Evercore Inc (EVR) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Partners second quarter 2012 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions). This conference call is being recorded today, Thursday, July 26, 2012.

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

Good morning and thank you for joining us today for Evercore's second quarter 2012 financial results conference call. I'm Bob Walsh, Evercore's Chief Credit Officer. Joining me on the call today are Ralph Schlosstein, our 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 second 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 Evercore website and an archive of it will be available beginning approximately one hour after the conclusion of this call, for 30 days.

I want to point out that during the course of this conference call we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. Those 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 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 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 of closings, both in the Advisory and Investment Management sides of our business. I will now turn the call over to Ralph.

Thanks very much, Bob, and good morning, everyone. Despite a quite challenging market environment, we are pleased with our second quarter and first half results as we delivered record quarterly and six-month revenues and record quarterly net income. Our investment banking revenues for the first half of the year grew by 23% on the strength of our global advisory business. We achieved this growth despite the 30% decline in the volume of completed M&A transactions globally for the period. Our early-stage investment banking businesses were in the black for the quarter, contributing marginally to profitability. Our Investment Management business generated $21 million in revenues during the quarter, an increase of 2% in comparison to the first quarter. Our operating margins for the quarter returned to levels that are acceptable in the current environment, though the six-month results continue to lag in light of the weak first quarter.

We continue to have success recruiting new senior management directors, expanding our geographic and sector coverage. As we recently announced, we will be opening a new advisory office in Toronto next week, which will be our 12th advisory office globally.

Let me quickly go over the numbers, starting with the second quarter. Second-quarter net revenues of $172 million were up 63% in comparison to the prior quarter and up 23% year-over-year. Our revenues are the highest we have ever achieved in a quarter. Net income was $21 million for the quarter with EPS of $0.49 a share. Net income is up 391% from the first quarter and 19% from the same period last year. Our net income for the quarter also is a record, and our EPS are $0.01 short of our all-time high, which was achieved in the very strong environment of the second quarter of 2007.

Our compensation ratio was 60% for both the quarter and the last 12 months, in line with the past year. The non-compensation ratio was 19% for the quarter, down from the prior quarter but up from last year, due in part to continued high activity levels in our advisory business and the higher level of facilities-related and professional services costs in the quarter. Bob will have more to say about that later in his remarks.

For the first half of the year, net revenues were $278 million, up 13% in comparison to last year. This was also a record. Net income was $26 million for the first half with earnings per share of $0.58, down 13% versus last year, reflecting the weak first quarter and higher level of operating costs in 2012 following our acquisition of Lexicon Partners, which closed in August of last year.

Let me conclude my remarks by making a couple of broader comments. First, with respect to the near-term outlook, there is clearly some uncertainty. Quite honestly, if I look only at our advisory business, the productivity of our advisory partners, the growth in the number of advisory partners and our backlogs, which is, after all, what drives our financial performance, I am confident that if the markets do not get excessively disrupted by the European financial crisis and the US fiscal uncertainty, our first half strong performance in revenues is sustainable for the remainder of the year.

Moreover, if market conditions do not get excessively disrupted by Europe and the US fiscal cliff, our year-to-date operating margins should continue to improve as our weak first quarter becomes a smaller influence on our year-to-date financial performance. So all of this is cause for optimism.

If, on the other hand, I look at the rest of the world, the uncertainty around Europe and the US fiscal situation and the volume declines in M&A activity globally in the first half of the year, I would have reason to be a little more cautious. So we are running the Company to be careful to take into account both of those scenarios. If we look at our business today, it looks very promising. But certainly, the rest of the world has some clouds over it at the moment.

Longer-term, there are very good reasons to be optimistic about our business. Our independent advice-based business model has never been more receptively embraced by CEOs, boards of directors and other business leaders. The clients quite honestly are voting pretty strongly for this model, both with respect to Evercore and some of our other independent competitors. And our operating model has never been more attractive than it is today to the advisory-oriented senior banking professionals who ultimately drive the growth of our business. These two factors have driven our market share gains over the last couple years, and I am confident that they will continue to do so in the coming years.

Let me now turn it over to Roger, who will talk about our advisory performance and the M&A environment.

Hi, everybody. You can see from our release that the investment banking business at Evercore, which of course dominates the firm, performed very well during the second quarter. Reflecting Ralph's comments, our net revenues in Banking were an all-time record, $151 million, up 78% from last quarter and up 35% from the second quarter a year ago. Operating income also a record, $35.5 million, also up nicely from the two prior comparisons.

Operating margin is essentially the same as a year ago, down a small fraction. Six months, arguably a better gauge, investment banking net revenues were $236 million, up from $193 million for the first half of 2011. That's a 23% gain; operating income slightly down for the six months, $43 million versus $45.7 million. But the main point is that both those numbers are very strong numbers. And that change or slight decline really reflects the extent to which we continue to add senior managing directors and the higher business development costs which come along with that, which are in the long run a good thing; and the fact that we integrated Lexicon largely during the first half of this year, including moving out of our own office, moving out of their office into a new third one and the cost associated with that.

The number of fee-paying clients increased to 137 in the quarter, up from 104 in the first quarter and 77 for the year-ago quarter. The number of clients paying the firm $1 million or more reached 30, very strong number. The comp ratio in Investment Banking was 59.4% for the quarter, down from 64.5% in the first quarter and from 60% in the year-earlier quarter. Non-comp costs, 17.1%, down from the first quarter, up a little tiny bit from the quarter a year ago. I would describe our backlog as strong.

Market share -- Evercore has been performing very strongly here for quite a few years and did again. Among all firms, from Goldman Sachs, Morgan Stanley, J.P. Morgan and so forth on down, in terms of completed transactions during the first six months in the United States, Evercore finished sixth. And in terms of announced transactions in the United States, Evercore finished ninth.

I want to emphasize that each of those two categories, if you just look at the league tables, you see a series of universal banks and bank holding companies and then, as has been the case for a long time in the US market, the first of the independent firms, which appears at Evercore.

Productivity on a rolling 12-month basis for the second quarter is $7.5 million per SMD. It's a bit higher than the end of the first quarter -- than it was at the end of the first quarter and about the same as a year ago. On headcount, we added 24 bankers, banking professionals, during the second quarter, 21 in advisory and three on the equity side. And we ended the quarter with 58 senior managing directors in banking.

A couple of broad comments to close -- you can see that Evercore is performing strongly. And I think that has to do with, as Ralph said, the strength of the model; and it has to do with the degree to which we are strong in both M&A and restructuring, not just one. And if you look at our results, as we just announced on this morning, compared to a series of other firms, we look rather good. So it seems pretty clear that we're doing something right. We are continuing to expand steadily, just as we have been doing for some time. So far this year, we've announced three new senior managing directors, two in restructuring -- Steve Wellington in London -- I'm sorry, one in restructuring, Steve Wellington in London; Randy [Stetson], also in London, transportation; and George [Estee]; as Ralph mentioned, for Canada. And we expect to announce three additional more SMDs, before our next earnings announcement. We are confident on that because they have been signed but we are not free yet to announce them.

Again, you can see that in the United States, Evercore is the number one independent investment bank. And that's, of course, the world's largest market. And you can also see or you know that for the past six years since we went public six years ago and a couple of weeks, we've been relentlessly globalizing ourselves. And our presence in London now with about 120 people, about 100 people between Mexico and Brazil, our group in Hong Kong, our major joint ventures in India, China, Korea and Japan -- we are making progress, although this is a long long-term effort.

Finally, on a global M&A market, as you can see, our business is obviously pretty good in this M&A environment. And I would describe the environment as a solid one. Yet, so far this year, most people have been surprised in the sense that at the outset of the year there was a widespread expectation that the volumes across the world would be higher. And so far this year on a global basis in announced terms in dollars, they are about 20% down, 21% down, to be specific.

But as I say, I think the environment is a solid one. And I say that in terms of historical standards looking back over many years. The flow of transactions, in my view, is steady. Just this week, you've seen a series of pretty major M&A announcements, including the CNOOC and the UTX announcement. And I would expect the environment to remain relatively steady like this and that the next major move in the environment will be upwards, not downwards. Now it's always possible, of course, that there's an implosion in the Eurozone, and I think all this would be off if that happened. But after that, I think the environment will remain steady and that, as I said, the next major leg in one direction or the other will be upwards.

Because, after all, as we've so often said, most of the basic ingredients for helping M&A volumes are in place in terms of extraordinarily low interest rates, very good credit availability, reasonably upward share prices. And in terms of business conditions, that is the one sort of yellow signal, because I would describe them as fair rather than strong. But in general, ingredients for M&A are fairly good. They are not perfect, but they're fairly good, and that's why I think the environment is a steady one. So on that note, back to Ralph.

Thanks, Roger. Let me briefly update you on our other businesses. First, institutional equities, the business generated marginal profitability this quarter, generating $6.7 million in revenues, a 29% increase in comparison to last quarter while maintaining expenses at the first-quarter levels of $6.6 million. During the quarter we continued to increase our market share as our transaction volumes increased by 22% in comparison to the first quarter compared to a 2% increase in volume in the broader market. Our capital markets team participated in eight transactions during the quarter, helping clients raised $6.4 billion in capital, and we remain optimistic in our pipeline for the second half, market conditions permitting.

Our private funds team was successful in closing two capital raises during the quarter and has won several new mandates, improving its backlog for the remainder of this year and beyond. It also contributed to profitability this quarter.

Investment Management -- operating income for the Investment Management business for the second quarter was $900,000 on net revenues of $21 million. Assets under management decreased to 8%, to $11.8 billion as we continued to experience outflows in our institutional asset management businesses as performance challenges at Atalanta Sosnoff continued. Quite honestly, this is the one cloud in our business right now.

Our wealth management business continues to perform well, increasing assets under management by 3% for the quarter to $3.6 billion. Finally, our unconsolidated affiliated managers contributed positively to this quarter, delivering $0.8 million of net profits with ABS being the largest contributor there.

Let Bob now comment further on some of our non-compensation costs and other financial matters, and then we'll open it up to questions.

Thanks, Ralph. As we've indicated, our non-compensation costs were just about $33 million for the quarter, up 9%, and these were delivered by higher facilities costs, as we've indicated in prior calls. As Roger mentioned, we have completed the move out of both Paternoster Square and Hill Street; and as a result, the redundant facilities cost in the UK is now behind us. We've also had higher business development costs in the quarter as well as somewhat higher professional fees, again due to growth, as Roger described.

Our tax rate for the quarter was 38%. Our financial position remains strong with nearly $200 million of cash and marketable securities. And during the quarter, we repurchased a bit more than 1 million shares of stock, performing against our commitment to offset the dilutive effect of equity that was awarded for bonuses. Finally, our Board declared a dividend of $0.20.

So with that, operator, can we open the line for questions?

(Operator instructions) Hugh Miller, Sidoti & Company.

Hi there. I had a question about the color you guys have given about the sustainability of the revenues in the second half of the year, barring an implosion in Europe. I was wondering, are you saying sustainable from the second-quarter levels or from the first half of the year's revenue levels?

The comment was about the first half.

Okay, okay. And with -- a couple of questions on the asset management segment -- comp ratio trended up a bit higher than what I expected. I was wondering if there's anything in particular that may have been driving that?

With respect to the whole business, was that, or --

Yes, for the whole business for the asset management side.

Oh, for asset management -- yes, it's really a function of when revenues go down, both the comp and non-comp ratios unfortunately go up because not all the comp is variable, and most of the non-comp is not variable, which is why we've seen much lower margins in that segment.

Sure, I guess it just -- it trends up a touch higher. But one thing I did notice in that area was that the pace of outflows slowed from this quarter relative to the March quarter, and I was just wondering if that's just a function of those can be quite lumpy, or are you noticing any trends there where you would anticipate some improvement on the flow side?

The pace did slow somewhat. I think it's too early to say whether that is a systemic change or whether it's anecdotal.

Okay, and on -- I know you guys have detailed this before. But on the non-comp side within the Investment Banking segment, you referred to some redundant costs. I was wondering how should we be thinking about that reduction as we head into 3Q.

We think that roughly $2 million of the costs that we saw in 2Q should not recur as we go forward.

Okay, and then you talked about obviously strong trends on the recruiting side, and that it appears that 3Q is off to -- will be off to a good start. Does the operating environment that we're in right now give you any pause on the recruiting side, especially given that, I guess for the first time, we've seen in some time this year you did have some turnover with the SMDs and some people moving to a senior managing role. Just your thought there would be --

Okay, well, two things -- first of all, with respect to the second, those are healthy, constructive things for the firm, and they have been done with the mutual assent of the individuals involved in the firm. And I think any organization that is healthy and growing and aspires to be the elite firm, which is what we aspire to be, will have some sorting out of senior professionals either as their interests change or as the firm's direction changes a little bit. So I view that as -- I certainly can't think of anyone, any example of something that happened that we weren't a party to and interested in.

Second, as Roger indicated, we've announced three hires. We have made three others which are not yet announced which we will announce before next earnings call. We have, because of the environment, consciously not taken advantage of every single opportunity we had this year. I would say this year, we could have, had we chosen to, hire 10 or 12 senior managing directors. And by the way, some of those very much in response to incoming calls, which is a fairly unique change from previous years. And we have been -- we've always been highly selective, but this year we were ultra-highly selective. And we basically have tried this year to balance our desire to continue to deliver good returns to shareholders and to grow and lay the foundation for significantly increased value in the Company in the future. And we've discussed this in the past, but the reality is that every hire that we make costs a few cents a share on the income statement of the period in which they are hired because the basic meter of these things is they tend to leave their firm in April or May or June; they've got three months garden leave -- in some cases, six months. So they don't join the firm until August-September -- in one case, October -- and it is literally almost impossible for someone to generate revenues in a three or four-month period of time because that involves getting hired, getting a deal announced and getting it closed, which is very difficult to do.

So we have moderated the amount of hiring that we are doing because of the other half of my comments about -- you know, the caution about the exogenous this environment.

Okay, great color there, I appreciate it. The last question I had was with regards to capital deployment. And you guys have always been a bit opportunistic on the share repurchase side. Obviously, you issued a strong dividend in the quarter. But has there been any discussions about maybe focusing a bit more on share repurchase and less on returns via dividend, given the current stock price?

The answer is no.

Okay, thank you.

Devin Ryan, Sandler O'Neill.

Most of my questions were just asked, but just one on the M&A outlook. I know that your average deal size is on the larger side. But within your outlook for M&A activity, I'd just be interested to get some perspective on whether you're seeing any difference between the appetite or need to do deals between the large clients that you speak with versus maybe some of the more middle-market clients. Is there any difference, or is it all the same drivers?

I think it's all the same.

Okay. I mean --

I could elaborate, but it wouldn't add anything. (laughter).

Okay, good, I was just curious there. Secondly, on the restructuring environment, just circling back, I know things have trailed off. But you've given maybe some increased macro uncertainty, I don't know if that's changing the outlook or beginnings of the pipeline there or if we're just not there yet.

The restructuring environment is better, I think, than a lot of people think it is. And it's not really because, wow, there are some dark clouds out there and restructuring has picked up. It's that there just has continued to be a series of restructuring opportunities. We are doing rather well, but so are some other people in that business. And those opportunities, by the way, some of which -- some of them are in Europe.

And so the business never, in a sense, dried up after the events of 2008 and 2009, although of course it did -- was at such high levels immediately after that it came to lower levels. So I would describe the restructuring business, at least at Evercore, as -- it's really quite healthy. And I think it's going to continue to be because there's no sign of -- there's no sign, at least to me, that it won't be.

Okay, great. And then just lastly, I don't know if you guys can provide an update -- I'm sorry if I missed this -- but on acquisition appetite or even whether the opportunities are continuing to come across the desk and what the thoughts are there currently.

I would say that, given our outlook for our business and the current value of the stock, it's hard to imagine that there's anything more attractive for us to buy then Evercore stock at this point.

Great, I agree. Thank you very much.

Joel Jeffrey, KBW.

Just to follow on Devin's question, and maybe just answered it, but I'll go ahead and ask it anyway. You've done a number of deals in terms of your investment management business and you've been suffering some outflows in that business lately. Is there any thought in a different strategy or taking that business in a different direction than you are currently operating in?

That at the moment, no. I think we want to continue to grow the businesses that we have -- we have been. Last year, we did. We had a number of early-stage businesses and we've been gradually addressing them. We shuttered our private equity business or put it into runoff about three years ago. We've closed Evercore Asset Management, the small and mid cap value manager that had been in business for about five-plus years, last year. We have another small asset management business that we're looking at right now. So I think we're basically in a mode of making sure that the businesses that we have have long-term strength and viability and then building those.

And in terms of use of firm capital, my statement before, I hope, is pretty clear that given where the stock is today., the free cash flow that we have that's not used for dividends is going to be used for share repurchases.

Okay, great. And this is maybe just a housekeeping question, but when you're discussing the Institutional Equities business and the revenues generated out of that, was the capital markets activity included in that number?

As is typical in most firms, it's half of the capital markets activity. It's generally split between banking and equity business.

Okay, great.

Half of the revenues are accounted for in terms of advisory and half in terms of equity.

Okay, and then just lastly, I'm not even sure if this is still relevant. But you had some warrants attached to the Mizuho debt deal you had done a few years ago, and I think the strike price was around $21. If the stock continues to stay below there, would those be considered anti-dilutive going forward?

Yes.

Okay, thanks for taking my questions.

Alex Blostein, Goldman Sachs.

I was hoping you could give us a little more color the way you think about operating margins in the investment banking business over the next couple of quarters. I guess, given the backlog that you guys are seeing and the top assignments that you guys are getting on because, if I look at the margins on a year-over-year basis, down about 600 basis points or 18% year to date, is that a decent run rate, do you think? Or, there could be more things you could do on the cost side to get the margin back to kind of mid-20s?

I think our comments were the comments I made were intended to essentially say the following. First of all, there are -- the year-to-date margins, when you have one less good quarter, as we did in the first quarter, year-to-date numbers, that represents roughly 50% of the time at the end of the second quarter; it represents one third of the time at the end of the third quarter and one fourth of the time at the end of the fourth quarter.

So given outlook that we have for our business, there's a tautological mathematical improvement that should come from margins as that quarter becomes less consequential to the year-to-date numbers. The second thing I think that Bob said is that there are some number of one-time items associated with consolidation of facilities and other factors that we also believe are somewhat helpful in that regard.

I would add one comment, which is I think our margins in banking are lower than they should be. And so we'll see if we can get them up. We should be able to, but I don't want to make any promises until we actually do it.

Got it. And then maybe my second question, I guess, on the recent hires you guys have made and the pipeline that you were seeing, could you elaborate a little bit more, I guess, on the structure of the pay packages as far as the vesting of -- maybe the breakdown of percentage of deferred stock versus upfront cash to help us better gauge the flexibility on expenses going forward?

Well, we're not going to go through in great detail as to the kind of offers that we make because we consider that proprietary.

Basically, each case is different.

They're all different.

Sometimes, you hire people who, for one reason or another, aren't leaving anything behind and you don't have to deal with it in terms of earned but unvested equity. In some cases, you are dealing with people who are. In some cases, you are dealing with people that walk in, they're very confident, they just want to start work. In some cases, you're dealing with people who want a first-year assurance. Every case is different. It really is; every case is different.

But the one thing that is true of all of them is that their first year, which is a stub year impact on the income statement, is negative.

Well, anybody you hire from an existing firm, and that's everybody, in our case, is subject to garden leave. And some firms have three months garden leave, some firms have six months garden leave. So they just can't show up until midyear, in general, mid-year. And as I've often said, it's almost impossible to actually close a deal within the six months of your arrival, just because of the amounts of time it takes, once the deal is announced, to actually close it.

So, by and large, the first year for almost everyone is a zero on the revenue side, and then they begin to produce beginning in the second year. That's just the way the world works because of garden leave.

I would say, though, too, that the hires that we made last year have had an important impact on the success of our business this year. So certainly, the historical evidence over the last few years, and we've gone back and looked at this pretty carefully, is that any good hire is significantly accretive to the value of the business and produces rates of return that are much higher than any other use of capital that we have.

Got it, thanks for taking my questions.

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

All right, well, thank you all very much, and we're going back to work and hopefully generating some good returns for you the next couple of quarters. Thank you.

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