Q3 2019 Earnings Call

Good day and welcome to the Moelis <unk> Company third quarter, two 2019 earnings conference call webcast, all participants will be able listen only mode. So you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to actually quite she May press Star then one like your Touchtone phone.

To withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Miss Michele Miyakawa head of Investor Relations. Please go ahead ma'am.

Good afternoon, and thank you everyone for joining that's funnels and company third quarter 2019 financial results conference call on the phone today or Ken Moelis, Chairman and CEO , Joe Simon Chief Financial Officer.

Before we begin I'd like to note that the remarks made on this call may contain certain forward looking statements, including regarding future performance, which are subject to various risks and uncertainties, including those identified from time to time and the risk factor section that molten companies filings with the FCC.

Actual results could differ materially from those currently anticipated the from undertakes no obligation to update any forward looking statements.

Comments today include references to certain adjusted or non-GAAP financial measures. We believe these measures when presented together with comparable GAAP measures are useful to investors to compare results across several periods and to better understand our operating result.

A reconciliation of these adjusted financial measures with the relevant gap instant 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 and investors that most dot com.

I'll turn the call over to Joe.

Thanks, Michelle and good afternoon, everyone.

Today's call I'll go through our financial results and then Ken will discuss our business further we achieved a record third quarter in which we earned 232 million of revenues, which was our second highest revenue quarter ever and represented a 12% increase over the prior year period. Our performance compares favorably to the overall M&A market in which the number.

Global M&A completions greater than 100 million was down 11% from the prior year quarter.

We witness positive momentum across all products with our total average fee specifically, our M&A average fee, increasing our completed transactions as compared to the prior year.

Restructuring had its largest quarter of activity since inception, and most was ranked number one in both global and U.S. restructuring completions by value and number of transactions in the third quarter.

Moving to expenses adjusted compensation expense was accrued at 58% in both the third quarter and year to date, our non comp ratio was 15% in the third quarter down from 16 and the prior year period.

For the third quarter, we reported 35.7 million of Noncomp expenses as a result of continued expense discipline.

As mentioned on last quarter's call, we anticipate our non compensation expenses to increase in the fourth quarter due to the build out an expansion of our New York City headquarters the increase space is vital to support our future growth, we expect quarter for non comp to be 38 to 39 million.

Our underlying corporate tax rate remained at approximately 25% as a reminder, our adjusted net income presentation reflects all the firm's income tax that are calculated effective corporate tax rate.

We recognized an adjusted net gain of 5.4 million related to our sale of 12.5 million shares or 25% of our ownership and Moelis, Australia. As previously announced there was an additional 8 million share Sal expected to occur in the fourth quarter, assuming that this transaction is consummated the adjusted net gain as expected to be a little more than.

$3 million pretax ultimately there is expected to be no change to the strategic partnership and the collaboration between Molson Company and Moelis, Australia as a result of this transaction.

Lastly regarding capital allocation board authorized the dividend of 50 cents per share consistent with last quarter. In addition to our regular dividend distributions, we have repurchased over a million shares year to date and continue to be opportunistic in utilizing our share buyback program. We ended the quarter with a strong financial position with no debt and 162 million.

Enough cash and liquid investments and I'll now turn the call over to cat.

Thanks, Joe Good afternoon, everyone. As we stated our last call we expected our second half performance can be much stronger than the first half of the year and I'm pleased to report double digit growth over record Q3 last year [noise].

Alright activity levels are strong and I'm confident about our business outlook going forward.

Our third quarter M&A activity was solid and we experienced a meaningful increased in the average transaction size and average fee earned per completed transaction.

We aren't greater revenue and achieved higher M&A average fees on both middle market transactions and deal values greater than 5 billion, demonstrating the breadth and diversity of our platform.

Restructuring continues to be a growing and significant part of our business.

Not only provides a counter cyclical component to our platform, but more importantly allows us to increase our mindshare and coverage with corporates and financial sponsors.

Since our last earnings call, we announced the hiring a for managing directors to expand and enhance our client coverage in important sectors and regions to managing directors are based in the U.S. and will provide financial and strategic advice to Fintech and specialty finance clients respectively.

The two other managing directors are based in Europe , one will expand our coverage of continental Europe , and the Benelux and Nordic regions and the other will enhance our expertise in the technology media and telecom sectors. All four of these individuals who joined the firm during the fourth quarter.

We remain focused on profitable organic growth and have a solid pipeline of both internal and external senior level talent.

Augment the 11, managing director additions made year to date.

Overall, which strikes me the most though is the opportunities we are seeing in helping companies around the globe I continue to be amazed that despite market volatility. The C suite and board rooms are focused on creating and maximizing value for their shareholders through strategic transactions and that's what we're in the business is doing delivering except exceptional advice and how.

Upping our clients succeed in all sorts of markets.

With that with that I'll open it up for questions.

We will now begin the question and answer session to actually question. You May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your headset before pressing Mickey's if at any time. Your question has been addressing you would like to withdraw. Your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.

And our first question will come from Ken Worthington of JP Morgan. Please go ahead.

Hi, good afternoon.

Maybe first empty hiring a youve hired a bunch andy's in Threeq and Fourq, you, so far I'm, which feels a bit unusual giving the timing of annual bonuses. So maybe is most benefiting from some of the dislocation seen ad.

The other banks and it's the nature of available talent, maybe increasing a little bit and then empty level has only grown and I'd say modestly over the last 18 months.

No quality is far far more important than quantity, but do you feel that there's the talent and you had the capacity.

Boost empty growth that maybe a faster pace looking forward than we've seen more recently.

So the answer to the last question was yes, I think this year, we've we've hired but we look we manage our head count actively we have some we're starting the year then you're 130 Mds to start the year.

And and we do actively manage it I mean, we.

That's that's our job is to keep track of where we think we can we are doing well in where we can do better so.

That probably happened more this year.

We continue to higher I think going forward. We think we continue to bring in you know a net eight to 10 do new managing directors the pipeline is.

Hi, good both from outside the firm and most important to me inside the firm.

So that I'll start with the second one the first question I think you're right we are.

It is a little later in the year. It's interesting I think some of the availability of talent is coming more out of the European mid market banking system.

And one of the benefits of that is they went a few years ago to a very high cash.

Salary level they pay a lot.

During the course of the year in salary. It actually gives you the ability to not feel so bad about hiring later in the year because the.

Okay.

They've already received a lot of their compensation, it's not all back and you're not picking up a 100% of.

Of the bonus so again, we try to higher earlier in the year than this but when you're when you're hiring in the European.

Banking sector, you can often higher later in the year and not not be penalize as much.

Awesome and then just maybe secondly, as we think about 2020.

What kind of feedback are you starting to get from your clients about the macro influence is impacting M&A decision, making so clearly some things haven't changed you've got the technology technological disruption.

But are you getting this sense that given some of the more.

Extreme political views by some of the leading candidates that there might be either more elevated activity in the U.S. to get things done before elections close or maybe at the other ended the spectrum, there's more uncertainty and more of a preference to wait and see and then going across the pond to Brexit.

Seems like we may be coming to a resolution at some point in the foreseeable future.

To what extent, you think theres been pent up demand in either the UK or continental Europe .

And that might.

Might come to market, if we get some sort of resolution finally.

So in general in the U.S. I think there is.

I don't think anybody holding back for election.

And really not from macro either I said that at the end to my speech because I think it is interesting how on the front foot everybody is and that's not always you know M&A.

But it is creating value there is lot of talk about spin offs.

Division sales M&A, but the board room, the C suite everybody's really.

I'll just engaged in creation to value I think.

So there's nobody is holding back for election, and I don't believe anybody's holding back on macro either.

That might that could change I mean, we're going to have a pretty.

Interesting election over the next what does it.

Year, I guess now close to inside of a year and look I think as polling changes that could change but for right now no it's not happening.

I mean, meaning that it's not affecting anything.

In Europe , almost got the feeling well then over in Europe , a lot in the last two three months, it's almost like especially in the UK people or so board of talking about Brexit it's like.

I think there's almost no.

Yes, it's I know you think the resolutions coming I think in People's mind is like we've got to move forward we cannot stay.

In paralyzed by this forever. So I think there if it ended it would probably be helpful and maybe there is pent up demand, but at this point I really believe.

People are sick and tired of talking about it and they're sick and tired of putting off plans to.

Create value even in Europe and people are trying to look past it.

Okay awesome. Thank you so much.

Our next question will come from Richard Rams, then of Goldman Sachs. Please go ahead.

Hi. This is south are there any on furniture grams and today you reached a record quarter in restructuring largely benign economic environment, where are you seeing the largest pockets of opportunity in restructuring today and then also can you comment on how your backlog is looking heading both into the end of the year and then also into 20 Bonnie.

Are you talking backlog, just specifically restructuring or.

Yes, that's right.

So.

Restructuring is fairly still idiosyncratic outside of some of the commodity sectors like oil and gas.

I think thats, the one where we see.

That's that's that's probably the sector that is having still.

Difficulties in a lot of restructuring about it we have a very good position and oilfield services and they're very affected by the downturn in the commodity.

And then around it's really idiosyncratic after that if you have a lot of companies with significant leverage one or 2% of them get in trouble, we have the market leading.

Restructuring group.

We have kept our investment in them during very what has been a pretty good economic environment with low defaults. We've invested in the group we believe in the group. So we're taking market share I believe.

In terms of their pipeline I think we haven't.

Pretty good restructuring pipeline going forward I think it continues to be at about the level that it has on a trailing basis, meaning elevated and doing well.

So.

Those are very hard to predict when they hit though you have.

Restructurings or almost harder to predict when they might hit success fees than they are easier to know that they will get to a six success fee, but the actual timing of those is sometimes even more difficult than M&A.

Okay, great. Thank you and then additionally on your Noncompensation expenses, they came in well below expectations and that 15% Noncomp ratio is one of the lowest levels you that you've achieved so far.

What degree to this quarter indicate your ability to control cost inflation I was just wanted a factor of some positive quarterly volatility.

And then looking forward how are you thinking about improving your non comp ratio from the current levels that we see today.

Yeah. So I'd say, we're working focused on expense management and the ordinary course.

Regardless of economic environment, I think that you know we we.

We think that Weve ultimately gotten some leverage on on costs. We look at our average quarterly cost per had this year on average is about $43000 per quarter per head and that compares to last year's 47000. So I think even with the expansion of space, that's kind of moved to maybe 40.

Before we think we've we've.

We pay attention to it we continue to make the right investments.

And I think what I've described as fourth quarter and what you should expect is probably a pretty reasonable estimate.

Okay. Thank you.

Yeah.

Our next question will come from Manning go cilia of Morgan Stanley . Please go ahead.

Hi, good afternoon.

So you had mentioned earlier this year that you know some buys were building a recession into their models, whereas as sellers who are not.

Is that a large bit ASCAP or are those coming closer now.

You know I Didnt ask so I haven't I don't have a good information if the and I was talking mostly about sponsors. So I have to defer to that I don't know if we're still seeing every model have a recession.

Yes, yes, but I think what we're seeing now.

Recently is and again I'll go back to the fourth quarter last year, we had a really volatile downturn in the market.

We felt in the first and second quarters that sponsors worn putting their best assets up for sale.

It was concerning what happened in the fourth quarter and processes takes a long time to market. If the fed did the wrong things or China Trade War went the wrong way.

My guess is people were unsure that the market was sustainable and didn't want to start what could be a six month process.

Into a market in which valuations wouldn't be good for their best assets Interestingly, we've come through all that the fed trade war Snps at all time highs.

It feels very resilient the market feels to people resilient now and I think we're starting to see sponsors.

Put their best assets.

Or thinking about putting their best assets in the market again, I think they feel comfortable so.

Although there may still be recession cases in there I think theres, a feeling that the valuation parameters are sustainable and solid here and we're starting to see quality assets quality private assets.

Be put into the market.

Got it that's helpful. And then secondly can you talk little bit about I.

I guess, how the overall IPO environmental impacts M&A, so basically if.

Yes, the IPO exit strategy is becoming tougher what do you think happened to sweat sponsor driven M&A do you think that helps because.

Then M&A as the only other exit strategy left.

I think people are using sponsors as an exit strategy more and more I think it's you look at a lot of the Ipos and they are significantly companies that are in money losing positions.

So maybe for good reason, they're building market share, but they need capital.

And you see more and more private companies that are at its solid EBITDA.

Thinking of monetizing and using the private market for liquidity and I think that's a trend that might go on for years.

As it's so much more efficient you you get to trade your company for a.

Control premium rather than for an IPO discount.

As a former banker I went public for.

Paying a 7% commission to all of you on the phone was a offensive and.

So I understand now why.

Why they Ah why people no longer I want to incur those kind of fees in friction costs and and I think you're going to see a continuing use of the sponsor and private markets as a way to create liquidity for companies that can do it.

Okay got it thank you.

It's helpful.

Our next question will come from Michael Brown with KBW. Please go ahead.

Hi, good afternoon.

Good afternoon.

So I guess first.

On the comp ratio. So clearly the revenues have been a little bit more episodic this year and I guess as a result to comp ratios have bounced around more than usual.

Quarter to quarter, so kind of based on where we're at for the year, how should we think about really where the full year comp ratio could end up.

Look we have been as disciplined as anybody on.

Our full year comp ratio and that's our goal.

But as you look at things. We also think that we have the best talent, we have an unbelievable opportunity to grow the business and that that we will protect that I mean number one is we want to protect our talent, but we have been disciplined and we intend to continue to be disciplined in the context of making sure. We can take advantage of.

I think is going to be a unique opportunity to grow our talent base and and I really.

I am excited about the talent, we have under under roof here and protecting that is the number one priority.

Great and then also of your kind of closer to year end any updated thoughts on how you're thinking about the capital return and kind of next between buybacks and and the special dividend.

It's where the special could be relative to where it was and the.

Fourth quarter last year.

Yes, we focus on that with the board at the next board meeting and look we've been more active in at these prices were more active repurchasing shares. So we're going to where we're going to look at it I mean, it's a it's a different market today, we have a different.

Valuation our shares trade differently than they did a year ago. When we were doing specials, and we're going to make that decision coming up a we've been.

More active in share repurchase and.

And.

There are two phase and the other thing we're going to do by the way as we continue to want to leave the company, 100% debt free.

So even the build out we're going to do in New York, We're going to fund out of cash flow, which will be a use of our cash too. So.

We're not we we thought about borrowing for that but we like being.

Debt free we think its motivating force for talent to be here and I think it also sends a message to our clients that we don't need to we don't need to do deals. It's very important us that our advice be seen as best possible advice not in context with any financial.

Pressure.

Great. Thanks for taking my questions.

Yeah.

Our next question will come from Devin Ryan with JMP Securities. Please go ahead.

Great Hey, Ken has.

Most have been asked but I just want to come back a little bit to just some of the commentary on the environment and just trying to kind of parse through on your tone Academy.

It feels like what you're saying is that the backdrops actually been improving and so I just want to make sure can I'm hearing that right, whether thats fair or if it's more just a function of a little bit of a slower start to the year, where you some things didnt hit and so we're just getting back to maybe where we were prior to the fourth quarter disruption or is your acts.

Really something maybe happening here, that's more meaningful in terms of the acceleration in terms of what you're seeing on dialogues, whether it be with sponsors or strategics.

Well it was you're right about one thing it was pretty easy to improve over our first half. So it was a low bar to two to improve but it was a good quarter I I think things are improving.

Look the first quarter had some.

Lumpiness to it for every one I think that the the end of last year was not a wonderful time. It was very volatile I think people change.

Plans in place.

There was some conservatism I think in companies as to how the first half of the year would play out.

So my feeling is we're kind of back to where we were I think the aberration of maybe it's a good way to say Devon is are the first six months to me.

Like the aberration I feel like we're back in the kind of.

Place, we were on run rate and feeling that we were you know sort of last year and.

Plus or minus we'll see again I don't we don't guide I don't want.

And again to look at US quarterly I think is it's just not the way to look at one of these companies I cannot control these quarters.

It's hard for me to even predict with full knowledge of what I'm looking at how these quarters come out, but I know we have great talent, we have a great market share we have great conversations and in my my gut feeling is.

The underlying tone is better.

It is is the best is as good as I've seen it since may be a year ago.

Yes.

Very helpful. Thanks, again, and then just a follow up on kind of Middle East footprint you guys, obviously have.

Quite a bit there and both.

Money and time and.

It seems like maybe there's some activity moving forward you sort of high profile.

Business and so I'm, just curious how you're thinking about that region for most whether it be your footprint footprint relative.

To the opportunity or just kind of more broadly.

But weve worked long and hard it hasn't been recently, it's been really 10 years ago. When we started we started.

Really with the restructuring and helping Dubai.

10 years ago, we've kept we have great talent there we maintain a very good presence there. It is a part of the world that I think.

Respects commitment and continuous commitment they respect discretion and confidentiality and I think we've got the best franchise in the Middle East Barr Nunn.

And we intend to keep investing in and I think we're we're actually looking at opening an office in.

In Saudi Arabia, so were.

We think it's a growing part of the world and a place where.

Having all of those attributes of loyalty discretion confidentiality and good advice pays off so we're pretty happy with.

Great. Thank you.

And then next question will come from Jim Mitchell with Buckingham Research. Please go ahead.

Hey, good afternoon.

Just couple of questions, maybe one on on the buyback Ken I know you.

Sort of set you're leaning towards buybacks, but in the quarter. If I read it correctly, you only get about two and half million buybacks out of the 100 million or so you had it.

The price was obviously was down quite a bit if it wasn't attractive in the third quarter, what why wasn't it. It was it a liquidity thing just trying to get a sense of why you weren't a little more active in Threeq you.

You know well first the first six months weren't exactly.

Liquidity, providing they weren't excessive revenue so thats fair.

Then we had some liquidity come in after the reporting period from the Australia sales. So we got more liquidity and so we've been active we had a tenbfive program that's done some.

But look I think we're going to we are going to be more active on it I want you know I I continue to believe and I think I was reading a Charlie Monger quote that said the key for us to succeed is just not do anything too stupid.

So I'm not trying to do to be brilliant on this stuff I think the keys to avoid being stupid and to me that means maintaining our liquidity being careful.

And being in a position to take care of times when other people might do something stupid.

And so that's a real goal life I've seen it.

This is along the market feels really good to me.

But things happen after 10 year expansions and I want to be ready for.

Those possibilities that give us the ability to really step function grow the firm we did that in all eight 910 in that and I I think there'll be a moment and I don't want to be the moment I don't have liquidity. So.

That's a long answer to where we're just being careful yep no. That's that's all fair and maybe on the restructuring side.

You guys have obviously done very well with M&A down restructuring seemingly up.

Can you kind of update you kind of talked about somewhere around 20% of revenues isn't running materially higher than that this year, how do you see that sort of eventing out overtime.

Definitely north is there, but look theres chunky stuff that comes in we had a couple of you know so I'd say, it's running north of 20, but you know don't don't overdue quarters things happened deals.

Happen inch chunks, and I'd, just say, it's running north of 20 and.

Yes, and it might still again, I I'm, not predicting that but as of now it's running slightly north of 20%.

All right well, thanks, and maybe one for you Joe just on a non comps kind of step up this in the fourth quarter.

How is that because of the investment and the New York Office is it going to stay at that level and move higher from there is that does the jumping off point for next year, which would push the growth rate higher and non comps or is that not the way to think about it.

Well, it's certainly a starting point I think it's always going to be.

Founded on head count that's that's the principal.

Basis, but ultimately yeah.

The new space and some of day.

Some of the process that we have to go through and the build out that's all taken into account in that new run rate.

Okay. Thanks for taking my questions.

We have a follow up question from Richard Rems and of Goldman Sachs. Please go ahead.

Hi, just a quick accounting question from us wasn't really any material pull forward of the revenues book This quarter I just want to make sure the where there were seeing the data correct relative to the backlogs.

Yeah, I mean again the quarters are now comparable since the new accounting came into effect. So we're really comparing the same 90 days, but I think if you're asking what happened in the first couple of days of October I think it was a few deals and it may have added up to around $15 million.

Okay. Thank you again.

This concludes our question and answer session I would like to turn the conference back over to Mr., Ken Moelis for any closing remarks. Please go ahead.

Thank you for your time. This afternoon, we appreciate and we look forward to speaking you assume.

Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.