Good afternoon and welcome to the Moelis & Company Earnings Conference Call for the Third Quarter of 2022. To begin, I'll turn the call over to Mr. Mat Tsukroff.

Good afternoon, and thank you for joining us from Moelis & Company's third quarter 2022 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures when presented together with comparable GAAP measures are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com. I will now turn the call over to Joe to discuss our results.

Thanks, Mat, 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 $232 million of adjusted revenues in the third quarter, a decrease of 55% from the record prior year's third quarter. The decrease during the quarter is primarily attributable to lower levels of transaction completions driven by the volatile markets. Our nine-month total revenues of $768 million were down 33% from the record prior year period. Moving to expenses, our year-to-date compensation expense was accrued at 62%. Given the dislocation in the transaction environment, our investment in new managing director hires and non-managing director compensation inflation across the industry, the 62% comp ratio is our best full-year estimate. Our third quarter non-comp expenses were $38 million, resulting in a year-to-date non-comp ratio of 15%. T&E is still tracking at 75% of pre-pandemic levels, consistent with expectations. Our year-to-date pre-tax margin is 24%. Moving to taxes, our underlying corporate tax rate of 27.1% for the third quarter is consistent with prior quarters. We continue to maintain a fortress balance sheet with no funded debt. Our board declared a regular dividend of $0.60 per share, and during the quarter we repurchased approximately 330,000 shares, which, together with the first and second quarters, has resulted in a year-to-date buyback of approximately 3.2 million shares. As always, we remain committed to returning 100% of our excess capital. And I'll now turn the call over to Ken.

Thanks, Joe. Following Chairman Powell's speech at the Jackson Hole meeting, all financial markets—stocks, bonds, currencies, commodities—became significantly more volatile. That volatility has adversely impacted M&A and capital markets. What I find surprising in this uncertain environment is how ambitious our clients continue to be. However, even though short-term deal execution is difficult in today's market, client engagement is very strong. Volatility, as I've said before, leads business leaders to reevaluate their competitive position in the world and make decisions. Many of these decisions will lead to transactions. Planning ahead in the short term, which is certainly turbulent, we have the leading restructuring team on Wall Street. This quarter, the team has seen an increase in mandates as financial stress continues to build. It only takes a modest uptick in default rates to fully deploy this very talented team, which remains an enormous opportunity for the firm. Looking over the horizon, these cycles are typically limited. The M&A market will continue to grow. To support that growth, we've added a total of 25 managing directors this year—16 through internal promotion and nine through external hiring. The areas of focus are the ones we have previously highlighted, which include technology, healthcare, industrials, and private funds advisory. We've built a resilient firm with a fortress balance sheet, no debt, and pre-tax margins of 25% or better over the course of the cycle. We view our people, our culture, and our client relationships as extremely valuable long-term investments. And with that, we will now take questions.

Our first question is from Devin Ryan.

This is actually Michael Falco standing in for Devin. I wanted to start on the financing markets. Are there any signs of improvement in overall conditions there? How big of a factor has that been in the recent slowdown in the M&A market overall? And what should we be watching going forward to see how that progresses from here?

So look, I’d say no, there's been no improvement, and it depends on what date you're asking, but again, since about Chairman Powell's speech at Jackson Hole, I'd say there's been no improvement, maybe even a slight degradation in that market over that time. It's pretty difficult to get a deal done. I think what will change that market is some form of stabilization of the interest rates. And I think people are just wondering how far and how long the Fed will go. You can't raise forever. So at some point, they will stop raising, interest rates will stabilize, and I do think capital will become available at that rate. That is the current missing piece—the most difficult part of the deal market is the pretty much lack of financing in the leveraged part of the market. Investment grade is still operational, although more expensive.

And then maybe for my follow-up. As you pointed out in your prepared remarks, you have been very active in recruiting year-to-date. Do you expect to continue to lean in on recruiting and headcount expansion? Or do you think there is any reason to be maybe a bit more cautious, given the more uncertain environment?

Well, the main reason that probably when you say 'lean in,' it's, I guess, November now. I think you are pretty much done for the year on the bonus cycle. But the answer is, we are going to continue to invest. We think we have maintained this balance sheet. We have a fabulous financial condition in terms of liquidity, balance sheet, and all of the internal fixed obligations you might have, including employees, leases, and all those things. We're in the best position in the industry, and it's a great time to use it. The reason we were very aggressive is just fabulous talent became available. I think it might have to do with the volatility. Some excellent bankers in the world realized working inside of a large institution might not have the upside they thought, and I also think now, during this downturn, having our balance sheet and solid sense of long-term visibility and investment in our talent base, they understand that as well. So I do think going into next year, we will be aggressive and we are going to spend. This is a long-term business. Your clients expect you to cover them and do good work for them through good times and bad. When you come out of it, you have an irreplaceable asset: great bankers and client relationships that are hard to recreate from scratch.

Our next question comes from the line of Manan Gosalia with Morgan Stanley.

Maybe a follow-up to the question on hiring. You've mentioned that there is good talent out there in the market and you are leaning in. And clearly in this environment, you're still doing $230 million, $240 million or so of revenues, which would I think put you on pace for your second strongest year. I guess how should we think about the revenue level that you need to get back to that high-50s comp ratio? Is the 62% comp ratio more temporary in this environment? And as soon as revenue starts to tick back up over $1 billion, can you get back to that 59% or should we think about the investments you're making in hiring as pushing out that high 50s comp ratio here to maybe a couple of years down the line?

Look, I think 62% is a comp of events, including a down revenue year. But one of them is also the inflation on non-managing director compensation, which remember, 85% of our headcount is non-managing director. That's pretty sticky. Like a lot of industries, there's a bid for talent that has proven sticky. So that's there. And then the revenue pressure, you take that into account. By the way, we looked around at our peers after the second quarter, and many of them are running GAAP ratios. Again, I look at GAAP because we don't adjust much; they're 4, 5, 6 points above us on GAAP comp ratio. Like any business, you can’t... I think we have a better model. I do think we can run two to three points better, but over time you have to be competitive and you can't. So you have to respond to that. Lastly, we did invest in talent, but I do think the investment in talent is actually not a negative. The talent we got will, I think, cover the comp ratio and allow us more room. I don't know the exact answer to that revenue threshold. But 62% is not our target. That's a unique confluence of events for this year, and the issues that I've pointed out from competitive nature, non-managing director inflation, and a lousy nine months of revenue to tell you the truth.

And then, a follow-up to your comments on the financing markets. Is there a distinction between the financing available for larger deals? Because clearly the larger buyout market has been fairly muted over the course of the last few months. But is there still private financing available for smaller deals? And how are sponsors currently financing the deals that they are doing? And maybe if you can just talk about how they're preparing for further rate hikes from here and what they need to see to lean in?

I think there is a slightly better or maybe an open market for smaller deals because you can get creative; you have more flexibility, and you have more lending sources. So I think for bigger deals, you have to go through a smaller number of institutions that can actually finance a larger deal. Many of those institutions have moved to the sidelines. At the end of the year, I think they've had issues with hung loans of that size. So that probably is the market that is most quiet at this point. There are some deals getting done, though. I mean, people are being very innovative. I saw a buyout, I think earlier this week, it was announced—very innovative, take-back paper financing. So there were deals getting done. And that's what I said about the ambition of our clients—the amount of conversations and desire to execute. Both buy and sell are a function of seeing the market available. Everybody realizes that market will have interest rate expenses that could be as high as double what they were 12 months ago. And that will affect the price, but the market wants to transact. Many of those transactions are on hold, or let's just say a large number of transactions are currently on hold.

Our next question is from the line of Steven Chubak of Wolfe Research.

This is Brendan O'Brien filling in for Steven. I guess to start, Ken, based on your comments, it sounds as if financing conditions are the biggest headwind at the moment. And you're hopeful that once the rate outlook kind of stabilizes, you expect some sort of improvement there. But at the same time, you as well as most of your peers are quite constructive on the restructuring outlook. So I guess my question is, do you believe that we could see a recovery in M&A activity in an environment with accelerating or elevated restructuring, or do like you typically don't see those move in lockstep? So I just want to get a sense as to how you expect those two businesses to interact?

I think you could see that. The reason is this is not 2009; it's not COVID. Those are the last times restructuring spiked, and they spiked very quickly. Like COVID was an eight-week fire drill, and then the Fed bailed everybody out. Again, '09 and '10 was similar, it might have been an eight-month fire drill, but the Fed bailed everybody out. I think the opposite is happening here; this is a slow-moving car wreck. There is nothing immediate causing defaults in a very short term. It’s just going to be rates keep rising. Remember, most corporations have only made two interest payments under the new Fed regime. And again, those payments are looking forward to the next quarter, probably 200 basis points higher than they were a quarter and a half ago. So what I think is going to happen is you're just going to have possible gross margin pressure on companies, reducing gross margins as the economy slows and increasing interest rates, leading to a long path of companies that are overleveraged and exposed to floating-rate interest. I think this could be a long path of a couple of years of restructuring, which is very different than '09 and COVID. I think transactions could flow if we get a market in which there is a supply of financing that allows transactions to be executed.

And then, I guess for my next question. Your restructuring mandates have been building, as you noted. However, given that activity was very subdued at the start of the year, I want to get a sense of where your mandate count sits today versus a more normalized environment, such as 2019. If you could provide any color on some of your non-traditional M&A businesses and how those performed in the quarter, as well as your expectations for private capital advisory in this environment and capital markets?

So restructurings are up significantly. I don't have an exact percentage of the mandates, but the mandates are up significantly, 20% to 25% over the last quarter—sequentially quarter-to-quarter—and it's starting to ramp. But as I said, that's going to be a long build. Again, people are just incurring their first interest rate increases. There is not a macro event causing everything to stand still. It's just people looking out at a maturity wall with rates increasing—that’s going to continue to build. But it's not a big revenue event immediately. In terms of capital markets, with financing down the way it is, our capital markets segment has run into the same headwinds. But the interesting part about that is we are built for that. As financings become less plain vanilla and more structured, that tends to be a call from an individual dealmaker to a large institution that could sit down and structure a solution for a client. This aligns with our strengths. However, in the short term, there aren't many terms to get a deal done. There aren’t many terms that an issuer actually wants to issue at, as we have been advising people that if you don't have to be in this market, you do not want to be in this market. This is not a market you voluntarily enter to refinance. You are already eliminating elective surgeries, and only those who truly need to enter the market will proceed. So all that is being affected. And I’d say the same for our private funds advisory. We have made some great hires in there, and by the way, of those external hires, we continue to build that group out. We think that's a long-term strategic place to be, but not in the third quarter of 2022. You are not going to monetize that in the third quarter of 2022.

The next question comes from James of Goldman Sachs.

I just wanted to ask one more about the rates environment, and then sort of the corollary of how that affects—how that's changed some of the FX players. So in particular, is there an absolute level of rates that really changes the advisory activity levels, or is that already sort of baked into the weaker market you're talking about? Maybe you could just touch on how rates are differently impacting sponsors versus strategics and how that will change the mix of M&A over the medium to long-term? And then we have obviously a much stronger U.S. dollar. Is that catalyzing any sort of cross-border activity into Europe, for example?

So you are right about the strategies. I think our mix has flipped a little bit in terms of our revenue. I think it’s done more strategic than ever before because strategics tend to have better credit ratings and more corporate availability. So that is happening right now—a bit more strategic in the mix than financial sponsors. I'm a believer that, if you have a rate, you also need to have some clarity or people need to have a vision of where the future economy will be. But even that is out there; I mean, people generally view that the economy will be difficult next year. That will affect pricing. There are substantial amounts of assets that want to sell, and there are substantial amounts of corporates and financials that want to execute on acquiring assets. I think the pricing will fix itself rather quickly. It might already be reflected in the pricing, but without a supply of financing to match a buyer and a seller and actually execute a transaction, it’s just not going to happen. So I think when you get to a stabilized rate environment, M&A will come back. You can’t just sit around wishing you were back in 2021; you execute at the prices that make sense given the capitalization available. The problem right now is close to zero in a lot of instances. On FX, yes, we have people looking at it. That happened rapidly and I think there are many who want to look at opportunities around that. But again, you need the supply of financing to execute on that and the confidence in where the Fed will stop and what the market will look like. I believe that could generate substantial activity maybe early next year as you can execute.

Just a quick one on the restructuring business. I think people have a little bit of this recency bias where I think people think that restructuring could pick up really quickly. I was just wondering, when you think about when those restructuring mandates that are starting to pick up are really going to be completed and manifest in your revenues? Is that more next year, or is that sort of more of a 2024-type event?

We'll have a lot more mandates. Revenues will pick up because some of these transactions will exchange and move maturities out. These are changes that happen in the interim, but the large success fees that are based on bankruptcies and recapitalizations are always out. I think the interest rates will take a while. COVID was an immediate event—people were like, 'Hey, everybody's home.' We modeled zero EBITDA for companies. But until COVID, we never modeled zero revenue from any companies as a downside. That's not happening now. In fact, in a lot of businesses, the consumer continues to spend and unemployment is low. It'll hit through margin and interest rates, and I think that will be a long but potentially very profitable opportunity. We got to like a 1% default rate. There's a tremendous amount of debt out there and, as Joe was saying before, all we needed to get to is 3% or 4%, and I’m not sure the street has the personnel to cover it.

And then just one quick one for Joe. Non-compensation came in down on a dollar basis, quarter-on-quarter. How should we sort of think about the run rate for non-compensation? Is that something we should expect to grow from here, given all of the inflationary pressures? Or is this sort of a good run rate to base next quarter on?

I think the run rate, as I've described in previous quarters, is kind of $40 million range; it'll fluctuate, but not a great deal, I don't think.

And our next question is from Brennan Hawken of UBS.

I’d like to start by circling back to the comp ratio. So 62% for the full year, Joe, got that loud and clear, but this environment has stayed uncertain for a lot longer than many folks expected earlier this year. And so, yes, I hear you, Ken, that eventually the Fed's going to stop raising rates. But they've also— the Fed has also basically told us that they're going to increase unemployment, and that's going to lead to credit losses. Lenders aren't exactly lining up when you've got credit losses stacking up. So if the environment remains uncertain into next year, how should we be thinking about a comp ratio at that point? Is it coming down to a ratio? Or is it more just thinking about the fixed expense base, and the ratio will fall where it will?

Well, it's probably a little about what you're saying at the end there, which is, so first of all, if we really have an environment, remember one of the things I talked about is the non-comp, the stickiness of the non-managing director compensation. If it's as bad as you're saying, Brennan, we can't stick to the comp levels that occurred last year. I think there will be some resilience in that if it gets as bad as you're saying. But what you said is a little bit right. I just want to say this is our best guess is 62% because we don't have a crystal ball on the fourth quarter. We think we know what our competitors are doing, which is an issue. We couldn't run our business in a way where the one across the street hires employees cheaper than we do. We’ve responded to that because we saw that people had begun to inch up their comp ratios which means we're not going to see any reduction. At the end, the real question is the underlying value. I love the team we put together; we've been in business for only 15 years. Our client base is as good as ever. Our penetration into boardrooms is better than ever. Yes, your last statement was kind of right, which is we look at where the business is and what we need to do to maintain the asset we've built. The asset is the culture, the people, and the relationships. I can’t just call up company XYZ and tell them, look, I know we spent six years building this relationship; we just can't do your work for a couple of months while we hold the comp ratio down. We'll get back to you when it's better and hope you’ll love to hear from us after we fire your team and hire them back. That's not going to work. So we spent six or seven years developing those clients. We're going to keep them, and if that's what you were asking at the end—does the last thing just fall out? The answer's sort of yes. Protect the franchise.

Right. It's an output, right? It's not an input.

It's kind of an output to protecting the franchise. And I look, the best part about what we have is even if you're the strongest bank on the planet, you're levered ten to one. That's just the economics of a big bank. We're not; we have no debt. Our balance sheet is in great shape, our liquidity, and we're not giving away the—we're not going to give away clients and franchise. We're going to be the strongest player coming out of this, not the weakest.

Okay. So it's interesting when—and you definitely hit on a lot of the upward pressure to comp at the more junior levels. I'm sitting here reflecting back on some prior discussions that I've had with yourself and other members of the management team. In the past, partly in the past, when you brought in junior members, it was completely fine for junior members of the team to ultimately move on into private equity or other industries as part of their career path, and actually you would facilitate and work with the juniors when they did that rather than make them feel as though they had to hide the activity and whatnot. Would this be an opportune time to begin to think about trimming ranks of juniors through attrition through those constructive channels that could help manage some of the expense base, particularly given the fact that—I mean, look, I hear you; this is a weird environment because financing is tight as a drum. But you could argue that since COVID, it was a weird environment because the Fed was pumping liquidity like crazy and this out of inflation means that, that solving advances over for quite some time. So you could argue that maybe the environment is—this is more than just temporary. And there is just going to be a different level of engagement than what we got used to during that very, very hot period of time. Sorry, I know it's kind of a long-winded question, Ken.

The two points. So the junior talent that goes to private equity or something like that are analysts. That's kind of our two- to three-year analyst program, and we continue to do that. They want to do it. We like to try to keep them, but we realize they may—so that's once they get here as associates and VPs. That's a very important part of our firm. And it’s frankly a very hard place to hire. Last year, that was our most difficult thing—getting our great VPs and third-year associates, second-year associates. No, we are not going to do that. In fact, just the opposite: our engagement is high, Brennan. There are not many firms like us, and there are a lot of companies in need of services, so you have to provide really good work to them. Those first, second, third, and fourth-year employees are the heart of the firm. That's where great work gets done—clients notice it. In the short-term, it's not easy, but those are the assets that when the market comes back, you cannot recreate. We are going to use this opportunity to outperform for our clients, to stay on top of them, to get work done on schedule and on time, and show off. I believe whether it’s six weeks, six months, or two years, the opportunities will be there. Look back at Wall Street for 40 years—there’s a growing group of clients, and we’re going to be there for them. I hope other banks do exactly what you say. Ask some of the other banks to do that; that would be a good favor for us.

And our next question is from the line of Mike Brown from KBW.

So, I guess most of my questions have been asked and answered, but for the fourth quarter is typically seasonally strong. And Ken, as you said, you don't really have a crystal ball here; but as you contemplate that 62% full-year comp ratio, does that include an expectation for that seasonality to play out as it typically does, like we've seen in the past?

Look, we have two forces at play in our pipeline. Our pipeline is about where it was in the third quarter last year. Our pipeline is high. That’s why I wasn’t trying to be negative. We want to service the people with the same level of deal activity they’re contemplating. We've scrubbed it as well as possible. Yes, you usually see a seasonality in the fourth quarter, but you haven't had the Fed trying to rain on that seasonal factor. I think we have a hurricane coming from the Fed that offsets the normal seasonal upturn. So we've scrubbed it as best we can. Yes, we factored both the seasonal positives of the fourth quarter and the negatives of what's been happening with the interest rate environment into those calculations.

And just to change gears to the capital return, you guys always return about 100% of capital to shareholders. Clearly, it's a more challenging environment here. Some inbound questions we've gotten from investors are about the regular dividend here. So your EPS was $0.37 this quarter and your regular dividend is $0.60. Your cash levels seem adequate and your free cash flow is typically higher than what your EPS would indicate. But just given the fact that we are still in quite a turbulent period here, as you mentioned, any comments about the regular dividend here? Is it still safe at $0.60?

Yeah. Remember your $0.37 includes a one-time change in the comp ratio to bring it up. The way we think about it is we're supposed to bring our accrual up to what our best guess of the year is. So we did it all in the quarter. Full-year earnings are approximately maybe a little higher than the year-to-date dividend. And we also have the non-cash charge of equity. If anything, we’ve had conversations, and I'll say this—but it's up to the board to do it—about increasing the regular dividend. We just felt like in this market it felt kind of strange to do that. We do want to return 100% of capital, and we think we’ve got more excess capital that we could return. We just haven't done it because it would seem strange to increase the dividend in light of what's going on.

And we have no further questions registered at this time, so I'd like to hand back to Mr. Ken Moelis for any closing remarks.

Thank you, everyone. I appreciate it. We'll see you on the next call.

Thank you to all those who joined. This concludes the Moelis & Company earnings conference call for the third quarter of 2022. You may now disconnect your lines.