Moelis & Company (NYSE:MC) Q4 2023 Earnings Call Transcript

Moelis & Company (NYSE:MC) Q4 2023 Earnings Call Transcript February 7, 2024

Moelis & Company 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 Fourth Quarter in 2023. To begin, I’d like to turn the call over to Matt Tsukroff

Matt Tsukroff: Good afternoon, and thank you for joining us for Moelis & Company’s fourth quarter and full year 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 to discuss our results.

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 $215 million of revenues in the fourth quarter, an increase of 6% versus the prior year period. For the full year, our adjusted revenues of $860 million were down 11%. The revenue declines were driven by a decrease in fees earned from M&A, partially offset by an increase in restructuring and capital markets fees. Regarding expenses, our full year compensation expense ratio is a little less than 83%. As a reminder, our first quarter compensation ratio will likely be elevated as a result of retirement eligible awards, which are expensed at the time of grant. For the full year, we reported a non-compensation ratio of approximately 21%.

As a result of our MD headcount expansion, underlying non-comp expenses will be in the $45 million to $46 million range, beginning in the first quarter, excluding transaction-related expenses. As many of the annual vesting of RSUs will occur later this month. For purposes of quantifying the excess tax benefit, we expect the impact to EPS to be approximately $0.01 for each $1 difference between the vesting price and adjusted grant price of $39 a share. Regarding capital allocation, the Board declared a regular quarterly dividend of 60 cents per share, consistent with the prior period. And lastly, we continue to maintain a strong balance sheet with $349 million of cash and no debt. I’ll now turn the call over to Ken.

Ken Moelis: Thanks, Joe. Good afternoon, everyone. While 2023 was a challenging year, we played strong offense and aggressively expanded our business. During the year, we hired 24 and promoted eight managing directors. Many of these new MDs are focused on the most significant global fee pools, including technology, industrials, and our clean technology group. While we expanded our new MD population by approximately 20% during the year, our total employee headcount grew just under 5% as we actively managed our headcount. In early 2024, we promoted seven bankers to MD and have hired three. One hire enhances the firm’s coverage of credit funds, and two managing directors we’ll join in the coming weeks are focused on upstream energy.

While we will selectively add talent in areas where we see meaningful fee pool opportunities, this year we expect to be primarily focused on delivering our expanded expertise to our clients. It’s difficult to predict when the M&A environment will fully rebound. However, the Fed’s messaging has eliminated the tail risk of future rate hikes and brought into view a high probability of rate cuts in the coming year, which I believe will give rise to an increase in M&A activity. We’re seeing early signs of an improvement in sentiment as expressed in our pipeline, which is near record levels at the beginning of the year. Barring unforeseen events, I’m confident that we have seen the bottom of this M&A cycle and that we have positioned the firm well for the coming uplift.

With that, I’ll open it up for questions.

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Q&A Session

Operator: Thank you, Mr. Moelis. [Operator Instructions]. Our first question is from the line of Devin Ryan with JMP Securities. Your line is live.

Devin Ryan: Great. Good evening, Ken and Joe. I guess I just want to start on the sponsor backdrop. Clearly, a very challenging market in 2023. I think sponsors had their slowest year of announcements since 2013. So, just want to get your thoughts on what do you think a recovery for sponsors could look like? Do you think it’s going to be a slow build? Do you see it snapping back? And just really how you see it developing maybe in the next two years relative to 2023. I can appreciate you’re now in some sectors like technology in a bigger way as well, so potentially get a bigger snapback. But just love to get some thoughts there. Thank you.

Ken Moelis: I think it’ll be somewhere in between and depending. Again, I think rate cuts, when they happen, will trigger a ramp up in whatever speed you’re asking me to handicap. And I think the actual event of a rate cut and the beginning of that will provide a tailwind. But again, Devin, I’ll take you back. I think the world changes so fast these days. I think sometimes we forget that within the last four or five months, we literally had the head of CEO of one of the major banks in the country telling the community that nobody’s ready for a 7% federal funds rate. And they have to be ready for it. It’s a possibility. We had one of the largest and most vocal hedge funds short the 30-year Treasury. This was in October, I think, early October, and saying that the theory was Treasury had to print so much paper and there was no way rates were going the opposite direction.

And today, there is none of that conversation. It is all about how quickly and how fast we go the other direction. Almost nobody’s talking about the tail risk of high rates. And I do think that will promote deal activity very rapidly. I don’t think the difference between a March or a June or a May or a — when rate cuts actually happen will have less impact than the fact that I believe the vast majority of the community believes they will happen. And that what we won’t face is a 7% fed funds rate that could destroy a deal that you entered into in the back half of last year. So I think it will start — we see it right now. It is building. I think most people are trying to use their best judgment as to when exactly to hit this market. And again, the private equity community is much more sensitive to timing their entrance and their exit into M&A than strategics are who are mostly investing for the long term.

So look, I think — long answer, but I think we will start to build from here gradually. And then I think it was — I forgot the famous one that said we will go gradually and then rapidly. I think that was in relation to bankruptcy, so I shouldn’t use that analogy. But I forgot who said first we will start out gradually and then it will move rapidly.

Devin Ryan: Yep. I fully understand. Thank you. And just to follow up on the other business and restructuring, yeah, obviously some optimism around I think the resilience and restructuring and hearing that through numerous earnings calls. You guys noted a year-over-year increase in the press release in that business. And so obviously 2023 had pockets of strength, but it felt like the mandates were building, and so therefore there should be some acceleration in revenues in 2024. So I just want to kind of get a sense of how you’re thinking about the trajectory of restructuring. And then perhaps your comment on M&A, as the Fed starts cutting, how that could accelerate M&A, maybe more than people think. Do you think that the Fed cutting could actually surprise people on kind of the fall-off in restructuring just as kind of conditions loosen and it’s a better environment?

Or do you just think that the maturity walls and just a high absolute level of rates is the biggest driver? So I just want to drill in there a little bit. Thank you.

Ken Moelis: Going into the year, we have, we think restructuring will be up and because of the size and the scope and how long and the impact of interest rates, higher interest rates on a long period of time. But look, if the Fed were to cut and begin to cut aggressively, I do think that that would, it cuts off a part of the restructuring market. Look, that’s why we built up capital markets so strongly. Most restructurings in this market are very close to being financings. It’s a matter of liquidity in the market terms, outlook on financials but there is nobody who in the market who wouldn’t rather do a financing than a liability management exercise or restructuring. So, yes, the speed and the aggressiveness with which the Fed addresses the market would definitely change the outlook for restructuring.

I still think it would be, there’s a fundamental amount of companies that are under pressure, interest rate pressure. But I think it would do a lot to damage the maturity wall if the Fed actually began, a whole series of things like, right now we have quantitative tightening. So they could do a bunch of things that would just make credit available and push out a lot of that wall.

Devin Ryan: Yeah, I understand. OK, thanks, Ken. I’ll leave it there.

Operator: Thanks for your questions. Our next question comes from the line of Ken Worthington with JP Morgan. Your line is live.