Christopher Crain - General Counsel Scott Beiser - Chief Executive Officer Lindsey Alley - Chief Financial Officer.

Mike Needham - Bank of America Devin Ryan - JMP Securities Brennan Hawken - UBS Ann Dai - KBW James Yaro - Goldman Sachs.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey Fiscal Third Quarter 2017 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 is being recorded today, February 1, 2017.

I will now turn the call over to Christopher Crain, Houlihan Lokey’s General Counsel. .

Thank you, operator and hello everyone. By now, everyone should have access to our third quarter fiscal 2017 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 third quarter ended December 31, 2016 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.

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 Lindsey Alley, Chief Financial Officer of the company.

They will provide some opening remarks and will then open the call to questions. With that, I will turn the call over to Scott..

Thank you, Christopher. Hello, everyone and welcome to our third quarter fiscal 2017 earnings call. Overall, this was a very good quarter for Houlihan Lokey. We reported record third quarter revenues of $248 million, up 21% from the previous year. Our nine month revenues of $615 million also a record and are also up 21% from the previous year.

Through December 2016, our latest 12 month revenues are $799 million, a record for the firm and just shy of another revenue milestone. Our adjusted earnings per share for the quarter is $0.57 versus $0.47 from the previous year and our adjusted earnings per share for the nine months are $1.29 versus $1.03 last year.

Our firm continues to benefit from the ongoing investments we’ve made over the last few years. Additionally, we expect to benefit from the improved business and market environment since the US elections. These factors have enabled all three of our business segments to report year-to-date revenue growth over the previous year.

One of the factors driving our growth is the investment we have made in senior bankers. As of December 31, we had 166 financial managing directors versus 123 two years ago, an increase of 35%. This increase is a result of internal promotions, opportunistic hirings and acquisitions.

We have and will continue to see our new MDs mature and improve their productivity levels as they effectively utilize the firm platform we have built.

Our reach both in terms of industry expertise and geographical coverage has never been greater and our brand awareness continues to grow enabling us to more effectively hire and retain quality senior and junior bankers. Now on the acquisition front, we continue to remain discipline and opportunistic.

We are excited about our most recent acquisition of Blackstone IP which we announced on January 18 after the close of the quarter. Blackstone IP is a boutique firm focused on providing financial advisory and investment banking services exclusively in the intellectual property space.

Blackstone IP has advice companies with their intellectual property assets in the context evaluations, mergers and acquisition transactions, capital raisings and financial restructurings. This acquisition further enhances Houlihan Lokey’s capabilities with companies who are considering maximizing the use of their intellectual property assets.

Additionally, the external markets have also contributed to our growth this quarter and we are optimistic that this will continue through calendar year 2017.

Uncertainty always exists with the change in our elected and appointed officials, but since the US elections, CEO confidence has improved, transaction dialogue in the suite has increased, asset values have risen and availability of capital for businesses has remained strong.

Potential and anticipated changes in corporate and individual tax rates should create a whole new set of transaction and advisory opportunities for our firm, but until these changes occur, it is difficult to assess the impact on our business. That being said, Houlihan Lokey has always excelled in times of change.

Now for some comments regarding each of our three business segments. Corporate Finance produced $123 million of revenues this quarter and $319 million year-to-date.

Our revenue growth in corporate finance year-to-date versus last year is up 9% while during the same nine month period, the number of transactions that were announced across the globe declined modestly.

We will once again rank as the number one M&A advisor for all US transactions by number of transactions completed in calendar year 2016 by Thompson Reuters and this was the second consecutive year we were in the top ten for most active global M&A advisors. We continue to make good progress across several areas that have been a focus of ours.

Most importantly, our continued expansion into geographies outside the US is resulting in increased overseas closed transactions better cross border advice to our clients and larger and more attractive business opportunities. In addition, we continue to grow our financing business and invest in our liquid financial asset product line.

The vast majority of the growth in MD headcount over the last two years has been in our corporate finance business and we expect that these new MDs will further contribute to growth in our results over the coming quarters as they mature on our platform.

Financial restructuring produced $90 million of revenues this quarter and $203 million year-to-date resulting in revenue growth of 80% for the quarter and 56% for the nine month period. These are the best financial results that financial restructuring has experienced in over five years.

We were once again ranked as the number one worldwide restructuring firm in calendar 2016 by Thompson Reuters having restructured over $155 billion of debt during the calendar year. As discussed on previous calls, our results this year have been substantially bolstered by restructuring in the energy space.

Year-to-date, our energy-related restructuring revenues have been a primary driver of growth in financial restructuring and we expect continued strength of energy revenues through the end of fiscal 2017. Our expectation for fiscal 2018 is that our energy-related revenues will decline.

However, over the last several months, we were experiencing increased restructuring activity in many other industries and geographies and have started to see a greater number of larger restructurings with higher fees than what we have experienced over the last couple of years.

We expect this building dynamic to mitigate the expected pressure in energy-related restructuring revenues next fiscal year enable us to have another strong year in financial restructuring.

Financial advisory services produced $34 million of quarterly revenues and $92 million year-to-date resulting in revenue growth of 10% for the quarter and 5% for the nine months. As we head into fiscal year 2018, remember that historically our financial advisory services business has done well in a dynamic regulatory and tax environment.

The kind of environment which is looking more likely to be the case with the new administration. So in closing, we are pleased with our results with all three of our business segments which are showing year-to-date growth.

The business environment has improved since the election and any significant reduction in corporate tax rates should have a meaningful impact on our earnings per share given our waiting in the US.

Our prospects look bright and we will continue to do our best to be successful regardless of the business, political or economic environment that we are in. With that, I’ll turn the call over to Lindsey. .

Thank you, Scott. Revenues for the quarter were $248 million, up 21% from the same quarter last year. As Scott suggested, this was a very strong quarter, especially in financial restructuring as we had several IP transactions closed during the period.

For our fourth fiscal quarter we expect to see the same seasonal trend as we have seen in the last two fiscal years. That is, typically, our third fiscal quarter has been our strongest followed by our fourth fiscal quarter which has historically been our second strongest quarter.

In corporate finance, revenues were essentially flat and $123 million for the quarter compared with the same period last year. We closed 50 transactions in the quarter compared to 52 in the same period last year and our average transactions fee on closed deals was 7% higher.

Year-to-date, our corporate finance revenue is up over 9% compared with the same period last year and we closed 154 transactions in the first nine months of the year compared to 122 transactions in the same period last year, an increase of 26%. Financial restructuring revenues were $90 million for the quarter, an increase of 80% from the prior year.

We closed 23 transactions in the quarter compared to 14 transactions in the same period last year and our average transactions fee on closed deals was 16% higher than in the same quarter last year.

The growth in revenues was primarily driven by a significant increase in the number of transactions closed for the quarter as well as an increase in the average transaction fees versus last year. Energy represents the largest sector contributing revenues and expectations are that we will continue to see this dynamic in the fourth quarter.

As a reminder, financial restructuring revenues generally fluctuate more than our other business lines due to fewer but larger fee engagements. And this quarter benefited from a couple of larger fees. In financial advisory services, revenues were $34 million for the quarter, a 10% increase from the prior year.

Similar to last quarter’s call, portfolio evaluation, transaction advisory services, and strategic consulting are all experiencing revenue growth while transaction opinion work just declined. That being said, our transaction opinion revenues in the third quarter represent the first year-over-year increase in several quarters.

FAS grew the number of fee events for the quarter by 2% and also saw an uptick in average project fees for the quarter as compared to the same quarter last year. Turning to expenses. Our adjusted compensation expenses were $159 million for the third quarter of fiscal 2017 versus $128 million for the same period last year.

The rise in adjusted compensation expenses was primarily due to the increase in revenues for the quarter.

For the third quarter of fiscal 2017, we had one adjustment of $6.5 million relating to the vesting of grants that were issued in connection with our IPO and we expect this adjustment to continue until our last tranche of pre-IPO grants vest in April 2020.

This resulted in an adjusted awarded compensation ratio of 65.5% for the third quarter of fiscal 2017 versus 65.2% for the third quarter last year. For the nine months period ended December 31, 2016, the adjusted awarded compensation ratio was 65.4%.

As we have said in the past, we manage our business using an adjusted awarded compensation ratio as we believe this ratio best matches current compensation cost with current revenues. For the third quarter, our GAAP compensation ratio adjusted for pre-IPO grants was 64%.

We expect that for the next quarter the GAAP compensation ration adjusted for pre-IPO grants will be between 125 and 175 basis points lower than our adjusted awarded compensation ratio. Our non-compensation expenses in the third quarter were $26 million or 10.5% of revenues, an adjusted $24 million or 11.9% of revenues in the third quarter last year.

Given that our revenues tend to be weighted towards the second half of the year, we often achieve non-compensation ratios above our target of 12.5% to 13.5% in the first half of the year and below our target in the second half of the year.

For the nine month period ended December 31, 2016, our non-compensation expenses as a percentage of revenues were 12.8% more in line with our target. We had no adjustments to our non-compensation expenses for this quarter.

Our GAAP effective tax rate for the third quarter of fiscal 2017 was 39%, which is similar to our rate in the first two quarters of fiscal 2017. Historically, over the last few years, our adjusted tax rate has ranged between 39% and 41% mostly driven by our US operations which accounts for more than 80% of our total profits.

Moving to the balance sheet, as of December 31, 2016, we had $254 million of cash and equivalents and debt of $44 million. In the third quarter, we paid our quarterly dividend and we made the scheduled principal payment of $7.5 million to ORIX on their outstanding note.

We paid bonuses to our officers in May and we expect that the cash portion of the bonus payments will use a significant portion of the balance sheet cash that we have at the time. Heading into the final quarter of our first fiscal year as a public company, we recognize that our business at times generate excess cash.

To the extent that we do not use that excess cash to grow organically, or through acquisitions, management will work with the Board to evaluate the most efficient and effective way to return it to shareholders.

In fact, because of our continued strong performance, today we are pleased to announce that our Board of Directors authorized an 18% increase in our quarterly dividend to $0.20 per share. The increase will be effective as of the next dividend payment date on March 15, 2017. With that, operator, we can open the line for questions..

[Operator Instructions] We will take a question from Mike Needham with Bank of America Merrill Lynch. .

Hi, good afternoon guys..

Hey, Mike. .

Hey. So I just wanted, some of you could elaborate on your comments about tax policy. You just kind of made the point that it could take some time, but it’s likely to lead to increased transaction activity.

Is that more like cash flow for companies, stronger economic growth or other factors?.

So, just the tax policy and what we’ve all said is, everything we evolve read and understand is there is likely to be some changes in both corporate and potentially individual tax rates which we think will get executives and shareholders and boards and financiers start to make new and different kinds of decisions and typically whenever there is kinds of changes like that, it is net helped our business with more transaction activity, more valuation activity et cetera.

.

Got it. Okay.

And then, just another on taxes, do you think the topic of potentially like capping or eliminating interest deductibility for corporate interest expense, assuming you get a lower tax rate, do you think that has like a meaningful impact on transaction volumes?.

I think any time, there is going to be changes. You’ll get two things.

One, you can always get sometimes people will wait to see what those changes are before they start transacting and any kind of changes, there will be some winners and losers and that will impact I think mid-term and long-term actually increased transaction volume for us and everybody else in the industry..

Okay. All right, got it. And then just, last one from me, just on growth opportunities, I saw the Blackstone deal recently and you guys addressed it. Can you, I guess, elaborate more on, like the capabilities that that business gives you and for this calendar year; you think you are going to be more active on the inorganic side versus last year.

Thanks..

So on the Blackstone piece, I mean, what they analyze, sell, value, et cetera are different kinds of assets and typical cash flows of I’ll call it, other kinds of companies. So if they bring to us a capability to understand a unique asset that many of our clients and prospects have, so we are better equipped to provide advice and assistance for them.

So we think it is that increases the breadth of what we have. And I forget your second question was….

Just, I think, like two years ago, you’ve done a few deals. Last year, it was a little bit later; I am just talking calendar year. So, just thinking about your pipeline or the things you are looking at.

Do you think you’ll be more active on the acquisition front?.

So, I would describe our pipeline is modestly active.

It’s not with a dozens of opportunities, but we are talking to several companies as we always are typically though when they might close and if they close is just a – some randomness in timing in what we saw in fiscal 2016 and fiscal 2015 was a lot of transactions closed didn’t have that same kind of volume that experienced for the most part over the last 12 months other than the Blackstone deal.

I think we are always targeting some combination of internal promotions lateral hiring as well as acquisitions, I won’t say that we have any specific view this next rolling 12 months will be different than kind of the blended average that we’ve seen probably over the last five years.

And if certain things break, we could do a couple acquisitions and if things don’t, it may stall out for several more quarters before transactions might occur. .

Okay, makes sense. Thank you..

We’ll take the next question from Devin Ryan with JMP Securities..

Hey, thanks. Good evening guys. .

Hey, Devin..

Hey, Devin..

Just coming back, I guess, to some of those last comments just want to clarify here.

So as we think about the timing of deal announcements, obviously some of the changes in DC could have a bigger impact on your clients which ultimately hopefully leads to a better backdrop, but when you put it all together, does that create a little bit of a soft spot, just an announcement that people recalibrate or does it feel like things are actually improving real-time and could actually accelerate to the extent we got certainty?.

So we are 80 days post-election which is not a whole lot of time. But so far we’ve seen no flowing in terms of number of opportunities that we are talking to executives about or in terms of number of new engagements we’ve been hired on.

We thought that there could be some timing issues where some people for pending tax changes might have wanted to try to purposely close or not close a transaction in calendar 2016 versus calendar 2017. But when you put it, I think all into the mix, so far we have seen a net increase of deal activity.

And nothing that has caused it to slow, as I did mentioned I think in the previous response, as we get closer to more conversations going on in Washington about what might happen with taxes, I am sure, like I said, there will be some people who will accelerate and want to do certain things and some people might want to slow down.

But currently, we’ve seen a net positive influence in terms of deal flow..

Got it. Okay, that’s helpful color. Maybe just drilling down a little bit more into some of the comments around restructuring. I am curious what you guys are seeing driving that call it, increasing restructuring activity outside of the energy complex.

Is it idiosyncratic events or are there other themes in other industries and if it’s retail or somewhere else that you’d highlight that’s driving deals and just when you put it all together, can you give any order of magnitude just to think about our new mandates on a net basis increasing or decreasing, just some sense we kind of think about the flow of that business understanding that it’s going to be lumpy from quarter-to-quarter?.

So you mentioned retail and that’s clearly been an area of last couple months, last quarter or two where you have seen an increase in activity.

But it’s really – while we would have previous quarters have been dominating our conversations probably in oil and gas, commodity, shipbuilding, et cetera, it’s a much broader different kinds of companies and different industries and across different geographies. It’s just a broader spectrum of opportunities that we’re seeing today.

We are actually seeing some larger size transactions with larger fee potentials; I mean still not where we were in the recession of – plus years ago. But it is a bigger opportunity set. I am not sure there is anything we can point to this specifically driving it. There is obviously some companies that will always sale for one reason or another.

So far the slight increase in interest rate, I think has not negatively impacted our corporate finance business, but for leverage companies, smaller increases can push them into a little more of a buying and needing to do something.

I think it’s just in marketplaces at the moment expanding in terms of restructuring opportunities in everything outside of the energy field. As we said, still be strong for a little bit longer, but the new business on the energy side is not nearly as robust as it was a year, year-and-a-half ago. .

Got it. Okay, great color.

And then, just a last quick one, I understand the Blackstone transaction is small, but just trying to think about the contribution and how we should be modeling that? I mean, is there any framework to think about as we bake that in?.

Yes, we hired as part of that acquisition to or brought on, I should say, two new MDs. And we looked at this acquisition just like any of the other acquisitions we’ve made where we believe those MDs will over some period of time mature on our platform and drive revenue results kind of consistent with the rest of our businesses.

The MDs in Blackstone are hybrid and that they work on both valuation and corporate finance type engagements. So you’ve got the metrics in terms of productivity for the two in something in between is where we are hoping to get.

And so we think there are some revenue synergies that will come from a larger platform broader products that they can offer their clients. .

Okay, great, okay, thanks a lot guys. Appreciated..

Thanks, Devin..

We’ll take our next question from Brennan Hawken with UBS. .

Hey, good afternoon, Scott and Lindsey. Thanks for taking the question. Follow-up actually on some of the restructuring questions for Devin there.

So, kind of curious, I think it was last quarter where you all said you were starting to see a slow in mandates and then this quarter we saw actually a pretty robust revenue quarter and now a more constructive outlook. How did things changed seeming so quickly.

Can you maybe, is something falling in this quarter and that was just episodic and just led the noise or was there some sort of pivot that you guys are seeing here? Maybe help us understand how that all shakes out?.

In terms of the new business activity, we just have seen increased activity this quarter versus maybe the last quarter or two.

What you are talking about from a revenue standpoint, of course is what we have accrued in revenues and we’ve always said, especially in our business the restructuring practice tends to have a smaller number of transactions close in any particular quarter and their sizes are bigger.

So when we’ve closed, had a lot more transactions closed in this particular quarter than we have in many recent quarters? It’s why we ended up with a larger revenue accrual for this quarter and I think we’ve always tried to discuss with people that what we do in one quarter isn’t necessarily something that you can expect to be repeated.

Sometimes we’ll do better, sometimes we’ll do worse than that and you’d see probably the volatility I think in our quarter-by-quarter restructuring revenues are much greater than the quarter volatility that you see in corporate finance or FAS..

What I would add to that is, the commentary around, kind of potential optimism changes for next year versus last quarter is driven in part by the fact that, for the last couple three years, we’ve been living off of singles and doubles in restructuring and I think really recently there have been some much larger fee transactions that have come through that will or expect to be closed in fiscal 2018.

And as you know in that business the fee transactions can get large and can move the needle for us on restructuring. So that’s another dynamic that’s occurred really in the last several months. .

Terrific. That’s helpful color. Thank you.

And then, when we think about your expectations of improvement on the back of likely some significant changes coming whether they be some policy or otherwise, do you expect that that would detract from potential restructuring opportunities or with the idea that you might have change could cause some business models or methods whether it be interest rate deductibility or some other factors we are not really sure about leading to or contributing to the potential opportunity in restructuring and it’s just not clear exactly where it’s going to fall in, it just seems like that’s going to result in more demand for your services?.

We still believe that once again changes however they might be will net improve the deal flow on our financial results. As you break it down by our products or our industries and what time period, I don’t think any of us are smart enough to know exactly what will happen or when.

We’d only comment once again we’ve not seen anything from kind of a restructuring standpoint in terms of how people are thinking about deals, who is file and who is trying to do a prepack has changed really pre or post-election.

Obviously, if they change deductibility of interest rates, that’s going to have some impact of people if there is certain relief or changes in regulation that could help some other companies.

All of that is kind of factored in the mix, but at this point, I don’t think we will get the outlook for restructuring has probably been significantly impacted by policy changes, there is just not enough information out there to have a concrete view on that..

Terrific. Thanks for the color. .

Thanks, Brennan..

We’ll now take a question from Ann Dai with KBW..

Hi, thanks for taking my question. Most of them have been asked. So, just one quick question on hiring.

I know you mentioned you had two new MDs from the Blackstone acquisition and I am sorry if I missed this, but what was the total number of hires in the quarter?.

There was one new hire in the quarter, from the quarter that just ended what Lindsey mentioned is there is two new MDs coming from the acquisition. It’s a typical light quarter for us in the third fiscal quarter just as you start heading towards bonus period for some of our peers.

People tend not to move until they get paid and then you’ll start seeing the activity pick up for us and our peers, we would anticipate in the first, second, et cetera calendar quarter..

Okay, great. That’s it for me. Thank you..

Sure, thanks, Ann..

[Operator Instructions] We’ll take a question from Conor Fitzgerald with Goldman Sachs..

Hey, this is James Yaro filling in for Conor Fitzgerald. Just two quick questions. This is a similar question to one that was asked before.

So if interest deductibilities are moved as part of the tax reform plans of President Trump, what impact did interest would have on sponsorship M&A?.

Better to probably ask them than us, but I think it would meaningfully change their business and how they’ve historically operated or what kind of capital structures they’ve put into place. What people might value things at.

When we have to go down a lot of speculation, I think like I said, Intel, any of us know what’s really going to be proposed really hard to tell, but once again we don’t see any significant rush by private equity firms to rapidly do something tomorrow because they are worried about what might happen in the tax policy deductibility et cetera.

So, at this point, it’s just anybody’s speculation on what’s going to happen. .

Got it. Thanks. And then, if corporate tax rates were lower, how should we think about that impacting your corporate tax rate? So, I think about 85% of your earnings are generated in the US.

It is as simple as you would benefit by 85% of what the decline was or are there other things that we should consider?.

Yes, I think that is a safe way to think about modeling a reduction in US tax rates. It’s 85% of our profitability. It’s very similar across the globe. So that’s a good way to think about it. .

Okay, thanks. .

And there are no further questions in the queue. .

All right. I want to thank you all for participating in our third quarter fiscal 2017 call. And we look forward to updating everybody on our progress when we discuss our fourth quarter results in the spring. Thank you everybody..

That concludes today’s conference and thank you for your participation..