Moelis & Co (MC) 2020 Q4 法說會逐字稿

Good afternoon and welcome to the Moelis & Company Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Chett Mandel, Head of Investor Relations. Please go ahead.

Thank you for joining us for the Moelis & Company Fourth Quarter and Full Year 2020 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, 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 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 will now turn the call over to Ken to discuss our results. Ken?

Thanks, Chett, and good afternoon, everyone. Our fourth quarter revenues of $422 million were 89 -- were up 89% from the prior year and represent our largest quarter of revenues since inception. Full year revenues of $943 million were also a record and up 26% from the prior year. The strength during the quarter was driven by a significant increase in completed transactions with our M&A franchise recording its highest level of activity in firm history.

Our full year revenue growth was powered by year-over-year increases across all of our products and regions as well as higher average fees earned per completed transaction. We produced record levels of capital markets and restructuring activity, and near records in M&A, despite the softer deal-making landscape in the first half of 2020.

With focus to expense discipline, we brought this top line strain down to the bottom line, exceeding our operating margin target while returning a significant amount of capital in a very tax-efficient manner to our shareholders.

I'll now turn the call over to Joe, who'll take you further through our financial results, and then I will discuss our business and outlook. Joe?

Thanks, Ken. Starting with expenses. Our adjusted comp ratio was 45% for the quarter and 59% for the full year. Our fourth quarter noncompensation expenses of $27 million translates to a noncomp ratio of 6%. For the full year, we reported a noncomp ratio of 12%, largely due to low levels of travel and related expenses as well as continued expense discipline. We achieved the full year pretax margin of 28%, exceeding our 25% target.

Regarding taxes, our normalized corporate tax rate for the year was 26%, in line with prior quarters of 2020. Also consistent with prior years, we may recognize a tax benefit in the first quarter of 2021 related to the annual vesting of RSUs later this month. For purposes of quantifying the excess tax benefit, the breakeven share price for this vest is approximately $31 per share.

For each dollar difference between the vesting and breakeven price, we expect the impact to EPS to be approximately $0.01. Our Board declared a regular dividend of $0.55 per share, representing an increase of 44% from the prior quarter and an 8% increase from our regular quarterly dividend amount pre-COVID. We've now increased our regular dividend and declared at least one special dividend in each year since becoming a public company.

In addition, we repurchased 1.2 million shares during 2020. We remain committed to returning 100% of our excess capital. And lastly, we continue to maintain a fortress balance sheet with substantial liquidity and no debt. We ended the year with cash and liquid investments of $375 million.

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

Thanks, Joe. The achievements of 2020 go beyond just our financial performance. We invested in the future growth of the business by adding 13 managing directors during the year across important products, regions and sectors. We expanded our capital markets business, which has already become a more substantial contributor and an important part of our advisory strategy. Also, we recently added a new Head of Private Funds Advisory, combining our existing primary funds placement and secondary businesses to help us capitalize on the broad opportunities we see in private equity.

In addition, earlier this year, we promoted 8 individuals to Managing Director, and our pipeline of external talent remains robust.

In conclusion, we believe that our platform is uniquely positioned to deliver innovative solutions for our clients. The resiliency of our people and the intense and focused effort of our bankers during 2020 have led to the highest level of new business activity we have ever seen, which is why I'm so confident about the firm's future growth outlook.

And with that, let's open it up for questions.

(Operator Instructions)

Our first question comes from Devin Ryan with JMP Securities.

So I guess this is the first quarter north of $400 million in revenue and then really the first quarter north of $300 million in revenue. So just given that it was such a, I guess, outsized quarter and I think, above expectations as well, it would be great if you could just maybe unpack a bit of what drove the strength? It just seems like a lot of things came together very quickly. So whether it was capital markets activity or restructuring or just deals that kind of closed quickly ahead of maybe potential thoughts around tax changes? Just love a little more flavor for what happened in the quarter to get to these numbers.

I think it was mostly driven by -- well, every -- things were strong across all sectors, and -- but it was really driven by M&A primarily. I think we started telling you at the end of the second quarter earnings report that we felt there was a tremendous resurgence of M&A. Some of it backlogged from a good backlog that we had going into the COVID environment and then it just started to come back quickly, and then it built from there. Stock market performance, low interest rates, really the animal spirits of the market, I think, just kept the momentum going as M&A continued to accelerate.

By the way, restructuring had a very good year too, but it was pretty much in line with our percentages in all other years. It was just that both were having good years. Fourth quarter is always seasonally strong or usually seasonally strong for a company like ours. But I would say that the give and take at year-end was nothing special, meaning I didn't feel like there was anything rushed into the quarter nor anything unusual push. It's the usual mix of give and take at year-end, things that leak over and things that accelerate, I didn't really see much differential there due to taxes.

Yes. Okay. Interesting. Well, obviously, a big revenue quarter. Maybe just to shift gears and talk a little bit about the recruiting backdrop. Clearly, 6, 9 months ago, I think the expectation was that -- and maybe 9 months ago, it's probably a better framework that it would be a difficult 2020, but that could create recruiting opportunities as competitors are kind of inward-focused. I'm curious how the recruiting environment has shifted and just the level of conversations you're having and expectations for the coming year? Obviously, you had a pretty nice step-up in Managing Director headcount from a combination of recruits and internal promotes last year, but just love some color on kind of the conversations today. Where you're looking to add? And just expectations now that it does feel like most firms had a pretty good year and compensation was likely pretty solid. So just how that plays into it as well.

Yes. I agree with you. So 9 months ago, I thought there might be an opportunity to use the strength of our balance sheet, our liquidity, like we did really back in the last crisis in 2009, 2010, we really took advantage of a pretty chaotic environment in banking to substantially grow the firm. And I think I did mention that, that could be a possibility. It really wasn't the Federal Reserve stepped in quickly. And as I said, by really our June quarter announcement, we were saying to the Street, we saw a pretty big and certain build in M&A and activity.

I would say at this point, recruiting is pretty good. There are people who want to move. I continue to believe the boutique environment and some of the dynamism around the innovations that we're able to show, including our capital markets activity and some of the things we're doing are still leading people to search out our platform. But it's not unusual. It's just -- I'd say it's very similar to the prior years.

The next question is from Ken Worthington with JPMorgan.

In your deck, you commented, I believe that 25% of the MDs have had that title at Moelis for less than 3 years. So how do we think about the production of these newer MDs as they remain in that position for 4 to 6 years and 7 to 10 years? And I guess the real thing we're after is, what sort of revenue pickup are you sort of expecting from this group as they mature over the next, I guess, handful of years?

Well, I do think we continue to emphasize internal promotion, 8 people this year, which is pretty substantial for us. It might be our most and those people are on the way up. They are developing franchises, they're quality relationships that are just going to get better. By the way, a lot of it is the world is changing so rapidly that you want to have these young, up and coming managing directors who are developing businesses in parts of the economy that almost didn't exist 10 years ago.

So it's very exciting to have that training and inward focus of where we're developing talent on our own and bringing them up. They definitely do improve in productivity fairly rapidly between sort of the first and second year of promotion and even out to the fifth, sixth and seventh year. It's really hard to -- for me to delineate that. It will be sporadic by person, but we definitely expect to see continued productivity.

And lastly, also the integration of the whole franchise is just getting better and better. And when COVID hit, I think the fact that we have a collaborative culture is one of the things you saw in our results is we didn't really have to reintroduce everybody. People were passing off the elements, I mean, different clients needed different things than they ever needed before. Some needed capital markets, some needed restructuring advice, some needed M&A advice, that were never in that part of our firm before, and our ability when somebody comes up through the system and they've been working here for 10 years, they know everybody. They know who to call.

People know who they are, and it's substantially more collaborative than bringing in somebody or your entire workforce over the transom. So Ken, I expect to continue to see productivity improvement.

Right. Is it a stretch to think that 3 years from now, if this group were exactly the same, the production would be up 50%? Or would it double? Or are those numbers just outside the realm of reasonableness?

If you're talking about over that group that might have only been with us 3 years, that group could be up 50%. As a whole, it will be divided over the -- then you have to divide it over the whole denominator. But it's not -- especially the new promotes, that would not be a number -- I don't have a scientific way of saying yes to that number, but my gut feel is you wouldn't be wrong.

Okay, awesome. And then maybe going to the more plain vanilla, in restructuring, have you been working through that pipeline at a more accelerated pace, that would sort of make sense given the more constructive environment? And then I guess what I'm maybe more after is how does the replenishment of the restructuring pipeline match up these days with the pace that you're completing those restructuring mandates?

Like a book-to-bill ratio, you're trying to come out of a banking with a book-to-bill. I think our restructuring retainers and assignments are still at all-time highs. We had a very good year. But it was in line with the percentage of the revenues that kind of they've always done.

We had a great year in M&A, and we had a great year in restructuring. And our restructuring backlog and retainers are at their all-time highs.

The next question is from Brennan Hawken with UBS.

I just wanted to follow-up on that. That's an interesting point, Ken, because I don't want to dig in on the restructuring, the mandates and the retainers being at all-time highs. Do you think that it's reasonable to assume that restructuring revenue will be stable or even up in 2021? Or is it -- is that too optimistic? And it will be a tailwind in the first half, more likely, but unless we see more mandates coming into the pipe, then we'll start to see a slowdown maybe in the back half. Is that fair? Or how should we think about the puts and takes there?

Look, again, without -- market's doing an incredible job of humbling you when you try to predict them through a year. I say it feels like stable, plus or minus, and depending on where the markets go, the economy is improving, but there's a lot of companies out there. They've taken on a lot of leverage to get through COVID and some will continue -- if the economy doesn't really come back, you'll still have a significant amount. And like I said, as of right now, our backlog is as high as it's ever been. So again, markets -- I don't like to try to become a visionary on markets because they always prove you -- they always humble you. But right now, I would kind of start with a stable environment and then keep an eye on it from there.

Okay. That's fair. And tell me about it on the market humbling you. I hear you. So on the capital front, so you had indicated when you guys initially had cut the dividend that you were being conservative. And clearly, you have put your money where your mouth is by bringing the regular dividend up back where it was above where it was pre-pandemic. So with the regular dividend now restored actually above its prior level, how are you thinking about weighing capital returns as far as the form, buybacks versus specials, versus other forms of capital return?

We're flexible. We were in buying in -- during the year, you have these blackout periods and the stock responded as I think you know, Brennan, the stock responded very rapidly. So with blackout periods and everything, it's very hard to get a lot of capital. So we decided to do that $2 dividend in December, which is our strategy is not to sit with your capital. And we deferred a dividend out of the prudence of making sure our bankers were focused on their clients, and just in case this virus was something that was even worse than it was, not that it wasn't, it was pretty bad. But we -- business survived much better, businesses did better than I even expected.

So -- but I think our first choice was to protect and then to immediately give it back. And so when we had $2 a share excess, we immediately paid it. We've now raised our dividend because we think our business is strong enough to sustain a level above pre-COVID dividend. And we are -- I still think we're going to produce substantial excess capital and we're going to be flexible between share repurchases and dividends. And the idea is to get you back your money as quick as we can now.

Next question is from Jeff Harte with Piper Sandler.

A very strong quarter. Along those lines, as we look at how good it seems M&A activity levels are kind of across the products and really everywhere, we've had a couple of ramp-ups like this since the great financial crisis. But each time it's kind of stalled out before reaching new cyclical extremes, understanding that there's not going to be a clear answer to this until we're through it. But do you think things will be different this time that we could actually see kind of new cyclical highs in a really robust frothy environment? And if so, why would it be different than the last couple of head fakes?

By the way, if you're going to try to get me out there on a quote, like, while the music is playing, you got to keep dancing, I am not -- I am not giving you that one. So again, I'm going to say that markets are humbling. They -- there's a lot of good things going on right now, low interest rates, recovery, government is putting a lot of money into the economy, liquidity. We retain a very -- an unlevered balance sheet, and we're very strong on the basis that tomorrow, something can happen, which we don't predict.

And then we have businesses that could take advantage of those movements as well. So how about this? For the permanence of never being recorded for the rest of my life predicting what Irving Fisher say the markets have reached an all-time high. I'm not going to say that. I'm just going to say that for right now, there's a lot of interest in -- as I said -- I was saying today on a call, if you think your business on the 1st of January 2020 and the 1st of January 2021 should be identical, that's a very unusual thought process in a corporate board going through COVID, something has changed in your go-to-market strategy, whether that's how high you want to run your leverage, where you're getting liquidity, which businesses you're keeping, which businesses you want to be in.

I would just tell you that I've never seen the business community in that short a period, rethink everything about what they're doing. And look, that's the business we're in, helping businesses rethink everything about their balance sheet and go-to-market and strategy. So that's why I think there's a lot of activity out there right now.

Okay. And I guess on the expense and kind of potential positive operating leverage side, you talked about targeting the 25% operating margin. But I guess that's starting to look very conservative given that you've beat it like 6 of the last 7 years. So is that a -- so as we look forward, should we start -- is it time to start thinking about potentially a higher kind of run rate positive operating margin going forward?

I want to give you a firm maybe. And that will be -- look, some of this was a result of reduced travel and T&E expenses. I think some of that's going to be permanent. But I'd be guessing if I told you how much. I really do think we're going to have a permanent reduction in travel and entertainment, especially the commodity parts. I think the part where we go visit clients in fact, I think we're missing some of that. I think revenues could be even better. As I was saying, some of the revenues that we're generating in 2020 were the result of airplane flights we took in 2015.

So we need to be back out there. There's nothing like looking at a client, meeting them and having them know who you are. But then again, I think some of these expenses where you all fly to a room just to draft a document and do something pretty commoditized will go away. So that's the answer. I think some part of that money that we're saving will stay and that might lead us to be able to permanently change how we think about margin, but we'll -- let's see how that plays out.

And I guess just related, then I'm done, how are you guys thinking about kind of noncomp expenses at least a quarter or 2 out? Do you have any more insight as to how quickly you think those could come back or not come back? Any help for us there?

I think what we are seeing right now is that there's a slight uptick in travel. I think $30 million is still a good baseline to be focused on. And I don't know beyond a couple of quarters where it's going to be. I don't know if I can project out to the second quarter. But I think $30 million plus or minus is probably a good range to be working with in the next couple of quarters.

But interestingly, I'd like to say, Joe, all our other expenses, like we don't have a lot of lease expenses that we're about to step into. Almost everything else is as you see it. And it will just be -- I think the big one -- I mean, it will fluctuate with the size of our personnel. But everything else is pretty much under control and the wildcard will be, does 1/3 of travel just never come back.

The next question is from Jim Mitchell with Seaport Global.

Maybe just a question. I don't know if you've had the time to think about this, but Senator Klobuchar is planning a bill to give any trust enforcement a little more teeth. Is that a worry for you? Have you had any conversations with CEOs that are concerned about it? Or is that just really a mega deal issue that's not too concerning?

I'd put it in that category. I mean if you're involved at a specific large transaction, I think you want to be very careful about this stuff. I saw something on early termination of the 30-day period, which could end up just delaying some transactions by slight margins. Again, I think a lot of our business is in the size transaction, where I don't believe that bill that you're referring to would have a big effect. But yes. I haven't spent a lot of time being that worried about it. I suspect there'll be a transaction in which it gets focused, but that will be specific to the transaction.

Okay. That's helpful. And maybe just on getting back to the margin discussion and maybe talking to the comp ratio, given the more positive environment, you talked about recruiting being sort of an average year with revenue outlook pretty positive. Is there an opportunity? Or can we expect that you can get back to sort of your prior targets closer to 58% comp ratio? Or is there still headwinds on that front?

Well, two things. First of all, I don't think it's an average year for hiring. I just said that there's not panic in the market. So it's the same environment. That doesn't mean we won't be aggressive into it given where we think our business is. I just want to be clear on that. We may choose to be aggressive. It's just not a -- it's not a weak market for people like 2009, 2010 or a strong market for obtaining people, number one.

Number 2, I don't understand the question of headwinds. We're returning 28%. I think it's the industry-leading margin of every revenue dollar and pretax to our shareholders. And that's what I'm focused on. I'm a shareholder, if I can return that kind of margin to our shareholders, the mix of how we do it up top. I think we're right within our range, and I'm very happy with if we can get into those kind of pretax margins, that's what I'm aiming for.

The next question is from Manan Gosalia with Morgan Stanley.

Could you talk a little bit about the SPAC opportunity here? Clearly, a lot of capital being raised and that should help the activity. So how are you thinking about that opportunity for the industry overall and for the firm?

Well, one of the reasons we beefed up our capital markets is for this reason. We've already underwritten book run for SPAC deals. It's a very institutional market. Our unique relationships with sovereigns is actually leading us to be a sought-after placement agent, underwriter really for these -- for SPACs. And then with that, you get our M&A team and our private placement team for the pipe and our despend, it's fairly exciting. It's one of the reasons we stop -- we stepped up and invested in capital markets, if you remember, in the third quarter, we hired a whole team, and it's really paying off.

I believe the SPAC market is real. I think it's got a regulatory arbitrage to it that is much more efficient than traditional IPOs. In fact, you can cut 7 or 8 months off, you can increase your certainty. And lastly, I'd just point out that the growth is 50% -- from 20 years ago, there's 50% less common stocks by name, the trade than did 20 years ago. And the reason that happened was because I think between private equity late-stage venture, they went and organized capital and said, why would you go into the public market? We get to see 5-year projections. We get to do due diligence. We get to impose some governance. We get to do all the kinds of checks before we invest.

And actually, what SPACs are allowing the public to do, some of the big investors, the mutual funds, is to have that access. To sit down in a room and have 5-year projections, access to management and 5 days of due diligence and being an insider and wall crossing. And there's about $1.5 trillion of private equity, and nobody's asked whether that's too much money, and there's about $300 billion or $350 billion of SPAC money now. I think that if you think about returning the number of stocks back to where it was 20 years ago, you can see a pretty interesting market develop, and we invested in our capital markets and our coverage model because we think it's real.

That's great color. And then separately, if you can comment maybe on what activity is doing. Outside the U.S., clearly, we're seeing activity ticking up pretty nicely in Europe. So maybe you can give some more color on what you're seeing outside the U.S. and how your share in those markets is tracking?

Yes. I think we said in the leading that we saw strength in really all regions, and we did. The U.S. is as usual in something like a COVID environment, amazing how fast the U.S. innovates and comes back. But we're seeing in Europe, a very steady strength. We're also -- we're starting to see strength back in Asia for a while there. We were -- maybe it was the last part of the last administration, but China was not as active. We're starting to see activity, China, Hong Kong, more in Asia. And our Brazil office had a pretty good fourth quarter in session and backlog. So we're seeing it across regions. As I always say, whenever there's a bit of turmoil, the U.S. is first to aggressively start to move. But I think everybody is right in there with them.

The next question is from Michael Brown with KBW.

So wanted to just start with a question on traditional M&A side of the business. So I got your outlook comments on the restructuring business, on the recruitment activity. But I guess, just wanting to complete the circle here with traditional M&A. So Ken, I understand the markets are humbling, but M&A activity has certainly been intense. That intensity seems to have continued, certainly since the end of 2020. So how are you feeling about M&A? Could you kind of characterize your outlook for '21 relative to prior upswings in M&A activity and how would you characterize your backlog now relative to prior periods as well?

This is the strongest backlog we've ever had to start a year. Again, I want to be careful. Somebody said to me, should you annualize the fourth quarter? And I said, yes, only if you want to lose your job as an analyst. The fourth quarter is always seasonally strong, and this one had more to it. But this is the strongest backlog we've had, there is a lot of activity out there. And our workforce is as good as it's ever been.

When I look through the players we have in position and what we did in 2020 to move people and to expand in sectors that we wanted to be in, at the top, I know you guys look at the gross numbers, and sometimes the MDs don't change as much as the ins and outs. But it's the team you put on the field and whether you're in the right positions to win. And I've never felt stronger about the team we have on the field and whether we're covering the right places with the right people, and collaborating to do it. So it's a good backlog, and it's a great team, and the system is working as well as it ever has.

Okay. Great. And just one cleanup for me. I think you alluded to it in your -- maybe your first answer, but the fourth quarter, did it include any material pull forward this quarter from activity that closed in the first quarter? Or was it a relatively clean fourth quarter?

I'm going to let Joe get that. But remember, I'd say it was clean, but there's always stuff that -- even last year, there's stuff that, in the third quarter, gets pulled from the fourth into the third, and there was this stuff in the first pulled out to the fourth.

So net-net, I didn't see anything unusual, but Joe, given the number on what we call...

Yes, it was a couple of transactions, and I think it added up to something around $30 million.

And our final question comes from Steven Chubak with Wolfe Research.

So wanted to start off with a question on comp expense. I mean You've always provided a lot of transparency around the comp algorithm. Based on your previous guidance for 2020, I think you alluded to fixed comp somewhere in the range of $340 million to $350 million and 20% variable comp ratio. And that would imply comp dollars of $533 million, not to get too precise, but you came in 5% above that. I know you've invested this past year in external hires and have an increase in internal promotes. I was just hoping you could provide updated guidance on what's a reasonable expectation for fixed comp dollars in 2021, given some of those additional hires and whether we need to contemplate any additional changes to this algorithm as we look out for the remainder of this year?

Well, I think this year, we looked at it, and again, if we're generating 28% of our revenue to our shareholders, that's the leading industry margin, I believe. I don't believe there's anybody doing that. And our comp ratio is dead in line with where we want to be. And if we can pull those together, that's the target. And we'll go through it with you in detail. I'm not going to -- we're not going to give guidance on 2021. But if I could get to exactly where I was and 28% pretax, I would -- in this kind of a revenue world, I would take it. And I think that I believe those are industry-leading margins and metrics the whole way. So we'll -- I'm not going to give any guidance on 2021.

Okay. Fair enough. Had to try, Ken. And then just I wanted to unpack some of the commentary on the restructuring side. You noted that your expectation is for restructuring revenues to be stable, plus or minus. I know you don't want to make any bold predictions there. But certainly, that's a more constructive message than what we've been hearing from some of your peers, especially given some of the tightening of credit spreads, bankruptcy seems to be declining. So that message is certainly encouraging. I was hoping you could speak to maybe some of the idiosyncratic factors that could support a better restructuring outlook that you're indicating. And are there other parts of the business that we should think about that could be impacted just by tough 2020 comps given the strong revenue year that you just had?

Yes. So I said stable. Remember, that's us. We're going to be -- I feel like we're stable, and that's based on having more retainers than we had last year and more backlog to start the year. So I'm -- you're asking me, and I'm going to stay away from it to comment on other people's mixes coming into their quarter and how they -- their mix from their quarter goes forward.

Our mix was very high M&A, and it was kind of stable as well in what it's -- the restructuring was as a participant in the overall revenue stream. Plus, we've grown our revenues, we add people and we've grown our restructuring revenues every year now for 5 years. So we -- I anticipate the percentage contribution to our overall business was not disproportionate going into it. I'm not -- so -- and we grow every year and so I just feel like stable to plus or minus is a fairly -- I would call it, a grounded view on where we think the world is.

And just one final cleanup question. I was hoping you could provide just the MD count to close out the year and whether that includes the full number of internal promotes that you had cited?

As of right now, we have 128. I think as of the end of the year, it was slightly less, 125. But as of right now, not counting the one announced -- I believe we have one announcement in transition. Everybody else is in there, I'm pretty sure.

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

Look, thanks for all your attention during the year, and we look forward to the next earning call in a few weeks. Thanks.

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