Evercore Inc (EVR) 2007 Q4 法說會逐字稿

Welcome to the Evercore Partners fourth quarter and full year 2007 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Robert Walsh, Evercore's Chief Financial Officer. Please go ahead, Mr. Walsh.

Good morning and thank you for joining us today for Evercore's fourth quarter and full year 2007 financial results conference call. I am Bob Walsh, Evercore's Chief Financial Officer and joining me on the call today is Roger Altman, Chairman and co-Chief Executive Officer. After our prepared remarks, we will open up the call for questions.

Earlier this we issued a press release announcing Evercore's fourth quarter and full year 2007 financial results. The Company's presentation today is complementary to that press release which is available on our website at www.Evercore.com. This conference call is being webcast live on the investor relations section of the Evercore website and an archive of it will be available beginning approximately one 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. These forward-looking statements 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 Securities and Exchange Commission 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 the Company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated we will be discussing adjusted proforma or non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For detailed disclosures on these measures and their GAAP reconciliations, you should refer to the financial data contained within our press release which as previously mentioned is posted on our website.

We will also refrain from repeating the information included in the press release and focus instead on the key opportunities, challenges and changes in our business. I would like to remind everybody that the restructuring transactions required to affect our IPO occurred during the third quarter of last year and as a consequence our results on a US GAAP basis for the full year of 2006 reflect different organizational forms before and after the IPO. These differences impact the comparability of our US GAAP results in 2007 as compared to 2006.

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 both on the advisory and investment management sides of our business. I would like to now turn it over to Roger for a review of the 2007 financial highlights and results.

Good morning everybody. Let me note at the beginning that Austin Beutner is not on this earnings call. He is recovering from a serious operation which he underwent in December. It was to deal with injuries which he had suffered in an earlier biking accident. He is on medical leave for a while but we have every reason to expect a full recovery and he is on that track now.

In the interim, I have taken a more active role on the investing side of Evercore and overseeing it. Jim Matthews and (inaudible) who run Evercore Capital Partners on a day-to-day basis naturally are continuing to do that.

Turning to our results, we had a record quarter and a record year. Fourth quarter revenues of $94 million represent our all-time high and we are 19% ahead of the year earlier quarter. On a full year basis, the firm's revenue grew 50% and that materially exceeded the revenue results of our peers.

Adjusted proforma EPS for the full year grew 23%. Excluding the cost of our special 2007 partner hiring program, adjusted earnings per share grew 58%. For the quarter, adjusted earnings before those new partner costs grew handsomely. After giving effect to those costs they were below the year earlier quarter.

I should emphasize that we recruited eight new partners in 2007, far more than we had ever recruited in one year and many of you will recall extensive discussions we had about that. One of those eight, Anthony Fry, in London became effective on January 1 2008.

As we explained before, adding new partners in effect increases costs in the year during which they joined before they can impact our revenues in the next year and beyond. That's because they typically arrive around July or August and it's not possible to materially affect our revenues by closing new transactions until the following year and years beyond that.

I am pleased to say that our international business continues to grow handsomely. In 2007 Evercore realized $66 million of revenue or 22 of our total advisory revenue from non-US clients. Both the UK and Mexico had outstanding years.

Overall, in terms of completed transactions we advised on 40 of them last year as compared to 32 during 2006. Total dollar volume was $150 million in round numbers which compares to $100 million the year before if you take out AT&T BellSouth or $192 [million] if you include it.

On announced transactions, we advised on 47 of them last year; that compared to 35 for 2006. The dollar volume of them taking out AT&T BellSouth was ahead of 2006. Including AT&T BellSouth it was somewhat behind 2006.

Our nominal backlog remains largely unchanged through mid-2007. What I mean by that is that the dollar volume of transactions we're working on has not materially changed. At the same time, all of you know that firms like us are now operating in a more challenging environment and it is more difficult to execute those transactions.

My overall view on 2008 is that it will be a complex and challenging year. But, I'm very confident on the relative performance of Evercore this year, this year we have just begun.

We were ranked first again among all US boutiques in 2007 by Thomson Financial and that is for the fourth year in a row. And I think that our chances of maintaining that market leading position again in 2008 are good.

Moreover, the outlook for global M&A volume over the medium and long-term in our judgment is excellent. And that gets back to factors of globalization, the drive for the scale, the rise of China, India and Brazil and the overall importance of M&A as the strategic imperatives for growing businesses.

In fact, I think you can argue that we're just seeing the beginning of truly global M&A markets. And, the value of the Evercore brand continues to grow and every year draws more opportunities to us than the year before. I want to say a couple words about the investing side of the firm.

We had a good year in 2007 on the investing side. We realized gains from the appreciation and value of two of the portfolio companies owned by Evercore Capital Partners II. That fund will be fully invested shortly as we are actively working on closing the final investment which will consume all of the remaining capital there.

We have begun marketing efforts, formal marketing efforts on Evercore Capital Partners III and are optimistic on raising that effectively. We also held a closing recently on our second private equity fund in Mexico.

In terms of our public securities investment management business, in Mexico which is a fixed income business we had a terrific year. Our business there closed 2007 was $650 million under management. It is a little more than a year old which was 54% growth and assets under management over the prior year.

And there are three funds ranked first, second and third in the respective classes. Our US business, Evercore Asset Management, closed the year with $500 million under management. That business is also a bit more than a year-old and that was 300% more to than [applied] the year earlier.

Before turning this back over to Bob I want to comment on our non-compensation costs. Bob will go into more detail on this but they are too high. We have committed to lower them materially and I do mean materially in 2008. I can tell you directly that will happen because if it doesn't somebody else would be on this call and not me. And under Bob's leadership we're putting in place all of the changes that are necessary to accomplish that for 2008 and you will see the results of that.

In terms of our compensation ratios finally excluding new partners they're very much in line with peer results -- 45% for the quarter, 46.7% for the year. Including new partners they are higher than that but I think that is as I have described before not a fair way of looking at it because we had all the costs of those new partners in 2007 and none of the benefits. So with that I'm going to turn to back over to Bob and we will go from there.

Thank you, Roger. To wrap up the quarter and the full year results as Roger said I will just offer some additional comments on our expense space. Overall expenses were $78.2 million for the quarter which compares with $56.1 million for the prior quarter and $53.8 million for the fourth quarter of 2006.

The growth in expenses is driven predominantly in three areas -- compensation, professional services costs and occupancy. Roger just commented on compensation costs and our compensation ratios so I won't go into that further.

In terms of our professional costs for this quarter there were three principal factors that drive the increase. First as we've discussed before we have been working on remediating our material weaknesses and improving our financial infrastructure to meet the requirements of operating as a public company. Those projects are substantially completed and we are in the midst of the final audit of those results. With that we will end all those projects and put them behind us.

Second there are certain costs associated with strategic investments that we have recognized in the fourth quarter. In particular there was one investment where we were terribly far down the road and in light of the dislocation in the financial markets we're not proceeding with that investment at least at this time.

Finally there was an increase in billable expenses associated with certain client assignments. The three factors that I've just described to you aggregated approximately $2.9 million when you compare that with either the prior quarter or the prior year's results that explains most of the variance.

Finally occupancy costs increased marginally in the quarter as a result of certain costs associated with the sublease in New York. We previously expected those costs would be factored into future lease costs.

As Roger indicated during the quarter we implemented a number of cost management initiatives in order to drive the growth in operating margins in the future and we expect to see the benefits of those costs beginning in the first quarter. Roger, let me turn it back to you to conclude.

I would like to conclude by reminding everybody what Evercore is and what Evercore is not. Evercore as I have said is the number one ranked M&A boutique in the US in 2007, in 2006, in 2005, and from 2000 through today on a cumulative basis. I think all of know that is not easy to do.

Evercore is the only boutique which truly has a large cap multinational franchise because -- and the reason we're ranked first in the lead tables is we work with larger clients and they do larger transactions. And the reason in turn we work with larger companies is the experience in seniority of our partners which is deeper than comparable firms. If you go on our website and you actually study the biographical material on our partners and compare them to our peer group, you see what I mean.

Third, our advisory business is centered around corporations and always has been, not financial investors. For 2007 we received only 18% of our revenue from financial sponsors. I think that is quite low by peer group standards. And 35 of our 40 largest clients over the past twelve months were corporations, not sponsors.

Now Evercore is in the midst of three core growth initiatives to. One is globalization. We're rapidly building out Europe. We have 14 bankers there now. We had two a year ago. We are very far ahead of our revenue plan there. My own vision is that Evercore Europe will become just as important to the advisory side of Evercore as is North America. We are also in the process of extending our very successful Latin American franchise to Brazil.

Second initiative is sectional coverage here in the US. Since going public 19 months ago we have recruited partners to cover six additional sectors which we didn't have at that time. They happened to be energy, healthcare, retailing, mining, defense and aerospace and automotive.

And third in terms of core initiatives is building out our investing platform. I believe that 2008 will be the year for Evercore's first inorganic step towards growth and that it will be taken on the investing side. Bob just referred to a project we were working on that for the time being has been put on hold but I believe we will cross that goal line in 2008. The proof is in the doing however and when we have something to say on that of course we will say it.

Finally a word on what Evercore is not. We do not sell or trade securities, we do not underwrite securities. We're not a lender. We do not publish securities research. We do not finance our clients. We don't compete against our clients. We never explain to anybody why loans didn't meet covenants and we have never used very high leverage or what anybody would call high leverage in our own private equity business.

Evercore is a rather simple model, a rather pure model, a strong model and compared to most other firms in this business large or small, a very good model. So on that note, I will stop and I think we will take any questions you have.

(OPERATOR INSTRUCTIONS) Ken Worthington, JPMorgan.

First I wanted to go to the best management side of the business. I guess first you mentioned that you are starting the formal process of racing capital for ECP 3. A couple of your peers have actually disclosed that initial expectation for fund-raising they're lowering expectations. Do you still feel that the $1 billion is an appropriate target given market conditions and can you talk about the environment for fund raising right now?

Well, I'm pretty current on that because I spent yesterday on the road myself in terms of this fund raising. I don't think that the attitudes among the large investors, the employee retirement systems, the corporate pension funds and so forth have changed much. I don't detect that.

I don't think allocations to private equity are diminishing at all. I personally sit on the investment committees of three large endowments, quite large endowments and we're not altering our allocations to private equity at all and I don't hear about it either.

Among other things I recently spoke to a large group of the public employee retirement systems. This is in the past few days and all of them from Calpers to New Jersey to New York and so forth were all there and there was no serious indication at all in the conversation that they were reducing their commitments to the sector.

Number two, that amount (inaudible) remains our goal. I'm always cautious about things like that. I don't actually know whether we will get to $1 billion. It's just our goal and we have begun this formal marketing process, distributed our private placement memorandum and so forth and we will just see how we do.

I don't really know how to comment on it beyond that. These things take quite a while and it will be give or take a year before we have a final closing, give or take. So that's my best answer.

You know what? That's helpful. That's what we wanted to hear. Maybe second you have a very well respected restructuring team. Can you give us an idea of how the restructuring pipeline looks and the outlook there and maybe talk about your ability to shift resources to restructuring if the outlook really is strong there?

First of all restructuring activity is picking up. It increased in the fourth quarter. That's carrying over so far this year and for all the reasons I think that would be obvious to everybody on this call in terms of the environment.

We currently have 10 professionals in our restructuring group. We are gradually adding to that. It's always Evercore's style to add people as revenue is available rather than to put the expense in place before the revenue is available and we expect that group to grow during 2008.

Yes, at intermediate and junior levels we have the ability to shift resources; Vice Presidents, associates and analysts. But in terms of the senior most resources, it's really the partners in the restructuring group supplemented by a few of us who drive the business. And if you're talking about particularly technical restructuring, the shifting of resources applies really at the intermediate and junior levels and not at the partner level.

Thank you. Lastly, I know you set expectations very low but you didn't hire a lot in '07 and some of these people were hired middle of the year and we believe did generate some revenue in '07. Any sense to help us see where the ramp is? How much revenue or how much business was brought in by these '07 hires? It seems at least one deal was brought in by a new hire.

Well, I think you're right in the sense that there was some revenue in '07 compared to zero but pretty modest -- I mean quite modest. So all the earlier statements we made and I just meet again here that you essentially recruit partners in the late winter. You sign them up in early spring, they go on garden leave which everybody now requires. They show up around July sometimes August and you know, it's almost impossible to actually start a transaction and then get it closed all within that five-month period.

So those statements just generally apply. I would also take advantage of your question to say we do intend to continue to hire laterally at the partner level. 2008 will return as I promised it would to what I will call the traditional Evercore levels of hiring. I really don't know what the final number would be but if you wanted a working figures -- and please treat this as a rough one because there are no agreements in place at the moment. You can think three. That is around the world. Nevertheless, the dynamic of the cost in year one and the benefits in years two, three, and four and so forth is a pretty safe rule.

(OPERATOR INSTRUCTIONS) Roger Freeman, Lehman Brothers.

I just wanted to build off of that last comment you made. If we think about hiring this year and you think about where the opportunities are, should we think about new hires coming in primarily on the restructuring side if you are thinking about three or four people?

Well, as I said there are no agreements in place so I can't be precise. Most people out there have not yet been paid and so you can't really start to talk turkey with them.

I would have to fall back on saying that it will likely be a mix meaning some restructuring and some M&A but I think the key point is we're very confident about our M&A business. The boutique M&A business is simply an excellent long-term business. If you think about it, it's a very high margin business, it requires no capital and if you have the type of very senior great people that we do, it's just a great business.

So we are adding to it. The way we measure our market impact it's going up very sharply. It's going up right now this morning, Tuesday. It went up yesterday, it's going up tomorrow. And so we are investing in that business. We are not retreating, we're not holding back. 2008 will be a regular year like 2006 or 2005 was in terms of adding to that business and investing in it. No slowdown from us on that.

Okay and I guess with respect to the senior hires you brought on last year and I guess one more that just got added in January, if we did the math right it looks like it was about $18 million of new hire comp in the fourth quarter. Is it fair to assume all those folks are on guarantees for 2008 so we should look at that as a fixed runrate and maybe add in this one additional one?

No, they're not all on two-year guarantees meaning they were brought in in '07. Some are and some aren't. I really don't want to get beneath that level of detail. It would be inappropriate but no, you cannot assume that.

Okay, can you comment a little bit on what corporate clients are telling you right now above about the environment? I guess what I would like to hear is what are the primary inhibitors of doing deals? Is it just wanting to reserve balance sheet capacity? Is it an inability to finance?

Also maybe if you could wrap in with that -- I think last quarter you said that there were discussions with international companies about doing deals in the US in part because of the weak dollar. You didn't mention that this quarter. I'm wondering if that's also still part of the discussion framework.

In my experience the only inhibitor is the leverage finance market and the availability of leverage finance. I don't think corporations are less interested or less active on M&A today than they were six or eight months ago -- at least larger ones. But all of you are just as familiar as we are with the changes in the leverage finance market and the availability of leverage.

Now that primarily affects sponsors but in turn it affects businesses that sponsors might buy from sellers. So its impact is both on the sponsors specific business and then on deals that would otherwise be sold to sponsors. But that's the only major change in the environment that I would choose to cite today versus early to mid-'07.

(multiple speakers) as far as your question about cross-border, I think cross-border for the industry as a whole is clearly picking up. And you know whether you're looking at very interesting transactions like all of the machinations around the [BHP Dilliton] and on the role of China and Alcoa in that were -- or whatever your favorite example is I think cross-border activity all around the world not just US versus other parts of the world but cross-border apart from the US is just picking up. And the outlook for as I have said before the so-called developing world in terms of M&A is very good and is just beginning. And I include the sovereign wealth funds in that.

(OPERATOR INSTRUCTIONS) William Tanona, Goldman Sachs.

Just three quick questions here. If we look at the breakdown of the geographical revenues in the financial advisory space whether it's the three-month or the twelve-month period and probably think the twelve-month period is a little bit more realistic to strip out some of the timeframes here.

I guess I was surprised to see that the European revenues grew so slowly considering you made your acquisition of Braveheart in the early part of 2007 and just given the level of activity that we have seen there. So if you could just shed light. Maybe I'm not looking at it on apples to apples basis but if you could just shed light on why that growth was so slow.

First of all, Braveheart in round numbers is two years old and Braveheart as I said in my own comments is way ahead of the revenues we expected it would be doing at the end of the second year. I think what you are referring to goes like those or is explained like this.

We represented Smith's UK on a very large transaction at very end of '06. It was a very large deal and a very large fee -- sell Smith's Aerospace to GE. And just like AT&T BellSouth distorts our performance '06 versus '07 on the US side, Smith's GE distorts their performance a bit '06 versus '07 on the advisory side. If you took that out they had a sharply higher '07 versus '06.

Okay, that's helpful. And again, Braveheart closed in December of -- was it December -- no, it was January of '06.

December of '06.

Okay, December of '06. And then I guess moving over to the investment management business you guys talked about having $15 million invested in private equity. I was wondering if you give us the comparable amount on the public securities side. I guess when we just look at the results for third quarter we see the unrealized and realized gains including performance fees for the public securities side being a loss this quarter. So just trying to get a sense as to the size of that business as well.

Both of the public securities businesses, Evercore Asset Management in the US and what we call PCB in Mexico, are early stage development businesses. They're both are roughly a year old.

So neither -- I mean they're still developing. And neither was profitable in '07 but that will be different we believe in '08. So they're just a year old and you have got the kind of typical performance you would have of a business you would start up and it was still twelve months from its birthdate.

I guess I can understand why the profitability of those businesses wouldn't be profitable but if I'm looking at kind of the added disclosure that you guys provided in terms of revenues and looking at the public securities and looking at the line that says realized and unrealized gains (multiple speakers)

You may be referring to our own investment in Evercore Asset Management.

Yes, what is the size of that?

We have about $6 million to $7 million invested as seed capital in products for those businesses. As Roger said, they are in their startup phase therefore they need product and they have to build a track record to make their case with the various consultants and gatekeepers. And that is about the dollars we have invested as of December 31.

And then is the majority of the loss there in that line item unrealized losses as opposed to a reversal of performance fees or anything like that?

The vast majority of those numbers is (inaudible) on the seed capital positions.

Finally, in terms of the compensation, if I look at the pro forma adjustments it looks like you guys actually added in additional comp for the adjustment factor. Was there a reversal of prior expenses relating to the new hires in 2007?

Let me try to answer that question. If I'm not 100% on point maybe you can clarify. We have significant costs in the fourth quarter for the new hires and that is a function of the fact that this is the first quarter where we have all of the partners or the expense associated with all the partners coming through and is I said before the timing of when we have to recognize specific expenses for individual partners is a function of their stock and the transition -- the cost of transitioning them from their old compensation programs. So it's about $15 million for the quarter for the new partners.

Okay, I guess I'm just looking at the A6 I'm looking at the pro forma adjustments and I see the employee comp and benefits actually being positive $2.2 million and if I kind of look at the full year numbers the pro forma adjustments typically excluded that figure or excluded compensation expenses.

I'm sorry, I am on the right Page now. Thanks for clarifying. That is just a correction from a prior quarter. As we have said we have been embarked on a number of activities to eliminate our material weaknesses and during the fourth quarter one of the projects identified that $2 million item.

There are no further questions. I would like to turn the floor back over to management for closing remarks.

Thank you all for joining us. I hope it was clear and have a good day.

Thank you. This does conclude today's Evercore Partners fourth-quarter and full-year 2007 financial results conference call. You may now disconnect.