Evercore Inc (EVR) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Evercore Partners fourth-quarter and full-year 2011 financial results conference call. (Operator Instructions).

This conference call is being recorded today, Thursday, February 2, 2012. I would now like to turn the conference call over to your host, Evercore Partners' Chief Financial Officer, Robert Walsh. Please go ahead, sir.

Thank you. Good morning and thank you for joining us today for Evercore's fourth-quarter and full-year 2011 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 fourth-quarter and full-year 2011 results. The Company's presentation today is complementary to that press release, which is available on our website. 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 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 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 to their GAAP reconciliations, you should refer to the financial data contained within our press release, which, as previously mentioned, is posted on the 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 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 will now turn the call over to Ralph.

Thanks very much, Bob, and welcome, everyone.

2011 was a year of milestones for Evercore. Investment Banking and Investment Management each delivered record performance both in terms of revenues and operating profit and operating margins improved in both businesses.

In Investment Banking, we expanded our ability to serve clients across the globe through the acquisition of Lexicon Partners in Europe, the recruitment of seven highly talented senior managing directors, the promotion of three senior managing directors internally, and through the expansion of our alliance partner network to include Kotak in India and Worri Bank in Korea.

In Investment Management, we continued our strategy of organic and inorganic growth, most notably with the acquisition in the fourth quarter of a 45% stake in ABS Investment Management, a leading equity-focused hedge fund to funds manager. We finished 2011 with good momentum, and we are well positioned as we enter 2012.

As we said last quarter, after six years of hard effort, our EAM team, Evercore Asset Management, and we decided to discontinue our EAM operations in the fourth quarter, returning all assets to their clients. This was completed at the end of the fourth quarter. As a result, all results today are presented on a continuing operations basis, which exclude EAM from both the current and prior year periods.

Let me quickly go over the numbers starting with the quarter. Fourth quarter of 2011 revenues were $112 million, up 10% from the same period last year but down 32% from last quarter's record. The decline in revenues subsequent compared to prior quarters was primarily the result of the timing of transaction closings in our Advisory business. As we discussed at the end of last quarter, the timing of revenue in any particular quarter is caused by a number of factors over which we have a limited amount of control and which cause some variability of revenues and earnings.

In the third-quarter earnings call, we advise you that our unusually strong third quarter included a couple of significant fees that we had expected to be paid in the fourth quarter. This quarter's Investment Banking revenues reflect this fact, as well as the fact that a couple of larger fees spilled over into the first couple of quarters of this year. While we cannot eliminate this variability, we can reduce it through diversification of our business by industry and by geography, and we have done a lot of that in the last year.

The fourth quarter demonstrated the benefit of that diversification as our UK-based team delivered almost 40% of our Advisory revenue, and more than 50% of our Advisory revenues were booked outside of the US. I can say with confidence that we are no longer punching below our weight in Europe.

Net income for the quarter was $14.1 million with earnings per share of $0.32 and a compensation ratio of 56%. With respect to the full year, net income was a record $63.2 million, up 66% from 2010. Earnings per share for the year was $1.48. Revenues exceeded $500 million for the first time in the firm's history, growing nearly 40% over 2010 and closing the gap between Evercore and our larger competitors. Expenses of $415 million increased 36% from last year, reflecting our continued investment in our business and efforts to manage our costs on a disciplined basis.

The full-year compensation ratio was 59.2%, down from around 61% last year and the third consecutive year we have reduced our compensation ratio. Excluding the effect of the investments we are making in the Institutional Equities and Private Funds businesses, our full-year compensation ratio would have been around 55%.

We continue to manage our compensation ratio to target a 55% or lower comp ratio, but we will also continue to make investments in our business, which we believe will produce high returns for our shareholders over the intermediate to longer term. And, as you all know, these investments produce compensation and non-compensation expense on our income statement before they produce revenues and profits.

Non-comp expenses were $106 million in 2011, up 35% from 2010, driven by the Lexicon acquisition and the growth in our core Advisory business. Our non-compensation ratio declined to 20.5%, and continued reduction of this metric is a goal for 2012. Full-year operating margins increased to 20% from 18% in 2010, and these are our best operating margins since 2007, and I might point out that those operating margins were earned despite the fact that we were making some pretty important investments in our business.

Let me now turn it over to Roger who will talk about the Advisory business and the M&A market.

Good morning, everyone. You can see that we had in round numbers $90 million of Investment Banking revenue in the fourth quarter. That was nicely up from the $75 million figure of the fourth quarter a year ago. Yes, as Ralph said, it is down from our all-time record third quarter. But, if you look back historically, Evercore has only had four quarters in its history that were better than the quarter we just completed.

During this past fourth quarter, we generated 26 separate fees of $1 million or more, including a particularly strong contribution in this category from Evercore Europe, and that figure of 26 was identical to the figure we realized in the third quarter. In other words, in each quarter we had 26 fees of $1 million or more.

We also had revenue contributions, of course, in this quarter from both the Equities business and from our Private Funds Group.

Our headcount in the quarter increased modestly by 12 bankers on a net basis. Our comp ratio came in in banking at 55.6%. That is a reasonably good level as compared to last year, as Ralph described. Our operating margin was 21%, but keep in mind we have two newer businesses, which are still in the development stage and for the moment are suppressing those margins. Those, of course, are the Equities business and the Private Funds Group. Without those businesses, our operating margins would have been 28%.

Looking at the full year, Evercore had a record year in Investment Banking, and it seems to me that we can do that again in 2012. We had net revenues of $421 million, operating income of $96 million. Those were essentially a 42% increase in each category over the previous year, very big increases. The number of feepaying clients for the year increased to 245 from 183, and 91 of the 245 of them paid us $1 million or more. That is also a record.

According to Thomson Financial, we advised on the two largest deals of the year, which were the AIG restructuring and the announced acquisition by Kinder Morgan of El Paso. We also advised on four of the 10 largest energy mergers of the year, namely Kinder Morgan, Exelon Constellation, Southern Union Energy Transfer and the ITOCHU KKR announced acquisition of Samson.

Evercore finished eight in the US M&A league tables for the year. The seven firms above us were all universal banks or bank holding companies, the obvious names, so we finished ahead of any firms which compare directly to us, including, of course, Lazard.

As we explained before, Evercore is no longer a boutique. We passed away from that category three or four years ago. Keep in mind, we now have 825 people and just shy of 70 partners. But there is some of the folks who follow this industry that still classify us in that group, and if you look at it that way, we literally did 5 times -- 5X more M&A business this year than the second most active firm, which is another reason to explain why we are no longer in that category anymore.

And, of course, we had two deals, very important ones, which were actually blocked by the antitrust authorities, and those were the NASDAQ offer for the New York Stock Exchange and the AT&T T-Mobile deal, which were two very, very large transactions.

On productivity our average revenue per partner on a rolling 12-month basis through the end of the year was $8 million, essentially the same as the third quarter on that same rolling 12-month basis, and up from $7 million a year ago. So productivity was good.

In the US alone, that figure was $10 million, which, as you have heard us say over the years, is the figure we seek to achieve in this country. So we are right on. Productivity in the UK also rose handsomely, and by the way, it did also in Mexico.

Let me say a few final words on the environment, both this past year and going forward. This past year global M&A volume on an announced basis rose 7.5% for the year. In other words, 2011 versus 2010. That is announced deals in terms of total dollars.

As it relates to completed deals, the total was 21% up year over year. This was the second consecutive year of higher global volume, and all of these patterns seem to us consistent with the long-term cycles of M&A, which we have discussed with you often in the past. And, as you know, historically we often use these charts in our investor presentations. The up cycles tend to be five or six years, and the down cycles tend to be two to three years over the past 50 years. So it seems to us that this recovery is in line so far with the historical patterns, and we expect it to continue to be so.

There was a little bit of weakness in these totals during the fourth quarter. Global M&A volume was down 3% year over year and US volume down 5%. That is in the announced category, but, as I said, the year as a whole was up.

At this very moment, the outlook for 2012 on an industrywide basis would seem to be solid. You have the major ingredients in place for higher levels of M&A -- extraordinary low interest rates, a relative abundance of credit availability for stronger borrowers, a reasonably upward trend in equity values, moderately improving business conditions and pretty good levels of management competence. And historically those are the ingredients that have made for higher levels of global M&A. So, at the moment, even though this is a relatively volatile environment as we saw last year with the European crisis and the overall volatility in the late summer and early fall, our view on 2012 is that it should be a solid year both for the industry and for Evercore.

Thanks, Roger. Let me talk a little bit about our newer businesses and the Investment Management business. Our Institutional Equities business continues to add clients and grow revenues. We now have research coverage on 227 companies and have earned revenues for more than 200 clients. This quarter the business generated $4.7 million in revenues as commissions increased 22% from last quarter in an environment where industry commissions were down approximately 15% to 20%. And there was virtually no equity capital markets activity.

Expenses were $10.5 million for the quarter, reflecting the full-quarter effect of our second-half headcount, and, as I explained last time when we hired people in midyear, we have to expense their full-year compensation in the remaining quarters. So that bumps up both the third- and fourth-quarter expenses.

Quarterly costs are expected to decline in 2012 as the second-half compression of new hire expense is eliminated. And in 2012 the cost of this business will be increasingly correlated with revenues so we don't expect cost in any quarter this year to approach last year's fourth quarter unless there is a concomitant increase in revenues. Although the new issuance environment was exceptionally quiet during the fourth quarter, we have increased our pipeline and are working with clients to launch offerings in 2012 as the equity markets have reopened, and we are starting to be a little bit more optimistic about that.

We remain committed to our goal for this business to begin to contribute to operating profits in the first quarter of this year and are hopeful that the market activity increases as the quarter progresses so that we achieve that goal. We are quite confident the business will contribute to earnings over the full year.

Our Private Funds team was successful in closing three capital raises during the quarter and is actively working on a number of mandates with closing targets during 2012. This business was a modest drag on earnings in 2011 and is also expected to contribute to profitability in 2012.

With respect to our Investment Management business, it also produced a record year. Net revenues were $98 million, a 33% increase from 2010. Operating income was $10 million, an eight-fold increase, and operating margins improved to 10%.

Operating income for the Investment Management business for the fourth quarter was $0.9 million on revenues of $21.3 million, the fifth consecutive quarter that the business contributed to earnings.

We have clearly made some progress in this business, but much work remains to be done. Assets under management decreased 1% to $13 billion as we continue to experience outflows in our Institutional and Asset Management business.

Our largest manager, Atalanta Sosnoff, like many concentrated active equity managers, has continued to experience subpar investment performance, which has negatively affected client flows.

On the positive side, our Wealth Management business is performing well, adding talent, clients and assets under management. Evercore Wealth Management increased assets under management to $3.2 billion at the end of the fourth quarter, and this business now has a full three-year track record in all of its key products, which is an important milestone and often a precondition for certain investors hiring you. Evercore trust Company also had a record year in revenues and earnings.

At the end of the year, we had the opportunity to purchase a 45% interest in ABS Investment Management. Founded in 2002, ABS is an institutionally focused equity longshore hedge fund to fund managers with approximately $3.7 billion in assets under management. We have had a long-standing interest in this sector, and ABS clearly meets our investment objectives.

Since inception, ABS has experience consistent asset growth driven by strong relationships, a disciplined investment process and an exemplary commitment to client service. As is the case in all of our asset management transactions, the founders have made a long-term commitment to the business, and consistent with our financial approach, this acquisition is expected to be accretive to earnings per share in 2012.

Before I turn it over to Bob to discuss non-comp costs and several other financial matters, let me just make a couple of points about our prospects. While 2011 was a strong year for Evercore, it also was a year in which we made some meaningful investments. Most notably, through the Lexicon acquisition and the addition of seven new SMDs, we added to our expense base in Advisory without a concomitant immediate increase in full-year revenues.

Second, we have made an important investment in the Institutional Equities business, which was a drag on earnings and margins in 2011. And third, our investment in the Private Funds business was also a modest drag on earnings and margins. While the payoff on these investments ultimately will be affected by the aggregate merger and advisory activity in the case of the Advisory SMDs, by trading volumes and underwriting activity in the equity market in the case of our Institutional Equities business and by the amount of private funds raised in the case of our Private Funds Group, it is our expectation that all three of these investments, assuming reasonably normal markets, will contribute to profitability in 2012.

Moreover, we believe that the continued dis-settlement in the larger integrated universal banking firms will continue to present market share opportunities for Evercore in all of our businesses. As a result, we believe that we enter 2012 with some modest breezes at our backs.

Bob, why don't you take it?

Just a few comments to wrap up. As Ralph had mentioned, all of the results we discussed today exclude the historic results for Evercore Asset Management. For context that discontinued operation had contributed revenues in the range of $2 million to $3 million in each of the last several years or a loss of about $0.01 per year. We will add a schedule to the Investor Relations section of our website, which provides that historic information for all periods.

In terms of non-compensation costs, the full-quarter addition of Lexicon increased our costs by about $2.5 million. That increase was offset by declines in other expense areas, principally professional fees. As we have mentioned before, as we look at coming quarters, there will be some upward pressure on non-compensation costs relating to the relocation of our facilities in the UK.

Finally, relating to the financial matters, our tax rate was lower in the quarter, which added a few cents to earnings. That is principally the result of a release of some tax reserves, which go back to the time of the IPO, as well as to some positive tax effects from increased international earnings. In the quarter we maintained a consistent capital management policy, again deferring a dividend of $0.20 and repurchasing approximately 366,000 shares during the quarter.

So now, operator, if you could open the line for questions.

(Operator Instructions). Patrick Davitt, Bank of America/Merrill Lynch.

So it looks like announcements were industrywide fairly weak in January, but the markets have clearly been doing very well. Are you starting to see that creep into the discussions that you are working on in terms of people getting more comfortable pulling the trigger on transactions?

Well, I really don't have anything to add to what I said already about the environment. It is at this very instant a good environment. Our own backlog reflects that. So, if you could extrapolate the current trends for the full year, it would be a very good year.

Right, right. Okay. Are you still seeing any uptick in restructuring conversations?

Well, the restructuring business remains quite active. We did not participate in either of these two particular ones, but you saw a couple of very large bankruptcy filings obviously with American Airlines and Kodak. They are just symbolic of a pretty high level of activity in restructuring. I mean it is, of course, not anywhere near all-time highs because restructuring is fundamentally countercyclical vis-a-vis M&A. But the restructuring business is quite healthy.

And did Lexicon have a capability in that business, or is it really just the legacy Evercore franchise that had the restructuring capability?

The answer is no.

No? Okay, great. And finally, Bob, you mentioned non-comp ticking up because of the relocation of your UK facilities. How long will that take? And then I assume that there would be some sort of net reduction once that process is over.

That is right. It will take two quarters.

Two quarters? Okay.

Two more quarters.

Devin Ryan, Sandler O'Neill.

You guys had a nice back-half of 2011 for deal announcements, which should bode well for the first half of 2012, even though the industry did see a decent drop in activity. So I would just like to get your view of maybe why your business has seemed at least to us a bit disconnected from overall industry trends? Is it just your client list is just generally better positioned and their M&A plans are less tied to market conditions? Is it just market share gains that we are seeing now, or am I just reading into too much to maybe a short window of time here?

Well, I'm not sure that it actually is disconnected in the sense that the M&A business as a whole in 2011 was pretty good. And, of course, Evercore itself had a very good year. So we did better than -- I mean we grew more than the industry grew, but it was fine year for the industry.

Now why are we doing so well? As trite as it may sound, there is a one-word answer to that, which is people. We have had really a quite extraordinary recruiting performance over the past several years. 2011 was a particularly strong year, but it has been building for years. The firm now has -- Bob can correct me on this -- I want to say 50 plus banking partners.

60 SMBs.

Okay, 60 SMBs in banking. And I know you will think that this is chest beating, but I think we have the best group of banking partners in the world. There is no firm however big it is and however well-known it is that has a better group of banking partners than Evercore, and that is why we have been doing well. As long as our recruiting record and trend continues, that should bode well for the firm.

But look, we have a strong brand. We obviously have a completely unblemished history in a world where there are not many of those. I like to think looking at Ralph we have very good management and --

I think it is our Chairman actually.

And I just think the firm has all the fundamentals in place. Of course, we have a lot of work to do, including particularly globalization. And there are still some verticals that we really are not where we need to be, quite a few of them actually. But, in general, Evercore has all the fundamentals in place.

And when you add all that up, it does actually add up to not inconsequential marketshare gains over the last couple of years.

Right.

And, you know, you can -- I want to just repeat one point I made in my own comments here. We have moved a long way from the boutique category. Evercore today is the most active independent Investment Banking firm in the United States, the second most active globally, and that is a category that fundamentally includes just three firms -- Lazard, Rothschild and Evercore.

So that is the group that we effectively are in. We don't care how people compare us. They can do whatever they want, but comparing us to some of the authentic boutiques, many of whom, by the way, are quite good, it's comparing an apple and an orange now. We are so much bigger.

Okay, I will move on from that. You mentioned a couple high-profile deals getting blocked by regulators. I just want to get your sense, are regulators getting tougher in how they are looking at deals? Have you felt that, or do you think that's just more a function of just specific deals and specific details of those deals?

No, I think there has been a change in both the US and in Europe on competition policy as they refer to it in Europe. And there has been a tightening of criteria in both areas over the past year. I would not describe it as the difference between night and day, but there has been a notable tightening criteria.

Okay, great. And then just lastly for me, on the comp ratio, I just want to dig into that a little bit. It obviously dropped quite a bit in the quarter and was down both within Investment Banking and the Asset Management segment.

So within Investment Banking, should I look at that more as truing up the full year just given how strong the revenues were? And then was the majority of the improvement within the Asset Management division just related to the shutting down of EAM, or is there anything else going on in either of the segments --?

Well, they are shutting down EAM because both the prior -- since we have taken that out of all periods, it's not really related to that. I think both of them are related to exactly what you said, a truing up. We do our best to estimate compensation over the course of the year, and as we got to the end of the year, both our hiring was a little lower and just aggregate levels of compensation in the industry were off a touch. So a little bit of what you see in the fourth quarter is a truing up or a catch-up to make the full-year compensation match what we were actually paying.

Joel Jeffrey, KBW.

In terms of the Private Funds Group, you closed three deals during the quarter. Can you give us a little more about how much that might have contributed to revenues and what your expectations are for that business going forward?

We don't really give specific information on individual businesses. It is a relatively small business at this point in terms of annual -- it is high single digits, low double digits in revenues, but expected to grow quite comfortably this year.

Okay, great. And then just thinking about the geographic composition of your revenues in the Advisory business, 50% coming from outside the US. I mean is that driven more by a combination of pullback in US activity, or do you expect these elevated trends to continue going forward?

It is somewhat anomalous. The mix, the geographic mix, is obviously in the future going to be quite a bit stronger non-US versus US than it has been historically by virtue of the acquisition that we made of Lexicon and also a little bit of a buildout in our office in Hong Kong and the success of our business in Brazil as well.

Having said that, the mix in the fourth quarter was a function of both strong activity outside the United States, and this is one of the side effects of the point that we made at the end of the third quarter of a couple of large fees. Those happened to be in the US following in the third quarter rather than the fourth quarter. So we have somewhat a very strong quarter outside the US and unusually lower activity in terms of revenues in the US in that particular quarter.

And then just lastly, in terms of the outflows in the Investment Management section, I know you talked about in terms of financials that EAM had been stripped out. Was the AUM number also excluding historical EAM numbers?

Yes, it was.

Okay. And then just thinking about that business a little bit going forward, I mean you have had a couple of quarters of outflows, and you had talked about it being primarily performance-related. I mean is there anything you can do to stem the outflows, or is it really just market related?

Better investment performance. This is a very difficult thing that every investment manager has to deal with and particularly with active concentrated portfolios. They have periods of strong outperformance and sometimes periods of underperformance. And you work very carefully with them on what they are doing from an investment point of view, but you certainly cannot go in and alter the investment process, or you wind up disrupting the relationship that they have with their client.

So I have dealt with this for many years at BlackRock, and it's very frustrating because you always want to try and figure out, can you fix it yourself? And the answer is it is very difficult to do.

Eric Bertrand, Barclays Capital.

Touching on the recruiting, how do you look at the environment today as your universal banking competitors have been pretty challenged of late and is experiencing another tough compensation era? Is Evercore positioned to gain some share again through a good amount of hires in the coming year?

Well, we have been positioned well on recruiting for several years, and you have seen the results. We have probably never been better positioned than we are right now, and we expect to make every effort to continue to capitalize on it. We had a strong recruiting year in 2011, and we expect to have a strong recruiting year in 2012. Are the events of the past several years beginning with 2008 at the largest institutions contributing to the opportunity for us to recruit? Of course, they are.

Okay. That sounds fair. On the Institutional Equities business, how much of the plan to get to profitability depends on higher commissions and underwriting revenues as opposed to the clearing out of that new hire expensive headwinds that you had in the back half of the year?

The key to the success of the business is topline growth. We have had -- if you look back over the four quarters of last year, we had roughly 25% to 30% commission growth quarter over quarter every quarter last year. The business is effectively a four or five quarter old business, and we have really been fully operational in terms of full research for one quarter.

So we would expect to continue to see ramp-up in both commissions, and obviously you could not have less equity underwriting activity than you had in the fourth quarter of last year.

So ultimately what will drive the profitability of this business is revenue growth as the business ramps up and we become more and more important to institutional investors, and we build a pipeline and actually execute equity capital markets activity.

Okay. That is helpful. Lastly, the broader market has firmed up a fair amount in the last couple of months. Has your Private Funds Group seen an uptick in the amount of interest on behalf of investors getting closer to closing on new fund acquisitions? Asked more simply, what does the pipeline look in that business compared to the back-half?

I would say, I guess, two things. Number one that we are quite confident given the backlog of activity there that will have quite substantial revenue gains in that business this year, and, second, that what was a modest loss will turn into a contributor to our earnings.

Hugh Miller, Sidoti & Co.

Most of my questions were asked and answered, but I just wanted to touch back a little bit further on the tax rate. Thinking about that going forward, you mentioned both reserve release and also the mix of global revenue. Can you have us a better sense of which was a bigger driver and how we should be thinking about the tax rate going forward? I realize longer-term as you see the shift towards greater revenue abroad that that will be a benefit, but I'm just trying to better assess that.

Quantitatively the reserve was a bigger driver in the quarter, but, as you look forward, there are two factors that should result in the tax rate coming down. One is the greater contribution of revenues from our overseas businesses, and second, a significant factor keeping the tax rate where it was was the losses associated with the businesses that we don't own 100% of. As those businesses move to profitability, which, as Ralph has said we expect this year, that will have a favorable effect on the tax rate.

Got you. And do you have an expected range for the tax rate for 2012?

It is too early to talk about that, but I think in the first quarter we will be able to give you some more insight.

There appear to be no questions at this time. I would like to turn the floor to Ralph Schlosstein for closing remarks.

Thank you all for joining us, and we will look forward to talking to you next quarter. Thank you.

This concludes today's Evercore Partners fourth-quarter and full-year 2011 financial results conference call. You may now disconnect.