Good afternoon, and welcome to the Moelis & Company Earnings Conference Call for the Second Quarter of 2021. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. To begin, I'll turn the call over to Mr. Chett Mandel, Head of Investor Relations.

Good afternoon, and thank you for joining us for Moelis & Company's second quarter 2021 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com. I will now turn the call over to Joe to discuss our results. Joe?

Thanks, Chett, and good afternoon, everyone. On today's call, I'll go through our financial results, and then Ken will comment further on the business. We achieved $361 million of revenues in the second quarter, an increase of 126% over the prior year. This represents our second largest quarter of revenues ever. Our first half revenues of $625 million were up nearly 100% from the prior year period. The robust growth during the second quarter was primarily attributable to increased levels of transaction completions with particular strength in M&A. In addition, our restructuring and capital markets teams remain very active as our model truly has three powerful revenue engines. Moving to expenses. Our compensation expense was accrued at 59.3%, consistent with both the prior quarter and the prior year. Our second quarter non-comp expenses were $29 million, resulting in a solid non-comp ratio of 8%. We expect our non-compensation expenses to be in the range of $33 million to $34 million for the third quarter, primarily driven by anticipated increases in travel. We achieved a quarterly pretax margin of 33.5%, well exceeding our 25% target. Moving to taxes. Our underlying corporate tax rate was 26% for the second quarter. Regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share, an increase of 9% from the first quarter of 2021, and our second increase since the end of 2020. In addition, we repurchased approximately 400,000 shares in the open market during the second quarter. In order to continue to execute on our capital management strategy, the Board of Directors has authorized an increase of $100 million to the repurchase authorization. Including today's announcement, our current repurchase capacity stands at approximately $150 million. As always, we remain committed to returning 100% of our excess cash. And lastly, we continue to maintain a fortress balance sheet with $281 million of cash and no debt. I'll now turn the call over to Ken.

Thanks, Joe, and good afternoon, everyone. I've never been more optimistic about our business given the changing dynamics of the M&A market. Alternative asset managers have seen tremendous inflows of capital over the past year. This trend is accelerating, and these institutions will become a dominant force in increasing the scale, velocity, and most importantly, the consistency of M&A going forward. Our holistic approach to client coverage brings comprehensive and innovative solutions to these clients across their entire portfolio and their investment cycle. Our approach is completely aligned with what is required by these companies. We believe that the combination of market factors and our model has resulted in Moelis & Company entering a period of secular growth. Our strong financial performance over the last few quarters is the direct result of the deliberate choices we made over the last 10 years by committing early on to spend the time, energy, and resources on internal talent development and promotion from within. We have created a growing and sustainable organic talent base. Combined with the dedication to having one P&L and no commission structure, we have a differentiated advisory offering, an exceptional pipeline of internal talent, and a franchise that would be extremely difficult to replicate. By setting up our platform the way we have since day one and remaining unwavering to that vision, we're able to be more nimble, integrated, and move into areas of high growth faster. For that reason, the pace of our new business activity remains high, and our pipeline is stronger than it has ever been, and I remain confident about our ability to continue generating value for our shareholders for years to come. And with that, we'll now welcome any questions.

[Operator Instructions]. Our first question will come from Devin Ryan with JMP Securities.

Hi, Ken. Hi, Joe. Clearly, a great quarter here. I'd love to maybe just dig in a little bit more, if you can, on the mix. I heard clearly that M&A was a big contributor, but restructuring and capital markets are very strong. So if you can give any more color on just the contribution, was it kind of the normal breakdown, but just at a higher absolute level? Or anything else you can share there? And then in terms of the M&A market, Ken, if you could just talk maybe a little bit more about what you're seeing in the middle markets where we're hearing there's just tremendous activity versus maybe kind of the larger end of the spectrum?

I think on the breakdown, it was very similar. We always say restructuring is 20% to 25% of our total revenues. And it was again at the lower end, and that wasn't as a result of a low level of restructuring activity. It was more a result of a very high level of M&A, creating a bigger denominator. So restructuring had a good quarter just on a bigger denominator because M&A was so large. Capital markets is probably high single-digits, but growing rapidly, and because the SEC put back and delayed a lot of the SPAC financings due to the accounting they implemented, I'm not sure that the quarter was. Look, I think they can do even a larger percentage. On your point, as to which is what I said in my remarks, I believe that the fundamentals of the M&A market are changing right in front of your eyes, and people aren't recognizing it as much. The flows of capital into alternative asset managers, who then do not choose when to execute a transaction. 10, 20, 30 years ago, M&A was a coverage of strategics, who would choose when and where they felt the market was good for them to act. The amount of capital flowing into an industry called private equity or alternatives or sovereign wealth is growing significantly. These entities and institutions are getting extremely large. And by the way, I think as a result of 2020, this trend will only accelerate because they did not experience the same volatility that the public capital markets did. They didn't have to suffer through a downturn like March 30, 2020. These institutions are in the business of transacting, which is why I said I think we are entering into a secular growth phase. I think M&A is in a secular growth mode. Lastly, I'd say there's a whole new asset class. I read somewhere yesterday that we're up to 900 unicorns. If you would have asked me 6, 7 years ago, what was our coverage for venture capital, I would have said really not our client base. But when you have 900 unicorns that I think have a market capitalization now of $3 trillion, that’s an asset class that will certainly make an impact. Some might go public, but some will pursue M&A as well. I believe that this has almost a market capitalization equivalent to private equity at this point. So we're seeing just a whole new M&A market, I believe.

I appreciate the color; it's fascinating. And maybe a follow-up for Joe, just on expenses. I heard the comments about the third quarter expectation with travel coming back in. Is that kind of the right level to be thinking about maybe as a new base if travel is normalizing? Or are there other puts and takes in there? And then on the compensation outlook. Clearly, it looks like there should be some solid revenue growth on the year. I understand how you're accruing for compensation over the first few quarters, but is it reasonable to think there's some flexibility as we get towards the end of the year here, just given the revenue backdrop, or how are you guys thinking about that here at the moment?

Joe, let me talk about compensation, and then I'll turn it over to you on the expenses side. On compensation, we thought just to stay where we were. There's a lot of time left in the year to figure that out. Two things I want to be clear. First of all, we came close to a 34% margin; I mean, we're getting -- people ask if you can get leverage on the model. I'd say getting close to a 34% margin in the second quarter is significant leverage on the model. We're pretty happy with that leverage. I would also point out that there is a real war for talent out there now, and that's why we didn't change; that's one of the reasons we didn't adjust our compensation. It's unclear. We'll see what happens over the rest of the year and where the year takes us. But right now, we want to keep the talent that's producing these kinds of 34% type margins in place. Joe, I'll turn it over to you regarding the other expenses.

Yes. So I think it's all a guess in terms of travel. We're seeing increased activity. Our underlying quarterly non-compensation run rate is probably $30 million to $31 million at the current travel level. So we think that it's prudent to suggest that a couple more million per quarter isn't out of the realm of reasonableness. But I don't have any magic insight on that.

Our next question will come from Ken Worthington with JPMorgan.

So I wanted to talk about MD and headcount there. That $125 million is about the same number that Moelis has had over the next couple of years with you guys continuing to be active on the hiring and promotion front, but it seems to be offsetting the attrition that you're generating, clearly not having a negative impact on the revenue growth. But as we think about the outlook for MD headcount over the next few years, what does that look like? Is now the right time to grow it? Is now the wrong time to grow it, and should you sort of harvest the decisions that you've made in the past? And can you talk about the white space that you would like to fill in here? You mentioned sort of VC. Is that kind of the place that you think you'll look to grow in coming years? Or are there other areas that you'd like to allocate your MD resources?

So on MD, I think no, we're not harvesting. In fact, we have worked extremely hard to match our MDs to the rapidly changing world of what's going on in the world. I think one of the reasons our revenues are where they are is, as I used the analogy in the last call, you guys might see the same MD count above water, but below water, like the duck, we're paddling like crazy, changing and focusing on sectors that are evolving. We have added 11 MDs. The most important thing I can tell you is that I said we believe our internal talent pool is phenomenal. It takes seven, eight, nine years for us to take a person from hiring as an associate out of business school to a Managing Director. Moelis & Company is only 14 years old, so the base of the pyramid didn't get large enough until 7, 8, 9 years ago, where we were hiring enough people out of school that when they came to that level, we had enough to replicate. Now we think we're looking at double-digit MDs internally. By the way, we are looking at hiring, and we are hiring externally, but that is fundamentally the power of the platform is that they're coming up -- and you can't go back 10 years and redo that. We did it. We've hired the people. We've trained them. A lot of the revenues right now are being generated by some of those pre-managing directors, executive directors who are already becoming productive. I'm very excited about our ability to grow Managing Director headcount by double digits. And I'm hoping that that's internal promotion plus a few externals plus maybe some lateral moves, but I'm very optimistic about what we have going on inside the firm.

And the second part of the question was sort of the white space to fill in. So lots of internal talent. Where are they getting assigned? Where do you want to direct them to help build their careers and build Moelis' revenue?

Ken, it's so strong across the board. A lot of it is coming from sizable transactions out of these alternative asset managers. The way you have to cover them is they want you to cover them in a holistic way. So when we say white space, first of all, just executing on $360 million of revenue, and there's more to be done. I mean, we have raised our average fee. We have tried to limit the work. There's a lot more work, I think, we could be doing. We're trying to -- in order to maintain -- get a margin like this, we're trying to select the best possible things we can work on. But I would say that we want to continue to cover these entities that I think are growing way faster than the market, and they cover all -- most of these alternative asset managers now have credit funds, real estate funds, all the sectors. That's one of the reasons why we went into secondaries. I know you saw it in the middle of the year, we hired a very prominent Managing Director in secondary transactions and funds. We just added more distribution this morning to our capital markets. And I'd say I'm trying to give you the message that I think the white space is uncovering an asset class that might go from $3 trillion to $5 trillion over the next five years. I believe it will, which is alternative asset managers. And as you said lastly -- you mentioned the venture capital groups, and I agree with you; that I don't think anybody is quite yet set perfectly to cover that $3 trillion of assets due to how rapidly it has shown up. Yes, I would like to figure out how to cover that better.

Our next question will come from Richard Ramsden with Goldman Sachs.

So could you talk a little bit about the dynamic in the strategic M&A market? I'm specifically interested in whether or not you've seen any shifts in terms of the geographic skew in terms of activity? And then linked to that, I know President Biden recently signed an executive order, which I think has heightened the focus on antitrust enforcement. Do you think that will have much of an impact in terms of near-term pipeline for M&A transactions?

So again, I've always said this, when something shocks the system, the U.S. rebounds quicker than anybody. It's almost scary how well the U.S. overcomes volatility and reemerges. I think we're seeing the U.S. lead the charge out of the COVID year. I will tell you, we've had a lot of strength down in Brazil. We've had strength in Europe. We've even had transactions in China. And actually, Australia is doing very well, which people forget about our Australian business. But the U.S., if you're looking for that, is at a peak and just leading the way out of the COVID year. Regarding the Biden executive order, look, we're watching that carefully. I do think there'll be transactions that are affected by that. I would look at our revenues and say 99% of them would not have been affected or none of them would -- let's just say 99% of the first half probably would have gone forward anyway even if those executive orders turned into some type of more active legislation or policy. But I do think there will be a few large transactions that might have happened that won't. Again, it will be a little like the dog that didn't bark; I'm not sure we'll know which ones didn't happen, but I think there will be a few.

Okay. And then secondly, can you just talk a little bit about the capital return philosophy? As you said, you've increased the dividend twice. I think you bought back $100 million of stock in the first half of the year alone. Historically, you also used special dividends as a capital return mechanism. How attractive do you think that is? And is that something that we should think about when we model capital returns in the second half of the year?

Yes. By the way, we did two specials of $2, I believe, in the last 7 or 8 months. So we've been returning a lot of capital. I said we'd look to all -- look, I think we always said we would look to all methods. We were active as we saw, and what we talked about today on the call, I think we got active when we saw the whole dynamic of the M&A market become -- which is both our effectiveness and our model and how it's working and also the realization that the M&A market has fundamentally changed. I think we'll go through secular growth. I know a lot of people keep asking, where are we in the cycle? Well, if alternative asset managers continue to grow their assets under management by double digits, then we're not going to cycle. Those managers are not going to sit on their hands. It's just not what they do for a living, not their business. I think we got active in buying back the stock early in the year. We've continued through this quarter, and we'll continue to focus on all different methods. As Joe said, we have no debt and $281 million of cash on the balance sheet. I wouldn't rule out any method that we can use to get our capital back to our shareholders.

Our next question will come from Steven Chubak with Wolfe Research.

This is Brendan O'Brien filling in for Steven. So Ken, I know you mentioned that restructuring actually did strong in the quarter, but at a recent industry conference, you said that industry restructuring activity has slowed down dramatically. I guess how much of the restructuring activity in revenues in the quarter was related to COVID mandates? And how would you compare the pace of new mandates today relative to, say, 2019?

Well, look, I don't know what you define as a COVID mandate because COVID has been with us now for 16 months or 17 months. Almost everything you're working on could definitely be considered a COVID mandate. I would say everybody always has idiosyncratic backlog in everything. I mean, I watch M&A, some people have idiosyncratic backlog. We happened to go into 2021 with a very good backlog of restructurings, and I believe they will remain in the range, I believe, of 20% to 25% of our revenue restructuring through the end of this year. Now I do know, and our team has told me that the pitching for new restructurings throughout the world is dropping off rather dramatically as capital becomes relatively free and equity markets are at all-time peaks, and you would expect that. Our backlog remains strong for the rest of the year because of the deals that we happen to have. But I do know, and I think I mentioned, that the number of opportunities to pitch new restructurings has gone down significantly. I will say this, by the way; somebody once had a famous quote, in bull markets, it’s stairs up and elevator down. Every time we've ever gone into a restructuring market from 2009 to 1998, to 2020 to 1994, nobody has in their 5-year projections a catastrophe, but they happen, and the elevator goes down quick. So again, everybody asks me what do I think about 2022? We're maintaining our whole team; we would even improve it. There's a lot of leverage in the system. A lot of companies out there. I don't know what will happen, but I know something always does happen. And when it does, it tends to happen quickly. So again, there are not a lot of pitches right now. But when they appear, they usually come very quickly as COVID did last year.

That's great color. Switching over to productivity, I know back when you went public, you initially outlined a target range of about $6 million to $9 million. Given the optimization of the MD base, some of the fee dynamics you mentioned earlier, as well as reduced travel and that benefit to productivity, how are you sort of thinking about maybe like a new range for where you think productivity could get to considering the last couple of quarters, you've run above that $8 million to $9 million range or $6 million to $9 million?

Let me go back and say I have never -- from the time we went public, I have never used productivity per MD. I think it's a terrible statistic. I get laughed at because I said I can tell you our revenues, and I can tell you our MD count, so I guess I could tell you what revenue per MD is, but it's a meaningless number. I don't know why that is -- we're a system; we're a company. I can tell you what we're really trying to do is produce a 30-plus margin right now. That's not even what we were hoping for; we were hoping for a 25% margin. But we produce revenue throughout the system. I don't have a target on that. I would ask you to just take our managing directors and divide it by whatever our trailing 12-month run rate is and you can have your own number. I think the system provides leverage as our clients want to stay connected with the system and look to stay in context. We're a huge feeder to that base of asset managers that we were talking about. I look at it systematically, and I really have never talked about a revenue per MD productivity number.

Our next question will come from Manan Gosalia with Morgan Stanley.

Hi, Ken. Hi, Joe, I know you said that M&A is in secular growth mode and you also mentioned that your pipelines are at record levels, which is pretty impressive just given the level of completions coming through. Is it too early here to get a read through into 2022? I'm sort of assuming that a majority of these deals in the pipeline should get completed by year-end.

We don't have -- I mean some of our pipeline is for 2022, but it's really too early to get a read other than my gut feel, which is there is nothing that says assets won't continue to flow to the alternatives. They will continue to execute transactions, buy, sell, whatever. So I expect 2022 to be a great year. But I don't have any unique crystal ball into that other than our pipeline being at record highs and some of that will flow into 2022. It's just my sense of where the secular growth of capital is and what those people are going to do with their capital.

Okay, great. And then maybe I just wanted to follow up on the comment on pretax margins. We're at record levels, you're well above 25% that you've been targeting in the past. Other than hiring, are there any areas you would want to invest in or any investments that you might want to accelerate here just given how strong the environment is right now?

I think it would be all around hiring and coverage. It would be all normal course of business, I think. We put some money into distribution, which was kind of a new investment, but I don't think that will have more leverage on it than -- so we're not going to have to hire too many more people in there. It would just be general coverage and general banker hiring.

Our next question will come from Michael Brown with KBW.

So in your presentation, I saw that comment that the capital markets advisory has seen a record first half. Obviously, 2020 had a really strong second half. So when we think about that comparable period, is it possible for that business to exceed its performance from 2020? I understand it's a smaller piece of the revenues, but clearly an area that you are investing in. I guess the stock regulatory environment can certainly impact how things play out from here. But based on what you know today, just kind of interested in your thoughts on how that could play out for the rest of the year.

Yes, I would hope so. I would hope it would be a bit larger. We had hired that team, and they really just started with us some of the new team in September of last year, so they didn't have a long lead time coming into the fourth quarter. The fact is that a lot of the pipes and some of the capital markets around SPAC transactions were pushed out. There were a lot of transactions that were delayed from this quarter and probably will happen in the back half of the year. Again, I suspect it will be a very strong back half of the year for capital markets.

Okay. And a follow-up on your comment earlier. You mentioned the war on talent. We’re out on lines across Wall Street and encountering a lot of technical difficulty. So it appears that you're really across the entire spectrum there. What are you doing to proactively retain talent? Are there actions that you need to take here?

I don't know if that's me, but you're fading. Is that me or is that everybody? I'm going to answer the question based on what I think you said, I think some of it faded. It’s a war for talent because I think some of the periodicals actually do report that it's a war on talent, but it's really we're not fighting the war on our talent; we are fighting the war for talent. We're trying to hire as many people as we can in the junior ranks especially to relieve the workload. You can imagine, for this $360 million revenue, we had over 180 fee events. You can imagine that's a lot of revenue on the talent. They're doing a great job. We are doing numerous things to improve the situation, though, and I don't want to go into all of them; maybe we can discuss them offline. But we are trying to make life better, easier, hire more people, give protected time; all the things that you would do to satisfy clients and ensure we get great work product. Yes, we are doing that, and that's one of the reasons we did not change our compensation ratio yet or may not. I mean it's a time to keep your talent; there's enough competition out there. One of the key things we want to do is have a highly motivated team.

Hopefully, you can hear me okay. I guess the other piece of that question was in terms of what you're seeing in the market. I'm just curious to hear if some of the players have reached a level of becoming somewhat irrational with guarantees, or what you're seeing in terms of what's needed to lure bankers away?

Competitors' irrationality only appears when they hire somebody, you stop bidding on, then all of a sudden they seem irrational. That said, I would say that the MD talent has always had a value. There is still a war for talent at the MD level, which happens every year. They are rare enough that when they come up, there’s a war for that kind of talent. What’s different about the current situation is that it’s throughout the pyramid. It’s affecting the entire structure of every firm. So I assume others are experiencing similar challenges, and that’s where it’s happening.

Our next question will come from Brennan Hawken with UBS.

Ken, interested to circle back on some of the comments and the metaphor of the duck’s feet swimming under the water and the processes and success that you've had around talent development. Can you talk about what specifically you have in place? Is it more laissez-faire and up to various team leads to drive that? In the decade or 15 years that you guys have been at this, how have you refined that process? How much of the success that you've had recently is a result of design versus maybe refinement and talent selection? How do you attribute the success to, and how systematized is it? I hope that makes sense.

I appreciate that question because I think it's an under-discussed response. Let me provide a detailed answer that fundamentally differentiates our model from others. First of all, we have an extensive internal training program. People are evaluated based on replacing themselves and training others, and their compensation is linked to it. When I talk about not being on commission, I must say two points that may be somewhat advanced for investment banking but are quite significant. First of all, if you're on a commission structure, you won’t get paid for training, so you're unlikely to train others. We evaluate the extent to which people engage in recruiting. This is fundamentally part of our approach. I believe in the importance of having one P&L and not operating on commission. If you’re on commission and you cover industrials, for example, and I told you that I had a brilliant Executive Director, you would think, “No. I need to keep that person out of my accounts.” God forbid they like him; they’d take away my commission. Therefore, the existence of one P&L allows us to truly support others in their development, and that's something unique about our approach.

Ken, appreciate it. And this might invite another long answer, but I’m going to take the shot anyway. From my perspective, this is clearly your swan song. The firm bears your name, and you put a lot of blood, sweat, and tears into it. But I do run into investors that get concerned about key-man risk. So what can you tell us about the succession planning process within Moelis and what is involved in that process? How can we allay concerns around human risk here?

Are you worried about Joe? Do you doubt Joe’s abilities? Look, we talk about it a lot. I want to say, COVID revealed this. My primary job was meeting clients, representing our business. I traveled incessantly for 14 years. Now, clients often seek a specialist banker for their transactions, not necessarily me. COVID has changed that dynamic significantly. I will tell you, Brennan, that we haven’t experienced a detrimental impact to our revenues during this time; in fact, they’re higher than ever. So, one, we discuss and have various plans for succession if needed. But one thing is clear: I’m in good health, enjoying my work, and watching the young people we hired out of school excel is incredibly rewarding. The firm is broader and more successful now. When you have a quarter with $360 million, it’s certainly not solely due to my efforts. The company has become more dynamic and I’m enjoying it tremendously. We have plans, but my focus is currently on developing the firm further.

Yes, that's fair. Happy belated birthday. I just want to sneak one last one in. Joe, you referenced the $30 million to $31 million non-comp at the current rate. 2Q was a little lower than that. But does that imply that you guys reversed some of that provision-oriented noise that we had in 1Q in this quarter, which is the run rate?

That's exactly right. Yes. Bad debt is basically trending exactly where it does every year, about $2 million, $2.5 million a year. We were at $1.3 million for the first half, but we took a volatile path. We had a little over $3 million in the first quarter, and we had a reversal in the second.

[Operator Instructions]. Our next question will come from Jeff Harte with Piper Sandler.

Very nice quarter. This has been touched on a few times, but I want to go back to it. I mean, we used to look at MD compensation, but I think there really stands out to me is the banking compensation going up to $670,000. That was a sizable increase. And we're seeing the trend of bankers per MD continuing to climb as well. So this has been touched on a bit. Can you talk about the efficiency of non-MD client coverage and kind of that productivity? Should we continue to expect that the ratio of bankers per MD will go up? Or maybe increases might be due to the significant promotions that are pending over the next couple of years?

I think some of that goes to the changing nature of the environment. Again, 10, 20 years ago to get into a big strategic boardroom, they'd want to see someone who looks and feels like me. With all this money in alternative capital today, many decisions are made by younger people in their 30s and 40s. Those asset managers run significant assets and also handle M&A transactions themselves. The reality is revenue generation has a different approach now. We have vice presidents who are experts in their sectors, and they are actively connecting with decision-makers of their age, who may not always be the CEOs of major corporations anymore. They may lead M&A portfolios that are sizeable in their own right and are effectively managing them. The market is changing, and I believe that we are employing the appropriate strategy to adapt.

Okay. Looking at the revenue strength, it’s always encouraging to see. Is there anything to highlight as far as transactions that have closed and in July that might have contributed to revenues being pulled into the quarter from 3Q to 2Q?

Yes. It was maybe four transactions. I think it aggregated to something around $20 million. It's nothing out of the ordinary.

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

Well, thanks for your time. We appreciate your support, and we'll see you in three months. Feel free to call Chett if you want any more insight into some of these questions. Thanks a lot.

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