Moelis & Co (MC) 2017 Q1 法說會逐字稿

Good day, and welcome to Moelis & Company's First Quarter Earnings Conference Call. (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. Good afternoon, everyone. Thanks for joining us for Moelis & Company's First Quarter 2017 Financial Results Conference Call. On the phone 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, including regarding future performance, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted 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 to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com. I'll now turn the call over to Joe.

Thanks, Michele. Good afternoon, everyone. On today's call, I'll go through our results and then Ken will speak about the market and our future outlook. I'm pleased to report that we achieved another record quarter of $173 million of revenues in the first quarter on the back of a record quarter 4 2016. Our quarter 1 revenue performance, which was up 37%, compares favorably to the overall M&A market in which the number of global M&A completions greater than $100 million declined 11% year-over-year. All areas contributed to our year-over-year revenue growth.

First in restructuring, you may recall that this time last year, we commented on the higher number in volume of restructuring mandates. Many of those mandates came to completion at the end of last year and this quarter. In capital markets, we experienced an increase in the number of deal completions in average fees. And in M&A, we continue to be active across the board, particularly in sell side, where we've seen a recent pickup in middle market and sponsor-related transactions. Overall, we advised a greater number of clients, and we completed a larger number of transactions over the prior year period.

Moving to expenses. Our adjusted comp expense ratio of 58% for the quarter is in line with our target as well as with prior periods. Our noncomp ratio decreased from 18% to 16% for the first quarter of 2017 driven by higher revenues. We reported $28.5 million of noncomp expenses. The increase in absolute dollars was primarily attributable to transaction-related charges as well as incremental business development activities. On an ongoing basis, we now believe the underlying run rate to be $26 million to $27 million per quarter, primarily the result of anticipated increases in recruiting and ongoing business development related activities.

Our corporate effective tax rate declined to 29.2% from 39.5%. This includes the impact of a tax benefit related to the new accounting, which reflected the increase in the value of employee equity delivered in February. The contribution to EPS this quarter was approximately $0.07. Excluding this discrete benefit, our effective tax rate would have been 38.8%. As a reminder, our adjusted presentation assumes that all partnership units have been converted to shares so that all the firm's income is taxed as if it were subject to the corporate effective rate. Our fully diluted share count was 62.3 million shares at quarter end. The increase in fully diluted share count is driven by the treasury stock method calculation. A significant factor in this calculation is the change in average share price. The average share price increased substantially in quarter 1 over the average observed in quarter 4 2016. This served as an accelerant of share dilution. So we now believe that instead of shares growing by 1 million per quarter, that will instead be approximately 300,000 per quarter, assuming a consistent average share price.

Lastly, on April 21, our board declared a quarterly dividend of $0.37 per share consistent with last quarter to be paid on May 24 to stockholders of record as of May 10. We ended the quarter with a strong financial position with $184 million of cash and short term investments and no debt. And I'll now turn the call over to Ken.

Thanks, Joe. We built off our significant momentum in 2016 to start 2017 on a high note, achieving record revenues this quarter. I'd like to point out 2 relevant trends that we saw in the quarter. Last year, I said we might experience an increase in middle market activity, particularly with the sale of private businesses. In fact, the number of global market completions was up 13% year-over-year for transactions, sized between $500 million and $2 billion, and the number of announcements was up 25%, and we are benefiting from this activity. We believe our expertise and focus on this part of the market differentiates us from other advisors and represents a significant growth opportunity going forward.

We continue to see increased synergies across our products and regions as the early investments we made in the global network continue to pay off. In fact, for the quarter, we saw growth across all major regions and products. We advised a greater number of total clients and completed more transactions in all areas: M&A, recapitalization and restructuring, capital markets advisory and private funds advisory. We continue to win important large global mandates as a result of our culture of collaboration. We expect to continue to grow the business organically and with a high focus on ROIC, which leads me to review an excellent recent example and that's our experience in Australia.

After reviewing the unique characteristics of the Australian market, we decided to form a joint venture with the best local talent in 2010, and we made a modest investment of approximately $4.5 million, which the team matched. The business opened on the Australian Stock Exchange earlier this month at a valuation of almost USD 300 million, and we continue to own 40% of the unconsolidated JV. This translates approximately $2.40 per share on the 50 million shares we hold, $2.40 on Moelis & Company stock on the 50 million shares we own.

In addition, as part of the IPO, we received a dividend of $11.7 million. Moelis Australia will continue to be an important part of our global network, and we believe the IPO will help accelerate its continued growth.

With a prudent focus on profitable organic growth, we have built a network of 110 managing directors, many of whom we promoted internally, and they're working together to better deliver advice to our clients. We announced recently a veteran software and technology hire who will join this summer, and our recruiting pipeline is strong. As a result of our unique model, a seamless and collaborative global network with relentless focus on profitable growth, I feel exceptionally optimistic about our prospects and ability to deliver for our shareholders in both the near and longer term. And with that, I welcome any questions.

(Operator Instructions) And our first question comes from Conor Fitzgerald with Goldman Sachs.

First one, just on restructuring. The strong quarter for completions, how is the pipeline for that tracking kind of from here? And any color you could provide on what sub sectors you saw the most activity would be helpful.

So again, I think restructuring has basically been a flat business for about the last 12 months. I think it's about flat going forward. This quarter was an exceptionally good one for closings, but I think it's a pretty much a -- it's a good business but it's a flat grower right now, and that's the way I feel it will stay for a while.

That's helpful. And then just maybe just 1 on tax reform. As you're talking to clients about the potential of pursuing M&A and then think about how tax reform can fit into those plans, give us a sense from them if there's a strong preference between tax cuts versus tax reform. Do you think one kind of makes M&A, the outlook for M&A, easier for kind of potential buyers to think about?

I don't know the answer to that. Tax reform, if it was large, might just trigger M&A because it would -- reform would mean tremendous changes in the way your capital structure, your go-to-market would have to be, not just the lower rate. People would have to respond to it possibly. But I don't have a strong belief or knowledge that either one would be a significant difference.

Our next question comes from Ken Worthington with JPMorgan.

Maybe along the same lines. Obviously, a lot of political uncertainty globally at the moment and in various layers. But given the strong equity markets, and I would say constructive credit markets, where are politics helping your business? And where are politics sort of (inaudible) hurting your various advisory businesses? And as you put the various pieces together into the big picture, how does politics kind of drive the outlook today, maybe compared to when you last spoke to us at the end of the last quarter?

Well, that's a tough one, and I'm limited to 1 hour on this phone call. So I'd say, look, in the U.S., remains extremely strong. And maybe what you're saying, I think politics might have slowed up the megadeals recently as -- I think the French election was -- as the market's response to it sort of shows we've got the response that I think was the most likely. And it was still a pretty positive response to a likely outcome, which shows possibly how much concern was in that election. But the U.S. remains a very strong market in all ways. And I think that's where you're seeing a lot of this middle market, what I call the $500 million, almost a $5 billion market, where people I think are buying cash flow, buying companies just based on the cash flow, low interest rates, low volatility and ability to make that transaction work in that environment. I'd say the place where politics might've hurt us the most in the quarter is the funds flow issues out of China right now. We had a very specific instance where a deal did not get done because of that. And I do think, if anything, we had, I think, 2016 we had 12 transactions from China into the U.S. That's an issue right now, is the flow of money. Europe, I feel pretty optimistic about Europe. I think it's coming back, and I do think that, that election was a bigger problem in a lot of people's mind than they were talking about.

Okay, great. Very helpful. And then just for the near term, as we think about the advisory business, obviously 1Q very strong here, to what extent would you say there was a reasonably big pull forward of activity out in 2Q and 3Q into 1Q? Or is your pipeline kind of good enough to really have replenished itself?

Look, I didn't see anything unusual in quarter 1. So there's nothing I could tell you that was pulled forward or backwards. It was a normal quarter. There was nothing unusual to it. Quarters are tough to evaluate our business. As I said, they -- I don't want you to evaluate our business on a quarterly basis, but there was nothing unusual about it. We've been saying if you're really bored one day and you went back to listen to our calls in retrospect, we've been saying we've been producing better and stronger client relationships, that's what we can control. And our system, the network we put together, has really kicked in another gear. We saw that a while back but you don't know when it's going to start to show. So the answer to your question is, no, there was nothing that we could find unusual except that it was a pretty good quarter.

Our next question comes from Devin Ryan with JMP Securities.

Just a couple kind of follow-ups here. So maybe just first on restructuring. Just love to get a sense of the flurry of energy activity from kind of late 2015 to early 2016, how much of that has already run its course? I know you had a good quarter of closings this quarter but I'm just curious kind of how much of that is maybe still left to close? And then when you think about some of the other opportunities, how big do you think retail can really be? It seems like we're only seeing that accelerate in the market. And then I think last quarter you also mentioned the TMT as well, so I just wanted to drill into those sectors, specifically.

Are you talking about solely -- in the restructuring market?

Correct.

So I think it had a natural moment there. I forgot exactly when it was, about 2 years ago now maybe a little more, when energy had its first downtick from 80s to high 40s. And that set a wave of restructurings in motion whose capitalization just could not absorb that. And I think we've seen a lot of that start to close. I've noticed just in the general market, ours and our competitors, in the fourth quarter and the first quarter. That doesn't mean it's over. That just means that first shock of companies that were capitalized in an $80 market who had to immediately go into a restructuring recap in a $50 or $40 market. So that's what I think you saw coming through the pipeline in the fourth and the first around -- all over Wall Street. But there's still a steady stream of companies that are exposed to energy capitalizations at $40 and $50 royals, still not going to be productive for those capitalizations. But it's not the same as that one cliff moment we saw when energy really went from 80 to 40 and 50 and triggered a wave. So the answer is I feel good about it but as I said I think it's going to be a pretty flat grower from here on out. Retail is just not as big. Retail is going to be an interesting market. It's just not as big as energy in the leveraged finance market. So it'll -- there will be some activity in retail, but I don't think it can replace energy.

Got it. Terrific, good color. And then maybe just a follow up just on the backlog question previously. Just trying to think about kind of new mandates and M&A, specifically, and whether we're accelerating, decelerating, kind of taking a pause. I mean the first quarter obviously a great quarter of deal closings. And you're probably stronger than normal, and so it does look like, from the outside, the backlogs come in a little bit, but just trying to get a sense of maybe that's just normal timing as you close a number of deals and then you have to replenish it. And so it's just the optics from the outside that we're looking at. And so that's kind of the genesis of my question, just trying to get a sense of does it feel like activities on the M&A side accelerating or kind of -- what's the pace right now?

Well, I'd say first of all, in the first quarter, all regions and all products were up. That was -- it was a broad-based acceleration. So I really do attribute it to the quality of the global network that we invested in a long time ago, put a lot of people on the ground. It's organic, so people know each other. It's noncommission based, so people work with each other. And we've seen the whole system jell into a way that is client-friendly and people want it. And that's what's happening. M&A continues to pick up. We've been saying it for a while and what we're seeing is a good increase in quality and quantity of discussions we're having and assignments we're in. Now I don't want to overstate that. I don't want people to get off this call and annualize that percentage increase in the first quarter. But the firm is doing very well.

Got it. Okay, terrific. And then just last one here. The comment on your financial sponsor activity picking up, I'm seeing that from some other companies that I cover and statistics in the market. So I'm just curious what you're seeing that's changed there, and what you think is driving better engagement from that group.

I'd say a couple of things. One is there's been a large reallocation in the alternative space of capital back into private equity or more toward private equity, as especially the allocations have come out of hedge funds. There's also a thing that happened back in '08, where the denominator, some people have an allocation of x percent to alternatives. And when the stock market goes up, that just creates a new basket to put money into alternatives. The denominator goes up, so the numerator can go up. That was the problem. In fact, it worked in the reverse in the '08, '09 crisis, as people had to stop funding private equity. So there's capital going in, prices are excellent, prices create sellers. People can sell their assets, private owners are finding this to be a wonderful time to capitalize on an asset they've grown for a long period of time. And the buyers are still finding low interest rates, very low volatility, and are really buying cash flow in a world where it's hard to find yield. What used to be considered high multiples are really not that high considering your alternative investment. So that's what's driving, and I believe their financial transactions and their being driven on the ability to create return on them.

Our next question comes from Michael Needham with Bank of America Merrill Lynch.

So first question on the Moelis Australia IPO. It looks like you had a good deal of success with that business. It looks like the IPO did well. Are there other markets where you think you may be able to, I don't know, like replicate but do something similar with the joint venture? That's the first question.

No. That was very unique, and it was because Australia is a unique market. I love my partners down in Australia, but Australia is a unique geography. People get it wrong a lot. We went in there and realized that the best way to motivate an Australia partnership was to be in partnership. We have great, great partners down there. They are -- they've been fantastic. We think they create a lot more value. But it really is the only place where we decided that the characteristics of that market are such that it works better in joint venture. I could give you, offline, a whole psychoanalysis of the Australian mentality but I'll save that for a private conversation. But they are entrepreneurial, and there's nowhere else that I think we can replicate that, that's unique.

Okay, fair enough. And from those comments it sounds like this is going to be -- continue to be a long term investment for you guys.

Yes. We continue to have the exact same relationship on advisory, and we're very close. And we think this has freed them up to grow. They do some other things, by the way, like asset management. That's one of the reasons they're a joint venture. And we think they have a very unique asset management opportunity down there, and are very -- encouraging them to grow that, and we think they will.

Okay. And then just last on the hiring pipeline. If I were to look back and pick a couple of sectors where I think you've been positioned to capture a good amount of deal activity -- I think of like TMT industrials [ as 2 -- ] are there specific areas where you're focusing for hiring this year? Or is it more just finding the right people?

It's really finding the right people. I mean I could give you a couple of areas. We were interested in expanding on a little more quickly but we think that the network we put in place has become extremely effective. Clients want collaborative coverage. They really do like the fact that when we cover them, we can have 5 MDs in the room, 1 might be giving you some input on Brazil, 1 might be giving you some input on China, and a regional specialist, a sector specialist. And I think we're very confident now that, that network is valuable. It's very, very hard for anybody to replicate. And so we want to build it. So the answer is, it's really about the talent and the people that want to be part of a network and a culture of collaboration versus kind of independent commission salesmen.

Our next question comes from Brennan Hawken with UBS.

Just 1 at this point, can you walk through the impact of the IPO, the Australian JV on 2Q? I think you mentioned a nearly $12 million [ DV ], so is that going to flow through? And what other dynamic should we think about when we think about modeling the impact of this on a go-forward basis?

Yes. So I think you got it right. The pre-IPO dividend of $11.7 million will be treated as a return of capital, so it won't go to the income statement. The accounting related to the effective dilution from 50% holding to 40% under GAAP is -- basically will report a gain. And I think that's approximately $15 million, and it's probably going to, after tax, be $0.15 for the quarter. But I think the 2 key takeaways are what Ken suggested, that the alliance continues with or without the investment. Of course, we're really positive about the investment. And the second is the fact that as Ken remarked, that the value, the $120 million of fair value, you won't find on our balance sheet because GAAP is a historical accounting model.

Sure. Yes. No, I completely got that message, I just wanted to ask a blocking and tackling question. That's it. So restructuring, just wanted to follow up on that. I think, Ken, you're pretty clear in saying that the market's been fairly flat for a while. But I think what you also said is that some deals, some closings, sort of fell into the quarter. And it caused the 1Q results to basically be a little bit better than maybe might otherwise be expected in a flattish restructuring market. Is that fair? Or did I hear that incorrectly?

No. Look, I think those, they could've -- they didn't surprise us. These were coming. If anything, we were hoping some of them got done last year, they just didn't. We had a good fourth quarter, though, too. We had a big fourth quarter. These are deals that were in backlog that were going to close sometime. That's why we ask you not to look at this as quarterly. But there was nothing unusual about them closing. There will be transactions, they close some quarters and others that don't close. And so I -- that's why the quarter is tough to look at, but I don't -- again, it was not something that surprised us. When we looked at our numbers and we try to figure out what's going to happen, we kind of -- these were all things we thought were going to happen and did happen.

Sure, no doubt. And the business is lumpy quarter-to-quarter, which is just the whole reason for the clarifying comments, that's all.

Yes. Look, the fact is the boom in energy restructuring was playing through a lot of numbers now for 12 months. I mean, it just was a matter of -- and it's still going to go on. We're not done with an energy restructuring market. So I think this is a natural way to restructuring in our firm work, there was a large M&A transaction that didn't happen in the quarter, so maybe there was a restructuring that did happen. I'm just saying that's the way the numbers have -- work. And again, I didn't think it was an unnatural quarter. I didn't see anything happen that we thought was going to happen in the second quarter, happen in the first.

Our next question comes from Jim Mitchell with Buckingham Research.

Maybe just another question on the outlook, just you guys seem to have great momentum. I think some of your peers have been more mixed around the commentary given uncertainty around policy. Do you see more -- have you sensed any of that, some hesitation on the part of some of your clients given the uncertainty around tax reform, for example? And if so, would you expect, if we do get more clarity that, that could be an accelerant for activity levels? Maybe who knows, in the back half of the year, do you sense that people are hesitating a little on that and that could help across the border, or larger deals, or how do you think about that?

It's hard for me to say. You're asking me about the deal that didn't happen. What's the reason for the deal that didn't happen? Well, I don't even know which deal didn't happen, so I don't know the reason. So I don't know that. I would think as things get more certain -- I thought the megadeals might have been toned down a little bit by some global risk that people were waiting to pass, but we see -- we don't see it. Look, we're in a -- we're a small percentage of the overall market and what we're seeing is, again, I think we're seeing our own system that we put in place and spent a lot of time and effort and it's only been 10 years. And so we're seeing our system mature into a really good network of method of covering people. And I think that's overrunning the global uncertainties you're talking about. We're just seeing our own network get more efficient and become more and more powerful as we put more and better MDs on it. So I -- again, I don't -- that might be happening, I just can't prove it. I can't prove that there's a transaction that didn't happen because of some tax deal.

Right. Just more -- a bit more market share for you guys. Maybe just where are we in MD headcount? And you talked about a pretty robust pipeline, is there kind of a -- can you size that opportunity set where you think you might end up by the end of the year? Is there any kind of soft targets on that front?

Yes. We are 110 as of today, and look, we'd like to grow it if we can get the right people, and we are looking at several people. But I don't want to commit to where it will be. And the good news is our internal pipe of promotions is stronger and stronger. Remember, we're just now getting into people that we really recruited out of business school 8 to 10 years ago, trained and acculturated. So we're getting much more confident in our own internal pipeline as well. So I do expect you'll see that go up either organically or with some hires, but I don't have a firm target on that.

Our next question comes from Jeffery Harte with Sandler O'Neill.

When we look at a stronger restructuring quarter and just kind of historically look at restructuring, can you give us kind of an idea of how big that business is for you relative to kind of your other revenue-generating businesses, maybe how outsized or in line the first quarter was?

We've always said on about a 12-month basis that we think it's about 20-ish plus or minus.

Maybe 25.

20 to 25, we've said, and that's been about right. I think our M&A business has been becoming a larger and larger -- our M&A business is -- probably had more growth, so if I had to guess it'd be at the lower end of that range of our business. And that's kind of where we -- it's because our M&A business is growing so strongly that I think the flatness of the restructuring has made it go to the bottom end of that range rather than the top end.

Is bottom of that range, I mean are you thinking over a 12-year -- 12-month period or?

Over 12-month, over a year. Over a 12-month period, it's in the bottom. I think -- Look, I'm giving you an estimate.

Yes, we don't look at it...

We don't look at it that way. We move people around and people are working, we have some very large restructurings out there right now where our sector team is leading the conversation because they're more exchange offer oriented than bankruptcy oriented, and that's the way we do it. But I would just say, we have been saying, it's about 20% to 25% we'd characterize as restructuring and recapitalization. And I think it's going because of the flatness in restructuring and the growth in M&A, we are seeing it on a 12-month basis but it will be at the bottom of the range of percentages.

Okay. And you mentioned MDs and hiring. Can you comment a little bit on the overall environment you're seeing out there? I mean M&A's kind of a business that's back in vogue, where it wasn't a few years ago. I mean, 2 hires, you guys had 2 hires in the year. I know it's still very early in the year but are you -- is your level of dialogue with prospective hires, kind of, as robust as it's been, say, the last couple of years?

Probably better, but yes, we think we have a strong pipeline. But again, those are -- you don't know until you know. Hiring quality people is always a -- you're never done till you're done. So I don't want to overdo it but our pipeline of people and conversations is as strong as it's ever been in the last 2 or 3 years.

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

Alright. I appreciate everybody calling in. Thank you for this time. And again, call me if you need to discuss the Australian psychology overview. Thanks. We look forward to talking to you soon.

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