Q2 2023 Moelis & Company Earnings Call
Afternoon, and welcome to the Moelis and company earnings Conference call for the second quarter of 2023 to begin I'll turn the call over to Mr. Mike Zuk Ross. Please go ahead.
Good afternoon, and thank you for joining us for Moelis <unk> company's second quarter 2023 financial results conference call on the phone today are Ken Moelis, Chairman and CEO and Joe Simon Chief Financial Officer.
Before we begin I would like to note that the remarks made on this call may contain certain forward looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the risk factors section of Moelis <unk> 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 firms.
Our earnings release, which can be found on our Investor relations website at investors that most dot com I'll now turn the call over to Joe.
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.
We reported $182 million of revenues in the second quarter, a decrease of 23% versus the prior year. Our first half revenues of $368 million were down 31% from the prior year period, which was primarily attributed to decrease in M&A transaction completions. This compares to a 40% decline in globe.
M&A announcements and a 50% decline in sponsor backed M&A during the first half of 2023.
Moving to expenses, our compensation expense was accrued at 80% consistent with the prior quarter, our second quarter adjusted non comp expenses were $43 million, including approximately $2 million of transaction related expense.
Believe that the run rate for adjusted non comp before transaction related expenses is closer to 41% to $42 million per quarter on a prospective basis.
Separately, we entered into an agreement to split certain fee amounts with SBB securities in connection with our large tech hiring earlier. This year. These owed will show up in non compensation expenses only if designated transactions close.
The thing that occurred this quarter, but I will call out any material expenses, if and when they do.
Regarding capital allocation the board declared a regular quarterly dividend of <unk> 60 per share consistent with the prior period and lastly, we continue to maintain a strong balance sheet with $194 $8 million of cash and no debt I will now turn the call over to Ken.
Thanks, Joe and good afternoon, everyone. We've been an M&A recession for the last 16 months. However in recent weeks, we have seen a healthy increase in new business activity as our clients begin to anticipate recovery.
Completing transactions however continues to be challenging.
Since June of last year, we have repositioned the firm to increase our focus on the largest global fee pools and opportunities, most notably technology healthcare and industrials, which together comprise approximately half of the global M&A fee pool.
Including two industrials focused managing directors, who will join the firm in the coming months, we have doubled the size of our combined coverage of those three sectors to external hiring and internal promotion in the last in the past year.
In addition, we continue to invest in our middle East coverage efforts. There has been a noticeable increase in new capital deployed by middle Eastern investors, particularly Lee there are sovereign wealth funds.
These investors have been playing an increasingly important role in high profile deals across the globe and this is a trend that should continue and we consistently rank as a top adviser in the middle East.
Even though we have significantly increased our hiring to date, we expect that on a pro forma basis, our year end head count will be up only modestly as we are aggressively rebalancing talent across the business.
The strategic investments we've made in talent have been transformative I believe that the deal backlog.
Feels like a coiled spring.
Generally deals not done don't go away I don't know when the deal environment normalizes, but I do know that we have prioritized access to the largest fee pools and that our ability to execute for our clients and investors has never been better and with that I'll open it up for questions.
Thank you if you have a question. Please press star one on your telephone keypad. If you have queued up for a question and want to withdraw simply press star one again.
Your first question comes from the line of Ken Worthington with Jpmorgan. Please go ahead.
Hi, good afternoon, and thanks for taking the question.
I'm curious about what youre seeing in terms of the availability of financing. So maybe first how is the syndicated loan market today versus earlier in the year and are you seeing financing availability improving more in any particular sectors geographies or deal sizes.
Okay.
I'll start by bifurcation in the investment grade market has been fairly accessible and open.
Rates have changed but it has been opened almost continuously.
I think the the leveraged finance market both private credit.
And.
Ordinary financing public credit markets Bank financing has become more available.
The rates have moved obviously fairly significantly.
I think especially the private credit market has become pretty aggressive in seeking out transactions.
Rates terms.
Are difficult and Thats, what makes transactions actually still pretty fragile I said.
The activity level has picked up fairly dramatically but.
The ability to close those transactions are going to be affected by the difficulty of getting financing that allows deals to make sense on a on a financial basis.
I think across regions. The U S is probably loosened up the most Europe , it's probably still a little more difficult.
And in size is I don't see a big difference through sizes.
Possibly the the Mega deals the Mega deals we have to write.
A very large checks are probably still more difficult to do but I think through the smaller to mid cap to the higher end of the mid cap range I don't know that you see a big difference in availability.
Okay, great. Thank you and then just a follow up on on the private credit element.
You mentioned private credit is more accessible what portion of deals do you think or do you see that are accessing private credit today versus maybe go back a year ago, how much more.
You know available is or how much how much more you're seeing private credit used today and in the past.
Ken I'm going to answer that it's funny, you say on deals whats really interesting about private credit as they've become a solution to.
Two.
Balance sheet problems.
Complex arrangements inside companies, what's what's really happening in the market now is yes the.
M&A is going to be the driver of the substantial part of the recovery in in our earnings but there are significant balance sheet problems that have to be addressed.
Rating agencies maturities and so when you asked me that question about private equity.
They are improving their share significantly of the deals themselves, but I think youre actually seeing them show up.
In.
I almost look again I'll go to the liability management side of the world solving problems that touch on both our M&A, but more on our capital markets and restructuring and they're stepping into a very large role in that area and I think youre going to see them be very aggressive in that.
Great. Thank you very much.
Your next question comes from the line of James <unk> with Goldman Sachs. Please go ahead.
Good afternoon, and thanks for taking my question.
Ken I just wanted to take the other side of this M&A recovery.
Debate.
Given your perspective on the issue over so many over so many cycles when you think about.
This cycle what are the biggest risks that you worry about in terms of.
What could slow down or impair the M&A and capital markets recovery.
Cost of capital difficulty look I'm not calling the bottom of the cycle I'm. Just it is interesting to me that about six or seven weeks ago, and I think it was right around the time the market got convinced the fed was going to.
Skip a rate increase and so the active skipping sort of implies that you are really closer to the end than the middle.
Our new business Review Committee, that's the first.
Stage of us seeing deals jumped rather significantly and and again I know.
Got real we have around the organization is that.
That we are as busy as we've ever been now.
Do think that pipeline those new business committee submissions in which people are going to attempt.
<unk> are probably as fragile as they've been and that goes to your question, which is you have.
Still a difficult regulatory environment and the capital cost to complete a transaction.
Our difficult expensive and uncertain.
And so the act of trying to get across the bridge from I want to transact and I have an idea on what I want to do to completing it.
Is very different than let's say, our new business activity jumped almost I think a jump more than it did a number of submissions in the early parts of the 2021.
Rebound the beginnings of the 2021 M&A cycle.
The difference then was the fed was on the way to zero interest rates and money was flowing through every.
Possible opening into into the market and I still think today money is difficult so.
How those two things will org.
Organize around themselves and how they will resolve will determine whether this the cycle takes off.
Okay that makes a lot of SaaS.
Maybe you could just speak to the sorts of activity that youre seeing in restructuring this quarter.
Has your view of the opportunity set changed and restructuring given the somewhat better macro backdrop and certain parts and then maybe if you could.
Contextualize what percentage of revenue was from restructuring I know, you've given that various points historically.
So we've had we had a pretty significant year over year and even quarter over quarter increase in restructuring its still about 20% of our overall revenue pool.
But our backlog in restructuring I would say jumped as much.
Which you can almost tell by our monthly retainers, which are also up about 70% to 75%.
And so those are usually your best precursor to.
Your future success fees in restructuring.
I believe very strongly we have a strong backlog and restructuring.
It continues to be more liability management. It's interesting you do just do not have company's revenues or EBIT cash.
Cash flows.
Falling like you did again I'll go back to the financial crisis of 0809 win.
Cash flows just fell off a cliff and everybody had to really go to what I'd call full scale restructuring.
There's a lot of liability management and by the way I know I always get asked on the call. What is liability management I'll just point out we announced transaction for Carvana.
About 10 days ago and it is a good example of what liability management is I won't say I don't like to talk about clients, but it is a very public example of liability management.
And we continue to see that being the driving force around restructuring, which we now call capital advisory because that's really what it what it's becoming which is.
Ebitdas cash flows and revenue aren't falling dramatically, sometimes just not enough to take care of maturities and in this market provide refinancing alternatives.
Okay, that's very clear thank you very much.
Your next question comes from the line of Stephen Ju back with Wolfe Research. Please go ahead.
Good afternoon. This is Brandon O'brien filling in for Steven.
So to start I just wanted to ask on.
The M&A inflection while they can.
Green shoots that you and your peers are citing are encouraging given the lag between deal processes getting launched two announcements the actual fear that it feels like revenues will not be and to pick up in earnest until <unk> realistically. If next year would be great to get your perspective on when we can actually see this underlying activity.
Again to hit revenues in your view, if we continue along this path more positive path and if the softer revenue environment persist beyond <unk> next year.
How we should be thinking about the comp ratio.
So.
Again.
In 2021 that Didnt happen, especially when you're within the financial sponsors show back up on the <unk> because the.
The actual time from transaction to completion.
Lot quicker than that strategics youre right. If we were to enter into a transaction discussed.
A discussion or even agreement today that could take until the first quarter, but a lot of the private transactions go much quicker than that.
I agree with you I don't think that will happen only because the financing of those transactions just is more difficult people aren't.
So I was going to say throwing money at you, but the access to capital just isn't what it was in the.
The old interest rate environment, so it could take longer.
But I think you've extended if this really is the beginning and again.
I'm not calling that it just has a sense that <unk>.
People are.
There are companies.
By the way I think it's a bit of a barbell. There are the companies that have been waiting around 16 months and now they want to execute strategic plan. They have the ability and they are ready to execute whether that'd be sell a division by division whatever I think the other side of that barbell is a group of companies that have to do something so.
It might have waited a long time.
And the environment has stayed where it is and the motivation for that group might be have to do something.
But I think that timeframe I hope does not if this is the beginning and the.
The New business Review Committee type of environment starts I don't think it should extend out that long, but it might.
If it does.
We'll just have to look at what the revenue situation looks like then for our comp ratio we've had a very unique.
Confluence of events for our comp ratio I mean, we caused it so I don't want to make it a passive thing, but we hired 19 people.
19 of Mds, managing directors and two more to come.
And it's a very tough revenue year. So that confluence of events is is is causing us to have to recognize.
We've almost board if you think about it it's almost like buying a 15 or 20% firm the size of us with <unk>, but we do run that through the income statement, because we're hiring them each individually there's no nothing goes on the balance sheet.
I think.
<unk>.
The method by which we've set the organization up now we've improved our facing in technology by more than double.
We've improved our healthcare focus by 50%. These are known by the number of managing directors and industrials by about 50% and median telecom by about 33%.
I think that should come out in the revenue line, but.
That's to be determined.
That's great color. Thank you John and I guess switching over from my follow up I'll just touch on the dividend really quick you know.
You're able to build some cash this quarter. Despite the negative earnings trend, which is encouraging the cash remains at fairly low levels from a historical perspective, and the biggest source of cash drain is really when you pay out bonuses and <unk> next year given the revenue environment is likely to remain at least relatively subdued over the next.
Couple of quarters I wanted to get a sense as to how confident you are in your ability to sustain the dividend from here.
I see no problem with the dividend again, I think we've improved we've improved the go to market of the firm significantly with the with what I call a significant restructuring of our market facing managing directors, we have no debt and we have $190 million plus of cash on the balance.
Sheet, so I don't see any problem with the dividend.
Alright, thanks for taking my questions.
Your next question comes from the line of Brennan Hawken with UBS financial. Please go ahead.
Hi, This is Ben Rubin filling in for Brennan.
My first question is based on kind of similar to the follow up that you Scott regarding capital obviously the environment remains challenging you guys have a $195 million of cash and liquid investments on the balance sheet and.
And you guys, obviously have been very successful in recruiting would you be would you be willing to take on external funding or debt to help fund that nir growth aspirations <unk> continue to fund the dividend at these levels.
If it came down to that.
Yes, those are two questions to fund future growth yes.
But we have a $190 million of cash right now and by the way there is a another liquid investment that you didn't include in that we have.
One 3 million shares of.
A an investment we have in our Australian subsidiary that's not.
Not as it's not completely liquid, but it trades in Israel.
Is a source of capital if we ever needed it.
So we've not discussed.
Really going into debt to do either of those two.
Look if the right opportunity came along.
Given we have zero leverage what I would I go into a line of credit for a couple of million dollars to accomplish something that would change the nature of the organization going forward for the next decade, yes.
But I don't see a reason why we would have to do that given our profile.
Got it no that makes sense and then my follow up is also related to the comp ratio, 80% you guys. Just gave and obviously, it's a result of the success in the recruitment and the 19, Mds, obviously already hired and two more additional would come on.
A question for you is what type of impact do those additional hires especially at the senior level have in terms of the different components of your fixed comp expense and are you, making any adjustments to your approaches to incentive comp or your policies because of the higher amount of fixed comp relative to those new hires.
No.
Our.
Philosophy on comp will remain the same.
And really I guess, it did change a little bit by the way is that we did.
Did exceed the comp ratio by a significant amount.
<unk> behind that is that the new investment, we're making in 20, new managing directors.
As a benefit the beneficiary that should be the equity investors.
Producing.
Managing directors, who are on the field.
My belief is they shouldn't have to pay for that investment out of their current production.
By the way if you do that you won't retain your you're continuing managing directors of your.
For long.
So we decided to kind of bifurcate it into.
How can we pay the existing managing directors for what they are producing and make room for the expansion but that doesn't.
I hope that's a bridge to a 212 months from now when everybody is continuing managing director and we're all one team we are seeing it.
Pretty quickly develop that way our technology backlog has improved dramatically we're already announcing transactions from the SBB Tech team higher.
So we're seeing it real time and pretty happy with the results.
That's great color. Thank you for taking my questions.
Once again, ladies and gentlemen, if you have a question it is star one.
Your next question comes from the line of Ryan Kenny with Morgan Stanley . Please go ahead.
Hi, good afternoon.
This is actually Carl Schmidt stepping in for Brian Kenny.
My first question is on the backlog.
Can you size the backlog versus the call back in April and then on the <unk> related mandates is there any sizing to the number of deals and volume of deals associated with that revenue sharing agreement.
On the on the backlog is up.
Our gross backlog is up pretty pretty decently from I forgot, which date USA last earnings call I guess, yes up pretty significantly.
Again to the question earlier on.
The gross backlog is actually.
And I'm just talking the gross amount of transactions were hired to do is.
Up near the highest levels it's been.
I just handicap that I think in this environment you have to handicap that as having more fragility to completion and so I don't want I'm not sure. The two numbers are completely comparable given the environments.
And then what was your second question again I was just on the <unk> related deals so like when there's a revenue sharing agreement with the 40 or so bankers that came on like is there any way to size the potential deal flow.
Please go ahead.
Yes.
There is a confidence confidentiality that related to that.
Yes.
<unk>.
We'll actually call them out when they happen so.
So youll see them on a real time basis, but there is confidentiality.
That relates to my follow up question as well I guess on the non comp so when they come through so we have.
Non comp over $43 million. This quarter is that's an all time high is that the new run rate, we should expect and can you call out any puts and takes that.
Will affect that number from here.
So yes in my opening remarks, I indicated that 43 included $2 million of transaction related expenses, which I can't predict.
So I look at the underlying run rate up 41, this quarter as persisting 41 to 42 is the underlying run rate absent.
Those transaction related costs.
Okay. That's helpful.
Thanks.
Your next question comes from the line of Devin Ryan with JMP Securities. Please go ahead.
Hi, Ken Hi, Joe how are you.
Okay.
Good so looking at slide 17 in your presentation and I like kind of at the framing here. So you have all the fee pools and kind of your market share and obviously technology.
Our largest.
Fee pool and by far the smallest market share from what was historically Mccann as you mentioned, you're roughly doubled your client facing managing directors you had 15 ftes in that group so I'm.
Trying to think about what that business that sector could look like in a recovery scenario.
And really just as one plus one more than two year, because oftentimes you plug into your sponsor network or vice versa.
More revenues than each unit and you're kind of bringing in a group that is as large as or even larger than what you previously had so lumpy. Maybe we just think that through I know, it's not precise but any framing around that would be helpful.
Well, yes, a couple of things first of all it was.
About it is double because I kind of rounded it but it is actually two five times. We had I think we had 10 managing directors and now we have 25.
And yes it was.
It was very hard actually building a protect effort one person at a time and it goes to your one plus one does it equal more.
If you don't have enough expertise to kind of make yourself important, especially the group that we hired was much more sponsor driven in fact, they were almost 100% sponsor driven our group prior to that was almost 100% strategic driven.
You can imagine first of all the cross flow of information between those two is very helpful to drive new business.
And that's just within the Tech Group then as I think I've said many times my.
My goal in this is to be as important to what I think of the largest growing fee pools.
And M&A on the planet the very large sponsor groups that I think will continue to grow and be very significant.
I do think there is a benefit to being an important supplier to them of quality idea flow throughout the organization and they are all tracking it they've all become extremely sophisticated they know how many calls you've made how many ideas you've shown them how many people have been in their hallway.
And I do think they are looking for important suppliers and look theres always a decision to be made on the allocation of some transaction and it could be a transaction in.
Just pick.
In the homebuilding and.
Your tech team might have shown 10, good ideas, none of them executed upon but but youll get leaned in on some other part of your organization because as a firm as a whole you are important and.
Very significant.
Supplier of idea flow and yes. So the answer to that is yes, I do think that one plus one should equal more than two in that event, especially with sponsors.
Who are literally one large corporation.
Just transact in multiple different spaces, but I think has become very sophisticated and keeping track of how you are calling on them.
Okay.
Okay I'll leave it there I appreciate it.
Okay.
There are no further questions at this time I will turn the call over to Ken Moelis for closing remarks.
Well I appreciate the support and everybody getting on the call look forward to.
Talking again in three months.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
[music].
Okay.