Moelis & Company (MC) Earnings Call Transcript & Summary

Hi. Good afternoon. Thank you for joining us. We're pleased to have with us today Navid Mahmoodzadegan, Co-President and Founding Partner in Moelis & Co. Before we begin, I'd like to remind listeners that you can submit your questions through the webcast portal. And also for important disclosures, please see Morgan Stanley research -- the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, Navid, thank you so much for joining us.

Thank you for having me, Manan. Pleasure to be with you today.

Great. Yes, I was -- maybe let's start with broad strategy. Moelis & Co. is a relatively young firm. You're coming into this recession with a strong balance sheet and a larger pool of talent than you were in at the financial crisis. Can you talk about the top 3 things that you're focused on as a management team?

Sure. I appreciate the question, and pleasure to be with everyone. I hope everyone is doing well through all of this dislocation and tough time we're all in together. So look, first and foremost, Manan, we've been most importantly concerned with the health and safety and welfare of our employees. Obviously, there's nothing more important than making sure our family at Moelis & Company and their families are all safe and doing well. And we're pleased to be able to say that, knock on wood, we've so far come through this from a health perspective in great shape. So -- and I'm very, very proud of how our teams and our people have responded and really stepped up in difficult circumstances as have others throughout the country. But as far as our firm really done an exceptional job of transitioning to work at home and really serving our clients at an extremely high level and doing it with all of the energy and excellence that we're proud of in Moelis & Company. So first and foremost, that's what we're focused on. Second is clients. We continue to spend all of our waking hours making sure that we're staying in front of our clients in this difficult time, making sure we're there to help them through any problem they might be having, whether it's a balance sheet issue or a liquidity issue or helping them kind of think through the next stage of M&A opportunities. That's the bread and butter of what we do every day, and that's the hard work in the trenches that our teams are doing an excellent job on. So staying very, very close to our clients is our second priority. And then third priority is making sure that we continue to maintain a very, very strong balance sheet. Very, very strong opportunity to continue to grow our firm. We're very pleased with how we've been able to do that. We continue to actively hire from the outside. We've announced 4 lateral MD hires, which, in addition to our 5 internal promotes, is already a very strong recruiting year. The 4 MDs we've announced so far are in important sectors in health care with the addition of Philippe Gallone from Morgan Stanley recently, a tremendous hire, and then also other great hires in oil and gas and shareholder activism and financial sponsors, all really important spaces for us. And then we continue to be active on the recruiting front. And then I think we'll have some other exciting hires to announce here as we roll forward. So those are, I think, 3 of our really critical priorities that we're very focused on today.

Got it. And then we've seen you on a string of high-profile restructuring mandates in the press. Can you talk a little bit about how your model is resonating with clients?

So one of the hallmarks of our firm for those of you who don't follow us as much is we really have built the firm around global collaboration across sectors and products and geographies. And the people we hire, the people we promote internally and our whole compensation philosophy is very much consistent with this global collaborative philosophy. We think it's critical to bring the best of the firm and our best thinking to our clients to operate the firm that way. And I think you especially see it in the restructuring business. So in the last cycle, we were able to put together a world-class team of restructuring bankers that we assembled from the outside primarily. That team integrated beautifully into our sector teams. And that combination of deep sector expertise and deep restructuring expertise was a winning combination and really enabled us to establish one of the premier restructuring franchises in the last cycle. Their excellence and high market share and placed at the top of the league tables has really continued since the last financial crisis. And as we unfortunately enter into a new period of severe dislocation prompted by the COVID-19 set of circumstances, they, once again -- again, this collaborative model and their excellence and brand in the marketplace is once again a winning strategy. That group is very busy. Our firm is very busy working on many, many assignments across different restructurings. And once again, I think, that model has proven to be a successful formula.

Got it. So I do want to dig into the M&A environment. But maybe while we're on restructuring, since it's one of the most topical ideas on everyone's mind right now, this cycle seems a little different from the last one. There are a lot of industries which have very little revenue visibility right now. What are you seeing in the environment? Are creditors more open to working with debtors in this environment? Is there more restructuring happening out-of-court right now?

Well, I think you're right, Manan. I think this thing came out of the blue, and it's impacted a bunch of sectors, where literally you had very healthy sectors, very healthy companies and very healthy businesses and then all of a sudden you woke up one day and you saw severe revenue impacts. You also see that in sectors where they're already secularly challenged like retail and consumer. And then you also see it in sectors like oil and gas where there was already a set of circumstances around lower oil prices that have been festering for a number of years. And then the combination of demand shortfalls brought on by the crisis, production issues, et cetera, have really exacerbated that. So each of these sectors is a little different, but I think the breadth and speed by which this crisis kind of overtook the U.S. economy and a bunch of companies was unprecedented, for sure. Look, I think it's tough to predict how long, how deep, how steep this restructuring cycle will be. Our teams, as I said, are extremely busy. I think some of the -- with the -- some of the recovery that we're seeing in the capital markets, I do think many of the companies that thought they might be in trouble are getting themselves out of trouble by either accessing the financing markets. And we've been involved in a lot of those kinds of transaction, whether it's private financings or public financings. I think other companies are pursuing out-of-court solutions or partial solutions, which are available to them. And I think other companies, unfortunately, will have to go through the court-mandated route and avail themselves of opportunity to restructure in court. So I think we're going to see a lot of different types of paths for different types of companies depending upon their circumstances. And what we don't know, obviously, is what's going to happen in the future, are we going to have a step back or 2 on the medical front. I hope not, but that's certainly a possibility as we roll in the fall. That could have some implications for the restructuring cycle and companies, what's going to happen to the overall economy, are we on the path to recovery or not, what's going to happen in the election. I think there's still a bunch of unknowables, which will impact both the restructuring cycle and also, obviously, the M&A cycle.

And then what about the actions that the Fed has taken? I mean, they've obviously taken aggressive action right now to increase liquidity in the market. Does that, in your opinion, just kick the can down the road? Or do you see less restructuring overall as a result of that?

Yes. Look, I think the actions of the government, both in terms of the CARE Act (sic) [ CARES Act ] and the actions of the Fed have been dramatic and important and critical to both, obviously, alleviating the human suffering that the crisis has brought on and also helping to foster liquidity in the markets and helping companies that might have had access -- and the difficult to access to the capital markets to get access to the capital markets. And so I think that's been really important for the country and for the economy and for people. So I'm personally very pleased that our government took swift action to try to alleviate a lot of these issues. Will it -- did it keep some companies out of bankruptcy and out of restructuring? Undoubtedly, and that's a good thing. Are there still companies that still have too much leverage despite being able to access near-term liquidity? Are there still, unfortunately, a bunch of companies that still have too much leverage in sectors that are secularly challenged? Yes. And I think there's still a very big opportunity there for firms like ours to help those companies kind of fix their balance sheets over time. So I suspect that even with that intervention, there'll still be a lot to do on the restructuring side for a while.

Got it. And what about your firm's relative position to win restructuring business this cycle versus the last? How do you think about your competitive position?

Look, I think it's even better than the last cycle. And as I said, we achieved very high market shares in the last cycle. I think it's better because, obviously, our team is even more seasoned and even more known in the marketplace. And then I think, importantly, I mentioned earlier that part of our really important go-to-market strategy that's been successful is pairing sector expertise with restructuring expertise. I think -- I don't have the stats in front of me, but I think our firm is 2 or 3x bigger now than it was before in terms of the number of sectors and high-quality sector bankers we have. So we have even more of an ability to pair high-quality sector bankers with restructuring bankers because we are a much bigger firm than we were back in 2009 and 2010 with many more spaces where we can actually pursue that strategy versus what we were able to do last time. So I think we're even better positioned this time than the last. Obviously, the -- it's a competitive space. But I think the number of firms that can bring that level of excellence and do it on a nonconflicted way and do it on a global basis is very few.

Got it. And then restructuring has been 20% to 25% of your revenues over the last few years. Any -- directionally, any idea for how large that business can get in a recession?

Well, it can certainly get a lot bigger. I think Ken said on the last call, it could get 2x in terms of dollar size. We'll see when and on what time frame that may or may not happen. But look, obviously, as a percentage basis, the denominator is a big part of the percentage. And the denominator is largely driven by M&A, right, because the M&A business is a larger business. So I don't know what the percentages are going to be. I do know and I do believe that our restructuring business is extremely busy and I think will grow versus where it's been kind of pre-COVID. What that means in terms of percentages, it is very hard to predict. I hope it grows and it's still a smaller percentage because that means our denominator is bigger, but we'll have to see how that goes out.

All right. And then you spoke a little bit about the various sectors that are under pressure. There were some sectors that were already under pressure before COVID like energy and retail. And there's some sectors that are under pressure now. There's travel, gaming and lodging. You're on the front lines of the media industry. Can you talk a little bit about how much of the restructuring in the sectors that were already under pressure is already done? And how much activity do you think you see in these new sectors that are coming up?

Yes. Look, I think if you look at travel, lodging and leisure, those were all very healthy sectors. Growing the experience economy was obviously one of the good and positive themes that we saw pre-COVID. Look, I personally believe that once we get through the crisis, that those sectors will continue to be very strong again. I don't believe that we've seen a fundamental shift away from travel and experiences and live events and all of those things. We'll see when it fully heals and how long that takes. And -- but I do think those sectors are going to be healthy again. I think retail -- what can you say about retail that hasn't been said already? Obviously, there's dramatic change happening in the relationship between brick-and-mortar and e-commerce and what does that mean for traditional retailers and how fastly can they adapt to the new environment. I think you're seeing not quite the same dynamic, but some of the similar technological disruptions, certainly, in the media industry with the direct-to-consumer delivery and the implications of that for traditional distributors and content creators and digital companies. And so I do think that still has a ways to play out. But certainly, we're in the middle of pretty dramatic change in the media industry. And obviously, technology is driving a lot of that. So you can go through each of these sectors, but I do think technology is impacting all of them to various degrees. And some spaces and sectors have companies that have a lot more leverage. And so when you combine a lot of leverage with technological disruption and sprinkle in a crisis on top of that, that's generally a recipe for some companies getting into trouble.

Got it. Maybe let's talk a little bit about the M&A environment. What are you seeing in the environment? Ken mentioned on the earnings call that client dialogues are ongoing, but a lot of deals are on hiatus right now. Have you seen any changes over the last 1.5 months?

Yes. I think things are definitely getting better. And by better, I kind of put it in 2 buckets. We have seen in very select sectors that have seen less disruption from the COVID crisis, health care, technology, there's been some transactional activity, certainly not what it was before or what it would have been but for the crisis. But there are some transactions that are getting done and some rumored transactions and conversations that are happening. So I do think that's positive. I think the level of dialogue generally is improving. I think there are more and more conversations we're having with clients where maybe these were companies that were looking to explore a sale, were in the middle of exploring a sale or about to explore a sale back in the spring, which all of those transactions pretty much got put on hold. And now you're starting to have the conversations with those companies again about when we might be able to restart. Is that a fall restart? Is it an early next year restart? Depends a lot on the sector and the company and the situation. And I do think some other things need to happen before we're going to see a significant volume of transactional activity. Namely, I do think while the financing markets have come back in many ways, in other ways, there's still a ways to go in terms of soup to nuts LBO financings and some of the edgier leverage credits that we saw that have been fueling a lot of the sponsor activity, for instance. So the level of dialogue is improving. I do think -- quite frankly, I do think the stress that we've seen and some of the dislocation we've seen will itself be a M&A accelerant down the road. I think whenever you have companies that have either gone through a restructuring or had a near-death experience or whose balance sheets have ballooned because of the crisis, I think, many of those companies themselves become M&A participants down the road, either because the companies are now going to be owned by credit -- former creditors who aren't long-term holders, or because companies feel vulnerable once they've been through a crisis like this and feel like maybe they need to be part of something bigger. Or because their balance sheets have gotten larger, and they need to shrink the balance sheets and one way to do that is through selling noncore assets. So I do think, while we've seen disruption in the near-term and are likely to see some disruption for a while, I do think over the longer term, I think, we can add another accelerant to the longer-term M&A cycle, which is the dislocation many of these companies would have felt, which goes along with the historical M&A ingredients, which were technological disruption, activism and M&A and private equity activity, which is large and will continue to be an important part of the M&A market.

Is that more like 1 or 2 years down the line? Because capital markets have rebounded quite nicely. I mean has that lent any urgency to people acting on opportunities available out there?

Not yet. As I said, I think it's more conversational for the most part as opposed to a big -- I don't think the queue is teed up and ready to go quite yet. Look, we're just hitting the summer. We're just seeing signs of recovery. We're just opening the country back up or different parts of the country back up. I still think there needs to be some things that need to happen. As people -- if you're thinking about selling your business, if you're a private equity sponsor and thinking about selling a portfolio company or whatever, you're still thinking about what you would have attained in March of 2020, but for the crisis. And in order to get that kind of valuation, I do think some things need to happen in terms of improved recovery, improved visibility on business performance, improved financing. And so you're monitoring the market. You're talking to your advisers. You're doing your scenario planning. You're doing your 2021 modeling and 2022 modeling. But I don't know that you're yet pulling the trigger for the vast majority of the companies quite yet.

And then on the sponsor side, we're hearing that sponsors are also raising funds. Is that also impacting the conversations that you're having?

Yes. Look, sponsors have been a really important part of the activity. As I think through -- I think what's safe to assume now through any cycle, any kind of market environment, the financial sponsors are going to be an important part of that. So when the M&A markets are booming, financial sponsors are an important part of it. When the M&A markets are not booming and companies are in trouble and need financing, sponsors have raised pools of money to be solutions providers there. So we saw that in 15 PIPEs or so -- sponsor PIPEs that were done for companies over the last couple of months. So sponsors are an important part of the entire ecosystem now, whether it's because they bought debt in companies and are looking to be part of a solution to fix the capital structure, whether it's them putting money into companies to help avoid a problem, like the sponsor PIPEs, or whether it's companies -- sponsor selling portfolio companies when the M&A market is back, or whether it's sponsors buying companies either from sales of large corporates looking to do divestitures. We saw that recently with KKR and Coty is one good example of a deal that's actually getting done in a tough market. I do think -- I do think sponsors are going to be important and continue to be very important through all the different permutations of deal activity.

And what about your positioning to capture more of that market? What are you doing there?

Look, sponsor coverage and sponsor focus has always been very much part of our business strategy since we started the firm, and quite frankly, even before we started Moelis & Company. So I think we were one of the first independent firms to have bankers who were primarily focused on sponsor coverage. We continue to add to that team. One of the hires I mentioned earlier today, Dennis Cornell, who we hired earlier this year is a sponsor banker. So we continue to add to our teams and capabilities in that area. And quite frankly, all of our coverage teams, teams that cover companies in sectors, sponsors and integration with our sponsor group and making sure that our bankers in those sectors are interfacing and have a relationship along with our sponsor teams with the key sponsors who are active in those spaces is very much part of their coverage plan. You cannot have -- I don't believe you can have a -- and be a sector banker in many of these sectors, who matters, if you don't have real connectivity to the sponsors who are active in those sectors as well. So in my view, the most effective bankers in any sector are bankers who have deep strategic client relationships and deep sponsor relationships, all 4 to 5 buyer sponsor coverage group who are taking holistic views of sponsor capabilities and relationships.

Got it. And then you touched on hiring. Do you think that you'll see an acceleration in this cycle similar to what you saw in 2008? Or is this cycle a little bit different?

Look, 2008 was a pretty unique opportunity with many of the investment banks upside down. I don't see that necessarily. The investment banks are not anywhere near the position they were in before. But the -- I do -- what I do think is happening and continues to happen and has been a trend for many years, which is not stopping, is I do think there's continued intellectual capital flight out of the big banks, the bulge bracket and other banks, to firms like ours. And I think we've seen that in the hiring we've done so far this year. I think, hopefully, we'll see more of it as we continue to try to close some of the conversations we're having with talented bankers at some of those firms. So I don't think that's stopping at all despite the fact that the big firms are in better financial shape than they were in the last financial crisis.

Got it. And then maybe on the expense side. Just given the sharp decline in M&A activity that we've seen so far, restructuring revenues take a little bit of time to come through. How should we think about your comp ratio for 2020?

Well, look, I do think the comp ratio for 2020 is not a straightforward equation. Look, there are certain costs that we have with our business, salaries and health care, and there are people-related costs, and there's a bucket of those that are just fixed, right? And so it doesn't matter what your revenues are or aren't. Those are costs that are going to get paid. So that does kind of create a certain -- and does have a certain impact on whatever the comp ratio will be. And then we'll see what the revenues end up being in a difficult revenue environment. But on top of that, we do expect that for our bankers who are important in producing whatever revenue that we ultimately create this year that there's going to be some performance bonuses there, too. So I don't know what that means in terms of comp ratio for 2020. I do think 2020 will end up being an unusual year relative to any year in the past and hopefully, any year in the future in terms of the comp ratio equation. So we'll see what it ends up being.

And when we think of the restructuring revenues coming through, is that more of a 2021 event?

Well, so restructuring typically does have a longer time line on it. Now we do -- when we're involved with restructurings, there is a retainer component to it, a monthly retainer component to it, which is a nice bridge to the ultimate success fee. But historically, restructurings have taken 6, 12, 18 months, sometimes 24 months to get to that ultimate success solution, solution for the company and success in terms of a fee for the financial advisers. But we are seeing sometimes these days where the solution isn't an out of -- an in-court 12, 18, 24-month solution, but sometimes it's, as we talked about earlier, a near-term capital market solution, a financing solution, a sale of asset solution, an amendment solution. And to the extent to which those transactions happen in a much more accelerated time line, the production of success-based revenues can happen much more quickly. And I think we're seeing some of that these days. So I do think that's a positive.

Got it. And then is there anything that you're doing on the noncomp side? I mean any longer-term investments you're making on that front?

Well, so on noncomp, look, clearly, we're not traveling, at least now, the way we used to historically. So I think there'll be some noncomp savings in terms of travel and entertainment and corporate events as people shelter and stay at home for the most part. And there may be some offsets to that for some increased technology costs as we make sure that people can work effectively and remotely from home. So I don't know exactly how that will all net out, but I think there'll be some savings there. Longer term, people ask about real estate and what does that mean. I think it's too early to say. I think we clearly -- I think, clearly, one of the lessons here is there are a bunch of things you can do remotely that you don't necessarily need to do in an office or you don't necessarily need to get on a plane and visit someone to do. Having said that, we are in the client service business. We're in the relationship-building business. We're in the team building and culture business with our employees and our partners and our bankers. And I do think it's hard to do all of those things without largely doing a lot of what we've done before, which is gather in offices, both with our internal colleagues as well as with clients and participants on deals. And it's hard to build relationships if you're not sitting in front of people and our clients are all over the world. So I suspect once we get through this crisis, our real estate footprint and our T&E footprint won't look too much different than it has in the past. That's my guess.

Got it. And then the last topic I wanted to touch on is balance sheet and capital. How do you think about your debt obligations? And why do you envision maintaining a very clean balance sheet?

Well, we don't think about our debt obligations because we don't have any...

Right.

Which is good. So it's good to not have to think about that. Look, I think we've always been really conservative about the way we've approached the business. It -- look, part of when we started the company was we always envisioned, like, what kind of company did we want to work for. That thought process permeated the culture we set up. It permeated the compensation philosophy we created, which is still the same today as it was 13 years ago. And it permeated how we think about capital structure. And we wanted to work at a firm where we didn't have to worry about leverage, we didn't have to worry about complexity, we didn't want to worry about, oh my God, we have earn-outs that we have to worry about and that kind of thing. We really want the focus to be on building the firm, maintaining the culture, attracting great bankers, servicing clients. And I think by keeping the balance sheet simple, clean, investable from an investor standpoint, because it's so transparent, returning capital as much as -- as much as we create excess capital, we've returned it either in regular dividends or special dividends or sometimes in share repurchases. It's just been how we wanted to run the firm. And we think it's the most investable way to do it. I don't know that leverage for a financial services firm is like the best thing to do. That's kind of our belief. And therefore, by having the balance sheet we have and the lack of obligations, it does give us always the maximum opportunity to be on offense and continue to invest in the firm where we see good opportunities to invest at higher rates of return. And so that's for better, for worse how we run it, and we like running it that way. And I think it will serve investors well. It has, and I think it will continue to serve investors well for the long run.

And was that the rationale behind cutting the dividends this quarter by half as well? You have about $150 million in liquidity. It seems like you're being conservative on that front.

Yes. I think it's very much an extension of that same philosophy. Again, we kind of looked at it and said -- and again, when we had to make that decision back in end of April, I guess it was, you were in kind of a point of maximum uncertainty or near the point of maximum uncertainty in the future, and we just had very little visibility on kind of how the rest of the year would play out. And we took the approach of, look, let's err on the side of conservatism. If things turn out better than the worst case, we can always return the money later. It's not like we've changed our philosophy, our philosophy is still the same. Our philosophy is invest in the business, invest in great people, go on offense when you can and return the capital when you can or when you've done all that, I should say. And so I think this is more just of a delay of that as opposed to any kind of change in philosophy.

And are there any specific guideposts you're looking at to restart -- or to get the dividends back up to the same level? Or is it more just the overall environment?

Yes. I think -- look, I think we're going to need to see demonstrated return to deal activity and volumes. And again, it's hard to do that just given how important the M&A business is until the M&A business really comes back. I hope it's not a long ways off, but we don't exactly know. As I said, there are some good indications, but we're not quite there yet. So I think we want to see real visibility, real transactional activity, a real -- better visibility in what our revenues will look like as we kind of roll out a few quarters. And I think once we have that and have that confidence in the business, I think we'll evaluate our dividend policy. And again, I don't think the philosophy has changed, which is we'll return excess capital over and above our investment opportunity as soon as we can.

Okay. Great. With that, I think, we're out of time. Navid, thank you so much for taking the time for joining us.

Thank you, Manan, and thank you, everybody, for listening. I hope everybody stays safe and well and has a great summer.

All right. Thank you.