Q1 2024 Moelis & Co Earnings Call

Participants

Joseph Simon; Chief Financial Officer; Moelis & Company LLC

Kenneth Moelis; Chairman of the Board, Chief Executive Officer; Moelis & Company LLC

Alex Jenkins; Analyst; JMP Securities

Ken Worthington; Analyst; JPMorgan

James Yaro; Analyst; Goldman Sachs

Brendan O'Brien; Analyst; Wolfe Research

Carly Schwartz; Analyst; Morgan Stanley

Brennan Hawken; Analyst; UBS

Presentation

Operator

Good afternoon, and welcome to the Moelis & Company earnings conference call for the first quarter of 2024. To begin, I'll turn the call over to Mr. Matthew Clark.

Good afternoon, and thank you for joining us for Moelis & Company's first-quarter 2024 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 & 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.moelis.com. I'll now turn the call over to Joe to discuss our results.

Joseph Simon

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 achieved revenues of $217 million in the first quarter, representing an increase of 17% over the prior year period. The revenue increase is primarily attributable to growth in restructuring the M&A pipeline continues to build, but conversion to revenue remains challenging. There is early evidence that this trend is pivoting more constructively.
Moving to expenses, our first quarter comp ratio was 75%. We expect the ratio to be similar in quarter two until we have better visibility on the full year, which is likely to be in the third quarter. Our first quarter non-comp ratio was 21.7%. The underlying quarterly run rate continues to be approximately $46 million per quarter, excluding transaction-related expenses.
Moving to taxes, our underlying corporate tax rate is expected to be 34%. For the full year, we expect the target of 28% to resume once we achieve a more normalized level of productivity.
Regarding capital allocation, the Board declared a regular quarterly dividend of $0.6 per share. And lastly, we continue to maintain a strong balance sheet with no funded debt.
And I'll now turn the call over to Ken.

Kenneth Moelis

Thanks, Joe, and good afternoon, everyone. We are getting closer to an M&A recovery. Our M&A pipeline continues to build as market participants have adjusted to the current cost of capital financing markets are open and both corporate and sponsored dialogues are active.
Our restructuring team is seeing a consistent flow of mandates, and we expect this to continue as we believe the current market environment, which combines coming maturities and an open financing market to be optimal for our business as we specialize in out-of-court restructurings, which benefit both from our strong capital markets and capital structure advisory capabilities.
Finally, in the first quarter, we hired four managing directors, three in the energy sector and one to cover credit funds our outlook for the deal environment is positive, and we are focused on our clients and execution going forward.
With that, I will open up for questions.

Question and Answer Session

Operator

(Operator Instructions)
Devin Ryan, JMP.

Alex Jenkins

Hi, guys. Hi Ken and Joe, this is Alex Jenkins on for Devin Ryan. Hope you guys are doing well.
And I guess just to start, can you speak to what you're hearing in terms of the sponsor backdrop most of the commentary we've been hearing recently sent out fairly positive dialogues picking up and something around the need for these firms to act.
I'd love to just get your perspective on what you're hearing and any timeframe information or place you're expecting would be helpful as well. Thank you.

Kenneth Moelis

Yes, so that's a good question. Let me just give you I think there's a bifurcated market right now are the shape of our M&A business is actually more weighted in the first quarter to publics and strategics. And I think the reason for that is, you know, strategics kind of do strategic deals with the timeframe being almost unlimited.
So there's no when they come available and there's something they have to accomplish. They usually execute. Interestingly, I think PE firms are one of the things they're paid to do is be good at timing on their in deals, usually for a whole the five to seven years and it matters when you purchase when you exit. I think that's one of their expertises.
I think if you approach the first part of the year, January and the betting I've just aligned was six Fed rate cuts. I mean that kind of what the market was telling you was supposed to happen this year. You might get ready for market, but you're not going to go till one to three of those cuts happen. I think you're trying to time that market are and by the way, our NBRC, which is our pipe where we that companies for what we want to do deals.
We want to do transactions we want to take on has been extremely busy and at highs and our pipeline. It is as large as it's ever been for this time of year. But let me say what so what happened is, I think if you saw that everybody was handicapping six rate cuts and you're paid to time the market, you probably say, well, let's get ready, but we're not going. I think you fast forward to today. And I think the handicapping is down to one to two rate cuts.
And I don't believe we need rate cuts. I think we need stability and ability to project. And I think if PE firms. If you told them, hey, we can 100% guarantee that there will not be a rate cut for two years. They will begin to transact fairly aggressively on the basis that capital is available, rates are high relative to 21, but not relative to the world of interest rates, you know, over a long period of time. And I think that you don't have to know if you knew there was no rate cut, you wouldn't be timing at that closely.
So I do think it was the divergence between, hey, I thought we were going to get lower rates and that would improve my value. That's a long answer.
But I think as people start really honing down to this is not going to be a rate cut environment you're going to have to transact in the environment we're in. I think it will unleash a lot of activity and pent-up activity. And I think it is awesome.

Alex Jenkins

Great. Thanks for that color. That makes a lot of sense and thanks for the great color to I guess just as a follow up on the ISDB team you guys hired last year.
Can you just speak to the momentum in the tech space relative to market expectations?

Kenneth Moelis

Look, they've met our expectations. I don't know what the market thought of the team. But we we think that it's almost one year. I think it is one year to the day. I think we did it on this earnings call last year, announced it on. We've gotten deeper, stronger, better in all areas.
It's not, as I said, there is they have a lot of PD focus. So it's not the optimal time period last 12 months to execute on revenues, just like the rest of the M&A industry.
But we're extremely happy with the penetration coverage expertise, client satisfaction backlog, given in the context of the market. We're very happy with it. It's worked almost exactly as we were hoping.

Alex Jenkins

Thank you.

Operator

Ken Worthington, JPMorgan.

Ken Worthington

Hi, good afternoon and thanks for taking the question. So along those same lines, in terms of the new bankers beyond just SBVR, are you seeing the new higher success rate over the last year or so compared to what you've seen in hiring some promotions in years past?
Are these more recent hires coming in line or are you seeing a better fit and better success rate? Any sort of color you can give there? I know it's still early, but figured you might have a view.

Kenneth Moelis

So I'm very bullish. But Ken, again, let me just say the people you hired at the beginning of 2021 probably had a better 2021 of the people you would hire at the beginning of 2023. So you also have to put it in market context in that context.
I think the hiring we've done has been our better it's been as I shouldn't say that because I'll insult somebody explain is good as we could have thought on. I think the talent is very good. The what I've spent a lot of time on the road with them.
The client interactions are the highest quality there in sectors that are more that are active. And so I'm very I'm very pleased with it. It's just 2023 has been a tough year to convert that to final transaction. But I feel like the backlog and the connectivity to a large people client base is exceptional, and I'm pretty happy with.

Ken Worthington

Okay. Great. And then maybe expanding on your rate comments. I think your rate comments really spoke about 2024. If we are sort of in a higher for longer environment beyond '24, does that have implications for either M&A sentiment or even restructuring opportunity?
Trying to figure out what you know, an extended period of rates at these levels means for your various businesses.

Kenneth Moelis

So to be clear, I think at this point you don't need a rate cut to trigger M&A. I actually think it's almost held back the resurgence in M&A. This idea that if you have a quality asset and by the way, like in all markets, I believe it's the availability of the quality asset to buy.
There are buyers out there. We believe that there's there's capital and there are people who would buy quality companies. What happens in a market is you don't put your quality companies up for sale in January when somebody says, hey, the probability is there six rate cuts come and you kind of wait. And by the way, you have quality asset. There's nothing going wrong with it.
It's probably growing if it's quality assets doing fine. So you're fine waiting to hit the market with your best quality assets. I believe at this point, it's like I said, if somebody guaranteed, yes, there will be zero rate cuts for two years. I guarantee you that I believe the market would explode with transactions because people would say, well, that's now I know that if I wait to May, there will be no difference.
There is capital out there there. There is actually acquisition capital single-B even triple C paper right now has come in dramatically to finance these types of transactions. And I think we just have to take away the opportunity that if I wait if I kick off my sale in June.
It will be a different rate environment if that happens by the way, great. I do think that will, and that would be a good thing wouldn't be a bad thing, but I don't think the market is waiting for a rate. I don't think this market needs a rate cut to accelerate pretty dramatically from here in the private side and the public side is already executing and they're pretty aggressive.
I believe the public market is executing and the only thing holding that back might be FTC issues for large transactions that are that don't want to go into this regulatory environment.

Ken Worthington

Thank you very much.

Operator

James Yaro, Goldman Sachs.

James Yaro

Good afternoon and thanks for taking my questions. I just want to start on restructuring quickly. Maybe you could just update us on your outlook for this business? You did talk about how there was that pretty strong activity this quarter there.
So maybe the outlook for both liability management and Chapter 11 as we look ahead, and then if you could perhaps give us the contributions to revenue from restructuring and capital markets as you have done historically. And like I'm not sure I've done that historically, but I've tried to give you some sense of where it is.

Kenneth Moelis

But yes, we had a good strong look, what's going to happen here? It's like I said, I'm not sure you need a rate cut for the quality part of the market to hit and enter M&A transactions. But if you do have a company that isn't performing higher rates are going to are going to continue to play that market and force some part of the part of that market into restructuring mode.
The interesting part is your risk capital has become very available this kind of rescue capital that's willing to insert itself and take out some of the maturities for high interest rate is available. And so you're not seeing a lot of the credit market, which you know in the last downturn, which might have been 15 years ago in the crisis, but a lot of those credits traded down to 2030, $0.4.
You don't have a huge market of 2030, $0.4 paper. It might be that on in this cycle there was a lot more equity putting under the deals. The transactions went at higher EBITDA multiples. And so there was possibly more equity, putting it under the same level of six or seven times leverage, which leaves a bigger slice of value for somebody to come in and finance and believe me, every single person, every single owner of a company would rather finance as they go bankrupt, no matter what the rate they will tried to extend the runway to that. So we're seeing a lot of that rescue financing extension of a buy structure moving of maturities out through some of these exchange offer techniques.
Of course, there will continue to be some Chapter elevens, but it's not as big a Chapter 11 market as it was, you know, in the last downturn by a long way, and I think it's because of the quality of the ownership through good sponsors who are getting in there early and getting to solutions quicker.
So that part of the market is I don't I think will continue by the way, because I do think higher rates will put more pressure on that bottom 10% of the economic performance and would say, by the way, are not M&A this quarter and we called it out.
Our M&A was the weakest was one of the weakest parts of our business or not M&A. And that includes capital markets, PFA and restructuring was about 50%.

James Yaro

Okay. That's incredibly helpful. Thank you.
Ken, I'm just taking a step back on the fundraising businesses. I think primary fundraising activities remained slow over the past few years and the past year and change, whereas industry secondaries and continuation funds have grown at a fairly robust pace.
Maybe you could just speak to the outlook for each of these businesses and then sort of separately peers using more continuation funds and some of these other structures versus regular way M&A to generate LP liquidity?
Are these structural changes to be in your view and how much of the growth in these vehicles has been driven by the lack of ability to transact using M&A?

Kenneth Moelis

It's a good question. It looks like you're right the primary fund raise has gotten commoditized over time. And it's a it's a business, but I don't think it's not the same business it was 10 years ago. And I think there's also going to be a consolidation, a lot of money in those.
And the primary was made by first-time funds who really needed to be introduced and were willing to pay three points on fund raise to get introduced. I think there will be a consolidation. There won't be as many the lack of capital is not as many new funds being started.
And the large funds are going back to their existing LPs. And so there's going to be a smaller and smaller primary market to go into. You're right about can continuation funds becoming a bigger part of the concept. It's just you have to have that as a tool in your pitch as to what to do with an asset.
I don't think it is generated by some lack of M&A. I think it was generated by it's a good solution for an asset manager to retain an asset they like and crystallize to carry and restarted. It's almost with I feel if you lay out what are continuing to find accomplishes, it's a dream for an asset manager and private equity.
They crystallize carry. They maintain the asset and you get to go forward again. So it has some real positives and that I think will continue to be a product that is important and growth.

James Yaro

That's very clear. Thanks a lot.

Operator

Steven Chubak, Wolfe Research.

Brendan O'Brien

Good evening. This is Brendan O'Brien filling in for Steven. To start, I guess I just wanted to touch on recruiting. You added four new MDs in 1Q, which is a pretty active start to this year. And while you're unlikely to match last year's recruiting level, due to the SBB hires, I just wanted to get a sense as to how the recruiting environment has evolved and if we should still expect another relatively active year on this front relative to history?

Kenneth Moelis

No, I don't think we have no plans to duplicate anything like last year. The energy hires that we did, which is three of the four were in process for why I actually think we kind of signed them up last year and we announced them when their gardening leave.
So we almost look at that as part of last year's move to fill in some gaps we had in technology and energy, and I am very excited and energy transition. So very excited with where we ended up if you look at that team, it's a spectacular team, very excited with that, that we're not going to we're not going not to nowhere, but we still have some spots.
We'd like to hire. If people came available, we would do it. But I don't expect an SVB type of situation to occur from now, but we a plan for that last year, it happened, we moved and it ended up bleeding does to have a deal that was 14, I think, of the MDs out of a total of something in the mid 20s. And even if we did the non SPP. part that to me that would be aggressive.
I don't even anticipate that many external hires. I think this is a year where we'll fill in where we can. We'll pick off some really quality people if they show up and we're going to focus on the clients for this year.

Brendan O'Brien

That's helpful.
And then I guess turning back to the capital markets business, yes, it's been quite active for you over the past 18 months. And given the lack of of capital availability through the credit and equity markets.
But with the reopening of equity markets or equity issuance and debt markets, I just want to get a sense as to how that's impacting the outlook for that business and whether you think you could continue to see growth there?

Kenneth Moelis

Yes. I'm very bullish on that. We do we took one of our best bankers and put them in charge of it. We I think these are big chunky checks from again, if it's plain vanilla distribution of an IPO, that often goes to one of the big banks. But it's almost M&A.
I mean this the idea of putting $1 billion into some position in a capital structure. It usually involves our what we consider our clients, the PE firms or the private credit firms, which is a very one-off bespoke conversation.
It often entails things like negotiation of governance and exit rights and all kinds of things that are just not conducive to a plain vanilla distribution and oftentimes also discretion and secrecy and people like a lot of people that might involve conflict of interest with your senior lender and that causes people to not want to have their senior lender involved in that on.
So this is all right. And the fact that it's available is fantastic for our business because, yes, we were having those conversations a year ago, but the capital wasn't that available, it was very hard. You might have had a perfect position to put a capital, but the capital didn't want to move yet.
They were very worried about 7% federal funds rate. And there were all kinds of issues around how bad this was going to get the fact that capital is now in motion and looking for those opportunities means I think our hit rate on marrying up a problem with a solution, it will be a lot higher.

Brendan O'Brien

Great. Thank you for taking my questions.

Operator

Ryan Kenny, Morgan Stanley.

Carly Schwartz

Good afternoon.
This is Carly Schwartz filling in for Ryan Kenny. So just going back to your outlook. So your commentary seemed a little bit more reserved than last quarter, given last quarter you called for a coming resurgence in M&A. So sorry, better get a sense of where you are with in the merger market.
Can you go back to your Formula one red light analogy, the last time you talked about that you said we were at the fourth of five red light, but now with the rate outlook has changed and you had made this comment off the back of Powell's November comments. So can you just give us an update on where we are with that?
And then as a follow-up on the 2Q comp ratio guide, can you just speak to what kind of revenue environment you're expecting on a sequential basis that gets you to a similar comp ratio?

Kenneth Moelis

Okay. Let me start. So I don't know the exact words I used, but I will tell you that our pipe is strong or our new R & DRC. activity stronger than whatever I said at that point. So I didn't mean to look, I think we've all been waiting for a recovery now in M&A.
And I don't want to overdo the ROE. It feels like it's coming. And our bet on our pipe is higher than it's been at any time at equivalent point in time, which the first quarter is usually your lowest point. But you might comment on what was it last November when we talked about the Fed comments, right, then led everybody to the six rate cut prediction.
So I thought, okay, we got for likes for likes right on track of my Formula One expertise. I'm not really that good but on. So I thought the first rate cut would be, you know, everybody would tear off. The interesting part is because it led everybody to believe six were coming the interesting part at this point, it does not look like six are coming, but I think the same outcome is going to derive from that, which is okay.
This is the environment. I think at the moment in time when I when I was waiting for it to move was people were saying, well, this isn't the environment.
The environment could be a 3.5% federal funds rate. One imagine going to your investment committee and say, let's go to market and some senior guy at the firm looks uses, will kind of 80, I'd argue the Fed's going to cut rates by 200 points in the next six months. Why wouldn't we go then and you go oh, storming back to your seat and never never talked to the guy again.
But I think as of today, it's becoming more clear that if there is a Fed drop, it could be late in the year. And this what I'm saying is I think that decision makers are going to come to the conclusion and are coming to the conclusion that this is the environment we have to liquefy some assets we're going to go and we're not going to look like idiots because we're not going to miss some gigantic six rate cut move.
I don't know how to tie that back to my Formula One analogy, I think the cars are just going to take off and get it to the I think the cars are going to start on the track on their own.
I think they're just going to go up because now this is the environment and PE firms are in the business of transacting and creating liquidity and buying new assets. So I think they're going to go on on the comp ratio. I think that was the last one. I just wanted to say what we put out there today is based on what we know not what I think might happen, not what I hope might happen and not what I even expect to happen.
But based on today's market environment. That's our best guess and we'll update it as things change. I'm not trying to predict the future, though, although we'll have time over the year to adjust, but that's based on our best estimate of what the current market conditions is, which is what Joe and I think we're supposed to do with comp ratio.

Carly Schwartz

That's helpful. Thanks.

Operator

Brennan Hawken, UBS.

Brennan Hawken

Good afternoon and thanks for taking my questions. So given the magnitude of recruiting arm and relatively quiet environment, what was the structure of comp awards, it is just past year end different?

Kenneth Moelis

And then what you saw in a typical year, I think they're pretty consistent. You can look in the outlook. I look every time about deferrals and I compare to the market and I feel like our comp was right, it was pretty pretty much where it was every other year in terms of component in terms of component components.

Brennan Hawken

Got it. That I guess the reason I ask is that the average stock outstanding, the diluted stock outstanding picked up a bit more than is typical the typical cadence. So I wasn't sure whether that was that a function of the recruiting and the magnitude of recruiting that came on and the stock-based comp that was tied to that?

Kenneth Moelis

Or was there something else involved in that maybe we might have to we might have to include that, Joe?

Joseph Simon

Yes, no, it's a yes, that's exactly right. You know, each one of these new hires ultimately comes with typically visibility on their comp for at least one, two years. And so in the 1st year, we're basically there's no revenue, but there's there's comp that's basically been guaranteed and it's a combination of cash and equity.

Brennan Hawken

Great.

Kenneth Moelis

Okay.

Brennan Hawken

Thanks, Joe. Appreciate that. Can I have a question? You sort of a related question the recruiting has been remarkably active. You have been really excited about that quality of the bankers that have come on to the platform. When we think about looking at your productivity per MD, and historically that ex the remarkably strong '21 and '22 previous sort of high watermark was about the mid sevens.
You think that the bar extent and magnitude of the recruiting you were able to do was to such a degree that you'll be able to move that high watermark up further? And what kind of order of magnitude you think would be reasonable to?

Kenneth Moelis

No, I don't know the answer to that, but I the look the first of all, I do think the market has gotten a lot larger audience expansion of of valuations of GDP. and quality of banker, but it's also unfair you to taking it in what is a cyclical business.
I mean 2018 was kind of a the Fed or you don't talk 2018, the Fed hurt us 2023, the Fed hurt us and the one-time, when is there some average through a cycle to have a bread and you can't just say take out your best to two scores.
I mean, I guess that's the way you do it in golf, but the deal you can't just say take out like two of the best five years you've had and then tell me what you do in only the craft beers. There is some cycle to this business.
And I do look at it through the cycle and I think we should do better than what you're my underwriting is better than what you're saying. Do I have an exact underwriting. You tell me the market, I'll kind of tell you what I think the underwriting is, but 21 and 22 were very different than that. And I think the right way to look at is kind of a through the cycle.

Joseph Simon

You're right.

Kenneth Moelis

I don't plan for 20 ones every year, but I don't plan for 20 threes every year, 2023 is either and dumb. But I think the amount of competitors are getting less. The amount of quality out there is getting less. And I think we're going to be more and more percentage of the market. And so that is getting better.
So I think I'm more bullish than than what you said on, but I wouldn't I wouldn't put a pin on what I think the actual productivity we'd have to tell me under what market conditions, I think, yes, that was what I was trying to narrow you down or anything up is.
And the only reason why I picked that was 18, was it we had that the bump after the tax reform. So it wasn't Fed was gone against, but there were some benefits, too.

Brennan Hawken

Okay. Appreciate all the color and I will get back in the queue.

Kenneth Moelis

Thank you.

Operator

There are no further questions at this time. I will now turn the call back to Mr. Ken Moelis for any closing.

Kenneth Moelis

Thank you for your time and look forward to talk to you. And hopefully, the market will change in line with a lot of what we're thinking. So look forward to in the next next call. Thanks.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.