Q1 2023 Moelis & Company Earnings Call

Speaker 1: So by one on your telephone keypad, if for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speaker phone, please remember to pick up your hands it before asking your question. We will pause here briefly if questions are registered.

Speaker 1: The first question comes from the line of Devon Ryan of JMP Securities. Please proceed.

Speaker 2: I guess first question obviously on the comp expense, just trying to think through some of the moving parts here. Does the comp accrual include any bonus accrual?

Speaker 2: And then is there any other parameters you can just maybe help us think about around like the full year because of the both the revenue environment that all the hiring that you're doing and then just I guess interrelated to that. What does that imply for capital return potential?

Speaker 2: Let me start on the accrual technicality, and I'll turn it over to Joe on what went into the accrual. Let me start on the accrual technicality, and I'll turn it over to Joe on what went

Speaker 3: So just how you think about this, I mean this morning 44 people showed up at our office in the technology group.

Speaker 3: In fact, it was pretty...

Speaker 3: Let's call it up. It was positive that everybody got to start as of today. I mean, and we were able to bring the whole team in and get them going.

Speaker 3: But I don't think they'll be immediately productive, but they will hit our payroll immediately.

Speaker 3: And by the way, that's just that's 11 of the MDs of the 22. We also took advantage hiring some of the bankers out of Credit Suisse We did some very significant healthcare hires at the beginning of the year and that goes into the 22 MDs we're talking about.

Speaker 3: That's 11 of the MDs of the 22. We also took advantage of hiring some of the bankers out of Credit Suisse. We did some very significant healthcare hires at the beginning of the year, and that goes into the 22 MDs we're talking about and the juniors that support them.

Speaker 3: You know, the way we're thinking about it, and I know it's hard to put this into a proformer, but it's almost the equivalent of a pretty substantial acquisition in the technology sector.

Speaker 3: Except...

Speaker 3: that it all goes through your income statement. You put it on and you don't capitalize, there's no upfront, but you end up covering the first few months of ramp up. And we're trying to estimate, Devin, you're asking a very difficult question. I'll get let Joe get to the...

Speaker 3: is where does the revenue go? That's hard enough, by the way. Our comparable ratio would be hard trying to figure out what the Fed and the banking environment is, where it is, what our revenues are going to be, and then we have to overlay that, which is what are the increased expenses going to be from carrying essentially 15 to 20 percent.

Speaker 3: expansion of the head count.

Speaker 3: You know during this period so again. I'll let Joe talk to the specifics of the accrual Yeah, so to answer your first question. Yeah, we did make an accrual For bonus this quarter in order to kind of push it to the 80% which we looked at As being kind of the best estimate for the full year

Speaker 2: consistent with where we are right now. And basically we've factored in all those new hires. So we factored in only what we know today into that. And one of the things that we don't know is.

Speaker 2: where revenues are ultimately going to land. And we also don't know what the market for banking compensation is going to be, which will happen at the end of the year. But that's our best guess right now, and that will obviously be adjusted when an if appropriate.

Speaker 2: Yeah, I got it. Okay, thanks. And so I guess the other part of that question is, it would seem just with all the elevated hiring and then the revenue backdrop that the company's under earning the dividend. So I guess just the question is, why continue to pay the dividend in the near term to the extent that's true? Maybe I'm off there, but just But there's a lot of compliment...

Speaker 2: kind of fall process. And then the other part of what we're talking about is these additions, you know, it's kind of under a unique circumstance. And so I'm assuming, you know, they would probably ramp faster and normal, just given that, you know, some of them are joining you probably with this little interruption from where they're leaving. So, you know, maybe, you know, that's kind of a fun

Speaker 3: that we've gotten to a, I would call it an agreed method for how we're gonna cover existing clients, service deals in progress. I do think it'll be more rapid. You know, and I will tell you that was happening on a real time basis. We put the announcement out this morning, so you can imagine.

Speaker 3: when all of those details got done. So you write about that. We do expect a more rapid than normal uptick.

Speaker 3: especially since we've avoided sort of a 90-day, you know, garden leave or any of those issues.

Speaker 3: On the dividend, look, we are debt-free. We are sitting with excess capital. We think we've just added significant value. I think most companies, if they make an acquisition, don't cut their dividend. We are cash-generative and we're very confident that we've just added significant value to the firm.

Speaker 1: from the line of Ken Wuerdington of JP Morgan, please proceed.

Speaker 4: Hi, good afternoon. Thanks for taking the questions. So you kind of flushed out big, big hiring MDs from Credit Suisse, Nell Swear. You also mentioned that you wish you sort of built and hired more around COVID. So given all that you've done.

Speaker 4: thus far and recently and quickly.

Speaker 4: What is the appetite for you to build even more here? And I'll go really out on a limb and say you've had some failures or near failures of some pretty high profile banks.

Speaker 4: Is there the opportunity to maybe broaden talent from those businesses or even lift out some advisory businesses that they had, sort of further building out your business and operations?

Speaker 4: I'll just start there. What is the appetite and opportunity there?

Speaker 3: Okay, just to reframe one thing, I was actually, the last time we really moved this was the GFC, you mentioned COVID, but it was really in the global financial crisis where we...

Speaker 3: expanded way faster than most people thought was possible because of the availability was unique back then, not COVID. But let me start with one thing. I think if you went back and you listened to our conference calls, I must have said technology to the point of making everybody nauseous.

Speaker 3: that we could use more and technology was very hard to get enough throw away, you know, you can hire a person here or a person there, even that was a struggle.

Speaker 3: The biggest feed pool, I think, by far right now is software.

Speaker 3: And in this group, I'd say you define seven or eight of the people as touching on the software category.

Speaker 3: you just have the throwaway to become important in the space. By the way, marry it up with the fact that we have an existing coverage platform, and again, I'll spend two seconds just to explain. Our coverage platform was doing very well, mostly on corporates and strategics.

Speaker 3: And it's interesting the group that we brought in is very much weighted to its sponsors.

Speaker 3: So we think the fit was almost perfect.

Speaker 3: So that was why we did. I mean, that's a large chunk about half of the hiring that I've described to you.

Speaker 3: And let me say that we would continue to be aggressive if something like that were to come. I mean, that seemed to be a slow fastball right down the middle for what we needed to move the firm into the next generation and really extend our growth.

Speaker 3: The same thing happened with a group of healthcare bankers that we took out. And Ken, to your question, if there is a space, and I don't see it exactly, there are some one-offs out there, but you're right. If it were…

Speaker 3: something we needed that we felt like technology and software was so integral to the future growth of the company, yeah, we would continue to be aggressive. I think I said it on the last call, is these types of teams don't come up often. They're very difficult to do in a good market. I would tell you in 20...

Speaker 3: there would have been zero chance of doing this.

Speaker 3: And the negative is it only happens during tough times. It's tough to pull the trigger because somebody will ask me about the business soon and I'll say it's not great out there in M&A land, but that's the only time it becomes available.

Speaker 4: And then how do you think about taking losses? So the earnings were pretty close to break even. The outlook doesn't seem to be better if it deteriorates.

Speaker 4: Are you concerned about pushing into losses or reasonable size losses to build the business for the longer term or is the focus somewhat in the longer term, losses for a couple of quarters or the year don't phase you and it's really about the long term?

Speaker 3: I don't want to lose money. And that's not a goal of ours.

Speaker 3: But the difference, so and look, I think that the first quarter, do I see it getting worse? I don't know. It's pretty bad. First quarter was pretty bad. I'm hoping that we have slight, you know, that it starts to get better from here. I'm not planning on losses. I don't want losses. But let me say the one thing about it.

Speaker 3: is if I were, you know, we said it's...

Speaker 3: You know, we said it's somewhat like an acquisition.

Speaker 3: We're to gather a group of people like this.

Speaker 3: might cost several hundred million dollars. Now that would not result in a loss. It would result in a capitalization of the cost.

Speaker 3: If the cost of doing this is to run $5 million through your income statement, it feels bad.

Speaker 3: But that's cheaper than several hundred million dollars of acquiring it. I get it. You can go through your P&L.

Speaker 3: you know, significantly better than anything we could have envisioned putting up the money in some type of M&A transaction. The negative is it will pressure the income statement in the short term.

Speaker 2: Okay, thank you very much. And I would just add that, just remember that we're not expecting losses, but if we were to have some modest losses, it's not cash flow. Cash flow is different than earnings in our business, and it's important to keep that in mind.

Speaker 5: Thank you.

Speaker 1: Thank you. The next question comes from the line of Matt Moon of KDW. Please proceed.

Speaker 6: Hi, good afternoon.

Speaker 2: Just one for me regarding the hiring, obviously, I was extremely strong and the result of some opportunistic activities. But I guess just looking at the outlook and kind of revenue pipelines across the industry, I'm just curious how long of a sustained downturn or...

Speaker 2: to what magnitude would be needed to come about before you would consider addressing either the head counter or even at the minimum freeze hiring and then in terms of recruiting packages, have there been at all shifts in terms of how these are structured in this type of environment and in color that would be great.

Speaker 3: So we are adjusting our headcount by the way. I think we have been much more active in also exiting, you know, every year we're disciplined. I don't want to say we're disciplined now. Every year we probably eliminate between 2 and 4% of our headcount on managed attrition. I think we're somewhere near double that.

Speaker 3: And we have been doing that aggressively.

Speaker 3: But the business is the people. The business is quality people motivated and also...

Speaker 3: structured against the economy, which technology and healthcare is where the economy is going and where we could we

Speaker 3: the packages? Yes, sure. Packages are different.

Speaker 3: Well, they change all the time. And it will change with the economy and the market and how unique and singular the talent is you're looking for and how irreplaceable it might be. So we do do that. But...

Speaker 3: Or I'll give you our pipeline, we think it's about down 20% something like that. It's a pretty strong pipeline, but as I said on the last call, I think it remains a fragile pipeline meeting that it's very hard to take your backlog to market to complete an naminate.

Speaker 3: Financing is still very difficult. Valuations are in fluctuation. You've heard all that. So this could go on. It'll definitely go on another quarter. And you know, it could go on six months. But...

Speaker 3: again i did having done this in the gfc and seeing that it basically created the firm

Speaker 3: having the talent and the organization and two years later that that was the asset and you withstood the

Speaker 3: the temporary downturn. The asset we're building...

Speaker 3: is a unique franchise in technology and in healthcare and in sponsors and in media. And I do think that asset, although not capitalized on a balance sheet.

Speaker 3: the people will be here for longer than most assets that are capitalized. We hope those people will be here for a very long time.

Speaker 3: And so we think the return is significant and will be to the shareholders benefit over a long period of time.

Speaker 2: Joe, one more of a cleanup type question.

Speaker 2: Last quarter, you talked about a kind of 6 to 8 percentage point impact from retiring an eligible share-based comp. Just curious if that was kind of in the right range of that impact in the first quarter, or any more specifics you could provide on that actual impact. Well, the quarter is good. Yeah. The 6 to 8 percent was kind of...

Speaker 2: referencing kind of flat revenues with the fourth quarter. So as you know now we were a little lower than that so it might have been a little so that that that ratio would have been probably a little higher when you kind of do the math.

Speaker 2: Okay, great. I'll hop back in the key. Thanks. Yes.

Speaker 1: Thank you. The next question comes from Steven Schubach.

Speaker 7: Wolf Research please proceed. Good afternoon this is Brendan O'Brien filling in for Steven. So first I just want to talk touch on the M&A environment. In the press release can you indicated that you felt the market was in a holding pattern at the moment.

Speaker 7: and M&A recovery, including the narrowing of bid aspects, greater macro clarity and financing availability. Just want to get a mark to market on these areas, various factors at the moment relative to where they were last quarter. And what do you view as being a potential catalyst for M&A in the near to intermediate term?

Speaker 3: Probably the single most difficult and is financing right now. I think the...

Speaker 3: The reason bank problems have caused credit spreads to widen. I think they'll continue to by the way I think that's a fundamental you had the fed and then in order to do a transaction there's a confidence level and I think people feel like they're out in a mine field and and then how flows their consideration.

Speaker 3: You know, you look left and you see a bank blow up and you don't know how many mines are out there I just think it's one of those things too, which is

Speaker 3: confidence level that you can underwrite the risks and so to have a... Nobody ever has certainty. I think there's always risks, the risks, you know, and the known unknowns and the unknown unknowns. But for right now I think people are just waiting for just some stabilization that they can underwrite, even if you had to underwrite a five and a half fed rate.

Speaker 3: a wider credit spread. I think people could get there, but you have all those issues moving. And that may be, it's just too easy to say, why don't we wait for a little more information before going forward? Again, like we just did M&A and making these decisions.

Speaker 3: It involves making a long-term bet. And I think having all factors moving, I'd like two out of the three of those to stabilize. And so possibly the Fed stabilizes. And maybe we get the bank market.

Speaker 3: to stabilize, but I will say I think the credit spreads are going to fundamentally be wider than they've ever been.

Speaker 3: And then you have the Fed as the benchmark rate, which is higher than it's been. So I think those things are going to take their toll.

Speaker 7: Thanks for that, Ken. I guess, not to beat a head dead horse, but pivoting to the comp ratio, in your prepared remarks show, you mentioned that the comp ratio could remain elevated for the next 12 to 18 months, depending on the environment.

Speaker 7: Just understand that obviously, you know.

Speaker 7: You mentioned that it's difficult to even set the comp ratio for this year in this type of environment, but as we think out into next year, I just want to get a sense as to what level of revenue or revenue growth you would need to be able to see to work the comp ratio back below 60% on a full year basis. And also just wanted to clarify one of your earlier remarks. For you indicating that the full year comp ratio will be 80% for this year.

Speaker 2: but without the understanding of where Banker Comp is going to be at the end of the year, and without knowing where revenues will actually land. I think in terms of next year, we're just providing some caution. We don't know when.

Speaker 2: when things will stabilize on the macro front, they could, to Ken's point, stabilize in the next six months, in which case it would be a different answer in the 12 months, would probably be more likely. But ultimately the macro sustains for a little longer, that's why we're saying that it could...

Speaker 3: it could bleed into 24 as well. Yeah, look, my guess is, especially since we were putting together our queue and some of this while we were still trying to figure out whether we would get the team on the field today or in 90 days or, you know, each individual, especially on the tech team, what their messages would, or what their

Speaker 3: Gordon leave requirements, non-competent all that was.

Speaker 3: It just so happens that everybody got to show up this morning and we have an agreement on how we can continue to service existing clients. That is a positive to the point of the hires causing the comp ratio to stay elevated longer than just this year. I would say that is probably not what we are.

Speaker 3: compensation.

Speaker 3: given how quickly we've got them on the field, should be covered by the production of the hires.

Speaker 3: by the first quarter of next year, then you tell me how the market is, how the M&A market is.

Speaker 1: Thanks. Thanks for taking my questions. Thank you. The next question comes from Brennan Hawking of UBS. Please proceed. Hi. Thanks for taking my question. This is Ben Rubin filling in for Brennan. Thank you.

Speaker 1: appreciate the aggressiveness on the recruitment front given the market environment. Just could you give us a rough sense of how the bankers and MDs that you just brought on compare in terms of their productivity or existing tech group and also what type of trajectory should we expect in terms of their ramp up now that they're in the building. Thank you.

Speaker 3: I think because they just selected, I would put them in the top.

Speaker 3: quartile to, by the way, I'm just talking about our full plethora of bankers. I think, not comparing it to the tech bankers we have, but you're probably trying to do a what's the revenue per MD. I would say they're top, they would fit in the top third, top quartile of where we've been.

Speaker 3: a lot quicker than I thought because we were able to reach agreement as to you know lots of things regarding that information, clients, etc. They're a pretty aggressive group of people.

Speaker 3: In the context of the market, I think they'll be back up to their full run rate in three to four months.

Speaker 3: But then of course the new deals they bring in and have to close, so that delays it a little bit. But they're here. All of them are on-premise, all of them are working, and they have, I mean one of the very unique things about it is they even have access to existing information and client.

Speaker 1: And the client access, which a lot of times when you cross higher somebody, you have a lot of issues around that. Great. Thank you for the color. And just to pivot a bit away from the recruiting, given that the restructure environment seems to be improving, you know, each quarter.

Speaker 1: How are you thinking about the boost to revenue from restructuring this year or is it more of a 24-25 event? And also, what percentage of your advisory revenue did restructuring contribute this quarter? I know historically it's been around 20-25 percent, but how quickly could we see it rebound to those levels? Thank you.

Speaker 3: Your right restructuring was probably right around the numbers you were talking about. If you really peel it off, but those things are starting to work hand in hand.

Speaker 3: And I do see an acceleration. Again, we talked about like a year ago when the Fed started raising, did we see restructuring? Well, I think I said back then, when you make one quarter of elevated interest payments, it's pretty easy. When you start to make a full year.

And then that full year is at the full Fed benchmark up where it is now. And lastly, I also think the ability to refinance.

That is closing, it's getting tighter. People are getting more aware of how difficult that market is and starting to call in for advice earlier. I think we're starting to see an inflection point where restructuring and liability management is inflecting upwards pretty rapidly.

So, we could continue that way as the market stays difficult. Great. Thank you for taking my questions. Thank you. The next question comes from the line of James Yarrow of Goldman Sachs. Please proceed.

Good afternoon and thanks for taking my questions. So maybe if we just turn to the non-M&A, non-restructuring businesses, how are the large buckets within that part of the business performing in this weaker macro environment and when would you expect those to improve as well?

private funds advisory in capital markets.

Capital markets actually had a good first quarter. And as I said, if you assume restructuring was about 20%, that was a combined 35, it was about 15. And the only reason I fudge on that is because some of these bleed into each other. They start in one place and are solved in another place.

And I do believe that bespoke.

capital is going to be the name of the game. There is nothing you can just put out into a Salesforce plain vanilla. Not well, not nothing. I hate when I shouldn't say absolutes. But you know, there's very few IPOs, very, very few stock offerings. And that's been great that market is still active so that can get done. But anything below double B.

And even equity needed is getting to be very structured, very bespoke.

And those calls are going into pension fund sovereign, well funds, the big private equity credit firms. And, you know, I actually think we're a better access point and a more creative and nimble access point for that than some of the large distributed universal banks. So I think that will go up with restructuring. I think you'll see that.

types of M&A, be it large cap M&A versus mid cap versus small cap M&A, if there are differences there.

There's a lot in that question. So first, look at the distress and it just...

very difficult out there. Now, one of the areas that you asked me about the other buckets, I do think the market is going to be rife with activism, because you have companies that are going to have difficulties. And some of it will just be the market and their capitalization. It'll give openings.

to people who want an opening in order to get their voice heard. They're looking for that opening.

it's going to be hard to avoid those openings in a difficult market. And we have very good activism group too, that's very active. And I just want to say that was part of the, uh, the buckets that are quotes, non M&A that are, that are accelerating.

The difference between large cap and small, they both have their own problems by the way. Large cap has a regulatory DOJ problem in that you truly have to have courage to attempt one of those right now.

Now, if it's a non-overlap, if it clearly works, I get it, but it's amazing the theories that have come up for the DOJ to get involved with large-cap deals.

And the exact opposite, the small cap deals can get done, but their financing is most often non-investment grade and bank or SOFR related financing. And that is just very expensive to go after. So I think both.

parts of the market are having their own issues at the same time. Okay, that's very helpful. Thanks so much, Ken.

Thank you. The next question comes from Ryan Kenny of Morgan Stanley . Please proceed.

Hey, good afternoon.

Hey, good afternoon.

Can you update us on what you're seeing in terms of M&A appetite among sponsors versus strategics? And on the sponsor side, understand that every DO and firm is nuanced, but in aggregate, how long can this group sit on the sidelines before they have to deploy capital?

Well, I do think the sponsor community is on the sidelines. I think they would prefer not to make a decision. Look, if there's a, again, a fat pitch, they're going to go for it.

But on the margin, I think they would like to be able to model better than they have, and they would like slightly better capital than they could get. So the whole thing is just not optimal for them to move. Now you remember, it's a big world. I'm not talking about every deal. But on the margin, I think they would like to be able to model better than they have,

You know, that is where it is. But they continue to have capital. They continue to raise capital. They continue to want to be innovative around that capital. And we will see it. There is a lot of pent-up demand to either exit successful companies that were invested in three to five years ago.

then to put new capital work. That is the business they're in, they're not in the business of sitting on their hands, you know, so they will move.

And that's why I think.

And that's why I think they will move well before.

the markets move. I think like in COVID, I remember our June call of 2020.

I think we did it in August and we were seeing the sponsors realize that the Fed had their back for whatever reason that COVID was going to be taken care of, that earnings were going to be okay and they were extremely active. And that was well before, remember the sponsors are actually trying to take advantage of the settlement.

of anomalies in the market so they're not the last to move they will be the first to move out of this and try to figure out where they can create value for their investors or asking them to figure this out.

So I do think that M&A was the first into the tank in this market because the sponsor group was the first to realize that the Fed was serious and it was going to get ugly and they started to pull their deals in last February , March, April .

I think they'll be the first to reach out and put capital out into a market they think will reward them. Remember, they don't have to mark to market quarterly, well they do have to, sorry, they do have to mark to market quarterly, but they are in it for long-term investment gains. So they can put money up on the basis of a three to five year business plan. I think they'll be the first to move.

first to reach out and put capital out into a market they think will be will reward them. Remember they don't have to mark to market quarterly well they do have to sorry they do have to mark to market quarterly but they are in it for long-term investment gains so they can put money up on the basis of a three to five year business plan I think they'll be the first move and then strategic

are still very active. Our conversations in the strategic corporate market are very active and it's just a matter of, I think it's for them, it's just a matter of stabilize on pricing and also getting a good read on the DOJ. That's been an issue.

still very active. Our conversations in the strategic corporate market are very active. And you know, it's just a matter of, I think it's for them, it's just a matter of stabilize on pricing and also getting a good read on the DOJ. That's been an issue. Thank you.

Thank you. There are currently no additional questions registered at this time, so I will pass the conference back over to the management team for any closing remarks.

Thank you. I know our earnings release this time was probably more complicated the most given what happened in the last 24 hours and a significant hiring. Feel free to call Joe or myself if anybody has any follow-up questions. Thank you. With that, we will conclude today's conference call. Thank you for participating. You may now disconnect your line.