Moelis & Co (MC) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the Moelis & Company Second Quarter 2018 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, and thank you for joining us for Moelis & Company's Second Quarter 2018 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 our results across several periods and to better understand our operating results.

The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com.

I'll now turn the call over to Joe.

Thanks, Michele, and good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will discuss our business further.

I'm pleased to report another record quarter in which we achieved $220 million of revenues. This represents a 28% increase over the prior year quarter and our highest quarter of revenues on record. Our performance compares favorably to the overall M&A market in which the number of global M&A completions greater than $100 million was down 12% from the prior year quarter.

For the first half, our revenues were $440 million, up 27% from the first half last year. Our revenue growth was primarily attributable to continued strong M&A activity and consistently strong restructuring activity. The level of our M&A activity this quarter was the highest it has ever been, and it accounted for more than half of our growth for the quarter.

We advised a greater number of clients on both public and private transactions and completed more transactions than in the prior year period.

Restructuring activity also continues to be a stable contributor, which is particularly noteworthy in light of the low default environment and as affirmed by our market-leading position on both completed and announced volumes globally in the first half.

In addition, we are seeing continued diversification in our revenues as our capital markets, private funds advisory and financial institutions advisory businesses experienced meaningful growth during the quarter.

Overall, we advised a greater number of clients in the second quarter, including a greater number of clients who paid fees over $1 million, and we completed a larger number of transactions as compared with the prior year period.

As you evaluate our second quarter and year-to-date results, I want to point out that our second quarter revenues benefited from deal timing and the new revenue recognition accounting rules that went into effect in January. Prior to January 1, revenue was generally recognized on the closing date of the transaction. However, based on the new guidance, fees are to be earned when the transaction meets all material conditions for completion even if they close in the subsequent quarter.

While we encourage you not to evaluate our business based on the results of any one quarter, we thought it was important to note this change, which resulted in the recognition of approximately $37 million in revenues on deals that met all material conditions for completion in June but closed in the first 2 business days of July.

Moving to expenses. Adjusted compensation expense continues to be accrued at 57.5%. Our noncomp ratio was 16.6% in the second quarter, and we reported $36.7 million of noncomp expenses. The year-over-year dollar increase was largely attributable to headcount increases and to the new accounting under which client reimbursements are no longer an offset to noncomp expense.

Our corporate effective tax rate was 12.8% for the second quarter and 8% for the first half. The reduced rate is a function of the new corporate tax rate plus the impact of excess tax benefits related to recent equity vests. This tax benefit contributed $0.11 to EPS in the second quarter. Given the timing of our vesting events, we do not anticipate similar tax benefits in the second half of the year. Excluding the impact of this discrete benefit, our corporate effective rate was 25.2% for the second quarter and first half. As a reminder, our adjusted net income presentation reflects all of the firm's income tax that are calculated effective corporate tax rate.

Consistent with our commitment to return our excess capital to shareholders, the board declared a special dividend of $1.50 per share, our sixth special dividend to date. This is in addition to the regular quarterly dividend of $0.47 per share. The $1.97 will be paid on September 12 to stockholders of record as of August 2. We ended the quarter with a strong financial position with no debt and $191 million of cash and liquid investments.

And I'll now turn the call over to Ken.

Thanks, Joe, and hello, everyone. As Joe discussed, we achieved another quarter of record revenues with strength across our diverse advisory businesses. At Moelis & Company, we developed the world's leading bankers and integrated them into a cohesive global network, delivering exceptional client service around the world. These bankers, many of whom were homegrown, have the unique ability to communicate and collaborate globally, and the results of this is evident in our strong results. Our activity levels are high, client conversations remain strong, and we feel good about our business, our positioning and our prospects for future growth.

We ended the quarter with 125 Managing Directors, this includes 5 promotes and 4 new hires year-to-date, one of which was announced since our last earnings call. Our hiring pipeline remains robust as we continue to look at talent across regions and sectors to enhance our global network.

As many of you know, Rick Leaman has repositioned his role at the firm and recently stepped down from our Board of Directors. Going forward, this board seat will be filled by our Chief Operating Officer, Elizabeth Crain. Elizabeth is a founding partner of our firm. She has over 25 years of experience in the financial service industry as a banker, principal and senior executive. We have worked closely together for over 18 years now, and she has been instrumental in the success of our firm. I believe she'll be an asset to our Board of Directors, and I look forward to working with her on this role.

With that, let me open it up for questions.

(Operator Instructions) And our first question today comes from Michael Needham with Bank of America Merrill Lynch.

So the first question I have is that $37 million of revenue recognized in 2Q for transactions closed in 3Q, I get the accounting change. Wondering, were those M&A transactions? Or did it come from other parts of the business?

I think predominantly, M&A transactions. Or advisory, it's a handful of transactions, I don't know if it's 100%, but it's predominantly M&A.

That's right.

Okay. And on the pipeline for new hires, just wondering if you could drill down on that. I think in the past, return on investment has been a key part of the hiring decision for you guys. And from what I've heard, the market is getting a little bit more competitive. Wondering, does that change that return calc at all? Has that evolved your thinking or not? Is it just that the platform is attractive and you still have a lot of white space?

Kind of all the above. Look, I think we still have the same high bar. So we're not changing our parameters for risk. I call it -- there's a risk-return to that, and we're very careful on that. And I even feel like maybe we're being more stringent on it. And the reason is I think we've become more confident over time that our internal training and promotion system is working and creating our own set of very young, spectacular leading bankers. And we do have a lot of white space, we do have a lot of areas we'd like to fill in. But I think we've all seen and we've become pretty confident that if we don't go outside, we can create those within. It might take a little longer, but the return on that investment is what we measure against going out and looking at a cross-hire. And I don't think we are -- on the margin, we may be -- it may get a little more difficult, but we're still seeing a great amount of quality people, and we're pretty stuck on our own parameters.

Next question today comes from Devin Ryan with JMP Securities.

I guess first question here on Europe. Last quarter, I think you mentioned that the announcement there were trending up more than double year-over-year. And so just love to get an update around kind of the tone, in Europe specifically, if that momentum is continuing. And then just more broadly across the globe, what you guys are hearing around trade tensions and if there's any concern there.

Europe continues to be -- I think it's down year-over-year slightly. But by the way, not just us. I think the numbers of announced transactions and closed transactions is down pretty significantly year-over-year in Europe. But we continue to be a very optimistic about the talent base that we're hiring there. Again, I always feel like just the way we created the firm, Europe is 3 or 4 years behind the U.S. in terms of development and reputationally just got started later. And I think given that we want to train people and have them come up through the system, it's just behind us a little bit in the development of the workforce. They are very optimistic about it. On the trade, we'd not seen -- I've not seen a big effect on it yet. The trade "wars," trade battles going on. I think regulatory has become somewhat of a minefield out there. There's a few things in regulatory that are surprising people. I think trade has not really affected anything we've seen yet in deals. But I could see it, if things continue to escalate, I think you could see it start to impinge on the deal environment.

Got it, okay. And then just the commentary on restructuring continuing to be pretty healthier. Can you just maybe give us a little more flavor for what's driving that level of activity? Is it just Moelis kind of outpunching competitors? Or are there some underlying themes that has been driving some of the recent activity?

We try not to punch our competitors. Sometimes we have to, but we try not to. But the -- I think it's pretty steady. I mean, it's a difficult market for restructuring groups. It's -- I call restructuring kind of a flat number, which is I think good for our team. It's difficult, the default rates are low, so I do think they're doing a good job. A lot of that still continues to be energy, and some of them more commodity-oriented parts of the cycle, which continue to drive restructuring, power and energy. But again, I think the team is doing a good job in a market that's not growing. And we're very -- look, we're very careful. We want to keep the team and motivate the team, as I said, it's hard to predict when, but there will be an upsurge in the default rate. I just don't know what month, much less what year.

Got it, okay. Great. And just last one for me. So we're seeing some more of the peers in the space set up these kind of increased financing capabilities, whether it be just advising on various financing options just given the plethora of choices out there, but maybe even more so now setting up kind of facilities or partnerships to provide capital commitments directly. So just love some thoughts, I know you guys are quite involved with all the sponsor community, on whether that's something to kind of push further into or just any thoughts on that as a business.

Well, we have a healthy business in advising on capital raising, IPO advice, some of the largest transactions in the world and other things, and we do advise. We have no plans, and we're going to -- we have no plans to provide facilities and go into the direct distributions, even if it were to be done with somebody else's balance sheet. I have a real healthy fear that, that gets to be competitive. And sooner or later, you get drawn into putting out a little more risk than you ever thought you would. It happens very incrementally. We love our low capital use business. As you can see by our special dividend, we want to give all the capital back, so we don't have to -- we don't end up in those businesses. And so the short answer is no, we have no plans to do that.

Next question comes from Ken Worthington with JPMorgan.

First, Ken, when you're thinking about growth and growing the business, Moelis has gone through periods of specific growth initiatives. And I remember when you called out the (inaudible) energy and the Mexico alliance and the Japanese alliance. I mean as you think about where we are in the economic and the market cycle, is now sort of the time to increase the pace of investment, maybe pull back the pace of investment or maintain it? And as you think about the next year or 2, like 12 to 24 months, are there areas that you can call out where you think you get the best returns? I don't know if you can call it out, but you have mentioned certain areas in the past, so...

Ken, it's a good question. M&A and advisory services are pretty strong across the board. I'm asked all the time, and I feel like I'm too dumb to figure out which is the sector because I think it's happening almost across all sectors. I can't really think of a sector I wouldn't want to have more talent in. So I think right now, I call it a very broad horizontal growth, meaning we could add a person or 2 in almost every sector, I think, I can't think of one I wouldn't if the right talent came along. So that's just sort of a broad growth. And number two, if there was anything where I think of investment spending at Moelis & Company to improve the company, I would almost think it's internal talent development and spending more. We have programs now where we really spend a lot on our internal training. We take all our promotes down to Wharton for executive education now for 4 days. We fly -- I think we flew in close to 50 or 60 people from around the globe just a month ago to spend time together. And I do think that spending that kind of money, what I'm seeing happening with our young Managing Directors and how well a good, integrated culture and network and how effective it makes them with the clients, I do think about actually investing more money in that base function, which is training and acculturating all of our young people into one big network. So that might be where I'd say the growth would be.

Great. Along the same lines, different angle, as you speak with CEOs, to what extent is MiFID or U.S. politics and policy or maybe another factor like the flattening of the yield curve starting to overshadow or come into play against the generally good economic data that we're seeing? And I guess, are there concerns that seem to be growing in the minds of the senior managers you're talking to who are looking to transact in the marketplace? Or is it still this very optimistic outlook that you're hearing from just the CEOs?

Good question. I just got back from a trip to Europe when Trump was there, I kind of overlaid part of it. And what was interesting to me is from a year ago where I spent a lot of time trying to explain Trump to Germany, I was in Germany, and he insulted -- said something about Germany being a captive of Russia, and I had a big dinner that night with the CEOs. And I thought I'd have to explain. Nobody even bothered to ask anymore. They were much more interested in what was going on with Merkel and her -- and Germany, Brexit and Theresa May. They're issues everywhere in the world, what's happening in Italy. So I think it's interesting -- there's almost an acceptance that you're going to see different things come out of U.S. politics than you've ever seen historically, but I don't think it's changing people's behavior. And lastly, to what you said, I want to correct, you said is it just about optimism. I think there's a healthy dose of both. People think the economy is growing, so there's optimism. But there's a real fear of having the wrong mix of assets. I think it's both. You want to make sure that you're set to win, it's -- many of these industries have turned much more into winner take all or top 2 or 3 take all industries. And so yes, there's an optimism that there's going to be a good backdrop in GDP, maybe even GDP globally, but there's a real desire by boards and managements to examine the assets they have and say are we in the right -- we can't afford to not have the right assets and be positioned to be in the top, call it, 3 in many industries. So that's what's driving it, and I think there's much more focus on that than politics.

Next question comes from Ann Dai with KBW.

So Ken, I was just curious about the impact that ratchet fees have had on revenues over the past couple of years. It just feels like maybe they were present and probably somewhat helpful during the strong equity markets we saw the last couple of years. So I'm just really trying to get a sense for what that contribution was last year, and how do we compare that to what we're seeing this year where we're seeing choppier markets?

It's a good question. I don't have it in front of me, and I'm not sure I would -- look, all fees are -- the structure of your fees, how you create them and what you ask for is a tremendous part of this business, probably one of the most underappreciated. There are certain bankers that just ask for fees, and they're valuable. And then there is structuring them and aligning yourself with the client. I don't have an answer to that. I'm not sure we even ever aggregated it. But I will say this, we spend a lot of time trying to set up fees that are in alignment with the client and that will reward behavior and execution that's excellent. And -- but I don't know that I could tell you how it affect this year versus last year because I think the fees are more complicated than you would think in how you approach them. So I think you should assume they're similar. How's that?

Okay, appreciate it. Just one for me on capital management. So now is the second year where you've done the special in second quarter. I think last year, it was driven in part by the distribution from Australia. So I don't know, maybe this year, it's just strong operating trends and decent levels of cash. But just looking forward, how should we be thinking about that cadence of the special dividends from here? Should we think about it as being triggered by an absolute level of cash on hand or just wanting to be committed to having 2 specials a year?

I'll let Joe walk through the cash flows. I mean, obviously, you look at the revenues year-to-date, and a lot of that translates into additional cash, and we also had some taxes. Look, we don't want to do specials every 4 weeks. But I think what triggers it is when we feel like we're sitting on your capital, and we have it invested in 90-day treasuries or 30 -- sorry, 30-day treasuries, and that's not optimal and we have enough of it to be material, we give it back. And that's the way we want to do it. Joe, I'll let you walk through the -- what led to us coming to this number at this time.

Yes, it really does come back to revenues. What we talked about was $440 million in the first half between that, and the new tax rates created substantial amount of cash that was in excess of our regular dividend. And so it was thought rather than waiting until the end of the year or some other arbitrary period, that it was a good idea to distribute it at this point.

Next question comes from Jim Mitchell with Buckingham Research.

Maybe just talk a little bit about your diversification efforts. I mean, clearly, it seems like fund advisory has been increasingly contributing to the story. How do we think about where you see the biggest opportunity set to kind of expand your footprint going forward? Is it fund placement advisory? Is it just private equity firms finally putting some dry powder to work in your work there to develop relationships? How do we think about that opportunity set across your franchise?

On a dollar amount, the growth is always going to come out of M&A. I actually believe the incremental growth in just our M&A business was like bigger than the total businesses right now of PFA, private funds group, and some of that. But I think the way we think about it is we want to be involved with companies that are doing very important transactions that are -- like M&A, restructuring is a life-threatening moment. And by the way, raising -- a private equity group raising their funding is probably the most significant thing they do. If they don't get the money, there is no business. Those are moments in time when relationships matter, that's number one, most important to us. And expertise and judgment come into effect, and then you can get paid because it's critical. Time is critical to each of those M&A, restructuring private funds. And risk advisory is a similar thing by the way. I do think our PFA group is on a great trend. And it's a business that we like, and we'll continue to grow that. But really, on an absolute dollar amount, I think our M&A business is the driver of incremental revenue in dollar size. And I guess, if we ever hit a recession, you could see restructuring have a surge. But for right now, it's going to be basically M&A.

Okay, that's helpful. And just maybe a follow-up question on the timing and the change in accounting. Joe, is it kind of limited to deals that are only a couple of days post the quarter? Could there be examples where it goes further than that? I just think, for us, we're kind of evaluating the data to have sort of a sense of what deals we should look at that may fall a day or 2 after the quarter, what kind of time frame you could give us would be great.

Yes. I mean, again, there is no setting in stone. But I think the practical application of the accounting is that deals that close in the first day or 2 of the succeeding quarter are likely to require recognition in the previous quarter. And I think in our experience, the probability that recognition conditions would be appropriate as of the prior quarter as time goes, that, that diminishes dramatically with the passage of time. That those conditions, just -- those diminishes as time passes.

Okay, that's helpful. And as you said, it was the first 2 business days, right, only?

That's right, in a quarter.

I think, just so you know, those are deals that go into the final week, sometimes the final 10 days. We're not sure they're going to close on June 30 or July 1. But that happens to us every quarter, and that's why we ask you to not look at us on a quarterly basis because, literally, we don't know if those things are going down -- going to close on June 30 or July 1 or one day later. And so it's very hard for us to project quarterly as well.

And I think the other important point is that we're still measuring approximately 90 days' worth of production. So this isn't like pulling in extra days or anything, it's just if there's been a time shift.

No, absolutely. We just like to be able to try to be as accurate as we can, that's all. So appreciate it.

Yes. Fair enough.

Next question comes from Jeff Harte with Sandler O'Neill.

A couple from me. On the accounting-driven revenue recognition benefit, and probably over simple -- is it as simple as saying $37 million of 3Q revenues that we would have expected got pulled into 2Q '18?

When you think about the old accounting. But again, this accounting came into effect on January 1. There was a whole transition process that happened as of the year-end. And so all we've done is reset the calendar starting with 2018. I think we're looking at the same -- again, we're looking at a similar time period for purposes of measuring production.

So one of the things just to be aware of, we can't predict the effect on 13 because, again, we're going to have the extra 2 days. If we -- October 1 and October 2, will that be the same? We don't know when these things will -- that's why we've never said to look at us on a quarter because the same thing can happen on October 1 or 2 or it could not, and the same thing could happen this quarter, these could have closed the 30th or the first, it's just -- as Joe said, it's just a new 90 days, so the July 2 to October 2 is the new third quarter.

Okay. And on the expense side, I mean, it looks like you accrued comp against noncomp as well. I mean, those -- that fell into the quarter too. And I guess what I'm getting at is last quarter, you kind of have mentioned $35 million, $36 million a quarter of noncomp run rate. Does this affect that going forward in the back half of the year, what you would expect?

No, I don't -- I think those 2 things are independent of one another. I think that noncomp -- the $35 million to $36 million, absent increases in headcount and extraordinary deal-related charges, I think remains a reasonable estimate. Again, this is also an accounting that isn't just affecting Moelis. This is a global standard.

Okay. And on the special dividend timing, it was touched on earlier. But is it unusual kind of going forward to consider a special dividend before year-end cash position? Is it -- I mean I kind of look at last year, you have the gains. This year, the Tax Cuts and Jobs Act. There were kind of some unusual things. Or is kind of the decision to pay out a special dividend or not kind of a real-time decision going forward as cash levels build? Or do you anticipate this coming back to more likely later in the year or in the future?

So yes.

Go ahead, Joe.

Yes. No, so I think the answer is that I think we can measure -- so we earmark cash for bonuses and taxes and other element, regular dividends, and then we obviously can compute what the excess is. To the extent that the number is a significant number, as Ken indicated, rather than trapping it in treasury bills for our account, we decide that, periodically, it's better in your -- in the investors' hand, and so we'll periodically make that decision. I don't think there's going to be a true rhythm necessarily. It could be twice a year, it could be once a year. We haven't -- it's really dependent -- it's fact and circumstances-dependent.

Our next question comes from Brennan Hawken with UBS.

Just one more from my end. Most of my questions have been asked and answered. On capital, you guys have really returned a great deal of capital via the special dividends. It's been really successful. As the liquidity in Moelis shares has improved, have you considered shifting to make the capital returns more of a balance between share buybacks and specials? Or has the reviews of special or the popularity of the specials amongst your shareholder base led you to conclude that you're going to just stick with the specials for the foreseeable future?

Look, we debate what to do with the capital. And it hasn't -- I have to say, so far, we think that it has been well received in that we've created a nice float for the common stock, and we found a very efficient way to distribute all the capital back without having to time markets, just give it back in -- to everybody pro rata. That may not always be, Brennan, we'll figure that out going forward. But for the time being, we've been very happy with the way it's worked. And it could change. But up to now, it's been -- we think it's been a good way to do it.

Yes. No, appreciate that, Ken. And there wasn't any implied criticism with the question. I just wanted to kind of understand how you guys were thinking about it.

Look, we think about it, and it just seems to be the dominant method right now because it's worked well. It could change. Things could change. I'm not -- we have not made a corporate policy that this is the way to do it. But we do think getting the capital back to our shareholders quickly and efficiently and not sitting on it is a really good way to go, and this -- we'll think about it going forward. And we may change. But for right now, this seems to be the best way.

At this time, this will conclude today's question-and-answer session. I'll now turn the conference back over to Ken Moelis for any closing remarks.

Thank you. I appreciate all the support you have given us and the analysis and you getting on the call and asking good questions. And I hope we could continue to perform. So appreciate the call, we'll see you in 3 months.

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