Moelis & Company (MC) Earnings Call Transcript & Summary

Okay. So good morning, everybody. Before we start, we're required to make certain disclosures and public appearances about Goldman Sachs' relationships with companies that we discuss. These disclosures could be found on the webcast page for your reference. So up next, we are very pleased to welcome Ken Moelis, who's the Founder, Chairman and CEO of Moelis & Co. Moelis & Co. was founded in 2007. And since then, I think it's fair to say that Ken has created one of the broadest independent advisers in the industry with a growing global footprint. Moelis went public in 2014. Since then, they've seen very rapid growth in revenues. They've returned significant amounts of capital to shareholders and have obviously seen a very significant improvement in profitability. So Ken, thank you very much for joining us. We really do appreciate your time.

I thought I'd start off with a broad question, which is that a lot has changed in the past few months. Now that we're past the election, we potentially have an effective vaccine on the horizon, how have your priorities evolved? And where are you spending the balance of your time today?

I'm glad you think we're past the election, Richard. There's a whole bunch of people who think there's -- that we're not. So today, it's -- I mean, the interesting part is significantly different in terms of my travel, which is about zero again, and a significant amount of my time on client matters and the amazing amount of activity you can get in a day and the efficiency with which you can go call-to-call. I have a -- without saying too much, I have a call with the Middle East that would have usually -- this week, which would have taken the whole week to do in a prior lifetime. I would have traveled across, come back, and each one of those trips takes 24 hours. So it is -- it's efficient, but it's an enormous amount of time on client costs because, again, we'll talk about this. The market today, everybody is in motion. I've never seen a time where almost every company we talk to is in some form of motion. I mean, you could be in the 25% of the economy that is an issue because of you're in the travel/crowd-related environment, or you could be in the 25%, which is really benefiting from the stay-at-home economy. Or you could be in the middle, where you're trying to figure out what do you do for the next 5 or 10 years. But I will say I've sort of never felt as much motion and as much feeling that every company has to think about how they're going to attack the next 3 to 5 years based on the changes accelerated by COVID.

So Ken, you touched on this, but you spent a lot of time in Board rooms, you spend a lot of time with management teams. And I know this is across a broad range of industries. And as you alluded to, the issues are very different, but what would you say is broadly top of mind today? And how has it changed in the last 6 months in boardrooms?

And 6 months, [indiscernible] funny, the difference in 8 months, 6 months and 4 months, they're all -- it's wildly different from 8. So 6, if you're thinking exactly that like April -- look, I know you're asking generally, but it is kind of funny, the difference between a February boardroom and April boardroom and in June, it's almost very different.

Maybe we should talk about each, a little bit about each. And maybe we do April, we do June and then we do more recent. Let's do -- yes, top of mind.

February is interesting, too, because January, February, the market was very -- we felt there was a big M&A wave come in January, February as we probably talked about that with you even in December at your last conference. We did feel that there was a lot of M&A building, and our backlogs were strong. And then, of course, March hits and everybody gets sent to their couch. And in April, I would say that you didn't have a lot of optimism, including us, by the way. There was a big well, what the heck's going to happen now? Nobody had ever been sent home and said there's going to be lockdown. And so in April, I'd say there was a bit of a real -- let's stand back and see what happens. And that happened in April. So there was not a lot of, I'd say, between April, May and the end of May and even into June, it was a real defensive posturing by almost everybody. What's going on with my workforce? What's going on with my operations? And then starting about June, and I think I was on an earnings call after the second quarter in July, so we started to see it in about June. A real sense of okay, we get it. We have to respond. We have to change our business. We -- I'm talking about the positive side. On the negative, there were people who are negatively affected, and those people had to take action, whether it was rescue financings. Some ended up in restructurings. Those always had a solid path that they had to figure out what they were going to do when revenues might have gone from -- to 0. But then in June, we started to feel the, "Hey, this is interesting." The Fed has printed money. The bond market is open. Bank market hasn't opened yet, by the way, but the bond market was open, and we could finance. And we think there'll be an end to this. And so we started to see that M&A, again, Richard, without boring you, is sometime in July, I guess -- and again, I might be getting the time frames mixed up. They started to be the feeling of a second wave or a Midwestern wave. It hiccupped a little bit. But then again by August, September, October, I felt like, "Okay, everybody got it. There's going to be second wave. There's going to be hiccups, but we're going to finance, and we're going to look to 2021, 2022, 2023." And we are going to change our business, and we are going to take steps to reposition our business. And I don't believe from that point forward, there's been anything but a very strong conversation about the future and very active.

So would you say that what you're hearing from management teams is consistent with the exuberant mood that we see in financial markets, equity markets, in particular, that keep on hitting all-time highs? Or do you think there's a disconnect between the 2?

No. I wouldn't call it exuberant. I would call it aware -- look, aware that possibly that the -- what a lot of people have said, which is COVID has accelerated things that were on trend and were going to take longer but might have accelerated the activity by 5, 10 years, whatever. I've heard different numbers. I think it's accelerating the thinking about what our companies thought they had to accomplish to position themselves to be competitive and to go to market. And so maybe -- I wouldn't call it exuberance. I would -- I think it's truncating what could have been anywhere from a 3- to 10-year acceleration in thinking about business plan and where we stand. And I think every company -- almost every company has to think about it, but I wouldn't call it exuberant. Some are doing it out of defense. Some are doing it just, "Hey, this happened to us, and we have to think about it." And by the way, there is a part of the economy, the stay-at-home valuation changes that are doing it, that are thinking, "How do I take advantage of something I never saw happening?" And valuations have changed fairly significantly for that group.

So on the Q3 call, you talked about a Zoom economy. What did you mean by that? And what does the concept of a Zoom economy mean for Moelis and for the advisory industry in general?

Look, I'm not the first one to say about a Zoom economy. I think you're asking me more about a Zoom business model for ourselves. It might be more of what you're asking. So all of a sudden, we are more efficient. I think deals -- transactions are more rapid from start to finish. I mean, literally, I could get a call at 8:00 in the morning, and people say, "When can we get the team together?" Well, the answer used to be, "Let's compare calendars," and 3 people per side were traveling at different points. I'd say the answer is usually, if somebody calls you at 8 in the morning, 9, 10 or 11. When do you want to have everybody on a conference call? There's nobody at their kids' sporting event. There's nobody at the mixed game. There's nobody out for dinner. So things are happening rather quickly. And then for the model, what it's doing, I think, is accelerate -- oh, one last thing that I think is interesting. We at Moelis, and I think we talked about it, we had a -- we always like the capital markets business, and we had a big capital markets second quarter, which kind of woke us up, too. Maybe the world is changing for that. And so we went out and really strengthened our capital markets team, hired 2 very significant players. And I think that's coming true, too. So when I talk about a Zoom economy, interestingly, people talk about trading floors and the need for that. Well, nobody is on a trading floor. And possibly and I think very definitely, we might have very significantly changed the method of how you go-to-market to access capital. And we are seeing that. We are -- continue to generate significant interest in the ability to generate capital in our model, which is what we call highly confidential. It's a very institutional world anyway. So I think Zoom might have changed how you're going to organize around raising capital and might really give us an opportunity, and we can talk a little bit about that if you want. But the last part also for our business model, as of now -- as of this year, we're probably saving $30 million run rate on travel and entertainment and things of that nature, and not losing anything in the efficiency of the model. Will that stay that way? No. Travel will come back. Will it come back 100%? I doubt it. I think there'll be some middle ground. I don't know where that is. But I bet one out of every 2 or 3 business meetings might not happen. By the way, I do look forward to traveling a lot. And I think that might make the part where you do travel to instigate and continue relationships. I just think that meeting where everybody shows up to draft and everybody travels miles and miles to do something that is now demonstrated, can be done fundamentally just as well by conference call or by Zoom call. I do think a lot of that will stay that way.

So you were one -- you were amongst the first to flag a rebound in the M&A market back in the summer. And since then, activity obviously has picked up, I think, a lot more than a lot of people would have expected. When you look at this pickup in activity, how durable do you think it's going to prove to be? How much of this is just activity that was put on ice back in March coming back versus how much of this is truly new business that the pandemic has created? And are you thinking about this as a new M&A cycle? Or is this just a continuation of the cycle that we kind of saw pre-COVID?

Great question because I think some of it is transactions that were talked about in pre-COVID. But I thought there was a new M&A cycle pre-COVID. And so the answer is all of the above. I think some of this is -- there is some catch up, but there's some real new things going on. First of all, the valuations. Look, the market is up significantly, and so our average transaction size is increasing pretty significantly. It tends to track just the market, and the market is up significantly. But I do think all things being equal, again, I don't like to use a crystal ball too often because usually something happens and proves you wrong. I didn't see COVID. Things happen. So -- but right now, it feels like that this is a continuation of the January -- what I felt like in January, February. With the benefit of the Fed keeping rates extremely low, there's a whole growth arbitrage going on in the financial markets right now, meaning the public markets have decided to value growth significantly different than the private markets. And you could see that in some of the SPAC IPOs that we've been seeing. But that's actually very interesting that, that resets. So every Board and every company and every entrepreneur has to rethink how they're going to finance their growth because cost of capital is a significant change in a competitive advantage, if you use it correctly. And I do think the markets have changed rather significantly, which might result in a rather significant place where you want to posture your company, where you want to have your -- how you want to finance come forward and where you want to be. So I do think this could lead to significant extension of the M&A market and some of the financing market, too.

Can you touch on financial sponsors? I mean financial sponsor activities really lag strategic activity. But in the last month or so, we've seen a significant pickup in financial sponsor activity. I mean, what's your dialogue with financial sponsors like today? How has that evolved? And how are financial sponsors thinking about the opportunity set against obviously markets rebounding as significantly as they have done?

It's the sponsors have been very aggressive. They were early in seeing that the valuations would change. I think they kind of led -- they led to August, September part of this. Strategics are coming now. I think for the first part, they led. And they led because they're sitting there with clean, newly raised money, and they do have a fuse on how long they have to put it to work. So they kind of leaned into it early. And then I think now you're seeing the strategics coming right up behind them. But financial sponsors are seeing this as quality companies, high-growth companies that have high margins and high growth. We can pay more for those because ultimately, the exit into the financial markets is pretty good, too. So I think the financial sponsor market is active, and it was active early and continues to be very active.

So let's talk about the restructuring business. Obviously a very, very important business for you. I think the view is it's going to be -- it's still going to be very strong heading into next year. But can you just update us on how the pipeline in the restructuring business has evolved over the last quarter? And how the broad availability of financing even for distressed companies is changing either the timing or the magnitude of what you think this restructuring cycle might look like?

So I think you're right. The restructuring business continues to feel about the same as it did in the third, which was it was -- it's elevated. It wasn't as immediate as everybody thought or the way the '08, '09 crisis was, which all came in one 18-month period. This seems to be cycling. We had a very big energy down cycle. You had some aerospace problems. You had some retailer problems. And I think it will be extended. It feels like it's continuous and extended. There's just a lot of debt out there. There were a lot of financial transactions done. I don't have the numbers in front of me exactly, but I know that the less than investment-grade debt is extremely elevated just in absolute size. And so if you put any percentage on it, 1% or 2% default rate or 3%, the number just gets large. And I think we will see that because the general economy is going to get through this, and you see that in the stock market. But will 2% or 3% or 4% of the companies continue to just get caught in what will be a pretty -- I think a violent recovery from this. Violent, meaning there'll be sectors that just don't move. Right now, we've had a $2 trillion stimulus. We're going to have some other form of stimulus. But sooner or later, the economy is going to have to function on its own. And in the interim, a lot of companies have taken on more debt to fund liquidity issues that will turn into solvency issues, if their particular part of the market doesn't recover or recovers differently than others. And I think that will happen. There will be parts of this economy that just recover differently. And again, it's been surprising. Every part of the COVID economy has been fairly surprising. So I think we'll find out over the next year or 2, but I can't imagine that we won't have -- the difference between a 1% elevation and default rate, I think the default rate coming into this was only 1 or 0.5. I don't have the exact number. So you just add a percent to it, you double the market, and that's a big -- that would be a big thing for us.

So can you talk a little bit about the dynamics in the restructuring environment from a competitive standpoint? Are you seeing people price business rationally? How do you think about your relative position within the restructuring business? And can you talk about whether or not it's been -- retention of staff has been something that's been a challenge in that business, just given the competition for people.

We think that the market has stayed fairly rational. I think there's always a bit of a competitive side of it, but it stayed where it is. I think the market is solid on its pricing. I think that market is hard to create new entrants. It is a market that is often referenced from either the legal community or its own community. And so it's hard to -- there are 4 or 5 leaders in that space. We think we are the leader. Depending on different years, I think in 2019, we were the leader. And obviously I'm not going to say you can't cut numbers to come up to different things. We are -- one of the reasons why the pricing, I think, stays pretty good in that, Richard, is -- and this is just an insider's view of it. In M&A, there's usually 2 seats or there are 3, but once the deal gets going, those seats, they're taken. There's a limited number of players in this space, and usually a bankruptcy or a restructuring has several different seats. There is the company, and then there's the bank or the senior -- there's several different seats. And I find that, that helps me become disciplined because it's not -- you don't either get it or lose it. There's often several different places to play, once a large-cap restructuring goes into a Chapter 11 proceeding, there's multiple ways to, I call it, mitigate the loss. You end up in some other seat down the cap structure, which I think is helpful to keeping it rational but I feel very good about our team. We've lost no one. I think I'm pretty sure that we've lost no one. We've kept our young team together, and this is throughout Moelis & Company, very excited about it, and we can talk about it. But we've kept -- almost the whole team has been with us for 10 years now, and some of our best assets and best people in that space are just coming up through the system. And we're -- we are really excited about those people.

So let's segue a bit and talk a little bit about capital and capital returns. You yesterday announced the decision to pay out a $2 special dividend. Can you talk a little bit about the thought process behind the decision to make that special dividend payment? Why you've done that now? Does it say anything about the business in the fourth quarter? And perhaps just talk more broadly about the trajectory for dividends, regular dividends and special dividends going forward?

So yes. So we did declare a $2 dividend. And the reason was really -- I'll give you 3 reasons. One and the most important is the business has -- you're right, I thought the business would accelerate in June. It did. I thought it would accelerate after the third quarter. And I think even at that point, we had reinstated half the dividend because we were just early -- by the way, the election hadn't happen, and we were early on the second wave of the virus. I think we've become -- the business is both solid. We have a lot of confidence in where we are. We don't guide, but we're pretty confident that we are -- we were right about the rebound in M&A. We see it, and we feel it, and we can measure it. And two, we had deferred dividends in order to make sure, again, the first thing we did was protect the franchise in April, and we'll always do that because we're long term. Our shareholders are long term. But we did say as soon as we're confident that we will give your money back to them. So we wanted to do it as quick, and it's in the same cycle, same tax year. And lastly, taxes did have something to do it. We have a very unique tax position, 2 things. Next year, we don't know where taxes will go on -- in general. So we thought if we can give capital back this year, that's excellent. And secondly, we're in a unique position where this dividend will be return of capital, we think. I think I'm going to wait. We're pretty sure it will be a return of capital. We'll make that statement at the end of the year when we know exactly where we stood. But for various reasons having to do with a lot of the tax law and the CARES Act and all that, this might be an ability to return capital is deferred and positive. So those are the 3 reasons we decided to do it and do it before year-end.

And then could you just talk briefly about the regular dividend? I mean, obviously you reduced that as you talked about in, I guess, it was in April. You've increased it again recently, but you haven't gone back all the way to where it was. What will it take to get that dividend back to kind of where it was? And how should we think about the longer-term growth profile of just the regular dividend?

So again, that's a Board decision, and let me say that. But I would think that we're on track to reinstate if things stay where they are, but that is a Board decision. I just want to say, given where I think the business is right now, we would go -- we would recommend to our Board. And again, that's -- we're not raising the dividend, but I do believe, given the knowledge I have of where I think the business is, I would feel comfortable, and I hope I feel comfortable when we get back to that decision. But that's a decision we make at the next Board meeting, which I think is -- and with our first -- with our conference call after the fourth quarter. So we're not changing it now. I want to be on record. But I would guess, we wouldn't have paid a $2 special if we didn't feel the business was generating cash.

Okay. So let's talk a little bit about the operating margin within the business. And I guess, look, the broad question, and I know that it is a difficult balance, but how are you thinking about the balance today between investing in the franchise versus maintaining or even improving near-term margins? I mean, what do you think is in shareholders' best, let's say, medium- to long-term interest today, given what you think the opportunity set is in the next 3 years? And perhaps you can talk maybe a little bit more broadly around where within the franchise you think you're going to get the best return on investing today, either by product, by geography or whether there's a business line that you really feel would make sense to acquire. Although I know historically, acquisitions is something that you haven't been keen on.

Well, our margin, if you're talking about relative to the first 9 months, our margin will improve rather significantly by the end of the year. We -- we've always said everybody focused on the conversation. We think we focus on kind of a 25% pretax margin, which worked out that way. There may be slight differences in the way we want to. We may save a little, want to save a little on the operating margin. And -- but look, we've always felt like that's the best way to run the business. We did have a second quarter that given COVID and the total stand down in activity was different. But look, we think given the momentum we have now, we don't think it's an either/or. We think we can start to think of margin. We've never felt -- look, I think there was a feeling last year that there was some -- we just had 1 year where we wanted to invest. We did. Now we've got the greatest team of people. This market is playing to our strength, which is collaboration, internal promotion. By the way, Richard, I want to say that if you've accelerated the world by 5 or 10 years, I think you've accelerated the desire to have young people in your system. And I really believe that the world is changing so rapidly that I almost -- I'd rather have a young, up and coming 35-year Managing Director than I got to watch it. I can't -- I'll get into an ageist problem. So let's just say I'd like to have a group of those, and we do. We've been hiring them, training them, organizing a culture around them. And the market wants that type of thinking right now. I think we've accelerated the transition of even the talented bankers by 5 or 10 years. If we've accelerated the world, we've accelerated the relevance of the trainee -- of the younger people in your system, and we feel great about that. So look, I think you're going to see us be able to do both because the system -- and in a Zoom environment, you can't create that culture once everybody spins out. We have that culture. And we're seeing the collaboration and ability to work with each other become a real asset as people separated. So I think it's one of the reasons we came out of this strong.

How would you characterize the hiring environment today? I mean, has it changed materially, again, relative to 3 months, 6 months, 12 months ago? And perhaps you can spend a couple of minutes talking about whether there's either a product vertical or an industry vertical that you really feel that a return on investment would produce outsized results today within your franchise?

It's hard to always -- in December, it's hard to make a statement about the hiring market because remember, we're 1 month away from bonuses. Some of that is -- I think it will be fine, though. I think actually, the -- I actually think this next year will demonstrate again that the world is going toward asset light. The boutiques are a great place to be. I think that the middle market will continue to prove to be a very tough place to make return on equity for the banks, especially the European banks. And as a result, I just think people will make a change. Look, we took 2 capital markets people out of a big bank, and they're inundated. I think they're stunned by what can happen inside of a boutique because everybody is so close and so focused and so desirous of collaborating, that there -- 1 or 2, 3 months after joining, they're working 24/7, and I think it's surprising to them. So I think that the market will remain well. I don't think evaluating it in December is a good way to do it. I think it will be a good hiring market. If we could -- if we can go after a couple of things, I think we could do in technology, certain areas of technology, we'd want to add to. I've always said I don't know how you can get too big in health care. It just seems to be enormous. And I think capital markets, you might see us continue to feed the beast in capital markets. We had a theory, and we think it's real now. And we think it might play out that, again, the Zoom economy might prove it to be more powerful than even we thought.

R So just to be clear, on the capital market side, are you referring to things like equity capital market advisory businesses?

Yes. Yes and raising. People are -- it's so institutional that we are raising money, equity money without a trading floor, without research on an asset-light basis. And it's working out phenomenally well. I mean, the money is organized around institutions and sovereign wealth funds. They want high intellectual content. If we deliver that to them and our client, I think we can disintermediate what was an old method. I think that's why you're seeing the SPAC market boom. Some of these traditional IPO methods are just being disintermediated, and I think you might see some of the traditional ways of going to market disintermediated by an asset-light ability to contact the same people while sitting in front of your computer.

So we have a few minutes left. So I'm going to take this question, which is a longer-term question, which I think is a good one, which is, if you look further ahead, let's say, 5 years, maybe even 10 years, what do you want Moelis to look like? And what excites you the most about your business? And I guess, as an add-on to that, again, over a 5- to 10-year time horizon, what are the milestones by which you will use to judge success?

So I do think that the world changed and not having assets -- look, when the world changes, I learned this in several times in 1990 crisis, 1998, I don't have to go through them all. But having asset -- being asset-light is a great thing because it's hard to get rid of the stuff. If you own a lot of assets, it's usually not the ones you want to own because something just happens. So COVID happened, and the world changed. And everything you owned, all that could happen is a lot of those assets might be not valuable going forward if you have a big balance sheet. We don't. We have intellectual capital. And I do think the world changed. And so we are pivoting with it. We raised the SPAC called Atlas Crest because I think the IPO market is possibly disintermediate, meaning that the SPAC method might be quicker, cleaner, better. And you don't need a trading floor and you don't need a lot of what the traditionals have. So I want to -- things like that, capital markets, but most -- if I'm excited about something is what I said, which is we spent 12 years talking about our culture, talking about why one P&L is a one bonus pool, especially, one bonus pool and not having people on commission was so important. Well, when everybody gets spread out to their own homes, you can't then say, "Hey, banker A and banker B, I know you're on commission, but can you meet each other and collaborate?" It's really hard. We have it. It's happening. We have 5 or 6 Managing Directors on calls with clients delivering the firm. It's very powerful. By the way, Richard, it's what made Goldman Sachs so difficult to compete with 30 years ago when I first ran into competing with Goldman in the late 1980s. They delivered a lot more than we were delivering at a firm like Drexel Burnham when it was singular. So I saw the power of it, and we're going to deliver it, and we are delivering it better than anyone. And lastly, the milestone, I would think of -- what really gets me excited is I see the power of the young people, the younger people that we've had. I call them young because I'm old, but they're not that young. But they are -- they've been with us 10 years, 12 years. They are leading us into the middle -- they're now the leaders of our Middle East franchise, the leaders of our European franchise. They are leading us into these new areas of high growth that I'm not -- I don't know that -- let's just say, they're on top of it. And I do think that you're going to have to transition to a generation that understands what's going on in the world. I didn't know Zoom existed until they forced me to in March. And now all of this ability to execute without asset, tech-enabled, everything is getting tech-enabled. Every industrial is going to be a tech company. This is all extremely exciting, and it's very empowering to young people coming up the system who wanted -- want to accelerate their career. And I think we have a tremendous amount of them. And if I had a milestone, it would be me to make sure that they get runway, they get ability and that we don't -- we let them flourish because they're flourishing. They are flourishing. If we have a strong comeback or a stronger comeback than I would have expected post-COVID, it's because of them.

Okay. So Ken, with that, we're out of time, but thank you very, very much for joining us. It was a really, really interesting discussion. And look, hopefully, we'll see you again next year but in person. Thanks a lot for joining us.

I'm hoping for that, too. Thanks, Richard.

Thank you.