Evercore Inc (EVR) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Partners third-quarter 2008 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, October 30.

I would now like to turn the conference over to your host, Evercore Partners' Chief Financial Officer, Robert Walsh. Please go ahead, sir.

Good morning, and thank you for joining us today for Evercore's third-quarter 2008 financial results conference call. I'm Bob Walsh, Evercore's Chief Financial Officer, and joining me on the call today is Roger Altman, Chairman and Chief Executive Officer. After our prepared remarks we will open up the call for questions.

Earlier this morning, we issued a press release announcing Evercore's third-quarter 2008 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 for 30 days.

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 different 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 that the Company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated, we will be discussing adjusted pro forma 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, was posted on our website. We will refrain from repeating the information included in the press release and focus instead on the key opportunities, challenges and changes in our business.

We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As noted previously, our results for any particular quarter or influenced by the timing of transaction closings, both in the advisory and investment management sides of our business.

I'll now turn it over to Roger for a review of the third-quarter highlights and results.

Good morning, everybody. Let me start with the review of the actual results for the third quarter and for the nine months. Revenues were, in round numbers, $57 million for the quarter. That represents a 5.5% decline versus the second quarter of '08 and a 23% decline compared to the comparable quarter of 2007.

I want to stop and say that under present circumstances in the financial markets and in Wall Street in general, which we all know are the worst in memory, those results, we think, are comparatively good.

For the nine months, revenues were $161.5 million. That represents a 28% decline versus the nine months of 2007.

Adjusted net income for the quarter which just ended was $2.3 million. That is a 61% decline versus the second quarter of this year, second quarter of '08, and a 71% decline versus the third quarter of '07.

Adjusted earnings per share was $0.07 per share, which is a 61% decline versus the second quarter of '08 and a 77% decline versus the second quarter of 2007 --I'm sorry, 77% decline year-over-year quarter. Excuse me.

Adjusted earnings per share for the nine months was $0.37, which is a 72% decline versus the nine months of 2007.

As the press release points out, on a GAAP basis, which we do not use but we do report it, our quarterly net income was a loss of $500,000 related to a series of accounting adjustments, which translates into $0.04 a share, negative $0.04 a share.

I want to point out that for the first time we are inaugurating line-of-business reporting, and you can see in our press release that we provide for the first time P&L results for the advisory side of the business and P&L results for the investment management side of the business. Essentially what it shows is that for the quarter, the advisory side of the firm earned $7 million on an adjusted net income basis and the investment management side of the business lost $3 million. I think you know that the investment side of the business is in transition and I'll come back to that. So let me put these results in perspective.

Yes, our revenues for this recent quarter were down 5.5% sequentially and 23% year over year but that is a smaller decline than some of our relevant peers that we all compare ourselves to. Also, the environment essentially speaks for itself. It is the worst financial market crisis since 1933. All of us know what has happened over the past 16 to 17 months. All of us know the gravity of the situation. All of us know the emergency actions which the fiscal and monetary authorities have taken around the world. All of us know how unprecedented they are. And all of us know that this crisis has engulfed the world.

I think we would all agree that many of the events we've seen, especially in the last three or four months, border on the unimaginable in a historical context. The Lehman, AIG, Fannie Mae and Freddie Mac events, the Fed supporting the commercial paper market and money market funds, the advent of the TARP. The TARP investing already in more than 20 banks and the announcement it is going to invest in "thousands" of them according to Treasury Secretary, Paulson, and so forth.

For our industry in particular, this has been the most difficult period in anyone's lifetime for completing merger transactions. It has also been the very difficult period in lots of other ways but I'm pointing that one out. That's because we have seen unprecedented share price declines and unprecedented share price volatility. And so sellers have a hard time selling at prices which have fallen so sharply and so recently. And buyers have a hard time playing the premiums which would result from using rolling averages of share prices because against spot prices, those premiums are so high.

You also have an obvious lack of acquisition financing, high yield volume on a global basis is literally down 72% year over year. We have the arrival of what undoubtedly will be a very long and very sharp recession. Most people saying the worst recession since the '30s. All of that has caused sharply lower M&A volume. There has been in round numbers a 50% decline globally in transactions over $1 billion, where Evercore particularly specializes year over year. So that is the environment and it's a difficult one.

But despite that, we are strengthening our franchise and laying the foundation for a strong performance when financial markets begin to truly recover. And I want to state emphatically that I actually am quite optimistic about the medium and longer-term earnings, market share and other performance of this organization.

I would just remind everyone we have three strategic objectives. I mention them every time we have a call like this or every time we do an investor presentation. They are, number one, to better balance the firm between advising and investing activities. Number two, to continue to globalize Evercore. And number three, to continue to take steps, especially on the recruiting side, to strengthen the core business of the firm, which is our market-leading advisory franchise.

Let me just speak briefly to each of these. On the first goal of better balancing the firm, we announced this past quarter that we committed $150 million, that's capital which we expect to be drawn over about four years, to our strategic partnership with HighView Investment Group. This is the firm which has been organized, founded and announced by Ralph Schlosstein, who is a co-founder and for 19 years the President of BlackRock. Ralph and I have been colleagues for over thirty years in various ventures, beginning in the US Treasury in the late '70s. HighView is a firm that will seek to acquire a minority interest in independent alternative asset managers. We have been joined in this investment by a couple of other extraordinarily prominent investors, together, of course, with Ralph and his management team. And we are extraordinarily pleased to have them a founding shareholder in this exciting business.

We also hired Chip Newton, a former partner at Perseus. That completes the promised partner recruiting effort at Evercore Capital Partners. The team there is now complete. We have resumed capital raising and we are in the market for Evercore Capital Partners III. I must say I personally returned last Thursday from five days in the Middle East in the context of raising that fund.

Second, on the globalization front, we entered into an alliance with the G5 group in Brazil, extending our reach there from our already very strong platform in Mexico, which parenthetically has had an extremely good year this year. And we are working assiduously towards a strategy for China. And when we have something to announce there, we will, but we're spending quite a bit of time on that.

As far as the third objective is concerned, continuing to strengthen our core business, we hired two additional advisory partners this past quarter. Les Fabuss, the former Vice Chairman of investment banking at Lehman Brothers, who has a long specialized in aerospace and defense; and Jed Sherwindt, former head of the software investment banking group at Citigroup, one of the best technology bankers in the business. And those are two very strong hires. And they further strengthen our advisory platform. We're going to continue to take advantage of this extraordinary recruiting opportunity presented by the turmoil, and we are going to continue to add people of that quality, as we can.

I would also point out that we closed our transaction with Mizuho, which provided us with $120 million of strategic capital to grow our business. Also strengthens our alliance in Japan with Mizuho. I'm going over there in about ten days myself. And we are going to be using that capital primarily to finance a series of initiatives on the investing side of the firm. We will have additional announcements in the fourth quarter, which you will see. So I think we are continuing to make very measured progress against those three strategic objectives.

Two other observations before I stop and open this up for questions. One on our backlog. Backlog actually is quite good. It's difficult as I said to actually execute transactions at this moment but I would describe our backlog as quite solid. The restructuring side of the firm is up strongly. We continue to add to that team and we will have an announcement there shortly in that regard. But I am very pleased with the progress of our restructuring business which is at a historic high now and I expect to continue to see that move upward. This next couple of years is going to be a very strong period for the restructuring business, which as you all know is a boutique-only business.

On expenses, finally, Bob Walsh is doing a wonderful job on the non-comp expense side. We're hitting our targets, as we have long promised to do. Non-comp expenses were down again quarter over quarter, to Bob's credit.

Compensation expense was up and that is very simple. There are 204 people in our advisory business today, all total human beings. That compares to 172 for the same period a year ago, in other words, the end of the third quarter a year ago. And so while compensation per capita this year may end up being down, compensation in absolute terms is up because we have more people and we're going to continue to add people to take advantage of this environment and to lay the foundation for what I think will be excellent performance after these prices have begin to ameliorate itself.

So with those comments, I think I'll stop and open this up to questions which any of you may have and thank you again for listening.

(Operator Instructions). Roger Freeman, Barclays Capital.

Good morning, Roger and Bob. I guess first of all with respect to the backlog, how much of that is would you say is restructuring at this point or let's say of the executable backlog?

Roger, first of all, it is good to hear from you. None of us has had the world's easiest time in recent months. I know that's true for the former senior members of Lehman Brothers, and you know I'm an alumnus of Lehman Brothers. So I'm glad to hear from you and I wish you well.

Well of course, we're not going to break out our backlog specifically between M&A and advisory. I think all I would say is the percentage of our backlog that is represented by restructuring is higher than it has been at any point since the founding of the firm. It is not, however, anywhere near a majority. And I think I would just leave it at that.

It is obvious why restructuring is up. The restructuring business is countercyclical -- the restructuring cycle is countercyclical to the M&A cycle. And for all of the secular reasons why M&A is down now those same reasons are why restructuring is up. And you've seen that chart we've used many times on presentations showing the long-term trends in the two businesses. They are almost perfectly countercyclical.

Right, yes. Do you think your position to get your fair share of this -- obviously you've been adding. You hired a head of restructuring from Bear and it sounds like you've got another one coming. How do you think, relative to the organization, your size there for the opportunity, which we all know is going to be fairly large?

Well, the two ways -- it's a good question, and there are two ways we're dealing with that. First, we are adding partners. And we are going to continue to do that, albeit very selectively, but continue to do that.

Second, we are adding at the levels just below partner. And third, we are also redeploying some people -- I don't want to indicate that it's some mass movement because it's not. But we're redeploying some people from -- and that would be at the middle and junior levels from the M&A side of the firm to the restructuring side of the firm. At the partner level, you really can't do that. It's an extremely technical business, as you know, but at the middle and junior levels, you can do that.

So the resources that we have deployed in the restructuring side of the business are larger than they look. And I'm just optimistic about A, the volume and B, our marketshare, because we're really doing well from the point of view of incoming business. And our medium-term goal, which I would describe as say three years is to be in the top three in that business. And I'm very intent that we achieve that.

Got it, okay. With respect to your current announced backlog, how much of that do you think is at risk of not closing due to inability to finance or changing the financing terms, etc.?

Hang on a sec; I'm looking at Tim LaLonde, who is our backlog maintenance.

I think what I would say there, it's practically impossible for us to give you a percentage of the backlog that's at risk. I think what we would say though is that the current backlog is, as Roger said, very good. Whether that translates into very good results, we'll see.

It is clearly the case that deals are more difficult to close and they're taking longer to close and in some cases they've kind of been put on hold until the financing markets return. And that's probably about all we can say.

Okay. That's fair. And then just on last one I guess. Can you talk a little bit about where you're having most of your M&A discussions, preferably industry specific. Where are most of the opportunities?

And then I guess to that point, you have a pretty good financials practice then presumably there's going to be plenty of M&A to come in the banking space. Do you think you're in a position to participate in that?

Well, first of all, there's a lot of classic, strategic to strategic backlog in our firm and generally out there. And what is needed is a period of stability in share prices which allows the disequilibrium that we see right now to rectify itself. As I said in my comments and maybe I should punch it up. The precise problem right now is that share prices fell so far so fast, and the emphasis I think should be on the second, so fast, that you have the following situation.

So if the two companies were circling each other and the target company or the smaller company's share price was I will pick a round number was $20, and it had been in the $20's for some time, all of a sudden, it's some number like $12 or something like that. And if the thought had been earlier that the fair deal price would have been say, $25, $27, well you can't put $25 to $27 on top of $12, because you are paying 100% market premium. And most corporations just aren't prepared to try to explain why they are paying 100% market premium.

On the other hand, the target company, assuming it's a solid business, says to itself, I am not going to just because our share price fell so sharply in the last two months, enter into a transaction at some price like $16 when the average share price the last six months is $20. There is you have it, right there, is what I got disequilibrium.

It needs, either A, a period of time at the lower price for a base to be established, which then puts premium in more justifiable territory, or a recovery. One or the other. It will resolve itself because either one will happen or the other will happen. But at the moment, the share price falls have been so recent and so sharp that it's produced -- it's put all those types of things on hold. Now --

You kind of said that in the past, right, there's sort of a twelve-month period of people -- executives think about their share price. And once you get far enough out, they kind of forget where the price was.

Well also you have, to be honest, you have a fairness issue. We render a lot of fairness opinions and it is not easy to think about how you would render a fairness opinion when the average share price for the past say six months or nine months was $20 and someone is offering $16, which is a nice premium over the current price, but on a rolling -- medium-term, rolling average basis, is not a good price. That's a very difficult situation to render a fairness opinion in.

Every situation is different but it's not easy, Roger, to be able to do that. So if a Board of Directors says I would not proceed at minimum without a fairness opinion, a lot of firms like us would say you need to wait because rendering a fairness opinion under those circumstances can't be done.

Right, okay, very interesting.

You asked the question about where the backlog is. I would just say it's particularly good in the strategic to strategic area, because financing isn't an issue there. A lot of corporations which generate cash by nature of their business are of course coming to the conclusion that this next year, give or take, may be one of the best acquisition opportunities of a lifetime. And I think you're going to see quite a few efforts to make acquisitions on the part of financially strong companies.

And you may also see -- I don't know this, Roger, I'm not sure. But you may also see a number of hostile offers, because of the difficulty of getting a negotiated deal done under the pricing circumstances I referred to. I wouldn't be surprised to see that. You saw one last week. So for those who need financing, pretty tough to get deals done. For those that don't, a really good opportunity.

Thanks a lot for your comments.

Bill Tanona, Goldman, Sachs.

Good morning, guys. You guys mentioned this a little bit in terms of the new hires and obviously you guys are not done in terms of what you're going to do for new hires, and I can understand that. And I think in this environment, given all the dislocation, it's probably a really, really ripe environment for you guys to go out there and acquire some good talent in this environment.

So just wanted to get an updated thought from you guys in terms of how we should be thinking about that new hire expectation as we head into kind of next year. Should it be somewhere in between this year and last year, just given how ripe it is? Or how should we be thinking about that in the context of how many new hires you would anticipate making?

Well, let me just give you some facts. As you may remember, we added eight partners in 2007. To date, we have added four in 2008. That will not end up being the final number for 2008.

I honestly, I don't know what the final number will be because I basically believe in the old strategy that the deals never close until the check clears and the hire is never made until the appointment letter is signed. So, I don't know, but it will be more than four.

As far as 2009 is concerned, Bill, OUR approach is an opportunistic one in two ways. There are several sectors which we want to strengthen ourselves in. I'm happy to mention some of them. We want to be stronger in financial institutions even though we already have one of the leading practices on Wall Street and probably the single best practitioner in that entire field in Jane Wheeler.

We want to add to our coverage in health care, because we cover it extremely well with Francois Maisonrouge but it's a huge industry and there are sections we don't cover. Like, for example, devices.

We want to, if we could, initiate coverage of fields like transportation. And so it's opportunistic in a sense that there are some sectors and if we can see opportunities to hire vis-a-vis the sectors that are important to us, we want to do that.

It's also opportunistic in the sense that if I can use a sports metaphor, if a fantastic athlete presents himself or herself, we want to hire him or her. So, we don't actually have internally a goal for 2009. We don't have at the management committee level of our firm, a number.

The only other comment I would make is we are sticking with our quality standards that we have maintained since inception. I always like to say that we only hire AAA people. So, we are not going to deviate from that.

One of Evercore's great strengths is the, if I can use this term, elite nature of our partnership, and we would be very foolish to lower our standards even by a smidgen in that regard, and we won't do so. That's really all I can say because we don't have a number for 2009.

That was helpful just understanding how you're thinking about the business. I guess I would ask you in terms of how we should be thinking about the comp to net revenue ratio. Obviously, it's been running a little bit high here this year because of some of the new hires that you've made. Any type of updated guidance?

It's running high actually for two reasons, three reasons, three reasons. First, investment management side of the firm is in transition. As you saw in our line of business reporting, it's currently losing money. I said either at the last time we had our earnings call or at an investor presentation in between, I can't recall which. But I thought we would achieve a 25% of our profits from the investing side by 2011. I don't know whether this current terrible environment will slow that, but that's our goal. So that business is really in transition.

If you look at a chart on the lines of the -- on the units, Evercore's units within investment management say a few years ago and the units we have now, the number of units we have is like tripled. Because we have Evercore Capital Partners Mexico. We have Protego Casa de Bolsa, which is our fixed income asset business in Mexico. We have Evercore Asset Management. We have our HighView Investment. We have our Pan-Asset management business in the UK and so forth none of which that I just mentioned, did we have three years ago.

But these are all very new initiatives and the whole business is now unprofitable. So therefore the comp that's paid on the investment management side, obviously, is more than 100% ratio comps to revenue and therefore pulls down the firm -- or pulls down in the negative sense, actually it raises the firm's comp ratio as a whole. That's one reason.

Second reason is, we are in a period of weak revenue and yet we believe of course in paying our people what absolutely what it takes to reflect their performance and to retain them.

The third reason is, we are also still in a buildout mode in Europe and adding people and building ourselves out, and not at what I would call an equilibrium level in terms of that business having reached what you might call even major adolescence.

So, the comp to revenue ratio in Europe as we keep building it still has certain early-stage business characteristics there and it's higher than it is in the US and will be for a little bit longer. So those are the reasons that it's high for the firm. But to be really direct, I don't think comp to revenue ratios mean a lot in this environment. I don't think they mean much.

And we are focused on -- here is the worst environment since 1933. I'm quite pleased we're profitable. I'm quite pleased our revenues only declined by 5.5% quarter over quarter. I think that is pretty damn good. And we are saying to ourselves let's set this firm up so we have record performance at some point over the medium term and that's what we're doing.

Okay. And then on the non-comp side, you guys, obviously, as you mentioned made some pretty good strides there since last year. How should we be thinking about that? Is there still some further room for additional cost saves on the non comp side as we look ahead?

Bill, the way I would think about that is in the short term looking ahead to the rest of the year, we're very much on target to deliver the way we've been talking about all year.

As I look ahead to next year in our existing businesses, same story, if you will. We do see opportunities for cost reductions and we are working to be in a position to achieve those.

Counterbalancing that, as Roger just indicated, we are investing in a number of businesses. And as those are launched, they will cause increases in non compensation expenses. In this quarter, we highlighted about $300,000 of those costs. So, exactly where those two courses will shake out for 2009 is something that we're working and looking at very carefully right now. But I don't have a final expectation to look at for next year.

Okay, thank you.

Ken Worthington, JPMorgan.

Hi, you know, actually all my questions have been asked and answered and your presentation was pretty complete, so thank you very much.

Are you sure about that, Ken? You know I had a laundry list and you guys just ticked them off. So, I am fine. Thank you.

Well, I will take advantage of a question you didn't ask to make a point I meant to and forgot to make. And thank you for allowing me to do that.

So in terms of your very good question about whether this environment in general favors boutiques, which is the best question, Ken, that's been asked this morning, that you just asked, I would say that it obviously does. Why does it favor boutiques? Well A, our competition has diminished for all the obvious reasons in terms of the following dominoes in the environment. B, a number of the largest firms in the business are in transition and in some difficulty as they absorb a lot of losses, recapitalize themselves and deal with internal issues.

And the landscape that's going to emerge is one where you have a small number like two, like three gigantic, intergalactically gigantic firms, like JPMorgan and Bank of America and Citi. You have the middle layer, which is essentially gone -- Bear, Lehman, Merrill and then Morgan and Goldman transforming themselves into banks, and probably that transformation isn't finished. And then you have the boutiques.

I saw a chart yesterday which someone put together. Actually it was an investment management presentation of an endowment board that I'm on. And this very intelligent guy said here's what the structure of the financial services industry looked like as far as investment banking and related -- was two years ago. Here's what it is now. And the number of squares on the chart was down like 80%.

So, there is no question that these seismic changes favor boutiques, and we've been the market leader in the U.S. for the last several years. And we will certainly finish in the top two or three this year. And so, short-term, not a lot of pain here, but medium and long term absolutely favors us.

Great. I'm glad I thought of that question. Thank you so very much.

You're entirely welcome. Any more?

No. That's it for me. Thank you.

Thank you. There appear to be no questions at this time. I would now like to turn the floor back to Roger Altman for any closing comments.

Thank you all for joining us this morning. We appreciate it. All nice to talk to you all and we'll see you soon.

This concludes today's Evercore Partners' third-quarter 2008 financial results conference call. You may now disconnect.