Evercore Inc (EVR) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Evercore Partners first-quarter 2010 financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference call will we open for questions. (Operator Instructions). This conference call is being recorded today, Tuesday, April 20, 2010. I would now like to turn the conference over to your host, Evercore Partners' Chief Financial Officer Robert Walsh. Please go ahead, sir.

Thank you, operator. Good morning and thank you all for joining us today for Evercore's first-quarter 2010 financial results conference call. I'm Bob Walsh, Evercore's Chief Financial Officer, and joining me on the call today are Ralph Schlosstein, President and Chief Executive Officer, and Roger Altman, our Chairman. After our prepared remarks we will open the call for questions.

Earlier this morning we issued a press release announcing Evercore's first-quarter 2010 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 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 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 and 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 when 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 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 we've 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. With that I'll turn the call over to Ralph.

Thank you, Bob, and we want to welcome the three people who have chosen to listen to the Evercore call instead of the Goldman Sachs call. If we had a choice we might the on that one too.

We had another good quarter, we made progress both in many of our strategic objectives and our financial objectives. Revenues in the first quarter were strong, $85 million, that's a 68% increase versus the same quarter last year, and a 22% decrease from our very strong near record results in the fourth quarter. As we've cautioned many times, you can't judge this business on a quarter-by-quarter basis because, particularly in our advisory business, revenue production tends to be somewhat lumpy.

Advisory revenues were up 50% versus Q1 last year and off about 25% from our near record fourth quarter of last year. Investment management continued to make strong progress with revenues up over 500% versus the same quarter last year and up 26% versus the fourth quarter of last year. First-quarter net income was up about 475% versus the first quarter of last year, but down about 37% from near record results in the fourth quarter.

Our results reflect continued strength in our investment banking business and also great progress in our investment management business and they are affected to the tune of a couple cents a share negatively by a non-comp expense that we incurred as a result of the acquisitions that we announced in the first quarter of Trilantic and Atalanta Sosnoff. As all of you know, you now have two expense transaction costs in the quarter that they occur, legal accounting and other expenses.

Our margins improved significantly from the first quarter of 2009 to 22% on an operating basis. Our comp ratio for the first quarter was 59%, slightly higher than the fourth quarter of last year, but much better than the first quarter of 2009. Both margins and the comp ratio were a little bit less good than the fourth quarter due primarily to lower revenues on a linked-quarter basis and also due somewhat to the investments that we're making.

With that, let me turn it over to Roger who will talk about our advisory business and the advisory outlook, and then I'll talk about investment management and our growth initiatives.

Hi, everybody. First a word on the broad environment. Our point of view remains that in terms of mergers and acquisitions we are in the early part -- maybe the first quarter or first third -- of a classic long-term upswing.

Some of you might remember the chart we used to often use which went back over 30 years and showed that upswings in M&A tend to last five to seven years and downturns two to three years. And it's very clear to me that we're in the first portion of a classic upswing. And you can see that in terms of overall volume. For the first three months of the year announced M&A volumes are up both globally and the US -- [26]% globally, 28% in the US. Now those are against extremely depressed levels of a year ago, but that's consistent with being in the early phases of an up cycle.

Having said that, let me turn to Evercore. Our advisory revenues rose 48% to $71.3 million as compared to the first quarter of a year ago. I think that's the more relevant comparison because if you look back over the last few years typically for us and our competitors the fourth-quarter tends to be seasonally strong. Why is that? Because of course there's always a push to close deals by the fourth quarter.

So I think the relevant comparison, or a much better comparison at least, is year over year -- and that's one I must say I pay attention to. So we were up 48% year over year, we were down, as Ralph said, on the advisory side 28% from the fourth quarter of last year, but I think that's a bit apples to oranges.

The number of fee paying clients year over year up just a touch to 70. Average revenue per partner, it's a metric we look at very, very closely; we look at it on a rolling 12-month basis because you just can't measure it quarterly with any real relevance. On a rolling 12-month basis it rose to $8.6 million worldwide, that's up from $6.9 million last quarter, meaning rolling 12, and $6.1 million a year ago. That's an important measure.

We had 14 clients who paid us $1 million or more during the quarter, that compared to seven in the same category a year earlier. The international side of our advisory business was mixed, slightly improved for Europe, weaker in Mexico as conditions there were difficult. We did participate in our first underwriting during this quarter, that's a very important initiative for us which I'm sure Ralph will talk about, and he'll talk about the impact of that ramp up on our P&L.

From a comp ratio point of view on the advisory side 55.6, that's again improved from the level of a year ago which was 60. Strategically we made some very key hires in this quarter, four of them -- Marty Cicco, real estate (technical difficulty) launching a real estate banking business for us; Perk Hixon, metals and mining, that's a very strategic sector; Alejandro Reynoso in Mexico; and Richard Anthony who is coming to Evercore with his colleagues who put us into the fund raising business, his group we're calling the Private Funds Group.

So there are three new sectors that we launched in that quarter, real estate advisory, metals and mining advisory and private fundraising. And as you know, we care a great deal about expanding the number of verticals we have -- we cover; that's been a huge initiative for us ever since we went public and we pay a lot of attention to that.

A word on backlog -- our backlog is strong, it reflects the point I made about this cyclical upswing in M&A, and we feel good about the backlog. And I think on that note I'm going to hand it back to Ralph to talk about investment management and the rest of the firm.

Okay, thank you, Roger. We continue to make good progress in our investment management business, our early-stage businesses, which there are a number of them, aggregated assets under management in the first quarter of $5 billion. That's up about 13% from the fourth quarter and if we could continue to grow at that pace we'd be very happy obviously.

Fee-based revenues are up 15% from the fourth quarter and over 200% from the first quarter of last year. And the growth in revenues and in fee-based business reflects both the growth in assets under management and also an increase in advisory assignments in our fiduciary business.

I've said a number of times that the best leading indicator of future growth in AUM and revenues is investment performance and investment performance remains strong in most of our key products. So we really, at least at this point, feel that we will continue to progress as we have over the last few quarters in growing both assets under management and revenues.

We've said a number of times that -- and have set the objective internally of having our early-stage businesses be breakeven on a run rate basis by the end of this year so that they are a net contributor to operating income and margins next year. And we are on track at this point to achieving that objective.

We also in the first quarter had two very important growth initiatives in our investment management business. We announced and closed a strategic investment in Trilantic Capital Partners, which is a global mid-market private equity firm, its lineage is that it's the -- was Lehman Brothers' merchant banking business and was spun out of the Lehman estate and we are becoming a partner in their business.

And they have about $3.9 billion of assets under management and we believe that this acquisition or investment that we've made will do a number of attractive things for the firm in addition to the accretive nature of the acquisition itself. One of the things that both Trilantic and we anticipate and expect is that there will be some opportunities that we will uncover in our advisory business that will fit well with their investment parameters.

We also announced that we will acquire a 49% interest in a long only large-cap equity manager, Atalanta Sosnoff. We announced that in early March. That transaction is expected to close at the end of May. Atalanta Sosnoff had approximately $10.4 billion of assets under management at December 31, 2009.

On March 31 of this year they had grown to about $11.4 billion of assets under management and that growth was accounted for roughly half from market appreciation and half from net inflows that, given my experience in the money management business, it's certainly atypical rather than typical that flows would continue to be very strong in the midst of a somewhat change of ownership.

So we're very pleased with the team there, excited to have them join us. And we're obviously pleased with the performance since we announced that acquisition. And we've said any number of times that we are open-minded about investing in businesses that have strong repeatable investment performance, a good cultural fit and where the investors in those businesses remain significant owners of their own business.

And finally, we're very disciplined in making sure that all of our investment management expansion activities that are not organic, that are inorganic, are accretive to shareholders and both the Trilantic and Atalanta Sosnoff transactions meet that bill well.

Let me talk a little bit about our capital markets advisory and institutional equities business. As Roger indicated, we got our underwriting authority in early March, we completed our first underwriting assignment in the quarter. And we also vary significantly started to ramp up hiring.

We do have an application pending for our institutional equities business to both publish and distribute research and to sell and distribute equity securities. One can never predict when one gets regulatory approval, but our hope and expectation is that that will achieve -- be achieved by mid-year, although one never knows for certain.

We've built out a fair amount of the infrastructure in this business; one of the wonderful things about the institutional equities business today is that your team is almost all sales, research, sales trading, obviously you need compliance and a COO. But the middle and back office of these businesses can now be outsourced entirely.

We have made progress, as I indicated, in our hiring. We've hired a number of specialist salespeople both in the [FIG] and TMT sectors which are the two sectors we're going to focus on initially and we feel strongly that we need to have that distribution capability in place in order to attract the very top analysts. And we are in what we believe are the final discussions with a number of very, very high-quality analysts in the FIG and TMT sector that we believe will be materially additive to our business.

The cost or the investment that we're making in this business as we add additional people will increase somewhat in the second and third quarters. And obviously the revenue is dependent upon getting approval from FINRA to begin to publish and distribute research and to distribute equity securities. So we do expect that we will see a little bit more impact of this investment on our financials in the coming quarters.

Let me conclude by just talking a little bit more about the backlog as Roger did, he obviously indicated that we have a strong backlog consistent with our expectations of a consistent, although not V-shaped recovery, in M&A activity.

And I want to just repeat what Roger said about our business and the way we look at it is really on a year-by-year basis. And in the next several months we have a number of large fees and the timing of when those transactions close could affect revenues in any particular quarter that's upcoming. But as we have said, we feel good about the backlog and about the year as a whole. Bob, do you want to --?

Just a couple of points to wrap up. I'm sure, as everyone has noted, expenses are up only modestly on a trailing quarter basis, that's driven entirely by the transaction costs that Ralph mentioned. So we continue to be very focused on expenses and controlling their build up as we build out the new businesses. They are up significantly year over year but, as we've said in prior quarters, that's driven entirely by the build out of the investment management platform. So we'll continue to stay focused on these costs as the new businesses ramp up.

The tax rate is down modestly, that's driven by the changing mix of revenues as we continue to diversify the business. And then finally, you'll note that our liquidity position remains strong, we're confident that it will continue to do so and give us ample flexibility even after we close on Atalanta. And we were successful during the quarter in returning some meaningful value to our shareholders, both with some significant increase in treasury repurchases, as well as a sustained level of our dividend. So with that we'll open it up for questions.

(Operator Instructions). Ken Worthington, JPMorgan.

Hi, good morning. Maybe first for Roger. Can you talk about the recruiting environment and advisory today? And maybe just compare it to another kind of very strong environment like 2007. And I guess what I'm most interested in is your elevated reputation in the interest in Evercore and then also maybe the terms to hire, how that would compare to another more robust period of time?

Hi, Ken, how are you? There are -- I would say there are two primary cross currents or countervailing factors here at the moment in recruiting. One is the one you mentioned. As we all look around we see a lot of turmoil, a lot of firms don't have the reputations that they had three years ago. And Evercore, I think it's fair to say, is a rather -- is rather pure from the point of view of its brand and its reputation and we certainly intend to keep it that way.

So we're in a strong recruiting position from the point of view of what people think of as the quality of our firm. But the other trend is a number of firms that were almost out of business a couple of years ago have now turned very aggressive on hiring. And also at the bottom they compensated people with shares to a much greater degree than cash. So on the one hand they're very aggressive and on the other hand a lot of their senior people got more stock than they expected to get and of course all that stock is subject to vesting.

So I would describe the environment as healthy but no lay-up because of those factors. Now a couple of the hires we just made, like Marty Cicco and Perk Hixon, those are sectors, real estate and metals and mining, that we've been working on for literally two or three years. And it's always been Evercore's point of view, and I think it always will be, that if we can't find the right person we're going to wait until we do.

We first started having conversations with Marty Cicco, for example, I don't know -- about three or four years ago. So we like our hand, so to speak -- if I can use a card playing term -- on recruiting. But it's not -- it's not a hot knife through butter, Ken.

Perfect. That's exactly the color I was looking for. Maybe for Ralph. You're buying the interest in Atalanta Sosnoff?

Yes.

If possible, could you just further flesh out the merits of the investment? And then maybe discuss if there are any revenue synergies or cross marketing opportunities in the transaction or is it really just high-quality company being kind of run at an arms length from Evercore?

Well, I think our thesis is that, first of all, you cannot make money in the investment management business unless you own really high-quality companies. And synergies cannot make up for an absence of that. And Atalanta is a company that's been in business more than 20 years, their one, five, 10, 15 year track record is strong, one of the strongest that I've ever seen actually in the large-cap equities space, which is not an easy -- it's a pretty efficient market, it's not an easy space to consistently outperform.

And they have had a long track record of success, they've had a stable team who've worked together for a long period of time and they have a [deep] team that's excited about and engaged in -- excited about being engaged in the business for double-digit years to come. So all of those are the absolute and central ingredients of anything that we would do in the investment management business.

Our strategy in that business is a holding company strategy. I would say that our -- the firms in which we -- with whom we partner have some expectations that the brand and some of the senior people at Evercore will be helpful to them both in the reputation of their business and certainly among certain larger institutional investors.

But we're also very careful not to over promise in that regard because fundamentally we want to have great partnerships with our investors and with our investment management businesses. And I think it's always been our approach, whether it's with shareholders or with our partners, to under promise and over deliver.

Okay, thank you. And just so Bob doesn't feel left out. The European advisory business, I think Roger mentioned in his comments that there was improvement from last quarter. How is that business going? And I think one of the goals was to broaden out the hiring in Europe. I know it's kind of a sensitive question in a public forum, but any even modest flavor you can get us there would be helpful?

Let me respond to that and then Bob can talk about the facts. I would say that, first of all, the comments that Roger made about hiring generically are also true of Europe. And as we've said a number of times, we need to expand the number of partners, senior managing directors that we have there both on an industry basis and also to have more critical mass there.

That's been a focus of ours. We're in discussions with more than one senior person in Europe. But it's a little bit like any other hire or any transaction that's in the backlog but not announced yet. It's very binary; there's no such thing as an expected value, it's either yes or no. So it's a very high focus of ours and over the next year or two we would expect to have a much more substantial business in Europe. But there's nothing at this moment to announce.

And Ken, as you saw in our press release, one of our closed transactions, [EADS], is driven from Europe. The most significant transaction in our backlog -- in our announced backlog also comes from Europe. And you and I have been swapping e-mails -- I know you've been stranded in Europe by the ash, as have a number of our bankers. So as our business becomes more and more global the reach to clients becomes a little bit indifferent to where the person's home geography is. Our guys from the US and Europe are reaching out around the world.

Great, thank you very much.

Daniel Harris, Goldman Sachs.

Good morning, guys. Clearly we're starting to see the early stages of some additional activity in M&A. And I was just hoping that you could also comment then on how you still see the restructuring pipeline stabilizing, building or starting to work through as we look forward over the next couple quarters?

Well, I'm happy to. I think there are two main points here. We're still working on a series of the very big assignments, example Lyondell Basell, which characterize last year. Some of the biggest work on that is not yet finished and remains to be done, for example. That's point one. And there has been a series of new assignments that we've garnered so far this year.

The second point is if you study the cycles you see that the M&A cycle and the restructuring cycle are quite countercyclical to each other. And so as M&A strengthens restructuring should wane. And the issue of course is hoping that M&A strengthens at a pace which more than makes up for the waning of restructuring.

So I would say that if you talk to people in our restructuring group or other groups around the business or to the legal community, they all say the same thing, which is as the economy strengthens, corporate liquidity strengthens, all the other indices of health begin to flash green, restructuring ought to be weaker. It's a little too soon to judge because we're going to have -- restructuring is going to be important again for us this year. But that's what the historical cycles very clearly and very consistently show.

Okay, great. Thanks, Roger. Moving on to the equity underwriting deal that you guys completed for Safe Bulkers. Obviously this is the beginning part of the equity strategy. But can you talk about how that is sort of a follow-up from the relationships that you guys have in advisory? And does that get stronger as you start putting people in place on the cash equities front?

Yes, I mean we did have some revenues in addition to Safe Bulkers in our capital markets advisory business in the first quarter, which is a direct result of the expanded activities in that area. And just first of all to reiterate, our goal here is to become important to our corporate and sponsor clients on the second most important thing that they think about, which is how does their stock trade, raising capital, whether it's initial public offerings or secondary offerings. And most executives of companies care most deeply about the strategic transactions they engage in and how their stock trades.

So we do believe that this is expanding the breadth and depth of our relationship with our most important clients among corporate sponsors, corporations and financial sponsors. That particular transaction was absolutely a relationship where Marc Freedman, who joined us about a year ago from then Merrill Lynch, is one of the top shipping bankers in the world. And he has a number of relationships, some of whom will be raising capital, and this was one that wanted to reward him for all of the good advice he's provided to the client.

And we see more opportunities like that. I don't think we want to get over our skis on this because, once again, we don't yet have a FINRA approval to distribute securities. So at this point we're included in transactions because of the superb advice we can give going up to that point, which is typically more valuable in initial offerings than in secondary offerings. And so the things that were included in that would tend to be more purely rewards for our advisory relationships.

Okay, great, thanks, Ralph. And then just lastly, given the trends that we've seen with AUM up sequentially and a couple deals in asset management, you guys still feel comfortable thinking by late this year, early next year that that asset management business isn't breakeven is starting to generate positive returns?

Well, it should do better than that because of the acquisitions. I think you set too easy a bar for us.

Yes.

What I said is that the businesses that we had in place at the end of last year, which would not include Trilantic and Atalanta Sosnoff, that we expect those businesses to be breakeven on a run rate basis by the end of this year. Which would mean not necessarily that they will be a contributor to earnings in the fourth quarter, but that they would be a contributor to earnings next year.

The Trilantic and Atalanta Sosnoff transactions are both quite accretive to earnings. So because of those the entire investment management business would certainly be expected to be a significant contributor to earnings next year. And we don't give projections obviously, but certainly this will accelerate the pace of its contribution to our overall business.

Great, thanks very much.

Devin Ryan, Sandler O'Neill.

Good morning. Just staying on the investment management team here. So you guys have clearly been pretty busy over the past few months. But just thinking about acquisitions going forward, are you still looking at acquisition opportunities or do you now feel like you pretty much have the pieces in place that you just want to focus on building upon?

No, we will continue to look at things. I think the -- one of the hypotheses that I had when I joined Evercore was that the -- Evercore's considerable brand and reputation for excellence and integrity, plus my experience in the investment management business as the President of BlackRock for 20 years, we would be a very attractive partner to investment management firms that were very high-quality and that didn't want to sell all of their business, that wanted to stay deeply engaged both financially and professionally in their businesses.

Yes, that's turned out -- we happened to have found two such opportunities in the first quarter of this year. And we continue to look at things, we're highly selective, obviously both Roger and I and all of our partners believe that our by far most important asset is our reputation for excellence and integrity. And not going to do anything that compromises that.

So we're very selective about the types of businesses and the types of people with whom we get involved and we're also very disciplined about the impact that any of these transactions would have on our shareholders. And we've set a pretty high bar of saying that anything that we do inorganically in any of our businesses has to be accretive.

And so the answer is yes, we're looking at lots of things. But it's a little bit like deals and hires -- it's all binary, they either happen or they don't. And we could have nothing active and a day later something very interesting walks in the door and becomes something that we want to do.

Right. No, that's helpful. And then you guys have also had a lot of success bringing in new assets. Just given the continued improvement in the markets and are your level of commitments building and how should we think about flows going forward?

Well, I think the -- you can't predict that because it's a function of a number of things. It's a function, first of all, of your own investment performance, which, as I've said to you, is generally quite good. It's also a function of which sectors of the markets are attractive or of interest to institutional or individual investors.

For example, one of our businesses is in the small- and mid-cap fairly deep value business, that has been a sector that has gotten about 0.000 flows in the last year or so. We're starting to see some real interest in that sector, but you never know whether -- how the timing of that works out. So, I think it's a very dangerous thing to try and predict future flows other than to cite that the contribution (technical difficulty) performance makes to them.

Right. Okay, thanks, Ralph. Bob, one more here on the expenses. It looks like they declined 6% if you back out that special charge. Is that more of just a first-quarter phenomenon or where there actually some additional areas that you found some efficiencies there?

I think it's more of a first-quarter phenomenon, Devin. We continue to look at efficiencies, but part of the variability of our costs these days is linked to the advisory business and how that is proceeding. So some of that's -- a little bit of that is timing.

Okay, got you. And then just lastly, on the capital markets and cash equities build out, it looks there was $1.6 million in related expenses this quarter. Can you give us a sense of how much of that's non-compensation expense? And should we expect that that portion won't be increasing materially? I think you guys mentioned that a lot of that build out of the infrastructure has already been done.

The significant majority of that is compensation related, Devin. And as Ralph said, much of the cost of that business will be variable; as the revenues ramp up the costs will follow the revenues. So I expect of the number increases in Q2 and Q3 it will continue to be strongly biased to compensation costs.

Got it. Okay, thanks a lot, guys.

There appear to the no questions at this time. I would now like to turn the floor back to Ralph Schlosstein for closing comments.

Thank you very much. We want to get off the phone so we can hear the end of the Goldman call. Have a great day, everyone.

Thanks, everyone.

This concludes today's Evercore Partners' first-quarter 2010 financial results conference call. You may now disconnect.