Evercore Inc (EVR) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, thanks for standing by, welcome to the Evercore Partners full year and fourth quarter 2008 financial results conference call. During today's presentation all participants are in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, February 5.

I would 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 fourth quarter and full year 2008 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'll open the call up for questions.

Earlier this morning we issued a press release announcing Evercore's fourth quarter and full year 2008 financial results. The company's presentation today is complimentary to that press release which is available on our website at www.Evercore.com. This conference call is being web cast live on the Investor Relations section of our 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 can cause actual outcomes to differ materially from those indicated in those statements. These factors include but are not limited to those discussed with Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on 10-Q, current reports on Form 8K.

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 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 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. We continue to believe that it is important to evaluate Evercore's performance on an annual basis, and as we 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'd now like to turn the call over to Roger for a review of our 2008 results.

Good morning, everyone. For Evercore, 2008 was a rather a ironic year. At one level we saw the worst financial market crisis, as you all know, since the 1930s. All of us are deeply familiar with all of the parameters of that. It was the most difficult business environment, speaking for myself, which I've ever experienced. And our results reflect that as everyone else's do. At another level, Evercore strengthened itself more in 2008 than in any other of our 13 years of existence. And we are poised for strong results, quite strong results, when the financial market environment begins to stabilize.

Let me begin by dealing with the numbers themselves. Here are our adjusted pro forma results, and all of you know who follow us, that's the way we've always measured ourselves since the initial public offering. 2008 revenues essentially $200 million, net income $400 million, earnings per share $0.12. These compare to 2007 revenues, net income and earnings per share of 320 million, 50 million and $1.56 per share for 2007; 2007, of course, was our all-time record.

For the fourth quarter, just ended, revenues were 35 million. We incurred a loss of 8.5 million and that translates into $0.25 per share loss. These numbers compare to 2007's fourth quarter which was our all-time best, revenues at 94 million, and income of 9.3 million and earnings per share of $0.28. Having laid those out and there are more details in the press release, I want to say that 2008 was a poor year. The fourth quarter was especially difficult, and we are severely dissatisfied with these results. I don't want to make any bones about that. But they did occur, of course, against the extraordinary backdrop of this financial crisis. And let me point out one particular factor which affected us.

US M&A volume, in dollars fell 42% year-over-year, that's '08 against '07. And the volume of transactions exceeding a billion in value, which is particularly relevant to Evercore, because that's our strength, fell 50% year-over-year. On a global basis the declines were comparable. And it's quite interesting you can see that the decline in our revenue quite closely track the decline in M&A volume. US M&A volume as a whole fell 42%, our revenue fell 39% for the year.

Now, that revenue performance on our part was essentially align with similar firms. And to illustrate that, here is the year-over-year revenue declines for these firms. Ours were down 39%, Greenhill's were down 41. That is the closest comparison. Lazard's were down 32, Morgan Stanley 32 and Goldman-Sachs 37 . You can see that the revenue performance of these organizations was essentially the same.

Let me say a word about what I mean by having strengthened ourselves more in 2008 than any other year. Number one, we had a record number of fee-paying clients in 2008, and a record of signed engagements. Number two, our restructuring business, which we have been working hard to build at a record year and we'll have another record year in 2009, in my judgment, it moves into the top five, we think, in that business, which has been a long-term goal of ours, with very large assignments like General Motors, [Lion del Bezel] , [Cirrus] XM, CIT and the like. We're proud of how much progress we made there and of course our group in the restructuring area is in much larger than it has ever been and we are continuing to invest in it and add to it. We advised on two of the largest transactions of 2008 as Evercore typically does. The Time Warner Cable spin off and the sale of EDS to Hewlett-Packard , for example.

We also began 2009 with a bang by advising on the proposed $68 billion merger of Wyeth into Pfizer, the only boutique involved. And that wasn't the largest US merger since Evercore advised AT&T of the $90 billion Bell South deal in 2006. By the way, I should say Evercore has advised now on two of the four largest mergers in the United States over the past 10 years. I might also add that our strategy of recruiting new partners to the advisory side is working. The Wyeth transaction was sourced by a partner who joined us in 2007, one of our largest restructuring assignment [Lion del Bezel] also was sourced by a partner who joined us in 2007. So the strategy of adding partners and building the earnings capacity of the firm is being realized through situations like these that's working.

We did add six new partners in 2008 in line with that strategy, five on the advisory side and one on the investing side. Les Fabuss, who had been Vice Chairman of Lehman Brothers in investment banking Dan [Sellantano] and [Kazi] [Fasoll], both partners in our restructuring group. Dan from Bear Sternes and Kazi from Miller (inaudible) Jed Sherwindt who had been global head of software banking at Citigroup. Robert Gillespie who had been Vice Chairman of UBS and who is based in London as he had for UBS and Chip Newton on the private equity side of Evercore who had been a partner in [Pursius]. And this continues, I might say, our strategy of hiring strictly straight A people.

We further globalized the firm in 2008. First of all, Evercore Mexico had a record year. Extraordinarily good performance. We expanded our alliance with Mizuho in Japan, working on a very large mandate there right now. We entered Brazil through an alliance with the G5 group there. And we will be announcing a new partnership for China.

Further, we met our goal, a credit to Bob Walsh of reducing our non-comp expenses by $12 million year-over-year and we will reduce them further in 2010. That's a commitment. We completed the year with a record cash position, so we have more flexibility from a financial point of view than we've ever had. And we took several key steps towards our goal of better balancing the firm between advising and investing, and one level, as I'll say in a moment, the P&L doesn't reflect that. But at another level the way the firm is headed, very much does. We launched Evercore Wealth Management headed by Jeff Mar the former President of US Trust and he has recruited a large team so far of portfolio managers and wealth planners. We're very optimistic about the outlook for that business. This is just an excellent time to be entering the wealth management business particularly with the Evercore brand and the strength of the Evercore brand.

We nearly doubled the size of Evercore Asset Management by adding another equity management team to it. We completed the second private equity fund in Mexico, Evercore Capital Partners Mexico 2. So from a strategic and long-term point of view, we accomplished more in our view in 2008 than in any other year we've had. But we also have a couple of key weaknesses. And there is no point in sugar-coating them. For the moment our investing businesses taken together, are unprofitable and they were substantially unprofitable in 2008 as the breakdowns in our press release indicate.

We loss 23 million on an adjusted pro forma basis, and that's a big number. That reflects the fact that we're between funds on Evercore Capital Partners in the US, it reflects we're in the start-up mode on a series of these businesses, like Evercore Wealth Management, like High-View, Pan-Asset Management in the UK and so forth. And we're in transition. I've said it before, though, and I'll repeat it here, we expect these losses to narrow in 2009 and to be profit -- and we expect Evercore to be profitable in the investment management business in 2010. And that's a commitment.

The other piece of bad news, we have a disappointing year in Europe, and we were unprofitable there. I must say that was unexpected because we had experienced three consecutive excellent years there and we have a great team there. But a series of large projects just didn't make it across the finish line and we had quite a weak top line in Europe. I don't expect that to be the case again in 2010 and we have a good backlog there -- in 2009, I don't expect it to be the case. In 2008, was a disappointment.

Finally, let me close by saying we don't give guidance, of course, and obvious question is whether 2009 will be better than 2008. I don't know the answer to that. I believe that it can be. Evercore will make progress on its expense structure and other strategic initiatives in 2009 and the firm will be stronger. It's too early to say how that will translate into our P&L. But if you believe, for example, that 2010 will see a return to relative normalcy, as I do, we should at that point be on a sharp upward track and headed toward record performance. So on that note I'll stop and we will be happy to take any questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Thank you. Our first question comes from Ken Worthington from JP Morgan, please go ahead.

Good morning, this is Funda Akarsu for Ken Worthington. It seems like we're starting to see the pipeline build for M&A even though there are not really enough data points. In our opinion has sellers accepted the really reality of lower offer prices and should the pipeline for deals continue to increase?

My personal view that overall M&A volume will be somewhat higher in 2009 than 2008. Evercore, for example, has already done more volume, I believe in 2009 than we did in 2008 between Pfizer-Wyeth and the [Switch-wry-Orchard Hathaway] deal announced this morning. which we advised with (inaudible). So we're already ahead of last year in term of our total volume, and obviously it's the first week of February. Evercore will probably have one of its pretty good years from that point of view. I can't really answer your question as to whether sellers have accepted the lower prices. I think it's too soon to judge that as to whether that's a factor that is pervasive and that truly applies across the board. I think it is too soon to say.

Okay. Separately out of the crowding out of strategic deals the past few years, is there any merit to the theory that strategic deals will come back to the market more quickly in this M&A cycle relative to past cycles, because they had been crowded out by financial sponsors over the past few years?

Well, here is how I would answer that question. I think the composition of M&A, yes, will be tilted more to strategic deals as compared to financial investor-driven deals in 2009, as I believe it was in 2008. But that's different than saying the strategic deals will be at a high level by historical standards. I don't know the answer to that. The mix will be, as you say, whether the total is at a high level, I don't know.

Okay. Thank you for taking my questions.

Thank you, the next question comes from the line of Devin Ryan with Sandler O'Neill, please go ahead.

Good morning.

Good morning.

So how do you think about the trade-off between opportunity to hire in this environment versus the additional drag on earnings in the near-term? As these hires ramp up production and particularly given just what may be continue to be a pretty challenging revenue environment just overall.

Well, we're setting this firm up so that in the 2010-2011 period, I'll be conservative, 2011, we have all-time records across the board. That is my goal as CEO, I believe we will achieve it. We will continue to invest in our advisory business which is a great business we're the leader in the us. If you look at the cumulative totals 2000 through the present, we have about a 1.5 -- 1.5 X lead over the next largest firm, we have done about 40 to 50% more volume than the next largest boutiques according to Thomson Financial. Evercore car is the strongest boutique in the United States. There is just no getting around it. We have been the leader, I should say, five of the last six years, according to Thomson Financial, the number one rank firm. So the US advisory business, and we believe we can replicate that over time in key global markets outside the US, is a great business, it requires no capital, and it's extremely high margin, and the barriers to entry which to some people look low are actually quite high. It is a fantastic business. It has always been a fantastic business. I personally have been in it now about 20 years. So we're going to keep investing in it and we're going to recruit further in 2009. Exactly how many partners we add is too soon to say but we will be definitely continuing to recruit in 2009 and invest in this business, because it is a great business. And when -- and when we get to 2010, 2011, it's going to be going like gang busters.

This question gets asked about every quarter but how should we think about compensation expense going forward in light of your comments and if also you have any comments with regard to the current administration, if you think this would have any impact on your firm?

Let us take your second question, I don't have any comments on executive pay. My broader comment would be, and this is not related to your questions. Of course, the competitive landscape has changed dramatically in the past year and a half, year and two-thirds. If you just look at a little chart, beginning of 2007, the number of competitors for Evercore and then right now the number has gone down by 30, 40%. We all know what's happened. Lehman, Bear, Merrill, gone. The large banking firms becoming semi-nationalized. Goldman Sachs and Morgan Stanley turning themselves into bank holding companies with attendant changes in balance sheets and their earnings power and their ability to keep people and so forth. So the competitive landscape is much more favorable to us and other firms like us.

Now, in comp, I like our comp ratio to be lower. It's too high. I take my hat off to other firms which have done a better job than we have on comp. We are handicapped by the fact, that as I said, our investment management business is unprofitable so our comp ratio is (inaudible) percent. Small business, it really distorts the firm-wide comp, and also Europe was unprofitable. So we had a distorted comp ratio there. If you look at what our comp ratio would have been without the new partners we added in 2007, 2008, it would have been about 53% in the advisory business. And, you know, that is about right. Little high, but that is about right. But we're committed to getting it down, and I certainly hope that 2009 our comp ratio will be better than it was in 2008 because 72% of the shares are held by Evercore. I'm the largest employee shareholder myself, and our goal is to make it work for the shareholders.

Okay. That's helpful. And then just finally here with restructuring activity clearly picking up significantly, it's obviously tough on the outside, I really get a sense of the traction that you are making or just how large an opportunity it is since a lot of the deals are not disclosed and you don't break them out from revenues. So is there any way you can at least give us some sense of what percentage of maybe the deals you're working on is restructuring assignments or anything else qualitative that can help us think about this opportunity for you guys.

I'm not going to break that down. That is a slippery slope . You get into a lot of trouble doing that. I would say, A, we had a record year in 2009. B, I'm sure on our backlog -- we had a record year in 2008. I'm sure based on our backlog we'll have a record here in 2009. Some of the assignments I mentioned, General Motors, [Lion del Bezel] [Cirrus] XM, CIT, [Trilogy], [Harrah], these are big ones, classic Evercore, very large ones. As I say, I think we moved into the top five in that business. It is hard to say. And our goal is to get into the top three. That is also a great business. We have a terrific team of people there. Four partners there, 22 professionals I think as a whole, and we're going to be adding more of them so our group will expand in 2009. And we will -- this is just a very good business. It is a boutique-only business, as I think you know. The large firms don't compete in it. In order of market share Lazard, Blackstone, Rothschild, [Miller] Evercore, so it is just boutiques. And we like the business a great deal. We have a great team of people and investing in them and supporting them.

Okay. Thanks for taking my questions .

Sure, thank you.

Thank you. As a reminder, if you have a question, please press the star followed by the one on your touch-tone phone. If you would like to withdraw your question, please press the star followed by the 2. Our text question comes from the line of Joel Jeffrey with KBW, please go ahead.

Good morning.

Good morning.

Quick question. Most of my questions have been asked already, but in term in expansion in the M&A area, are there any particular new verticals you guys are looking at?

Yes, there are. We would like to expand our capacity in financial institutions banking. We would like to expand our capacity in oil and gas. We would like to expand our capacity in transportation. To name three. And we are looking at trying to execute on those in 2009. There's others, too, but I'll use those as example.

Okay. And just going back to your comments before that you advised [Swiss] on the Berkshire deal. Were you the only advisor to [Swiss] on that?

Yes.

Great. Thanks so much.

Thank you . The next question comes from the line of Roger Freeman from Barclays Capital.

Good Morning.

Nice to talk to you, Roger, how are you.

Good. Just to come back to sort of comp and related questions. I think you might have given a number that I missed. Like maybe an adjusted comp to revenue ratio and advisory, excluding people hired you're comping that haven't brought revenues in -- from the recent hires. I'm just trying to get a sense of sort of what the -- what the overhead you're essentially carrying for people you expect to generate numbers going forward.

The numbers I use is this, we look at this about a thousand different ways because I don't like our comp ratio. If you take out the partners we added in 2007 and 2008, our comp ratio on the advisory side even including London and the problem we had there in 2008, would have been 53%. Now, let me hastily say that is not an entirely fair way to look at it because we always said you add partners in one year and for other reasons they can't show up until mid-year. They can't close deals or hard to in that one year, so typically you have the costs in year run and revenue ramp-up beyond that. Of course, for the 2007 class, Roger, as you well know, they came, they joined the firm in effect just as the greatest hurricane in finance since the '30s broke upon us, and it is always hard to perform in 2008. So that's the way I looked at it is one way to look at it. You can say, wait a second, you might want to put aside the cost of the first year, but then they should be added in. We could debate that. I concede that is a fair possible critique. But that's what I said.

Okay. But that 53% I thought in the release that was adjusted for stock comp, right?

That's right.

But essentially most of that stock comp would have been brought to new folks you brought on, is that the way to think about that?

Yes.

All right. And let me -- of the -- of the--

Roger, you can see that our comp expense as a whole, in absolute dollars went down quite a bit. Of course it does in a business like this.

As you would expect. I was just getting at it. At least in the fourth quarter it was 76% the advisory business, and I figured that some of this was going on. Let me ask you this, of the six senior hires last year, how many actually have guarantees for '09? Are you paying maybe in restructuring guarantees for forward years?

Well, I don't want to get into that level of detail but I would say to you this. Our policy, and you can never be perfect on this, is that we don't give guarantees beyond one year. Of course, it's not true that we've never done it, but our policy right now, and our policy in 2008, is that we make ever effort to avoid that, so as we're recruiting right now, and we have a lot going on, because it is the greatest recruiting opportunity of all time, I mean that, we're not talking to people about guarantees extending beyond one year.

Right. So, yes, because I'm just trying to figure out the leverage here because on the one hand it was a fantastic opportunity and a lot of folks and larger firms are either losing jobs or looking to get out from things they can't control. On the other hand, I would imagine your peers and you are competing for the same folks. I'm just wondering it feels like there might be a small job actual competitive job market in this part of the industry. Is that fair to say?

No, I don't think so, Roger. It's a good question, but I'm sure that Greenhill and Center View, [Mullus] I'll say this, Lazard, we're getting just flooded with inquiries from senior and high-quality people. I mean to say there is a brain drain going on of the large firms is to understate it. But let me come back to your question because I want to give a little better answer. Of all the partners we hired in 2007 and 2008, there is only one that has a guarantee for 2009. But if you give someone some equity, as you know, that amortizes over the vesting period.

Yes.

So in terms of a guarantee, meaning cash, there is only one who has a guarantee for 2009 of the class of '08, and none of the class of '07.

Got it. That is helpful.

When you look at the total comp, which includes stock based comp, there is that amortization.

Right. Okay. Just maybe shifting gears a little bit. So in terms of the mix, right restructuring versus advisory, maybe from a staffing perspective, I know there were some shifts you were doing on the lower levels. In your advisory business can you say what percentage of employees are focussed on restructuring versus a year ago?

Well, rough number, Roger, this is really not science, because I haven't -- I don't have the numbers in front of me, and, you know, just think 25% and rising -- sorry, 20% and rising.

Got it. Okay. And I guess maybe just one big picture question. So, if you sort of think about the outlook going forward for M&A, when we see what is going on in capital markets, High Grade had a strong month in February, seems to be some incremental activity on the equity front, do you think that from a financing perspective is the picture looking a little better maybe for the sort of the best companies, the higher-tier names that you would typically advise?

I would say a little tiny bit better. You see Pfizer got 22 .5 billion of bank commitments. (inaudible) , Roach had a substantial, and [Enbeav] , the same one, AB. It's, somewhat better. But it's -- it's like on a scale of one to 20 an improvement of 1.5.

I mean, it's fair to say that the financing constraints are probably the biggest inhibitors, still, versus just the issue of low stock prices and sellers not wanting to sell out at these levels? Where do you think that balance is right now?

I think it's about very, very roughly, Roger, 50-50. When you look at -- look at the market. I mean, the market is flirting with its low, right? And I mean flirting with its cyclical low. So the only sellers that are motivated are sellers that have to sell. Or, and I believe you'll see more of this, or those that are faced, of course, with hostile, I think there are going to be more hostile.

Which industries do you think have the most potential for activity going, later this year?

I think for 2009 you're going to continue to see a great deal of activity in Fig. I think they'll continue to be pretty considerable activity in energy. And all -- energy and power.

Okay. All right. Thanks a lot.

Those two strike me off the top of my head as likely to be active.

Okay. Appreciate it.

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

Thank you, all, for joining us this morning. We appreciate it. We'll talk to you all soon.

Thank you. This concludes today's Evercore Partners full year and fourth quarter 2008 financial results conference call. You may now disconnect.