Hey, guys Moelis & Company third-quarter 2022 financial result conference call. On the phone toady are Ken Moelis, Chairman and CEO, and Joe Simon Chief Financial Officer, Before we begin, I would like to note that the remarks made on this call may include forward-looking statements. These statements are subject to risks and uncertainties, and actual results could differ materially from those currently anticipated. The company undertakes no obligation to update any forward-looking statements. Our comments today also include references to certain adjusted financial measures. We believe these measures provide useful information for investors. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings release, which is available on our Investor Relations website at investors.moelis.com. I will now turn the call over to Joe to discuss our results.
Thank you. Good afternoon, everyone. On today's call, we're seeing lower levels of transaction completions driven by the volatile markets. Our nine month total revenues of $768 million were down 33% from the record prior year period. Moving to expenses. Given the dislocation in the transaction environment, our investment in new MD hires and non-MD compensation inflation across the industry, the 62% comp ratio is our best full year estimate. Our third quarter non-comp expenses were $38 million, resulting in a year-to-date non-comp ratio of 15%. T&E is still tracking at 75% of pre-pandemic levels, consistent with expectations. Our year-to-date pre-tax margin is 24%. Moving to taxes, our underlying corporate tax rate of 27.1% for the third quarter is consistent with prior quarters. We continue to maintain a fortress balance sheet with no funded debt.
Our board declared a regular dividend of $0.60 per share, and during the quarter, we repurchased approximately 330,000 shares, which together with the first and second quarters, has resulted in a year-to-date buyback of approximately 3.2 million shares. As always, we remain committed to returning 100% of our excess capital. I'll now turn the call over to Ken.
Thanks, Joe. Following Chairman Powell's speech at the Jackson Hole meeting, also uncertain environment is how ambitious our clients continue to be, however. Even though short-term deal execution is difficult in today's market, client engagement is very strong. They evaluate their competitive position in the world and make decisions. Many of these decisions will lead to transactions. Planning ahead in the short term, which is certainly turbulent, we have a leading restructuring team on Wall Street. This quarter, the team has seen an increase in mandates as financial stress continues to build. It only takes a modest uptick in default rates to fully deploy this very talented team, which remains an enormous opportunity for the firm. Looking over the horizon, these cycles are typically limited. The M&A market will continue to grow.
To support that growth, we've added a total of 25 managing directors this year, 16 through internal promotion and nine through external hiring. The areas of focus are the ones we have industrials and Private Capital Advisory. We've built a resilient firm with a fortress balance sheet, no debt, and pre-tax margins of 25% or better over the course of the cycle. We view our people, our culture, and our client relationships as extremely valuable long-term investments. With that, we'll now take questions.
Let's start on the financing market. You know, are there any signs of improvement in overall conditions there? You know, how big of a factor has that been in the recent slowdown in the M&A market overall? What we should be watching going forward to see how that progresses from here?
Look, I'd say no, there's been no, and it depends from what date you're asking. Again, since about Jackson Hole speech, I say there's been no improvement, maybe even a slight degradation of that market over that time. It's pretty difficult to get a deal done. Some form of stabilization of the interest rate. I think people are just wondering how far and how long the Fed goes. You know, you can't raise forever. At some point they will stop raising, interest rates will reset around that rate. I do think capital will become available at that rate, although more expensive.
Thanks. That's helpful. Maybe for my follow-up, you know, as you pointed out in your prepared remarks, you've been very active on recruiting year to date. Do you expect to continue to lean in on recruiting and headcount expansion, or do you think there's any reason to be maybe a bit more cautious given the more uncertain environment?
Well, when you say lean in, it's already November now. I think, you know, you're pretty much done for the year on the bonus cycle. The answer is, we're gonna continue. We have a fabulous financial condition in terms of liquidity, balance sheet, all of the internal fixed obligations you might have, including employee leases, all those things. We're in, I think, the best position in the industry, and it's a great time to use it. I mean, the reason you sit here and maintain your operations very aggressively is just fabulous talent became available. I think it might have to do with the volatility.
By the way, I think some of it was the volatility of last year, having our balance sheet and solid feeling of long-term visibility and investment in our talent base. They understand that as well. I do think going into next year, we'll be aggressive, and clients expect you to cover them and do good work for them through good times and bad. When you come out of it, you have an irreplaceable asset.
Thank you. Our next question comes from the line of Manan Gosalia, Morgan Stanley. Manan, your line is now open.
Hi, good afternoon. Maybe a follow-up, you know, and clearly in this environment you're still doing $230 million -$240 million or so of revenues, which would, I think, put you on pace for your second strongest year. I guess, how should we think about the revenue level that you need to get back to that high 50s comp ratio? Is, you know, is the 62% comp ratio more temporary in this environment and, you know, as soon as revenue started to tick back up over $1 billion, can you get back to that 59%? Or should we think about the investments you're making in hiring as pushing out that high 50s comp ratio to maybe a couple of years down the line?
Look, I think 62% is a confluence of events, including a down revenue year, but one of them is also the inflation on non-MD compensation, which, remember 85% of our head count is non-managing director. That's proven pretty sticky. Like a lot of industries, there's a bid out for talent and, you know, that's proven sticky. You take that into account. By the way, we looked around at our peers after the second quarter and many of them are running GAAP ratios. Again, I look at GAAP because we don't adjust much. You know, they're four, five, six points over us on GAAP comp ratio. Like any business, you can't. You know, I think we have a better team. You have to be competitive and you can't.
You have to respond to that. Lastly, we did invest in talent. I do think, look, the investment in talent is actually not a negative. The talent we got will, I think, cover the comp ratio and will allow us more room. You know, I think that if we've done our job right, that should not be pressure on the comp ratio. That should actually relieve comp ratio as they produce. I don't know the exact answer to that. You know, sorry, to the point of, you know, what exact revenue you have to be at, but you know, 62% is not our target. That's a unique confluence of events for this year.
You know, the issues that I pointed out from competitive nature, non-MD inflation and a lousy nine months of revenue, to tell you the truth.
Got it. Okay, that's helpful. You know, a follow-up to your comments on the financing markets. Is there a distinction between the financing available for larger deals? Because clearly the larger deal market has been fairly muted over the course of the last few months. Is there still private financing available for smaller deals? How are sponsors currently financing the deals that they are doing? You know, maybe if you can just talk about how they're preparing for further rate hikes from here and what they need to see to lean in.
I think there is a slightly better or there may be an open market for smaller deals because you can get creative, you have more flexibility, you have more lending sources. I think the bigger deal, to put it in a negative way, you have to go through a smaller amount of institutions that can actually stand up for a larger deal. Many of those institutions have moved to the sidelines, where at the end of the year, I think they've had, you know, they have issues with hung loans of that size. That probably is the market that is most quiet at this point. There are some deals getting done, though. I mean, people are being very innovative. I saw a buyout, I think earlier this week, it was announced.
Very innovative take-back paper financing. There are deals getting done, and that's what I said about the ambition of our clients. The amount of conversations and desire to execute. I think both buy and sell, by the way, is a function of there becoming a market available. Everybody realizes that that market will have interest rate expense that could be as high, you know, double 12- months ago. That will affect the price. The market wants to transact on those, on some of those transactions. There's just no capital available, and so everything is put on hold. Let's just say a large amount of transactions are just being put on hold.
Great. Thanks, Ken.
Great. Our next question is from the line of Steven Chubak of Wolfe Research. Steven, your line is now open.
Good afternoon. This is Brendan O'Brien filling in for Steven. I guess to start, Ken, based on your comments, it sounds as if, you know, financing conditions are the biggest headwind at the moment, and you're hopeful that once the rate outlook kind of stabilizes, you expect some sort of improvement there. But at the same time, you as well as most of your peers, are quite constructive on the restructuring outlook. I guess my question is, do you believe that we could see a recovery in M&A activity in an environment with accelerating or elevated restructuring, or like, you typically don't see those move in lockstep. I just want to get a sense as to how you expect those two, businesses to kind of interact.
I think you could see that. It's not COVID. You know, those are the last times restructuring spiked, and they spiked very quickly. Like, COVID was an eight week fire drill. The Fed bailed everybody out. By the way, 2009, 2010 was a little the same. It might have been an eight month fire drill, but the Fed bailed everybody out. I think the opposite's happening here is that this is a slow-moving car wreck. There's not anything immediate that is causing defaults in a very short term. It's just gonna be rates keep rising. Remember, we've probably only had most corporations have only made two interest payments under the new Fed regime. Again, those payments are looking forward to next quarter, probably, you know, 200 basis points higher than they were a quarter and a half ago.
What I think is gonna happen is you're just gonna have the elements of possible gross margin pressure on companies, reduced gross margin as the economy slows. Increasing interest rates just result in a long path of companies that are overlevered, too exposed to floating rate interest and have their margins squeezed, businesses where the margins get hit. You know, I think that could be a long path of a couple of years of restructuring, which is very different than, again, 2009 and COVID. I think it could be extended. During that time, again, there's a lot of money in private equity hands, and strategics are not sitting still.
I do think the transactions could be flowing if we get a market in which there is a supply of financing that allows transactions to actually be executed.
No, that's great color. Thank you. Sorry. That's great color. Thank you for that. I guess, for my next question, so on restructuring your mandates there have been building as you noted. However, given activity was very subdued to start the year, wanted to get a sense as to where your mandate count sits today versus a more normalized environment such as 2019. Also, if you could provide any color on some of your non-traditional M&A businesses and how those performed in the quarter and your expectations for, you know, Private Capital Advisory in this environment, and Capital Markets, that'd be great.
Restructures are up significantly. I don't have an exact percentage of the mandates, but the mandates are up pretty significant. You know, 25% over the last quarter.
Sequentially.
Sequentially. Quarter to quarter. It's starting to ramp. As I said, that's gonna be a long, you know, again, people are just incurring their first interest rate increases and there's not a macro event that's caused everything to stand still. It's just you know, people looking out at a 2024 maturity wall or a 2025 and interest rates increasing, that's gonna continue to build. It's not a big revenue event immediately. In terms of Capital Markets, that's with financing down the way it is, our Capital Markets has run into the same headwinds. The interesting part about that is we're built for that.
We have, as financings become less plain vanilla, more structured, it tends to be a call from an individual deal maker to a large institution that can sit down and structure a solution for a client. That's really right up our alley. We're not made to have a long sale, you know, a big sales force distribute plain vanilla items. I think that's gonna be a positive for us. In the short term, there aren't many terms to get a deal done. I mean, you know, there aren't many terms that an issuer actually wants to issue at. As we've been advising people, if you don't have to be in this market, you do not wanna be in this market. This is not a market you go into voluntarily to refinance.
You're already eliminating, you know, as you say, all the elective surgeries being eliminated. It's only, you know, it's only if you really need it, that you're gonna go into the market. All that is being affected. I'd say the same for our private funds advisory. I think we've made some great hires in there, by the way. Of those external hires, we continue to build that group out. We think that's a long-term strategic place to be. You know, not in the third quarter of 2022. You're not gonna monetize it in the third quarter of 2022.
Great. Thanks for taking my questions.
The next question comes from the line of James Yaro of Goldman Sachs. Please go ahead.
Yeah. Thanks for taking my questions. I just wanted to ask one more, on the rates environment and then sort of the corollary, you know, how that affects, you know, how that's changed some of the FX pairs. In particular, you know, is there an absolute level of rates that really changes the advisory activity levels or, you know, is that already sort of baked into, you know, the weaker market you're talking about? And maybe you could just talk about, you know, how rates are differently impacting sponsors versus strategics and how that could just change the, you know, the mix of M&A over the medium to long term. You know, we have obviously a much stronger US dollar. Is that catalyzing any sort of cross-border activity into Europe, for example?
You're right about the strategics. I think our mix has kind of flipped a little bit. Of our revenue, I think it's gone, you know, more strategic than ever before because strategics tend to have better credit ratings and have more corporate, you know, availabilities. That is happening right now, a little more strategic in the mix than financial sponsors. I'm a believer that if you have a rate. Let's just put it this way too. I think you also need to have some clarity or people need to have some vision of where the future economy will be. Even that I think is out there. I mean, there is a general view that the economy will be difficult next year. That's priced in, and that will be in the prices.
There are a substantial amount of assets that wanna sell, and there are a substantial amount of corporates and financials that wanna execute on acquiring assets. I think the pricing will fix itself rather quickly. I think the pricing might already be there, but if you don't have a supply of financing to actually match a buyer and a seller and actually execute a transaction, it's just not gonna happen. I think when you get to a stabilized rate environment, M&A will come back. You can't just sit around wishing you were back and given the capitalization you can get and the financing you can get. The problem with that right now, it's close to zero in a lot of instances.
On FX, yes, we have people looking at it. Again, that happened pretty rapidly. I think there are a lot of people who wanna look at opportunities around that, but again, you need the supply of financing to be able to execute on that and the confidence in where the Fed's gonna stop and what the market will look like. That could be a substantial generator of activity maybe early next year as you can execute.
Okay. That's very clear. Just a quick one on the restructuring business. You know, I think people have a little bit of this recency bias, where I think people think that, you know, restructuring can pick up really quickly. I was just wondering, you know, when you think about when those, you know, restructuring mandates that are, you know, starting to pick up are really going to, you know, be completed and manifest in your revenues. Is that more next year or is that sort of more of a 2024 type event?
We'll have a lot more mandates. We'll have a lot more. By the way, revenues will pick up because some of these transactions are to exchange debt, move maturities out. There's a lot of things that happen in the interim. Those large success fees that are based on, you know, bankruptcies, recapitalizations are a ways out. I think that the interest rate takes a while. Again, COVID was an immediate event. People were like, hey, everybody's home. Or we had a model, you know, companies that went to zero revenue. I mean, we've modeled zero EBITDA, but until COVID, we never really modeled zero revenue for many companies as a downside. That's not happening now.
In fact, you know, in a lot of businesses, the consumer continues to spend and unemployment is low. So it'll hit through margin and interest rates, and I think that will be a long but could be very profitable long-term opportunity. Again, we're at like a 1% default rate. There's a tremendous amount of debt out there. As Joe was saying before, all we need to get to is, you know, 3% or 4%, and I'm not sure the Street has the personnel to cover it.
Oh, okay. That's really interesting. Just one quick one for Joe. You know, non-comps came in down on a US dollar basis quarter-over-quarter. You know, how should we sort of think about the run rate for non-comps? Is that, you know, something we should expect to grow from here given all of the inflationary pressures, or is this sort of, you know, a good run rate to base next quarter on?
Yeah. I think the run rate, as I've described in previous quarters, is kind of 40 area. You know, it'll fluctuate, but not a great deal, I don't think.
Okay. Thank you so much.
Sure.
As a reminder, if you would like to ask a question, please dial star then one on your telephone keypad now. Our next question is from the line of Brennan Hawken of UBS. Please go ahead.
Good evening. Thanks for taking my questions. I'd like to start by circling back to the comp ratio. 52% for the full year, Joe, got that loud and clear. You know, this environment has stayed uncertain for a lot longer than many folks expected earlier this year. Yeah, I hear you, Ken, that eventually the Fed's going to stop raising rates. You know, the Fed has also basically told us that they're gonna jack up unemployment, and that's gonna lead to credit losses, and lenders aren't exactly lining up when you got credit losses stacking up. If the environment remains uncertain, you know, into next year, how should we be thinking about a comp ratio at that point?
Does it come down to a ratio or is it more just thinking about the fixed expense base and the ratio will fall where it will?
Well, it's probably a little about what you're saying at the end there, which is. First of all, if we really have an environment that you have, remember, one of the things I talked about is the non-comp, the stickiness of the non- and the inflation on comp. If it's as bad as you're saying, Brennan Hawken, look, we can't, you know, 85% of the workforce in the banking environment can't stick to the comp levels that that sort of happened last year. You know, I think there'll be some resilience in that if it gets as bad as you're saying, and that's hitting it. Again, what you said is a little bit right.
I just wanna say this is, look, our best guess is 62 because we don't have a crystal ball on the fourth quarter, but we think we have a good outlook on where it is. We think we know what our competitors are doing. Which, by the way, is an issue. I mean, we literally can't run our business. You know, you can't have a supermarket that sells the goods, you know, or hires employees cheaper than the one across the street. We responded to that because we saw that people had started to inch up their comp ratios, which mean that we're not gonna see any reduction. What happens at the end of it is, I love the team we put together. It's, you know, we've been in business.
We're only been around 15- years. Our client base is as good as it's ever been. Our penetration into boardrooms is better than it's ever been. Yeah, your last statement was kind of right, which is we look at where the business is and what we need to do to maintain the asset we built. The asset is the culture, the people and the relationships. I can't call up company XYZ and tell them: Look, I know we spent six years getting this relationship. We just can't do your work for a couple of months here while we hold the comp ratio down. We'll be back to you when, you know, in a better time, and I'm sure you'll love to hear from us after we fire your team, and we'll hire them back. That's not gonna work.
We spent six or seven years developing these clients. We're gonna keep them. If that's what you were asking at the end, does the last thing just fall out? The answer is sort of yes. Protect the franchise.
Right. It's an output, right? It's not an input.
It's kind of an output to protecting the franchise. Look, the best part about what we have is even if you're the strongest bank in the planet, you know, you leverage 10 to one. That's just the method. That's the economics of a big bank. We're not. We have no debt. Our balance sheet's in great shape, our liquidity. We're not gonna give away clients and franchise to, you know. We're gonna be the strongest player coming out of this, not the weakest.
Okay. So, like, it's interesting when you definitely hit on a lot of the upward pressure to comp at the more junior levels. I'm sitting here reflecting back on some, you know, prior discussions that I've had with yourself and other members of the management team. In the past, part of the allure, and this might have changed over time, but was that you when you brought in junior members, it was completely fine for junior members of the team to have ultimately, you know, moving on into private equity or other industries as part of their career path. Actually, you would facilitate and work with the juniors when they did that, rather than make them feel as though they had to hide the activity and whatnot.
Would this be an opportune time to begin to try to think about trimming ranks of juniors through attrition, through those constructive channels that could help manage some of the expense base, particularly given the fact that I mean, look, I hear you. This is a weird environment because, you know, financing is tight as a drum. You know, you could argue that since COVID, it was a weird environment because Fed was pumping liquidity like crazy. This bout of inflation means that that song and dance is over for quite some time. You could argue that maybe the environment is more than just temporary, and there is just gonna be a different level of engagement than what we got used to there for that very, very hot period of time. Sorry, I know it's kind of a long-winded question, Ken.
Well, there are two points. Two points. The junior talent that goes to, you know, private equity or something like that, are analysts. That's kind of our two to three year analyst program. We continue to do that. I mean, they wanna do it. We like to try to keep them, but we, you know, we realize that they might. That's. Once they get here as associates and VPs, that's a very important part of our firm. By the way, it's a very hard place to hire. Last year, that was our most difficult thing, was getting our great VPs and, you know, third-year associates, second-year associates. No, we're not gonna do that. In fact, just the opposite. Our engagement is high, Brandon.
You know, again, there's not a lot of firms like ours, and there's a lot of companies in the world, and you've got to provide really good work to them. Those people that you're talking about, the first, second, third, fourth, you know, year out of school, permanent employees, it's the heart of the firm. That's where great work gets done. Clients notice it. Those assets, I look, you know, I know in the short term it's not easy, but those are the assets that when the market comes back, you can't recreate. We're gonna use this opportunity to outperform for our clients, to be on top of them and to get work done on schedule and on time and show off.
I believe whether it be six weeks, six months, two years, there always has been. Look back at Wall Street for 40- years. You know, it's just a growing group of clients, and we're gonna be there for them. I hope other people do exactly what you say. Make sure you ask some of the other banks to do that, because that would be a good favor for us.
All right. Fair enough.
Thank you. Our next question is from the line of Michael Brown from KBW. Your line is now open.
Great. Thanks for taking my questions. I guess most of my questions have been asked and answered. You know, the fourth quarter is typically seasonally strong. Ken, as you said that you don't really have a crystal ball here, but as you contemplate that 62% full year comp ratio, does that include an expectation for that seasonality to play out as it typically does like we've seen in the past?
Look, yeah, two forces going on. Our pipe is about where it was in the third quarter last year. Our pipe is high. That's why, you know, to Brennan Hawken, to the question, I wasn't trying to be mean. We wanna service the people who have the same level of deal activity they're contemplating. We've scrubbed it. I'd use the word the pipe has to be, by definition, more fragile than it's ever been because you get to the financing part and, you know, it's not there. So we've scrubbed it as good as we can. Yes, you usually have a seasonality in the fourth quarter, but you know, you haven't had the Fed trying to, you know, rein in the seasonal factors.
I mean, if I think we have a hurricane coming out of the Fed and a seasonal upturn that's normal, I think those things might offset each other. What we've really done is just looked through our pipe, scrubbed it, and tried to come up with what we think, the revenues that we can expect to come in. Again, you know, to this point of investing through the cycle, I just wanna say, you know, through the nine months we've run a 24% pre-tax margin. That's not a terrible business and that's not a business that, you know, to get to a point higher margin, you know, it's again, it was to Brandon's last point. It's not a horrible business to run a 24% pre-tax margin.
I think we probably still have one of the highest pre-tax margins of anyone in the business, of our peers. Again, I do think you're gonna have competing forces in the fourth quarter. We tried to take that into account, as best we could. It takes into account both things you're saying, the seasonal positives of the fourth quarter and also the negatives of what's been happening in the interest rate environment.
Okay, great. Just to change gears to the capital return, you guys, you know, always return about 100% of capital to shareholders. Clearly it's a more challenging environment here. Some of the inbound questions we've gotten from investors is, you know, about the regular dividend here. Your EPS was $0.37 this quarter and your regular dividend is $0.60. You know, your cash levels certainly seem adequate and your free cash flow is typically higher than what your EPS would indicate. You know, just given the fact that we are still in a quite turbulent period here as you mentioned, any comment there about the regular dividend here? Is it still safe here at that $0.60, Ken?
Full year earnings are approximately maybe a little higher than the year to date dividend.
Yeah.
We also have the non-cash charge of equity.
Like in this market it felt kind of strange to do that. We do wanna return 100% of capital and we think we've got more excess capital that we can return. We just
Thank you to all those who joined. This concludes the Moelis & Company Earnings Conference Call third quarter of 2022. You may now disconnect your lines.