Moelis & Company (NYSE:MC) Q3 2023 Earnings Call Transcript

Moelis & Company (NYSE:MC) Q3 2023 Earnings Call Transcript November 2, 2023

Moelis & Company misses on earnings expectations. Reported EPS is $-0.15 EPS, expectations were $0.05.

Operator: Ladies and gentlemen, thank you for standing-by. My name is Sheryl. And I will be your conference operator today. At this time I would like to welcome to the Moelis & Company Earnings Conference Call for the Third Quarter of 2023. [Operator Instructions] I’ll now like to 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 third 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 $278 million of adjusted revenues in the third quarter, an increase of 19% versus the prior year. The revenue increase was driven by our restructuring business and some particularly large restructuring key events. We do not expect this to recur next quarter. Our year-to-date adjusted revenues were $645 million representing a decrease of 16% from the prior year period. The decline in revenues is primarily attributable to a decrease in M&A transaction completions. Moving to expenses, our year-to-date compensation expense was accrued at 83%, which is our best estimate of a full year ratio.

Our elevated compensation ratio is a function of a revenue dislocation, driven by the still challenging M&A environment and our decision to aggressively invest in talent during this downturn. Our third quarter adjusted non-comp expenses were $50 million, which includes approximately $8 million of co-advisor and legal fee expense related to completed transactions, which includes our transitional SVB fee sharing agreement related to certain preselected mandates. Our non-compensation expenses are expected to remain elevated through the first quarter of 2024. When our SVB fee sharing agreement terminates, however, the underlying quarterly run rate continued to be approximately $42 million. Based on our updated full year projection of income we accrued tax expense to equal an effective rate of 1.7%.

Our non-deductible expenses are large relative to our pre-tax book income. Over the longer term, we expect to reflect the tax rate more consistent with our recent history once normalized productivity can be restored. 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 $297.8 million of cash and no debt. And I’ll now turn the call over to Ken.

Ken Moelis: Thanks, Joe. And good afternoon, everyone. The third quarter marked a significant increase in revenues versus prior quarters. In addition, the pipelines for each of our three product areas continue to grow, and the total pipeline is near record levels. However, M&A completions continue to be challenging, and although our restructuring capital markets business have been quite actively outsized restructuring contribution is unlikely to repeat in the fourth quarter. Liability management continues to be the main driver of restructuring activity. The team has been a leader in out of court engagements having advised companies on five of the 10 largest at a [ph] restructuring transactions since 2020. If the FED maintains rates at current levels out of court, restructurings will continue to be a significant opportunity for us, in order to help our clients not only grow but also help them address liquidity and maturity issues.

Expanding our capital markets business has been a strategic priority for the firm. The team has grown in size and capability and we’re advising clients on a broad range of capital markets transactions. We have significantly enhanced the firm’s ability to address the largest sector fee pools. Over the last 12 months, we’ve hired 27 Managing Directors, while still managing overall headcount through targeted attrition. Although it is difficult to predict when the M&A business will recover, what we do know is that the cycle will turn and when it does, we are well positioned to capitalize on it for years to come. The investments we’re making today have dramatically improved the firm’s earnings power. And with that, I’ll open it up for questions.

Operator: [Operator Instructions]. Your first question comes from the line of Devin Ryan with JMP Securities. Devin, your line is open.

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Q&A Session

Devin Ryan: Okay, great. Good afternoon, Kevin and Joe. I guess first question, just want to start on kind of compensation construct? So, I guess first off, Joe, you may have said it. But in terms of just the full year, you’re running at 83%? Is that the right way to think about the fourth quarter? Or is 87% I guess the right way? And then I guess the bigger question is just trying to think about this year and appreciating this year as far from normal, if we look at the 83% year-to-date, and compare that to where I think you guys have historically said, comp ratio closer to 60% is quite more normal. The delta is like $150 million in compensation. So, I guess the question is like, is virtually all of that just tied to this kind of elevated recruiting?

Or how much is kind of competitive dynamics that I guess everybody should kind of think about? Like where we revert back to any more normal environment? And how much inflation, if you will, and compensation is just in the system? And I think that’s a question every firm is getting asked right now. Thanks.

Joe Simon: Yeah, so I’ll answer the first part of your question, which has to do with the ratio, that 83% is the target for the full year, the 87% for the quarter was basically the catch up for the first two quarters that were accrued for at 80%.

Ken Moelis: And addressing your issue, look, there are two events going on and they’re intermingled. One is downturn in revenues due to a pretty difficult M&A environment. And yeah, that would cause a significant elevation in the comp ratio no matter what. But then two things happen this year, we decided, and again, I’ve done this, I’ve been doing this for many years, there are four times in the last 40 years where I thought you could take advantage of significant disruption, lengthy, difficult disruption in the banker market. The first was when we, the last was when we founded the company in the great financial crisis, of ‘10, where we really created the company. I look back, I went to Drexel DLJ from Drexel Burnham in 1990.

And they created a firm in the midst of a disaster in the junk bond market, they created a firm that ultimately was extremely valuable over that franchise. And even UBS did that. After the tech downturn in 2001, this felt like that opportunity, a huge disruption in talent, people’s desire to stay where they were. And we took advantage of it. We hired 27 people in a year, it’s almost — it’s more than 20% of the existing Managing Director base. And by the way, Devin, while we did that, you’ll see that the headcount is only up 3% to 4%, at the end of the year. So, we actively managed a very significant amount of people out. We don’t schedule any of that, we run it right through our income statements. So some of that other people might have put as a charge for terminations or one timers.

We’re kind of running it all through the income statement. I don’t know the exact breakdown of what it would be. But I think the earnings power of the firm has significantly expanded. And that in a through the cycle normal business that we’ll be back to our normal comp ratio. I’d say this — there’s probably and we’ll see what happens over the next year, there’s probably a percent, maybe two of comp ratio that is going to the junior bet, the junior non-MDs that will not be recoverable. Just because we’ve raised — calm throughout the non-managing directors on the street, and I suspect that might be sticky.