Moelis & Company's (MC) CEO Ken Moelis on Q2 2016 Results - Earnings Call Transcript

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Moelis & Company (NYSE:MC)

Q2 2016 Earnings Conference Call

August 3, 2016 05:00 pm ET

Executives

Joe Simon - CFO

Ken Moelis - Chairman and CEO

Analysts

Ashley Serrao - Credit Suisse

Worthington - JP Morgan

Devin Ryan - JMP Securities

Conor Fitzgerald - Goldman Sachs

Jim Mitchell - Buckingham Research

Operator

Good afternoon and welcome to the Moelis & Company Second Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Joe Simon, Chief Financial Officer. Please go ahead.

Joe Simon

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

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.

On today's call I'll go through our results and then Ken will provide his thoughts on the current environment and our outlook. I'm pleased to report that we delivered our strongest second quarter revenues to-date of $132 million up 5% from the prior year period. Our performance [indiscernible] favorably to the overall M&A market and which the number of global M&A completions greater than $100 million declined 23% as compared with the prior year quarter.

Our first half revenues were $258 million up 15% from the first half last year and were driven by strong M&A activity and in particular higher average fees earn for 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 activities 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 GMP [ph] among others. Moving to compensation, our second quarter and first half adjusted comp expense ratio 58% is in line with our target and compares with 54.2% in 2015. The increased compensation ratio is attributable to the additional tranche of equity awarded in early 2016 as well as the modified vesting terms associated with that equity.

Our non-comp 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 share so that all of the firms 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 cash and short-term investments and no debt. Lastly, our board approved $0.02 per share or 7% increase in our quarterly dividend to 32% share to be paid on September 6, to stockholders of record as of August 22. Ken will touch more on this shortly and I will now turn it over to him.

Ken Moelis

Thanks, Joe. I'd like to spend a few minutes on our continued growth the current to current environment and our commitment to return capital. We continue to opportunistically fill in 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 third Managing Director to join us in Houston in the past 12 months and we now have premier coverage of upstream, midstream and oil field services client.

In addition, we recently added a veteran in US diversified industrials in aerospace and defense as well as 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 US, M&A activity should continue to be driven a consistent and predictable low growth environment which CEOs are able to plan for. Interest rates remain low, capital markets were open and companies are planning accordingly. Our outlook remains positive, our M&A dialog 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've 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 a $176 million of cash on our balance sheet with no debt and we did all this while increasing our revenues by almost 50%, all through organic growth.

We will now welcome any questions.

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from Ashley Serrao of Credit Suisse. Please go ahead.

Ashley Serrao

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

Ken Moelis

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

Ashley Serrao

Okay and then just curious, just what your sense is on BREXIT and what is means for the firm, the environment and the opportunities that may come out of it?

Ken Moelis

We were, I think 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 how you know exactly what BREXIT did or did not do during that timeframe. I actually I'm 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'm bullish on the environment. I think it's going to be quite helpful to a lot of business but I can't say that's true over the very short-term.

Ashley Serrao

Okay, thank you for taking my questions.

Ken Moelis

And then lastly Ashley, let me just I do thinks it's causing some distress in the European banking environment that will help free talent.

Ashley Serrao

Great, appreciate the color.

Operator

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

Ken Worthington

First, continue on Ashley's question 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 you're positioning sort of means both for fees as well as maybe the persistency of those restructuring customer relationships.

Ken Moelis

Look I'll tell you where we do position ourselves a little differently. We think invest [ph] a substantially more amount of our restructuring transactions are out of core [ph]. I mean now you're getting down to almost tell you, how we market a little bit. We think, we're more innovative and market orientated, we use our sector bankers and tried to look we tried to solve problems outside of the court. We think that's the most productive for the companies that we especially when we're company side by the way. If there's one position 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're proud of that because bankruptcy is never good for the equity owner or almost never, I should say never but almost never optimal I think. 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're going to solve their problems using market based solutions is usually very attractive and that is, if that answers your question, that's how we like to position ourselves.

Ken Worthington

Totally does. Is that a higher fee or lower fee part of the restructuring market and it feels like it's a much longer persistency as longer persistency in terms of the customer relationship as well. Is that a good read or bad read?

Ken Moelis

Again, it should be a better read because the company that you represented continues to controls us on equity, if you succeed out of [indiscernible] many times and so they appreciative and should have a continuing relationship. Where often if you go through full-fledged bankruptcy control will change hands to a different class of owners. But I think all I'm 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.

Ken Worthington

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

Ken Moelis

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

Ken Worthington

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 good amount of larger deals that feels like we're seeing more moderate size 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’s not proportionate. So how should we think about deal size in Moelis going forward?

Ken Moelis

I think the first half of sort of is indicative, there is a lot of indicative of the deal size and what we're and things we're seeing. There is a lot of conversations. I think that's the point there, 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's not always M&A, there's a lot of things that go on as I said, if you're in Europe and the UK right now, look for decisions you have to make and so there's 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 look that's the way we feel right now, is it we're working on substantial work for substantial clients, but not all of it leads to company A merging with company B.

Ken Worthington

Great, thank you very much for taking my questions.

Operator

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

Devin Ryan

A couple questions here I guess first coming back to the comments on restructuring, so you're still growing mandates which is good to hear, I'm just curious on the energy side. Obviously your prices have bounced from the lows and maybe we're pulling back here a little bit, but 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 that we don't have another big reversal in oil prices.

Ken Moelis

It's an interesting question to ask us. Remember I think for the first year that we had this conference call, people asked 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've gone from a pretty low amount of assignments to, so we're feeling like we're advancing our energy assignments pretty rapidly. You said, when I was 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 below [ph] unless we have a major rebounded price. The think the price that is out today will continue to lead to it now.

Again on our specifically, we saw a pretty big increase over the last 12 months but that's because we added talent and expertise and again, the addition of talent in the relationship and the sector plus the restructuring and our model which causes people to work together it's been extraordinarily effective.

Devin Ryan

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

Ken Moelis

Sorry, I missed the beginning of the question.

Devin Ryan

The question was about the comment of there being higher average fee in the quarter and just weather into that new trend that we should be looking it.

Ken Moelis

No I think it's a continuation of - I think we're doing a very good job of being disciplined on the work we take on. It's probably more result of us, it's really busy in a decision while back to almost cut the bottom half of the fee schedule off so that we can continue to develop more and more time to our large clients.

Devin Ryan

Okay, last one here maybe for Joe. I think last quarter you had mentioned non-comp expenses for the year and thinking about maybe $100 million level obviously a dip below that, this quarter. I know it can be lumpy just trying to think about it. Is $100 million still a good annualized level or you know have there been maybe some reductions on the go forward expense rate just given the backdrop.

Joe Simon

I think our average headcount is up about 10% to 15% year-over-year. I think we've 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 on annualized rate that you're suggesting.

Devin Ryan

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

Operator

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

Conor Fitzgerald

I heard your comments on being [indiscernible] optimistic about the outlook for the back half of the year. Just on that, I'll be curious how much you're expecting US elections to impact M&A in the back half and how much kind of political uncertainty is coming up in your topic as a conversation topic?

Ken Moelis

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

Conor Fitzgerald

That's helpful. Thanks. And then funding costs for corporates obviously keep coming down in Europe just wondering how much do you think that's going to be talent for activity in Europe specifically and how eager you think corporates are to maybe use some of the cheap funding for acquisitions?

Ken Moelis

I think I'm bullish over Europe and the UK over the future. I actually I've been, I wasn't surprised but I think the UK has moved to solve a lot of problems pretty quickly but politically, they are solving some of the issues that were deemed to be unsolvable prior to the vote. I think that we'll see a lot of activity there, but in the short-term there's a hangover I think from the vote.

It is an interesting and I think it's more psychological, it's almost like what it must have been like to be in the warriors locker room after - they sort of thought they were head three to one on the vote and somehow lost and I think, there was a, there's almost a psychological how that happened moment. But I think people will rebound from that and I think it will, I'm bullish on activity but it might not be the next six months.

Conor Fitzgerald

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 and historically that's been pretty tough to have both work at the same time, but wondering if you think we can thread the needle as you [ph] go around.

Ken Moelis

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

Conor Fitzgerald

Thanks for taking my questions. Thanks.

Operator

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

Jim Mitchell

Maybe we could just talk a little bit about the MD headcount reduction a little bit, is that just sort of a retrenchment and we should still expect some growth sort of freeing up some ability to kind of whether to upgrade to reposition potentially in Europe as you see MD hit [ph] as the banks over there struggle, do you see opportunities to grow there given your positive view of Europe, is that sort of just sort of how you're thinking about, just give us some color I guess, would be helpful?

Ken Moelis

Yes when we said we managed that headcount very actively that was us managing the business the reduction to headcount and there was a [indiscernible] 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 hire but the best way to do that effectively is to manage your headcount effectively as well, in the other direction and that's I think we've done a good job with that.

Jim Mitchell

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

Ken Moelis

In terms of the hiring plan or?

Jim Mitchell

Yes, the hiring plan, yes.

Ken Moelis

Look on Europe, definitely over as I said, I'm bullish on Europe and I think, we would hire in Europe and we will hire in Europe but look we still have a lot of white space in the United States and as I said revenues are up 30% there, so yes 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.

Jim Mitchell

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

Joe Simon

First of all the treasury method defines the path and it's a function of one the invested shares as well as the price of the average price and as that varies, you're going to see some volatility. I would estimate that, if share price stayed flat that would probably be closer to 700,000 to 800,000 per quarter and the sensitivity to kind of $1 would be in a 200,000 shares either way.

Jim Mitchell

Okay, great. That's helpful. Thanks.

Operator

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

Joe Simon

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

Operator

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

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