Good afternoon, welcome to the Moelis & Company earnings conference call for the fourth quarter of 2022. To begin, I'll turn the call over to Mr. Matt Tsukroff.
Good afternoon, thank you for joining us for Moelis & Company's fourth quarter 2022 financial results conference call. On the phone today 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 contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results.
The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our investor relations website at investors.moelis.com. I will now turn the call over to Joe to discuss our results.
Thanks, Matt. Good afternoon, everyone. On today's call, I'll go through our financial results, then Ken will comment further on the business. First, we achieved $202 million of adjusted revenues in the fourth quarter. For the full year, our adjusted revenues of $970 million were down 38% from the record prior year. Regarding expenses, our full year compensation expense ratio is 63%. For the full year, we reported a non-compensation ratio of 15.6%. The increase in full-year non-compensation expenses is largely due to a normalization of travel and related expenses. Looking to the first quarter, we expect non-compensation expenses to be in the $40 million range, excluding episodic transaction-related costs. Our full-year pre-tax margin is 22.5%.
Regarding taxes, our normalized corporate tax rate for the year was approximately 27%, and our effective tax rate was approximately 22%. The difference is driven primarily by excess tax benefits related to the delivery of equity-based compensation in the first quarter of 2022. We may recognize a tax benefit in the first quarter of 2023 related to the annual vesting of RSUs later this month. For purposes of quantifying the excess tax benefit, we expect the impact to EPS to be approximately $0.01 for each $1.25 difference between the vesting and breakeven price of $36 per share. Regarding capital allocation, we remain committed to returning 100% of our excess capital. Our board declared a $0.60 per share dividend.
We will have returned approximately $316 million to shareholders with respect to the 2022 performance year, which includes this declared dividend. Lastly, we continue to maintain a fortress balance sheet with $413 million of cash and liquid investments and no funded debt. I'll now turn the call over to Ken.
Thanks, Joe. Before I begin, I just want to thank our bankers and the entire organization for their focus on our clients and their commitment to excellence in what has been a challenging year for M&A and the capital markets. The financing markets are the lubricant to complete M&A, and financing has been a challenge. Despite the difficulties of completing transactions, our new business origination activities remain strong. As long as access to capital is limited, M&A transaction volumes are likely to be less robust. We also price our services based on transaction values, which have been lower. At the same time, we're experiencing inflation in our costs, primarily compensation. The current business environment, however, is the reason that we have maintained an unlevered balance sheet since our founding. This environment will change, and our goal is to be ready for it when it does.
Restructuring activity is increasing. This cycle will be longer to fully develop. It may also be more sustainable over a longer period of time. Companies took advantage of attractive debt markets between 2019 and 2021 to refinance their debt and are now just beginning to see the higher the impact of higher interest rates. Global market capitalization has doubled since 2012, and private equity AUM has more than tripled over the past 10 years. Markets expand, transactions follow, and there'll be increased demand for high caliber bankers operating within a focused organization delivering comprehensive advice. This is the opportunity we are pursuing and the reason why we continue to build for the long term. We've hired four new managing directors and promoted eight since the beginning of the year.
By continuing to invest in the platform, I remain confident in our ability to execute for our clients, employees, and shareholders. With that, I'll open it up to questions.
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Devin Ryan with JMP Securities. Your line is now open.
Thanks. This is Brian McKenna for Devin Ryan. I'm curious, you know, how dialogues with sponsors have trended thus far in 2023 relative to the last couple of months in 2022. Has there been any, you know, pickup in conversations? Are you seeing any early signs of dialogue starting to move through the process toward formal announcements?
Yeah, I'd say, you know, it's fairly volatile, and I think the sponsor dialogue has been improving pretty significantly as of the start of the year. There is an opening in the financing markets. We've actually seen a dividend recap deal, which in the sponsor community is a pretty significant event. Terms are better, but it remains, to me, very volatile as these markets... You know, as I said, I think Chairman Powell effectively shut down the market or really the market deteriorated pretty significantly in the September speech at Jackson Hole. Last week, in the beginning of the year, a lot of the market has taken it to mean party on and started to get fairly optimistic, at least part of the market. I think it remains volatile.
As I said, the indication that we're all waiting around for a single individual's statements, to me, is an indication that the market is not healthy. We hadn't done that for five years before that. It's probably not a good indication. Again, the activity level I would have to characterize as getting, you know, more active over the last three or four weeks than eight weeks prior. Maybe significantly so. At least the conversation. I might even say significantly so. We'll see if the markets hold long enough to complete some of these.
Okay, great. Thanks. Just a question on the comp ratio. You know, assuming the first half of this year is still somewhat slow, you know, for revenue to start to normalize in the back half of the year, you know, should we expect the comp ratio in the first half to be in a similar zip code as the back half of 2022, then you'll kind of true that up into 3Q and 4Q? Should we expect somewhat of a steady accrual throughout the year?
Well, I'm gonna turn it over to Joe for the first quarter because we do have some events in the first quarter that always cause us to have a differential in timing. Our belief is that the general comp ratio of the firm should fall between where it fell, you know, over the last three or four years. Again, that depending on revenues because our comp ratio did increase last year, based on a very difficult market and our desire to hold the culture and team together. Again, depending on the revenue, I think that's the range we are viewing for the entire year. I want to turn it over to Joe because we have some first quarter items.
Yeah. In the first quarter, you know, that in two weeks, we'll be granting equity. We expense all the equity granted to retirement eligible partners at the time of grant. Accordingly, our pre-bonus comp expense is likely to be much larger in the first quarter than the next three. Within a challenging revenue environment, which we're still experiencing, the comp ratio is likely to be higher than the target ratio. I would imagine that, you know, we would think of whatever, probably what you were just describing, it's probably a six-to-eight-point spike in the first quarter. Again, we expect that the full year ratio will settle back, assuming again, revenues pick up.
Thank you guys.
Thank you for your question. The next question is from the line of James Yaro with Goldman Sachs. Your line is now open.
Good afternoon Ken and Joe. I just wanted to return to the previous comments that you made, Ken, or in December around, you know, the middle markets slowing down quite precipitously. Maybe that's not exactly your language. But I guess the question is: How would you compare and contrast the dialogue across, you know, larger versus middle market firms and in terms of, you know, your expectations for which might come back to transacting on the M&A side first?
When you say larger and middle, you're talking about the sponsor community?
I mean, I guess it'd be interesting to hear, you know, both sponsor and strategic from that perspective.
I'll start with the strategic dialogue's been pretty active. I've found the strategics to be, it's a good time. They don't You know, they have most of it. When you talk about investment grade strategics, have access to financial markets. It's a good time for them. The financing markets have moved in basis points, not in availability. They do have goals they want to achieve, so they've been actively discussing and, you know, a significant amount of transactions. It's some of that. By the way, I do think some of the regulatory environment is also impacting that to the negative, but there is a lot of dialogue there. On the sponsor community, I believe there is a huge pent-up demand. Sponsors cannot sit still.
I'm not sure it's that difference between large and middle market because both are trying to figure out an economy and a cost of capital that makes sense for them to invest in. I think some of the larger ones have switched their focus maybe to providing other sorts of capital, and might be more active just because they can more easily deploy their capital in other areas, and maybe they also have get more pockets of alternative capital, providing solutions, preferreds, things of that nature. The dialogue is definitely, I'd say, improving. I think October, November, December, you really had a wait and see attitude.
They knew that they were in the middle of a cycle of interest rate raises. I think now you're starting to see people take a view that we are possibly near the end. Some people wanna be more aggressive on that, but that's what makes markets. I think you're having some part of the market say, "I think I see one or two raises." As soon as that's done, I really think most of them feel like it's time to start figuring out prices, accessing financing markets at the new levels, and moving on.
Okay, that's incredibly helpful. Just for my follow-up, when you think about some of the... Putting aside M&A and restructuring, when you think about your capital advisory businesses, in particular the sort of fundraising businesses, how do you expect those to perform over the course of 2023 in what appears to be a somewhat more challenged sponsor fundraising backdrop?
Last year I think last year was a unique year. There was a lot of capital committed going into the year. You know, everybody talks about the numerator/denominator problem. You had a shrinkage in the denominator, total assets under management as all assets shrunk, and therefore people ran out of ability to commit. I think that slate starts clean in January. Again, it'll depend if the denominator holds and we have markets, public markets that hold. I think that might return over the course of the year to a positive fundraising market. What we're really focused on is more secondaries, continuation funds, a little more higher value add part of that process, and I do think that will be active.
We're building into that part of the private equity, services much more than primary fundraising.
That's incredibly clear. Thank you.
Thank you for your question. The next question is from the line of Ken Worthington with JP Morgan. Your line is now open.
Hello, good evening. This is Michael Cho in for Ken tonight. Thanks for taking my question. Ken, Joe, I just wanted to touch on your restructuring business. I was hoping we can just get some updated commentary on kind of how mandates have trended sequentially and if there's any particular, you know, industries or geographies that have been more active than others recently.
On the geographies, I can't discern a real difference. I mean, I think the, you know, the main markets are Europe and the U.S. where they're pretty much going into the cycle in a similar way. Facing the same issues whether people want to get ahead of the cycle and manage their liabilities. What was interesting is, again, we've said it was slower than the crisis restructuring markets of 2008, 2009 and even COVID, but this idea that the maturity wall was gonna force people to... You know, there's always this discussion of, is that a large maturity wall in 2024 and 2025, I think.
I do not think that maturity wall will be as much of a motivating force as people are thinking if the market stays at least where it is today. Financing markets are opening up. People are finding solutions to not restructure, but to access capital. It's one of the reasons why I think the previous questions was about our private funds group, but we have beefed up our capital advisory group because we think innovative financings around that marginal one turn of leverage that you just have to solve in order to access the bank market and the private lending market.
We think there'll be a lot of activity around that, you know, last turn of leverage that just keeps companies from having to enter restructuring, and that might actually be more active than the restructuring that people were focused on. It is improving, but I do think we're not seeing stress. I was just with a major one of the leaders of a large group of private equity firms, and they said there's no distress in the portfolio, no defaults, and companies are actually performing. If the financing markets come back, I think the wall will take care of itself. That's a lot of what-ifs. The financing market could change and as they say in a Jay Powell speech. For now, they are trending in the direction of being accessible.
Oh, that's great. Thanks for the color, Ken. I guess just to follow up on that and just relating to your business today in terms of restructuring, I guess, behind those comments. I mean, is it fair to say you've seen you know, some, I guess, deceleration of growth in terms of the mandate trends or they've been-?
Well-
pretty strong, for the quarter as well?
They've been accelerating, and they were building toward what I think was everybody looking. Again, when I say everybody, there's always a restructuring going on somewhere. Even in a good economy, you know, 1% or 2% of the companies are having distress that needs to be addressed immediately. The idea of getting in front of a 2024, 2025 wall, which was in, you know, it was getting in vogue in the late part, half of last year, that there would be no access, so get ahead of it. I think you're gonna see companies delay and think about whether or not the financing markets might open again and give them a chance to regular way finance. Yes, our backlog is increasing.
Our M&A restructuring volume was up significantly year-over-year. The idea that the wave of 2024, 2025 maturities would cause people to accelerate their plan to address their liabilities, I think is slowing down a little bit. I think there's a hope and a belief that the capital markets might open and give people a regular way access to refinancing.
Okay, great. Great. Thank you. If I could just squeeze one more in on the other side of the business, when we kind of think about the M&A environment. I mean, you've made it clear around, you know, retaining culture and continuing to invest. You know, and at the end, the head count continues to develop as well. I guess just near term, just given your statement around caution around the deal environment, I mean, do you think there's kind of a stabilized or a normalized MD count number for this type of environment, you know, looking ahead in the near term?
Which type of environment are you referring to? The environment seems, you know, it's like, this weather and you're living in, you know, New Hampshire. As I said, look, we wanna build... We have a lot of white space we can build to. What our goal in managing the company, we do it every year, is to go through our labor force, which is now 1,000 people, and figure out who's not right, who's not gonna you know, who's not the right skill set, and proactively address that. Then continue to build around people who can address it and create quality. I do believe we're gonna look back at some point, I hope it's months, and soon, but there is a large pent-up demand for our clients to transact and to move forward.
Lastly, one of the challenges we have is those clients which we fought hard to get in the front door, both strategics and sponsors, you know, we talk about sponsors, behind every sponsor transaction is an actual company with a CEO and a CFO who we get to know. These things aren't awarded like, you know, apples off the tree.
You develop relations and expertise in that system as well. We can't go dark on them and just say, "You know, so long, your team's not around for the next six months, but we'll hire a team back when you wanna transact." You know, I think we will continue to grow the footprint, but we will continue to also be very diligent in making sure that we're focusing on the, you know, bottom couple of percentile that we think does not make it and be very careful, especially in a bad environment, that we're analyzing that carefully and moving as quickly as we think we as we should.
Okay, great. Thank you for all the color, Ken.
Thank you for your question. The next question is from the line of Brennan Hawken with UBS. Your line is now open.
Hey, good afternoon, Ken. How are you? Good afternoon, Joe.
Good. How are you Brennan?
Just wanted to follow up on that a little bit and maybe clarify. H as some of that work already started on going through and parsing through the workforce and the talents you have and the bankers and whether or not everybody's got the right skill set? Because when you look at, I think it's 151 MDs in the release, it seems like that includes the eight promotions and the four external hires suggest that the year-end was like around 139. You know, maybe there was already some review or maybe I'm not backing into the right year-end number. Has that review process begun already, and what was the year-end MD head count?
Well, first of all, that review happens every year and sometimes during the year. That's our job is to manage that workforce and stay on top of it. Joe's just showing me what the end of the year head count was. 142, the answer to your end of the year head count.
Okay.
Look, we do that every year. All I say when it gets tough, if the bar is, you know, 2%, you might go to 3% of the system. We're not looking at it as a change Brennan Hawken. We're looking at it as something we do every year. We do it mid-year. We do it all year, by the way. We have these conversations. We don't wait and do it once a year. You know, that's always ongoing. Yes, the answer to you is that that process has begun because it's continuous.
Fair enough. A good hygiene. I get it. So, I'd love to clarify, you guys gave a little color on near-term expectations of comp ratio and whatnot. It sounds like we'll see some noise here, and you seem to expect that the comp ratio will come down as the revenue ramps. The ratio seems like maybe in this environment, so uncertain, maybe more of an output. Another way to maybe ask the question might be how should we think about fixed expense comp? You know, you spoke, I think, Ken you spoke to continued inflation in banker cost. Is that on the fixed side, or is that a comment about recruiting?
How much should we think about that fixed expense base, you know, growing in 2023 based on what you know today?
Yeah. Well, we don't have a fixed expense side. You know, If you're First of all, the managing director pool of the firm is down very significantly in line with revenues. You can bank on that. I don't have the exact number. I can get it for you. The managing director pool, which we view as our equity partners in the outcome of the firm, are very definitely down. What happens is, I think we all fought, all the firms, especially probably the boutiques, fought very hard to keep their talent. 2021, I get my years mixed up, 2021 was a very difficult year to maintain your workforce in the light of what was a very significant deal stream.
What happened in 2022 is I think everybody wanted to keep their quality people. Worked really hard to keep them. There's been, you know, some softening, but not much. The inflationary impact on the non-managing director workforce is... You know, I would just say that compensation level is much stickier than it is for people who are promoted and are equity partners in the outcome of the firm as managing directors. When you were talking about the comp ratio, I just wanna be clear that we do expense this... It must go in the time period it is in, from what I understand, what we call retirement eligible equity. It just happens to hit in that quarter. It's...
You know, we expect our comp ratio to be back in line. It's not dependent solely on revenue. There is a significant one-time sort of comp charge that we get hit with on retirement eligible equity awards in the first quarter.
Right. It's that combined with potentially more challenging revenue that will give rise to the comp ratio issue that we described earlier. We've talked about this in the past. We've, you know.
Yeah
W e used to disclose fixed, but none of our competitors do. We're at a competitive disadvantage, and we really don't wanna start sharing that detail. We don't disclose it.
Yep. That's why I was trying to ask for a growth rate rather than an absolute number. I get it. Is the cadence of the quarterly dynamic similar to how it was, you know, at least proportionally when you used to disclose it, so we could think about it at least from that seasonal pattern?
I think you're probably, I think that would probably be difficult. I'm not sure that you would be able to extrapolate that. Maybe on a full year basis, but again, you'd have to embed some inflation in that as well.
All right, a ll right. I'll stop trying to poke around here because I don't think you guys wanna play patty cake with me. Shifting gears a little bit here. Ken, your comments, you know, you recognize the short-term environment is, you know, somewhat cautious. But you're optimistic over the long run. That's fair. You know, based on what you can see today and what your expectations are, do you think it's, 2023 will be a year where you can grow revenue? Or do you think that the challenges are pretty significant and it's kinda hard to make that call at this stage?
I hope it is, but it's almost impossible. I think anybody making that call would have to be sitting somewhere in the Fed Chairman's brain at this point. I think, by the way, that's my view is that's an unhealthy economy. We never had this commentary. I don't remembering sitting there wondering, you know, will the Fed Chairman smile at the next meeting, or what will his intonations be for the first seven years we were a public company. I, you know, again, I am optimistic because I think there is such a pent-up demand to do things. The economy is a dynamic economy, and there are great CEOs and the private equity guys have a lot of capital. They also own a lot of companies they need to realize value on.
There have to be transactions at some point. How quickly that happens is a little out of my control. I wanna be there when it happens because I was just at a pitch today where we're talking to a client. You know, six managing directors in the room. I'd say the average experience that Most of those people worked together for 15 or 20 years, partners. That comes across, the client relationship, the culture of the firm being that deep and knowledgeable about each other and being able to finish each other's sentences and know what we wanna accomplish. In my mind, you know, that's worth keeping. You can't.
You know, to the extent you wanna be smaller for a couple of minutes, that's a really bad decision when you give up that asset, the asset of a culture and an ability to communicate with 20 years of knowledge of each other. Again, that's a long answer because I really don't know. But I'm fairly optimistic that when it stops, when I think the economy or the markets and deal people get a feeling that the Fed has stopped, I think you'll see a spring uncoil that will be pretty dramatic.
Okay.
I just don't know what that date is.
Thanks for the color. Sure. Fair enough. Thanks for the color. Appreciate it.
Thank you for your question. The next question is from the line of Matt Moon with KBW. Your line is now open.
Hi, good afternoon.
Good afternoon.
Good afternoon. Just a couple clarifying questions for me. Previously you've talked about kind of the contribution from restructuring being kind of anywhere between 20%-25% of revenue. Just kind of curious as to where that stood in the fourth quarter, and kind of given your commentary, just given the backdrop and the environment. Is it possible to see that kind of trend higher than the upper bound of that range, kind of in the near term?
I think the restructuring, again, it's hard for us to break out totally, but we think it was closer to 10% in the fourth quarter than 20% or 25%. That's probably I think that's the full year that I gave you. Sorry, 10% for the full year, and the fourth quarter might be up a little bit. Look, it is possible, but this feeling that there is an immediate wave coming, the company results are not that bad yet. The financing markets are showing a little bit of blue sky. Again, we continue to have a lot of conversations with firms that are talking to us about how to negotiate problems they're in.
Some of those might be just to refinance their debt at some point, because the results are good enough and the financing markets open up at a new interest rates. That's not good. If you're a private equity firm, look, that's not perfect for your rate of return on the equity, but it is what it is, and they will refinance rather than restructure, which is smart. You know, we'll see where that all goes and if the market To your point, if the market has another serious downturn or we're all wrong and the Fed has to go to 6% instead of 5%, yeah, I do think you'll see a rather significant kick-up in restructuring and it can become that big a force.
I just wanna be clear, as of right now, this market doesn't feel like that's happening in the short term.
Understood. Makes sense. Shifting gears Joe, just a couple for you as well. Just curious on the comments just related to kind of the one-time step-up in the first quarter related to the comp ratio of 6 to 8 percentage points. Is that off of the full year 2022 number, or was that off the first quarter of last year? Then once we get to the first quarter when we receive that comp ratio, is it fair to think about the full year expectation at that point, just excluding that 6%-8% figure?
Yeah. The first question is what's the base? I'd say it's the end of year, the 63 is the base on which I would take the six-to-eight spike. Over the course of the year, we would expect, again, revenue dependent, to get back to the kind of low to mid 60.
Great.
For a full year.
Last one. Yep, understood. Then last one is just related to the buybacks. It seemed pretty minimal in the quarter. Just curious in terms of after a strong year for buyback activity, if we should assume, given the environmental comments, that should be a little bit more cautious on that front, kind of at least for the next couple quarters.
I can't predict the next couple of quarters, but I'd say for the next quarter, you know, given the current environment, I would be cautious. Of course, you know...
Great
... we have this pre-February, we have a vesting event, and part of the vesting event is a buyback that's embedded in that. That's already kind of factored in.
Understood. Understood. Thank you for taking my questions.
Yeah. Sure.
Thank you for your question. The next question is from the line of Steven Chubak with Wolfe Research. Your line is now open.
Good evening. This is Brendan O'Brien filling in for Steven. To start, I guess, I wanted to ask on the non-comp expense. It came in lighter than what we were anticipating this quarter, but based on the guidance, it sounds like you're expecting a pretty meaningful step up sequentially here. I was hoping you could unpack what is driving that sequential increase and how we should be thinking about the trajectory in non-comps for the remainder of the year.
Yeah. Yeah. I would not consider that I mean, it's a sequential increase math-wise, but I think I've been communicating or guiding that 39-40 is our underlying run rate. I don't see much of a change to that. What happened in the fourth quarter was just a series of small non-recurring benefits that basically added up to a fairly meaningful change. It's not something that I would be counting on. It's the run rate is still the same, kind of 39, 40, again, prior to any transaction-related charges that happen episodically.
Gotcha. Thanks for that color. I guess Ken, I believe it was last quarter that you indicated that you believe activity would accelerate once there was greater certainty around, you know, the path of interest rates. Given we're getting closer to the end of the rate hiking cycle, wanted to get a sense as to whether you still expect a Fed pause will serve as a, as a catalyst potentially, or do we need to see how the environment or the impacts through the macro economy kind of play out before you feel like strategics and sponsors will feel comfortable dipping their toes back in?
No. Yeah. No, I think, look, if the Fed paused today, if there was a breaking news flash on CNN, Fed announces it's done, I think you'd see activity rip. I really believe that. Remember, what you're seeing now, though, and is our fourth quarter, which we're announcing today, is probably transactions that at best started their birth in September, October. The first quarter is a reflection of the activity and the conversations you probably had in October, November, or maybe September. You know, on some strategic deals, it could go back as far as a year ago. You know, when we announce our quarter, I hate to say it, we're almost reporting on the activity of ancient history. It just takes that long to get to the revenue line.
The first quarter is gonna reflect November, December, or October, November, December, some point like that. As you said, if you told me that the Fed announced today that was done, I would say, "We don't have enough people. We need a bigger boat." I think it would move very rapidly. I'm not expecting that, but you asked the question.
Gotcha. Thanks for the color, Ken.
Thank you for your question. There are currently no further questions registered. As a reminder, it is star one on your telephone keypad. There are no additional questions waiting at this time. I'll pass the conference back to Ken Moelis for any closing remarks.
All right. I appreciate everybody's time, and we'll talk to you after the first quarter. Thank you.
That concludes the conference call. Thank you for your participation. You may now disconnect your lines.