Moelis & Co 2Q17 Earnings Call Notes

Kenneth Moelis – Chairman and CEO

Companies waiting to see what happens with tax before inverting

“there’s a hold waiting to see what happens with tax. I think there were some industries that felt like the U.S. tax rate was not competitive and they were looking to do inversions for a few years. I think there’s a feeling now and a hope that’s worth waiting for. It’s sizable enough that we may solve our own tax problem. So not to do an unnatural act here while waiting to see what happens. Look, if that goes on another year, maybe they will run out of patience. But I think, for the time being, there is a feeling that, that particular problem might get solved.”

Outlook for retail and restructuring

“I think there’s a fundamental need to rationalize. People want to get larger to fight online and to fight Amazon and retail specifically. And there’ll be restructurings as well. Now the last time I was asked this, this would retail step in for energy? And the answer is I don’t believe it’s going to be as big an opportunity as energy. Energy was a very, very large user of capital in the leverage world. So I think retail will undergo both, but I don’t think it’s worth — I don’t think it’ll be so large that it’ll step in and replace things like energy in the restructuring world. But it will be — yes, there’s a lot of restructuring going on in the retail business, but a lot of those are smaller companies who are just kind of closing stores and shutting down, in some cases. So yes, I do think you’ll see some of both.”

I’m sensing an upturn in the European business

“Yes, I’m sensing a bit of an upturn in European business. I think some of it’s, us, doing better as a group. So I always like when you guys ask us these questions, we only have — we have a small portal into it. But we do — we feel like the general market is getting more upbeat on doing things and we feel like we’re having a better year and have organized Europe and feel much better about our activity there. So yes, I think it’s steady — I wouldn’t expect a spike, but I think — I feel like there’ll be a steady improvement in European corporate activity”

Goldman Sachs at Deutsche Bank Conference Notes

David Solomon

Client activity has remained subdued

“No, look you know that we don’t provide inter quarter detail and so I’m not going to provide that. I did just make the comment that volatility, client activities which were more subdued in the first quarter kind of in these first two months have continued in a comparable fashion in the second quarter. There are obviously four more weeks left to go. You know and we know the stuff can ebb and flow. So I leave my commentary at that and we’ll see as the quarter plays out.”

CEOs have to move forward, they can’t just sit around and wait

“They have to, I mean, look we can talk about tax reforms, but I’ll tell you just in January talking to CEOs, it was less about tax reform, more about what is Donald Trump mean and very quickly CEOs got to the point where they said the administration, yes the administration might mean some different things, but we have got to move forward. If you think about the average life of the CEO, you don’t get a number of years to sit around waiting for policy changes to kind of move their growth trajectory forward. And so CEOs by nature has to act they have to move forward, they don’t spent a lot of time waiting, they take the current environment and they figure out how to do what they need to do strategically in that current environment.”

There is no question there’s a tonal change from the new administration

“Look, it’s very hard to know exactly how this will play out. And so I don’t like the idea of predicting, but there is no question there is tonal change with the new administration. The whole industry is benefits from that tonal change. And regulations are very, very important in this industry. And we can kind of understand how we got here. We had a very, very deep crisis. There was a massive amount of regulation that was really focused on safety and soundness of the system that’s good and that’s important, but it all happened quickly. It came together very there were lot of rules. And now we’re eight years out and it’s very appropriate to kind of look at all those rules and say okay what matters for safety and soundness.”

Societe Generale’s (SCGLF) Q1 2017

Philippe Heim – Chief Financial Officer

Loan orgination is up

“Another sign of good commercial activities is, of course, the loan origination, which is very dynamic on the corporate side. The production is up by 28% compared with last year. Production on housing loan also is very variant. The production turned that volume up of €5.9 million, an increase of 63% on a year-on-year basis…. the book of productivity loans increased by 1.8% on a year-on-year basis. ”

A move to digitization of back offices

“Regarding the back offices, the model is one of digitization. Is one of the front-to-back industrialized processes. And overall, we want to reduce the number of back offices from 20 to 14.”

On Russia

“Russia is currently returning to growth after the short we know in early 2015. Inflation declined sharply, round back to 4.3% in March allowing the Central Bank of Russia to cut interest rate below the symbolic threshold of 10%. And we expect now a GDP goal of around 1% into 2017.”‘

On Africa

“In Africa, situation is still very solid, very strong, at least in the countries where we operate, with the GDP growth between 4% to 6%, in particular, in Ivory Coast, Senegal and Cameron….It’s still a firm pace of growth with outstanding loans at about 8%. And then some specific franchises around growth of about 20% like in Nigeria, plus 25%; in Ivory Coast, 25%; up”

A wait-and-see attitude from investors. 

“to characterize the situation of business activity beginning of 2017, let’s say, that January and February were pretty much in line with the end of 2017, where investors were very active after the American election in November and the context of high inflation. And then in March, we’ve seen, let’s say, the return of political uncertainties leading to, let’s say, more wait-and-see, let’s say, mood in the markets..”

Moelis & Company 1Q17 Earnings Call Notes

Ken Moelis – Chairman & CEO

Activity up in middle markets

“Last year, I said we might experience an increase in middle market activity particularly with the sale of private businesses. In fact the number of global market completions was up 13% year-over-year for transactions size between $500 million and $2 billion and the number of announcements was up 25%. And we are benefiting from this activity.”

I feel optimistic about Europe

“Europe, I feel pretty optimistic about Europe. I think it’s coming back and I do think that that election was a bigger a bigger problem in a lot of people’s mind than they were talking about.”

Sellers are finding excellent prices

‘So there’s capital going in prices are excellent prices create sellers. People can sell their assets. Private owners are finding this to be a wonderful time to capitalize on an asset they have gone for a long period of time. And the buyers are still finding low interest rates, very low volatility. And they are really buying cash flow in a world where it’s hard to find yield, what used to be considered high multiples are really not that high considering your alternative investment.”

Moelis and Co 4Q16 Earnings Call Notes

Ken Moelis

M&A dialogue continues to be extremely active

“Our M&A dialogue continues to be extremely active and certainly in the U.S. CEOs are looking to transact. And there could be further tailwinds if the new administration implements regulatory and tax reform as has been suggested. A recapitalization and restructuring dialogue remains healthy and we continue to advise clients on how to navigate a slower growth and rising interest rate environment.”

Look there is a business cycle but not a lot of growth in restructuring

“I call it out – if it’s growing it’s slight – it is not fiercely growing, let’s put it that way. For right now you have a lot of optimism in markets, there is a lot of refinancing capability, the markets are open. But it’s fine, it’s healthy and it’s spreading. There is a lot, look the locus of restructuring is around energy and commodities, but there is a lot of leverage companies out there in retail, media, TMT and there will be specific one-off occurrences based on the overleveraged et cetera, where you have to do restructuring and we’re seeing it start to evolve in that. There is a tremendous amount of leverage paper in the world. There is a business cycle and we feel very good about the restructuring group and what the next three years look like. But that’s not to say that I characterize it as growth in the very short-term.”

Deregulated environment going to drive M&A

“by the way rates are not moving as fast as people thought; I have not changed my view on where the economy is right now on growth. Now there’s an expectation I think of a deregulated environment that is making people very excited about what they might be able to implement and I actually think that’s what’s going to drive M&A. There’s a feeling that you can achieve the goals you set out that the government will not get in your way if you have a strategy to implement something and I think that’s rifling through all industries, people call it animal spirits but I think it’s the optimism that they can envision a creative way to create value and that the government might not get in their way and that’s going to motivate people to attempt and try things that will be exciting for everyone. That’s what I think is going to drive the M&A market.”

I think everyone is excited about lower taxes

“I think everybody is very excited about lower taxes and most executives have in the back of their mind exactly how much their earnings go up and lower tax rate but I’m not heard one person say we do that deal in a lower tax environment. I think the transactions are strategic and they are not based solely on the financials around lower tax. Lower tax would affect everybody across the board. So I think there’s a feeling it might affect your cost of capital, raise your equity stock price, lower your cost of equity but I haven’t heard it become a precursor to a deal.”

Goldman Sachs 4Q16 Earnings Call Notes

Harvey Schwartz

Shifting policy around the globe is an extraordinary catalyst for client dialogue

“And as you know over the past several years there’s been a general sense of concern with respect to global growth that was reinforced by a lot of the monitory policy around the world. And so I would say as we come into 2017, activity levels are quite high. You know we can’t – we’ve come out of a very low volume, low volatility environment for a number of years. We’re happy to see how this year progresses. But with the shipping policies around the globe, it’s an extraordinary catalyst for client dialog, for decision making and for content and that’s really where as a firm that’s where we really want to drive value and drive value with content.”

Lots of opportunity if rates rise in connection with expectations of growth

” I would say the following I think if rates continue to rise and it’s a reflection of optimism and concerns around deflation abate and concerns around economic decline debate and they are replaced with expectations of economic growth and activity and confidence and client sentiment continues to shift. I think there is meaningful upside in terms of the activity levels we could see in fixed income. So we’ve been pretty optimistic now. We’re positioned for a number of scenarios obviously given all the steps we’ve taken over the years. ”

It’s pretty difficult to predict

“I think it’s very difficult to quantify just like it was difficult to quantify in 2012, 2013, 2014 how concerns around deflation and low economic growth will impact activity in a number of businesses. I think it’s very difficult to quantify how increased optimism. You know we like to say in some respects, confidence is the best stimulus. And the extent to which we enter a period of increased confidence with respect to economic growth, physical policy, you mentioned tax policy, I think there could be a lot that happens. Now we’ll have to see all these policies of ours. But who knows we could be at the beginning of a long term trend, we may not be. Again it was difficult to predict things in 2012 and how they will be in 2013, 2014 and 2015.”

This is a huge body of work compiled by regulators

” I think what we’ve seen and one of the things I think gets lost in the global dialog around regulation is that you know eight years past the crisis, the body of work that’s been created by the regulators whether it’s Basel capital ratios, the implementation of CCAR, stress testing broadly globally, the leverage ratios, the requirements around liquidity, all those things that were designed to address points to systemic risk, clearing, margin requirements, all of that data reporting, I think sometimes gets lost in the narrative and have to step back and look at the past eight years and realize that and it’s a credible body of work that regulators, the industry participants and the clients have actually created.

I think long – I think the dialog around regulation and whether or not there should be some degree of pause and stepping back, I think that started really at the beginning of last year maybe a little bit before you saw some of that in the Basel Committee across the second half of the year, and obviously I think market participants regulators and also it seems like a very reasonable point in time to step back and assess we obviously have gotten some great benefits out of the regulation and the question is, is there a cost in economic growth. So this seems like a pretty normal part of the process in terms of taking a step back and evaluating it.”

Goldman Sachs at Bank of America Conference

Harvey Schwartz – EVP and CFO

Client connectivity feels super strong

“So the client connectivity feels super strong. I think the world is a little bit uneven obviously but I would say that again the client feels quite good coming into the US elections as is the case in a normal election environment, sort of a bit of a decline in activity levels, that is to be expected. And then obviously as you would expect post the election which I think came as a surprise to obviously all the pollsters and everyone, a big uptick right alongside the election. Now we are only talking about several days but I think that institutional clients, corporations, investors are all reassessing what do these things mean in terms of the long-term forward profile for activities. So we are seeing some of that adjustment.”

Hoping that we can get back to a more normalized environment

“I think in terms of the growth, the numbers in some of the data have looked better but yet large parts of the world have been in negative interest rate territory for a while and in very low rate policy. And so as we talked about many times, we don’t want to view that policy globally or locally certainly as normal and so to the extent to which we can get back to a more normalized rate environment when we are normalized economic growth globally, that should positively correlate for us. And we root for growth. So I think we will see over the next several months and years the extent to which the policies are supportive of growth, it should translate quite well.”

Moelis & Co 3Q16 Earnings Call Notes

Moelis & Company’s (MC) CEO Ken Moelis on Q3 2016 Results

M&A dialogue remains healthy

“My commentary on the market is similar to what we discussed last quarter. While there have been declines in M&A volumes across the board, our M&A dialogue remains healthy. Fundamentals remain in place for continued activity and the current study low growth environment is actually very conducive to M&A.”

restructuring business picking up nicely

“Our restructuring business is picking up nicely with continued momentum in new mandates leading to higher ongoing retainers. We expect the trends that we are seeing in U.S. M&A and restructuring in the third quarter to continue through the end of the year and we will continue to emphasize strict financial discipline.”

Restructuring has longer lead time but M&A harder to tell for 2017

“I’d say sitting here in a static environment, because we know what we have and restructuring is long lead times with lots of retainer, you know they have a lengthy time. So I’d have to say right now it would be in the restructuring market but I have to tell you that our relationships and our connectivity at the Board room is pretty good. So M&A just less predictable and less able for me to know what 2017 is going to look where restructuring – we have a serious of things that we know should conclude in 2017.”

Can’t say that Brexit changed much, but it was already slow before the vote

“I think Europe and the UK were slow going into the vote and they’re slow coming out of the vote. So I don’t know if there were slow going into the vote because of the vote. But it’s been a slow year. I don’t know how it will all play out. I actually think – there are people who think when they actually start to have negotiations that it will have more of an effect. But it’s not dominating any conversations. I don’t believe it’s – there’s nothing I can point to, to say that Brexit is keeping anything that would have happened. Let’s put it this way. I cannot discern that Brexit has changed the direction but it was slow before Brexit and it has continued.”

There’s plenty of dialogue everywhere else, just not in Europe

“I think the animal spirits of Europe trying to do what the United States – look, the United States is having a tremendous amount of conversation and dialogue and we had a tremendous amount of activity in India and in China, and yet there’s something in Europe, UK, Eurozone that just seems to be not exciting about M&A. And it could be Brexit related but it started a year ago, if it started.”

The slow growth is helping the M&A environment

” I believe the M&A dialogue and the desire to take action to that against what is a low growth economy, threating your top line, you cannot get the growth organically. And then secondly, there’s a big thing going on. I believe the change, the technology that each industry is facing and trying to figure out where their business is going to be three, five years from now and setting themselves up in a technology format to compete is really adding a tremendous amount to the dialogue”

Goldman Sachs 3Q16 Earnings Call Notes

Goldman Sachs Group’s (GS) Management on Q3 2016 Results

More favorable backdrop

“Ultimately a more favorable backdrop and improved client sentiment translated into year-over-year revenue growth in three of our four business segments. ”

Launched online personal loan platfrom

“Last week we launched a new online personal loan platform Marcus by Goldman Sachs. Marcus’ goal is to enter the consumer credit market and provide a product that is simple, transparent, flexible and provides consumers with real value. Like any new effort, we are taking a slow and methodical approach with Marcus. We are leveraging all the firm’s pre-existing strengths across risk management and technology and we have brought an experienced team of consumer lending professionals to drive Marcus forward led by Harit Talwar.”

Brexit could drive share to the US

“I would say that Brexit potentially is something that could drive share to the U.S. I think what we’ve witnessed over the last several years is U.S. firms like ourselves with really, really strong market shares and leading business positions whether you look at FICC, investment banking, equities, asset management, if you’re a leader in a franchise throughout this cycle, particularly as activity picks up, I think there is share to gain. I think our European clients need us. But in terms of Brexit, I think it’s unclear whether that’s having any impact at this stage. It feels like early days.”

M&A pipeline feels pretty good

“So the pipeline feels pretty good when you talk our M&A team. And the backlog sequentially was up, not down. But the activity levels that I mentioned in terms of completed transactions in the market, obviously down over year after very, very healthy levels. The best perspective I can share with you is the one I get from talking to our M&A bankers. And it hasn’t shifted much over the course of the year. The same fundamental factors that are contributing to the last two years of M&A activity, generally low topline growth, a desire to drive efficiencies, access to the capital markets, all those factors still in place.”

Still feel reasonably good about activity in IPO markets

“So in underwriting as you saw, we’ve had very strong debt performance and we had a record for the first nine months of this year on a year-to-date basis. I mentioned before that half year IPO volume or meaningful portion of the IPO volume actually occurred in September. So it does feel like we are starting now again into a market where a lot of that activity that got pushed from the first quarter into the second quarter that that still exists. So we feel reasonably good about activity levels in the capital markets on an intermediate basis.”

Bank of America at Barclays Conference Notes

Christian Meissner – Head Investment Bank

Significant improvement since beginning of the year

” the third quarter again is proving to be a better quarter from a revenue and activity perspective than the second quarter has been. So, from that perspective, a clearly difficult environment in aggregate, but I would say, a very tough start at the beginning of the year with significant improvement since then.”

Banking is a very very profitable business

“Banking is a very, very profitable business. Having said that, we also have challenges, of course, the most important one being that a higher or better rate environment would benefit our treasury business. As I mentioned, the loan markets, while growth has been okay, clearly profitability has been under pressure given the global liquidity environment and given the amount of capital that is chasing those assets and to get that we are trying to invest as well. So, we are trying to balance all these factors.”

Have been shifting from inward facing to outward facing hires

“as people have been rolling off the platform, we have been able to hire new coverage bankers, new sales people and effectively been able to shift the mix of our population of our people from a little bit more inward-facing to a little bit more outward-facing. So again, as I have mentioned before, we have been able to effectively therefore work within the parameters of a pretty tight expense environment in terms of investing in our people. ”

Rising rates are good for us

“overall, rising rates are good for us given the setup of our asset and liability mix. That’s obvious, I guess. And equally, as it relates to the bulk of the commercial loan book, given the way it’s structured, net-net, we actually don’t think that there is an incremental negative by rising debt spread.”

Momentum has picked up a little in M&A but growth has definitely slowed

” I would say the M&A environment, the M&A momentum in terms of the types of things that companies are thinking about and types of deals that are being announced. I think it’s picked up again a little bit after a lull over the summer. Some of that by the way, is also seasonal, so it’s not that surprising that the third quarter is a little bit of a low point from that perspective. So overall, I would say again, nothing really to add to what you have said. It’s a little bit of a tale of two cities. On the one hand, the underlying growth isn’t bad, but you have a couple of counterbalancing factors, the net result is that growth has definitely slowed.”

Largely through the changes in leverage lending guidelines

“Well, the leverage lending guidelines had a big impact on our business a couple of years ago when they came out. And I think it’s fair to say that it took the markets a little bit of time to adjust. It’s also fair to say that the playing field perhaps wasn’t entirely level. But I would say now, a couple of years on, we have been – we are largely through that. And I think both we and the system overall has adjusted for it. And frankly, in a positive way, taking down risk in the sector, taking down risk in the business and ultimately what I think is ironic is that the same market leaders that have the largest share pre-lending guidelines still do today, albeit the business looks very differently.”