U.S. Markets open in 2 hrs 25 mins
  • S&P Futures

    3,676.00
    +11.50 (+0.31%)
     
  • Dow Futures

    30,043.00
    +111.00 (+0.37%)
     
  • Nasdaq Futures

    12,511.50
    +49.25 (+0.40%)
     
  • Russell 2000 Futures

    1,855.80
    +8.60 (+0.47%)
     
  • Crude Oil

    46.21
    +0.57 (+1.25%)
     
  • Gold

    1,845.60
    +4.50 (+0.24%)
     
  • Silver

    24.40
    +0.26 (+1.09%)
     
  • EUR/USD

    1.2170
    +0.0021 (+0.1704%)
     
  • 10-Yr Bond

    0.9200
    0.0000 (0.00%)
     
  • Vix

    21.09
    -0.08 (-0.38%)
     
  • GBP/USD

    1.3475
    +0.0023 (+0.1698%)
     
  • USD/JPY

    103.9600
    +0.1000 (+0.0963%)
     
  • BTC-USD

    18,836.86
    -420.72 (-2.18%)
     
  • CMC Crypto 200

    369.97
    -4.44 (-1.19%)
     
  • FTSE 100

    6,548.98
    +58.71 (+0.90%)
     
  • Nikkei 225

    26,751.24
    -58.13 (-0.22%)
     

Edited Transcript of MC.N earnings conference call or presentation 26-Oct-20 9:00pm GMT

·35 min read

Q3 2020 Moelis & Co Earnings Call New York Oct 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Moelis & Co earnings conference call or presentation Monday, October 26, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Chett Mandel Moelis & Company - Head of IR * Joseph Walter Simon Moelis & Company - MD & CFO * Kenneth David Moelis Moelis & Company - Chairman & CEO ================================================================================ Conference Call Participants ================================================================================ * 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 Equity Research Analyst * Jeffery J. Harte Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Kenneth Brooks Worthington JPMorgan Chase & Co, Research Division - MD * Manan Gosalia Morgan Stanley, Research Division - Equity Analyst * Michael C. Brown Keefe, Bruyette, & Woods, Inc., Research Division - Associate * Steven Joseph Chubak Wolfe Research, LLC - Director of Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Moelis & Company Q3 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would like now to turn the conference over to Mr. Chett Mandel, Head of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Chett Mandel, Moelis & Company - Head of IR [2] -------------------------------------------------------------------------------- Good afternoon, and thank you for joining us for Moelis & Company's Third Quarter 2020 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 and in our earnings release. 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. Joe? -------------------------------------------------------------------------------- Joseph Walter Simon, Moelis & Company - MD & CFO [3] -------------------------------------------------------------------------------- Thanks, Chett. Good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will discuss our business further. We achieved a strong third quarter, earning $208 million of revenues. This resulted in sequential growth for the second consecutive quarter since the onset of COVID-19. The general M&A landscape dramatically improved in the third quarter, leading to a solid contribution from both strategics and sponsors. Our restructuring-related activity was the highest it's ever been, exceeding last year's record third quarter contribution. We experienced particular strength in out-of-court restructurings, a specialty of ours. We continue to excel in offering innovative solutions, which in certain cases can accelerate the time line to resolution and avoid a lengthy Chapter 11 process. In addition, our restructuring retainers remain significantly elevated over the prior year, and our capital markets business continues to make a steady contribution to revenues. Moving to expenses. Adjusted compensation expense was accrued at 61% in the third quarter. Our noncomp ratio was 14% in the third quarter, and we reported $28 million of noncomp expenses due to continued low travel and continued expense discipline. Our normalized corporate tax rate remained at approximately 25%. This quarter's effective tax rate was higher than the normalized rate due to the reversal of some CARES benefits previously accrued due to current quarter profitability. Regarding capital allocation, the Board declared a dividend of $0.3825 per share, an increase of 50% from the second quarter, which is halfway back to our former regular dividend. We have always operated from a position of financial discipline and remain committed to returning 100% of our excess capital. And lastly, we continue to maintain a fortress balance sheet with substantial liquidity and no debt. We ended the quarter with $266 million of cash and liquid investments and an undrawn revolver. And I'll now turn the call over to Ken. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [4] -------------------------------------------------------------------------------- Good afternoon, and thank you all for joining the call. I know I'm looking that a lot of our people listening to our calls, the internal people. So I just wanted to say how grateful I am to the dedication and focus you showed during the unusual time. We have all worked together to come up with innovative solutions for our clients, which has created a powerful and positive energy within the company, even though everyone has been working remotely. I'm awed by the breadth and depth of the leadership shown throughout the firm during this crisis. Our unique culture sets us apart and allowed our people to come together creatively to solve client problems, which is why our business has been able to rebound so quickly. The fact that we have no debt and a fortress balance sheet enables everyone in the organization to put their heads down and concentrate on clients. Nobody was concerned about the financial health of our company, and everybody was busy helping clients focus on opportunities. Also, without the friction of an internal commission structure, we were able to rapidly form new teams to deal with client matters, many of which we have never seen before, even thought of or faced. And lastly, I do believe COVID-19 will continue to reshape the global economy for years to come. The ramifications of the pandemic will force companies to make large-scale decisions about their marketing position, growth strategy and capitalization and they need an adviser who can quickly pivot their resources and strive with the changing environment. This is exactly what we do. I believe we are the best at it, and that is why I feel so great about the future of the firm. And with that, I'll open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Ken Worthington with JPMorgan. -------------------------------------------------------------------------------- Kenneth Brooks Worthington, JPMorgan Chase & Co, Research Division - MD [2] -------------------------------------------------------------------------------- You mentioned an accelerated path to restructuring resolutions. How big a driver was that accelerated path to the restructuring success that you had this quarter? And in terms of the restructuring outlook, did you continue to see a ramp in activity levels throughout the quarter? Or has restructuring started to kind of level off given the environment? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [3] -------------------------------------------------------------------------------- No. Our -- as Joe said, it was on a current basis that our retainers remain elevated. So restructuring continues. It's really a bifurcated economy. 75% of it is really headlong looking in M&A, 25% of it is having troubles and something like that. And so we are continued to elevate and find a restructuring. And Ken, we were just pointing out, we always do out of courts. It's sort of a specialty of ours. It's a continuation. There was really nothing unusual about it other than people prefer it and we've done a lot of -- and we've always done it. I forgot the exact percentage, but a significant percentage of our restructuring is done without doing it out of court, and we think it's innovative. And it's -- as far as we're concerned, most companies prefer to stay out of Chapter 11. I found very few that like going in. Yes, especially after the fact -- after they've been through it. -------------------------------------------------------------------------------- Kenneth Brooks Worthington, JPMorgan Chase & Co, Research Division - MD [4] -------------------------------------------------------------------------------- Okay. Okay. Fair enough. And then maybe your thoughts about a special dividend this year, maybe it's a little bit of the crib for the horse. But given potential changes to the dividend tax rate under certain election scenarios, would you consider pulling forward a special dividend into 2020? Or is the policy really to wait until March of the following year if you should choose to move in that direction? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [5] -------------------------------------------------------------------------------- Let's put it this way. I think our balance sheet, and we brought the dividend back, but we still have a substantial amount of liquidity, no leverage. Our balance sheet is fortress. Again, we are pretty conservative with the virus floating around in case -- look, people have a different read on it, and we just don't know if we're done or -- it feels like we're done. Business-wise, I mean, things are picking up pretty dramatically. If there would be a substantial -- I think you're thinking substantial change in the election and an indication that there were some relevance in bringing a dividend forward that would be a benefit, we would definitely think about it. I don't want to say any more because that involves our Board, but we have the capabilities of thinking quickly, being nimble. And if there was something in the tax future that we can foresee that this was a real benefit, yes, we would respond to it. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from Devin Ryan from JMP Securities. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [7] -------------------------------------------------------------------------------- So maybe to talk a little bit about the M&A environment and what you guys are seeing there, can you maybe put just a little bit more flavor around the tone for business today and maybe how that compares relative to the pre-pandemic levels when business was obviously quite healthy? And really, what I'm getting at here is it feels like M&A is getting back to kind of similar levels we were at. Restructuring is at a higher level, which would seem to come together for a pretty strong outlook for 2021. But really, the M&A piece if you're trying to get a flavor for how you would frame that relative to, call it, the pre-pandemic pace. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [8] -------------------------------------------------------------------------------- I think our M&A pace feels as high as it's ever been. Our backlog is as strong totally as it's ever been. We, I think -- I forgot when was second earnings quarter? Was in late July, we said we started to -- we really felt it. It may be that it's -- we deal with a little bit of a growth year middle -- a lot of what we do is in the sponsor community. And possibly, they responded quicker. I think the larger transactions are a little more affected by maybe by the election and tax policy and what happens globally. And if you're growing 20% to 40% a year, I think those types of clients tend to -- the election doesn't make a big difference if your growth rate is high and you're in that kind of a market. So we felt it starting in June, July. I think we talked about it on our second quarter call. And right now, we feel like it's exceptionally busy. And 2 things are happening. One is, we're getting extraordinary efficiency in the way the bankers use their time. I mean, literally, our bank -- I've talked to bankers, and they're on their Zoom from like 7 am to 7 at night, I used to ask a banker, "Were you busy this week?" And they said, "Oh, yes, I had to travel to Germany and then I came back and I had to get to the West Coast and then I came back." So we were literally talking about 2/3 of their -- 90% of the work time was getting to or from an airport. I think we're getting more production per hour, because of -- dramatically because of where people are. And actually, we're getting less expensive. So it's pretty interesting what's going on right now. So the short answer is, I feel like M&A might be as strong as we've ever felt, let's put it that way. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [9] -------------------------------------------------------------------------------- Yes. Okay. Terrific. And then this ties into the point you just made, Ken. I guess, for Joe, just around expenses. So noncomp costs are down 20% year-over-year, at least in the third quarter. And clearly, some tailwinds there just with the limited travel. But as business starts to or continues to recover, hopefully. And travel, hopefully, at some point here starts to pick back up. Where do you see that, I guess, balancing out? And how should we think about noncompensation costs trending into next year, just contemplating kind of maybe some recovery? But at the same time, maybe you pull back in some spending areas, travel may not quite get back to where it was. And also contemplating some of the headcount expansion that you're also talking about. -------------------------------------------------------------------------------- Joseph Walter Simon, Moelis & Company - MD & CFO [10] -------------------------------------------------------------------------------- Yes. So I think thinking about noncomp, if I think about just the next quarter, I'm thinking that it's still probably in the $30 million level thereabouts. Again, that's assuming that travel stays at current levels. I have no idea how to predict travel, but I'm fairly sure that it's not going to resort back to where we were in 2021 or I don't believe it will be. I think it's probably something on the order of at this point $8 million per quarter that we see in terms of the decrement in travel. So -- and then on top of that, you should also know that the new New York lease expense is fully taken into account in that $30 million run rate. So the real swing factor is going to be travel. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [11] -------------------------------------------------------------------------------- Okay. Got it. I just want to make sure the $8 million is where we get back to? Or that's the one going to benefit? -------------------------------------------------------------------------------- Joseph Walter Simon, Moelis & Company - MD & CFO [12] -------------------------------------------------------------------------------- No, no. I'm just saying that if you want to think about a boundary, it's -- we're currently spending modest amounts on travel, a couple of million dollars a quarter, used to be probably $10 million a quarter. So there's an $8 million delta on a quarterly basis. I don't know how to judge how much of that is going to return. I'm assuming that it's going to be quite a bit less than the full $8 million gap right now. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from Manan Gosalia from Morgan Stanley. -------------------------------------------------------------------------------- Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [14] -------------------------------------------------------------------------------- Maybe just a follow-up on the prior line of questions. Do you think that we're on the start of another, like, 2 to 3 cycle in M&A? Your comments earlier in the call are pretty bullish overall. But basically, what I'm trying to get at is we typically saw 2- to 3-year down cycles when we had a recession. This time it was 2 to 3 months. So how robust do you think this inflection is that we're seeing right now? And does this rebound have a lot more room to go from here? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [15] -------------------------------------------------------------------------------- Well, look, there's a lot of things up in the air, right? There's an election next week, and there is a virus out there. But what I'm seeing would lead me to believe we're in a long-term M&A cycle, 2 to 3 years is easy. And one of the reasons is, I think you have all this part of the economy. So you have 25% or whatever it is, 15% to 20% that's going through restructuring, just affected so negatively by the virus. So they'll restructure and maybe -- and I don't know what happens there, they might consolidate. I think size showed that size mattered in this downturn, number two. And lastly, and I think most importantly, the scope of the economy really changed. The pandemic has really -- I look at our own business, and I said, maybe we're a kind of a Zoom economy, but maybe we did save $8 million of travel or maybe it will be $4 million and maybe our productivity went up. And I think every business is looking at their business and is going to make -- that's what I said at the end, it's going to make large decisions. If you're a winner in this environment and your stock -- you're booming, you might make a decision to change or continue to grow. And if you were a company that was marginally, you're not in restructuring, but you're kind of marginally off center and you weren't ready for the digital economy, maybe you have to do something quick and change your strategy in your go-to-market. I think what I said at the end is very important. COVID will change everything, whether it's to the extent we believe today, but it will change a lot of businesses. And those businesses will have to make decisions around a capitalization, go-to-market, and that's what we do for living. We help corporations make really big decisions and implement them. I think it will go on for a while. -------------------------------------------------------------------------------- Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [16] -------------------------------------------------------------------------------- That's helpful. And then last quarter, I think you spoke about you had done 14 deals on the capital raising side. I don't know if I caught it, but did you mention how much you did on the capital raising side this quarter? And how much of a deal win do you have in that business? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [17] -------------------------------------------------------------------------------- We like that business. We hired 2 really seasoned veterans that joined us over the summer. But I'd say the third quarter -- the second quarter, if you remember, I pointed out because it was so immediate. People needed liquidity, and we were there to raise it. The third quarter continued that the business is good, it wasn't quite -- the second quarter was an outlier. The third quarter was strong. And I don't -- Joe might have the number. We pointed it out in a second because it was one of reasons, it was big enough to point out. Now we think that business, though, will continue to grow. We see lots of new markets opening up and opportunities and places for us to play and we've really stepped up our game. So Joe, I don't know if you have numbers from the PAT. -------------------------------------------------------------------------------- Joseph Walter Simon, Moelis & Company - MD & CFO [18] -------------------------------------------------------------------------------- Yes. And the PAT, if I look at last year, it was probably a couple of points of -- 2% to 4% of revenues. This quarter, I think it's probably around 8% to 10%. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [19] -------------------------------------------------------------------------------- And that's capital markets advisory. Remember, we don't have any trading -- it's all advisory revenue. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from Steven Chubak from Wolfe Research. -------------------------------------------------------------------------------- Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [21] -------------------------------------------------------------------------------- So wanted to start off with just a question on MD productivity. Just looking at the historical performance, MD productivity for you guys peaked in 2018, just above $7 million per -- the 5-year average is just above $6 million per MD. Just given the optimistic outlook in the release, how should we be thinking about the productivity looking out to next year? And just given what you're seeing in the current pipeline, how quickly do you believe that you can get to that $7 million plus productivity level? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [22] -------------------------------------------------------------------------------- I'm not going to give guidance, but I think that's a good analysis of -- remember, when we were growing fast, we always had a new fresh -- whenever you're growing too fast, you're always taking on so many new people that the new people don't add. So one of the things 2018 did, it was the end of a very significant growth period. So our revenue per MD statistic catched -- caught up. I don't really think of it that way, but I do think, and I've said this before that we -- there was a lot of people talking about do we have a comp problem. We had a revenue shortfall in the first half of '19 that followed us for a while. And then COVID hit in March. So we didn't get to show what we thought was a pretty significant backlog coming into 2020, which is -- it came to a halt. I think some of what you're seeing now is that backlog is coming to market because we were involved with it to begin the year. And it's a long way of saying, I don't want to give guidance, but I don't -- I think the fact that, that was revenue per MD. And if we can get more productivity by Zoom calling and I would hope that, that's the path we're on. But I don't want to give a time frame. We're not giving guidance. -------------------------------------------------------------------------------- Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [23] -------------------------------------------------------------------------------- No, I could certainly appreciate that, Ken. Just a follow-up on the -- since you brought up the topic of compensation, through the first 9 months, revenues are tracking flat year-to-date. I understand that the fixed comp base is going to grow as the firm grows, but I wanted to just get some insight in terms of why that variable comp piece is higher since the revenue production is tracking flat with last year? And any specific factors that maybe you could speak to? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [24] -------------------------------------------------------------------------------- Well, because it's really a 9-month -- the quarter was 61% for the revenue we produced. And I think that's -- if you look at the firm, we're not back to full normal. We're still -- the first month of the third quarter was just beginning. Now we're getting back to full stride. I think you can see us get right back to where we want to be on comp. I want to point out one thing, too. I've always said, we really aim for 25% pretax margin. We beat that right now. And that's -- I don't think we're full stride yet. And so you see -- look, you're seeing -- when you're looking at the 9 months, you're looking at -- there's a quarter in there where March, April, May, nothing happened. There was no M&A. Restructuring was just getting started. So again, I keep telling people, do not look at this year's stats. There was a 3-month complete black hole, but you can start to look at what we're doing on a run rate, and I think you can see what we're doing. -------------------------------------------------------------------------------- Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [25] -------------------------------------------------------------------------------- Great. And just one quick cleanup for me. Can you speak to the contribution from ratchet fees, whether that was a meaningful contributor in the quarter and also just provide the MD headcount? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [26] -------------------------------------------------------------------------------- The MDs are 127, if I had it correct. Joe might know exactly. And I would ... -------------------------------------------------------------------------------- Joseph Walter Simon, Moelis & Company - MD & CFO [27] -------------------------------------------------------------------------------- 127. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [28] -------------------------------------------------------------------------------- Yes, 127. And I don't have a specific number. And one of the reasons is, I don't think ratchets played a major role in the third quarter. I mean I'm sure there was a dealer or 2. But I'm usually knowledgeable of when we've had something really hit the top end of a ratchet or change it. It's probably -- I thought it's kind of minor. But Joe, do you have a flavor? -------------------------------------------------------------------------------- Joseph Walter Simon, Moelis & Company - MD & CFO [29] -------------------------------------------------------------------------------- I agree. I don't know that number off the top of my head, but it's not something that was something that struck us as being something that popped off the page. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [30] -------------------------------------------------------------------------------- Right. Because, I mean, look, they're in a lot of deals. So if it's meaningful, we would know it. That's why it's not meaningful. If it was meaningful, we would know the number. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from Brennan Hawken with UBS. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [32] -------------------------------------------------------------------------------- So just wanted to start it out on the dividend. I appreciate your comments before in considering maybe a special, but this has been quite a roller coaster for even the regular for you all. So I'm really curious about how your experience in this year maybe might inform how you think about a regular -- how you manage the regular dividend, how your approach is going to be to the regular dividend going forward? Clearly, you're feeling a lot better about your business, which is -- and raising the dividend by 50% is a very powerful way to state that. But just -- could you maybe help us think about what you might be instilling as far as guardrails go or overall philosophy around the regular dividend going forward? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [33] -------------------------------------------------------------------------------- I think if we would go back to where we were -- our goal over time is to go back to the regular dividend. And the same philosophy we like it. We ended up with excess capital even at the end and paid it out in specials. Look, I can't -- if you tell me when the next time the entire world will shut down and lock themselves and anybody who didn't take emergency actions in March, let me say it in the positive. I run the company as if I own the whole thing. I run it as it's my kid, I own every share. I did what I would do to protect what is one of the great franchises that we're building. And by the way, I said it during the call. We are rebounding much more -- I think we're on a rapid rebound because there was not one person in this company who was concerned about the future of the company or its own stability. And if you remember on April 1, by the way, it's hard to re-remember that moment. People were scared. And at least I can look everybody on our internal and say, "You're fine, you're fine. Pick up the phone when the clients call, you're fine, don't worry about us." That's worth a fortune. And we will bank that over the next few years as we picked up great people. We banked our clients, and we'll see that in -- for 5 years now of the focus we were able to have. So yes, it was a roller coaster. But you tell me the next time we shut the entire global economy down, and that's the time I might go through that again. But in the interim, I'll assume we won't do that again, and I'll go back to regular way dividend. And by the way, if the same thing -- if it was March 15, again, I would do the exact same thing until I knew the coast was clear. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [34] -------------------------------------------------------------------------------- Yes. I totally appreciate that April was a very different period. And I'm not trying to -- I wasn't trying to imply any kind of question about the decision, whether or not it was a good one. Just was more the business that you're in is a great business. It kicks off a ton of cash as is evidenced by your capital return policy. But sometimes, the trajectory of the revenue can change pretty dramatically, whether it's cyclically driven or what have you. And so I'm just -- my question was more based around that and whether or not you might approach raising the dividend at a more measured pace as you grow? That's all. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [35] -------------------------------------------------------------------------------- No. I think we'll try to bring it back as soon. If you tell me the virus was cured tomorrow, I know where I'd be, and it would look pretty -- again, I'm speaking out of turn because I'd have to talk to the Board, but we would probably bring it back pretty quick and we'd want to go back to that. We have a great, balanced business. We have a great restructuring team. And they -- usually, it's countercyclical. And our cash flow is balanced for that reason. We also have a very nimble team, and they all move to do like in the second quarter, they all move to help do the capital market side of the business. So I have a lot of faith in them to do things like that. I just had no idea of what will happen when we all went home and sat on our couches, that concerns me because I've never done it before. But I do know in regular way, if you've got a great restructuring team and you've got great bankers, I know what we can do with cash. By the way, we have no debt. So if there's a quarter of downturn, I don't mind because we have such a fortress balance sheet, quarters don't matter. So I'm pretty comfortable with it. We generate that kind of free cash flow. That's why for all those years, we were shedding cash. We were having to do 2 specials, 1 midyear, 1 at the beginning of the year because the cash buildup is so quick. So I think I'd be -- if you told me, Brennan, that you had cured the virus, I think I know what I'd recommend to the Board, and it would be very similar to what it was prior. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [36] -------------------------------------------------------------------------------- That is very, very clear. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [37] -------------------------------------------------------------------------------- Yes. I can't say the Board would approve it. They have to speak for them, but I know what I would recommend. -------------------------------------------------------------------------------- Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [38] -------------------------------------------------------------------------------- Great. And then I just wanted to follow up on the MD headcount question. So it's at 127. I think that's up 1 year-to-date, but you have either promoted or hired a total of 13. So can you help us square -- was that just the idea that maybe you had realized at the end of 2019 that you had previously gone through too fast to growth spurt and you needed to make some adjustments? Or was that just regular way departures that happen all the time? Can you maybe -- was there anything unusual that was happening on the MD count side? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [39] -------------------------------------------------------------------------------- No, but a lot of times what happens is, we manage our headcount actively every year. And what usually happens is, we start talking to people like sometime around now. And we give them to the end of the year. And a lot of those then heads drop-off in January and February. They're -- December 30, not -- they're still on the payroll formally. And we give them time and then they go. So -- and we don't -- look, the reason you don't know it, we don't do extraordinary charges. Our comp ratio includes all our hiring, which is investment spend. And all of our people management, we view people management as the core competency of what we do. So we don't segment it out. It's just in there, it's in there every year. And look, and in a year like this, I don't know how to look if some people left midyear. I don't think it was a lot of this year because we really tried not to do anything during the pendency of the beginning of the crisis. We really didn't want to do any headcount. So if there was, it was people we talked to at the end of 2019 and gave time to find their way out. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question comes from Michael Brown with KBW. -------------------------------------------------------------------------------- Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [41] -------------------------------------------------------------------------------- So Ken, I just wanted to follow up on the compensation discussion earlier. So as mentioned before, revenues are kind of flat year-to-date. Now that we are towards the end of October. I'm just kind of curious how you think about that full year comp ratio. I know that there was a lot of uncertainty earlier in the year, but now that we're kind of closer to the end of the year. Any sense as to where that could end up? Last year, you ended at 63% comp ratio for the full year. I understand this greater fixed and variable costs embedded in the comp structure this year. But just trying to get a sense if we could kind of get down into that ballpark, perhaps something in the mid-60% range. Obviously, knowing there's an election around the corner, which could certainly be a wildcard here. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [42] -------------------------------------------------------------------------------- Well, look, I'm not going to give guidance for the fourth quarter. We think we have a very -- we have a great -- we said our backlog is strong. And I think if you look at the third quarter, third quarter is pretty clean. And it's not back up to our run rate of 2018, but it's clean. So I think you can see how we think about comp. When we don't have a virus, when we don't have a shutdown going on or hopefully the stoppage of business. Look, very hard to say the second quarter and even the first quarter. The second quarter, especially of 2020, reflected any natural business environment. So again, you're trying to blend the whole year into what was 3 distinct lego blocks coming together for the year, the first. The second was completely different. The third is clean, and the fourth will be what it is. But I think if you look at the third, you can see the way we think about the business on a natural basis. -------------------------------------------------------------------------------- Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [43] -------------------------------------------------------------------------------- Okay. Great. You mentioned the backlog. And because of this pandemic, the drivers of this turnaround in M&A have been quite different, and we've seen certain areas that have been a lot stronger and others that have been a lot weaker here. And so cross-border has been weak, large-cap strategics have had pockets of strength, but we haven't seen a full bounce back there, at least not yet. So how would you characterize some of the key themes supporting your backlog at this time? What are some of the key strengths there? And then I also wanted to hear about what you're seeing in Europe? Obviously, the cases there have been spiking. And just curious if that has started to impact deal activity over there in Europe? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [44] -------------------------------------------------------------------------------- The interesting part is, I can't -- almost everywhere is strong. I go around the world. I think Asia is fairly strong. Our -- even our joint venture, which nobody talks about, we do have significant exposure to Australia. They're doing well. The Middle East is booming, I will tell you that. That franchise since we're involved with the Saudi Aramco IPO as we lead adviser on that, I think our activity there has never been higher. Europe is as good as it's been in a long time. And we did a lot of headcount. We brought in some great people. We've done some maneuvering around Europe. Does it have the profitability of the U.S.? No. It doesn't have the velocity of deals that the U.S. does, but I feel much better about what we're doing in Europe. The U.S. is strong, and the U.S. is unbelievable how it recovers from these things. I think it's a real testament to our economy. And I think, as we said, all the businesses are really doing well. I can't think of -- I mean, M&A is doing fine, doing very well. Restructuring is elevated, and even cap markets continues to grow fairly well. I think if I had maybe a mark -- I don't have that really that everybody seems to be doing pretty good. I can't really think of a bad market. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question comes from Jeff Harte from Piper Sandler. -------------------------------------------------------------------------------- Jeffery J. Harte, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [46] -------------------------------------------------------------------------------- Most of it have been asked, but just a couple of follow-ups. When we look at the M&A business, is it reasonable to think that the worst is kind of behind us now from the COVID announcement drop-off? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [47] -------------------------------------------------------------------------------- Yes. From my viewpoint, the answer is not only yes, but I also think people are leaning into things and really are -- it seems like -- and I know it sounds strange, right? Because we're in the middle -- we're still home and there's still a lot of uncertainty, but I believe that the amount of people who -- companies and institutions and especially private equity, that want to do things is significant. -------------------------------------------------------------------------------- Jeffery J. Harte, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [48] -------------------------------------------------------------------------------- Okay. And as we look from the outside, kind of the industry data we can see shows mega deals and really big deals being awfully strong, but deal counts kind of lagging a bit. Are you starting to see some spillover from kind of the mega deals into more of the middle market? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [49] -------------------------------------------------------------------------------- Kind of see it the other way around. I thought the middle market -- when I was on the call in July, and I said I saw the M&A market come back, I've got feedback that all you guys said, well, what's Ken -- that I was seeing something different than everybody else. So I saw the first mover being the sponsor community coming back quickly. And then I saw -- I thought that then went to the big deal market, but that may just be me, but that's what I saw. -------------------------------------------------------------------------------- Jeffery J. Harte, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [50] -------------------------------------------------------------------------------- Okay. Well, it's interesting. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [51] -------------------------------------------------------------------------------- Yes. I do think -- by the way, I want to be clear. I do think that it's the market that is big enough to access institutional financing. And that's important. I think that the subscale deals, the smaller deal flow, I think does have trouble. The bank market is kind of like banks aren't fully back. There's going to be a real price to pay here in the general economy. But -- and so I do think you have to be careful. I do think M&A started, and it was what we now call sponsor middle market, which could be anywhere from $1 billion to $10 billion. But that's -- they can access the institutional money markets and credit markets, which is a little different than having to go to banks. Banks are not fully back in the financing. And I think that you might see that lag a little bit because they might -- there's some -- I think there's some troubles coming from just credits in the banking system. -------------------------------------------------------------------------------- Jeffery J. Harte, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [52] -------------------------------------------------------------------------------- Okay. And then you mentioned earlier the relative contribution kind of from the capital markets business. And I thought I heard you say something earlier about restructuring. And did -- did I hear you right to say that restructuring was kind of close to the top of that 25% of revenue range that it's been in historically in 3Q '20? -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [53] -------------------------------------------------------------------------------- I think that's right. Yes. For Q3, that's right. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Ken Moelis for any closing remarks. -------------------------------------------------------------------------------- Kenneth David Moelis, Moelis & Company - Chairman & CEO [55] -------------------------------------------------------------------------------- Thank you all for getting on. Next time we talk election will be behind us. It will be 2021. Hard to believe, and I hope we're talking from an office somewhere and not from home. So good luck, stay safe, and we'll see you in 2021. Thank you. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.