Houlihan Lokey Q4 2024 Earnings Call Transcript

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May 8, 2024

There are 11 speakers on the call.

Operator

day, ladies and gentlemen. Thank you for standing by, and welcome to Houlihan Lokey's 4th Quarter and Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. And please note that this conference call is being recorded today, May 8, 2024.

Operator

I will now turn the call over to the company. Please go ahead.

Speaker 1

Thank you, operator, and hello, everyone. By now, everyone should have access to our Q4 fiscal year 2024 earnings release, which can be found on the Houlihan Lokey website at www dothl.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.

Speaker 1

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 ks for the year ended March 31, 2024, when it is filed with the SEC. During today's call, we will discuss non GAAP financial measures, which we believe can 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.

Speaker 1

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 Scott Adelson, Co President and Co Head of Corporate Finance and Lindsay Alley, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call to questions. And with that, I'll turn the call over to Scott.

Speaker 2

Thank you, Christopher. Welcome everyone to our Q4 fiscal 2024 earnings call. First of all, let me say how enjoyable it has been for the last 21 years to have had the pleasure of leading Houlihan Lokey on its journey to become a world class investment banking firm. I'm incredibly thankful to the thousands of employees, clients and shareholders who helped make this firm the success it is today. A special thanks to my co executive officers, Scott Adelson, Lindsay Alley, Christopher Crane, Irwin Gold and David Preiser, as well as our entire global leadership team.

Speaker 2

The partnership we have developed over the decade has been extraordinary. I'm incredibly pleased to be handing over the CEO title to my long term partner, Scott Adelson, and a growing team of outstanding managers to lead the firm in the years ahead. Intend to remain involved with Houlihan Lokey, but in a different capacity to assist Scott and others in our continuing effort to build the best investment banking firm in the world. Now on to the business update. We ended the quarter with revenues of $520,000,000 and adjusted earnings per share of 1.27 dollars Revenues were up 17% and adjusted earnings per share were up 14% compared to the same quarter last year.

Speaker 2

We also ended our fiscal year with revenues up 6% versus last year, a good result in a challenging market. One of our firm strengths is our diversified business model. Over the past year, in an otherwise sluggish M and A market, our Corporate Finance and Financial and Valuation Advisory businesses were relatively stable, while our Financial Restructuring business grew. We begin the new fiscal year with momentum in all three of our business lines and remain optimistic that improving market conditions will continue throughout the year. As previously described, after reaching what we believe was the trough in the M and A markets in the spring of 2023, our Corporate Finance business has been steadily improving ever since.

Speaker 2

Some of the highlights in our last quarter include $288,000,000 in Corporate Finance Revenues, representing our highest 4th quarter corporate finance revenues in 3 years, dollars 155,000,000 in financial restructuring revenues, representing our 2nd highest quarterly revenues ever in restructuring and $77,000,000 in Financial and Evaluation Advisory Revenues, also representing our 2nd highest quarterly revenues ever in FEA. Overall, the market for our Corporate Finance and FEA businesses is steadily improving. Financing continues to be available in the marketplace, albeit at higher rates than in the last few years. Financial sponsors are gradually reentering the market and we have seen an uptick in opportunities to sell private equity portfolio companies. Our pipeline of opportunities and backlog in corporate finance continues to grow as does the size of our transactions.

Speaker 2

When the timeframe to complete transactions returns to historical norms, it will have a further positive impact on performance. Our Financial Restructuring business remains at elevated levels and we reiterate our expectations that these elevated levels will continue through fiscal 2025, albeit with some level of quarterly volatility. In the quarter, we hired 11 new Managing Directors, a recent high watermark. Those hires were partially offset by mostly planned departures. In our current quarter, we are pleased to announce the promotion of 14 Directors to Managing Director and the closing of the Triago acquisition, which added 7 Managing Directors to our Capital Markets business.

Speaker 2

I would like to close my comments today by introducing you to Scott Adelson. Many of you know that Scott has been a partner of mine in the leadership of the firm for the last 20 years. I've asked Scott to join this call and participate in the Q and A and starting next quarter, you will hear from Scott as Houlihan Lokey's new CEO. With that, I will hand it over to Scott for a few additional comments.

Speaker 3

Thank you, Scott. I'm honored to be asked to hold this important position at Houlihan Lokey and want to thank Scott and the Board of Directors for entrusting me with this role. Our team of executives has been managing this firm for over a decade. We have set out a vision of what we wanted this firm to be and we've been executing on that shared vision for as long as I can remember. I intend to continue down the same path with my colleagues with the goal of creating the finest independent investment banking firm in the world.

Speaker 3

This transition is happening at a unique time in our firm's evolution. We are emerging from 2 years of a sluggish M and A market with a record number of senior bankers, strong backlog, momentum in all three of our business lines, increasing market share around the world and the best shareholder base in our category. While I've had the pleasure of spending time with a number of you, I look forward to working with all of you in this new role and thank you for your continued support of Houlihan Lokey. And with that, I will hand it over to Lindsay.

Speaker 4

Thank you, Scott. Revenues in Corporate Finance were $288,000,000 for the quarter, up 12% when compared to the same quarter last year. We closed 121 transactions in this quarter, a high for fiscal 2024. And our average transaction fee was higher for the quarter versus the same quarter last year. Financial restructuring revenues were 155,000,000 dollars for the quarter, a 29% increase versus the same period last year.

Speaker 4

We closed 35 transactions in the quarter compared to 38 in the same quarter last year, but our average transaction fee on closed deals increased significantly. As we've mentioned in the past, given the nature of the business, revenues in our Financial Restructuring business can be lumpy quarter to quarter. This quarter benefited from some larger transactions and favorable timing. In Financial and Valuation Advisory, revenues were $77,000,000 for the quarter, a 14% increase from the same period last year. We had 10.25 fee events during the quarter compared to 9.57 in the same period last year.

Speaker 4

Turning to expenses. With higher revenues, our adjusted compensation expenses were $320,000,000 for the quarter versus $274,000,000 for the same period last year. Our only adjustment was $9,400,000 for deferred retention payments related to certain acquisitions. In both fiscal 20242023, our adjusted compensation expense ratio for the 4th quarter and fiscal year was 61.5%. We expect to maintain our long term target of 61.5% for our adjusted compensation expense ratio.

Speaker 4

Our adjusted non compensation expenses were $81,000,000 for the quarter, an increase of $13,000,000 over the same period last year, but relatively flat compared with last quarter. This resulted in an adjusted non compensation expense ratio of 15.6% for the quarter compared to an adjusted non compensation expense ratio 15.3% for the same period last year. On a per employee basis, our adjusted non comp expense was $31,000 this quarter versus $26,000 for the same period last year. For the last couple of fiscal years, our adjusted non compensation expense has grown significantly as we invested heavily in real estate, technology, our bankers returned to travel post pandemic and we experienced inflation across all of our non comp categories. The significant increase in our employee headcount also contributed to increases in our non compensation expense.

Speaker 4

For the fiscal year on a per employee basis, our adjusted non compensation expense grew 8% from 100 and $12,000 per employee in fiscal 2023 to $121,000 per employee in fiscal 2024. We expect that absolute dollar growth in our non compensation expense will temper in fiscal 2025. For the quarter, we adjusted out of our non compensation expenses $2,500,000 in non cash acquisition related amortization, $1,300,000 for acquisition related costs, primarily related to the Triago acquisition, which closed during our Q1 of fiscal 2025 and $3,500,000 pertaining to professional fees associated with streamlining our global organizational structure, which we refer to as Project Solo as we discussed on our last quarter's call. We are more than halfway through Project Solo and expect that the bulk of the work will be completed by the end of calendar year 2024. Our adjusted other income and expense produced income of approximately $5,800,000 versus income of approximately $3,900,000 in the same period last year.

Speaker 4

The improvement in this category was primarily due to a net increase in interest income generated by our investment securities. We adjusted out of other income and expense a gain of approximately $9,600,000 related to the reduction in value of an earn out liability associated with one of our prior acquisitions. We treat all acquisition related earn outs as purchase price and adjust out of our P and L any significant changes in the value of these earn outs. Our adjusted effective tax rate for the quarter was 29.9% compared to 28% for the same quarter last year. Our taxes increased year over year primarily as a result of increased taxes due to our foreign operations.

Speaker 4

Our long term targeted range for our adjusted effective tax rate is between 28% 30%. Turning to the balance sheet. As of the quarter end, we had approximately $759,000,000 of unrestricted cash and equivalents and investment securities. As a reminder, a significant portion of our cash is earmarked to cover accrued but unpaid bonuses for fiscal year 2024 that will be paid this month and in November. Shares issued this month as part of our fiscal 2024 compensation will vest into the fully diluted share count over a 4 year period from the date issued.

Speaker 4

In this past quarter, we did not repurchase any shares in the open market. We continue to take a conservative approach to share repurchases as we are prioritizing balance sheet strength, liquidity and flexibility to be able to take advantage of acquisition and hiring opportunities in this market. And finally, the Board approved a 3.5% increase to our quarterly dividend to $0.57 per share. And with that, operator, we can open the line for questions.

Operator

Thank you, Mr. Ali. We go first this afternoon to Brennan Hawken of UBS.

Speaker 5

Good afternoon, Scott, Scott and Lindsay. Thank you for taking my questions. I wanted to start with restructuring. You spoke to the fact that there were larger deals and some timing that benefited the quarter. But could you take a step back and talk about the near term outlook for Structur and it seems as though the environment is pretty solid, some comments that some of your competitors have made.

Speaker 5

You hear a lot about the maturity well this year and in 2025. And so how should we be thinking about restructuring revenues and the potential for growth off as a base that you established this year? Thanks.

Speaker 2

Brandon, it sounds like you're on some construction equipment. It was a little hard to hear you, but I think we got the gist of your question. I think the market environment for restructuring is similar to what we've seen really over the last couple of quarters. As we've described, we think it's going to stay at an elevated level for a while, still driven by a number of companies that are going to need to do some form of solutions. And while there is some opening of the capital markets as we've described, it's still going to be at a higher interest rate environment than what they've experienced in the past.

Speaker 2

So that isn't necessarily the solution that once could have had before. There's still all the technology disruptors that were occurring over the last couple of years that are still continuing. We're seeing a lot of work, not only in the United States and Western Europe, but really in other parts of the globe as our restructuring franchise is one of the most global components of our firm. And we think we're just only ourselves, but probably the industry in general is going to be in an uptick in this area for some time. We do note it is the most volatile of our businesses.

Speaker 2

And so we're going to have some quarters that are probably a little higher than normal and some quarters maybe a little lower than normal. But we think kind of the operating level we've been at it for a while is probably going to exist for the next year or 2.

Speaker 5

Okay, got it. I switched. Sorry, I'm actually in an airport dealing with flight delays. So switched off Bluetooth. Hopefully, it's a little easier to hear now.

Speaker 5

So I appreciate all that color. Thank you. For my follow-up, FVA actually came in a little bit better even though Thin was a little lighter and those businesses have historically moved together. Are you seeing an emergence of maybe some divergence in between those two businesses or maybe some greater resilience or unique drivers to the FDA business that could allow for that historical relationship to diverge a little and we could see a little bit more strength in FCA even though Corp Fin is still a bit of a waiting game?

Speaker 4

Yes, I don't think so, Brad. I think it's just the measurement period is too short. I think 1 quarter doesn't tell the story. I think all of this sort of movement of SCA and Corporate Finance that we've talked about is still kind of consistent. There's been no structural change.

Speaker 5

Okay, great. Thank you for taking my questions.

Operator

Thank you. We go next now to Devin Ryan of Citizens JMP.

Speaker 6

Hi, Scott, Scott and Lindsey. This is Alex Jenkins stepping in for Devin Ryan. Hope you're all doing well. I guess just to start on the GCA acquisition, it closed right before the market downturn. Can you talk about the momentum you're seeing in today and how the GCA team has enhanced your offering and position in the market?

Speaker 3

Yes, happy to do that. This is Scott Adelson. So clearly the type of business that we are doing within Europe has evolved as a result of that transaction very materially. We have gone our importance in the European marketplace has fundamentally changed as a result of that transaction. While we had an emerging business that was doing well prior to that acquisition, we are now kind of just steps behind at least from a deal count standpoint, institutions that have been at it for 100 of years longer than we have in Europe.

Speaker 6

Awesome. Thank you for that color. I guess generally on sponsors, can you give us any insight into the dialogues you're currently having? I'm sure the conversations are picking up given where we are in the cycle, but just want to get a better sense of your expectations, going forward from here. Thank you.

Speaker 3

The level of sponsor conversations does continue to pick up by the day and has been for a while. It really is the velocity of that and how quickly deals are working their way through the pipeline, but there is clearly continues to be steady increase in dialogues across the sponsor spectrum.

Operator

We'll go next now to Ken Worthington of JPMorgan.

Speaker 7

Hi, good afternoon guys. This is Michael Cho in for Ken Worthington today. I guess, first, I just wanted to touch on productivity, MD productivity. So you've been adding to your talent base, GCA was one that you just talked to as well, but key hires and then some other bolt ons as well. So the MD accounts are up considerably over the last couple of years.

Speaker 7

If we think about the corporate finance business, we think about average revenue per NB, that's trending a little bit less than half or about half of peak COVID period. And how should we think about the upside to revenue per MD if that could be picked up given the larger and upgraded talent bench at Hulan today?

Speaker 4

That's a good question. I mean, my quick response is, corporate finance is loaded for bear. We have a very high MD count relative to where revenues are. You're seeing it in productivity. Do we see productivity levels getting as high as they did during COVID?

Speaker 4

I think that's tough because during COVID, no one was traveling. So we are seeing some improvements in our average transaction size that will help make the argument that you could see COVID level productivity, but I think it's too early to tell. But I think we all will tell you that it is low on a relative basis and expectations are that we'll see productivity improvements. I think where that caps out, if it ever caps out is a little hard to tell. But the some of the momentum in average transaction size, average fee size, is certainly a win behind us and expectations are that will help us drive productivity once the markets get back.

Speaker 7

Great. Thanks for all that color. And then just a quick follow-up on the topic around kind of the sponsor activity, and just kind of pick up in overall in conversation. I mean, are there any particular geographies or sectors that you'd call out today in terms of having more of an acceleration versus some other sectors or deals where you're not seeing as much? Thanks.

Speaker 3

Again, Scott, Allison. Not really. I mean, I can't there's something that I can point to in any sectors that are particularly strong or particularly weak. And geography? And geography, I mean, I think that there has been some ebbs and flows between the U.

Speaker 3

S. And Europe, but at least right now, there's no discernible difference. And our Asian business is still just at a different scale level than U. S. And Europe.

Speaker 7

Yes, makes sense. Great. Thank you.

Operator

Thank you. We go next now to James Yaro at Goldman Sachs.

Speaker 8

Good afternoon and thanks for taking my questions. On the non M and A parts of Corporate Finance, maybe if you could just provide some color on how these businesses are performing in this environment and the

Speaker 3

outlook for those going forward? Sure. Thanks. The capital markets business, I think, as we have discussed, has continued to grow quite nicely and we are feeling good about where that is going and continues to be a strong growth area for us. And obviously with the acquisition of Triago and the addition of individuals earlier in the year to our PFG business, that's another area that we think in conjunction with the Capital Markets business will have a meaningful impact on growth within those non M and A areas of Corporate Finance in the periods to come.

Speaker 8

Okay, thanks. And then maybe just one on the Triago acquisition. Any ability to give any sort of contribution to your results now that's closed? And then maybe you talked a little bit about how there's a strong trajectory of that business going forward. So perhaps just how you're thinking about the synergies of that business with the rest of your sponsor franchise and how you might be able to grow the business beyond when it was a standalone entity?

Speaker 3

Thanks a lot. So on the synergies between, obviously, we have a very large sponsor set of sponsor relationships and we do believe that our ability to offer them an integrated solution of advice ranges from primary, secondary, directs, GP stakes, LP stakes and financings in general is something that we really are feeling very good about the opportunity that lies ahead. Obviously, we need to execute on that, but we are feeling very good about that. In terms of the contribution of that particular group, that's not something that we disclose.

Speaker 7

Okay. Thanks a lot.

Operator

We'll go next now to Ryan Kenny with Morgan Stanley.

Speaker 9

Hi, good afternoon. So my question is on the M and A environment, specifically the comment in the press release around being realistic on the pace of recovery and the sluggish M and A environment. Can you just unpack that a bit? Is the realism more around the size of the pipeline? Is it more around the timing of the lag?

Speaker 9

Is it more around sponsors than strategic? Any color there would be helpful.

Speaker 2

Yes. I think we did purposely think about the words that we wanted to use. We don't believe that we are in a robust environment like we were probably a couple of years ago. And we're also not in an antidepressant environment. We've been kind of slugging it along, I'd say for the last year or 2.

Speaker 2

We've continued to actually be able to grow the business in terms of headcount, in terms of quality of clients, in terms of number of mandates that we're engaged on kind of average size, everything is making, I would say, slow but sure progress. The one thing that we continually discuss that we could snap our fingers and change, it would probably be the timeframe from when you get hired, when you get started on a mandate and when you close it. It is still taking longer than what we think is the normal time period. But almost all the measures that we look at are more positive today than they were a year or 2 ago. And we're not yet in a robust environment.

Speaker 2

And when we think we are, I guess, we'll describe that to you as well. But we're not where we were a year ago when I think we kind of called the bottom and said that was about as negative as the environment that we had seen. Ryan, another way

Speaker 4

to think about it is the commentary was more macro than micro. I think us and probably many of our peers have seen activity levels improve, have seen reasonable momentum in their business. And yet we have this sluggish macro environment that makes deals getting closed much harder. And so hard for us to control that. And so we are and I think most of this thought we would have come out of it months or quarters ago and it's just taken longer than I think any of us expected.

Speaker 4

So I think we're just being realistic that this year we think it's going to look better than last year, but it's anyone's guess just given the macro environment.

Speaker 9

And on the macro, the Fed funds futures curve has moved meaningfully since the last call when the curve was pricing in fixed rate cuts this year, now we're at 1% or 2%. How are your clients thinking about that change? Is it having any impact on the pipeline or not really because there aren't any hikes priced in?

Speaker 3

Yes. I mean, really it has been, I've said this many times, much more about the availability of capital than the cost of that capital. And today, capital is very available to our clients and people are actually being aggressive about deploying it. That is a good thing. In terms of pricing, it obviously makes a difference in valuations, but it is really in terms of activity levels is much more about the availability than the cost of it.

Speaker 3

Great. Thank you. We'll go

Operator

next now to Steven Chubak of Wolfe Research.

Speaker 10

Good afternoon. This is Brendan O'Brien filling in for Steven. I guess to start, so I want to touch on sponsors. While activity has been subdued for much of the past couple of years, one dynamic that is apparent from the data or publicly available data is that, call it, dollars 1,000,000,000 plus activity has been much stronger, more resilient relative to SMID cap. Know that you tend to be more focused on SMID cap activity, but just wanted to get a sense as to what might be driving this divergence and trends between these two buckets?

Speaker 3

I think the way that we think about it is that globally there are tremendous number of deals that take place around the world and the vast, vast, vast preponderance of those are mid cap and we still have a very small market share of that overall number of deals. And the fact that a relatively small handful of large cap deals are getting done doesn't impact the overall denominator, if you will, of the total number of M and A deals. And we are much more focused on total volume of deals than we are deal value in any given period of time.

Speaker 2

And I think that's probably the key point that we'd always want to make the press at times maybe investors or the analysts, you're focused on the dollar value of announced or completed transactions, and it sways your view of what may be more or less healthy in the marketplace. We're much more focused on the number of transactions that gets done, and that has probably more of a trending importance to us. So we don't actually see or experience what you maybe described, which is, is there at this juncture any meaningful difference between the healthiness, buoyancy, whatever you want to call it, of the larger cap deals versus the mid cap deals.

Operator

That's great color.

Speaker 10

Thank you. And then as for my follow-up, I just wanted to touch on the time to complete deals and the deal cycle. So you noted in your prepared remarks that the time frame to close remains elongated. I just want to get a sense as to what could drive that normalization of timelines in your view. Is it just more certainty on the rate trajectory, or the macro global economic backdrop or anything else?

Speaker 3

It is really that the we are still in a buyer's market at this point. And as that begins to shift to equilibrium, you will start to see velocity pickup. Right now, buyers are able to say, I'd like to see that one incremental piece of information. I'd like to wait 1 more quarter to see results. I mean, endless array of things that cause it to drag on, but it is clearly that we are still in an environment where buyers have that leverage that it but that is changing literally week by week at this point.

Speaker 10

All right. Thank you for taking my questions.

Operator

And gentlemen, it appears we have no further questions this afternoon. Mr. Beiser, I'd like to turn things back to you, sir, for any closing comments.

Speaker 2

I will end today's call with a thank you to all employees at Goulihan Lokey. It is all of you that have made this firm's success possible. You've truly made my time as CEO enjoyable and I look forward to continuing our journey together over the coming years. And finally, we look forward to updating everyone on our progress when we discuss our Q1 results for fiscal 2025 this summer.

Operator

Thank you, Mr. Viser. Ladies and gentlemen, that will conclude today's Houlihan Lokey 4th quarter and fiscal year 2024 earnings call. Again, thank you so much for joining us. We wish you all a great remainder of your day.

Operator

Goodbye.

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