Evercore Inc (EVR) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Partners first quarter 2012 financial results conference call.

(Operator Instructions)

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

Good morning. Thank you. Good morning, everyone, and thank you for joining us today for Evercore's first quarter 2012 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 up the call for questions.

Earlier this morning we issued a press release announcing Evercore's first quarter 2012 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 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 10K, quarterly reports on Form 10Q and current reports on Form 8K. 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 in the investment banking and investment management sides of our business.

I'll now turn the call over to Ralph.

Thanks, Bob, and good morning everyone.

As we have said many times in the past, our results are not easily judged on a quarterly basis, as quarterly revenues and earnings are driven by the timing of deal closings, over which we have virtually no control. In some quarters, like the third quarter of last year, we had a number of unexpected closings, which produced record revenues and earnings in that quarter. In the first quarter of this year the opposite happened, with closings postponed into April, producing disappointing revenues and earnings for the first quarter.

While our results this quarter fall short of our expectations, the good news is that the fundamentals of our business remain quite strong. First, as we have often said, our business is best judged not on the basis of one quarter's results but on the basis of longer periods. On this basis our trailing 12 months' banking revenues are a record $424.4 million, the third consecutive quarter that we have set such a record. So, while this quarter fell a little short, our advisory business continues to grow despite the weaker M&A environment generally. We are doing this, of course, by taking share from our competitors.

Moreover, our backlogs in our advisory business on both a risk and non-risk basis have never been higher, which bodes well for the second quarter and the rest of the year. Finally, some of the transactions that slipped from the first quarter to the second quarter have since closed, so we expect advisory revenues to be well in excess of $50 million for April alone. So, while M&A volumes have been weaker for the last three quarters, we continue to gain market share when measured on a trailing 12-month basis, even though our revenues this quarter fell a little short.

Broadly speaking, the overall environment for our business was not great in the first quarter. Both announced and closed M&A transactions were down globally, and more specifically in the US. Nonetheless, we maintained our position in the M&A league tables, continuing to rank No. 8 in announced transactions in the US and No. 14 globally and No. 1 among independent firms in the US.

Equity trading volume was down more than 20% in the quarter, but we gained share in our institutional equities business as our transaction revenues increased by 2% versus the prior quarter, despite the 20% overall decline in volumes. Our equity capital markets team completed seven transactions in the quarter, nine year to date, which helped raise $3.2 billion for our clients, including the first transaction as a lead manager for a third-party client. We also completed a $600 million follow-on offering in Mexico for Fibra Uno, the successful REIT that we helped launch at the end of 2011, which was the first REIT ever underwritten in Mexico.

Our investment management benefited from the rise in the equity markets, which largely offset outflows in our institutional equities business due to historical underperformance. Our performance in these products improved in the first quarter of this year.

Our wealth management business increased assets under management to $3.5 billion as investment performance in all key products exceeded benchmarks as the business benefited from both client inflows and market appreciation. And we are making real progress in attracting new senior managing directors in our advisory business, which Roger will discuss in more detail.

Let me very quickly go over the numbers. First quarter 2012 net revenues of $105.5 million were essentially equal to revenues in the same period last year and down 5% from last quarter. Net income was $4.3 million for the quarter, with earnings per share of $0.10 a share, and these results are down significantly from the first and fourth quarters of 2011.

Our compensation ratio was 63% for the quarter and 60% for the trailing 12 months, in line with the past year. Non-compensation costs were roughly equal to the fourth quarter, reflecting higher facilities costs as we continue to transition to new offices in London, which is occurring in the second quarter, and expanded offices in New York to accommodate growth in our advisory business. Due to our lower revenues, non-compensation expenses as a percentage of revenues were elevated, but they remain essentially unchanged on a per-person basis.

Let me now turn the call over to Roger to comment on the M&A environment broadly and our advisory business [performance].

Good morning, everybody. We had $85 million of total investment banking revenue for the first quarter of 2012. That's up from the $80 million of the first quarter of 2011 but down from the $90 million of the first quarter -- of the fourth quarter last year. As Ralph said, this figure is lower than we expected as of a few weeks ago because we, as so often happens in this business, experienced slippage in closing dates on three particular deals and a few minor ones between the first quarter and the second quarter. And that's why, as he said, April is obviously going to be extremely strong.

Moreover, our backlog, and we review this constantly and always on a risk-adjusted basis, is at an all-time high, and it's well up from the level of a year ago. I might add it's higher on a US-only basis, which washes out the impacts of the Lexicon acquisition, and it's also higher on a global basis.

Parsing the quarter, about $85 million of investment banking revenue, $73 million of it related to advisory, $7 million of it related to equity sales and underwriting, $2 million was our private funds group and $2 million our investment in Brazil. We realized 17 fees of $1 million or more during the quarter. That's essentially the same as the first quarter a year ago, down, however, from the 26 figure which applied in the fourth quarter of last year. 54% of our advisory revenue for the quarter was realized from non-US sources, and I might say we like that. Revenues per partner on a rolling 12-month basis were $7.4 million globally. That's up from $7.1 million a year ago, down a bit, however, from the fourth quarter figure of $8 million.

In terms of headcount, at the end of the first quarter 506 total investment banking personnel, of which 432 are advisory. That's down slightly from last year's fourth quarter total, but it's up a lot from the pre-Lexicon figure of about 280 a year ago.

In terms of partners, there were 56 investment banking senior managing directors in the firm at the end of last quarter. 54% of those are advisory SMDs. That figure actually is down four from a year ago, as a number of senior managing directors have converted to senior advisor status. I might add that we are continuing to recruit steadily new banking partners. We've announced two so far, Randy Sesson, who will head European Transportation, based in London, and Steve Wellington, who will join our Restructuring group, also based in London. We do expect to announce others over the short to medium term, and in general you can expect that we will ultimately add for 2012 at the same rate we generally have been adding in recent years.

The comp ratio for last quarter in investment banking was 64%. That's abnormally high because of the revenue slippage I referred to. It compares to essentially 59% for the first quarter a year ago. Over the last 12 months, the comp ratio in investment banking was 60%.

Non-comp costs were up in absolute terms, as you would expect with a higher total headcount, but were not up on a per-banker basis.

In terms of market share, Ralph alluded to this, the firm maintained its leadership position, again first among all independent firms in terms of announced deals in the first quarter in the United States and eighth among all firms, and the only firms ahead of us are the universal banks and bank holding companies.

Let me say a word about the global M&A environment. 2012 is off to a slower than expected start in terms of global M&A volume in dollar terms. It's off 33% in terms of announced transactions versus the first quarter of 2011. There are a lot of competing explanations for this, as it was not widely expected, I would say, throughout the industry. The most logical explanation, in my view, is this one, that beginning last August and extending through the middle of December all of us saw very volatile financial markets, very poor credit market conditions, and deal activity came to a screeching halt. Given lead times, it takes a while to restart it.

But the fundamentals, at least in my experience, are positive for global M&A volume. We've talked about these many times -- low interest rates, generally rising equity prices, abundant credit availability, improving business conditions, at least in the United States and most of the world, excluding Europe, and generally good levels of management competence. And on that basis it's my own view that the year will steadily improve in terms of global volume. You saw three important European deals announced on Monday morning. You saw the Suburban Propane deal, on which we're advising, announced this morning. We'll see. There are no guarantees. But that's my best expectation.

Okay, let me briefly talk about our other businesses. The equities business continues to add clients and grow revenues. This quarter the business generated $5.2 million in revenues, a 10% increase in comparison to last quarter, driven by increased underwriting activity and modestly higher secondary revenues. Expenses were $6.6 million for the quarter, down significantly versus the levels of the fourth quarter of last year, which you will recall were elevated by concentrated comp expenses associated with new hires. We remain committed to our goal for this business to begin to contribute to operating profits this year and are hopeful that market volumes and capital markets activities will improve sufficiently so that this is actually achieved in the second quarter.

Our private funds business was successful in closing one capital raise during the quarter and is actively working on several mandates with closing targets during the second quarter and the remainder of the year. This business is also expected to contribute to profitability this year.

Investment management -- operating income for the investment management business was $1.4 million, up from $850,000 last quarter. Assets under management decreased 1%, to $12.9 million -- billion, excuse me, as we continue to experience outflows in our institutional asset management business, which were largely offset by market appreciation.

Our wealth management business continues to perform well, increasing assets under management more than 9% for the quarter, to $3.5 billion. And performance improved in virtually all of our institutional businesses and our wealth management products.

Let me conclude by saying that while we are unable to predict, as Roger said, the timing of a resumption in the M&A recovery, we are confident that all of the conditions are in place today for that recovery to occur, and we have never been more confident in our ability to increase our market share in all of our businesses, and most particularly in the advisory business. Our recent partner hires from last year are starting to make meaningful contributions to our success, and the recruiting environment, both from large firms and from other independent firms, has never been better for Evercore. And, while these additional partners can have a dampening effect on our margins and on our compensation ratio in their first year at the firm, we are confident that making the right new partner hires consistently adds to the value of Evercore.

Let me now turn it over to Bob, who will discuss a couple of financial issues.

Thank you, Ralph. Both Roger and Ralph have commented on our non-compensation costs, so I won't elaborate further other than to highlight that the facilities consolidation in the UK is on track, and we should be out of our old offices and therefore eliminating those costs beginning -- at the end of the second quarter, so the cost reduction beginning in the third.

You'll have noted that our tax rate in the first quarter is at 38%, reflecting expectations of increased profitability, both in the equities and wealth management business, and greater international profit contribution.

Our financial position remains strong. The fundamental change in our balance sheet reflects lower cash and marketable securities position associated with the payment of bonuses in the first quarter, with no other significant changes.

And, finally, during the first quarter we repurchased approximately 530,000 shares, and our Board has declared a dividend of $0.20.

With that, operator, if you would open the line for questions, please.

Thank you, sir.

(Operator Instructions)

Our first question comes from the line of Devin Ryan, with Sandler O'Neill. Please proceed.

Hey, good morning, guys, how are you?

Hey, how are you doing?

Good morning.

Good. So, you mentioned that given lead times it can take a while to restart deal announcements, so trying to get a sense, is it fair to characterize that there is a high level of pent-up activity that could come quickly, or do you feel like it's going to be more of a steady build of M&A announcements over the course of the year?

I think it's the latter. No one has a perfect crystal ball. I certainly don't. And, as I said in my comments, it just seems to me that between things like our own backlog, which we scrutinized very carefully, and the fundamentals as I ticked them off, the year is going to steadily improve for the -- in terms of all volume, not just Evercore volume. We still expect, as the press release says in terms of my own quote, we still expect this to be a very good year when all is said and done. And so I would imagine it would be steady rather than quick, because that's not how those patterns tend to evolve. So, if it turns out in fact that this explanation is correct and the disruption in the capital markets beginning last August froze deal volume and then it took a long time to restart it, well, then, it'll take -- it'll only be a gradual recovery, rather than a sudden one.

And just in terms of the mix of activity, what are you seeing from a geographic perspective?

Well, are you asking about us, or are you asking about the industry?

Well, I'm asking about you guys specifically in terms of not stuff that's actually been announced yet, but just clients that you're working with, what geographies are more active?

Well, our business is pretty well balanced. You saw that figure that 54% of our revenue in the first quarter came from non-US sources. And, of course, a very big event in Evercore's life was the Lexicon acquisition last year, which just transformed our platform in London and to a degree in Europe as a whole. So, we're much more active in London than we've ever been, because we have 10 times the banking personnel that we had, for example, a year ago today. We have built up a meaningful office in Hong Kong, by our standards. I believe we have 16 people in Hong Kong. Of course, we have over 100 people between Mexico and Brazil, and very, very active joint ventures in Japan, our oldest, but China, India and Korea. So, our business is steadily, every quarter, becoming more global. And that's a good thing, because the overall advisory business as a whole is getting more global with the entry into the M&A mainstream, for example, of countries like China and India and Brazil and so forth. So, that's how I'd answer your question.

Okay. Great. And just in terms of hiring, you guys have added a couple senior bankers so far this year, and in recent interviews I think the goal is to double the senior banker headcount over the next five years, so that would -- you imply adding more than 10 bankers a year. So, is that a new target? Or I know that you maybe don't specifically target hiring, but how should we think about the level of hiring that you may do over the next couple years here?

You should think about that as something that the FD imputed from a statement that I made, which is not something that we ever said. Our hiring policy remains exactly what it's always been, that when we can find A+ or A talent that can move the needle at Evercore we try very hard to hire them. Historically, we've added four to six senior managing directors or partners a year. Last year we were fortunate enough to hire seven. We typically shoot to hire four to six. The environment this year might allow us to do a little bit better than that again, as we did last year.

But what was really said to the FD was that over the next five years or next three to five years we would like to be mentioned in the same breath as the other two global independent firms, Lazard and Rothschild, which are today somewhat bigger than we are, and there's no reason why we can't achieve that goal, but being in the same breath doesn't necessarily mean equal to them in terms of revenues, nor does it mean a doubling of our partnership.

Got it. Okay. Great. And just lastly from me, within the asset management business, the AUM decline as a result of net outflows, I think you mentioned that performance has stabilized in the equities platform, so do you feel like the worst of the outflows are behind us, or are those continuing? Just any color there would be helpful.

Well, based on my 20-plus years' experience in investment management I would say that flows tend to lag performance, so even after performance stabilizes outflows still continue but at a lower rate. So, I would not prognosticate at this point that that is behind us. I think you need a couple or three or four quarters of outperformance before things stabilize and then ultimately turn around.

Okay. Great. Okay. Thanks for taking all my questions.

Our next question is from the line of Patrick Davitt, with Bank of America. Please proceed.

Good morning, guys.

Good morning.

Hey, how are you?

I'm well. I'm [up]. Going back to the record pipeline commentary, you talked about how kind of the uncertainty in the second half of last year really dragged on announcements and whatnot, and I assume that the record pipeline you're talking about isn't all announced. Are you now seeing the increase of European --

Well, well, let me just -- let me just clarify something.

Okay.

By definition, none of it's announced.

Okay.

In other words -- by the way, the word "pipeline," it's up to you, but I wouldn't use that word.

[Okay.]

Because that means different things to different people. We don't -- we never use that word. I just said our backlog is at an all-time high, and it's higher on a US-US basis, which washes out the impacts of the Lexicon acquisition and it's also higher globally. And by definition what's in the backlog hasn't been announced.

Okay. Okay. Okay, that's [different than we think] about it, but I appreciate that. Are you now -- are you not seeing any of the increased European uncertainty and now there's a lot more talk about the uncertainty around the fiscal cliff at the end of the year? Are you not seeing that bleed into the corporate discussion at all?

I for one haven't heard any discussion yet of that year-end fiscal cliff stuff, at least in a way that would be -- one could infer would affect M&A activity. As for Europe, I don't think there's any doubt that financial instability and recessionary conditions in Europe are negative for deal activity and retarding it. Conditions here in the United States and conditions in the big emerging market are healthier and improving from a deal point of view. But Europe is a difficult situation.

Yes, okay. And then, on capital management, you repurchased some shares in the first quarter. Prices continued to come down quite a bit. Could you kind of speak to us about how you think about repurchases versus dividends and if you feel like you could ratchet up the repurchase a bit given the price decline?

I think that we periodically -- we have authorization to purchase shares, and when we find attractive opportunities in the market to do that we will take advantage of them. I think it's clearly understood by all of you that at the current moment we're in the blackout period, so there's not a whole lot we can do no matter what we think about the value of the stock. So --

And, Patrick, as we've said before, it's been our objective to offset the dilutive effect of bonus equity through Treasury repurchases over time. We've accomplished that, frankly, and more in each of the last several years, and 500,000 shares is meaningfully lower than the bonus equity that we just granted. So we're going to continue to follow that policy in the right way.

Okay. Great. And then, finally, in asset management, we were expecting a larger revenue bump from the full quarter inclusion of the ABS. Could you speak to kind of the drivers there, and can there be a larger amount coming in over the next few quarters?

Well, keep in mind ABS is not consolidated, so therefore --

Right.

-- the only thing that shows up is our share of their income --

Yes.

-- net of the intangible expense. So it's not that big a number. That's why it's not a big number.

Yes, I mean, Patrick, we have roughly $600,000 of intangibles that --

Right.

-- we were required to recognize in conjunction with that, and we have not eliminated those in our adjusted pro forma presentation. So that --

I think that's what it is. Okay.

-- would be the issue.

Yes. All right. Thanks, guys.

Your next question comes from the line of Alim Shaikh, with KBW. Please proceed.

Hi, thanks for taking my question.

Sure.

In terms of your equity underwriting business, just wondering if you could provide some color on which industry verticals have been showing the most strength.

Well, we have three concentrations from a research point of view so far, which are TMT, FIG and transportation. So those are the areas where the firm is -- has the most vertical capabilities, if you will, between banking and the equity side. So we've had a particularly strong period in transportation and shipping-related equity financing. That's a sector which is really amenable to our approach, and we've done very well there. Evercore probably has the leading, for example, shipping banking practice anywhere. But transportation and shipping I would say has been number one.

Okay.

We're doing a financial institutions offering --

Right now.

-- right now. But those are the three sectors in which we're focused right now and which we're working in.

Great. Thank you.

There appears to be no questions at this time. I would now like to turn the floor over to Ralph Schlosstein for any closing comments.

I just thank everybody for being here, and I can assure you that we'll be here next quarter with a happier discussion. Thank you.

This concludes today's Evercore Partners first quarter 2012 financial results conference call. You may now disconnect.