Moelis & Co (MC) 2015 Q3 法說會逐字稿

Good day and welcome to the Moelis & Company Third Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Michele Miyakawa head of Investor Relations. Please go ahead.

Great. 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 Factors 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 our 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 our Investor Relations website at investors.moelis.com.

I will now turn the call over to Ken.

Thanks, Michele and thank you everyone for joining our third quarter 2015 earnings call. We had record third quarter earnings -- record third quarter revenues, up 18% over last year primarily as a result of continued growth in our M&A deal activity. Additionally, we had a strong quarter of deal announcements, which I will touch on shortly.

We continue to attract top talent with a number of new joiners both at the Managing Director level and Junior Banker levels and to invest in internal development of our people, including the appointment of my Co-Founders Navid Mahmoodzadegan and Jeff Raich as Co-Presidents of the firm, as well as Rick Leaman as Vice Chairman, which should strengthen our leadership and position us well for continued growth of our business.

We've also appointed John Allison to our Board of Directors as our third Independent Director. John has an impressive track record as a leader in the financial services industry, currently serving as Chairman of the Executive Advisory Council of the Cato Institute's Center for Monetary and Financial Alternatives and as a member of the Cato Institute's Board of Directors.

Prior to joining Cato, John was Chairman and CEO of BB&T Corporation where under his leadership BB&T grew from $4.5 billion in assets to $152 billion. We are delighted to have John on our Board and believe our firm will benefit from his experience in growing a strong and well-respected financial institution.

On today's call I'm going to focus on three topics. First, additional color around our Q3 results, second our thoughts on the market environment and outlook, and third, our key investment themes and long-term earnings power. So starting with our results, our quarterly growth can be primarily attributed to an acceleration in our M&A deal activity as we continue to win new business and clients and our Managing Directors continue to mature on our platform. This increase in M&A activity was tempered by softer activity in restructuring. While current restructuring activity remains low, it is beginning to stabilize given default rates have held around 2% now for the last 18 to 20 months.

Drilling down further, we experienced an increase in average fees as a result of advising on larger M&A transactions during the third quarter of 2015. Lastly, we continue to see diversity in both deal value and sector coverage in our M&A deal completions. This diversity is important in creating a stable revenue stream and will make us less reliant on a particular sector or segment of the M&A market.

Turning to the market environment in general, we continue to see strong completion activity for deals greater than $10 billion. Mega deals were four times greater in number of transactions for both the quarter and the year-to-date 2015 periods. However, the number of global M&A completions greater than $100 million in value, which is how we look at sort of general market activity, was actually down 20% for the third quarter and 6% for the year-to-date.

While September's volatility in the equity markets was not conducive to deal activity, our momentum hasn't been disrupted in October has felt more stable. However, I do want to prolong volatility of that nature could make a deal environment more challenging and is probably the number one risk for deal making activity.

I continue to believe that we will experience a steadily improving M&A market. Companies must continue to seek ways to grow or save costs through consolidation and financial sponsors need to put dry powder to work.

In terms of announcements, we had a strong quarter of activity at Moelis & Company. We're advising DENTSPLY on a $13 billion merger with Sirona, the largest dental transaction in history. We're currently advising TECO Energy on its $10 billion sale to Emera, creating a top 20 North American regulated utility. And by the way, I should note that these two deals are good examples of relationships that were primarily led by recently hired Managing Directors.

We're also advising Starwood on a $7 billion merger with Colony Homes, establishing the owner and manager of over 30,000 homes in the US. And we are advising Meredith Corporation on its $3 billion merger with Media General creating the third largest owner of major television networks.

Given announcements and other factors we assess in determining our activity levels, we remain optimistic that we will achieve modest growth in our full-year revenues. From a longer-term growth perspective, we believe we are well positioned to benefit from a steadily improving M&A market and any pickup in the restructuring environment. We're encouraged by our continued ability to grow our franchise by attracting, promoting and retaining top-tier talent. We'll continue to benefit from managing directors both new hires and internal promotes as they mature on our platform.

For the third quarter, we had five managing directors start including a senior oil and gas hire in the UK, two TMT bankers and a consumer banker in the US, as well as a partner in our private funds business.

In addition, a whole class of 90 junior bankers joined in July and we ended the quarter with 104 managing directors including five private funds advisory partners and 463 total bankers. While we have experienced significant growth this year, there's still plenty of white space left to fill with energy and Continental Europe as the obvious areas to look out for in 2016.

We will add talent opportunistically as we continue to see talent wanting to leave the larger regulated banks. As a result, we have built a strong hiring pipeline for 2016.

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

Thanks, Ken. I'll now spend a few minutes on revenues, compensation and non-compensation expenses, our continued commitment to return capital and the strength of our balance sheet. We reported $152 million of revenues for the third quarter of 2015, which was up 18% over the prior-year quarter and $377 million of revenues for the first nine months, which was up 1% over the prior-year period.

Regarding compensation, our year-to-date comp expense ratio on an adjusted pro forma basis was 54.9% of revenues, which is in line with the 54% to 55% range we previously discussed, and compares to 52% of revenues in the first nine months of 2014. The increased compensation ratio is attributable to the additional tranche of equity awarded in early 2015, the increase in head count combined with modest revenue growth.

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 accelerated the best of MD equity and instituted long term lock-up agreements, a topic which we have discussed in previous quarters.

Regarding non-comp expense, third quarter adjusted pro forma non-comp expenses were $25.6 million, which is up 4% from the $24.7 million reported in the third quarter of 2014.

Our third quarter 2015 non-comp ratio of 17% compares with 19% in the prior-year period. The decrease results from higher 2015 revenues combined with the timing of our annual client event, which was held in the third quarter last year versus the fourth quarter this year.

For the first nine months of 2015, our non-comp ratio increased to 19% from 18%, primarily driven by increased headcount. As discussed last quarter, given some of our recent headcount growth, our non-comp ratio may exceed our target for the full year. However, our long-term target continues to be in the 15% to 18% range. Our key focus is to manage the pace of expenses while still ensuring and supporting growth.

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 tax as a corporation that our current corporate effective tax rate of 40%. This compares with last year's tax rate of 40.5%.

On October 27, our Board declared a quarterly dividend of $0.30 per share consistent with last quarter and to be paid on December 8 to stockholders of record as of November 23.

Finally, we ended the quarter with a strong financial position with $200 million of cash and short-term investments and no debt.

I'll now turn it back to Ken.

Thanks, Joe. I'm confident that the strength of the firm and the franchise that we're building for our shareholders. And I'd like to wrap up with just a few key investment themes. First, we're a global firm with 17 offices around the world. We have been able to establish this footprint and grow from [$0 million] to over $500 million in revenue without any acquisitions, with a clean balance sheet which has no debt and no goodwill. The strength of our net income reflects the strength of the franchise and the free cash flow generation we have committed to return to our shareholders.

Second, we have a diversified revenue stream both across sectors and in terms of the spectrum of clients that we cover. And third, we continue to differentiate ourselves through our culture. Our One Firm compensation philosophy allows us to influence behavior and focus on rewarding those who are delivering revenues, growing the franchise through collaboration and focusing on the internal development of our junior bankers.

Internal development is the key to creating a self-generating pool of talent and ultimately a self-sustaining lasting franchise. And lastly, we have an exceptional leadership team with a deep bench of multifaceted talented executives who can both manage the firm and cover clients. And to that point, I'm pleased that both Navid and Jeff are in positions to lead and manage by example in how they cover clients and win business. Their appointments are consistent with our philosophy of growth from within and development of our people and I'm excited for them to join me and continue to make Moelis & Company the leading independent investment bank.

And with that, I'll open it up for questions.

(Operator Instructions) Ashley Serrao, Credit Suisse.

Ken, can you just talk about your hiring process when you and the team source external talent? What do you look for and what do you avoid?

What we look for is people who want to be well -- first of all, talent, I mean just great banking talent. And a lot of our sourcing is from the 104 managing directors we have. We kind of like to ask people, we have a diverse group of people from a diverse group of prior employers, and we sort of ask them who do they like and I'll tell you one of our biggest ways of hiring is who has been across the table from us that's really impressed us. And we go right after those people.

And then after that, we very much -- and it comes out in the hiring process, Ashley, is we look for people who are looking to be part of a team and operate as a team. And it comes out pretty directly when you're talking about methods of compensation et cetera. People elect to either be part of a team, or they want to operate individually and we could tell that pretty quickly.

So, I think what we avoid, I'll tell you two things we avoid, we avoid that, and we also avoid people who are looking for immediacy. I have a big belief that the value in hiring people is the duration of which you keep those people. I would say there's very little value in a short-term employee, no matter how productive they are. We want to have duration and longevity in our workforce and so that's also another point we look for.

Great. Thanks for the color there. And I guess my second question just respect to your hiring pipeline, how many do you expect to add in 2016? And maybe if you could share some thoughts on overall firm size and whether you're seeing the bulge brackets fight back in any way?

I don't really have a good answer for 2016, because it's all talent based and it's early, so we have some people we want to talk to. I do think you'll see us -- usually I say we don't put a box around an industry and hire that, we just look for best talent. But we have hired a leader, he joined us after the third quarter, it was announced in energy in Houston. We have a great team down there and we added to it. And I think we intend to be aggressive in the energy hiring field.

Other than that it will be very difficult to tell you exactly what the size of it will be because it will be up to how good the talent is that we meet.

And I don't have a concern about the firm, I think, getting too big if that's what you're asking. We still have several firms that are significantly larger in number of managing directors.

And lastly, it's really not a financial battle with the big firms. I think every day, every week there's somebody who has run into a bureaucracy or a regulatory event at a financial -- at a big financial firm who just doesn't want to do it anymore. And that person is usually not -- it's really not a financial and obviously it comes down on the margin to a financial transaction, but that person has made a mental decision to get out of the regulatory environment.

Okay. And I guess a final question on my end is can you just talk about what you and your team are hearing in Europe?

Look we hear -- I think we hear good things. People are having a lot of discussions in Europe. It's just always slower to move. The United States might have an economy of similar size and Europe combined, but it is one integrated economy. And so it's just easier, nobody ever thinks of transacting between California and New York as an impediment, it's just is what it is, where Europe there are a lot of different countries and cultures et cetera.

So what I'd say is I think Europe is steadily improving and I think -- by the way, I think it is in business and improving probably even a little faster than the US right now. But I think M&A there is always just a little more difficult to complete.

Ken Worthington, JP Morgan.

Maybe first on the credit market, you had a hiccup going into kind of quarter-end in the credit markets and I guess maybe credit markets were deteriorating somewhat for all of the third quarter. How does the behavior in the credit markets, maybe, impact the conversations you're having on the advisory side? And while it seems like credit has recovered since, any lingering impact on the clients in how they are viewing funding deals or activity levels? Thanks.

I think, look credit on the margin, especially on lower quality credits, high yield and leveraged credits has become more expensive. And I think that definitely affects -- it's affecting pricing of transactions, it's affecting cost of financing and it definitely has moved and is in effect.

I think if you're asking that relation to what I said in the first quarter was more of a regulatory process change that was much more difficult. I find the market is the market and buyers and sellers can deal with the market.

So, I think they're adjusting around those pricing mechanisms that you talked about last quarter and what I've mentioned in the first quarter was a regulatory kind of hurdle that dropped in out of -- really it wasn't anticipated at all this idea that they were going to put a maximum of leverage on leverage finance. And I think that had a much larger effect on the pace of deals than just the pricing did in the third quarter.

Great. And then the fund advisory business, you were hiring there and I think the team started off very strong with some big activity. What's the latest there? How stable is kind of the fund advisory business versus the other areas of advisory? And I guess how has the team been doing most recently? Thanks.

They're doing well. It's a long lead time business, like anything else. They come in and then you have to pitch -- it's a fund -- you're really raising funds for private equity businesses. So, it's a long lead time business to get the first -- to get your transactions in and to close. Once you start on that cycle, it's a pretty -- and you have a reputation for being able to do it, it's pretty -- it could be pretty stable.

There is a lot -- I am not going to quote the number, but you'd be surprised that how many private equity firms there are in the United States. And the more there are, the more there is a fight for the resources to raise money from endowments and pensions and high net worth individuals. So they are -- and it's their life blood, remember. There may be a 1,000, I don't know, maybe more than that, I think there's more than that. And remember, for them to have a business, they have to raise a new fund.

So the act of employing a private fund raising group is key to their existence and so it's -- I think it's very steady and it will be very dependable unless for some reason private equity just goes -- there's no such thing as private equity, which I don't think will happen.

And with limited resources you're hiring in a number and growing in a number of different areas. Does this seem like it would be a greater priority if you can get the talent or maybe other areas are greater? Like how does this sort of rank in the pecking order in terms of priorities for expansion, pick your time horizon, next year or next two years or so?

I think in a funny way it's -- like I said, we don't put a lot of boxes on a board and fill boxes. But this is one where we want to have more bulk in the space. So the way you're asking that question, I'd say it's probably more of a priority, because we don't go into a lot of sectors and say, oh, we have to fill these three boxes. We wait for real talent to show up and then we say, okay, that'd be a great person to add to our firm. But in this particular field, we think we could use more depth and more bulk in the space. So I think the way you've asked it that it's a priority.

Okay, awesome. Thank you very much.

Devin Ryan, JMP Securities.

So in the real estate sector it seems like you guys have been getting more than your fair share all the time over the past four months or always you've been having a lot of success. So is that a situation of success begetting more success and just any update on the pipeline there because it just seems that there's been a lot of activity for malls?

Well, thank you. Yes, overnight success that they've been working on for five years and that's the way the business works. Just I think start counts been like a five-year overnight success. And some of the other ones we've been hard at work. You put out a lot of effort, we've got great people in our real estate group. It's a funny business. I mean, again I think it's an amazing thing (inaudible) literally was something that we took on the assignment, I believe, five years ago.

So I'd say we have a great talent pool there. They've spend a lot of time talking to the industry and you're right certain things happen a hit. It's hard to explain. That's what's so hard about our business on quarters and it's so hard to explain when people ask me what sector is going to hit. And I don't believe you can -- I know everybody has a prognosis and I try really hard to avoid it because, boy, I think it was Yogi Berra who said, making predictions is really hard, especially when it's about the future.

Got it, okay. With respect to Brazil, how are you guys feeling about the restructuring outlook? I know some think that we're going to see more activity there. And you have been engaged on some big assignments in the past, maybe they didn't get to fruition. But do you see an opportunity there and how do you feel like you are staffed if that's the case?

Yes, we've had a great start in Brazil. I think on the last call we talked about that we're even involved helping out Petrobras early on and we love our team down there. I will tell you that they warned me.

The restructuring mechanisms in Brazil are difficult. They don't have a very clean Chapter 11 procedure. Again, not to overdo these statements but I thought it was a great statement, somebody said they were quoting somebody else who said even in Brazil the past is not -- in Brazil even the past is not certain because you can actually change things in the process.

So, I only point that out to say we're optimistic about our team down there and getting hired, but it is not as clean and consistent a restructuring environment as US Chapter 11. This makes it difficult, Devin, that's all I'm saying. We live in the same environment everybody else does. It's more difficult than our system here.

Okay, that's an helpful color. Financial sponsors have always been a big piece of your business. And so one thing that we've been hearing was that with valuations at such high levels, they were just less compelled and that was one of the factors that was leading to maybe less engagement and in that group. So you think about the market pullback and maybe we would had some recovery here. But has that dynamic changed at all in terms of how they're viewing value and are you seeing any change in their level of engagement based on some of the recent market volatility?

So, I think -- again, I believe that the high market was not a preclusion. It was actually pulling companies out of private equity, really good companies. There were a lot of good selling going on over the last two years because valuation, the sellers were driving it, they wanted to realize and strategics were coming in and other private equity firms were coming in.

And I think if the valuations -- we're kind of seeing a little move now to back to the going private. I think you could see a little return to private equity showing up. Remember a lot of M&A is in the mega deal. And I also think, even the markets right now, a lot of the recoveries in the S&P 500 and I think as you get down to small caps, you're not seeing quite the same recovery in valuations. And so in the mid -- the Russell 2000, Russell 5000 Index, I don't think it's recovered quite as much and you could start to see a little more of the going-private, private equity deals that we saw, prior to the crisis really.

Okay. Great point. Last quick one for maybe Joe on the comp ratio, a little bit above the range in the quarter, but is that 54% to 55% target still good on the year and was that uptick just a function of kind of the accelerated accrual from the recent hires and their shorten period of time?

Yes, I think we've estimated both full year revenues, required comp and believe 54.9% is our best guess of where it's going to land.

Got it. Okay, great. Thanks everyone.

Brennan Hawken, UBS.

Thanks for taking the question. So, first a quick one on cash sort of drove up nicely here this quarter versus last quarter. We've seen you guys tend to build heading into year-end, so should we continue to expect that sort of pattern on the balance sheet? And when we look at last year's trends in cash going from 4Q to 1Q and the drop of about $100 million, should we think about that same type of pattern as it relates to year-end payouts and the like or is that going to be a little bit different this year around?

Similar. I mean, we build cash all year and then we pay bonuses. And that drop you're talking about, a substantial part of that was bonuses minus cash build in the quarter. It was -- and so again, it should be close. I think that is the natural pattern. It will depend. We've more people, but I think you also said there was $100 million drop. Remember, our first quarter wasn't great. So I think we had not as much cash build to offset the cash out. But that is the way the firm -- that is the way the cash will build.

And the other significant outflow is taxes.

Sure. Okay, great. I'm just trying to think about gauging excess cash on the balance sheet.

Yes. But you're right that's the pattern and that's likely to be the pattern this year as well as future years.

Perfect. Okay.

Look, Brennan, we do believe in keeping a very strong balance sheet. I believe -- again, it's a core thing, I believe we have people who work here and they elect to come in everyday and I think that unlike a lot of businesses where the assets can be levered and they don't have the volition of choosing to work or not. I like our employees to come in every morning and feel that they are working for the safest, strongest, highest growth investment bank in the Wall Street. And I think it's a real positive. It's an asset that's hard to explain to people, but it's an asset.

Sure. And clearly my question wasn't based around any kind of where you [pout] the balance sheet. (multiple speakers)

No, I was saying -- I tell you why you have excess, why do you have -- we do have what could be called too much cash, but we don't think so.

Well, as I'm thinking about excess, I'm also thinking about uses of excess such as specialists and the like. So, more about --

Look, we do want to return 100% of our cash to people. We raised our dividend last period substantially. So we have a pretty substantial dividend payment now and again we have committed to return all our excess back to the shareholders and we will continue to do that.

Sure, great. Thanks. Thinking about last year's hires, productivity with you guys, it looks like you are going to be roughly flat if we look at a trailing MD basis 2015 versus 2014. But probably it has as much to do with the fact that 2014 was such a productive year in hiring. How are you feeling about last year's hires ramping up? How should we think about productivity as those MDs settle into the seats, start to season and start to make more substantial contributions to your productivity numbers here in the next few years?

Look, I feel very good about it. That group, I'll tell you two of our biggest transactions of the quarter and again, since we're a team player, I say primarily were led by hires that are in that vintage. It's been a great vintage for us. People ask me that, remember, that's -- a lot of that is since going public, and people ask me about the IPO, and I say look it's a powerful thing to have a publicly traded stock in order to attract the top talent on Wall Street. It was a little harder when you'd have to try to convince people what a private equity valuation was. So this has been very helpful.

So, I'm very happy with the vintage that I would say not just 2014 vintage, the post IPO vintage, right up to today and I think the team is getting better and better. And you're right, by the way, I looked at it before the call. I think close to 40%, maybe 38% or 39%, of our managing directors have been managing directors here for less than three years. So, I think we have a lot of maturation to go.

And look, I hope we continue to find and promote a talent that continues to have a large amount of our class to be young, but as I said, young in terms of seniority here. But, as we continue to find like we did in the last year, 14, four promotes and nine -- 13, four promotes and nine joiners that will continue to drag down that metric. And I'm fine with that. It's just we want to keep growing.

Absolutely. And that definitely helps long-term value. I'm with you there. Last question for me. It'd be helpful I know you had mentioned in your prepared remarks about restructuring remaining very, very quiet. One of the things that investors are increasingly trying to think about as far as an opportunity set would be the oil patch and what kind of restructuring opportunities we're going to get there. You've had a very dynamic platform as we just talked about with all of the folks joining and the promotes that you've had.

So thinking about restructuring as it fits into your revenue mix, can you help us sort of frame that out, plus maybe talk about your outlook and what kind of opportunity set we're going to be having here with the stress in the oil regions?

Yes, there will be an opportunity set and they'll go on for a long period of time. But what's interesting about the oil in the Houston market, look there is a lot of diverse assets down there and a lot of entrepreneurial type businessmen as well. So I do think you're going to see them take a lot of interim actions, sell quality assets, sell divisions, finance.

Look people tend to not surrender quickly into these, especially if you live through violent commodity swings. And believe me if you're down in Houston you've seen, if you are my age, you've seen three or four really volatile swings. So I think it will -- they will stay alive for a while which is really good for us.

Look, there are two things you need to be great in restructuring, a great restructuring group, and we have that. I think we have the best on Wall Street. What we didn't have was enough bulk down in Houston for the introduction. It's sort of somebody has got to walk in the room and say, hey, I'd like to introduce you to this team. And we added a great banker in the fourth quarter, as I said, and we had a good team down there already and we're going to add more to it. And the more introducers we have the better we'll do. So, I'm very excited by it. I think it will be a longer-term opportunity than people think.

Okay. Thanks a lot for the color.

I don't think it's all going to be happen -- it doesn't all happen immediately.

Of course.

Dan Paris, Goldman Sachs.

It definitely looks like 3Q was an active quarter for you guys in terms of announcements. Just hoping maybe you can just give us a sense for where the most activity came from at the margin, whether it's by geography, size, or sector and if you think that's kind of indicative of where things are going from here?

By sector, I almost pointed out purposely the sector was incredibly diverse. I mean it was energy, healthcare, real estate, media, pharma, decent announcement in consumer products. I mean, it was -- that's what I love -- it's what I am most proud of about the firm by the way. It is diversity because as I said, if I was smart enough to actually know what was going to happen next year, I probably wouldn't have to work here. So, the better thing is to cover your clients and they'll do the transactions and that diversity shows it and that was the third quarter. And I think if I had one it was probably more US centric than it was global in the third quarter, but I don't know it that's a trend, it's just what it was.

Got it. And you mentioned volatility is a risk to M&A activity. Are there any parts of the market where the margin things feel more difficult than they do maybe a quarter or two ago as confidence is down and people wait for better clarity?

That's funny. I think it got back to pretty stable in October. If it had gone on for a longer time, it didn't feel really great like on September, I don't if it was second or third week, that did not feel great. And people ask me why it's very hard. If your firm is fluctuating up and down by 10% and the firm you're talking to is fluctuating by 10% a day or week whatever you want to talk about, it's very hard to pin a deal down. What is I think actually interesting is how quickly it felt stable again by mid October. And so I don't think that I can point to a -- other than, I think it did affect the price of leverage finance, has changed. But other than that, right now, it feels stable.

Got it. That's helpful. Thanks. Maybe just one more follow-up on the cash deployment questions from earlier. As you seem to be kind of prioritizing the dividend, what's the right way to think about the share count creep as you have issuance for employees?

No, it's not -- Joe, you want to go through share count creep? And by the way, let me just say one thing. We do have enough cash and we would think about buying stock back in the market. But right now, none of that stock is hitting the actual market inflow. So there are days now where we get very low double digits, 10,000, 20,000, 30,000 of shares and destroying that, reducing it further just seems to me to be not a good use of our cash, until we have a better flow. But in terms of the share creep, Joe, why don't you just go through the math?

Yes. So the share count, obviously the diluted share count, the volatility is driven by the unvested shares. The unvested shares ultimately are captured within the treasury method, which is a function of both the number of units or shares that you granted offset or ultimately expanded upon by the price. And so the one item that we never can predict is the price of our stock. The price of our stock because it's been going down over the last couple of quarters has actually neutralized the natural share creep. If price were kept constant I believe that the share creep would be naturally 300,000 to 400,000 a quarter.

That's very helpful. Thanks Ken. Thanks Joe.

Joel Jeffrey, KBW.

Realizing that the market volatility clearly negatively impacts deals, just wondering -- and I know the things have settled down a bit. But does that have any impact on recruiting either good or bad? Are people more willing or less willing to leave in times of high market volatility?

I don't think September -- if it causes losses, which by the way often it does. So in 2009 and 2010, yes, the answer was, yes. It created a huge demand to get out of leveraged institutions. So I'd say no unless it creates losses which then highlight to people that all their hard work is subject to swings on their parent company balance sheet that's very disturbing. So what could happen by the way. You could see trading losses or balance sheet or fines in regulatory things cause firms to have to take financial action and that's very disheartening to people who feel that they only have one product, they are intellectual and their talent and their time and they will choose, yes, they will choose to leave, if that happens.

Okay. And then just in terms of M&A activity during the quarter, I know you had mentioned that healthcare was an area where you did see some strength. Just wondering though there has been a pretty big sell off in biotech and life sciences. I'm just wondering specifically as it relates to that sector, you've seen any improvement or decline in that sense the quarter-end?

Hard to generalize. I would assume, look I'm not in every conversation I would know. But I would assume that the general sell off has made some conversations more difficult than they were. There is individual reasons for doing things often and so that doesn't mean you're to see the end of that deal making environment.

Okay. And then just lastly from me, maybe for Joe, on the non-comp side, it did look like professional fees picked up a little bit more this quarter, is that a function of the recruiting?

Yes. It would -- recruiting was up I think professional fees were actually, I'm not sure that they were up that much. Now, I'm not sure that professional fees were up that much based on what we published.

If you have a specific on that call, Joe. I don't have the professional --

Yes, I think it was actually down in terms of what we reported. So, that was recruiting on one side and last year we had I think a deal involved the consultant and so that was kind of offsetting it.

Betsy Graseck, Morgan Stanley.

Two questions, one just on the leverage finance, I know we touched on a little bit in the prior conversations. But you mentioned Ken that price has gone up a little bit for it. Can you talk a little bit about the availability of credit, and in particular, if there is any kind of break points between what kind of size deals can get done? I know there has been some chatter recently in the marketplace around some larger deals potentially driving some folks to the sidelines while they're waiting for things to get done.

I think credit is generally available at the price, tempered a little bit by the regulatory environment on absolute multiples. But I think there is money available. I think it's at a different price but it's available. In the size, look, I don't know exactly where the limit is. I think one by one people are kind of stepping out and testing. And we will find out. I think people are testing and you're starting to see the deals start to inch up in size again and they are testing how much is too big a deal. I don't have an answer to that. But I think it's bigger than we saw a year ago.

Okay and then just separately, I think you recently brought in a new Board member, John Allison?

Yes.

Could you speak a little bit to what you're hoping to have in terms of what he is going to add to the Board and the conversations that got him to be part of your Board?

Oh, Betsy, thank you because I love John Allison. I've been a fan of John Allison for many years. And I took a shot at asking him to be our Board member and if you are listening, I was stunned that he agreed.

If you've ever seen, he is -- look he ran BB&T according to some rules and ethics and methods that I always thought was just fabulous. If you remember in the crisis, there was not one mention of BB&T being anything but the most solid bank that there was, there were no rumors about it. John is a world-renowned lecturer on ethics at some of the best business schools in the country. Everybody on this phone call, if you had a chance, YouTube John Allison and watch it. It's fantastic. And I think we live in a world where how you can put yourself over long periods of time is what makes these institutions what they are and I think John Allison is going to add a lot to that.

Vincent Hung, Autonomous.

Firstly, about the recent management shuffle. Do you think you guys lost some business by not being in the [bulk] there as much as you'd like? And have you been spending more time with clients already?

No. I don't see this as a management shuffle, by the way, I'd say, Navid and Jeff founded the Company with me eight years ago. There was really no business decisions I made without talking to them and Rick. By the way, Rick joined us right after that. So it's the four of us.

I just decided the only thing they didn't do or did do was they got the second guess me on all the bad stuff and say it was my decision. So I thought I'd give them titles and make them account for their own decisions. But they've been right there, they are probably over the last five, six, seven years are number one or two most consistent largest steel producers. They were last year, they better be next year.

And what I wanted to do and I think this is important, these are people businesses and I wanted to send a signal to our -- they're 45 and 47, but I really wanted to send a signal to our 35 and 37 years old that I'm not holding on to the steering wheel with the death grip and there's going to be great opportunities here for people. If you step up and you want to step up and make Moelis & Company into something that we're going to find room for you to be a leader here. And I thought the earlier I do that the better and I'm not going anywhere. I'm 57. I've got a lot of time and I want to be out with clients. But this was really a statement internal that we have room for leadership here and no need to go someplace else, you can stay right here and become a leader.

Okay, cool. And just on this mega deals, how much spill-over effect do you expect from those in terms of like spin-offs and sales, because I assume it's something you track?

Yes. I think anytime somebody makes a big move like that, it has residual effects whether spins or even competitors have to react. So there'll be -- it's impossible for me to come up with a number on it, but there'll be a lot of ripple effects from the large transactions that cause everybody throughout the system to at least reassess where they are or step up to buy a division that has to come out. So I do think they bring with them other transactions.

Okay. And just last one for me. We talked about leverage finance on that call, but if it did dry up, how much of a backstop could non-bank financing be or would (inaudible)?

No, I think the non-banking world is getting pretty big. And I think this is a trend by the way for another conversation. I think the trend of leverage financing to the non-banking institution is a long trend that's very positive for us. And the only thing that would happen would be a change in pricing because the non-bank institutions do not use subsidized money so they price a little more market based. And it will probably affect deal prices. But there is substantial firepower in the non-bank market and it's growing and I believe the firms that are in it are ambitious about what they think they can -- where they think that market goes. So it's big, it's large today and I think it will get larger.

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Moelis for any closing remarks.

Thank you. Thanks for spending the time with us. We appreciate the support and if there's anything we didn't answer call myself or Joe directly. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.