Moelis & Company Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 10 speakers on the call.

Operator

Afternoon, and welcome to the Moelis and Company Earnings Conference Call for the Q2 of 2023. To begin, I'll turn the call over to Mr. Matt Sekharov. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us for Moelis and Company's Q2 2020 Financial Results Conference Call. On the phone today are Ken Moelis, Chairman and CEO and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call They contain certain forward looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Molson Companies' filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward looking statements.

Speaker 1

Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information Another information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors. Moelis.com. I'll now turn

Speaker 2

the call over to Joe. Thanks, Matt. Good afternoon, everyone. On today's call, I'll go through our financial results and then Ken will comment further on the business. We reported $182,000,000 of revenues in the 2nd quarter, a decrease of 23% versus the prior year.

Speaker 2

Our first half revenues of $368,000,000 were down 31% from the prior year period, which is primarily attributed to decrease In M and A transaction completions, this compares to a 40% decline in global M and A announcements and a 50% decline in sponsor backed M and A during the first half of 2023. Moving to expenses. Our compensation expense was accrued at 80% consistent with the prior quarter. Our Q2 adjusted non comp expenses were $43,000,000 including approximately $2,000,000 of transaction related expense. I believe that the run rate for adjusted non comp before transaction related expenses is closer to $41,000,000 to $42,000,000 per quarter on a prospective basis.

Speaker 2

Separately, we entered into an agreement to split certain fee amounts with SVB Securities in connection with our large tech hiring earlier this year. Fees owed will show up in non compensation expenses only if designated transactions close. Nothing occurred this quarter, but I will call out any material expenses if Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share, consistent with the prior period. And lastly, we continue to maintain a strong balance sheet with $194,800,000 of cash and no debt. I'll now turn the call over to Ken.

Speaker 3

Thanks, Joe, and good afternoon, everyone. We've been in an M and A recession for the last 16 months. However, in We have seen a healthy increase in new business activity as our clients begin to anticipate recovery. Completing transactions, however, continues to be challenging. Since June of last year, we have repositioned the firm to increase our focus on the largest global fee pools and opportunities, Most notably, Technology, Healthcare and Industrials, which together comprises approximately half of the global M and A fee pool, Including 2 industrials focused Managing Directors who will join the firm in the coming months, we have doubled the size of our combined coverage of those three sectors through Internal hiring and internal promotion in the past year.

Speaker 3

In addition, we continue to invest in our Middle East coverage efforts. There's been a noticeable increase in new capital deployed by Middle Eastern investors, particularly their sovereign wealth funds. These investors have been playing an increasingly important role in high profile deals across the globe and this is a trend that Should continue and we consistently rank as a top advisor in the Middle East. Even though we have significantly increased our hiring to date, We expect that on a pro form a basis, our year end headcount will be up only modestly as we are aggressively rebalancing talent across the business. The strategic investments we've made in talent have been transformative.

Speaker 3

I believe that the deal backlog feels like a coiled spring. Generally, deals not done don't go away. I don't know when the deal environment normalizes, but I do know that we have prioritized Access to the largest fee pools and then our ability to execute for our clients and investors has never been better. And with that, I'll open it up for questions.

Operator

Your first question comes from the line of Ken Worthington with JPMorgan. Please go ahead.

Speaker 4

Hi, good afternoon and thanks for taking the question. I'm curious about what you're seeing in terms of the availability of financing. So maybe first, how is the syndicated loan market today versus earlier in the year? And are you seeing financing availability improving more And any particular sectors, geographies or deal sizes?

Speaker 3

I'll start by bifurcating. The investment grade market has been fairly accessible and open, just rates have changed, but it has been open almost continuously. I think the leveraged finance market, both private credit and Ordinary financing, public credit markets, bank financing has become more available. The rates have moved obviously fairly significantly, but I think especially the private credit market has become pretty aggressive in Seeking out transactions. Rates, terms are difficult, and that's what makes transactions Actually still pretty fragile.

Speaker 3

I said the activity level has picked up fairly dramatically, but The ability to close those transactions are going to be affected by the difficulty of getting financing that allows deals to make sense On a financial basis, I think across regions, the U. S. Is probably loosened up the most. Europe It's probably still a little more difficult. And in sizes, I don't See a big difference through sizes, possibly the mega deals the mega Deals we have to write a very large check are probably still more difficult to do.

Speaker 3

But I think through The smaller to mid cap to the higher end of the mid cap range, I don't know that you see a big difference in availability.

Speaker 4

Okay, great. Thank you. And then just a follow-up on the private credit element. You mentioned private credit is more accessible. What portion of deals do you think or do you see that are accessing private credit today versus Maybe go back a year ago, how much more available is or how much more you're seeing private credit use today Than in the

Speaker 5

past? Ken, I'm

Speaker 3

going to answer that. It's funny you say on deals. What's really interesting about Private credit is they become a solution to balance sheet problems, complex Arrangements inside companies, what's really happening in the market now is, yes, M and A is going to be the driver of the substantial part of Recovery in our earnings, but there are significant balance sheet problems that have to be addressed, Rating agencies, maturities, and so when you asked me that question about private equity, they're improving their share Significantly of the deals themselves, but I think you're actually seeing them show up in almost again, I'll go to the liability management side of the world solving problems that touch on both our M and A, but more on our capital markets And they're stepping into a very large role in that area, and I think you're going to see them be very aggressive in that.

Speaker 4

Great. Thank you very much.

Operator

Your next question comes from the line of James Yaro with Goldman Sachs. Please go ahead.

Speaker 6

Good afternoon and thanks for taking my question. Ken, I just wanted to take the other side of this M and A Recovery debate given your perspective on the issue over so many cycles. When you think about This cycle, what are the biggest risks that you worry about in terms of what could slow down or impair the M and A and Capital Markets recovery?

Speaker 3

Cost of capital difficulty. Look, I'm not calling the bottom of the cycle. I'm just It is interesting to me that about 6 or 7 weeks ago, and I think it was right around the time the market got convinced the Fed was going to Skip a rate increase. And so the act of skipping sort of implies that you're really closer to the end than the middle. Our new business review committee, that's the first stage of us seeing deals, jumped rather significantly.

Speaker 3

And again, I know the gut feel we have around the organization is that we are as busy as we've ever been. Now I do think that pipeline, those new business committee submissions in which people are going to attempt A transaction are probably as fragile as they've been. And that goes to your question, which is you have Still a difficult regulatory environment and the capital cost to complete a transaction are difficult, expensive And uncertain. And so the act of trying to get across the bridge from I want to transact And I have an idea on what I want to do to completing it is very different than let's say our new business activity jumped I think it jumped more than it did in number of submissions in the early parts of the 2021 Rebound, the beginnings of the 2021 M and A cycle. The difference then was the Fed was on the way to 0 Interest rates and money was flowing through every possible opening into the market.

Speaker 3

And I still think today money is difficult. So how those two things will organize around themselves and how they will resolve will determine whether this cycle takes off.

Speaker 6

Okay. That makes a lot of sense. Maybe you could just speak to the source of activity that you're seeing in restructuring this quarter. Has your view of the opportunities that changed In restructuring, given the somewhat better macro backdrop in certain parts? And then maybe if you could Could you contextualize what percentage of revenue was from restructuring?

Speaker 6

I know you've given that at various points historically.

Speaker 3

So we've had a pretty significant year over year and even quarter over quarter increase in restructuring. It's still about 20 Our backlog and restructuring, I would say, jumped as much, Which you can almost tell by our monthly retainers, which are also up about 70%, 75%. And so Those are usually your best precursor to your future success fees in restructuring. I believe very we have a strong backlog in restructuring. It continues to be More liability management, it's interesting you just do not have company's revenues or EBIT Cash flows falling like you did, again, I'll go back to the financial crisis of 'eight, 'nine when Cash flows just fell off a cliff and everybody had to really go to what I call full scale restructuring.

Speaker 3

Today, there's a lot of liability management. And by the way, I know I always get asked on the call, what is liability management? And I'll just point out, We announced a transaction for Carvana about 10 days ago and it's a good example of what liability management is. Won't say I don't like to talk about clients, but it is a very public example of liability management. And we continue to see that Being the driving force around restructuring, which we now call capital advisory Because that's really what it's becoming, which is EBITDA's cash flows and revenue aren't falling dramatically.

Speaker 3

They're Sometimes just not enough to take care of maturities and in this market provide refinancing alternatives.

Speaker 6

Okay. That's very clear. Thank you very much.

Operator

Your next question comes from the line of Steven Chubak with Wolfe Research. Please go ahead.

Speaker 7

Good afternoon. This is Brendan O'Brien filling in for Steven. So to start, I just want to ask on the M and A inflection. While the green shoots that you and your peers are citing are encouraging, Given the lag between deal processes getting launched to announcements, the actual fee events, it feels like revenues will not be into pickup in earnest until 2Q realistically of next year. Would be great to get your perspective on when we could actually This underlying activity begin to hit revenues in your view if we continue along this more positive path?

Speaker 7

And if the softer revenue environment persists beyond 1Q Next year, how we should be thinking about the comp ratio?

Speaker 3

So Again, compared to in 2021 that didn't happen, especially when you're when the financial sponsors show back up on the scene because The actual time from transaction to completion is a lot quicker than that. Strategics, you're right, if we were to enter into a transaction Discussion or even agreement today that could take till the Q1, but a lot of the private transactions go much quicker than that. I agree with you. I don't think that will happen only because the financing of those transactions just is more difficult. People aren't, I was going to say throwing money at you, but the access to capital just isn't what it was in the old interest rate environment.

Speaker 3

So it could take longer, but I think you've extended if this really is the beginning. And again, I'm not calling that. It just has a sense that people are there are companies And by the way, I think it's a bit of a barbell. There are the companies that have been waiting around 16 months and now they want to execute strategic plan. They have the ability And they're ready to execute whether that be sell a division, buy a division, whatever.

Speaker 3

I think the other side of that barbell is A group of companies that have to do something. So that might have waited a long time and the environment has stayed where it is and The motivation for that group might be have to do something. But I think that timeframe, I hope, does not if this is the beginning and The new business review committee type of environment starts, I don't think it should extend out that long, but it might. If it does, we'll just have to look at what the revenue situation looks like then for our comp ratio. We've had a very Unique confluence of events for our comp ratio, I mean, we caused it, so I don't want to make it a passive thing, But we hired 19 people, 19 MDs, Managing Directors and 2 more to come.

Speaker 3

And it's a very tough revenue year. So that confluence of events is causing us to have to recognize We've almost bought, if you think about it, it's almost like buying a 15% or 20% firm the size of us with 20 MDs. But we do run that through the income statement because we're hiring them each individually. There's no nothing goes on the balance sheet. I think That the method by which we've set the organization up now, we've improved our facing and technology by more than double.

Speaker 3

We've improved our healthcare focus by 50% by the number of managing directors and industrials by about 50 And Media and Telecom by about 33%. I think that should come out in the revenue line, but that's to be determined.

Speaker 7

That's great color. Thank you, Ken. And I guess switching over for my follow-up, I want to just touch on the dividend really quick. You're able to build cash this quarter despite the negative earnings print, which is encouraging, but cash remains at fairly low levels from a historical perspective. And the biggest source of cash drain is really when you pay out bonuses in 1Q of next year.

Speaker 7

Given the revenue environment is Likely to remain at least relatively subdued over the next couple of quarters. I want to get a sense as to how confident you are in your ability to sustain the dividend from here.

Speaker 3

I see no problem with the dividend. Again, I think we've improved the go to market of the firm significantly with What I call a significant restructuring of our market facing managing directors, we have no debt And we have $190,000,000 plus of cash on the balance sheet. So I don't see any problem with the dividend.

Speaker 7

Great. Thanks for taking my questions.

Operator

Your next question comes from the line of Brennan Hawken with UBS Financial. Please go ahead.

Speaker 8

Hi. This is Ben Rubin filling in for Brennan. My first question is based kind of similar to the follow-up that You just got regarding capital. Obviously, the environment remains challenging. You guys have $195,000,000 of cash and liquid investments on the balance sheet.

Speaker 8

And you guys obviously have been very successful in recruiting. Would you be willing to take on external funding or debt to help fund that to your growth And or continue to fund the dividend at these levels, if it came down to that?

Speaker 3

Yes. Those are two questions. To fund future growth, yes, but we have $190,000,000 of cash right now. And by the way, there is another Investment that you didn't include in that. We have 23,000,000 shares of an investment we have in our Australian subsidiary that's It's not completely liquid, but it trades and is a source of capital if we ever needed it.

Speaker 3

So we've not discussed really going into debt to do either of those Look, if the right opportunity came along, given we have 0 leverage, would I go into a line of credit for a couple of $1,000,000 To accomplish something that would change the nature of the organization going forward for the next decade? Yes. But I don't see a reason why we'd have to do that given our profile.

Speaker 8

Got it. No, that makes sense. And then my follow-up is also as related to Comp ratio 80% you guys just gave and obviously it's a result of the success and the recruitment and the 19 MDs Obviously, already hired and 2 more additional will come on. Question for you is, what type of impact do those additional hires, especially at the senior level, Have in terms of the different components of your fixed comp expense? And are you making any adjustments to your approaches to incentive comp or your policies because of the higher amount of fixed comp relative to those new hires?

Speaker 8

Thank you.

Speaker 3

No. Our philosophy on comp will remain the same. And really, I guess it did change a little bit by the way is that we did exceed the comp ratio by a significant amount. The philosophy behind that is That the new investment we're making in 20 new managing directors is a benefit the beneficiary that should be the Equity investors, the producing, managing directors who are on the field, My belief is they shouldn't have to pay for that investment out of their current production. By the way, if you do that, you won't retain your continuing managing directors or your for long.

Speaker 3

So we decided to kind of bifurcate it into how can we pay the existing managing directors for what they're producing and make room for the But that doesn't I hope that's a bridge to 12 months from now When everybody is a continuing Managing Director and we're all one team. We are seeing it pretty quickly develop that way. Our technology backlog has improved dramatically. We're already announcing transactions from the SVB Tech team higher. So we're seeing it real time and pretty happy with the results.

Speaker 8

That's great color. Thank you for taking my questions.

Operator

Your next question comes from the line of Ryan Kenny with Morgan Stanley. Please go ahead.

Speaker 9

Hi, good afternoon. This is actually Connell Schmitz stepping in for Ryan Kenny. My first question is on the backlog. Can you size the backlog versus the call back in April? And then on the SIB related mandates, Is there any sizing to the number of deals and volume of deals associated with that revenue sharing agreement?

Speaker 3

On the backlog, it's up our gross backlog is up Pretty decently from I forgot which date you asked. Last earnings call, I guess. Yes, up pretty significantly. Again, to the question earlier on, the gross backlog is actually and I'm just talking to the gross amount of transactions We're hired to do is up near the highest levels it's been. I just handicap that.

Speaker 3

I think in this environment, you have to handicap that as having more fragility to completion. And So I don't want I'm not sure the two numbers are completely comparable given the environments. And then what was your second question again?

Speaker 9

Just on the SIB related deals, so like we know there's a revenue sharing agreement with the 40 or so bankers that came on, like Is there any way to size the potential deal flow that could come from those? Yes, I'll get into that.

Speaker 2

There's confidentiality related to that.

Speaker 9

Okay. But

Speaker 3

as Joe said, as they if we'll actually Call them out when they happen, so you see them on a real time basis. But there is confidence.

Speaker 9

That relates to my follow-up question as well, guess on the non comp, so when they come through, so we have non comp over $43,000,000 this quarter, That's an all time high. Is that the new run rate we should expect? And can you call out any puts and takes that will affect that number from here?

Speaker 2

So yes, in my opening remarks, I indicated that $43,000,000 included $2,000,000 of transaction related expenses, Which I can't predict. So I look at the underlying run rate of 41 this quarter As persisting 41 to 42 is the underlying run rate absent those transaction related costs.

Speaker 9

Okay. That's helpful. All right. That's it. Thanks.

Operator

Your next question comes from the line of Devin Ryan with JMP Securities, please go ahead.

Speaker 5

Hi, Ken. Hi, Joe. How are you? Hi, Ken. Good.

Speaker 5

So looking at Slide 17 in your presentation, and I like kind of the framing here. So you have All the fee pools and kind of your market share and obviously technology is by far the largest Fee Pool and by far the smallest market share for Moelis historically. But Ken, as you mentioned, you roughly doubled your client facing Managing Directors, you had 15 MDs in that group. So, trying to think about what that business, that sector could look like in a recovery scenario. And really just is 1 plus 1 more than 2 here?

Speaker 5

Because oftentimes, you plug in to your sponsor network or vice versa, There's maybe more revenues than each unit and you're kind of bringing in a group that's as large as or even larger than what you previously had. So Love that maybe we just think that through. I know it's not precise, but any framing around that would be helpful.

Speaker 3

Yes, a couple of things. First of all, it was I Talk about it as double because I kind of rounded it, but it's actually 2.5 times. We had I think we had 10 Managing Directors and now we have 25. And yes, it was very hard actually building up a tech effort 1 person at a time and it goes to your 1 plus 1, does it equal more? If you don't have enough expertise to kind of make yourself important, especially the group that we hired was much more sponsor driven.

Speaker 3

In fact, they were almost 100% sponsor driven. Our group prior to that was almost 100% strategic driven. You can imagine, 1st of all, the cross flow of information between those two is very helpful to drive new business. And that's just within the Tech Group. Then as I think I've said many times, my goal in this is to be as important To what I think is our largest growing feed pools in M and A on the planet, the very large sponsor groups that I think We'll continue to grow and be very significant.

Speaker 3

I do think there's a benefit to being an important supplier to them of Quality idea flow throughout the organization and they are all tracking it. They've all become extremely sophisticated. They know how many You've made how many ideas you've shown them, how many people have been in their hallway. And I do think that they're looking for important suppliers. And look, there's always a decision to be made on the allocation of some transaction.

Speaker 3

And it could be a transaction I'll just pick in homebuilding and your tech team might have shown them 10 good ideas, none of them Executed upon, but you'll get leaned in on some other part of your organization because as a firm as a whole, You are important and a very significant supplier of Ideaflow. And yes, so the answer to that is yes, I do think that 1 plus 1 should equal more than 2 in that event, especially with sponsors, who are literally 1 large corporation who just transacts in multiple different spaces, But I think has become very sophisticated in keeping track of how you're calling on them.

Speaker 5

Okay. Thanks, Ken. I'll leave it there. Appreciate it.

Operator

There are no further questions at this time. I will turn the call over to Ken Moelis for closing remarks.

Speaker 3

Well, I appreciate the support and everybody getting on the call. Look forward to Talk to me again in 3 months.

Operator

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • Q2 revenues were $182M, down 23% y/y (H1 down 31%) amid a prolonged M&A recession and lower deal completions.
  • Moelis ended the quarter with $195M in cash, no debt, and declared a steady quarterly dividend of $0.60 per share.
  • The firm has doubled headcount in key fee pools—technology, healthcare and industrials—and expanded Middle East coverage to capitalize on an anticipated M&A recovery.
  • Restructuring and capital advisory activity surged, with backlog and monthly retainers up nearly 70% and the segment contributing about 20% of revenues as liability management deals increase.
  • Adjusted non‐compensation expenses run at a stable $41–42M per quarter (excluding transaction‐related costs), reflecting disciplined cost management.
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Earnings Conference Call
Moelis & Company Q2 2023
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