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Edited Transcript of MC earnings conference call or presentation 5-Feb-20 10:00pm GMT

Q4 2019 Moelis & Co Earnings Call

New York Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Moelis & Co earnings conference call or presentation Wednesday, February 5, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Walter Simon

Moelis & Company - MD & CFO

* Kenneth David Moelis

Moelis & Company - Chairman & CEO

* Michele S. Miyakawa

Moelis & Company - MD

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Conference Call Participants

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* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Kenneth Brooks Worthington

JPMorgan Chase & Co, Research Division - MD

* Manan Gosalia

Morgan Stanley, Research Division - Equity Analyst

* Matthew Coad

Autonomous Research - Analyst

* Michael C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Salvatore Domenico Saroni

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Moelis & Company Fourth Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Michele Miyakawa, Head of Investor Relations. Please go ahead.

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Michele S. Miyakawa, Moelis & Company - MD [2]

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Good afternoon, and thank you, everyone, for joining us for Moelis & Company's Fourth Quarter and Full Year 2019 Financial Results Conference Call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer.

Before we begin, I'd 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 statement. 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'll now turn the call over to Ken to discuss our year-end results.

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [3]

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Thanks, Michele, and good afternoon, everyone. We finished 2019 strong, earning fourth quarter revenues of $224 million. The second half of 2019 was our strongest 6-month period of revenue since our inception and illustrates the momentum the company has coming into 2020. Our full year 2019 was really a tale of 2 halves with the first half dragging down our fiscal year results.

During the year, we continued to invest in the franchise in order to create long-term value. As a result, we're witnessing our highest level of client activity since our inception. We added 11 new Managing Directors to the platform during the year, while actively managing our existing MD population as part of our ongoing commitment to evaluating our talent base. We invested in our junior talent pool, and ended the year with our average banker headcount up 9% from the prior year. And we continue to run the business with financial discipline, which resulted in our non-compensation expenses decreasing versus the prior year despite adding to our total headcount.

And finally, we stayed committed to returning our excess capital back to our shareholders with a 2% increase in our regular quarterly dividend and a $0.75 special dividend. The regular increase was our seventh and our special dividend was our eighth since going public in 2014. Coupled with a record share repurchases of 1.3 million shares, we will have returned approximately $225 million with respect to the 2019 performance year.

As we previously have discussed, we have shifted our capital management strategy to include a more balanced approach to returning capital via dividends and share repurchases.

At this point, Joe will take you through our financial results, and then I will discuss the current environment and how the firm is positioned going forward. Joe?

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Joseph Walter Simon, Moelis & Company - MD & CFO [4]

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Thanks, Ken. Let's start with a review of revenues. We earned fourth quarter revenues of $224 million, down 6% from a record fourth quarter of 2018. Full year 2019 revenues of $747 million were down 16% from the prior year. Our 2019 results reflected fewer transaction completions than 2018, partially offset by higher average fees earned per completed transaction as compared to the prior year. We experienced higher average fees in both M&A and restructuring during 2019.

Our restructuring franchise achieved record revenues for the full year, surpassing last year's peak level of activity. This was the fourth consecutive year of growth, reflecting our continued market share gains and the strength of the team. We ended the year as the #1 adviser globally and in the U.S. for completed transaction volumes according to Refinitiv, and advised on 6 of the year's top 10 completed restructuring deals globally.

Moving to expenses. Our full year adjusted compensation expense ratio was 63%. As Ken mentioned, on a real-time basis, we actively manage our headcount. And as a result, had 10 MD departures during fiscal 2019. All the cost of hiring and severance are reflected in our adjusted comp expenses.

Our non-compensation ratio was 19% for the full year of 2019. Through continued expense discipline, absolute non-compensation expenses actually declined versus the prior year. This happened in a period when we grew the average total employee headcount by 8%. Looking to the first quarter, we expect non-compensation expenses to be $38 million to $39 million.

As a reminder, we recognized an adjusted net gain of $3.1 million related to the sale of 8 million shares of Moelis Australia during the fourth quarter. This gain was the second part of a 2-part share transaction that was announced during the third quarter of 2019. In total, during 2019, we recognized an adjusted net gain of $8.4 million due to the transaction.

On taxes, the underlying normalized corporate tax rate for the year was 25%. On an adjusted basis, we expect our underlying corporate effective tax rate to remain near the same level, assuming a comparable geographical mix of revenues. As with prior years, we may receive a tax benefit in the first quarter of 2020 related to the annual vesting of RSUs later this month.

For purposes of quantifying the excess tax benefit in quarter 1, the breakeven share price for this vest is approximately $29 a share. For each $1 difference between the vesting and breakeven price, we expect the impact to EPS to be approximately $0.01.

As Ken mentioned earlier, we bought back over 1.3 million shares, which was nearly double the amount that we repurchased in 2018. We'll continue to be opportunistic in utilizing our share buyback program.

Lastly, our Board declared an increase to our regular quarterly dividend from $0.50 to $0.51 per share as well as a $0.75 special dividend. We've increased our regular quarterly dividend and have declared at least 1 special dividend annually since becoming a public company. The $1.26 in dividends will be paid on March 27 to stockholders of record as of February 18. We finished the year with a strong financial position with no debt and $342 million of cash and liquid investments.

And I'll now hand the call back to Ken.

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [5]

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Thanks, Joe. So the M&A outlook remains strong, and our restructuring business continues to grow, which positions us very well going forward. We achieved an increase in our average fees earned per completed transaction for the fourth consecutive year and strengthened our Managing Director population by enhancing our expertise in key products and sectors and by entering into a new geography in Continental Europe. We recruited the largest and most diverse analyst and associate class in the firm history as Moelis & Company remains the premier company for young bankers to begin their careers.

Earlier this year, we announced the internal promotion of 5 Managing Directors, and we have a strong hiring pipeline of external hires for 2020. Our continued investment and commitment to talent remains critical to our success. Activity across all of our core products remain strong. Our sponsor-related activity increased nearly 50% in the second half of the year, as private equity remains an important part of the M&A ecosystem.

Over the past 20 years, the number of private equity firms in existence has increased almost fivefold. It's now reported that there are currently over 9,500 private equity firms. And they all need to transact as part of their business model. We view ourselves as a critical part of the sponsor supply chain, helping them to put money to work as well as helping to monetize their investments. Since the inception of our firm, our dedicated sponsor coverage has been a key differentiator, driven primarily by our deep relationships, and we expect to continue benefiting from this unique positioning. By continuing to invest in the platform and nurturing our best-in-class talent, I remain confident on the outlook of the business.

And with that, I'd like to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Ken Worthington of JPMorgan.

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Kenneth Brooks Worthington, JPMorgan Chase & Co, Research Division - MD [2]

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I'll start playing bad cop. But through the end of 3Q, if I'm correct, I think you were thinking about maintaining your compensation ratio at your historical 58% plus or minus. And in the December quarter, it seems like you made the decision that the business would benefit if you found what seems like an extra $40 million of compensation to pay your people. So maybe to start, bless you, why this decision? And if you can go a layer deeper, in terms of how you utilize the extra comps so we can feel better about the decision?

And then to beat the dead horse, investors hate the concept of heads you win, tails I lose. And it seems like there's a precedent now that if business conditions are weaker that shareholders bear the burden more than employees. And I'm sort of hoping you reject that interpretation. But what are your thoughts there?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [3]

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Okay. And I do reject that interpretation. But let me start with the firm went through 2 distinctly different halves of a cycle. In the first half of 2019, our run rate of revenues was actually sub-$600 million. Our run rate in the back half of 2019 was north of $900 million. Those are 2 different firms. And I think if I can use the analogy, I think if the first half, if you were a chemical company or an oil company, let's say, and the first half of the year, the price of oil was $30 a share (sic) [a barrel], but the second half, it was $100 a share -- $100 a barrel, sorry, I think you might make different capital expenditure decisions. You wouldn't say, hey, let's average that. The average oil is $50, so why don't we pay that?

No, you're in an environment where our run rate at the back half of the year, and it became clear to me, and that's why it became clear to me in December. We reported it to you as quickly as we came to the conclusion that we were not in an environment that was running, both inside of Moelis and really the context of the market was not reflective of the first half of the year. It is, right now, it's a very, I think, confident and fulsome market, it's a robust market for all sorts of dialogue.

And so somewhere in December, I did not want to average the price of oil and pay as if it was $50, I wanted to recognize we're in a market that is reflective of what's going on on that day, not in the past. And the best thing you could do then is invest in your company, and our company are people, I don't have -- we don't have plant and property and CapEx, we have people.

The difference between, by the way, $900 million and $600 million, if you were run rating that at a 58% comp ratio is like $100 million and -- I'm going to script the miss, call it $180 million just to round up at $60 million. And you're right, we added a little under $40 million, I think, to the deal flow. Everybody, the average MD in our firm was down significantly. I read where we're boosting pay. No, we did not boost pay. The average Managing Director here was down pretty significantly, I think, more than in line with the down revenues.

Because what happens is, by the way, your junior talent does not fluctuate. A lot of your pay down at the junior level fluctuates very minorly. So there is a large part of this that's borne up at the top. So what we did on that with that extra money was we used it to go down, where our franchises that are hitting on full cylinders in the back half of the year and that we expect to be going forward. And like every company, that's our capital investment. We invested in it, Ken, and I feel very good about it because I think from December to today, I've probably gotten more positive on where the market is and what the possibilities are. And really, the best thing we could do, we invested 1% of our entire capitalization in our property, plant and equipment, the way we define it, which is our people. And it was worth it.

And lastly, let me say one thing. We've never scheduled it out. We've never called it extraordinary, it's not extraordinary, it's managing people. We -- as I said, we managed a lot of people out because it was a tough market. So we use that to manage; that causes friction. And we managed a lot of people in, and it's all in that number. It's a clean number. And I do -- I somewhat reject that we'll see -- but I do think if you're living in a $600 million run rate environment and the market reflected that, and that's what it was, and that's where the world was, I think we would have found a way to hold. I think then you're in a market and you can price into that market. But I think my oil analogy might be good. You can't pretend just because the average price isn't relevant to where the market is at the time you're protecting your franchise. That's a long answer. I'll move on.

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Kenneth Brooks Worthington, JPMorgan Chase & Co, Research Division - MD [4]

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Yes. No, no, good. I appreciate it. And I'll try the good cop. So part of this is your confidence in 2020. If you can maybe go a layer deeper, what are the themes that you think are playing out that gives you confidence that business activity this year is going to be -- continue to be really good?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [5]

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I think there are several things. First of all, low interest rates continue. GDP growth is good. Low tax rates. I think that finally, just, I think, 5 days ago, the U.K. finally separates from Europe and everybody can move on with certainty. Certainty is what counts. It's never -- it's actually never whether it's good or bad, it's the certainty of what happened.

And lastly, and I pointed that out at the end of my set remarks, the amount of capital being allocated to private equity and illiquid investments in many different categories is actually kind of stunning, the number as well as the scale of each of these firms. Again, 9,500 private equity, they're not all relevant to us, but a lot are. And as I look at it, I continue to believe they're in a business of manufacturing, really, these 9,500 firms, and they must -- they buy things and they sell things. That's actually their business.

So if you are one of the few firms that is in the deal flow and can provide unique product to that group, I mean, I think of the group of boutiques or even counting the big firms, I mean, maybe there's 20 or 25 relevant names in the world to provide the kind of flow that these firms need on the scale. I think we've become an incredibly important supply chain operator. I think that's good for margin. We become important in the ecosphere. And I think that's continuing to -- it's going to continue to drive the importance of high intellectual content for M&A. And so all that, I'm bullish on all that. I don't see a lot of it really changing right now.

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Operator [6]

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The next question is from Devin Ryan with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [7]

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Sorry. I guess first question following on the lines of the last one on the environment. So I heard the comment about sponsor activity up 50%. What is that relative to? Is that year-over-year? Or is that revenues? And then just if you can, Ken, a little more context because I think the outlook that you're providing is quite bullish. But are we getting back to an environment that is similar to pre kind of things falling off a cliff at the end of '18 and the beginning of '19? Or does it actually feel like it's accelerating from that prior period? I'm just trying to get more context around that. I know you probably don't want to be overly quantitative here, but anything else would be helpful.

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [8]

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Yes. It's up 50%. I believe that's the 6 months -- over the 6 months. But I think the amount of money and the amount of allocation there, it's just going to continue to -- I'm not sure that we're going to have as many public companies. I think the amount of public companies will shrink, and there will be a lot of liquidity and companies who choose to stay private and buy and sell themselves, 4, 5, 6 times in the private markets. I think that's going to be -- it's a phenomenon that's already happening. I just think it will become much more frequent that that will happen.

Look, it's hard -- you're asking me how many angels on the head of a pin and it's -- I believe it's back to at least that good, and then we'll find out how -- look, there are things like the coronavirus out there that who knows, it seems like it's under control. So I can't predict everything. But for right now and by the way, I don't want to -- for right now, that's not affecting really anything in the deal environment. But I think that the desire to do things, the need for capital to be allocated, the interest rates, where credit is, it feels as good as it's ever been. I would like to hope and think that it's better than it was at the end of 2018 before the drop-off. But hard for me to commit to that. It has that feeling, though.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [9]

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Sure. Okay, great. And it's good context. And then a follow-up here on just capital management. I heard the comment about a bit more balanced on repurchases versus dividends. And if you look at the stock, throughout a lot of last year was trading in kind of the low 30s and I think you took advantage of that. Obviously, the stock has -- you traded a bit higher here recently. But how are you thinking about that balance? I understand that you're going to be dynamic in your capital allocation. So as the stock is recovering, how are you thinking about just how much you want to shift towards repurchases versus dividends? And just from the outside, how we should think about that?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [10]

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Well, we were very active and in the market in our 10b5 program throughout December and a lot of January. We tend to be pretty conservative in our 10b5 program. It's just one of those things where you have to make a locked-in decision and you're not allowed to touch it, which just doesn't appeal to me in a lot of ways. I like -- I'm a bit of a control freak on that. So -- but we were in the market continuously. We're going to assess this. Obviously, the markets have kind of changed really pretty in recent times. Obviously, we'll be free to do what we want to do post this earnings announcement.

And look, I think if you looked at our year-end cash figure, the fact that we have no debt, the fact that we have over $100 million of US, of Australian liquid stock that we can access, we are -- we have a lot of firepower. And I think we probably could have done more special, and we chose to just stay capable of doing both, if that makes sense. And we'll make those decisions as things unfold.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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Okay, great. Last quick one, just to be clear here on kind of the prior line of questioning on the comp ratio. Is it still reasonable to be modeling 58% or lower in a revenue backdrop that, obviously, is more like the back half of last year than the first half?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [12]

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Yes.

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Operator [13]

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The next question is from Richard Ramsden with Goldman Sachs.

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Salvatore Domenico Saroni, Goldman Sachs Group Inc., Research Division - Research Analyst [14]

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This is Sal Saroni on for Richard today. This year, you reached record levels of restructuring even in a pretty benign credit environment, and we also saw a reduction in the U.S. benchmark interest rate this year. Can you elaborate on some of your expectations for the restructuring environment in 2020? And then to what degree has some of the cadence of restructuring activity changed over the past few months?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [15]

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So I expect our restructuring group to continue to gain market share. It was #1 ranked this year. They did a spectacular job. It doesn't feel like the economy is going to give us a spike up. There may be small amounts of growth. But we're talking about natural growth of the market just because the size of the market gets bigger, there's so much out there. I don't sense a GDP problem that would cause us to have a leapfrog right now. But I expect we'll continue to gain market share the way we have, stay focused on it, maybe grow marginally. Again, that's sort of a macro cost. So I want to stay away from that.

But look, all I know is, sooner or later, the cycle does have a bit of an issue. And there's a lot of paper out there. I think we're in a 1% to 2% default market. We've been that way for 5 years now. Going back in time, we've always gotten to 3%, 4%. In the 2007/'08 cycle, we got into the high single digits in default. So I know that's going to happen someday, not high, but I think we'll get into mid-single digits in a downturn, and it will become a tremendous -- it will do a tremendous jump. And that's a long way of saying, I don't expect anything spectacular out of them this year, barring an event that I have not foreseen. I think it will just be steady improvement in our market share.

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Salvatore Domenico Saroni, Goldman Sachs Group Inc., Research Division - Research Analyst [16]

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Great. And then additionally, you noted that the European backdrop is looking a little bit more constructive, particularly post the conclusion of Brexit. Can you discuss your aspirations for building up both your U.K. as well as your Continental European businesses? And then as you look at the current environment, how are you thinking about competitive dynamics, both for some of your local bulge brackets and then also some of you -- the peer independent advisers that are thinking about growing in the region as well?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [17]

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We're going to be careful with Europe. I think it feels better because you can make decisions based on what happened. It's done. And decision-making is always very difficult for people when things are not done. And now you can make your decision. I think there will be some people who think that the U.K. is undervalued and a tremendous opportunity. By the way, there'll be people who think the U.K. is in trouble because they left the European Union. But each of those people now can make a decision based on their point of view. And that usually triggers -- and by the way, same thing for Germany, France and the Continental Europe. So I think people -- companies, individuals, private equity, they can all make a better decision and come up with a point of view.

On our build-out there, we're going to be careful. It is a tough market. It's been a tough market for a long time. Some of our headcount management in the prior year was in Europe that we changed that as we talked about it over 2019. So look, we're going to be very careful, and I don't think -- you won't see us go pell-mell into a big expansion strategy, but we want to hire great people, bank the clients that are relevant to us, and we don't have to be all things to everybody. We do not have to compete with every bulge bracket or a bank in Europe, and we won't. We'll pick our spots.

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Operator [18]

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The next question is from Matt Coad with Autonomous Research.

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Matthew Coad, Autonomous Research - Analyst [19]

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One more on restructuring, just to be a little nuanced here. One of your peers mentioned an uptick in activity from the energy sector. I'm just curious if you guys are seeing that same trend?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [20]

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Yes. Last year was a big, big, I mean, especially oilfield services. And I think if oil stays down here around $50, you're going to see a continued march of companies in that sector. So I don't know what time frame they were talking about, but it's been pretty busy, I'd say, for the last year and no downturn. I think energy has not had a rebound and the price of oil has been under pressure. And I think we're continuing to see the same thing.

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Matthew Coad, Autonomous Research - Analyst [21]

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Awesome. And then just kind of expanding on your sponsor activity comment. I think we all see the dry powder numbers, and it's easy for us to understand that that capital has to be deployed over time, but I feel like what's kind of overlooked is the recent equity market recovery, the good marks from PE firms and the necessary realizations that they have to occur over time. So I'm kind of curious if you could like characterize sell-side activity from your sponsor clients?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [22]

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Well, you're right. So everybody talks about dry powder, but there is the other side of that, which is the full powder, whatever the other. I don't even know what the other side of dry powder is, so I won't try. But they've got -- people have to sell. So the beauty of this market is it's not even -- again, you go back 10, 20 years ago, M&A was kind of an animal spirits cycle market. Companies wanted to do things. Today, you have these 9,000 private equity firms and they're a business. They're a manufacturer of purchasing and selling. And see, everybody focuses on dry powder, but selling is the other side of that. And I think I mentioned this about a year ago, when we were down on our sell-side, a private equity, and what happens is I think I related it to the art market. You don't put your good stuff on the market if you're not sure that there's going to be an underlying bid.

There's a real feeling right now and they're correct about it. There is an underlying bid for quality assets at very high multiples with great credit and a lot of capital. And so it's a good time. People want to put their best assets out on the market and monetize. And again, that's not the end of the game. Unlike Corporate America where sometimes sale is the end, if you're a private equity shop and you sell a premier asset, the next thing you do is go fundraise, start a new fund, and you're back in the cycle. And we want to be part of that cycle straight through. And yes, I think you're seeing a significant amount of the high-quality assets coming into the market now on the sell side. And they're not going public.

Lastly, very few of these, very few want to go public. I mean, I think it will be interesting to see what the public policy part of this would be. I suspect you will just see a continuing decrease in public market companies. The private market has become so much more efficient structurally, governance, capital structure, and that's why we have focused so hard on private equity. I think it's a structural thing that has changed pretty dramatically.

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Operator [23]

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The next question is from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [24]

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So Ken, I appreciate the color on the environment, and you mentioned that you're seeing a high level of activity right now. When we look at the public data, it shows some recent momentum in your public pipeline, but let's say not necessarily quite to the level that you're kind of alluding to. So could you just give us a little more color there? Is it more of a trend in the early deal flow or in conversations with clients? Just to help us square that.

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [25]

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It's what we're working on. Look, I -- the funny part is I don't ever see that pipeline. I know after the fact, my IR people always tell me this is what the pipe -- whatever numbers you use. But I don't look at that because I don't -- I have the numbers that I see. So I don't have to look at what some third party is doing. So I don't really know the number you're talking about. But I know what I see, and are -- we have things like what we're working on. And then also there's a trend of submissions. We have a committee, new business review committee. And so we can -- often, I'll show you what a great manager -- often, I just open up the submissions and I count how many we have. That's the level of detail the -- I am kidding. But that is one way. If I see we have 10 or 15 of them, I go, okay, that's probably pretty good. And you could see them and track them on a real -- I can see them. And those submissions have been doing very well and increasing.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [26]

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Okay, great. And then just one last one for me. Was there any impact from the revenue recognition standard this quarter, anything material?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [27]

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Joe?

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Joseph Walter Simon, Moelis & Company - MD & CFO [28]

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No, there was nothing material pulled forward.

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Operator [29]

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The next question is from Manan Gosalia with Morgan Stanley.

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Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [30]

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So you mentioned that there were 10 MD departures in 2019. Are there any specific industries and markets that you moved away from? And as we look ahead into 2020, are there any markets or industries that you're reallocating your resources to?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [31]

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I'd say 2019 was individual-specific. So I can't really point out anything. We have 126 Managing Directors and we look at them as individuals. And it's hard -- I never really try to guess sectors. It's tough because even if a sector is having a trouble in M&A, it usually means we're moving in on restructuring. So unless the sector just becomes irrelevant, which very rarely happens, it's individuals. I do think, from a top down, where are we looking to expand. I've said this over and over. I continue to believe health care will drive -- become a significantly larger part of the economy. We think we can get much bigger in health care. Our media franchise is a spectacular franchise for us, and we'd like to continue to push that into some more of the tech side and the digital media aspects.

And then, again, I don't know whether you call it a sector, but we have really revamped and put a lot of effort, including -- I know some of you have asked me about the AI that we've had. We are putting a lot of resources into sponsor coverage and see that -- if you call it -- we call it a sector, we think it's a place to put a lot of effort.

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Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [32]

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Got it. And then you mentioned that the average fee rate was higher this quarter and has been going higher for a few years. I was just wondering, is that just because you're on larger and larger deals? Or is there anything else going on there?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [33]

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I think it's larger deals and discipline. I mean, one of the -- I mentioned this new business review committee. We instituted that about 3, 4 years ago. And one of the reasons was to be disciplined. Again, we manage -- as I say, our people manage their clients and then it's up to us to manage people, and what do you manage people with time and resources? And one of the things that can happen is if you're not disciplined, you spend a lot of time on -- and junior resources on transactions that aren't worth the possible fee. So we have been disciplined around it and put some of our best people on monitoring that and making sure that the assignment and the fee structure are correct, and it's worked. It's done very well.

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Operator [34]

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(Operator Instructions) The next question is from Brennan Hawken with UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [35]

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So it seems like there was a lot of puts and takes as far as the MD side, some recruiting and some departures here in 2019. Can you -- how should we think about how that movement is going to impact your productivity here in 2020, assuming that you're -- since you feel good about the business, Ken, it seems as though the back half revenue pace is the right way to think about things. So if we just take that backdrop as an operating assumption, how will those adjustments feed through into the productivity line that we all model?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [36]

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Well, our hope is, and this is the reason we do it that it should go up. We hope we have changed bodies and put better and more productive people in the spot. And look, we don't do this and move people out in an instant. So it's usually done every 3 or 4 years, where you kind of get serious and really the first half downturn focuses your mind on it. And so you do it. And I think that if we did it right, we should have a higher productivity. We're hoping that's what we did.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [37]

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Okay. Let me ask the question in a different way. The 10 departures that you will manage your way through, what sort of quantum or lag were they behind your firm-wide average productivity rates so that we can at least use that as maybe an input when we want to think about this analytically.

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [38]

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Look, significantly, I'd say. But I -- that's why we did what we did. But that's really hard to do. We run a 1-firm balance -- income statement, and we don't pay commission. And so we work as a team on projects. So going to that number, it's an overall thing, really. It's -- and again, there are people's lives involved. So I don't want to say too much other than we think we've improved our go-to-market, the quality of the product that we're going to market. And we wouldn't do it if we didn't think it was significant.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [39]

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Okay. And then circling back to the price of oil example that you gave in the beginning of the Q&A. It seems as though that implies that some of the payout here in the back -- in 2019 was based on pending revenue. So if really this was an investment and we're using that capital, CapEx and price of oil example, then in that oil company, shareholders would benefit from capital investments that's already made and then monetization of the price of the oil at the higher price point. So then is it -- shouldn't it be reasonable to assume that once the revenues that you guys are working on right now are actually monetized, that the comp ratio should not be below the prior range of the 57% to 58%?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [40]

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Brennan, the good news is I never ran an oil company. So I'm not exactly sure how they would work this. So I'll give you what we -- we did not prepay. I don't want to -- we didn't prepay. We invested in the talent base. We didn't look like who's got a revenue. There's -- we didn't do an IOU and say you got something coming in. We said we just thought it was worth -- again, I gave you the numbers. The difference between a $900 million run rate company and a $600 million, it's like $180 million of comp, most of which goes to our Managing Directors, and we took about $35 million or so and put it in there.

It was to keep the team. It was to make sure that team is on the field and then I'm not going to -- I was going to try to go back to the oil analogy, but I'll just screw that up. We want this team on the field motivated, but we did not prepay revenues. Now if we do really well, should there be some leverage in the comp ratio? Look, maybe. Maybe going back to 2018, we had a great year. Maybe there could -- maybe we should do more if we have years like that where we outperform. And I'm willing to think about that going forward. But I don't want you to think that we prepaid. I don't view it that way.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [41]

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Okay, got it. Maybe walking away from the oil example is better for both of us. Then can you help us think about -- because when you all came public and Ken, you were very clear in talking about the comp ratio of 57% to 58%. And this year was a good revenue year really, like regardless of the divergence of run rate, you're talking about ballpark $750 million of revenue. So that's your second best revenue year ever. And so the idea that there would be a departure from the comp ratio was just confusing to investors. And so what level of comfort can you give that that's the right way to think about things in all but the most really rough -- in most revenue environments and anything that isn't really quite extraordinary?

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [42]

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Well, all I can do is tell you that if you look back since we went public, we were completely disciplined on it. We intend to be disciplined on it. We're one of the few firms that has not taken extraordinary charges on our employee base in different times. We're transparent about it. We ran it through. I'm not going to convince you until we run the firm at that level. So I'll just -- I think we're going to have to run the firm at our comp ratio, and that will be the best proof that I have. But you're right. Right now, it's talk other than in 2014 to today, we were extremely disciplined, and we never used any method of -- you can look at our income statement, it was clean. I don't think we used any tricks or shortcuts to try to get around it. And we intend to go back to that.

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Operator [43]

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This concludes our question-and-answer session. I would like to turn the conference back over to Ken Moelis for any closing remarks.

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Kenneth David Moelis, Moelis & Company - Chairman & CEO [44]

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No, I just want to thank everybody for the time on the call and look forward to an exciting 2020. Thank you.

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Operator [45]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.