Moelis & Company (NYSE:MC) Q2 2023 Earnings Call Transcript

Moelis & Company (NYSE:MC) Q2 2023 Earnings Call Transcript July 26, 2023

Moelis & Company beats earnings expectations. Reported EPS is $0.57, expectations were $-0.01.

Operator: Good afternoon, and welcome to the Moelis & Company Earnings Conference Call for the Second Quarter of 2023. To begin, I’ll turn the call over to Mr. Matt Tsukroff. Please go ahead.

Matt Tsukroff: Good afternoon, and thank you for joining us for Moelis & Company’s second quarter 2023 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.

Joe Simon: 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 million of revenues in the second quarter, a decrease of 23% versus the prior year. Our first half revenues of $368 million were down 31% from the prior year period which is primarily attributed to a decrease in M&A transaction completions. This compares to a 40% decline in global M&A announcements and a 50% decline in sponsor-backed M&A during the first half of 2023. Moving to expenses. Our compensation expense was accrued at 80%, consistent with the prior quarter. Our second quarter adjusted non-comp expenses were $43 million, including approximately $2 million of transaction-related expense I believe that the run rate for adjusted non-comp before transaction-related expenses is closer to $41 million to $42 million per quarter on a prospective basis.

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Separately, we entered into an agreement to split some fee amount with SVB securities in connection with our large tech hiring earlier this year. These owed will show up in non-compensation expenses only if designated transactions closed. Nothing occurred this quarter, but I will call out any material expenses if and when they do. 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 of $194.8 million of cash and no debt. I’ll now turn the call over to Ken.

Ken Moelis: Thanks, Joe, and good afternoon, everyone. We’ve been in an M&A recession for the last 16 months. However, in recent weeks, 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, health care and industrials, which together comprises approximately half of the global M&A fee pool, including two 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 to external hiring and internal promotion in the last — in the past year.

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 adviser in the Middle East. Even though we have significantly increased our hiring to-date, we expect that on a pro forma 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. 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 that our ability to execute for our clients and investors has never been better. And with that, I’ll open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Ken Worthington with JPMorgan. Please go ahead.

Ken Worthington: Hi. Good afternoon and thanks for taking the questions. 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 in any particular sectors, geographies or deal sizes?

Ken Moelis: 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 or 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. 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 US has probably loosened up the most. Europe is 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. 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.

Ken Worthington: 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 are you seeing private credit use today than in the past?

Ken Moelis: Ken, I’m going to answer that. It’s funny you say on deals. What’s really interesting about private credit is, they’ve become a solution to balance sheet problems complex arrangements inside companies. What’s really happening in the market now is, M&A is going to be the driver of the substantial part of the 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&A, but more on our capital markets and restructuring, 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.

Ken Worthington: Great. Thank you very much.

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

James Yaro: Good afternoon and thanks for taking my question. Ken, I just wanted to take the other side of this M&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&A and capital markets recovery?

Ken Moelis: Cost of capital difficulty. Look, I’m not calling the bottom of the cycle. I’m just — it is interesting to me that about six or seven 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 active 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. And again, I know the gut feel we have around the organization is that that we are as busy as we’ve ever been. Now I do think that pipeline, those new business or the 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.