Evercore Inc (EVR) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore First Quarter 2021 Financial Results Conference Call. (Operator Instructions) This conference call is being recorded today, Wednesday, April 28, 2021.

I would now like to turn the conference call over to your host, Evercore's Head of Investor Relations, Hallie Miller. Please go ahead, ma'am.

Thank you, Crystal. Good morning, everyone, and thank you for joining us today for Evercore's First Quarter 2021 Financial Results Conference Call.

I'm Hallie Miller, Evercore's Head of Investor Relations. Joining me today on the call are John Weinberg and Ralph Schlosstein, our Co-Chairman and Co-CEOs; and Bob Walsh, our CFO. After our prepared remarks, we will open up the call for questions.

Earlier today, we issued a press release announcing Evercore's first quarter 2021 financial results. The company's discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website and an archive of it will be available for 30 days, beginning approximately 1 hour after the conclusion of this call.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which is posted on our website.

We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.

I'll now turn the call over to John.

Thank you, Hallie, and good morning, everyone. What a difference a year makes? This time last year, we were in the early stages of the global pandemic. There was uncertainty about the science and trajectory of the virus, and there was no visibility on vaccines. The economic environment was weak and the pace and shape of an economic recovery was unclear. With so much uncertainty and the weak economic environment and outlook, most of our clients turned inward to focus on operations, liquidity, and in many cases, restructuring while restructuring activity and strategic activity was paused.

From an operational perspective, I don't think any of us expected to spend the remainder of 2020 in a good -- and a good portion of '21 working predominantly remotely. Fast forward 1 year, and we've made tremendous progress. Monetary and fiscal stimulus helped stabilize the economy and financial markets and a recovery is well underway. Vaccine distribution is gaining momentum. And as a firm, we are actively planning for a gradual return to our offices over the next several months.

In fact, Ralph, Bob and I are in the office today for this call. And our business is robust, as we continue to act as an advisor to clients on strategic, financial, investment and capital initiatives. The momentum we experienced through the first half of last year has continued into the first quarter. Our results, which represent our best first quarter ever, reflect our team's client focus, the breadth of capabilities that we can offer and the continued favorable environment for M&A and capital raising activity.

Transactions announced in the second half of 2020 and some even earlier moved towards completion during the quarter and translated to revenues. We've also realized revenues from transactions announced and closed within the first quarter and have benefited from increased demand for Activist Defense advice over the past several months.

Capital advisory, both public and private, has continued its strong contribution. The breadth of our Equity Capital Markets capabilities, including IPOs, follow-ons, convertibles and SPACs, has enabled us to participate in a meaningful way in the sustained strong levels of market issuance.

In the first quarter, we participated in nearly 40 public market transactions that raised more than $22 billion in total proceeds. In private capital advisory, GP-led transactions remained strong during the quarter, and we have seen a strong recovery of volumes in new capital needs. In the face of economic recovery and strength in M&A and capital raising, classic restructuring activity has slowed and is concentrated among key sectors and issuers that have not rebounded as quickly as some others have.

Our Equities business, Evercore ISI, has continued to stay connected and engaged with our clients and has provided valuable research insight and sales and trading execution. And solid performance drove AUM growth in our Wealth Management business. We continue to focus on expanding coverage of key industries and building out our capabilities.

We welcomed Mark Mahaney in March to Evercore ISI as Head of Internet Research; and Juan Pedro Pérez Cózar joined our Advisory business in Madrid as our new Head of Iberia earlier this month. And we are benefiting from Kristy Grippi joining us earlier this year as our new Head of ECM as well as other strategic adds we have made on our ECM team.

With the key ingredients for M&A activity in place, a positive economic outlook, strong equity markets and available credit, high CEO confidence in continue private equity activity, the momentum for strategic activity continues and the desire for capital raising persists. Several of our key markets continue to be busy, and our backlogs are strong. The strategic merger market accelerated in the first quarter.

Global and U.S. announced M&A dollar volume increased 95% and 164%, respectively, compared to the first quarter of 2020, and increased 3% and 13%, respectively, from a strong fourth quarter. In ECM, the desire for capital raising remains strong, though we have seen a cooling off in the SPAC underwriting market over the past several weeks. Our investments in stack capabilities have positioned us well to serve many new clients, though we remain selective in our participation in underwriting opportunities. We continue to see activity in shareholder Advisory and Activist Defense. The number of new activist positions in the U.S. reached its highest level in more than 2 years at the end of 2020, and activists are focusing on larger targets.

On the private capital advisory side of things, we are seeing accelerating activity in both capital raising for new funds as well as secondary and GP level activity. In short, we feel continuing momentum in our business, and we are excited by the prospects we see in front of us. Our broad capabilities have positioned us well to offer more services to clients as they execute on their priorities.

Let me now turn to our financial results. We achieved record first quarter adjusted operating income, adjusted operating margin, adjusted net income and adjusted earnings per share, driven by solid revenue growth and good operating leverage. First quarter adjusted net revenues of $669.9 million grew 54% year-over-year. First quarter advisory fees of $512.1 million grew 43% year-over-year.

Based on current consensus estimates and actual results, we expect to maintain our #4 ranking on advisory fees among all publicly traded investment banking firms for the last 12 months and to grow our market share relative to these same firms. We also continued to narrow the gap between us and the #3 ranked firm on a latest 12-month advisory revenue and market share basis.

Our first quarter underwriting fees of $79.3 million more than tripled year-over-year. As we said last quarter, this business experienced a step-up in 2020, as the demand for capital raising increased substantially and the expansion of our capabilities and enhanced sector coverage enabled us to work on diverse assignments for clients.

We've continued to broaden our participation across sectors, which we believe is helping us grow our business. While health care still represents the largest portion of revenues, TMT and industrials more than tripled their combined portion of revenues in the first quarter compared to full year 2020.

First quarter commissions and related revenue of $53.5 million decreased 4% year-over-year as volumes declined relative to the elevated levels in the first quarter of 2020. First quarter asset management and administration fees of $17.8 million increased 16% year-over-year on higher AUM, which was $10.6 billion at quarter end, an increase of 11% year-over-year.

Turning to expenses. Our adjusted compensation revenue for the first quarter is 59%. First quarter noncomp costs of $72.7 million declined 12% year-over-year. Our noncompensation ratio for the first quarter is 10.9%. Bob will comment more on our noncomp expenses in his comments.

First quarter adjusted operating income and adjusted net income of $201.8 million and $162.5 million increased 145% and 181%, respectively. We delivered a first quarter adjusted operating margin of 30.1% and a first quarter adjusted EPS of $3.29, increased 172% year-over-year.

Finally, we continued to execute on our capital return strategy. We returned $275.3 million to shareholders during the quarter through dividends and the repurchase of 1.9 million shares. And we achieved our commitment to offset the dilution associated with our annual bonus RSU grants through share repurchase in the first quarter.

Our Board declared a dividend of $0.68, an increase of 11.5%. We expect to continue our annual reassessment of the dividend each April. Our Board also approved a refresh of our share repurchase authority to $750 million. We will resume our historical policy of returning cash not needed for investment in our business to our shareholders through additional share repurchases.

Now let me turn the call over to Ralph to discuss some of our business highlights in the first quarter and update on our 2021 priorities.

Thank you very much, John. Our first quarter results clearly demonstrate that we are operating at a higher level than the level at which we have operated historically as measured by any financial metric; revenues, operating income, net income, earnings per share, operating margins and senior managing director productivity and advisory.

While our operating margins clearly are benefiting modestly from the decline in travel and entertainment due to the pandemic, the strength in the other financial metrics is indicative of a real uptick in our business. Our diverse capabilities and the more balanced mix of our business contributed to our record first quarter results, the third best quarter in our firm's history, as well as to the record fourth quarter and full year results last year.

On top of our strong financial performance, we sustained our #1 lead table ranking in the dollar volume of announced M&A transactions, both globally and in the U.S., among independent firms for the last 12 months ending March 31 and in the first quarter of 2021. And we advised on the 2 largest M&A transactions announced in the first quarter. Additionally, while not first quarter events, we have prominent roles on the 2 biggest tech announcements this year, both of which were announced in April.

We served as the lead advisor on Grab's $40 billion IPO via a SPAC merger, the largest tech merger this year, the largest SPAC merger in history and the largest pipe issued in conjunction with a SPAC merger at a little over $4 billion. And we also served as the sole advisor to Nuance on its pending $19.7 billion sale to Microsoft, the second largest tech merger this year. These are franchise-defining transactions for our clients and for Evercore and are reflective of the breadth of our capabilities and the strength of collaboration and teamwork across the firm.

Our Underwriting business continues to perform well and produced its third best quarter ever. When we first acquired ISI almost 7 years ago, we identified one of the most important opportunities created by that transaction to be our ability to increase our underwriting revenues to perhaps $75 million to $100 million of revenue per year over the ensuing few years. It unquestionably took a little bit longer than we initially expected to get to that level of revenue annually. But we have definitely seen a real stem function -- step function increase in this business.

In fact, 3 of the past 4 quarters, including the first quarter of 2021, we're, in just 1 quarter, within that $75 million to $100 million target that we had set for the full year. Activity in backlogs and underwriting continue to be strong, and we remain focused on building out this business strategically so that we can continue to serve the needs of our clients without any use of our balance sheet. Needless to say, our revenue aspirations for this business have grown materially.

The first quarter also saw a number of significant transactions in the convertible debt space, which we launched in the third quarter of 2020, including our first sole book run convertible offering and an active book runner position on a biotech convert. These transactions are indicative of the breadth and diversity of our platform and our capacity to meet increasingly diverse client needs.

Our investments in ECM have earned us a place in the top 20 for underwriting revenue as estimated by Dealogic when bought deals are excluded. We continue to believe that we have runway here, and we are focused on systematically gaining share as we have done in Advisory historically, though breaking into the top 10 currently seems challenging given our aversion to block trades and our independent balance sheet light approach.

Activity in our private capital advisory business, our secondaries advisory business which we call PCA, our primary fundraising business which we call PFG, and our real estate fundraising and secondaries business which we call RECA, continues to be strong as volumes increased meaningfully during the quarter.

Our success in this area is driven by the strength of our client relationships and our superb execution track record, including our unique success executing transactions done solely through remote communication. And restructuring the team's activity level and footprint are resetting back towards historical levels as the economy and debt market liquidity have meaningfully improved. The team continues to work through assignments started in 2020 and is also focused on new liability management, private financing and conventional restructuring assignments in sectors that are still stressed by the pandemic.

In Equities, client connectivity and engagement continued to be strong as our macroeconomic and fundamental analysts continued to provide valuable insights to institutional clients. Our team also has continued to meet high client demand for our robust virtual conferences, webinars and corporate access events. The investments that we have made in our platform to support our ECM franchise, including convertibles, performed well during the quarter and are a natural capability extension for us. And we continue to expand our sector coverage with Mark Mahaney's launch on Internet stocks earlier this month. And as we've always said, we will continue to look for senior impactful analysts who will serve our clients and contribute to the growth of this business.

Finally, our Wealth Management business continued to grow AUM as long-term performance has remained very solid and as we have continued to provide important advice to our clients.

Let me now turn to discuss some of our priorities for the remainder of the year. As we think about the rest of the year, we are focused on several important items.

First, we are intensely focused on continuing to position our business for sustaining long-term growth by: #1, providing outstanding advice and execution of our clients as we continue to advise them on their most important strategic, financial and capital decisions; #2, by continuing to enhance our coverage of the most significant client groups, including our initiatives around the Evercore 100 and financial sponsors; #3, investing to further deepen and broaden our capabilities by continuing to build out certain industry groups, geographies and product capabilities.

Second, we are focused on planning for our return to our offices globally, with the health and safety of our employees and their families paramount as we develop and execute our plans.

Third, we are highly focused on integrating diversity, equity and inclusion and sustainability more completely into how we conduct our business and how we hire, train and mentor our talent.

And finally, we are focused on operating with financial discipline and delivering strong returns to our shareholders, returning excess cash not needed for growth investments to our shareholders through dividends and share repurchases, while maintaining a strong and liquid balance sheet.

We are actively recruiting A plus and A talent in advisory to our team and we continue to have many conversations with talented individuals in key sectors and geographies, including TMT, fintech, biopharma, health care, consumer, financial sponsors and Europe. Equally important is our long-term commitment to attracting, recruiting, mentoring and promoting talented professionals and promoting them to senior managing director from within.

We strongly believe that in-person collaboration, training and mentorship are crucial to our culture and our apprenticeship model. These experiences are most effective when we are together and contribute to the development of our future leaders, which is why we are so focused on our return to office over the next several months. We are pleased to be sustaining advisory senior managing director productivity that is at a materially higher level than our long-term average.

However, we are finding, probably due to the pandemic, that it is taking new hires and new internally promoted senior managing directors a little longer, perhaps a year or so longer, to reach full productivity. Fortunately, this longer ramp time means that we have more partners who will contribute to our future growth.

Before I turn the call over to Bob, I want to thank each and every member of our exceptional team. The first quarter results and achievements that John and I have summarized, and really our results over the past year could not have happened without the dedication, teamwork, collaboration and commitment of our entire team. Every single one of our employees has stepped up to the challenges of the past year plus, and there have been many such challenges. We very much look forward to bring our teams back together in person soon so that we can continue to build and strengthen the culture that has been the foundation of our success.

Let me now turn the call over to Bob.

Thank you, Ralph, and just a few items from me this morning. Beginning with GAAP and some related metrics. For the first quarter of 2021, net revenues, net income and earnings per share on a GAAP basis were $662 million, $144 million and $3.25, respectively. Our GAAP tax rate for the first quarter was 16.1% compared to 25.8% for the prior year period.

The appreciation in the firm's share price upon vesting of employee share-based awards above the original grant price positively affected our effective tax rate on both a GAAP and adjusted basis. On a GAAP basis, our share count was 44.5 million shares for the first quarter. The share count for adjusted earnings per share was 49.4 million for the quarter.

Focusing for a moment on noncompensation costs, as John noted, we continued to generate significant operating leverage, in part due to lower noncompensation costs. Firm-wide noncompensation cost per employee were approximately $40,000 for the first quarter, down 9% on a year-over-year basis. The decrease in noncompensation cost per employee versus last year primarily reflects lower travel and related expenses. As we continue to evolve towards more normal operations, including returning to our offices and engaging in person with our clients, costs associated with recruiting, travel, entertainment and other expenses are expected to increase.

I'd like to call your attention briefly to a modest change in presentation that we made in our income statement during the quarter. Commissions and related fees has been renamed to commissions and related revenues, and now includes riskless principal profits, which were previously in other revenue, including interest and investments. The reclassified revenue principally represents the spread income earned from riskless principal transactions in convertibles and other fixed income securities. The reclassification amounts for this change going back 8 quarters can be found in our press release.

Finally, focusing on the balance sheet, 2 points. On March 29, we issued $38 million of aggregate principal amount of unsecured senior notes with a 1.97% coupon through a private placement. We used the proceeds from the notes to refinance senior notes that matured on March 30. And finally, at the end of the quarter, we held $411 million in cash and cash equivalents and $873 million in investment securities, down from year-end due to compensation-related payments and strong return of capital.

I would now like to turn the call over for questions. Operator, if you could open the line.

(Operator Instructions) Our first question is from the line of Michael Brown with KBW.

Just -- I wanted to start with some of the top priorities that you talked about for long-term growth and narrowing on that a little bit. I guess alongside COVID, we've seen a lot of major secular shifts in the way we work and live. And a tremendous pull forward of the impact of digital and technology across all sectors. So obviously, you made the hire of Mark Mahaney.

And I was just curious, as you think about ongoing talent mix, where do you think you'll need to continue to invest to make sure you're at the forefront of these shifts in things like software, cloud, EV, AI, a lot of these major hot trends? Is that an area where you can address via hiring? Or is the fact that a lot of these subsector coverage may not really exist today? Is that something that you will address more with internal development and promotion?

We are very focused on the growth areas around our business. And clearly, technology is one of them and a major one. We are investing in our tech business. We're looking aggressively for talent throughout the tech sectors. We have a strategy to, in effect, populate many of the areas that you've talked about. We have some very, very good tech bankers who are already in those areas, and we're working on them. As you know, we've built out our equity capital markets area in the tech sector also.

But we're also looking at other sectors besides tech, whether it's health care and biotech, whether it's energy transformation. We really think there are several very high-growth sectors that we are continuing to focus and grow in. In addition, we have other white space, whether it's in Europe, where we're looking with respect to telecom and oil and gas, or whether it's generally in our equity capital markets area, which Ralph articulated, is -- it's a very high-growth area for us, and we're very much focused on the fact that we think we have real runway to grow there.

So in direct answer to your question, in technology, we are very focused. We are looking aggressively for good talent. And I think we feel like we have some very good dialogues in place ongoing right now.

The only thing I would add is that if you look at our income statement, and let's take a 5-year look forward, the growth we would expect to come on 2 lines of that income statement, Advisory and Underwriting. And in both of those, obviously, we're benefited right now by a pretty robust markets in both Advisory and Underwriting. But we believe the opportunity for us is to continue to take market share as we have over the last 12 years in Advisory and over the last handful of years in Underwriting.

Okay. Great. And just a quick follow-up on that same topic. As we look at some of the hiring trends across the industry, it seems to be, at least from my seat, that things are a little bit slower here in 2021. I could see that the M&A market being so strong, could be keeping bankers at their current firm and really kind of have them be hesitant to make a move until maybe their pipelines work down over time.

But I was wondering if you could expand on really what you were seeing in the hiring environment. And if you agree with some of those assertions that I just made and just be interested to hear how the hiring environment for Evercore could trend relative to some of the historical periods?

Yes. I think we've said for each of the last 8, 10 years, that we expect to hire 4 to 8 new SMDs in our Advisory business. And as we sit here today, we don't see any reason why this year would be different from prior years. I do think there is an industry-wide phenomenon right now, which is hiring was relatively slow last year because we were all uncertain about the environment from early March on, and that didn't really resolve itself until the fourth quarter.

So you have a pickup in M&A and underwriting and just about every other activity. And most firms are not up a lot in head count versus last year or even flattish. So the fight for talent is pretty intense right now. But we don't expect that, that will prevent us from doing our normal hiring.

In fact, I'd say that there are many ongoing dialogues with people, and there are many people who are interested in talking to us. I think one of the things that Ralph and I have found is that we have a large number of people who seek us out as they think about their career moving forward. And so we feel like we have a broad offering of opportunities, and we're really working on them right now. So I think what Ralph said is absolutely right, that the environment is very competitive. But we're actually seeing our opportunities, and we're acting and aggressively trying to find people who we think are top level talent.

Okay. Great. So it sounds like it's a challenging environment but nothing that you can't overcome.

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

I was wondering if you can unpack your comments on M&A activity. Can you talk about how your risked and unrisked backlogs are trending relative to where you started the year? Maybe the rate of replenishment of your pipeline and also how you expect that to evolve for the rest of the year?

They're strong.

Yes. Our backlogs are strong, and activity is very much ongoing. As we said, the ingredients are just in place, whether it's economic positive outlook, the equity markets, private equity activity, CEO counts, all those things are in place. And we are in many dialogues throughout our sectors and feeling like the activity level is strong. So I think we feel optimistic, as we said.

And if you look at the level of activity that John outlined in his opening remarks, which is just the dollar volume of M&A activity, and our backlogs are consistent with that.

Okay, great. And then can you talk a little bit about the de-SPAC opportunity here. We've seen activity slow of late, but there's still 400-plus SPACs out there looking for a deal. Can you give us a sense of how you think that activity will trend for the remainder of the year? And what opportunity that presents for Evercore specifically?

Yes. We've had a pretty good participation in, particularly sell sides to SPACs or mergers that lead to de-SPACing transactions. So our backlog in that area is strong. And the way we think about this is you have essentially a new private equity cash pool. And it's almost equal to when you look at the pipes that normally accompany a SPAC or a de-SPACing transaction. There's almost $1 trillion of dry powder in the SPACs that have not yet de-SPACed, and they obviously have a time in which they have to make their investments. So they are a significant source of purchasing power in the M&A market alongside, of course, private equity firms and strategics.

Your next question comes from the line of Devin Ryan with JMP Securities.

Another question, just kind of bigger picture on the Advisory market. Clearly, the advisory fee pool is secular growth and then within that Evercore has been expanding market share. But as I'm trying to think about the opportunity in the Advisory market, it kind of feels like we're in a step function of activity. And I appreciate the ingredients are in place. But maybe love to just take it a layer deeper around some of the drivers that are maybe unique now and whether this is just kind of a culmination of the past year and just an urgency to get deals done? Or if there's something bigger happening here that maybe we haven't experienced before just as companies are thinking in new ways strategically that they haven't in the past?

Well, I don't think that we would see a step function necessarily. I think what we see is that CEO confidence. And as we talked about the availability of money and people's views have really led to momentum in terms of deals. I think what we saw is that as the COVID weakness and the economy started to lift in the third and fourth quarter, people's dialogues started to pick up. And so as you know, mergers don't just happen overnight. And there are many, many dialogues that go on as executives and as Boards really consider them -- where they are strategically.

What they do is they begin to put together a process which is part of their strategic plan of growth. And I think in many respects, what we are seeing right now is the ramp-up from the cessation of some of these dialogues and the ramp-up has really culminated in, I think, a lot of activity, a lot of people looking at their growth and really thinking that inorganic growth is a very good way to go given where the economy is right now.

They're looking at what could be a continuing strong economy. They're looking at continuing access to money, and they're looking at the fact that shareholders are really looking to them to really grow. And so we see that in the activities that we have, there's a lot of focus on just that. And so there's -- it's just a growing momentum.

And in addition, I think, from our perspective, we continue to focus on big companies. We continue to focus on aggressive prolific companies. And I think we're making progress. And in that progress, I think, is showing that we were able to build some momentum in our business.

And the only thing I would add, Devin, is if you look over the long cycle from 1980 through today, historically, we've had 5- to 8-year up cycles and 2- to 3-year down cycles. The up cycle coming out of the financial crisis was probably 10 years long. And the down cycle caused by the pandemic probably was 6 months long. And so we're now in a period of recovery again. And notwithstanding the strong M&A volumes that we've had over the last 2 quarters, we're still below the historical trend or average of M&A volume versus either global market cap or global GDP. So that's the way I look at it.

Yes. That's great perspective. I appreciate it. And then maybe 1 for Bob here, just thinking about the comp flexibility throughout the year. I appreciate there's a number of moving parts. But the 59% comp ratio in the first quarter is approximately in line with the full year 2020 level. So just want to get a little more perspective around some of the puts and takes in kind of comp leverage and maybe bigger picture operating leverage as we think about 2021, especially given some of the commentary about how kind of all metrics are operating at kind of record levels right now.

Devin, as you would expect me to say, it's early days trying to figure out comp on a full year basis in the first quarter. It always requires a lot of judgment and is part art. To the positive side with this kind of performance, history would tell us we generate comp leverage, not to the negative side, but perhaps putting some pressure against that is the level of investment that we successfully accomplished during the year.

If we have a very successful year, as Ralph has pointed out, anytime I think he's asked, that cost goes through the income statement right away. So I think those are the 2 big puts and takes, what's the top line, what's the level of investment and it is early days.

Yes. Okay. I appreciate, Bob. Figured I'd try to get some color.

Your next question comes from the line of Brennan Hawken with UBS.

There was a comment made in the prepared remarks, I believe, Ralph, it was from you, that you're seeing a longer ramp time for some of the new recruits and the new promotes. Could you maybe provide a little bit more color and context around that? Is there a difference in between the promotes and the recruits? Does this just apply to the last few years of vintages, for lack of a better term?

And do you think it might be tied to the environment specifically given how unusual it is, and we're seeing a lot of deals basically come back after they were put on ice before the pandemic? And therefore, if a banker has moved, then there's a dislocation in the discussion and engagement with the corporates. I'm just trying to understand whether or not something is different or this is just environmental.

Okay. So let me give you the genesis of that comment. Historically, we've all -- we've got data going back 10, 12 years on this. If you look at external promotes, the first stub year, the best assumption is de minimis revenue. The first full year historically has been 50% to 70% of what their ultimate normalized run rate would be. And the second full year, they would get to that. And internal promotes, the line is a little different because they're being promoted because they already have some revenue generation, but it generally -- it's this second or third full year after they were promoted that they get to that normalized level as well.

And what we're finding is in the last couple of years of hiring and promotion, it's really that third full year, not the second full year where you're getting to normalized productivity. Our hypothesis. We're not going to know the answer until we're 3 or 4 years from now. But our hypothesis is that this is a function of the challenges of building an enhanced client base in a period when you can't interact with people on a human basis. So if you think about one of the things that we, I think, benefited from last year is we've got a lot of senior bankers who have long-term relationships. And when companies needed to do things, they are turning to their trusted advisors.

The corollary to that is for a banker on a new platform or for a younger banker who has just been internally promoted, the capacity or the ability to establish that kind of a trusted relationship in person-to-person contact is harder. And so our hypothesis is that, that's what's going on here. And that it's nothing really fundamental.

The reason we called it out is because it does mean that we have -- even though last year was a relatively light hiring year for SMDs, we were at the bottom rather at the top of our 4 to 8 range. We still have a fair number of people who were hired in '19 and '18 or were promoted in '19 and '18 that are in that ramp-up phase.

Brennan, it's Bob. The other point I might add is, as you would all know, normalized productivity today is materially higher than it would have been 5 or 7 years ago. And that due certainly in part to the much broader capabilities than any SMD can deliver to the client -- to the clients who left the firm or the clients that follow them to the firm. So as we -- as Ralph made a note in his comments, in our view, this isn't all bad news, in that as someone joins us, sort of plugging into all of those capabilities and connecting them to the clients, while it takes a little bit longer, there's more upside in it.

I would just add, and I'm going to say that you probably would expect that I'd say it, but I'm going to say it anyway because I believe it. The people that we've added in the last 3 years or so are very high quality. And we're feeling really good about their ramp and about really the progress they're making. And really, the contribution they're making, both in terms of commercially, but as well as culturally. We really feel good about our team and the ramp that we have in place with the people who are just coming up to stream right now.

Thanks for all that thorough color. Much appreciated. Just a handful of kind of follow-up items, Bob, probably for you. Where were we or where do we stand today on SMD head count? And then when you think about -- I think there was a $6 million gain from hedges that you flagged, $6.2 million. Can you remind us, does that fully flow through to comp at the same time as revenue? Or is the comp offset spread over the vesting period so since this was tied to the cash component, it would be over the next few quarters instead of all in this quarter?

Well, I'll do the easy one first, 107. And all of our deferred comp is amortized into the income statement over the vesting period, which is generally pro rata over a 4- year period.

Right. But this is tied to the cash, which is a shorter vesting period, right? So wouldn't it vest over a shorter period?

Well, the deferred comp, whether it is restricted stock units or the deferred cash program, has the same vesting.

So therefore, like the revenue was benefited a bit more than the comp offset and so that probably flatter -- do you know how much that flatter the comp pressure?

I'm going to go back to Devin Ryan's question and say the comp ratio has a multitude of factors, puts and takes. None of them, Brennan, translate down into how does deferred cash comp amortization work.

Your next question comes from the line of Richard Ramsden with Goldman Sachs.

This is James Yaro filling in for Richard. So perhaps you could help us understand the restructuring opportunity from here. And what do you expect the cadence in this business to be over the course of the year? And then do you lend any credence to the idea that the speed of the economic recovery has meant that companies that would have otherwise ended up in a restructuring situation, ended up doing M&A?

Well, the first question is that you should -- and as I said in my opening remarks, restructuring activity is returning to its historical levels. Last year was a bit of a bump upward, and we're returning back to historical levels. And I would reiterate what I've said in the past, which is there isn't a bright line between restructuring and M&A and other forms of Advisory. It's really sort of white to gray to black.

And so -- for example, last year, the capabilities that we have in restructuring were incredibly important to some large cap companies who were raising large amounts of debt, and we were an advisor to them on those financings. So number one, there's always some level of restructuring activity, even in the most robust economic environments and the most liquid debt environments. And we're kind of in that world today, where there are particular sectors or companies that have challenges, even though we're in a very liquid market, debt market had a very healthy economic recovery.

So the way I think about this is we're kind of back to normalized levels, and we have some terrific capabilities in that -- in our restructuring group. And we are, as we did last year, utilizing these capabilities to help companies raise debt privately, to do not traditional restructurings but liability management. And then also, obviously, as I did say in my remarks, in any given year, there are always some individual companies or some sectors that have some stress.

The only thing that I would add to that is that what we have done and what our group has done is they have expanded their opportunity set in that they are extensively debtor and creditor. And they also have spent more time with sponsored portfolio companies that may be seeing some distress. So as a result, there are more opportunities. There are more targets for them, and we see some of those coming through. So over time, I think you'll see that group continue to create its own momentum, and that's something that we're really happy with.

Got it. So we've seen such a strong backdrop in M&A announcements so far this year, and it's clear you do expect this to continue. So not to be overly negative, but is there anything you think that could derail this M&A improvement such as perhaps further COVID-related shutdowns? And have you seen any of this in any of the geographies so far this year?

We really haven't seen any flagging of the momentum. That's not to say that it won't happen. But really, what we're seeing is that a continuing momentum, and we see the dialogues, if anything, strengthening even more but we really don't see -- now obviously, there are things that can happen, whether it's an international issue that could drive it. There could be some political issue that does -- comes back. There could be a disruption. We don't really see that.

So I think our view is that not to be overly optimistic. We think that, certainly, over the next 3 to 6 months, that the momentum will continue as it is. We don't see any real disruptor in -- on the horizon.

That's great. And then your noncomp ratio came in once again better than you would have expected, and we're now a year into this new environment, but you are focusing on returning to the office. So maybe you could update us on your expectation for the permanence of some of these lower COVID-related noncomp costs from here?

Inevitably, the rate and pace at which travel and entertainment expense recovers is difficult. And our expectation is it will not return sort of in a step function to historic levels. Many clients like the flexibility and the efficiency that they've learned, we can achieve using remote communication technology. So I think if you asked Ralph or John or any of the bankers, they're looking forward to engaging face-to-face at senior levels, but perhaps execution won't require the travel that it used to. We think there'll be some changes in engagement with research analysts, et cetera.

So it will go up. It's hard to imagine it going down from the extremely low levels of today. The pace is hard to judge. And recruiting is a function of success, and I'll just refer to the comments that I made on the comp question. We're optimistic that it will go up, but there's work to do.

Your next question comes from the line of Steven Chubak with Wolfe Research.

So Bob, maybe wanted to start off by just following up on that earlier question on noncomps. Just as we prepare for some reversion to more normal T&E, if I look at the historical trajectory of noncomp per employee, which I know is your favorite metric, 2019 was a high watermark at $194,000, 2020 was the low watermark at about $170,000. I'm just curious, like from your point of view, as you underwrite noncomps or just budget for noncomps, I should say, how should we think about that new normal baseline for that metric once T&E reverts to some new normal?

I think you should -- as you talk about that high watermark, you'll recall at the time that there -- that we emphasized some significant real estate and technology investments sort of disproportionately high. So much of that is behind us. That -- those accelerations of costs are now into our operating model, Steven. So I don't see that high watermark. The pace from that 2020 low to something below that high watermark is an uncertainty for us. But again, we're far more focused on the benefits of travel, the benefits of entertainment and the benefits of investing in new talent. So if it goes up in a disciplined way, that's a positive for us because it should drive further growth on the top line.

Maybe just 1 follow-up on the underwriting outlook. Activity has started to slow a bit for the industry, admittedly following a neck-breaking case these last few quarters. At the same time, it's also clear that the new normal run rate for Evercore is going to be well above the sell target of $75 million to $100 million at the time that you acquired ISI. I was hoping you could maybe just speak to how you're thinking about the new normal run rate for the business given the expansion into new TAMs, such as converts, even as industry-wide activity levels begin to normalize a bit?

I don't think we really have an answer to that because the level of underwriting revenue is a function of 2 things: number one, the total level of underwriting activity and Evercore's market share within that underwriting activity; the second, quite confident of that when you strip out block trades, which we're not in that business, and you look at underwriting revenue and Dealogic is the best source for this. As I said in my opening remarks, we broke into the top 20 over the last -- on a trailing 12-month basis. And it certainly seems reasonable for us to continue to move up in that in the teens toward 10.

And do we have an opportunity to break into the top 10? I think we do. But that's going to be harder than advancing from breaking into the top 20 and moving through the teens. And yes, the only thing I would say is if we were sitting here 10 years ago when we probably broke into the top 20 in Advisory and you had asked me that same question, I probably would have given you the same answer about Advisory that seems pretty easy to go from market share gains from 20 to 10, but harder to break in beyond that, and we're now #4 in the world in Advisory revenues.

And what I'd like to add to that is that there are at least 2 and maybe more ways that we're going to increase our revenues with our existing base of business. The first is that the more active we become in the deals that we're involved in and the further to the left we go, the higher the fees are with respect to those in the contribution. We feel like we are continuing the March left, meaning we are trying a more and more active role in those deals that we do get a chance to work on. And we think we are contributing more and more. That's number one.

Number two, as you've seen, health care was really our leading edge in Equities and Equity Capital Markets. We will continue to invest in that business. But what we also are beginning to really develop and see momentum in is expanding into other sectors, whether that's technology, industrial and really other types, transportation. And we think that, that evolution for us will continue and we don't see that there's going to be a restriction to that.

So we're really, as you would expect with any business that is beginning and evolving and growing, we are seeing increasing opportunities just to get to the scale sector by sector that we think we can get to. So I think it's those 2 things that are maybe exogenous factors to growth.

Very helpful color. And just if I could squeeze in 1 more, just very quickly on capital structure. Since I've gotten a number of clients pinging me. Just wanted to get some perspective, Bob, on the fact that a lot of your competitors have touted the fact that they do have a debt-free balance sheet and admittedly, they're also trading at higher PE multiples despite similar earnings growth profiles.

I'm just curious, given the strength of your liquidity position, why you need to have any debt within your capital structure or capital stack, especially given how small it is relative to your overall liquidity? And maybe just speak to the appetite to maybe accelerate buybacks given you did see a little bit of share creep as I look at the share count on a year-on-year basis?

So the share creep that you see in the quarter is a little bit of a good news problem, which is the mechanics of share count as you think about the unvested RSUs is such that the number of shares that go into the share count increases significantly when your company share price increases significantly. And so if you sort of peel the onion back a bit on the quarter, a major factor contributing to this share count increasing in the quarter was a direct function of the improvement in the share price. So perhaps a negative outcome to a good problem.

Steven, in terms of the corporate finance analysis, let me just bring this all the way down to a very tactical decision that I talked about in my remarks, which is we have $38 million of debt mature at the end of the quarter. Borrowing at 1.97%, basically refinancing that was a no-brainer corporate finance decision even for a simple accountant like me, leaving that cash available for buybacks and to return to shareholders.

Your next question comes from the line of Jeff Harte with Piper Sandler.

Great quarter once again. A couple of questions left for me at least. One, following up on some of the SPAC conversation earlier. SPAC IPO underwriting business is somewhat unique to you versus the other independent peers. How much do you think that will help you in landing de-SPACing advisory roles as we move through the next couple of years?

Well, first of all, we're a very modest participant in SPAC underwriting. And we're very selective. We've been on the cutting-edge of creating new blind pool investment vehicles, SPAC like vehicles, with lower underwriting fees, promotes that are much more aligned with the institutional investors. And as you can imagine, in a hot SPAC issuance market, the vast majority of sponsors are opting for more generous promotes than what we've done. And we've done a couple of traditional SPACs as well.

Our real strength in this business is not -- even though we are unique among independent firms as an underwriter, but it's not driven by that capability here. It's driven by the fact that we've invested very heavily in having not only industry capabilities but SPAC merger capabilities. And so the opportunity for us is as an independent advisor to private companies that are going public view through a merger and de-SPACing transaction. And we've got a pretty robust backlog of those kinds of advisory assignments.

They are completely unrelated to the fact that we happen to be the only independent firm with underwriting capability as well. They do provide us a modest amount of opportunity to be a participant in the pipe transactions. So for example, in the Grab merger into Altimeter's SPAC. We were the lead advisor to Grab on that transaction from an M&A point of view, and we were a participant in the $4 billion-plus pipe as well.

So the thing that is most material to us in terms of future revenues is the 400 or so SPACs that are out there who have raised capital and are looking for a partner. And so -- that's a long answer, I apologize for it, but that's really what the way that either this -- either the ramp-up in SPAC activity in the first quarter or the slowdown right now, it's not a major effect on our business, to be honest.

Yes. And the other thing I would say is that one of the interesting things that we've seen is that we have a very strong group of people who are actually our SPAC experts. And what they've done is they have translated this expertise and appreciation for what SPACs actually do offer and really what clients can -- all different clients and opportunities can get from SPACs. And I think there's an appreciation through our whole Advisory business that we have a capability where we can really give good advice and be out there talking to those companies who could benefit from doing a SPAC and giving them good advice with respect to that.

So I think we have a high level of knowledge that we are applying to the marketing of our capabilities in SPACs. And we think that, that is leading to really a bigger opportunity set for us to participate on de-SPACing and the M&A side of this.

Okay. And the final one on kind of the outlook for productivity. So I'm getting revs per SMD of something close to $16 million in the first quarter, which is historically high, but well below some of the peaks we have seen. How are you thinking about the forward trajectory there given that a lot of businesses are simultaneously strong right now, which is a little unusual, but you've also got such a much more broader product service offering relative to what you had, say, 10 years ago?

Why don't I -- I'll make a general comment, and then I'll let Bob go through the math. I think we feel, as we have always, that to look at 1 quarter's numbers is a -- was a crazy thing to do. And so when we look at SMD productivity, it's always on a 12-month basis, rolling 12-month basis, full year basis. And so -- and the way we calculate that, I'll let Bob go through, but not -- the bottom line is not all 107 SMDs that Bob identified earlier are in the denominator because we don't count in the denominator those that joined a weak ago.

Jeff, I think many people calculate productivity different ways. Ralph is referring to our internal metric, which is where the external hires, we don't really put them in the denominator for a year to really account for that ramp period that Ralph described earlier. What you put in the denominator, as long as you do it consistently, doesn't really matter. It's the trend. I think that you're asking about, I'm going to take the company stance of, we're not going to comment on the trajectory of the numerator.

I do think the actions taken, actions completed a year ago, really focused on looking at productivity, looking at the potential of individuals, either based on their sort of personal profile or the markets in which they operated, has had a positive impact on productivity. People that just weren't going to be productive on this platform have moved out.

So I do think that's positive, and I think that continued focus on making sure we've got the right productivity for everyone on the team, that will push -- will help to the upside without taking a view on what future revenues are going to be.

Put another way, the question that was asked earlier of Bob, how many advisory SMDs we had, he answered 107. Had that question been answered, and I don't remember, and I don't remember if it was on this same call a year ago, notwithstanding the fact that we hired some SMDs externally last year, and we promoted some at the end of last year. The number that you would have received would have been higher than 107.

112.

Yes.

Your next question comes from the line of Jim Mitchell with Seaport Global.

Maybe just a strategy question longer term. You talked about investing in new capabilities and trading to support convertible underwriting, including riskless principal trading in converts and even fixed income. So assuming success in a hybrid security like converts, is there an eventual and I mean eventual step towards pure debt underwriting? Is that sort of maybe the test here that you could start to expand into another vertical, another fee pool longer term?

At this time, we're not thinking of doing that. We have a very robust business in debt advisory and financial advisory. But we're not at this time, thinking that, that is a place we need to go because we're -- as we've said, and we're consistent with that, we are a balance sheet light firm and as you know, getting into the debt side of the business, you really have to be thinking much more from a balance sheet perspective. So I think it is not currently on the chart for us to use that as a place for growth. We have several other places that we're thinking of. As we've mentioned, a lot of them on the call here, but that's not one of them.

I think the bright line here is really simple. If it requires capital risk, either in the form of bought deals or block trades in the Equities business, we're just never going to be in those businesses. So what we really are doing here is, for example, when we were the sole underwriter in the first quarter of a convertible offering, we have to be a stabilization agent in the aftermarket. And we earn a very big fee and could one of those trades wind up with a de minimis loss. But when you look at the totality of it, it's a very, very high earnings, high revenue, low-risk activity. Debt is not. So that's not a business that we aspire to be in. Private placements, yes. Public debt underwritings, no, thank you.

Okay. Fair enough. And maybe just on the buyback, Bob. Is there -- I mean stock price, I guess, holding that neutral. Is the assumption or the expectation is you want to return to sort of net share count reduction from here given the environment?

I think that's the outcome -- that's the expected outcome, again, with the caveat of share price. So in the first quarter, just to kind of restate the principles, in the first quarter, we offset the dilution associated with our annual bonus grants, which has always been our first principle. From here on out, our intent is to return the cash flow that's not needed for investment in the business, not needed to drive future growth through dividends, which the Board increased, and buybacks. The consequence of that ought to be a reduced share count.

Yes. I mean absent the noise that comes from our stock price, if you held the stock price constant, the share count would shrink every year.

Your last question comes from the line of Brennan Hawken with UBS.

It's actually related to that last question from Jim. So it seems as though, Bob, a return to a more normal capital return approach could result in capital returns exceeding earnings as they have in prior years when we take both the totality of the dividend as well as the buyback. Obviously, it's going to depend upon what the denominator is, but is it fair to say that you don't have any binding constraints as far as earnings generation or whatnot as far as capital return goes?

That's fair.

There appear to be no questions -- no further questions at this time. I would now like to turn the floor to Ralph Schlosstein and John Weinberg for closing comments.

Thank you all very much for joining us today. If you have any other additional questions that occur to you, please don't hesitate to reach out to our Investor Relations team, Hallie and Elizabeth. Thank you all.

This concludes today's Evercore First Quarter 2021 Financial Results Conference Call. You may now disconnect.