Moelis & Co Q4 FY2024 earnings call

• Pleased with strong year-over-year performance in 2024 across all products and sectors, driven by global team's collaboration. - Made significant investments in key sectors in 2023, with technology being the largest sector contributor to 2024 revenues. - Industrials and energy sectors active, capital markets group had a strong year. - Optimistic for 2025 with M&A market poised to benefit from pro-growth strategy, pickup in sponsor activity, and opportunities in restructuring and private funds advisory. - Announced hire of Global Head of Private Funds Advisory to expand private capital solutions.

In the fourth quarter, Moelis & Company reported $439 million of revenues, an increase of 104% versus the prior year period. For the full year, adjusted revenues increased 40% to $1.2 billion. Revenue growth was across all products. Adjusted compensation expense ratio was 58.4% for Q4 and 69% for the full year. Non-comp expense ratio was 11.4% for Q4 and 15.9% for the full year. Pretax margin was 31.4% for Q4 and 16.4% for the full year. Normalized corporate tax rate was 30.1% and effective tax rate was 23.5% due to excess tax benefit from equity-based compensation. The board declared a regular quarterly dividend of $0.65 per share, an 8% increase from the prior quarter, and the company maintains a strong balance sheet with $560 million of cash and no debt.

• Optimistic for 2025 due to M&A market potential from new administration's pro-growth strategy and pickup in sponsor activity. - Restructuring business benefits from elevated rates and enhanced credit capabilities. - Board declared a regular quarterly dividend with an 8% increase, and plans to return excess capital through various means like stock repurchases.

Q: Hey, Ken. Hey, Joe. How are you? Rally nice end of the year here for you guys and I just wanted to dig in a little bit on what you're seeing in the environment. Obviously, you've been saying kind of backlogs have been at records and then we see kind of this really strong quarter here. I know turnover has been a bit slow but I'm just curious if we should think about this quarter as maybe there being a catalyst where there's been a change in kind of that conversion ratio or timing or is this just more seasonality from this quarter? And then just more broadly how we should think about kind of that conversion ratio or timing of deals kind of moving through the backlog as we look into 2025.

A: Well, it felt to me like that just the pace of deals closing, there's always some seasonality in the fourth as opposed to some of the other quarters, but this one felt like something happened and it might've been the election, but something happened and conversion did pick up. What's interesting is like we always talked about, you kind of have this book-to-bill with your pipeline. So, you can look at the fourth quarter and say, you emptied the pipeline of a significant amount of revenue, but our pipeline isn't at the highest levels ever. It's increasing. So we're building backlog faster than even than it is converting. But I think the problem was, Devin, it was just, it was really in that period of the Fed uncertainty and maybe even some of the regulatory uncertainty. It was just, everything just took a long time. There was some accordion effect that started at 2022, I guess when the rate started to move, where everything just took longer to get through your pipe from start to finish. It feels different now. It's not quite as quick to completion as 2021, but it's much clearer and more rapid to go from deal start to deal end, it feels.

Q: Good afternoon, and thanks for taking my questions. Just want to turn to restructuring quickly. Obviously, it's very strong for you and for the industry in 2024. As you think about the outlook for 2025, what's the ability to hold this level of activity? Is there any potential that we could see a further acceleration from here, and then any ability for you to just give a rough split of how much revenue in the quarter was from M&A versus restructuring versus capital markets?

A: Look, it's always hard to project because restructuring is based on the economy interest rates. I look, we did have a very good year. The economy feels strong enough that, as of now, I don't see an event that would cause a major disruption. Of course, I have to also say that things are pretty volatile in and around the things like the government and things like that. So anything could happen. I would expect 2025 to be a year that looked a lot like 2024 as of now, and that's without any external events in the restructuring world. I think, to your answer, about 60% of our revenue was M&A. That doesn't mean it was all restructuring. The rest is capital markets, really capital markets and restructuring. And those numbers, by the way, are for the full year.

Q: Good afternoon, Ken and Joe, thanks for taking my question. Curious on capital, Ken, so saw the dividend increase, clear sign of confidence from you. And I know that you have an expressed fondness for dividends and being in the dividend growing club and whatnot. But with fully diluted shares on an average basis from 4Q ‘23 to 4Q ‘24, it's increasing by 12%, what are your thoughts on allocating some of your excess capital or capital generation to buy back, to neutralize the employee comp?

A: Can I just correct one thing that you said, Brenn? You're looking at an accounting result with respect to share count. And as you may remember, when you run losses, which is what we did in ‘23, you only have basic count, and the fully diluted count is what you're looking at the end of ‘24. So you basically are looking at apples and oranges. It did not grow by 12%. But I'll let Ken answer the question now. The gist of the question, which is, look, we're 12 months away from, I think, on this earnings call being asked if our dividend was safe. And today we're being asked what we're going to do with our excess capital. So we increased the dividend because it very timely and quickly gives away what we think will be excess cash generation, and we're confident in that, so we raised the dividend. And from there, we will return the capital. It may be a series of things, right. It might be stock repurchases. We're not against that. We repurchased a large amount of stock a few years ago. So, we're not against that. It's going to be determined by us, the board, the market, how we want to get the capital back to you, a series of things. But, again, this is a good conversation and I'll be discussing what we're going to do with our substantial excess capital versus can we make our dividend. So, we'll address that. And believe me, we will not keep any of the capital. It will be returned in the best way we can think of and as quickly as possible.

Q: Hey, good afternoon and thanks for taking my questions. I guess to start just on the sponsor business, you said that you're starting to see signs of a pickup there. It would be great to get a sense as to, how meaningful of an acceleration we could start to see. And on top of that, a lot of the restructuring activity has been focused among sponsor clients through LME activity. I was just wondering whether there's any connection between the elevated restructuring activity among sponsor-backed companies and the subdued sponsor M&A backdrop?

A: I think sponsors are definitely coming forward. I mean, again, is it, I don't know, on a scale of 1 to 10, I guess a year ago, I'd give it a 2 or a 3. I think we're probably at a 6. Again, very rough estimate amount. I don't think we're at full speed where, again, I'd go to 2021 when, on a scale of 1 to 10, that was kind of a 10. Everybody was buying and selling at the same time and it was active. But I think we're kind of at a 6. But my feeling is people want it to get, as opposed to a year ago where I think people are like, hey, we're not doing anything and we really don't expect to do anything. I think it's we're doing things and we expect to do more and want to do more. So I think the desire and the bias is to be more aggressive. On the creditor side, it's interesting, probably our biggest opening is a lot of our restructurings were company side or debtor side. It's where we do a lot. I mean, it's probably 70:30. And we're we are being much more active now on the private credit side and trying to get in on that side of the restructurings. Is your point like these companies couldn't sell so they're getting into trouble? I don't think that's the answer, because it's hard to sell a company that can't cover its debt. So I don't think M&A truly covers restructuring. I think restructuring might be driven more by interest rates would just make the onerous debt obligations kind of come in quicker than they would have three or four years ago. But I don't think it's the M&A that's driving it. In fact, if anything, I think some of the private capital solutions that we're doing, very pick preferred, structured rescue credit, that's probably staving off some of the restructuring more than M&A would.

Q: Hi, thanks for taking my question. So you've been really strong at hiring and protecting your workforce and downturns and then taking share and market upturn. So as the market starts to recover, is the recruiting environment getting more competitive and does that slow the pace of leaning into hiring or do you expect to continue hiring up too?

A: I think the environment's not gotten, it's competitive. It's about the same as it's been. I actually think the continuing, what I call the continuing regulatory crunch on the major banks makes people available. I actually think the owner's capital restrictions, I think there was a, I said it at the Goldman conference when I was there, I do believe that the entire transaction financing economy is switching from being bank-centric to being, I won't call it private credit-centric, but to be institutional-centric, whether that be sovereign wealth funds, insurance, private credit. I do think the regulators are intent on taking the risk out of the taxpayer-guaranteed financing sector, which is commercial banks, and I agree with them. That should have been done long ago. But you can see it. I think there was a major bank that two weeks ago announced they were shutting down their entire investment bank. And I think bankers are starting to see, all you have to do is look at the market and realize that being independent and not having the conflicts and the problems of being a regulated financial institution lead the best, I think the best people in the world tend to want to come to an independent firm in which creativity and intellectual talent is highly recognized. So that continues to happen. And that's where a lot of the talent comes from.

Q: Hi, good afternoon. Big questions, largely answering and asked and answered. Joe, a little one for you. The comp ratio, usually early in the year, the comp ratio is like a placeholder, and then you true up later in the year. How should we think about, the placeholder as we start thinking about compensation for 2025?

A: Yes, it's a good question. As you know, we always have a bump in the equity charge due to the incentive equity, which is granted later this month, and then the retirement eligible participants, are accelerated in the first quarter, and then what Ken was describing as typical seasonality in the first quarter. I would probably start with where we landed for the full year as a starting point placeholder, and we'll go from there.

Q: Thanks, Ken, for taking the follow-up. I just wanted to clarify on your comment around the 25% comp ratio here. Just to confirm, are you saying that for, say $100 million increase in revenue, that 75% of that would drop to the bottom line? So that'd be like a 25% comp margin? Is that the right, is that what you -- A: No, look, Joe's looking at me because he said, stay away from extending out the algorithm we want. And of course, I stepped in it. I was just saying that, it's not straight line. I was going to say it's asymptotic what happens as you go to 61, but Joe told me no one will know what that means. So I'll try it and see if anybody writes that and gets it. But it's just going to slow, we were doing 400 basis points. I think we gave you at the beginning of last year per 100, it can't go that fast it's not straight line. There is room to improve so I was saying would we get 300 basis points if we did nothing else maybe, maybe that would be right but again that's going to change because as you get that you're getting down closer and closer to 60, low 60s and then you're going to look around and see what is the competitive environment. What you have to do as you get there that's you're not going to go through that so the question is how close how quick and when do you do it. I don't think it, look, I don't think the right answer here is to have an algorithm from this point on other than to say to you I think we can get a lot of savings and then offset that by any outsized investment in a new business that is outsized. I think inside that comp ratio we always do think we're going to hire some people, so I don't want to say that we're but if we do something in which, let's say, PFA, which could be a sizable thing, that might affect it too. So it's complicated, and Joe told me not to do it, and I made the mistake getting past it.