Moelis & Company (NYSE:MC) Q3 2024 Earnings Call Transcript

Moelis & Company (NYSE:MC) Q3 2024 Earnings Call Transcript October 23, 2024

Operator: Good afternoon, and welcome to the Moelis & Company’s Earnings Conference Call for the Third Quarter of 2024. 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 third 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 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 We reported $281 million of adjusted revenues in the third quarter. Our adjusted revenues for the first nine months were $763 million, up 18% from the prior year period. The year-over-year increase in revenues for the first nine months of the year is driven by growth across all major product areas, and our year-to-date revenue distribution remains approximately 60% M&A, 40% non-M&A. Moving to expenses. Our third quarter compensation expense was accrued at 75% consistent with the first two quarters. Our non-compensation expenses in the third quarter were $48 million and we expect a similar non-comp expense result in quarter four.

Moving to taxes. Our underlying corporate tax rate was 34% consistent with the prior quarter. Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share consistent with the prior period. Lastly, we continue to maintain a strong balance sheet with $298 million of cash and no debt. I’ll now turn the call over to Ken.

Kenneth Moelis: Thanks, Joe, and good afternoon, everyone. We’ve seen gradual improvement in the M&A market throughout the year. Equity market valuations are at or near all-time highs. The Fed has changed course and appears to be committed to lower interest rates, although the pace may be up for debate. At the same time, rapid innovation driven by technology fuels the need for M&A, and these factors suggest we are getting closer to the next upcycle in M&A. In our capital structure advisory business, we continue to experience elevated activity and engagement with clients. We anticipate a prolonged restructuring cycle centered around liability management exercises due to a large amount of non-investment grade debt maturing in the next few years.

Turning to capital markets. The rise of private credits has allowed us to compete with the legacy banks on arranging capital for our clients. This market actually appears to be larger and developing more rapidly than we had anticipated. We were early to identify, and we have invested in this secular trend. We continue to experience strong demand for structured capital solutions, as issuers look to grow their businesses or to refinance upcoming maturities. Turning to talent. We recently added a Biotech MD who is set to join the firm next month. Our recruiting efforts remain active, and we will continue to selectively add talent in areas of key strategic importance to the firm. Our expertise across products, sectors, and regions has deepened, allowing us to deliver even more impactful, independent, and conflict-free advice.

We are well-positioned to drive long-term growth. And with that, I’ll open it up for questions.

Q&A Session

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

Devin Ryan: First question just on comp ratio, kind of near-term and then intermediate-term. Revenue is up 18% year-to-date. I think comp expense is up about 7%. You’re already seeing some leverage there, but obviously backlogs appear to be building. I’d just love to get some sense around whether you feel like there might be some positive leverage in the fourth quarter off of this 75% level? And then, how we should think about that relationship into 2025? Should we still think about kind of that guide that you guys have been previously given every, I think, $100 million or so is four to five points? Just how we should think about that connection as we look into 2025 and beyond? Thanks.

Kenneth Moelis: I’m going to ask Joe to reiterate, because I think we think the model that we gave you that kind of algorithm works. And your question about the fourth quarter is, yes, dependent on the fourth quarter revenue. This market continues to show signs of having energy behind it and having a desire or again, I’ve said this, I think, two or three calls now, but our pipelines continue to be at all-time highs. Our announced transactions are at all-time highs. The amount of activity is very significant, and yet the time to complete the transactions continues to be longer than you’d see in a full scale bull market. I just don’t think we’ve seen the increase in the speed to market that we might have thought we saw when the Fed first started to move rates.

So, yes, the answer is, there is leverage, and I hope the fourth quarter continues on the pace of improvement that we’ve seen. I think I’ll turn it over to Joe for a second, but I think the algorithm he gave you on four to a points per $100 million still holds true.

Joseph Simon: Yes. I think that’s right. It does barring any significant hiring phase, which we don’t expect at this time. I think that the algorithm is still relevant.

Devin Ryan: Okay, great. That’s helpful. And then just a follow-up, Ken, just on the interplay M&A with interest rates. Obviously, we’ve been talking about rates coming down as a catalyst, but we just had one move, right, and it was recent. We’re still pretty far away from, I think, what many people consider a neutral rate. In terms of sponsor reengagement, do you think we need to kind of see where rates settle out to really see reacceleration, or is this just, the rates coming down, people see the writing, and so they’re starting to try to progress things with the expectation that by the time you’re actually getting to closing a deal, rates will maybe be closer to that neutral rate? I’m just curious kind of how that interplay is working out based on the first move we’ve seen.

Kenneth Moelis: A lot of that question, Devin, anticipates that, I know exactly what the neutral rate is or the Fed does or anybody does. Interestingly, the 10 year probably disagrees with you and has moved in the other direction. Maybe that’s causing some of the slowdown. But I think the whole system will move together. What’s we find that the sponsors are engaged. It’s very different than it was, I’d say, 18 months ago when the default was everybody knew you weren’t going to do anything. It was kind of like waiting for put down, waiting for something to happen. We are in active conversations in and around all all sorts of things, liability management, private credit placement, M&A. There’s a lot of things going on. I still think one of the missing ingredients is, and we were talking about this the other day, is, there’s a lot of sector partners in private equity and other placing sponsors like that, that are out there on their front foot getting long ideas and maybe even transactions.

And then I think it gets back to the investment committee and maybe it’s the slowness of the replacement capital, the replacement LP capital. And so, the whole system hasn’t really started back up where everybody knows they can go back out and raise another fund. I think somewhere between the partner on the transaction itself and the entity as a firm at an investment committee decides, where they’re going to allocate capital, things just seem to slow down a little bit. The exact opposite happens in a bull market. In 2021, things just accelerated right through to completion. It can be — maybe if interest rates, if the Fed continues to cut, that will restart the whole process, but, it’s kind of a whole system that will move together, I think.

Operator: Your next question comes from the line of Ken Worthington with JPMorgan. Your line is now open.

Ken Worthington: Hi. Good afternoon. This is sort of a pie in the sky question as well. If you go back to the beginning of the year, Ken, you were optimistic about the outlook for M&A, you’re still optimistic about the outlook for M&A. At the beginning of the year, you mentioned that, Moelis’ pipeline was at record levels, we’re still at record levels, the S&P is at sort of record highs. But M&A, the recovery has been fine so far, you called it gradual. If there are no surprises, nothing out of left field, so to speak, could 2025 just be another kind of so, so year, better than ’24, but maybe disappointing relative to high expectations? If we have our chat a year from now and activity was so rather than great, what are the likely drivers of expectations that a reality that fall short of expectations next year?

Is it just rates? You mentioned that a lot of things are working together. What else sort of comes to mind on what could drive a mediocre rather than like a really healthy recovery in activity levels next year?

Kenneth Moelis: Again, a good question. I’m going to repeat what I was trying to say. Maybe I got too involved. I think, everything about it, barring an unseen external event, ’25, as you said, I think it’ll be a good year. It’ll be somewhere between good and very good. It the activity levels are picking up. It is different than it was if you went back a year ago. I don’t think we were quite at the levels we were of activity of optimism of people on their front foot. If I were to say one thing then, I think the thing that’s going to — and it might be a derivative of interest rates, but it’s the ability to raise capital in the LP market. Is there a fund 10 behind fund 9 that is available, if you allocate capital and use up your last 25% of capital?

That may not be — that may be related to interest rates. And so, I’m not discounting interest rates. It may be related to a lot of things, because I think the rise in interest rates definitely stop that allocation of capital going into at least private equity alternatives. A lot of capital going into private credit alternatives. If I had a thermometer and if you’d to tell me, how that market looked? How that re-allocation of capital into the private equity market looked? That might be a derivative, I said, of interest rates, but it would probably be the best indicator of whether we’ll have a mediocre recovery or a very good recovery.

Ken Worthington: I appreciate your thoughts. Thanks much.

Operator: The next question comes from the line of Brennan Hawken with UBS. Your line is now open.

Brennan Hawken: It’s a bit of an unusual environment for sure, but as we’re thinking about the coming quarter, do you expect that, we’ll be seeing the typical seasonality and a stronger fourth quarter than what we’ve been seeing here year-to-date? Is the seasonality you think still something we can count on?

Kenneth Moelis: Again, I don’t want to guide, but, yes, the business seems to feel and I’m not sure it’s totally about the seasonality as much, as there’ll be some deals that always try to close in fourth. That’s the little bit of seasonality as people rush to close at year end. But the business also seems to be gradually getting better each quarter, somewhere between a gradual or mediocre recovery every quarter. That could change. By the way, we’re going to have an event here in a couple weeks, elections. I think what Powell does after that. There’s a lot of things that could accelerate that. So it it feels like things are improving. Let’s put it that way. I’m not going to try to guide to a number. And then, I think there are things that could accelerate that.

Brennan Hawken: Okay. Yes, wasn’t trying to fish for a number, but thanks for that, the high level commentary. If we end up seeing some seasonality then and the leverage, as Joe just endorsed earlier on the call, and we have a decent fourth quarter here, it sounds as though, you’re implying that the 75%, comp ratio that we saw in the first nine months, that’s not necessarily the way we’re going to shake out for the year, and we have to see how solid the fourth quarter can end up being before we can make that call. Is that fair?

Kenneth Moelis: Yes. What we look at is what does the run rate as of today get based on this market indicate. And I think that’s the conservative way to think about it. If the market gets better, then the comp ratio will get better.

Operator: Your next question comes from the line of Brendan O’Brien with Wolfe Research. Your line is now open.

Brendan O’Brien: Good evening and thanks for taking my questions. I guess to start, I just wanted to talk about headcount. While your MD count is down slightly year-on-year, your employee count is up nearly 20% with a fairly significant increase quarter-on-quarter in 3Q. I just want to get a sense as to what drove the big step-up in headcount. Is it simply because you need to fill out some of the teams after the significant recruiting done over the past few years or something else?

Kenneth Moelis: It’s a little bit of both. I think, we’re a little — we believe our ratio is a little over-staffed per MD, but I will say some of that is, there are some sectors where we are recruiting in senior talent, where we have junior talent that we like as well, and that might distort it just a little bit that we kept some teams pending. I think we announced, we just said, we’re going to hire a senior biotech banker. Those types of ratios might end up as a result of having a team that we think is capable of calling on it, but they’re not MDs yet and we’re going to bring in MD on top of that. And some of it is just, again, part of the comp ratio. I think I’ve said this before, is as deals take longer and your backlog kind of stays there, you don’t abandon your backlog.

You sort of have all the deals that you thought you were going to do six months ago, and you still have all the deals that you want to execute on in the next six months. And so, I think some of this drawing out of the pipeline and backlog and even the length of time it gets to take deals done and you end up with a larger headcount just because you can’t walk away from them. You can’t just leave them on the shelf. It’s not a commodity. You have to service the client whose transaction you took on 18 months ago but has not completed. That’s what happens as the pipeline gets dragged down.

Joseph Simon: Yes. And just one correction, Brendan. I’m not sure what figure you’re looking at, but year-to-date, I think we’re closer to 12%, not 20%.

Brendan O’Brien: I was looking at a year-on-year, Joe. Because I wasn’t sure if there was some seasonality in terms of like summer hiring and alike. But, yes, no, that all makes sense, Ken. I guess for my follow-up, I just wanted to touch on capital allocation and specifically whether you would consider doing an acquisition to accelerate growth. I know, it’s something that you’ve not been interested in previously, but given where you and your peers are trading today, it feels like, there could be some interesting opportunities out there to leverage your multiple to do some accretive acquisitions and accelerate growth. Just want to get a sense as to how your thinking has evolved here, if at all?

Kenneth Moelis: I’m not. I’ve never been 100% against acquisitions. There’s never going to be I don’t see a way that that a large M&A deal happens. By the way. I again, I’m a you’re a function of where you’ve grown up in the world. I was at DLJ when Credit Suisse merged. I don’t think I can ever, ever do a transaction of that magnitude. What we did with SVB, in my mind, was as close to an acquisition as you can get. We took 50 bankers out without doing an acquisition. I think there are that type of a situation where you might have to accomplish it through, as you said, a purchase. I’m not averse to that. If it makes sense, if it’s the right price, if it’s the right culture, I think they’re very difficult to do. I think the earn-out method of buying those comes with risks.

They don’t show up for five years. I know that can make your financials look good. I think at the end of 5 years and when earn outs run out, I’ve seen what can happen. Again, I’m not verse to it. I’m not saying I won’t do it, but it it would be the it would look and feel much more like an SVB type of thing than it would anything dramatic.

Operator: Your next question comes from the line of Mike Brown with Wells Fargo Securities. Your line is now open.

Michael Brown: I just want to maybe follow up on the comp ratio discussion. How is the competitive landscape in terms of hiring? Are you finding that the fiber talent is getting tougher and resulting in the need to pay up? And are you also finding a need to pay up to retain your talent. I guess I’m just trying to figure out if there’s potentially some more structural pressure on the comp cost as we start to think more about 2025. And of course, I appreciate the comp ratio algorithm that you guys have laid out, but just trying to think about that dynamic right now.

Kenneth Moelis: I would say, it feels fairly stable over the last, really 18 months. I think there are people available. I think the market has quieted down a little, but as in all markets, there’s always going to be 5%, 10% of people who want to move for whatever reasons. I think the large banks continue, especially with this pressure on what I call as, again, is just any remuneration of lending from going to private credit. I think the regulators have our intent on pushing risky credit off of the major bank’s balance sheet and into the private credit market. I think that’s what’s driving that market. And as a result, I think bankers who would tend to have gone to those banks in order to be able to provide I call it off-market credit or better credit are going to become more and more available.

But I think it’s been stable. I mean it’s hard to say, overall, if you go for certain segments and there is a shortage in that segment, you could find some pressure. But I think talent is available and it stayed about, look, the market’s been pretty flat. I think that the cost of acquisition has been pretty flat for 18 months.

Michael Brown: Okay. Great. Just change gears and talk about restructuring. How has activity been holding up there? And when we think about the next 18 months, how do you expect restructuring activity to progress? And what will be kind of the interplay between, call it, traditional restructuring and liability management?

Kenneth Moelis: I think it will be more liability management than restructuring because the capital markets are open. Really, the Chapter 11 part of financial restructuring usually happens, when you get to a maturity and there’s no other alternative. Chapter 11 is always the last alternative, that kind of a full-scale restructuring is the last alternative. Today, there is aggressive money. There’s risk-oriented money. There’s a lot of capital that will find a way to play in a capitalization and extend maturity. There’s also — again, the liability management exercises we do now are pretty sophisticated. The large institutions are willing to participate and do the analysis. If the company has a valid business usually provide runway.

So I think that will be the dominant part of what we call restructuring. I think it’s going to be gradual and continuous, because the size of the credit market just has gotten so much bigger over the last seven or eight years, and it’s — you can almost do a regression and the amount of restructuring, reliability management you have is a direct correlative event to how much issuance happened somewhere between two to four years before the event. There’s just going to be a percentage of issues. And if the market is growing, the liability management market will continue to grow.

Operator: Your next question comes from the line of Aidan Hall with KBW.

Aidan Hall: Ken, maybe just a follow-up on your M&A comments or large team lift-outs. Curious how you would characterize appetite for not just like traditional M&A bankers, but maybe some of the non-M&A capabilities, obviously, private capital advisory, primary fundraising as well are areas that come to mind that some of your competitors have been a little more aggressive in kind of growing. Any appetite there? Do you guys have ambitions to grow in those verticals?

Kenneth Moelis: Yes. The answer is yes and yes. We have significant ambitions to be in there. We think it’s an important part. One of the things we want to be is the most valuable and important provider of services to the private equity community and alternative private credit as well. We’re looking at that. Yes, if that were — that would be on the order something that I think would look and feel like almost an SPV when I use that. It’s just the size that — of the size and shape that if it were something that made sense for us, might make sense in M&A as well as hiring talent either way.

Aidan Hall: Got it. I appreciate the color there. And maybe just a follow up on Brendan’s question about kind of head count more on a sequential basis. It looks like the MD head count decreased by 5% quarter-over-quarter. Anything to call out there? It just seems pretty elevated, but I know there can be some noise here and clarifications. So I just want to clarify.

Kenneth Moelis: Yes. I think what happens is, those might have occurred four, five, six months ago. Some that are voluntary or we might give people time. There’s also a garden leave if somebody would leave. So I think those are a result of things that might have happened in and around bonus time or after right around that time, where I’m not saying they’re all managed, but we manage our headcount. Some of them are not on our things we promote. But I do think that’s what happens. It takes time, sometimes four, five, six months for an exit to show up in your headcount.

Operator: [Operator Instructions] The next question comes from the line of Ryan Kenny with Morgan Stanley.

Ryan Kenny: Just on the comments around longer lag to complete transactions. Can you just give us an update on what’s still driving that? Is it all regulatory driven? Is it just a longer vetting process? And do you expect that lag to normalize as the cycle picks up and sponsors start coming back and forth?

Kenneth Moelis: It can be all of the above. I think in the public markets, it can be some regulatory, in the private markets is usually not regulatory in private equity. But I do think, again, these dynamics are kind of interesting. You have these large organizations and sector partners go out and we might have a product that is attractive to them. You might go through a long process of which you’re getting close to having the transaction. When it gets coordinated inside the larger entity, the investment committee of that entity, it might not be the right time for their capital, for their fundraise needs, for their exit needs. I think there’s a lot of dynamics going on around positioning private equity and trying to figure out how much capital do we have in Fund I?

When do we want to Fund V? Whatever fund you’re in? When do we want to go to market? I think in 2020 and 2021, again, I use those markets, because they were kind of time of bull market. The answer was, we can complete that transaction and the sooner the better because if we want to go back to market and raise another fund, everybody waiting for, and we already have commitments and things will roll. The fundraising market has been very slow. That’s been — if you think M&A has been painful, I think the active fundraising in the private equity market was extremely slow in ’23, getting a little better in ’24 and people are hoping for a brighter ’25. But I also think the inability to project that and feel confident about that, I think slows everybody down in the process.

I think that’s just one of those things that is working behind the scenes as part of the slowdown. By the way, it’s not always when you have a deal. Look, there are bake-offs we’ve done, been assigned a project and done the diligence, gotten to work on it and then it was put on hold for six months. That happens, too. It’s not all regulatory. It’s not on market. It’s not all interest rates. It’s a whole bunch of things that just come together, when markets are rockier, interest rates do not seem to be going rapidly one direction and definitely the funding from private sources does not seem to be going directly in one direction. So I think it’s all of the above.

Ryan Kenny: All right. Helpful. And then, one technical question. On the $7 million gain on Moelis Australia shares, was that a one-off? And any update on how Australia fits into your strategy from here?

Kenneth Moelis: Australia has been — when we started with Australia, it was purely advisory, and we wanted to do advice with them. They have been very entrepreneurial and they created a pretty significant public company down there for the financial now. That was a reverse inquiry. They called us up. They went public, I think, four years ago, or something. They called this up and said we have a buyer for five million shares and we just decided why not take the liquidity and do it. It was helpful to them, and it was helpful to us. We continue to do things with them. We continue to use them and co-advise on anything that happens in Australia. It’s a significant alliance for us. We have no plans on any of the other stocks that happened to be reverse inquiries, so we executed.

Operator: The last question comes from the line of James Yaro with Goldman Sachs.

James Yaro: I think we’ve seen a couple of recent successful sponsor IPOs. Is that something that’s starting to come up in your dialogues with private equity and do you think that’s something that could lead to more activity either in ECM or M&A in that part of the market?

Kenneth Moelis: I think there’ll be more sponsor IPO. Some of the transactions are large enough that finding an exit buyer is difficult. Very successful large buyouts end up having even larger exits. The IPO market, I think, is an obvious place for them to go. Look, again, with the stock market at all-time highs in interest rates coming down, you would expect to see an IPO market develop. It’s actually kind of strange. Nasdaq is at all-time high. It’s kind of strains that there is no IPO market. I think, if people come to market with the right price with quality product, there will be IPO market and people will take advantage of it.

James Yaro: Okay. Just quick one here. Maybe any way you could just size the percentage contribution to revenue this quarter from restructuring and capital markets versus M&A?

Kenneth Moelis: Yes. I think M&A was about $60 and all the other was about 40%. That’s been pretty consistent throughout the year.

Operator: At this time, there are no further questions. And I would like to turn it back over to Mr. Ken Moelis. Please go ahead.

Kenneth Moelis: Thank you very much. Appreciate it. Look forward to talking to you after the end of the year.

Operator: This concludes today’s conference call. You may now disconnect.