Moelis & Co (MC) 2016 Q2 法說會逐字稿

Good day, and welcome to the Moelis & Company second quarter 2016 earnings conference call and webcast. 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 convince over to Mr. Joe Simon. Chief Financial Officer. Please go ahead.

Good afternoon, and thank you for joining us for Moelis & Company's second quarter 2016 financial results conference call. With me today is Ken Moelis, Chairman and CEO.

Before we begin I would like to note that the remarks made on this call may contain certain forward-looking statements, including regarding future performance which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors sections 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 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 to 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.

On today's call I will go through our results, and then Ken will provide his thoughts on the current environment and our outlook. I am pleased to report that we delivered the strongest second quarter revenues to date of $132 million, up 5% from the prior year period. Our performance compares favorably to the overall M&A market in which the global M&A completions rated on volume declined 23% as compared with the prior year quarter. Our first half revenues were $258 million, up 15% from the first half of last year, and were driven by strong M&A activity, and in particular higher average fees earned per completed transaction. Similar to last quarter, we participated in growing restructuring activity. While completions were down for the second quarter the number of mandates on which we are actively advising increased, resulting in a higher level of ongoing retainers. Restructuring activity has been particularly strong in the energy and commodity related sectors, and we are also seeing activity in industries, such as consumer and retail and TMT, among others.

Moving to compensation, our second quarter and first half adjusted comp expense ratio of 58% is in line with our target, and compares with 54.2% in 2015. The increased compensation ratio is attributable to the additional traunch of equity awarded in early 2016, as well as the modified vesting terms associated with that equity. Our noncomp expense ratio decreased from 18.5% to 17.5% for the second quarter of 2016, and from 20.5% to 17.8% for the first half, driven by solid cost control and higher revenues.

Our adjusted presentation assumes that all partnership units have been converted to shares, so that all of the firm's income is taxed as if subject to our corporate effective tax rate of 39.5%, which compares with the prior year's rate of 40%. We ended the quarter with a strong financial position with $176 million of cash and short-term investments, and no doubt. Lastly, our Board approved a $0.02 per share, or 7% increase in our dividend to $0.32 per share, to be paid on September 6th to stockholders of record as of August 22nd. Ken will touch more on this shortly, and I will now turn it over to him.

Thanks Joe. I would like to spend a few minutes on our continued growth, the current environment, and our commitment to return capital. We continue to opportunistically fill in the gaps in our coverage universe to better serve our clients, and to increase market share. Last month we made an MD hire in our Houston office to advise on upstream oil and gas clients. This is the third managing director to join us in Houston in the past 12 months, and we now have premiere coverage of upstream, midstream and oil field service clients.

In addition, we recently added a veteran in US diversified industrials and aerospace and defense, as well as a senior coverage managing director in Frankfurt. As Joe discussed we achieved record revenues in both the second quarter and first half of the year. In the US in particular, we experienced substantial growth of approximately 30% for the first half. While our European revenues were down for the same period, our growth in the US and other regions more than offset those declines.

In the US, M&A activity should continue to be driven by a consistent and predictable low growth environment which CEOs are able to plan for. Interest rates remain low, capital markets are open, and companies are planning accordingly. Our outlook remains positive, our M&A dialogue remains healthy, our restructuring activity is growing, and our internal talent has developed to serve a growing client base. From where we sit today we continue to expect growth in our underlying business. The ability to grow revenues in a slow M&A market environment, illustrates the durability of our model, and ability to gain market share.

But more importantly we have been able to grow without acquisitions or debt, and return a significant amount of cash back to our shareholders. This is the earnings power of our model, combined with an intense focus on shareholder returns. Since going public and including today's dividend we have now returned $4.12 of cash per share, or close to 20% of our IPO price back to our shareholders. We currently have $176 million of cash on our balance sheet with no debt, and we did all of this while increasing our revenues by almost 50%, all through organic growth. We will now welcome any questions.

We will now begin the question and answer session. (Operator Instructions) our first question comes from Ashley Serrao of Credit Suisse. Please go ahead.

Good afternoon.

Hi Ashley.

On restructuring, I believe Joe cited a variety of industries in the prepared remarks, but curious if that means that we are now finally beginning to see some of the troubles that were largely confined to energy spread to other industries, or is this just more episodic activity that you just see from time to time?

I would call it at this point episodic. I think some of it is a little retail oriented. I think the consumer and some part of that sector is seeing more than episodic, but I can't discern a trend across the economy. And in some ways that is the good news. I don't think it has yet hit across the high yield spectrum of all industries. I think that is still to come.

Okay. And then just curious, just what your stance is on Brexit, and what it means for the firm, the environment, and opportunities that may come out of it?

We were, I think we said we were slow in Europe, and I can't attribute that to Brexit. I'm not sure it was. I'm not sure it wasn't. I think people have attributed a lot to Brexit, but I'm not sure exactly what Brexit did or did not do during that time frame. I am actually very bullish. I think the UK is responding quickly. I actually think when you have almost chaotic financial markets, people need to make decisions, and they ask for advice to help make those decisions in financial markets. So I suspect over the long haul I am bullish on the environment, I think it's going to be probably helpful to our business, but I can't say that is true over the very short term.

Okay. Thank you for taking the questions.

And let me just say I do think it is causing some distress in the European banking environment that will help free talent.

Great. Appreciate the color.

And our next question comes from Ken Worthington of JPMorgan. Please go ahead.

Hi, good afternoon. First continue on Ashley's questions about restructuring, can you talk a little bit about higher level where you see Moelis' position in the market versus some of the peers that are also known for restructuring, what your positioning sort of means both for fees, as well as maybe the persistency of those restructuring customer relationships?

Look I will tell you where we do position ourselves a little differently. We think a vast, a substantially more amount of our restructuring transactions are out-of-court. It is sort of a market--, now you are getting down into almost how we market a little bit. We think we are more innovative and market oriented. We use our sector bankers and try to, look we try to solve problems outside of the Court. We think that is the most productive for the companies that we, especially when we are company side by the way.

So if there is one position in that I think we try to do, is if you compare the amount of our transactions that finish in a market-based solution pre-bankruptcy, and the reason we are proud of that, is because bankruptcy is never good for the equity owner or almost never, I shouldn't say never, but almost never an optimal thing. But the majority of our assignments are company side. And so I think that part of it to be able to portray to people that we are going to solve their problems using market-based solutions is usually very attractive. And that is, if that answers your question that is how we like to position ourselves.

Totally does. Is that a higher fee or lower fee part of their structuring market, and feels like it has longer persistency in terms of the customer relationship as well. Is that a good read or bad read?

It should be a better read because the company that you represented continues to control its own equity if you succeed out-of-court many times, and so they are appreciative, and should have a continuing relationship. Where often if you go through full-fledged bankruptcy control will change hands to a different class owners. I think, I am not sure I could say which is more persistent. I think the company that solves its problems without going through a court chapter proceeding is probably a more persistent client. But I'm not sure I have a lot of data to back that up.

All right. MD count. I think last quarter at least some point during the quarter you were around 107 MDs. I believe now I think on the latest presentation it is 101. You have given some color on the additions. Anything useful for us on the attrition side? So obviously like oil and gas has been a big, big focus and you have been building there. I assume the attrition is more idiosyncratic. Any that areas than were less of a focus for you today than they were for you in the recent past?

No. I would say the vast majority of the change in headcount was us managing the business. I think we continue to look at our workforce and actively manage it. And I would hope, that is what we want to do, and on a base of 107, every once in a while, you decide there are changes you want to make. But most of it was us managing our own business.

I figured, but I had to ask. And then lastly, in terms of the deals that Moelis is seeing in the market, there was definitely maybe over the last year a good amount of larger deals, and it feels like we are seeing more moderate-sized transactions in the market. How do we think about the revenue outlook in this environment? So larger deals I assume are always better for fees, but it is not proportionate. How should we think about deal size in Moelis going forward?

I think the first half sort of is indicative. There is a lot of, indicative of the deal size and what we are, and things we are seeing. There are a lot of conversations. I think that is the point, these splashy large transactions are definitely down. But I can say the amount of conversations, and the amount of work, and the level of which companies want to talk to us about issues, and it is not always M&A, there are a lot of things that go on, as I said, if you are in Europe and the UK right now, look there are decisions you have to make, and so there are opportunities around all of these things. So look, I don't think the fee pool should be down as much as the volume pool. And that is, look, that is the way we feel right now, is that we are working on substantial work for substantial clients, but not all of it leads to company A merging with company B.

Great. Thank you very much for taking my questions.

Our next question comes from Devin Ryan of JMP. Please go ahead.

Thanks. Good afternoon, Ken and Joe. A couple of questions. First coming back to the comments on restructuring, so you are still growing mandates which is good to hear. Just curious on the energy side obviously your prices have bounced from the lows and maybe we are pulling back here a little bit. Are you seeing any tapering in new activity, just with that and maybe with the capital markets opening up a little bit? And really just trying to think about the outlook for kind of new energy-related restructuring activity, to the extent we don't have another big reversal in oil prices?

It is an interesting question to ask us. Remember, I think for the first year that we had this conference call people would ask where we had to add talent and I would say in energy, so our ramp-up in energy might not be indicative of the market, because we have gone from a pretty low amount of assignments. So we are feeling like we are advancing our energy assignments pretty rapidly. You said oil has rebounded, it didn't feel that way in the last 10 days, and I suspect that it will be episodic but there will be a continued restructuring flow unless we have a major rebound in price. The price that it is at today will continue to lead to it. Again, on us specifically, we saw a pretty big increase over the last 12 months, but that is because we added talent and expertise. Again, the addition of talent in the relationship and the sector, plus the restructuring, and our model, which causes people to work together, it has been extraordinarily effective.

Got it. Okay. Great color. You mentioned in the prepared remarks that you are seeing a higher average fee, or maybe that contributed at least in the quarter. Just trying to get a sense of, is that just the nature of some larger deals closing, or is something else going on? Just trying to get a sense of whether that is maybe a trend that we should look into, or if it is just kind of a quarter anomaly?

I missed the beginning of the question.

The question was about the comment of there being a higher average fee in the quarter, and just whether that is a new trend that we should be looking for?

No. I think it is a continuation of I think we are doing a very good job of being disciplined on the work we take on. It is probably more a result of us being fairly busy, and a decision a while back to almost cut the bottom half of the fee schedule off, so that we can continue to devote more and more time to our larger clients.

Okay. Last one here maybe for Joe, I think last quarter you had mentioned non-comp expenses for the year thinking about maybe $100 million level. Obviously dipped below that. Is $100 million still a good annualized level, or have there been maybe some reductions on the go-forward expense rate just given the backdrop?

Yes, I think, our average headcount is up about 10% to 15% year-over-year. I think we have been pretty disciplined with respect to the first half certainly, and we expect to continue that. But I would suggest that the underlying run rate is probably in the $24 million to $25 million per quarter area, which is kind of an annualized rate that you are suggesting.

Got it, okay. All right, thank you for taking my questions.

Thanks.

And our next question comes from Conor Fitzgerald of Goldman Sachs. Please go ahead.

Good afternoon, thanks for taking my questions. So I heard your comments on being relatively optimistic about the outlook for the back half of the year. Just on that I would be curious how much you are expecting US elections to impact M&A in the back half and how much political uncertainty is coming up in your topic, as a conversation topic?

I don't expect the elections to have much input. I said there is a funny bumper sticker I saw which said the good news is we can only elect one of them. So I think all of the possibilities are out there, and so there are only two outcomes, and I think the market is kind of ready for either one.

That's helpful, thanks. Funding costs for corporates obviously keep coming down in Europe. Just wondering how much you think that is going to be a tailwind for activity in Europe specifically, and how eager you think corporates are to maybe use some of the cheap funding for acquisitions?

Look, I am bullish in Europe and the UK over the future. I actually wasn't surprised, but I think the UK has moved to solve a lot of the problems pretty quickly, both politically, they are solving some of the issues that were deemed to be unsolvable prior to the vote. I think that we will see a lot of activity there. In the short-term, there is a hangover, I think from the vote. It was an interesting, I think it is more psychological. Almost like what it must have been like to be in the Warriors locker room, sort of thought they were ahead 3-1 on the vote, and somehow lost. I think there is almost a psychological how-did-that-happen moment. But I think people will rebound from that, and I think it will, I am bullish on activity, but it might not be the next six months.

Got it. That's helpful. And then last one for me just trying to square kind of your outlook for being relatively optimistic about restructuring revenue and M&A. Historically it has been pretty tough to have both work at the same time. Wondering if you think we can thread the needle this go around?

I feel like it is moving in that direction. I feel no diminution in level of activity from sort of a fee standpoint. We haven't really incurred it. I know there are volume changes and the restructuring revenues are ramping up, and it is all because of a very poor economic environment. If somebody said how confident are CEOs, I said they are confident that the economy will be lousy, and they may need to do things about it, but they are confident that they understand there will be a no growth economy. That is not good for leveraged companies, but it does allow corporations to plan around a very predictable and unchanging low growth economy.

Thanks for taking my question, thanks.

Our next question comes from Jim Mitchell of Buckingham Research. Please go ahead.

Thanks, good afternoon. Maybe we could just talk a little bit about the MD headcount reduction a little bit. Is that a retrenchment and we should still expect some growth sort of freeing up some ability to kind of, whether it is upgrade or reposition potentially in Europe, as you see MD hit, or as the banks over there struggle do you see opportunity there, given your positive view of Europe? Just give us some more color I guess would be helpful.

We said we manage our headcount very actively. That was us managing the business, the reduction in headcount. There was a coach who came to speak to us a while back, and he used the word, addition by subtraction. And the answer is, we are making sure that our employee base is prepped and ready for growth. We will continue to grow. We will continue to hire. But the best way to do that effectively is to manage your headcount effectively as well in the other direction, and I think we have done a good job of that.

That makes sense. Is the focus would it be is it Europe given you view and given the struggling of the banks over there, and the opportunity set or still very broad-based?

In terms of hiring plan or?

Yes, the hiring plan, yes.

Look, Europe definitely as I said I'm bullish on Europe, and I think we would hire Europe and we will hire Europe. We still have a lot of white space in the United States, and as I said, revenues are up 30% there. The answer is yes on Europe, yes on the UK, but also yes on the US. I think there is a lot we have to fill in there.

Okay, great. Maybe just one for Joe on the share count. I think diluted shares were up 1.1 million quarter-over-quarter. I think that you were indicating on a quarterly basis closer to 600,000. Is it just lumpy in terms of the impact? Still kind of 600,000 per quarter for the year, or is this a little bit of a higher trajectory?

First of all, the Treasury method defines the path, and it is a function of one, the invested shares as well as the price of the average price, as that varied you are going to see some volatility. I would estimate that if share price stayed flat, that we would probably be closer to 700,000 to 800,000 per quarter, and the sensitivity to kind of the dollar would be a couple hundred thousand shares either way.

That is helpful, thanks.

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

Thank you for your time this afternoon. We look forward to speaking with you all soon.

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