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

Devin Ryan – JMP Securities Michael Carrier – Bank of America Merrill Lynch Brennan Hawken – UBS Doug Doucette – KBW Jeff Harte – Sandler O'Neill

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey Fiscal 2017 First Quarter 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 this conference is being recorded today, August 2nd, 2016. I will now turn the call over to Christopher Crain, Houlihan Lokey's General Counsel. Please go ahead, sir.

Thank you, operator, and hello, everyone. By now everyone should have access to our fiscal 2017 first quarter 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 in 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 first quarter ended June 30, 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 operating 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 then we'll open up the call to questions. With that, I'll turn the call over to Scott.

Thank you, Christopher. Hello, everyone, and welcome to our first quarter fiscal 2017 earnings call. Overall, this was a very good quarter for the firm. We reported record first-quarter revenues of $181 million, up 24% from the previous year, and adjusted earnings per share of $0.35 versus $0.28 from the previous year. Despite a challenging market during the quarter our business model produced strong results. Our Corporate Finance revenues were $96 million, a record first quarter level and up 22% year-over-year. Our Financial Restructuring revenues were $56 million, up 44% year-over-year and the highest first quarter since the last recession. And our Financial Advisory Service revenues were $28 million, down 2% from the same quarter last year. As Houlihan Lokey approaches its one year anniversary of being a public company, I'd like to reemphasize three of the key attributes that differentiate our business model. First, our unique and cohesive culture, second, the broad diversification of our business model, and third, our focus on the mid-cap space in our Corporate Finance practice. Throughout our 44 years we have maintained an entrepreneurial consensus driven culture of teamwork and collaboration that for decades has aligned shareholders and bankers through broad employee ownership. We believe that our culture results in superior service to our clients, very low turnover at the senior levels of our institution and a highly profitable business model. We've also strategically built a firm that is highly diversified. It’s diversified by product lines, diversified by industry, diversified by geography and diversified by clients. In addition, we've avoided a star culture that reduces our reliance on any individual within our organization. With respect to product diversification, about 30% of our first quarter in fiscal 2016 revenues were achieved from our Financial Restructuring practice. We believe this product mix leads to less volatility in our revenues when the markets vacillate from bullish-to-bearish and bearish-to-bullish as they have rather frequently over this last year. Since its inception, Houlihan Lokey's Corporate Finance business has focused on mid-cap clients. Our original premise was that we believe that these clients were underserved by investment banking firms and we saw an opportunity to provide world class advice to this client base. This focus has enabled us to become a leader in mid-cap M&A in the US with the growing presence in Europe and Asia-Pacific. During the quarter, our industry experienced a meaningful decline in the value of global completed M&A transactions as a result of continued volatility in the market. However, we believe the number of global completed M&A transactions is a more accurate indicator of the health of the mid-cap market and that number has held up much better. Even through the current softness in the M&A market we believe we continue to grow our market share at mid-cap deal closings. We've accomplished this in three ways. First by recognizing and promoting exceptional bankers within our financial staff. Second, by hiring talented senior bankers from other institutions who we believe - who believe that the depth and breadth of our platform will make them more successful. And third, by acquiring firms that are complimentary to our business model and are accretive to our shareholders. On the new business front, Corporate Finance continues to grow and currently we have the highest level of active engagements in our history. Active Financial Restructuring engagements continue to grow in the first quarter, albeit the growth in new mandates has slowed somewhat from the pace we experienced over the last several quarters. With respect to business mix, we are experiencing good diversification in new M&A mandates across industry sectors. In our Financial Restructuring practice, the largest sector of work continues to be in energy and natural resources, which has been a successful growth area for our firm. Financial Advisory Services is seeing growth in portfolio evaluation, tax and financial reporting and dispute resolution, offset by a slowdown in transaction opinion work as a result of the previously mentioned decline in large cap M&A transactions. Finally, I have mentioned in the last couple of earnings calls that mid-cap transactions were taking longer to close. Our experience in the first quarter that this trend did not continue and in fact the time to close transactions has stabilized. While we are still not back to levels achieved a few years ago, deal closings are more predictable and buyers and sellers and lenders and borrowers, appear to have reached a point of equilibrium. During the quarter, the world's capital markets were impacted by the Brexit vote and the level of uncertainty cast over the UK and EU M&A marketplace is high. While it’s only been six weeks since the Brexit vote, to date we have seen no material change in our Corporate Finance business either in the UK on Continental Europe. At this point, we remain bullish on our opportunities in the UK and Europe and in fact, during the quarter we hired three new MDs in our London office, one in our business services sector and two in our liquid financial asset practice. We are also adding a senior banker in our financial sponsor coverage group in London, scheduled to start this second fiscal quarter. Complimenting our growing European Corporate Finance business is our Financial Restructuring practice which is already a market leader in Europe. Let me end my remarks by touching on one of the key drivers of growth of our business which is MD head count. During the quarter we promoted nine employees to Managing Director in connection with year end process. The majority of MDs at our firm have been promoted from within and we believe that MD development is one of the reasons for our success. We also hired three MDs across both product and industry and we had eight MDs depart as part of our year-end process. Furthermore, we added another three MDs so far in the second fiscal quarter who have already started. They have joined our business services sector, energy sector and M&A practice. We continue to actively recruit additional senior bankers where we see growth opportunities in the marketplace or where we want to deepen bench. On the acquisition front, we have proven that acquisitions are an accretive way to grow our revenues and continue to assess acquisitions that fit strict criteria. Overall, while market conditions are volatile, we believe we have built a business model that is successful in any market environment. With that, I will now turn the call over to Lindsey.

Thank you, Scott. We reported our first-quarter fiscal 2017 results on a GAAP-adjusted and adjusted awarded basis in order to provide an easier interpretation of our performance when compared to the same period last year. For the first 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. The adjustments related to the vesting of pre-IPO grants will cease when the last grants vest in April, 2020. Historically, we've had adjustments in additional categories including IPO-related costs, transaction expenses associated with acquisitions and adjustments relating to previous ownership agreements and we will continue to show these adjustments in the historical quarters until they roll off. Also, it is important to note that the financial results presented today reflect the third quarter of the company operating under our new post-IPO business model whereby we are no longer using a fixed revenue sharing model but instead targeting long-term awarded compensation and non-compensation ratios. Now, on to the quarter. Fee revenue grew nearly 24% to $181 million for the three months ended June 30, 2016, compared with $146 million for the prior-year quarter. In Corporate Finance, revenues grew 22% to $96 million for the quarter, compared with $78 million during the same period last year. Activity during the quarter was strong in Corporate Finance as we closed 48 transactions, compared to 40 in the same period last year, with an increase in the average transaction fee for closed transactions in the quarter. As expected, we saw an increase in activity for the quarter in Corporate Finance as several transactions that were expected to close in the fourth quarter of last year were delayed into the first quarter of this year. Financial Restructuring revenues were $56 million for the quarter, an increase of 44% from the prior year. The growth in revenues was primarily driven by significant increase in the average transaction fees on closed transactions for the quarter versus last year. In addition, we saw an increase in retainer fees for the quarter, compared to last year, as the number of active mandates in Financial Restructuring increased year-over-year. In Financial Advisory Services, revenues were $28 million for the quarter, a slight decrease from the prior year. Revenue pressure in FAS was a result of softness for transaction-based opinions as a result of weakness in the overall M&A market almost completely offset by growth in all of the other non-transaction based product lines. Turning to expenses. Our adjusted compensation expenses were $115 million for the first quarter of fiscal 2017, versus $97 million for the same period last year. The increase in adjusted compensation expenses was primarily a result of the increase in revenues for the quarter, partially offset by our change on October 1, 2015, from a revenue sharing model to a target adjusted awarded compensation ratio. This resulted in an adjusted awarded compensation ratio of 65.5% for the quarter, of fiscal 2017, versus 68.2% for the first-quarter last year. Our non-compensation expenses in the first quarter were $26 million or 14.4% of revenues, versus an adjusted $22 million or 15% of revenues in the first-quarter last year. The increase in non-compensation expenses was primarily a result of planned increases in costs as a result of being a public company, increases in general operating expenses associated with the growth of our financial staff and increased amortization expenses related to our acquisitions. As a result of the fact that our revenues tend to be back weighted towards the second half of the year, we expect to achieve a lower non-compensation expense ratio for the year than what we achieved in the first quarter. Our GAAP effective tax rates for the first quarter of fiscal 2017 and 2016 were 39% and 41% respectively. The first quarter of fiscal 2017 effective tax rate decreased primarily as a result of the expected growth and improved profitability of our non-US business in fiscal 2017. Moving to the balance sheet, as of June 30, 2016, we had $106 million of cash and equivalents, we had debt of $94 million, resulting in a net cash position of $12 million as of that date. As a reminder, we paid bonuses based on last year's results to our financial staff in the first quarter of fiscal 2017. To fund a portion of the cash bonus payments, we drew on our revolver and currently have an outstanding balance of $25 million. In addition, during the first quarter we paid our quarterly dividend and we made a scheduled principal payment of $7.5 million to ORIX on their outstanding note. While we do not provide earnings guidance, we remind everyone that the key drivers of our financial performance are our revenues and our compensation ratio. We continue to target long-term revenue growth of between 7% and 10%, which we anticipate will occur through a combination of organic growth and growth through acquisitions. We target an awarded compensation ratio of between 65% and 66%, and a non-compensation expense ratio of between 12% and 13%, which we expect to achieve over the long term. With that, operator, we can open the line for questions.

[Operator Instructions] We'll go to Devin Ryan with JMP Securities.

Hey. Good afternoon, guys, how are you?

Hi, Devin. How are you doing?

Hey, Devin.

Doing well. Just maybe a couple here quick on restructuring, heard the comment that the growth in new mandates slowed throughout the quarter. Just trying to put that in some perspective and I think last quarter you had mentioned that mandates and restructuring were up 25% year-over-year. So I'm just trying to put all that together?

Yes, the new mandates continue to grow but they weren't growing at a 25% year-over-year. Effectively what we saw over the last several quarters a significant increase in the number of mandates from what we had a year or two years ago. And as we mentioned, they're at their highest level when we were in the recession many years ago. Like I said, the growth has slowed but it is still growing.

Got it. Okay. That's very helpful. And then just with respect to the result, obviously, another nice result in restructuring. If you can give any color or just kind of help us think about the mix of that result between retainers and closing fees? And just - if you can't give exact numbers just trying to think through the trajectory of closing fees here, just as we look out over the next 12 to 18 months? Just given the kind of continued pickup in new mandates?

Devin, it varies year-to-year but I would say, historically, if you kind of look back on 2013, 2014 and 2015, the average retainers relative to total fees and restructuring was about 40%. This quarter was consistent with that. When you have a significant number of mandates close in a quarter or in a year, you'll obviously see that mix change. But if you look at the last three years in a quarter we are operating at about the same. In a significant recession or in a significant spike in restructuring activity you will see retainers as a percentage of revenues decline because you have a lot of mandates closing.

Got it. That makes sense. That's helpful. And then last, coming back to the comment about seeing that equilibrium in the timing of deal closings, good to see that I guess the light has been shortening. I'm trying to think through what is driving that or what drove that for the last few months here? Is that higher evaluations or financing markets being more functioning? And effectively trying to think about what could change in that if we're looking for what may revert it back to a longer timeline?

I think ultimately it is shocks to the system cause people to take a pause in whether you're the buyer or seller or financier. If it was August of 2015, you had devaluation of the Chinese currency in December and January and we had the -- at that juncture the trough in oil prices. You had a little bit of it with the Brexit issue in June. So I think it's when there is something that is not anticipated by the marketplace, people tend to take a pause and then after a while they seem to have accumulated all that new information and then continue to go forward on their deals.

Great. Okay. I'll leave it there. Thank you, guys. Appreciate it.

Thanks, Devin.

Thank you. Our next question will come from Michael Carrier with Bank of America Merrill Lynch.

Hi. Thanks, guys. Maybe first one just on the corporate finance, just given the strength in the revenues that you saw this quarter, is there a way to maybe give us some color on what portion, the strength this quarter, were from deals that didn't get done in the first - in the calendar first quarter? That completed this quarter versus - it seems like an overall healthy run rate just given your comments on the mandates. But just wanted to get a sense so we don't get too carried away with the level that you actually booked this quarter.

Yes, Michael, the difficulty in answering that question -- I think what we found as deals took longer to close, they were deals that we thought should have closed in March and they ended up closing in April and May and, likewise, deals we probably thought should have closed in April turned into May and June and, et cetera. So there's clearly some number of deals that we ultimately closed in our fiscal first quarter that otherwise probably three-plus months ago were would have thought would have fallen in the previous quarter, but we still have deals that have continued due to, like I said, that whole timeline got pushed out. So we don't really believe that this particular quarter had any double counting, per se, but we do know, like I said, some deals closed in this quarter that originally we thought we were going to close in the previous quarter. And there are still some deals that we originally thought we would close in the first quarter, we will likely now close in the second quarter.

Okay. That is helpful. And then maybe just on the financials or the expenses, on the non-comp, I think it picked up a bit. It sounds like it is a little bit weighted and you still think from the back half of the year that the ratio will move down. I just wanted to understand maybe what's driving that. And then the tax rate tick-down, and just given where you see the business and where you have been doing the hiring and acquisitions, is this type of a mix likely to be more consistent? So we can below that 40% level or is it just ebb and flow based on, obviously, the quarter where the activity is booked?

I think on the non-comp expense we do expect, and we've shown this over the years, that our revenues will be slightly seasonal. First half of the year is generally about 45%, give or take, of our revenues the last few years. So we do expect on a ratio basis, that our non-compensation expense will be lower in the second half of the year. We do our best to have consistent non-compensation expense quarter-to-quarter, but it's not. We do have a little bit of seasonality in the non-comp expense in the first six months of the year as it relates to, really, a couple of things. We have some significant professional service payments in the first quarter. We also do all of our training for analyst associates in the second quarter. The other dynamic we have this year is we have a heavier amortization of intangibles related to acquisitions in the first six months of the year versus the latter six months. So, we will see some downward pressure in the absolute dollars in the second half of the year. But, yes, that hopefully answers your question. Relating to taxes, this is one quarter of lower taxes. I do think that we will probably see tax rates closer to 40%. I'm not sure I would model below that. But we do think that 41% that we're experiencing in the last several quarters is probably closer to 40% on a go-forward basis and, obviously, we do everything we can to be as aggressive as we can in managing our taxes so that we get as low an effective rate as we can. Hopefully, there is the downward pressure on even the 40% number, but I would stick with 40%.

Okay. Thanks a lot.

Thank you. We'll continue on to Brennan Hawken with UBS.

Sorry. It was muted. Apologies about that. So thinking about the nine promotes and eight departures on the MD side that you highlighted in your prepared remarks, how do those numbers compare to your expectations?

That's been pretty consistent. The number of MDs that we promoted over the last couple of year have been I think akin to the numbers that we talked about here. Departures, probably similar. Maybe a little higher this particular time period, but also our total number of MDs starting at the quarter were much greater than we have been just due to hiring that we've done over the last year, acquisitions we've done. And so on percentage basis it is still a relatively small percentage. And I would say there is really nothing out of the ordinary in terms of the number of promotions or the number of departures that we saw in this particular cycle than we've seen in the last year or two.

Okay. So maybe departures might be a bit more elevated this year because there were a larger number of bolt-ons in the preceding year. Is that the right way we should think about that turnover rate?

Yes, I'd say two things. One, as I said, just the total head count is greater today than it was before. And as we've entered some new areas, and whether that is geographies or industries or products, there is always going to be more turnovers in some newer areas than in existing, longstanding sectors that we might be in.

Okay. Okay. Great. Thanks. And then one just quick sort of minor follow-up on the non-comp front, I get it that the ratio you guys expect to come down is a function of the revenues, sort of a denominator function. How much of your non-comp spend is fixed versus variable? How much of it is tied to activity? Just asking this with the central point of the question being, if we at some point see a revenue decline, just trying to think about how much flexibility we should think about in that non-comp item.

You still have the majority of that non-comp is fixed, it is associated, obviously, with the staff that we have, real estate we have. There would be certain things of activity were to shrink, certain areas in professional services, recruiting, head hunter fees are going to come down. There is always some amount of head count that you could change in a downturn. You're generally - you're stuck with your real estate for quite a while, but I think you would probably assume that most of the non-comp costs are fixed versus variable.

Okay. Great. And then last one on restructuring. I know that you guys mentioned in previous comments that it is still a lot weaker than by the energy- and commodity-related sectors. Is that how we should think about this cycle? Others have drawn a parallel to the dot-com of restructuring opportunity in trying to think about and frame this opportunity set as we try to forecast your revenues in this business because it is a little bit unusual for us to see M&A continuing to do well and then restructuring picking up at the same time.

Brennan, where I'd agree and maybe I would add some additional color to that comment. I think in the dot-com or telecommunication bust of 15 years ago you clearly had an industry sector that had a lot of debt and went south. But then ultimately there was a recession during that time period so you did get other industries that started to participate in the restructuring. What we're seeing today is still, default rates are low by historical standards. They're a little higher today than they were a year or two years ago. But, so where there is always some subset of companies and industries and businesses that are failing, that we're doing work on that are outside of the energy or natural resources, but that is still the -- the largest industry sectors are in those two. So, I think anybody's guess on where the market environment goes. But, yes, we could be in the environment like we are now, which is we'll continue as well our peers do well in those couple industry sectors and we're still doing okay in modest default rates. And if default rates pick up for a much larger group of companies across the globe, then we're going to see our restructuring revenues further increase.

Okay. Thanks for the color. Appreciate it.

Okay. Take care, Brennan.

Thank you. [Operator Instructions] We'll go to Doug Doucette with KBW.

Good afternoon, guys. I just wanted to clarify on the restructuring side, given I think you said that the proportion of the retainer fees and closing fees was the same as it has been in prior quarters. So in that regard, is that just kind of the absolute average transaction or fee per transaction increase, is that kind of just due to a larger transaction size?

Doug, I'm not sure I understand exactly the question. I understand the initial part of it where you suggested that the quarter is consistent with what we experienced in previous years. I didn't understand the connection to transaction size.

Sorry. A larger average transaction size.

No, in fact, our transaction size, particularly in restructuring because we do fewer transactions and the fees vary, tends to be - tends to fluctuate quarter-to-quarter. I think the averages across the quarters the last three years have been about 40% of retainers and in quarters where you have got low transaction fees, that number might be higher. And transaction where you have got higher transactions fees, it's going to be lower. This quarter just happened to be consistent with the previous years.

But it varies. In our fourth fiscal quarter of last year, we had a larger amount of transaction fees than retainer fees. So when you see a spike upward in the revenues in restructuring, it is typically because they just happen to have more closing fees in that quarter. And conversely if there is going to be a downward trend for a particular quarter. And that business just is more volatile than our other two business lines. So we can be more lumpy on what transactions will close in what quarter?

Got it. That's all I got, thanks, guys.

Thanks, Doug.

Thank you. And we'll go to Jeff Harte with Sandler O'Neill.

Good afternoon, guys. Nice quarter.

Hello, Jeff, thank you.

A couple things. One, you talked a little bit about it but I always like to come back to it because you guys have your fingers on the pulse of the middle market and that's theoretically where we can get more deals as opposed to mega deals done. How is CEO confidence, buyer, seller, kind of indicators or pre-pipeline activity levels and with mega deals slowing down are you seeing any increased competition from some of the big guys trying to come downstream more?

Two questions there I think in terms of investor, or excuse me, CEO or C-suite confidence. It seems to be, right now, like I said, relatively stable. It's hit this point of equilibrium, other than we have really over the last year, there seems to be something in a week or a month, here or there that tends to jolt buyers, sellers, lenders, borrowers a little differently. But right now I think people are feeling pretty good about businesses, about prospects of doing deals, prospects of being able to get capital, prospects of being able to close transactions. And what really happens on the front page of the Wall Street Journal in terms of very sizeable deals that get announced or cancelled are not having a significant influence, I think on the mid-cap space that we tend to deal with. And I forget the second part of your question was?

As we see the mega deals fall by the wayside a little bit, or at least decline, are you seeing any kind of bulge bracket moves to get more aggressive in the smaller kind of mid-cap space?

We always have a number of competitors during the best of times and worst of times. But we tend to specialize in this area and there are certain structural reasons, while the larger players will always have some amount of their time and efforts in working in that, I don't really see a change in the complexion of the competition that we're seeing today versus what we saw a quarter or a year ago.

Okay. And as we move forward, since there really isn't a buy-back, how should we be thinking about the pace of share count creep-through, compensation and other means. What kind of share count growth should we be thinking about?

So last year was right around 3% of our market value in terms of the amount of shares that we issued to employees as part of the - as part of their compensation for the year. Bonus payouts for the year. I don't see that number changing significantly on a go-forward basis. I mean, I think the fundamental question is, we've told you, we've told everyone in the past, we would like to enter into a buy back program to offset that dilution. When we enter into it, whether it's this year or next year, a lot of that is going to be driven by our comfort that there is enough float out there in the market to support a buy-back program. And I think right now the board is not convinced of that. So we're hoping that we may have a year of some dilution but we have no idea.

Okay. Thank you.

Thank you. And with no additional questions in the queue, I would like to turn the floor back over to Scott Beiser for any closing remarks.

Thank you. And I want to thank everyone for participating in our first quarter fiscal 2017 call. And we look forward to updating everybody on our progress when we discuss our second quarter results later this fall. Thank you, everyone.

Ladies and gentlemen, once again that does conclude today's conference. Thank you all again for your participation.