Houlihan Lokey(HLI) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Revenues for Q2 FY2024 were $467 million, down 5% YoY but up 12% QoQ [109] - Adjusted EPS was$ 1.11, down 7% YoY but up 25% QoQ [109] - Corporate Finance revenues were $282 million, down 11% YoY but up from last quarter [40][68] - Financial Restructuring revenues were$ 115 million, up 17% YoY [91] - Financial and Valuation Advisory revenues were $71 million, down 8% YoY [41] - Adjusted compensation expense ratio remained at 61.5%, consistent with the long-term target [42] - Adjusted non-compensation expenses were$ 75 million, up $3 million YoY [72] - Adjusted effective tax rate was 28.4%, compared to 27.9% in the same quarter last year [44] Business Line Performance - Corporate Finance closed 117 transactions, up from 114 in the same period last year [40] - Financial Restructuring closed 31 transactions, up from 24 in the same period last year [91] - Financial and Valuation Advisory had 852 fee events, down from 890 in the same quarter last year [41] - The average transaction fee in Corporate Finance declined slightly due to deal mix, not trends in transaction value or fee size [54] Market Performance - The US restructuring market slowed, but Europe, Asia, and South America showed continued strength [70] - Capital Markets revenues improved, driven by better credit availability in the mid-cap space [69] - Private credit markets have been more robust than public debt or bank syndicate markets [15] Strategy and Industry Competition - The company expects elevated restructuring revenues over the next couple of years due to higher interest rates and a fast-approaching debt maturity wall [117][122] - Strategic buyers and sellers are slowly returning, buoyed by improving equity markets and stable financial performance [33] - The company is prioritizing balance sheet strength and flexibility for potential acquisitions and hiring opportunities [118][124] Management Commentary on Operating Environment and Future Outlook - Management believes the worst of the M&A downturn is behind, with improving client confidence and capital markets [116] - The pace of improvement in Corporate Finance and M&A markets is expected to be slow [116] - The company remains optimistic about market conditions but is realistic about macro pressures [110] Other Important Information - The company repurchased 239,000 shares at an average price of$ 104.33 per share [124] - Adjusted other income and expense increased to $2.5 million from an expense of$ 1.2 million in the same period last year [43] - The company expects non-compensation expenses to be seasonally higher in the second half of the year [27] Q&A Session Summary Question: Impact of higher long-term rates on middle market M&A - Middle market M&A deals are financed similarly to large-scale M&A, with a mix of debt and equity [98] - Higher financing costs may have a lasting negative impact on deal activity over the next 6-12 months [96] Question: Seasonality in Corporate Finance - The December quarter is historically the best for the industry, except for calendar 2022 [125] Question: Restructuring business outlook - The restructuring environment remains favorable due to higher interest rates and debt maturities [60] - The company expects steady business flow, with some companies acting proactively before hitting maturity walls [50] Question: Compensation ratio and expense management - The company has no plans to change its long-term target compensation ratio of 61.5% [104] - Non-compensation expenses are expected to remain consistent with historical trends [111] Question: Acquisitions and hiring - Acquisitions remain an important part of nonorganic growth, with opportunities in the current market [78] - The company has added significant value through senior hires, acquisitions, and geographic expansions over the last seven quarters [53]