Moelis & Co (MC) 2015 Q2 法說會逐字稿

Good afternoon and welcome to the Moelis & Company Second Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Michele Miyakawa. Please go ahead.

Thank you, and good afternoon. With me today are Ken Moelis, Chairman and CEO, and Joe Simon, Chief Financial Officer.

Before we begin, I'd 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 Factor section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated.

Our comments today include references to certain adjusted pro forma or non-GAAP financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare results across several periods and better understand our operating results.

The reconciliation of these adjusted pro forma 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 Investor Relations website at investors.moelis.com.

I'll now turn the call over to Ken.

Thanks, Michele and thank you, everyone for joining our second quarter 2015 earnings call. We had a very active quarter as we continue to participate in an improving M&A market. Our M&A related activity grew through in both the second quarter and first half of the year and our deal teams remain very busy.

We are confident in the strength of our business model and our continued growth. And we are committed to returning our excess capital to shareholders. Since our IPO, we've returned over $98 million and today we're pleased to announce a 50% increase in our quarterly dividend.

On today's call, I will discuss three topics. First, additional color on our Q2 results and how we're benefiting from the increased M&A activity. Second, our gross strategy and our ability to attract and retain top talent, as we continue to build our global footprint. And third, our intense focus on not just top line growth, but also on maximizing our return on invested capital as we continue to expand.

So starting with our results. We reported second quarter revenues of $126 million compared to $132 million at the same time last year. We benefited this quarter from the improving M&A environment with M&A deal activity having increased. In fact for both the second quarter and year-to-date 2015, our M&A activity has substantially grown, which has helped us counter softer activity in restructuring and fewer capital markets advisory completions.

In addition, although we've experienced extended timelines for certain credit sensitive M&A processes due to a tightening of bank credit, we discussed that in our last call, by the end of the second quarter, the market seems to have adjust and we feel like we're back on track. Given this market adjustment, and our increased M&A activity and based other factors we assess in determining our activity levels, we are still optimistic that we will achieve growth in our full-year of revenues.

From a longer-term perspective, we see a continued healthy M&A market. While announced and completed deal count data for the US and Europe is flat to down year-to-date, we believe that the recent uptick of activity in the mega deals, which has substantially driven increased volume is filtering down to the broader market. And as we have articulated since our IPO, we believe this will be a long, steadily improving cycle.

We're encouraged by our continued ability to grow our franchise by attracting and retaining top-tier talent to take advantage of this M&A environment. We are attracting talent at all levels, as bankers seek firms with a differentiated culture such as ours, and with a high degree of collaboration. So far this year we have promoted four Managing Directors and hired eight Managing Directors who have or will start with us this year plus one partner in our Private Funds advisory business.

So this includes two senior oil and gas hires, one in Houston and one in London, two of the main energy investment banking hubs. With these hires and the strength of our existing team in place, we feel we are positioned to further benefit from both US and global activity in the sector.

Regarding our EMEA footprint, half of our Managing Director promotes and four of our hires were in this region. We continue to invest in EMEA to position ourselves for increased M&A activity there as well. We also hired three additional Managing Directors in the US since the beginning of the year in the TMT sector, which will further strengthen our share of the market and drive further growth. And as I mentioned, we continue to expand our Private Funds advisory business with the hiring of a new partner in the US.

Lastly, we recently hired a largest incoming full class of 90 junior bankers, as our brand recognition grows across campuses and we attract more and more of the topmost entrepreneurial students. Recruitment on campuses and developing our talent to become home-grown MDs is an important part of our strategy. It creates a self-sustaining and self-generating pipeline of future managing directors. We believe this is unique to our business model and it's an important part of driving a very high long-term return on invested capital, which we think will result in the creation of significant enterprise value.

We are confident that our focus on growth with an emphasis on return on capital will result in sustained generation of a high level of free cash flow and we're committed to return that cash flow to our shareholders. This confidence is demonstrated by the 50% increase in our quarterly dividend to $0.30 per share.

At this part I'll turn the call over to Joe Simon to discuss the financial results in more detail.

Thanks, Ken. I'll now speak the three broad areas. One, compensation and non-compensation expenses. Two, our increase dividend and commitment to return capital; and three, the strength of our balance sheet.

Regarding compensation. Our compensation expense ratio of 54% for the second quarter and first half is higher than the 53% reported in the prior year period, primarily due to an additional tranche of equity amortization expense, which began to accrue in 2015, which we mentioned last quarter.

As a reminder, we report a lower than targeted total comp run rate expense due to the incentive equity reset that occurred last year when we both accelerated the vest of MD equity and instituted long term lock-up agreements, which we have discussed in previous quarters. Regarding non-comp expense, second quarter adjusted pro forma non-comp expenses were $23.4 million, which is up 1% from the $23.1 million reported in the second quarter of 2014.

Our second quarter 2015 non-comp ratio of 19% compares with 18% in the prior year period. For the first half of 2015, our non-comp ratio increased to 20% from 18% in the prior-year period, primarily driven by increased head count along with the decline in revenues. Our adjusted pro forma presentation assumes that all partnership units have been converted to shares, so that 100% of the firm's income is presented as if taxed as a corporation at our current corporate effective tax rate of 40%. This compares with last year's tax rate of 40.5%.

On July 28, our Board approved a $0.10 increase in our quarterly dividend to $0.30 per share, consistent with our commitment to returning excess capital to our shareholders. The dividend will be paid on September 8, to stockholders of record as of August 24. During the second quarter, we bought back approximately 57,000 share equivalents at an average share price of $28.65. These buybacks were all in connection with required tax withholding executed in connection with employee (inaudible) events.

Finally, we ended the quarter with a strong financial position with $154.6 million of cash and short-term investments and no debt. I'll now turn it back to Ken.

Thanks, Joe. I want to conclude by reiterating how we will continue to create long-term franchise value and deliver returns to our shareholders. Number one, we are differentiated by our culture, our focus on collaboration, internal talent development and financial discipline. We did not just do a great experience for our clients, but I think a very high return on invested capital for our shareholders.

Number two, we're continuing to benefit from an improving M&A environment and we're also positioned to take advantage of any restructuring activity with what we believe is the best restructuring team on Wall Street.

Number three, there is still significant room to grow, as we continue to build out sector and regional expertise across the globe. Number four, we are able to attract top talent that both the senior and junior levels in the US and abroad and have a robust pipeline of potential on these. And number five, our capital-light model and strong focus on cost discipline generate significant free cash flow. And we are committed to returning our excess capital back to our shareholders.

Now we'll be happy to take your questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Ashley Serrao, Credit Suisse.

May be a question on your MD population today. Where did it stand at the end of the quarter and how are you thinking about growing that? Where the opportunities that you -- what are the opportunities that you see today?

We ended the quarter with 95 advisory MDs and four partners in the Private Funds Advisory Group. I think -- well, we have a bunch of the hires that we talked about have not actually joined yet. So some of those, I think -- the vast majority of them are going to join in the next two months, I think, maybe three (inaudible). Again after that I still think we have enormous opportunities, sector, like for example, the two managing directors we hired in London and in Houston in energy wasn't the finishing touch, that was the beginning. You know we do have a team here, but we want to build it out pretty significantly, it's a big sector. It's been under-represented by us. We feel like we've got great leadership with our existing team and now this addition. And so we're going to continue to look to build that out. We think healthcare, we could build out strongly, general industrial, not done in Europe yet. So I think we have a lot of room in the sectors and then probably on the regions, we have one or two spots in the region that if the right team showed up, maybe Southeast Asia, maybe Nordic region, but those are not -- I wouldn't say those are tomorrow things, if the right people showed up, we'd probably do it.

And then can you just talk about your decision to increase the dividend? How do you decide on the magnitude to increase and how are you thinking about growing that dividend going forward?

Look, we looked at our cash flows and we're very comfortable with this dividend, we think there is substantial excess capital, we have no debt on our balance sheet and we're very comfortable I think, as we've experienced being a public company for a year and a quarter. We've got more and more comfortable and feel like we want to have a stronger dividend.

Look, we do hope to grow the dividend, I think we've come to the conclusion that we did a dollar special dividend last year, we think it'd be better to continue to put those into regular dividends, return them showing the strength of the franchise. Look, we -- I'm not saying we will never do an acquisition, but we've grown organically from the day we started, we believe the return on equity on organic growth is extremely high and we think that will free up a lot of cash flow and allow us to grow our dividend to pay this comfortably and still have room for growth.

And then final question. Can you just talk about your level of confidence in delivering year-over-year revenue growth this year?

Look, I get to see a lot of what we're working on. And there's a lot of transactions, there are different stages. So you're still subject to the market, but some of them are contractually signed transactions that are going to close. And I look at it and I say everything I see indicates to me that we have a very strong revenue base that I feel very confident is coming in. I mean a lot of it, a significant part of it is under contracted deals. Some of it is things in process though we look at -- I am confident, I mean, we are always subject to the market, but I feel pretty good about it. And I'm more confident in the third quarter than the fourth and more in the fourth than the first. So as you get further down the future, it's tough, but I feel pretty good about it.

Daniel Paris, Goldman Sachs.

Question to, this year data has been the first time in a while I think revenue growth for independent advisors have lagged behind, in bold brackets. It doesn't seem like that's a function of recruiting and that actually seems like it's going the other way, but curious to see -- to hear your thoughts on whether that's just a function of deals being really concentrated in the mega cap space, just timing related issues around closing or anything else you'd point to?

I'd try to come up with the trend on that. I'm not sure that there is one in any quarter. I think, strange things can happen. I feel like the underlying growth of our model is still strong. I do think in some of the big cap transactions, there is a need for large amounts of cash credit, maybe some more capital markets in those types of transactions and maybe that's the reason. But look, like I still feel like the trend toward independent advisors and the trend toward talent wanting to go to those independent advisors is in place. And that may not be the best answer, but I'm not sure. I'm willing to say that that I can discern a reason for what you see happening that I can forecast into the future. We'll see, maybe we'll talk a little later. Hopefully, we won't have that conversation again in the next quarter or two, but if we do, maybe I'll be able to figure it out.

And maybe just one follow-up. I mean, one of the interesting dynamics this year is that the corporate activity seems to be accelerating a bit while sponsor activity kind of flat to down. I know you spoke a lot about issues around credit sensitivity last quarter and seems like you feel a little bit better about it, towards the end of this quarter. But what kind of gives you the confidence on the forward that the credit sensitive end of the spectrum can kind of pick up from here?

Well, two things. First of all, I think it is a strategic market. Look, strategics have better currency in this cycle right now to out-bid. So if you have an asset and it's moving in a strategic asset interest, they often have a better currency to use.

So what happened in the first quarter was really a disruption in the flow, meaning the Fed came in, the regulatory environment came in and kind of changed the game. I think midstream, it happened right around January, and imposed different parameters on deals, so everybody had to adjust.

And that was adjustment everywhere, like all markets. Price might have adjusted, method of financing might have adjusted. And I thought I always said, I thought it was temporary adjustment as people figured out how to acquire or sell the company thy wanted to. And so again, yes, I still think it's a better market for strategic M&A, but at least that the flow and the process on (inaudible) now levered in private equity and sponsored M&A, I think it shifts back in normal flow.

Devin Ryan, JMP Securities.

So just coming back to may be some of the earlier comments on the fund placement business, you guys have had some nice wins there, out of the gate. So I'm just trying to get some more perspective on how that group is performing, not a heck of a lot we can see from the outside, but just may be some anecdotes or sense of how they're performing relative to your expectations.

Doing well. They've had -- closing this quarter, they've got a decent pipeline, it's -- I think they're doing well and this new hire that we just put in there, it's one of businesses that I think should do better than mathematical increases. People want full distribution, meaning one plus four is in a 25% benefit. It's kind of more, people want to know that you're distributed in all markets and that you've put together the team and then when you can pitch with the whole team, you'll do even better and better.

So the actual addition of talent was very helpful to them and I think they're on track and look, I think we have to continue, and we'll continue to add to that, so that when we go to market to the client, it's the best distribution and it competes. And so the more -- I think, the more we expand the group, the better we'll get and it won't be -- and I think it will expand more than arithmetically.

And then with respect of restructuring (inaudible) from the outside looks very slow. Is there any signs of life that you're seeing, may be kind of in the pre-backlog or things that would suggest we could see any pickup in that business or is it just a function of defaults remaining incredibly low and so until that changes, expect that business to be slow?

I give our team credit, they've stayed, I think busy relative to the default rate they found interesting ways to stay busy. But it is a default rate business and I think they're doing well in a very -- there's not a lot of opportunities. So yeah, I would look at the default rate, that's the general reason why they are slowing down and there are certain sectors where you start to see some volatility and that could help. But in general, very low interest rates, kind of a decent economy, I think is -- I don't see a short-term reason why that market would pick up. But I know from being alive in Wall Street for 35 years, it will.

Got it. Okay, great. And then I guess last from me, appreciate the update on the expectations and hopefully we'll see some revenue growth. Any thought on kind of the bottom line, clearly there's some moving parts between expenses, the revenues are growing, just wanted to get a sense of if we could anticipate that we'll also see earnings growth year-over-year as well?

Well, that's a little more difficult to predict. I think overall the comp ratio should be, I think 54, 55 is the area that we're targeting. And with respect to non-comp, as a result of some of the headcount growth, that may tick up a little higher than the range of 15 to 18, but we're managing it aggressively.

Ken Worthington, JPMorgan.

I guess maybe first, there seems to be or there is meaningful seasonality in both the hiring or promoting of managing directors. Any reason for the next 12 months to deviate from normal seasonality or should we expect kind of hiring and promoting as usual in the seasonally strong and seasonally weak periods?

I think it'll be similar. Yes. I think you can depend on the shape being very similar.

Okay. In terms of maybe lift outs as a way to kind of continue to grow in the latter half of year, and this seasonally slow time to actually hire, are there opportunities there too or is kind of hiring and promoting really the focus for Moelis for the rest of the year?

Well, lift outs really are hiring, by the way, and it gets -- if you do too big a lift out and it looks like you've taken a business, there are some actual ramifications to that, very hard, you have to be very careful on "large lift outs." So I think that is hiring and it is the back half of the year. We are going to slow down on our hiring, that's not to say that there is nobody because through our special situations in which you can make it work. But as you get to the end of a bonus cycle, it's very hard to hire somebody and make it work, especially the way on our cost discipline, as you get to the back half of the year. So I'd expect it to a slow -- rapidly from pace you just saw.

Okay. Great. And then,can you talk about Paul and hopefully I pronounced his name right (inaudible) departure. He seem to be higher profile, I think you have talked about the attractiveness of working at Moelis in tenure of your employees. Obviously we're in a business where the towns walks in out the door every day. Any comments you can make about that situation in particular?

I'll just talk about in general, our management head count. So we try to be very aggressive on our management, we now have close to 100 managing directors. And we try to actively manage it. We have two managing director departures, both of which were mutual. And I'll leave it at that and just say that part of managing the firm is in just -- I'll just leave it at that. Let's just say we had two departures this year and both of those are mutually agreed to.

Vincent Hung, Autonomous.

Just a follow-up on the credit sensitive transactions. So if I look at the data, leverage lending improved in the second quarter and one of the rating agencies, the other day noted the loan pipeline was currently above average. But this doesn't really seem to have fed through into M&A announcements. There hasn't been much of a meaningful improvement in financial sponsored transaction. So is it just based in your compensation that you detect some improved sentiment from sponsors (inaudible)?

No, let me make sure I'm clear on this. I still think that there's a price at which the financial sponsors kind of don't go. They don't want to pay and the strategics can. So there's still going to be -- it's a good strategic market. What happened in the first quarter and earlier this year was processes and transactions in development were stopped or changed by regulatory changes in the way they were going to access financing, which is very different than wanting to pay a higher price and not. So I think you have to bifurcate that, what we thought was happening in the first part of this year is the processes that we thought were heading toward completion got sidetracked by a regulatory overlay on how those deals could get financed.

Now, I sense is happening now and we see it in our processes, people learn, they are now planning. They understand the regulatory environment, banks are fore-warning them when they might have an issue. People know the leverage limits and they are structuring -- we're structuring the process, the price and the capitalization around that. And so now we feel those processes and the way they go, finishing are cleaner, smoother because they're anticipated. But that does not mean that you might see a higher financial sponsor activity level going forward forever, I do think it's a tough market for them, given the prices.

Okay. And can you give me a sense of what the revenues were by geography and sector?

No. I'm sorry. I thought you actually tried it a way that there will not be a good answer because I thought (inaudible) knew that.

Okay. Well, any discussion on how Europe is doing?

Europe's actually doing very well. We had a good, I'd say we had improving Europe and better, I did give you little by sector by saying our M&A revenues had improved in the first and the second. And you know it's really restructuring, capital markets advisory that's been down, so I kind of gave you a little indication of where we're seeing things. (Technical difficulty) and a good second quarter.

Okay. And then the last question is around MDs seasoning. Ken, just talk about what progress you've made on seasoning last year's MDs that you hired.

This is again a high level, it's not with big statistical. I feel like our MD class of last year is producing probably, I think they are significantly producing and they've done very well. Look, there is a difference when you internally promote than when you cross-hire. And I do think, as we internally promote, you just get a different -- the person is new to MD, they're more junior. But the cost of creating a managing director out of an MD promote is also almost zero. You can make a good case to your cost as you've extracted value while they work for you from associate arm. And so you might have -- I do think you see a different revenue ramp from the MD promote than you do from the cross-hire, but I do think you also see a very different cost of entry. So that may be something you're seeing a little bit as well.

Joe Jeffrey, KBW.

So just it sounds like you're a bit more optimistic about the back half the year. I'm just wondering, when you look at your pipeline and then think about the expectations, what do you we believe is the biggest risk to not reaching those at this point of this year?

Market debacle, I mean some fundamental market hick-up, it's pretty significant. I think that would -- because a lot of things are in mode already. Now, for us if that debacle were some restructuring revenues, we might still find a different way to make it. I mean that's what happened in 2009 and 2010. So look, it has to be the market, some dramatic change in the market that would cause people to second-guess transactions they're doing.

Okay. And then, just a follow-up on some of your comments about growth, I know from a return on capital standpoint, you're not a fan of acquisitions, but are there any geographies and markets where that would be the best way to get into that space?

Well, that's possible, but they would be done in ways that are characterize -- it'd probably be 1% higher or 2% that you might -- somebody might want to characterize for tax reasons or structuring the -- they might want to declare it to be a sale of -- but we think -- look, we think the organic growth. We've grown organically from day one to today because the return on invested capital is so high -- and by the way, I include one off transfer hires as organic. I think in our business it's fair to call that organic.

But the closer you actually get to internal development, the higher the return on capital and so if you put a spectrum across, I'm very focused on that, in getting return on the investment and so look, acquisitions just had extremely high bar in my mind and I think they're riskier than most people think, in a people business. So they have a very high bar and they should when your alternative use of capital might be a rate of return that's astronomical compared to any other business because we don't have assets, we just have people and most of our investment goes right through the income statement. I mean, inside of that comp ratio is our CapEx, if you think about it, it's just in our comp ratio.

Brennan Hawken, UBS Investment Bank.

Just a couple of cleanup questions from me here. The revenues, did you guys benefit from any unusual revenue sources like you had in the past such as ratchets or anything like that?

I think this is a pretty clean quarter. I mean normal, I can't think of anything that was unusual, Joe is saying no either, I think it's pretty normal quarter.

Okay, thanks a lot.

Maybe it was abnormal and that there was nothing extravagant.

Okay. And then following up on some of the restructuring questions, are you all seeing any opportunities emerge in energy, from what we're hearing, some folks are saying that bank lending actually may be contracting as we progress through the year due to regulatory pressure and I'm just curious whether you think that might bring about more opportunities there? And if you're seeing any early signs?

We were surprised as -- probably shouldn't have been, but the world was, how much capital in the first quarter marshalled itself to go into energy. And so really staved off defaults. I think the amount of capital that's focused on opportunities to try to invest in energy during the downturn, that -- I can't speak to a contraction of the bank credit, but I do think if we get into a prolonged environment you will see it increase the restructuring backlog. Again, you had two things. An enormous amount of capital was just marshalled to put it in, and secondly, there were a lot of hedges that extended for at least till June 30, natural operating hedges that people didn't have to take the pain yet of the full downturn in oil prices.

So I think that will over time start to creep up on people.

Betsy Graseck, Morgan Stanley.

Appreciate the divident hike. So, couple questions, one is, just you're mentioning earlier the leverage roles and obviously that's the changing. I just like to deal with that. I'm just wondering, if you feel like, you fully maxed out relationships that you need to have with partners on a street to deal with that new leverage roles that are out there?

Look, what we'd like to position ourselves is as the advisor to people who need capital. So yes, we have a lot of relationships and we think the beneficial part of being in this is, if some institution is having trouble and you're using them for advice, they don't really tell you to go to their competing institutions. That's actually an asset we have. Sometimes we'll tell our clients look, you deal with bank x but bank y is much more open for capital or shadow bank z is available. And so, I think would you say relationship somebody were feeding a transaction to? The real answer would rather be kind of the Switzerland advice on that because the relevant capital changes pretty rapidly depending on whether people are feeling aggressive or not. And one of the things we like to offer people is, help on finding that capital and staying neutral. I don't know if that's the question, but that's the way we --.

Yeah, no, that's exactly, and I was just thinking about the fact that in Switzerland you have relationships with lots of different folks and didn't need to build any new ones with regard to the -- in light of the leverage loan changes and which was the answer to that?

Well, the answer to that is yes. And we have a couple of capital markets advisory people and they do go around meeting and introduce themselves to make sure we do have -- because you're right, there is a lot of capital being developed in what people call the shadow banking system, but there is lots of alternative capital and yes, we like to know where it is. And our point of sale is, if you go to a large bank, they won't often steer you to that capital and we will, if it's better, if it's the right capital.

And I would think, yes, you built that out, that drives some of the confidence in the back half of the year revenues.

Yes. Look, I think it's just overall, we have a level of activity that I'm comfortable with, markets are good, our deal teams are busy. And again I see, there's a lot of times you're in contract for things that close and you can look in the future, and we feel pretty good about what we can see.

And then just separately, I know there was an announcement that one of the Board of Directors has stepped down. I guess he was busy, a lot of other things on his plate (inaudible) and I'm just wondering if there is any plan to add somebody to the Board at this stage or do you take current -- existing Board members to take on the roles he had in audit and comp?

They are, in the interim. But we are looking for another Board member, we need another Board member. And just to be clear, I think, we said this, Steve was a great Board member and probably -- a client of mine for 35 years before this. What really happened there is, Steve is very active in the corporate world. And it occured to him that his activity was going to cause us issues. It's an -- the amount of sensitivity to conflict in the world, I think is increasing, people are very sensitive and Steve came to me and said, look, I think it's better for you. And I said I can see why -- I'm on a lot of things in which I could conflict you, why don't we part company and we agreed to it and we're friends and we're going to get another Board member.

Okay. Got it. Thanks.

Okay. All right. I think that's it on questions. Thank you for your attention. If you have other questions, call Michele or myself and we appreciate your time. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.