Q4 2022 Moelis & Co Earnings Call
Good afternoon, and welcome to the Moelis and company earnings Conference call for the fourth quarter of 2022 to begin I'll turn the call over to Mr. Matthew Crawford.
Good afternoon, and thank you for joining us for Moelis <unk> company's fourth quarter 2022 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.
If I had from time to time in the risk factors section of most of the 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 not most dot com I will now turn the call over to Joe to discuss our results.
Thanks, Matt and good afternoon, everyone on today's call I'll go through our financial results and then Ken will comment further on the business first we achieved $202 million of adjusted revenues in the fourth quarter for the full year, our adjusted revenues of $970 million were down 38% from a record prior year regarding.
Our full year compensation expense ratio is 63% for the full year, we reported a non compensation ratio of 15, 6%. The increase in full year non compensation expenses is largely due to a normalization of travel and related expenses looking to the first quarter, we expect non compensation expenses to be in.
The $40 million range, excluding episodic transaction related costs, our full year pre tax margin is 22, 5% regarding taxes, our normalized corporate tax rate for the year was approximately 27% and our effective tax rate was approximately 22%. The difference is driven primarily by excess tax benefits.
Added to the delivery of equity based compensation in the first quarter of 2022.
We may recognize a tax benefit in the first quarter of 2023 related to the annual vesting of <unk>. Later this month for purposes of quantifying the excess tax benefit we expect the impact to EPS to be approximately <unk> <unk> for each dollar in the quarter difference between the vesting and breakeven price of $36 per share regarding capital.
Allocation, we remain committed to returning 100% of our excess capital our board declared a <unk> 60 cents per share dividend. We will have returned approximately $316 million to shareholders with respect to the 2022 performance here, which includes this declared dividend and lastly, we continue to maintain a fortress balance.
One sheet with $413 million of cash and liquid investments and no funded debt I'll now turn the call over to Ken.
Thanks, Joe.
Before I begin I, just want to thank our bankers and the entire organization for their focus on our clients and their commitment to excellence in what has been a challenging year for M&A and the capital markets.
The financing markets are the lubricant to complete M&A and financing has been a challenge.
Despite the difficulties of completing transactions, our new business origination activities remains strong.
However, as long as access to capital is limited M&A transaction device volumes are likely to be less robust.
We also price our services based on transaction values, which have been lower and at the same time, we are experiencing inflation in our costs primarily compensation.
The current business environment. However is the reason that we have maintained an unlevered balance sheet since our founding.
This environment will change and our goal is to be ready for it when it does.
Structuring activity is increasing but this cycle will be longer to fully develop.
However, it may also be more sustainable over a longer period of time companies took advantage of attractive debt markets between 2019, and 2021 to refinance their debt and are now just beginning to see the higher the impact of higher interest rates.
Again global market capitalization has doubled since 2012 and private equity AUM has more than tripled over the past 10 years as markets expand transactions follow and there'll be increased demand for high caliber bankers operating with it within a focused organization delivering comprehensive advice.
This is the opportunity we are pursuing pursuing and the reason why we continue to build for the long term, we hired four new managing directors and promoted eight since the beginning of the year by.
By continuing to invest in the platform I remain confident in our ability to execute for our clients employees and shareholders and with that I'll open it up for questions.
Yeah.
If you'd like to ask a question. Please press star followed by wondering your telephone keypad. If for any reason you like they're moved a question press star followed by two against the ask a question Press Star one as a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question, we will pause briefly as questions registered.
The first question is from the line of Devin Ryan with JMP Securities. Your line is now open.
Thanks. This is Brian Mckenna for Devin So I'm curious how dialogue with sponsors have trended thus far in 2023 relative to the last couple of months in 2020 Q has there been any pick up in conversations and then are you seeing any early signs of dialogues starting to move through the process towards formal announcements.
Yes, I'd say, it's fairly volatile and I think the sponsored dialog has been improving pretty significantly as of the start of the year.
There is an opening in the financing markets, we've actually seen a dividend recap deal was in the sponsor community is a pretty significant event.
Terms are better.
But it remains to be very volatile as these.
Markets, you know as I said I think.
Chairman Powell.
Effectively shut down the market or really.
Deteriorated pretty significantly in the September speech at Jackson hole.
Last week in the beginning of the year a lot of the market has taken it to mean party on and starting to get fairly optimistic at least part of the market.
But I think it remains volatile as I said the indication that we're all waiting around for a single individuals statements to me is an indication that the market is not healthy.
We hadn't done that for five years before that that's probably not a good indication but again.
The activity level I would have to characterize is getting more active over the last three or four weeks than eight weeks prior.
And maybe significantly so.
At least the conversation I might even say significantly so, but we'll see if the markets hold long enough to complete some of these.
Okay, great. Thanks, and then just.
Question on the comp ratio, assuming that first half of this year is it still somewhat slow and then revenue start to normalize in the back half of the year should we expect the comp ratio in the first half to be in a similar ZIP code as the back half of 2022, and then you'll kind of true that up into <unk> and <unk> or should we expect somewhat of a steady accrual throughout the year.
Sure.
Well I'm going to I'm going to turn it over to Joe for the first quarter, because we do have some events in the first quarter that always cause us to have a differential in timing.
Our belief is that the general comp ratio of the firm should fall between where it fell.
Over the last three or four years again, depending on revenues because our comp ratio did increase last year.
Based on a very difficult market and our desire to hold the culture and team together. So again, depending on the revenue I think thats. The range. We are viewing for the entire year, but I wanted to turn it over to Joe because we have some first quarter.
So in the first quarter.
And a couple of weeks will be granting equity we expense all the equity granted to retirement eligible partners at the time of grant.
Accordingly, accordingly, our pre bonus comp expense is likely to be much larger in the first quarter than the next three so within a challenging revenue environment, which we're still experiencing the comp ratio is likely to be higher.
And then the target ratio and I would imagine that.
We would think or whatever probably what you were just describing its probably a six to eight point spike in the first quarter.
But again, we expect that the full year ratio will settle back assuming again revenues pick up.
Thank you guys.
Thank you for your question.
The next question is from the line of Jean <unk> with Goldman Sachs. Your line is now open.
Good afternoon, Ken and Joe.
I just wanted to.
Return to previous comments.
Ken.
In December around.
The middle markets slowing down.
Quite precipitously.
Maybe that's how exactly Youre language, but I guess the question is how would you compare and contrast, the dialog cross larger versus middle market firms and in terms of your expectations for which might come back to transacting on the M&A side first.
When you say larger middle you're talking about the sponsor community.
And then I guess it'd be interesting to hear both sponsor and strategic from that perspective.
Okay. So I'll start with the strategic dialogues been pretty active.
I found the strategics to be it is a good time they don't.
They have.
Most of it when you're talking about investment grade strategics have access to financial markets.
It's a good time for them the financing markets have moved in basis points not in availability.
And they do have goals they want to achieve so <unk> been actively discussing in now.
A significant amount of transactions, it's some of that by the way I do think some of the regulatory environment is also impacting that to the negative but theres a lot of dialogue there.
On the sponsor community.
I believe there is a huge pent up demand sponsors cannot sit still.
I'm not sure it's that difference between large and middle market because both are trying to figure out an economy and a cost of capital that makes sense for them to invest in.
So I think some of the larger ones have switched there.
Focus may be to providing other sorts of capital.
And might be more active just because they can more easily deploy your capital in other areas and maybe they also have more pockets of alternatives.
Capital, providing solutions preferreds as things of that nature.
So, but the dialogue is definitely.
I would say improving I think October November December you really had to wait and see attitude. They knew that they were in the middle of a cycle of interest rate raises.
I think now you're starting to see people take a view that we are.
Possibly near the yen some people want to be more aggressive on that.
But that's what makes markets, but I think youre, having some part of the market say I think I see one or two raises and as soon as that's done I really think most of them feel like it's time to start.
Figuring out prices.
Accessing financing markets at the new levels and moving on.
Okay, that's incredibly helpful.
Just for my follow up when you think about some of the putting aside M&A and restructuring what do you think about your capital advisory businesses in particular, the sort of fund raising businesses. How do you expect those to perform over the course of 2023 and what appears to be somewhat more challenged sponsor fundraising backdrop.
Last year, we I think last year was unique year. There was a lot of capital committed going into the year than everybody talks about the numerator denominator problem you had a shrinkage in the denominator total assets under management as all assets shrunk and therefore people ran out of <unk>.
Ability to commit now I think that slate starts clean in January .
And again it will depend if the denominator holds and we have markets public markets and hold so I think that might return over the course of the year to a positive fund raising market.
Well, we're really focused on is more.
Secondaries continuation funds, a little more higher value add part of that process and I do think that we'll be active.
And we're building into that part of the private equity.
Services.
Much more than primary fundraising.
Yeah.
That's incredibly clear thank you.
Thank you for your question.
Okay.
The next question is from the line of Ken Worthington with JP Morgan. Your line is now open.
Hello, Good evening.
Michael.
Okay.
Thanks for thanks for taking my question.
Okay.
Wanted to just touch on your restructuring business I was hoping I can we can just get some updated commentary on kind of how mandates have trended sequentially and if theres any particular industries or geographies that are.
It had been more active than others recently.
So on the geographies.
I can't discern a real difference I mean I think.
Main markets.
Europe and the U S.
You can see theyre pretty much going into the cycle is similar way Fei.
Facing the same issues, whether people want to get ahead of the cycle and manage their liabilities what was interesting is <unk>.
Again, we've said it was slower than the.
The crisis restructuring markets of <unk>, nine and even COVID-19.
But this idea that the maturity wall was going to force people to there's always discussion or is that a large maturity wall in 'twenty four 'twenty five I think.
I think.
I do not think that maturity wall will be as much of a.
A motivating force as people are thinking.
If the market stays at least where it is today all of a sudden financing markets are opening up people are finding solutions to not restructure but to access capital by the way. It's one of the reasons why I think the previous questions was about our private funds group, but we have beefed up our capital Advisory group, because we think innovative.
Financings around that marginal one turn of leverage.
You just have to solve in order to access the bank market and the private lending market, we think there'll be a lot of activity around that last turn of leverage that.
It just keeps companies from having jan to restructuring and that might actually be more active in the restructuring.
That people were focused on again, it is improving but I.
I do think were not seeing stress I was just with a major one.
Leaders are the large group of private equity firms and they said no distress in the portfolio no defaults.
And companies are actually performing and if the financing markets come back.
The wall will take care of itself now that's a lot.
That's a lot of what ifs the financing market.
It could change and as I say in a J.
J, Paul speech, but for now they are trending in the direction of being accessible.
Oh, that's great. Thanks, Thanks for that color and I guess just to follow up on that.
Relating to your business today in terms of restructuring I guess.
<unk> comment I mean is.
Is it fair to say you've seen some I guess <unk>.
Deceleration.
In terms of the mandate trends or or or.
Or pretty strong.
Yourself.
They've been they've been accelerating and they were building toward what I think was everybody looking again.
Sure.
When I say, everybody Theres always a restructuring going on somewhere even in a good and a good economy, one or 2% of the.
The companies are having distress that needs to be addressed immediately.
But the idea of getting in front of a 'twenty four 'twenty five wall, which was in <unk>.
Getting in Vogue in the late <unk>.
Half of last year.
That there would be no access so get ahead of it.
I think youre going to see companies delay and.
Think about whether or not the financing markets might open again and give them a chance to regular way finance. So yes, our backlog is increasing our M&A or restructuring volume was up significantly year over year, but the idea that the.
Yes.
The wave of 'twenty four 'twenty five maturities would cause people to accelerate their plans to address their liabilities I think is slowing down a little bit I think there's a hope and belief that the capital markets might open and give people a regular way access to refinancing.
Okay, great great. Thank you and if I could just squeeze one more in on the other side of the business.
Can you kind of think about the M&A environment.
Made it clear around retaining culture, and continuing to invest in them and.
At the end of the head count.
Continues to develop as well.
Just near term just given your statement on caution around the deal online I mean, do you think there's kind of a stable.
Stabilized.
Normalized <unk> count number for this type of environment looking ahead in the near term.
Which type of environment are you referring to.
The environment seems like.
This weather and you're living in New Hampshire.
As I said look we want to build we have a lot of white space. We can build two was our goal in managing the company. We do it every year is to go through our Labor force.
Which is now a 1000 people and figure out who's who is not right who's not who's not the right skill set and <unk>.
Proactively address that and then continue to build around people, who can address it and create quality I do believe we're going to look back.
At some point I hope it's months.
Soon but there is a large pent up demand.
For our clients to transact and to move forward.
And lastly, one of the challenges we have is those clients, which we fought hard to get in the front door, both strategics and <unk>.
Sponsors, we talked about sponsors but behind every sponsor transaction is an actual company with east with the CEO and a CFO , who we get to know these things arent awarded like apples off the tree you you develop relations and expertise in that system as well.
And we can't go dark on them and just say so long your team is not around for the next six months, but we will hire a team back when you want to transact so.
<unk>.
I think we will continue to grow the footprint.
But we will continue to also be very diligent in making sure that we're focusing on the bottom couple of percentile that we think does not make it and.
And be very careful, especially in a bad environment that that we're analyzing that carefully and moving as quickly as we think we as we should.
Okay, great. Thank you for all the color.
Thank you for your question.
The next question is from the line of Brennan Hawken with UBS. Your line is now open.
Hey, good afternoon, Ken how are you Jeff.
Right.
Just wanted to follow up on that a little bit and maybe clarify it so.
Hey.
Some of that work.
Started ongoing through and parsing through the.
The workforce and the talent, you have and the bankers and whether or not everybody's got the right skill set because when you look at I think at 151 Mds in the release it seems like that includes the promotions and the poor external hires suggest.
Suggest that the yearend was like around 139.
Maybe there was already some review or maybe I'm not backing into the right year end number so has that review process.
Ready and what was the year end MD head count.
Well first of all that review happens every year.
Sometimes during the year and that's our job is to manage that workforce and stay on top of it.
Jos just shown me with the end of the year head Count was 142 the answer to your end of the year head count.
But look we do that every year.
And all I would say when it gets tough you might you might if the bar is.
2% you might go to 3% of the system.
Looking at it as a change brand and we're looking at it as something we do every year, we do at mid year, we do it all year by the way we have these conversations we don't wait and do it once a year but.
That's always ongoing and so yes. The answer to you is that that process has begun because it's continuous.
Fair enough.
A good hygiene to get it.
So.
The.
I'd Love to clarify you guys gave a little color on near term expectations of comp ratio and whatnot it sounds like.
It will be we'll see some noise here.
And your account you seem to.
Expect that.
Comp ratio will come down as the revenue ramps. So the ratio seems like maybe in this environment. So uncertain, maybe more of an output so.
Another way to maybe ask the question might be how should we think about fixed expense comp.
And you spoke I think can you spoke to continued inflation in <unk>.
Banker cost is that on is that on the fixed side or is that a comment about recruiting and how much should we think about that fixed expense base growing in 2023 based on what you know today.
Yes, well we don't.
We have a fixed expense side.
We keep.
Okay.
First of all the managing director pool of the firm is down very significantly in line with revenues.
<unk>.
I think on that I don't have the exact number I can get it for you but.
The.
The managing director pool, which we view as our equity partners in the outcome of the firm are very definitely down.
What happens is.
I think we all thought all the firms, especially probably the boutiques fought very hard to keep their talent 2021, I get my years mixed up but 2021 was a very difficult year to maintain your workforce in the light of what was a.
A very significant deal stream so.
And then what happened in 2022 is I think everybody wanted to keep their quality people.
It's really hard to keep them.
And there has been.
Some some softening but not much.
The inflationary impact.
On the non managing director workforce is.
Uh huh.
I would just say that that compensation level is much stickier than it is for people who are promoted and our equity partners in the outcome of the firm as managing directors.
When you were talking about.
Comp ratio I, just want to be clear that we do expense this and it must go in the time period in ASEAN from what I understand what we call retirement eligible equity it just happens to hit in that quarter.
Sure.
We expect our comp ratio to be back in line, it's not dependent solely on revenue. There is a significant one time sort of comp charge that we get hit with on retirement eligible equity awards in the first quarter.
Right and it's and it's that combined with potentially more challenging revenue that will give rise to the comp ratio issue that we described earlier.
But we've talked about the path, we have to disclose fixed but none of our competitors do where at a competitive disadvantage and we really don't want to start sharing that detail, we don't disclose it.
Yes, that's why I was trying to ask for a growth rate rather than absolute number I get it.
And it is the cadence of the quarterly dynamic similar to how it was at least proportionately when you used to disclose it. So we could think about it at least from that seasonal pattern.
[laughter].
I think youre probably.
I think that would probably be.
Difficult I'm not sure that you would be able to extrapolate that maybe on a full year basis, but again you'd have to embed some inflation in that as well.
Alright, alright, I'll stop trying to poke around here because I don't think you guys quite a play Patty-cake with me.
Shifting gears a little bit here.
Ken Your comments you recognize the short term environment.
<unk>.
Yes somewhat cautious.
But youre optimistic over the long run that's fair.
Based on what you can see today.
And what your expectations are do you think it's.
2023 will be a year, where you can grow revenue or do you think that the challenges are pretty significant and it's kind of hard to make that call at this stage.
I hope it is almost impossible I think anybody making that call would have to be sitting somewhere in the fed chairman's brain at this point.
And I think by the way that's my view is that's an unhealthy economy.
We never had this commentary I don't remembering sitting there wondering.
Will the fed chair smile at the next meeting or what what was intonations b for the first seven years, we were public company.
So again I am optimistic because I think.
There is.
Pent up demand to do things.
The economy is it's a dynamic economy and they were great Ceos in the private equity guys have a lot of capital.
And they also own a lot of companies they need to realize value on there have to be transactions at some point and how quickly that happens is a little out of my control, but I want to be there when it happens because you can I was just at a pitch today, where we're talking to a client.
Six managing directors in the room and I would say the average experience that we have.
Most of those people worked together for 15 or 20 years partners that comes across.
The client relationship the culture of the firm being that.
That deep and knowledgeable about each other and being able to finish each other's sentences and know what we what we want to accomplish.
In my mind.
That's worth keeping you can to the extent you want to.
Be smaller for a couple of minutes, that's a really bad decision when you give up that asset the asset of a culture and an ability to communicate with 20 years of knowledge with each other so again, that's a long answer because I really don't know, but I'm fairly optimistic that win.
It stops win win I think the economy or the markets and.
Deal people get a feeling that.
The fed has stopped I think youll see a spring.
Uncoil that will be pretty dramatic.
I just don't know what that data thanks for the color.
Sure Fair enough. Thanks for the color I appreciate it.
Sure.
Thank you for your question.
The next question is from the line of Matt <unk> with <unk>. Your line is now open.
Hi, good afternoon.
Yes.
Yes. Good afternoon, just a couple of clarifying questions for me.
Previously you've talked about kind of the contribution from restructuring.
Kind of anywhere between 20% to 25% of revenues just kind of curious as to where that stood in the fourth quarter and kind of.
Given your commentary just given the backdrop in the environment is it possible see that kind of trend higher than the upper bound of that range kind of in the near term.
Yeah.
So I think.
Restructuring again, it's hard for us to break out totally but we think it was closer to 10 in the fourth quarter than 'twenty or 'twenty five.
And Thats, probably I think thats the full year that I gave you sorry.
Sorry, 10 for the full year and fourth quarter, it might be up a little bit.
Look it is possible.
But.
This.
This feeling that there was an immediate wave coming.
Company, the company results or not.
Not that bad yet.
And the financing markets are showing a little bit of blue Sky.
And so again, we continue to have a lot of.
Conversations at firms that are talking to us about how to how to negotiate problems. There in some of those it might be just to refinance their debt at some point.
Because the results are good enough in the financing markets open up at a new interest rate that's not good if you're if you're a private equity firm look that's not perfect for your rate of return on the equity.
But it is what it is and they will refinance rather than restructure which is which is smart so.
We will see where that all goes and if the market to your point if.
If the market has a another serious downturn or were all wrong and the fed has to go to 6% instead of 5%, Yes, I do think youll see a rather significant kick up in restructuring and it can become that bigger force, but I just want to be clear as of right. Now this market doesn't feel like that's happening.
In the short term.
Understood makes sense.
And then shifting gears.
Joe just a couple for you as well Im just curious on the comment just related to kind of a onetime step up in the first quarter related to.
The comp ratio of six to eight percentage points is that off of the full year 2022 number or was that for the first quarter of last year.
And then once we get to the first quarter when we receive that comp ratio is it fair to think about.
The full year expectation at that point, just excluding that 6% to 8% figure.
Yes. So the first question is what's the base and I'd say, it's the end of year. The 63 is the base on which I would take the six to eight spike and then over the course of the year, we would expect again revenue dependent.
To get back to the kind of low to mid 60.
For full year asked one yet.
Yep understood.
And then last one is just related to the buybacks it seemed pretty minimal in the quarter. So just curious.
After a strong year for buyback activity, if we should assume given the environmental comments said.
Can you be a little bit more cautious on that side.
At least for the next couple of quarters.
I don't I can't predict the next couple of quarters, but I would say for the next quarter given the current environment I would be cautious.
But of course.
We have this February we have a vesting event and part of the vesting event as a buyback that's embedded in that so that's already kind of factored in.
Understood understood.
Thanks for taking my questions.
Sure.
Thank you for your question the.
The next question is from the line of Steven <unk> with Wolfe Research. Your line is now open.
Good evening this is Brendan O'brien filling in for Steven.
So to start I guess I want to ask on the non comp expense. It came in lighter than what we were anticipating this quarter about based on the guidance it sounds like you're expecting a pretty meaningful step up.
Sequentially here. So I was hoping you could unpack what is driving that sequential increase and how we should be thinking about the trajectory in non comps for the remainder of the year.
Yes, so I would not consider that.
The sequential increase math wise, but I think I've been communicating our guiding at 39% to 40 as our underlying run rate I don't see much of a change to that.
And what happened in the fourth quarter was just a series of small nonrecurring benefits that basically added up to a fairly meaningful a meaningful change, but it's not something that I would I would be counting on.
The run rate is still the same kind of $39 40.
Again prior to any transaction related charges that happen episodically.
Gotcha. Thanks for that color and then I guess, Ken I believe it was last quarter that you indicated that you believe activity would accelerate once there is greater certainty around the path of interest rates, given we're getting closer to the end of the rate hiking cycle, one to get a sense as to whether you still expect a fed pause.
This will serve as a catalyst potentially or do we need to see how the environment or the impacts through the macro economy kind of play out before you feel like strategics and sponsors will feel comfortable dipping their toes back in.
No.
No I think look if you get if the fed pause today, if there was a breaking news flash on CNN fed announces its done.
I think you'd see activity ramp.
I really believe that.
Remember, what youre seeing now, though and I keep as our fourth quarter, which we're announcing today is probably transactions.
That at best started there started there.
In September October the.
The first quarter is a reflection of the activity and the conversations you probably had in October November or maybe September .
On some strategic deals that could go back as far as a year ago.
So when.
When we announce our quarter I hate to say it we're almost reporting on the activity of ancient history.
It just takes that long to get to the revenue line.
So the first quarter is going to reflect November December October November December some put some point like that.
If as you said if you could if you told me that the fed announced today that was done I would say, we don't have enough people, we need a bigger boat I think it would it would move very.
Rapidly I'm not expecting that but you asked the question.
Gotcha and then thanks for the color John .
Thank you for your question.
There are currently no further questions registered so as a reminder, it is star one on your telephone keypad.
There are no additional questions waiting at this time, so I'll pass the conference back to Ken Moelis for any closing remarks.
Alright, I appreciate everybody's time, and we'll talk to you after the first quarter. Thank you.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.