Moelis & Company (NYSE:MC) Q1 2024 Earnings Call Transcript

Moelis & Company (NYSE:MC) Q1 2024 Earnings Call Transcript April 24, 2024

Moelis & Company beats earnings expectations. Reported EPS is $0.22, expectations were $0.11. MC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Moelis & Company Earnings Conference Call for the First Quarter of 2024. To begin, I’ll turn the call over to Mr. Matt Tsukroff.

Matt Tsukroff: Good afternoon, and thank you for joining us for Moelis & Company’s first quarter 2024 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 may 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 Moelis & Company’s filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. 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 to 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 and other 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 the call over to Joe, to discuss our results.

Joseph W. Simon: Thanks, Matt, and good afternoon, everyone. On today’s call, I’ll go through our financial results, and then Ken will comment further on the business. We achieved revenues of $217 million in the first quarter, representing an increase of 17% over the prior year period. The revenue increase is primarily attributable to growth in restructuring. The M&A pipeline continues to build, but conversion to revenue remains challenging. There is early evidence that this trend is pivoting more constructively. Moving to expenses. Our first quarter comp ratio was 75%. We expect the ratio to be similar in quarter two until we have better visibility on the full-year, which is likely to be in the third quarter. Our first quarter non-comp ratio was 21.7%.

The underlying quarterly run rate continues to be approximately $46 million per quarter, excluding transaction related expenses. Moving to taxes. Our underlying corporate tax rate is expected to be 34% for the full-year. We expect the target of 28% to resume once we achieve a more normalized level of productivity. Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share. And lastly, we continue to maintain a strong balance sheet with no funded debt. And I’ll now turn the call over to, Ken.

Kenneth Moelis: Thanks, Joe, and good afternoon, everyone. We are getting closer to an M&A recovery. Our M&A pipeline continues to build as market participants have adjusted to the current cost of capital. Financing markets are open and both corporate and sponsor dialogues are active. Our restructuring team is seeing consistent flow of mandates, and we expect this to continue as we believe the current market environment, which combines coming maturities and an open financing market to be optimal for our business as we specialize in out of court restructurings, which benefit both from our strong capital markets and capital structure advisory capabilities. Finally, in the first quarter, we hired four Managing Directors, three in the energy sector and one to cover credit funds. Our outlook for the deal environment is positive, and we are focused on our clients and execution going forward. With that, I’m going to open up for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Devin Ryan with Citizens JMP. Please go ahead.

Alex Jenkins: Hi, guys. Hi, Ken and Joe. This is Alex Jenkins, filling in for Devin Ryan. Hope you guys are doing well. I guess, just to start, can you speak to what you’re hearing in terms of the sponsor backdrop? Most of the commentary we’ve been hearing recently has been fairly positive, but dialogue’s picking up and something around the need for these firms to act. I’d love to just get your perspective on what you’re hearing, and any time frame, information, or place you’re expecting would be helpful as well? Thank you.

Kenneth Moelis: Yes. So that’s a good question. Let me just give you, I think there’s a bifurcated market right now. The shape of our M&A business is actually more weighted in the first quarter to publics and strategics. And I think the reason for that is strategics kind of do strategic deals with the timeframe being almost unlimited. So, there’s no, when they come available and there’s something they have to accomplish, they usually execute. Interestingly, I think PE firms are one of the things they’re paid to do is be good at timing. They’re in deals usually for a hold of five to seven years and it matters when you purchase and when you exit and I think that’s one of their expertises. I think if you approach the first part of the year, January, and the betting odds, the line was six Fed rate cuts.

I mean, that’s kind of what the market was telling you was supposed to happen this year. You might get ready for market, but you’re not going to go till one, two, three of those cuts happen. I think you’re trying to time that market. Our by the way, our NBRC, which is our pipe where we vet companies for what we want to, deals we want to do, transactions we want to take on, has been extremely busy and it highs and our pipeline is as large as it’s ever been for this time of year. But, let me say what’s happened is, I think if you saw that everybody was handicapping six rate cuts and you were paid to time the market, you probably say, well, let’s get ready, but we’re not going. I think you fast forward to today, and I think the handicapping is down to one to two rate cuts.

And, I don’t believe we need rate cuts. I think we need stability and ability to project. And I think if PE firms, if you told them, hey, we can 100% guarantee that there will not be a rate cut for two years, they will begin to transact fairly aggressively on the basis that capital is available, rates are high relative to ‘21, but not relative to the world of interest rates over a long period of time. And, I think that you don’t have to, if you knew there was no rate cut, you wouldn’t be timing it that closely. So, I do think it was the divergence between, hey, I thought we were going to get lower rates and that would improve my value. That’s a long answer, but I think as people start really honing down to this is not going to be a rate cut environment, you’re going to have to transact in the environment we’re in, I think it will unleash a lot of activity and pent up activity.

And I think it is.

Alex Jenkins: Awesome. Great. Thank you for that color. That makes a lot of sense. Thanks for the rate color too. I guess just as a follow-up on the SVB team you guys hired last year, can you just speak to the momentum in the tech space relative to market expectations? Thank you.

Kenneth Moelis: Look, they’ve met our expectations. I don’t know what the market thought of the team, but we think that it’s almost one year I think it is one year to the day, I think we did it on this earnings call last year, announced it. We’ve gotten deeper, stronger, better in all areas. It’s not as I said, they have a lot of PE focus, so it’s not the optimal time period, the last 12 months to execute on revenues just like the rest of the M&A industry. But, we’re extremely happy with the penetration, coverage, expertise, client satisfaction, backlog given in the context of the market, we are very happy with it. It’s worked almost exactly as we were hoping.

Alex Jenkins: Awesome. Thank you, guys.

Operator: Your next question comes from Ken Worthington with JP Morgan. Please go ahead.

Ken Worthington: Hi, good afternoon. Thanks for taking the question. So, along the same lines, in terms of the new bankers beyond just SVB, how are you seeing the new hire success rate over the last year or so compared to what you’ve seen in hirings and promotions in years past? Are these more recent hires coming in-line? Are you seeing better fit and better success rate any sort of color you can give there? I know it’s so early but figured you might have a view?

Kenneth Moelis: I’m very bullish, but, Ken, again, let me just say the people you hired at the beginning of 2021, probably had a better 2021 than the people you would hire at the beginning of 2023. So, you also have to put it in market context. In that context, I think the hiring we’ve done has been better. It’s been as I shouldn’t say that because I’ll insult somebody. It’s been as good as we could have thought. I think the talent is very good. I’d spend a lot of time on the road with them. The client interactions are of the highest quality. They’re in sectors that are more that are active. So, I’m very pleased with it. It’s just 2023 has been a tough year to convert that to final transaction, but I feel like the backlog and the connectivity to a large fee pool client base is exceptional, and I’m pretty happy with it.

Ken Worthington: Okay, great. And, then maybe expanding on your rate comments. I think your rate comments really spoke about 2024. If we are sort of in a higher for longer environment beyond ‘24, does that have implications for either M&A sentiment or even restructuring opportunity? Trying to figure out what an extended period of rates at these levels means for your various businesses?