Q1 2022 Moelis & Co Earnings Call

With that that doesn't really seem to exactly jive with how you're describing the pipeline. Although maybe it's you know the pipeline is extended so maybe that's sort of how the the two data points converge.

Is that a reasonable explanation here the pipeline is as strong as ever but because it's being extended its the same number of deals closing over a longer period of time, and then maybe to kind of flush out the pipeline is the nature of the pipeline changing at all either by geography or sector.

<unk> or participant type.

Or is it largely as it was a year ago.

At this time.

So I think your first point is the right one the pipeline pipelines are gross fees.

Fees that you have in backlog those those are in different stages.

Completion and again.

I don't know the numbers you are looking at so Ken.

Don't see the public numbers in fact, now that now the Czech leaving US you can call him and ask him to interpret that from some outside but the but that would be consistent with what I call an elongation of our process.

If that were to happen.

And.

We might have been awarded the assignment to go sell company X and that company could have planned to push off to market less.

Last week and they could have decided hey, we're going to wait another week or two to see how the markets come out and see the markets settle down.

That's just the two or three week elongation that is what happens in volatility.

We're pretty confident all of that is coming to market.

So we feel very good about the pipeline in terms of the.

Of the makeup of it.

As opposed to this time last year, it's definitely down in backlog on restructuring.

And in M&A, we would consider it a.

Better pipeline, because it's up in cell sites.

<unk>.

M&A sell side is a better probability of closure, meaning you have the asset.

There could be five bidders.

No youre going to sell it when you have a buy side there could be five bidders. So you youre not sure youre going to transact, whereas if you are the seller you usually.

You're pretty sure youre going to transact.

Now, that's usually where you want to be so I feel like the the.

Backlog pipeline.

<unk> done on this being as good.

And that's it.

Everybody decides to go to market and the volatility doesn't get to the point where people keep pushing it off so those are the that's the combination of events that's going on.

Okay.

If in your.

Stations with with clients there seems to be a number of factors that may be contributing to the.

The extension we've got <unk>.

<unk> rates, we've got inflation, we've got supply chain, we've got Russia, and I assume this each factor maybe contributing differently depending on.

The sector and the geography of the clients.

Is there is there one or or.

Is any one of those a bigger factor and dialogue with Ceos and decision making than the others or are they just sort of all factors that are being combined together. So I think about like as we get resolution to these different factors over time, what should we be paying more attention to in terms of.

Maybe shrinking the time for these deals to kind of come to market.

I think when you put it all together the fundamental driver is all of those activities, resulting in price volatility.

You could see interest rates, but we don't see that yet interest rates do not seem to be driving any transaction to non closure cap.

Capital is available.

And.

Rates are still historically low enough.

To fund transactions so.

<unk>.

But I think when you aggregate the issues that you talked about what's happening is and all you have to do is look back a couple of days is you're having some very significant price volatility.

<unk> volatility.

Changes People's desire to go into a market and find the discovery of price for the asset that they that they have if.

It's a quality asset they want to discover the price in an environment where somebody.

Is willing to pay for that quality asset.

And you could also get into a situation, where you've launched the transaction five months ago. You you have indications of value from five months ago.

You are coming down to the finale of it and the comparable.

Companies or comparable prices have changed enough that your buyer and seller no longer agree on where the outcome of the transaction closes that.

So look it's a long way of saying.

Those activities, you're talking about they've happened pretty.

Significantly interest rates have changed pretty rapidly.

Russia invade Ukraine pretty quickly.

And so these things had sharp implications to prices and I would really occur.

Attribute most of what we're talking about to the volatility and price.

And values okay.

Just maybe last question you operated at 59% comp ratio this quarter.

Right.

Planning planning for the best or hoping for the best planning for the worst at what level at what revenue level.

This year with that comp ratio.

Start to move higher how should we think about the debt.

The downside protection to that comp ratio.

At this point, we're pretty confident that that comp ratios debt on under a pretty wide range.

Outcomes in and around.

What we are expecting seeing planning board. So I'd, just say I'm confident that 59%.

Barring some.

Catastrophe I think it covers a lot of outcomes.

In the range of expectation, 59% is going to be fine.

Okay, great. Thank you so much.

Yeah.

Thank you. The next question is from the line of.

Devin Ryan Your line is now open.

Hey, great good afternoon, Ken and Joe.

Want to come back to the conversation you were just having a confluence of factors impacting M&A, but maybe.

You hit it from the restructuring angle because you did mentioned just pockets of stress or at least you're starting to see those can you maybe talk a little about where that is and then as we think about rates.

Normalizing here, a couple of hundred basis points isn't much healthy company, but.

For a company that is less healthy than all the other dynamics that may go along with that what is your expectation.

In the market for how maybe the restructuring opportunity could evolve just based on on kind of the implications of what higher rates mean for kind of the broader economy.

Yeah.

So we're not we're not seeing a restructuring boom.

But you're right. There's a lot of there's a lot of paper out there theres a lot of issuers.

And look even without rate movements just operational issues.

That are individually expected, 1% to 2% of companies.

Have their own particular issues.

Layer on 200 300 basis points of rates.

And yes, we're going to see it I would say right now the restructuring team is working I think more on liability management kind of shifting around those obligations in a market that doesn't need to go through or getting near.

More of them I'm, just speaking in the aggregate more of them are.

How to address.

Liability management.

But not in the context of the next.

Chapter 11 could be around the corner.

I do think you know.

Look there's a lot of paper you only need one or 2% to get effective I mean, if we had a 2% default rates all the restructuring teams throughout wall Street would be at 100% capacity because of the number.

The large amount of paper out there.

So.

As I said I think I think the restructuring business is warming up in the bullpen.

And I expect we'll get a full.

They're going to be called in and it's just a matter of.

What confluence of things triggers it.

But it's going to I think it's going to happen I think you have too much.

There's too much change and people lay out there.

Excel spreadsheets and they they do transactions based on pretty predictable.

Or an attempt to predict <unk>.

Five years of cash flows well when you had supply chains interest rates energy costs technological influences moving this rapidly.

It would be unusual if one or 2% of those models didn't turn out to be wrong.

Got it so I mean, just to put a fine point on it like in that scenario you still can have a relatively healthy M&A backdrop, but you're starting to see.

Distress around the edges for the companies that maybe.

Maybe we're in a great spot to start with and this is just the final blow was that is that the way to think about it yes.

Look in a normal.

A stressed market I think we will see that in the last.

Hyper distress was the <unk> market and M&A did kind of dry up for a while.

The opposite happened in the Covid distressed market.

My guess is this market will not will result in both markets operating and I'll tell you I I.

I come back to the fact that there is.

There is a new market for M&A that is it's not a new market, but it's it's.

So substantially impacted by the flows into private equity.

And the activity of those firms that they will continue to transact.

There may be some strategics that don't want to transact for awhile.

But I do think the firms that are in the business of transacting for private capital we'll transact.

And you will have both you can have both markets healthy.

Hard to call the restructuring market healthy, but you could have both markets.

Busy at the same time.

Yep.

Okay, Great and just a quick follow up here on the capital markets business. So I. Appreciate you know this has been a focus of expanding the footprint there and we're also coming off of a phenomenal year for that business in 2021, So just trying to think about what.

This is a hard maybe.

Question to answer, but like what normalized looks like.

Is it right to think about that business growing off of 'twenty 'twenty. One just because you are expanding the footprint or where conditions. Just it was kind of like four great quarters in a row for that business. So it's just a little bit of a high bar for the near term and then you kind of resumed growth.

Also that I'm, just trying to think about how the last piece of it is I also understand that you guys are not just connected to kind of broader capital raising or capital markets you can be.

Active and maybe more dislocated markets and that value. So I'm, just trying to get a little more color there because it's a question we get from investors.

Yes.

Bullish on capital markets.

The growth I think the growth could be is substantial it is.

I'm expecting it to grow this year and by the way that is with a headwind.

Having a much smaller spec capital market activity.

I just think.

The ability there are large pools of capital they like structured finance those require real hand, holding much more so than trading floors and the way.

The way the world was structured or is structured I think we could I'm.

I'm very bullish on that business I will just leave it I expect it to grow this year and I would hope it would become.

They continue to grow let's just leave it that way we are we have large growth plans for capital markets.

Sure.

Got it is there any way to just kind of size out that business, whether it's the revenues or percentage or anything else just to help us.

I think thats getting to be I'd say in the first quarter I think it's getting to be close it was close to 15% of the business.

I think I'm right about that Joe might stop me if I'm wrong.

That's right that's right.

Yes.

Okay, alright, great well, thanks, so much for taking the questions.

Thank you. Thank you Mr. Ryan.

The next question is from James <unk> with Goldman Sachs. Your line is open.

Good afternoon, Ken and thanks for taking my questions.

So your revenue this quarter was significantly higher than the Dealogic and website data I'd say I would expect this reflects continued growth outside of traditional M&A. You. Obviously just cited the 15% for capital markets. When you think about your non M&A businesses would you say these perhaps have more great.

We have greater durability versus M&A revenue or perhaps more counter cyclicality and thus are they something we can view as a bit more sticky when we plug in your revenue run rate going forward.

Yes.

Again I I.

I never really try to bridge to the public markets. So I don't have a great answer other than to say, we advise on a lot of as I said, there's a lot of decision making going on in boards.

That might not result in the transaction that can be measured the way you're measuring and.

I like that I think more and more under the complexities of the world We're being brought in.

To advise on things that you might not consider traditional M&A, but but do involve the future of our company and how they're positioning themselves.

That could be the answer but I will say that you know I think I think our M&A was extremely strong this quarter I don't know why it didn't show.

In the numbers Youre looking at.

<unk>.

But again I would I would ask you to contact Joe Afterwards and go through.

What it is we're missing other than I do think we're doing things inside of corporate strategic activity that may be more broad than that is generally recognized.

When I say broad it it just doesn't result in a definitive transaction of purchasing an asset asset X, we're selling assets and maybe that's not listed.

Okay that makes sense.

Maybe just.

Turning to <unk>.

A world in which we did see a sort of a deeper economic risk.

A recession to what extent do you think your restructuring business could offset a decline in M&A.

Revenue and then if we just dig in a little bit on the capital Advisory business do you think thats something that could perform well if we did enter a more troubled economic backdrop.

So I think the restructuring business could do that because I think the size of the market is gigantic no I don't have it at my fingertips, but theres been a lot of issuance Theres just a lot of paper out there and the way we've set up the company remember, we do not divide up the restructuring team.

The general corporate finance team, that's why we don't break it out.

So again when the market was much smaller back in <unk>, we had 96% of the bankers.

We're working on a restructuring with the restructuring team getting a lot of leverage out of that expertise. So.

I do think we could.

I think we did revenue of something like $300 million restructuring back nine or 10 could could we double that.

I do believe it's possible I'm not trying to make any prediction here, but or more because we could have.

I think we could have 95% of the company. If it was a deep recession and everybody needed that advice, we would move our talent over there and operate as a team like we always do and I think that's one of the parts of our model that is exceptional nobody has a blockage or a or a fence around their business.

So, yes, I think it could get to be.

A very large number in an environment.

A very large number by the way at the beginning of Covid. It came and went quickly but in the in the three month timeframe that that it was active it was very active and to capital markets I continue to believe as as.

As plain vanilla financing.

And most capital markets R. R.

Our setup to do plain vanilla better than they are highly structured we are doing we're setting up to do highly structured.

And I think in a deep if there was a deep downturn I know things would go structured the one thing I know is in a downturn.

Plain vanilla fully distributed regular way financings.

Are much harder to do and everybody wants to put some structure in and we've got a great large integrated team around that so I think I think that would do well in that environment as well.

Okay. That's really helpful. And then just one other quick one you've seen a lot of different cycles and I know you said that interest rates have not.

Affected the M&A dialogue, so far or the M&A completion, so far but.

When you look back historically at what level of interest rates do you think that would start to affect the M&A backdrop or do you think the world is just different and thats not really the right way to think about it.

A little of both by the way.

I don't have a great answer a win because that's the only removed 25 basis points and yet it feels like they've moved 250 I mean, the market is so anticipatory.

So I don't you know maybe the market's already anticipated.

Six rate hikes.

It's the anticipation as much as the actual hike.

But I do think again theres a fundamental.

There is a fundamental change in the business and that is that there is enormous amount of firms out there that are in the business of transacting.

And they will transact so again.

<unk> 15, 20 years ago, if rates went up three or 400 basis points and there was a downturn a significant amount of the strategics would decide they've got to take care of their own business. This is no time their stocks are at all time lows there shareholders don't want them to do M&A, maybe they would do stock repurchases.

And that would put a chill on the largest part of the market 90% of the market.

I would just say that there is a part of the market that if if.

<unk> went down significantly.

I would turn the engines on NR and significantly ramp up M&A and by the way they have enough money now to actually make a difference in our business.

So yeah, I think it's a different business, but I think it's a little of both of what you said, it's a different business.

And I don't have a great answer of when it will actually.

You know create create that moment.

Okay. Thanks for answering my questions.

Thank you Mr Yao ground.

The next question is from the line of Jim Mitchell with Seaport Global Your line is open.

Yeah.

Tim Your line is currently open.

Oh, Hey, sorry, I was on mute.

Thanks, Good afternoon, Ken maybe just.

One more question on financial sponsors understand.

The story, there and the flows but if we look back to 2019, there was worried about a recession.

The financial sponsors we're pricing in a recession their valuation models activity really pulled back why is it now different as we start to worry about a recession, if the fed goes too far.

Just sounds to me that you feel that the flows are there in activity is going to happen no matter, what but it does it wasn't that long ago that we did have a pretty pretty significant pullback.

And actual sponsor activity.

Well, we should give me the material to study for this test them ahead of time, So now I've got to try to I'm sorry.

[laughter] I think if I remember the fed really made a move at the end of 2018 right I think they really crushed the markets at the end of 2018 and made US say it made an.

But they were going to raise.

There was some there was a real downturn.

Again, you I think it recovered pretty quick here, if I remember I didn't think I thought it was coming back pretty quick at the end of 19.

Right, but if I remember there was there was a pretty hard move by the fed indicating that they were going to shut the economy down and then they changed.

I also think by the way.

The markets have changed a lot even from 19 I mean, it's three years later and I believe.

The amount of momentum and aggressiveness in the alternative asset category and private equity by the way they came through Covid because they had no reported volatility I'll give you know a lot of the volatility might happen, but it was in private eye.

The allocation of capital to these markets accelerated.

Just look go back and look at some of the leading private equity firms and look at the fundraising they were doing in 2018 or 2019 early 2019 and look at it today I'll bet. They don't resemble each other I would bet.

And scope of those markets.

Our extremely different today.

But I don't know again, you didn't give I'll give a homework for the next call.

Right.

Sounds like you think though there are a lot more resilient that's I appreciate the color.

Maybe pivoting to the buyback I think you did it right.

Yeah.

Thank Jim.

Yes. Please.

There being growth companies go back to the evaluation of those public companies are better I'll bet that significantly different.

The private equity environment is that these entities has growth companies, hence, they're going to deliver growth, hence theyre going to.

Transact.

As you know Theres a lot of there's a lot of changes besides just.

How do they feel I think that the the whole thought process on what these companies are how are they valued at what can they be has changed and they're going to go try to fulfill that mission.

Right right no I appreciate that.

Just maybe on the on the buyback I think year to date. If you include April your $2 4 million shares I think that's more than all of last year.

Does that affect at all how you think about specials versus buybacks or are you sort of signaling you're going to be doing more buybacks less specials are alright.

What's the thought process.

Well look we're committed as I said, we're committed to returning our excess capital as quickly as we can figure out what the best way to do it.

This time, we went into the market pretty aggressively between I think some time in the call at the beginning of the year.

And the reason is.

Look we just felt like we're again, we felt the valuation was there were trading at a little over eight times P/e I think there are steel companies that trade at a higher multiple.

And so our feeling was we don't see this as the cyclical.

We feel like we're in a secular growth industry that is being valued as it was 15 years ago as if these cycles will take you out.

Again, that's so we went in aggressively.

Hum.

We will make that decision with the board depending on a series of factors, but you know what we're gonna do is return the capital or excess capital to you quickly and aggressively as soon as we can.

And 100, okay, great. Thanks.

Alright. Thanks.

Thank you Mr Mitchell.

The next question is from the line of Manan <unk> with Morgan Stanley . Your line is open.

Hi, good afternoon.

I was wondering if you could give some color on what youre seeing in the different sub segments of deals are small and large.

I know that smaller deals tend to decline faster given that our buyers.

Buyers and sellers can be a little bit more nimble. There. So we saw that during COVID-19 is that something that youre seeing right now or.

Has it been pretty consistent across the board.

No I'm not sure I agree with that assumption I know that assumption is kind of out there COVID-19 .

It wasn't availability of capital problem literally the beginning of Covid.

Smaller deals will suffer in an availability the first.

Availability becomes an issue for smaller companies as capital dries up and it's totally available right now.

So I don't see the same.

Situation I actually think if if any transaction.

Is having trouble.

Large transactions are.

So under focused by the Doj and the administration.

I do think there are the transaction that's under pressure is probably the large transaction that would've been attempted two or three years ago. That's just not being attempted today not because of capital not because of price just because of the.

Fears of getting hung out there in the market.

So I can't say that I see and I know I've read in some of your reports that the.

Think the mid size or smaller or under pressure I don't I don't see that yet.

I think they are.

There.

They're they're going along at about the same manner.

Got it that's helpful and.

I'm sorry, if I missed this but did you talk about non comp expenses should we expect that.

Ramps up from here as <unk>.

Travel ramps up.

I think that we feel pretty comfortable that I mean.

Only looking kind of a quarter forward, but I would say that kind of $37 million area is.

It was a reasonable landing point, so not looking for a whole lot of growth from here.

Got it thanks, so much.

Thank you Mr Castagna.

The next question is from Michael Brown with <unk>. Your line is open.

Great. Thank you operator.

Hi, Ken good evening.

Alright.

So restructuring was traditionally 20% to 25% of revenue in a in a normalized environment.

Hard to nail down was really normal anymore, but.

My question is is that still the right way to think about the contribution of that business just given the growth that you experienced in the non traditional M&A businesses.

You flagged the growth that you've seen in our capital markets business. So just wanted to see if that's still the right way to think about the business.

Yeah.

I think it will be over the long term in the first quarter, it's not it's below that it's probably mid teens.

I think I told as I said on the last call that.

The fourth quarter did not have a large amount of.

New new business.

I think over the long haul.

It will be back into the 2025, the only thing that could cause it to become a lower percentage is the rise of capital markets as just a larger part of the business creating.

A larger denominator for restructuring to get up to 20% to 25%, but yeah. I do think I don't think there's anything fundamental that has changed in the business. We had we had a year last year, where there was so much money put into the market that it was you know low interest zero interest rates the.

<unk>.

Just flushing money into the system.

And I think it was a very abnormal year for restructurings.

By the end of it it wasn't it was very abnormal and very unusual.

Yeah.

And what is the dedicated MD head count and restructuring today and just given the opportunity set that you see that you flagged in terms of the potential for a lot of restructuring activity to calm down down the pike.

Do you see a need to add more talent there, perhaps at the MD level or to build out the pyramid more.

No because as I said you'd be amazed at how we put teams together on restructuring we move again.

It's a little technical but I know there are some.

Models in which restructuring gets the restructuring revenue and the M&A Department gets in M&A revenue.

We have a single bonus pool and so we can move we will move the entire media team now I'm just make it I'm, just saying that team would move over in a heartbeat and work alongside the restructuring team and fill it out so.

That team is expandable to five to six fold.

And it's pretty significant.

I'm thinking we probably have you know.

15, managing directors that you would call experts in it.

Joe Correct me, if I'm wrong, but the but it would expand.

Okay.

Would expand to 100 very quickly and it did.

Look we just went through this by Covid hit on March whatever 12 to 13 to be shut down by April 1st I would say there were 100 managing directors on teams.

Organized with restructuring.

Doing the work and maximizing that event. So no I I I think we would you'd see a radical expansion of the manpower without us having to go outside.

Yes.

Okay very helpful. Thanks for taking my questions.

Yes.

Thank you Mr. Brown.

The next question is from Brennan Hawken with UBS. Your line is open.

Yes.

Double dip and this one Ken thanks for taking my follow up.

So you commented before on the.

The attractive multiple in most shares driving a bit more buyback activity.

For you.

Should we assume that that will remain a capital allocation decision of choice.

If the stock remains.

At these attractive levels and therefore, maybe Wes capital allocated to our special how should we think about that for the rest of this year.

Well, it's you know.

That as Matt Brendan we have $115 million less dollars to do a special with because we bought a bunch of stock. So it's mathematically.

You know you can only use your capital once if I can if you figure out a way for me to do both I'll I'll happy to do it.

We're going to make that decision based on where the market is.

Well look we're going to make that decision along with the board, but it is if you're asking is is it a decision that have we changed fundamentally no. We made a decision.

Based on market conditions.

Quality of where we think the market is all of those things lead us to believe this was a very good use of capital.

We will make that decision on a real time basis.

Okay.

Continue to assess got it.

I was tempted to make a joke, where you could add by the way but.

Any context by the way I just wanted to know one of the problems as you enter these blackout periods. So you know people have why didn't you do this on Tuesday or Thursday.

You don't have 100% flexibility. So I just wanted to put that in there that we have to make these decisions in and around the periods in which we are open to do it so.

Sure.

With the caveat.

Also just a yes.

Kind of curious to put a finer point on this so I know you don't watch the public data you've made that clear both this call and last call but.

The I'll just let you know the public data data basically suggests that your most Ah is likely to see a revenue air pocket either you know in the next quarter or two.

It sounds like you do not the data you're watching does not suggest that that is the case.

Am I paraphrasing that in a fair way or would you adjust that.

Yeah.

We have a we have a backlog that is larger than we had a pipeline amount of backlog that we have a pipeline that's larger than at this point last year. We then had 12 months of the you know if I can replicate the 12 months, we had post that pipeline.

I would 100% do it.

If theres any sense of.

All I worry about is trying to be accurate by quarter in a time when it's volatile so I don't I don't.

Our revenue backlog, Paul would you call it a revenue.

Could you go to market.

There are clear pockets.

All right.

We are extremely busy organization with a very large pipeline and but I'm not I don't want to get down to predicting what happens to the markets in the next two weeks and whether or not people people decided to put off executing these transactions for three months and that's one of the reasons why we aggressively.

What the stock that doesn't really matter to us.

If we're sitting with a larger backlog than we had and we think our franchise and brand is better than it's ever been we think our go to market strategy is right on with capital markets. We think restructuring has been suboptimal in terms of its ability to generate for us. So.

I I again I. The reason I don't look at it is because I really look at I almost look at the company and thank you.

Are we executing and if we have a backlog that's bigger than last year pipeline. So I am not allowed to use the backlog.

Our pipeline is bigger than last year.

And by the way we continue to be our biggest problem is still.

Hiring and and bringing in the quality talent, we want to execute on what we think is the available market.

So that's what I look at and again to look at the public data.

I think Matt now and Joe I'm, not saying don't go over with them I just don't manage the company based on it.

It would be like trying to fly an airplane with data that somebody else's, telling you how high your airplane as it doesn't it doesn't matter to me.

Sure.

Understood. Thanks, Ken.

Okay.

Thank you Mr. Hakan again to ask a question press star one.

There are no additional questions waiting at this time.

I'll now turn the conference over to management for any concluding remarks.

So just want to thank everybody. Thank you again check for all your hard work and we look forward to talking to you in the next call I appreciate it.

Okay.

Okay.

That concludes similar listing company Q1 2022 earnings conference call. Thank you for your participation you may now disconnect your lines.

[noise].