that we're working on today or things that have closed.
Yes, we might see some incremental revenues in Q3, but it's to Scott's point, it's I mean the rest of it is very sustainable.
Great. Thank you for taking my questions.
Thank you.
That will conclude today's question and answer session. I will now turn the conference over to Scott Beiser for any additional closing remarks.
I'd like to thank you all for participating in our Q2 fiscal 2021 earnings call. And we look forward to updating everybody on our progress when we discuss our Q3 results for fiscal 2021 this coming winter. Bye bye.
That will conclude today's conference. Thank you for your participation. You may now disconnect.