Evercore Inc (EVR) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore second-quarter and first-half 2014 financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference call will be open for questions. (Operator Instructions). This conference call is being recorded today, Wednesday, July 23, 2014. I would now like to turn the conference call over to your host, Evercore's Chief Financial Officer, Bob Walsh. Please go ahead, sir.

Good morning and thank you for joining us today for Evercore's second-quarter and first-half of 2014 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 today we issued a press release announcing Evercore's second-quarter and first-half results. The Company's presentation today is complementary to that press release which is available on our website at 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 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 statement.

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 a detailed disclosures on these measures and to their GAAP reconciliations you should referred 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 have noted previously, our results for any particular quarter are influenced by the timing of transaction closings. I will now turn to call over to Ralph.

Thanks, Bob, and good morning, everyone. We are very pleased with our second-quarter operating results as we delivered record quarterly revenues with a balanced contribution from both our investment banking and our investment management business. Throughout the first half of the year the market environment continues to improve and our competitive position has remained strong. Announced transaction volumes are up significantly as large M&A transactions have returned and we are advising on several of the most significant ones including the sale of Shire to AbbVie; the defense of AstraZeneca against an unsolicited proposal from Pfizer; and the restructuring of Energy Future Holdings, the largest restructuring in the market today.

Revenue per advisory senior managing director on a trailing 12 month basis was $10 million consistent with our long-term through-the-cycle targets. We remain an attractive destination for some of the best talent in the business. We have announced the addition of three new senior managing directors already this year and have reached agreement with two more in the past week and hope to reach agreement with another in the next few days. More on that in the coming weeks.

Assets under management for the investment management business increased to $14.6 billion, reflecting our seventh consecutive quarter of growth, and we have purchased $113 million -- we have returned $113 million of capital to our shareholders year to date, repurchasing 1.7 million shares, nearly completely offsetting in the first six months of the year the dilutive equity effect of the equity bonus awards made earlier this year.

Let me fairly quickly go over the numbers. First, the second quarter. Second-quarter net revenues of $217.3 million were the highest quarterly revenues in our history and were up 5% from the same period last year and up 46% from last quarter. Net income was $30.7 million for the quarter, with earnings per share of $0.66. These results are up 4% from the prior year and 109% in comparison to the first quarter of 2014.

Operating margins were nearly 24% for the quarter and our compensation ratio was 58% for the quarter. Our non-compensation costs were $39.1 million, up from both the second quarter of last year and first quarter of this year. The increase in non-compensation expenses was affected by the general growth in our headcount and the pickup in our business activity. More on that later.

In the quarter we returned more than $42 million to our shareholders including repurchasing 572,000 shares. With respect to the first half, first half net revenues of $366.2 million were also a record for the first half and were up 2% from $359 million in the first half of last year. Net income was $45.4 million for the first six months of 2014, down 2% compared to the same period in 2013. Operating margins were 21.2% for the first six months compared to 22.5% for the first half of last year. Our compensation ratio was that 58.7% for the first half compared to 59.3% for the first half last year. Non-compensation costs were 20.1% of revenue compared to 18.2% for the same period last year.

Our margins and our non-compensation expenses for the first half were negatively affected by an increase in our non-compensation costs resulting from the steady addition of new talent as well as an increase in client-related expense in the second quarter. The client-related expenses often precede the signing of engagement letters and the recognition of revenue, just as the announcement of M&A transactions precedes closings. So over the coming quarters we expect the non-comp -- the ratio of non-compensation cost of revenues will normalize. I have stated many times in the past, in good times and bad, our business is best viewed over a longer period than three or even six months and we should not be judged on a quarter-by-quarter basis as we do not have control over the timing of the closing of transactions or the timing of the signing of engagement letters.

Finally for the last 12 months net revenues of $767.3 million on a trailing 12 month basis ended June 30 were also a record and the compensation ratio for the last 12 months was 58.9%. Let me now turn to call over to Roger.

Good morning, everyone. You can see that the investment banking side of the Firm did well in this past quarter. Revenue of $189 million was the best second-quarter on the banking side that the Firm has ever had and the second highest quarterly revenue ever -- 5% above the second quarter a year ago and 50% above the first quarter of 2014. For the first half of the year revenues were $315 million. That's also the highest six-month total we've ever had and slightly better than the first half of last year. Operating income for the second quarter was essentially flat versus a year ago and our operating margin in banking was 23.6%.

The bulk of this past quarter's investment banking revenue was, of course, as it always is, advisory fees. We did have, however, within those totals about $20 million of revenue related to advising on capital markets transactions, and that's a growing part of our business. The equity side of Evercore, which we include in our investment banking totals, contributed $12 million of the $188 million total for the quarter. That was up from the first quarter, primarily reflecting better underwriting revenue.

Across-the-board we realized 40 fees equal or greater than $1 million. That compares 38 a year ago. That's in the quarter and for the six months the total was 72, up from 64 last year. Total fee-paying clients in the quarter was 150, essentially the same as a year ago and up from 116 in the first quarter.

36% of our second-quarter banking revenue was earned outside of the US. That's the ratio we've been experiencing for some time now.

Ralph referred to our productivity, something we watch closely. Average revenue per SMD was $10 million on the same rolling 12 month basis we always use and that figure has been quite consistent really in recent quarters. And comp ratio -- in banking, 59.4%, down slightly from a year ago and from the first quarter.

We've also done well rather recently in terms of market share. We advised on the biggest deal this year and that's the successful takeover defense of AstraZeneca, vis-a-vis the Pfizer offer -- Ralph referred to that. Also the just announced $52 billion agreement for AbbVie to acquire Shire, the fourth largest deal of the year globally. We are also doing, as he said, the largest bankruptcy and a variety of other large transactions including the merger agreement involving our client, TW Telecom -- $7 billion to $8 billion.

You may remember that our share of the total reported fee pool has been rising consistently for several years. It will take a little while for all of that data to come in for this past quarter, but that trend is likely intact. On recruiting -- I think it's steady Eddie. We are again going to add either five or six senior managing directors on the advisory side this year. That's been our pace for quite a few years as those of you who follow us know. Three of them are done and, as Ralph said, done in terms of completed -- in every sense. The others are imminent. Very senior technology banker in Silicon Valley; a social media and Internet banker also in that Valley. International oil and gas banker in Houston, and we'll have other announcements shortly. Recruiting is the future. So that progress is vital. Remember that if we didn't recruit any new SMDs our short-term P&L would be better but a long-term P&L would be worse. So it is important to keep in mind the effects of this recruiting -- a very important aspect of what we do. I want to say, Ralph has done a great job in this regard because I just have to interview them. He actually has to negotiate with them.

We had 583 total bankers at the end of the second quarter, up from 563 at the end of the first quarter. A couple of comments about the market broadly. This was a strong first half for global M&A. Announced volume in total dollar terms was up 73% over the 2013 first half. The US was strong, up just about that figure, but results were really strong in terms of dollars across the board. For the second quarter specifically, the US announced volume doubled and European volume tripled.

It's important to note that these increases in dollar volumes are concentrated or have been concentrated so far in larger transactions. In fact all of the higher volume that I just referred to has occurred in the category of deals greater than $5 billion per transaction. That's important because this strong upward trend in dollar volume diverges from the other measure that everybody uses which is the number of transactions.

The number of announced transactions in the first half was flat versus 2013 on a global basis. Now, we are pleased to see this increase in dollar volume. It is positive for us. We've always had very high rankings in terms of revenues per SMD and so forth. So that is good for us. But you have to also have to be realistic about the market. It is healthy, but there's a lot of room to run. And it's not yet extraordinary. That's one reason I'm reasonably optimistic that volumes can and will improve further, at least in the terms of the number of deals. And that's a very important metric.

Now, why is this all happening? This improvement on the dollar side among larger deals. I think it's happening for a very basic reason. And the question you could ask is, why did it take so long to happen? US growth is slowly improving, but steadily so. Credit remains abundant and extraordinarily cheap. Equity values are higher and higher and confidence as a whole is slowly healing. Many of those factors, albeit not so much on the equity side, have been in place for some time, although they are strengthening, and the one great mystery about markets always at least in my experience is when the turns occur, which is always harder to figure that the very long-term direction. So the transaction market around the world is healthier and I think it's likely to improve somewhat further over the foreseeable future. Back to you.

Let me just talk briefly about our institutional equities business and investment management. Our institutional equities business generated $11.4 million in revenues, a 16% increase in comparison to last quarter driven principally, as Roger said, by higher underwriting activity. Expenses were $12.7 million for the quarter, up 13% versus the prior year -- prior quarter, excuse me. Year to date the business generated $21.2 million in revenues, essentially flat the same period last year. We now have research coverage on 339 companies and serve more than 400 clients. Our equities team continues to focus on sustaining revenue growth and maintaining strong cost control.

In investment management, operating income for investment management for the second quarter was $6.9 million on net revenues of $28.5 million, as positive valuation adjustments and the recognition of carried interest contributed $4 million to our revenues. Operating margins were 24.3%. In the first quarter of the year net revenues -- first half of the year, net revenues were $51.3 million and operating income was $10.1 million and operating margins, 19.8%. Assets under management, as I mentioned earlier, increased 5% to $14.6 billion, and our wealth management and institutional investment management businesses both experienced net inflows in the quarter and also benefited from appreciation in the market. In particular, our wealth management business continues to perform well, increasing assets under management 4% for the quarter to nearly $5.4 billion. Bob will now provide further comments on our non-compensation costs and several other financial matters.

Thank you, Ralph. As has already been noted in the call, our non-comp costs show an increase in the quarter. Let me give you some color on the two more significant items. First, as Ralph had noted, the most significant increase is driven by new business-related costs which principally show up in the travel line. So I won't comment on that further. Secondarily you will see an increase in costs associated with professional fees. This increase results from compensation due to a small number of first our senior advisers that work under consulting arrangements rather than employment agreements. This increase relates directly to business produced by these individuals and resulted in a corresponding decrease to compensation expense in the period.

In the bigger picture our cost for the 12 months ended June of 2014, our cost per person, which is the key measure we manage to, was approximately $127,000 per person. That's up slightly from prior periods. Taxes -- our adjusted pro forma tax rate for the first half was 36.7% compared to 38% for 2013. As we have indicated before changes in the effective tax rate are principally driven by the level of earnings in businesses with minority owners and earnings generated outside of the US.

In terms of our capital, our Board declared a dividend of $0.25 per share for the quarter and, as previously noted, we have repurchased 572,000 shares in the quarter, or 1.7 million, year to date.

The share count on an adjusted basis was 46.9 million shares, a decrease of approximately 300,000 shares versus Q1. The decrease reflects the effect of our share repurchase activity as well as the effect that a changing share price has on both the well Mizuho warrants and unvested RSUs. The average share price for the quarter was $54.87. Finally, our cash position remains strong as we hold $229 million of cash and marketable securities with current assets exceeding current liabilities by approximately $259 million. So let me turn it back to Ralph.

Okay. Let me just conclude with a few comments about the overall M&A environment in our business. As I have observed many times on his call, it is a mistake to judge M&A activity or Evercore's performance on the basis of one or even two quarters. Consequently the measure of M&A activity that I prefer is the trailing 12 months dollar volume and the trailing 12 months number of announced transactions. For 15 consecutive quarters ending the first quarter of 2014 this measure was essentially between $2.2 trillion and $2.6 trillion, or essentially flat. In the second quarter of 2014, the most recent quarter, this measure was $3.06 trillion, the first time it has been above $3 trillion since the third quarter of 2008. By contrast, as Roger pointed out, the number of announced transactions on a trailing 12 month basis -- number of transactions not dollar value, which is a more important driver of advisory revenues is still essentially flat.

So the logical question which Roger talked about is are we really seeing the beginning of a long expected recovery in M&A activity? Let me make a couple of comments on this. First -- there is no question it's mathematical that the first half of 2014 was stronger than the first half of last year, which I might point out was a particularly weak six-month period. The dollar volume of announced transactions, as Roger said, was up approximately 70% or around $700 billion. And, as Roger pointed out, this increase incurred exclusively or almost exclusively -- like 97% -- in transactions larger than $5 billion.

The number of announced transactions, which once again is a more important driver of revenues, was essentially flat. The dollar volume and the number of closed transactions as opposed to announced transactions also was still essentially flat, which has resulted in essentially flat revenues for the industry as a whole. If the momentum of announced transactions that we saw in the first half continues, we would expect that announced transactions would be followed in future quarters by increased closings and some increase in industry revenues.

With respect to Evercore, we just finished our strongest quarter ever in terms of the number of announced transactions. And as Roger indicated, our backlogs on both a risked and unrisked basis remains strong. So if the industrywide momentum continues we would expect that this trend could have a positive effect on industry revenues and if we sustain or continue our market share on Evercore as well. Obviously, the existence of any inceptive recovery and its strength is always difficult to predict, and it is equally difficult to predict if this recovery occurs, whether industrywide and Evercore revenues will begin to be affected in the second half of this year or next year.

One thing we can say confidently, however, is that it's always easier to predict the past than the future. Thanks very much, and we will now take any questions.

(Operator Instructions). Devin Ryan, JMP Securites.

I just wanted to come back to a guess the comment around greater deal value but flat deal count. I really appreciate all the color there but I just want to be clear in terms of the view at Evercore. Is it in your view just more a function of the cycle and big deals are going to drive that domino effect within industry so it's more just a matter of timing before more deals follow? Or is there actually some dynamic where just smaller companies or smaller deals in your opinion aren't occurring and something needs to change so that we see that broader participation in the market?

I think it's a matter of slow healing. So at least in theory, as Ralph said, the deal count should improve. I personally think it will improve, but I don't think it will be in any explosive fashion. Because as a whole, as I said the market is better, but it's not extraordinary and has a lot of room to run. And I think you will see a slow improvement on the deal count side following this surge on the dollar side.

Okay. All right. Great. And then with respect to the view that the environment is improving and Evercore is at least maintaining market share and hopefully growing market share, that would also imply that revenues per SMD should be improving from $10 million to something higher. So can you help remind us where --?

I think you've got to be careful about that. And I'll tell you why -- you know, there is a, as we have talked before, there is a maturity curve or whatever term you might like in terms of new SMDs such that it's the rare new person who joins the firm -- and as we said we will probably do five or six this year -- who joins the firm and hits a home run on the first week or month quarter. That doesn't happen very often. It takes a while for anybody, however good he or she is, to hit their stride in a new firm and become fully productive. And that can take -- it varies obviously with individuals -- but it can take a couple of years. So if you take a conservative assumption that new hires take a couple of years to hit their full stride and you are hiring, say, six a year -- and we have I think, Bob, correct me, I think we have 63 SMDs in banking today. Okay, so let's say we will have hired at the end of this year, six, and last year, six, just for illustration here. You've got a fairly high percentage of your total SMDs that are in the early stages of immaturity and that depresses the SMD numbers, right? So you just have to keep that in mind. We are big on recruiting, as you know. I said it's the future of the firm. But it has that effect. So you just have to keep that in mind.

Understood. And I guess with maybe that is the backdrop -- to the extent that there is some opportunity and then maybe the answer is that you think 10 million is just going to be the number, even in an improving the environment. To the extent and the production still has room for some improvement from here -- again, I don't think we necessarily get back to your pre-peak levels but can just you help -- maybe help us think about where the incremental margins would go? Because I'm assuming that past $10 million there is going to be --

Ralph will answer that, but one comment on what you just said. I don't want to imply that our productivity figures cannot improve. They can improve. I just want to say that you have keep in mind when you think about the relationship between revenue per SMD and the broad environment, that there is this extra factor of newer partners that you just have to take into account. I personally think our productivity figures may improve but I don't want to give you the impression that I'm down on that; I'm not. I just want to just explain how the dynamics work. So, Ralph, go ahead.

Devin, first of all following up on Roger's comments, in what has been an essentially flat environment, as I described earlier, our productivity has gone up from about $8 million to about $10 million per SMD. We don't have a conclusion as to why that has occurred. My hypothesis is that it has occurred because as Evercore's brand and repute has become more broadly known it's a little bit -- not a lot -- this is a hugely competitive business -- but a little bit easier to get at-bats and our batting average is a little bit higher. Whether that improvement in productivity per SMD continues and if the environment remained flat, I don't think anybody has any idea. The second part of your question with respect to if we did have a truly stronger environment we would expect that that would have, as Roger said, some affect on productivity per SMD, and the marginal profitability of that is quite a bit higher than the operating margins on the first $10 million of profitability. So I've often said, speaking to investors and others, the only operating leverage in this business is when productivity per SMD goes up. That does widen your margins.

Okay. Appreciate that. And then just lastly on the non-comp expenses, I just want to make sure that we are clear here. Does the uptick also imply that there was an actual uptick in the pace of engagements -- which I'm assuming we haven't seen fully in the public domain yet? Or was there something unusual about expense tied to a particular engagement or particular engagements in the quarter for something that may not recur if we are just thinking about in environment where the run rate on new engagements is flat. I'm just trying to parse through the comments on the non-comp.

I think, as we said, it's a function of both a higher level of activity. It's not any single engagement. But also we don't control when engagement letters are finalized.

Just to be clear -- and I'm certainly not the accountant -- but in the weeds of the accounting here, expenses can't be assigned to a deal until an engagement letter is actually signed. So if we have expenses incurred working with a client without an engagement letter signed, those show up as firm expenses rather than those that can be billed to clients. And keep in mind that as we add more people, I just said we have more bankers than ever in the Firm -- a pretty meaningful increase quarter over quarter here -- those figures, call them the pre-engagement letter costs are going to go up because we have more people.

Yes. Understood. Okay. Appreciate all that color.

Steven Chubak, Nomura.

So I was actually hoping to ask a follow-up on the nonpersonnel side. Ralph, I do appreciate the detailed commentary on what drove the increase in nonpersonnel expense. You did mention that you expect either the ratio or the expense to normalize in the back half of the year of the year. I was just hoping you can clarify your statement there. Should we expect that the full-year ratio is going to be in line with -- I guess somewhere in the middle of the range of the 16% to 20% that you guide to -- which is actually where it fell out last year, so around 17.6, or how we should think about that for the remainder of the year?

Steven, that's a reasonable way to think about it. Of course, the variable that always strives that ratio is printing the revenue.

Sure. I suppose the expectation is that given the strength that we've seen on the revenue side that ultimately that would translate into higher operating leverage. And so one of the questions that's been asked quite a bit this morning from clients is whether we can actually expect to see any improvement off of that 17.6% base that we saw last year or given that that was already in line for the targeted range that presumably that would be a reasonable expectation in terms of the run rate going forward.

Look, I think we did have, as we said, some blip upward in the second quarter and we do expect that to normalize. We've said that we expect it to be in the 16% to 20% range. We definitely expect that this year as well. We don't ever provide a view, because we can't as to whether it's going to the above or below 17.6% this year. Because as Bob said, the expenses that we are going to incur we know pretty damn well. The revenues, you don't. Those are the primary drivers of whether that ratio will be above or below 17.6% this year. So that's all we can tell you.

Understood. I appreciate the color. Also in terms of the commentary you guys have given on the M&A front, I appreciate the extensive detail you provided. Ralph, in the past you had actually talked about -- similar to the guidance you guys have just given -- the slower growth backdrop actually yield to a more, call it, protracted M&A recovery versus what we experienced in prior cycles. But given the strong pickup in volumes, not necessarily transactions completed or announced, but volumes this year after a four-year period of stagnating growth, has this altered your outlook at all in terms of how the current cycle may play out? Should it be more reasonable to expect another two years of growth, so more consistent with the five- to seven-year pick up that we've seen historically or could this still be, call it an eight- to 10-year cycle?

Since I can't see forward I'm going to let Roger answer that one.

That question comes back to the observation that Ralph and I each made which is that the M&A market, as I said, is healing but I would say slowly. So, I think the premise of your question is right. It's a little bit like the economy as a whole -- the US economy. It's been recovering so slowly that it may be able to grow for a longer period of time than one normally sees. I think that's true of the M&A recovery, too.

Okay. Great. And then just one last one for me. Just trying to better understand what's driving the large deals that we've seen over the last few months that have been announced. One of the things that we've been hearing is that the recent flurry of large deal activity has been really been more a function of deal momentum, call it, versus, say, improving fundamentals as some of the transformational mergers in certain sectors have effectively forced their competitors to respond in kind. The response has been by pursuing their own combinations. I didn't know if you expected to see a similar dynamic play out in some of the other sectors and whether that was a sustainable catalyst over a multiyear horizon.

My answer to you is I don't think that's the way it's working. The increase in larger transactions -- at least one man's view -- is -- traces to more fundamental factors than the one you just talked about. I've said on these calls for three years or so that the elements of a recovery in M&A were in place. And yet we didn't see it. Now we are seeing it, and, as I said in my prepared remarks, to me after all these years in the business I'm looking at markets as a whole -- the great mystery of markets is when the turns will occur -- no one knows that -- rather than the long-term directions. So arguably there should have been an improvement a couple of years ago. But anyway, there wasn't. And now I do think it traces to the fundamentals that I ticked off. Rather than the type of what I'll call micro factors you referred to, I think it's fundamental.

Okay. Understood. Thanks for the color and congrats on the record revenue quarter.

Alex Blostein, Goldman Sachs.

Good morning, guys. So first question is just on the competitive dynamic. I think one of the things we saw so far this year is the bigger banks market share in M&A landscape [has topped] relative to where it's been in the past. So curious to hear your thoughts on this. Is this just a function of the deals that have been announced or something else perhaps a higher emphasis on the business relative to some other parts of the business -- that these firms have tried to go after in the past. And then I guess more importantly how does that impact comp discussions and competition for talent?

Alex, I think there are many ways to measure market share. Probably the two that are used the most frequently in the public -- or the one used most frequently in the public is the share of announced deals on a dollar volume basis. And I guess I would make a couple of comments. First, while some of the large firms have indeed done well because some of the larger transactions have involved some amount of significant financing -- and they are so also are still big factors in the business -- on an overall basis I think the market share of the independent firms such as Evercore has continued to strengthen.

If I could just insert -- if you just look at the rankings for the first six months -- just in terms of the simplest measure, what number of rungs on the top 10 are occupied by independent firms I think it's higher than ever.

And then the second thing which is in some respects as important or more important and certainly is ultimately what we use to pay our shareholders and our employees is our market share of advisory revenues. And as Roger indicated, that has been growing quite healthily over the last five years. Last year our market share -- we monitor this very carefully -- there were 13 firms that were public and report there their advisory fees separately. That includes all of the large firms, with the exception of Barclays for some reason, and Greenhill, Lazard, Evercore, Blackstone. Our market share among those 13 firms grew from 1.3% -- with is of revenues, reported revenues -- grew from 1.3% to 5.2% from 2008 to 2012.

We don't really know what our market share is in the first half of the year because not everyone has reported yet. And second, with Moelis going public early in the second quarter there now will be 14 firms which we can measure our market share against. So, we don't have enough data to conclude at this point whether we are going to hold market share, gain market share, or lose. If we lose a little, sometimes that can bounce around just from one deal or two deals. But over the longer cycle I think we feel there's still a fair amount of room to run in the market share gains for the independent firms generally and for Evercore particularly.

Got it. That makes sense. Thanks for all the color there. And the point on comp -- I guess as the M&A cycle heats up, presumably competition for talent does as well. Have you guys noticed any meaningful shift in that dynamic over the last six months or so?

The only thing I would observe is that anything that's said about investment banking comp in July is not worth the air that it went over or the paper it was printed on.

Okay. Bob, one question for you, so without trying to kind of pinpoint you guys a margin target -- I understand over the near-term things can definitely fluctuate a ton. But as you think about the business over, call it a medium-term, right, so call it like a year or two years. Let's say consistent with your guys' view that this M&A cycle has still decent runway, thinking in a maybe low- to mid-double digit kind of growth in the revenues, what kind of operating leverage do you think we could anticipate from the construct of the business that you have?

As I said before, truly the only operating leverage in this business comes from increases in productivity per senior managing director and productivity per employee. Notwithstanding our experience over the last three years, which has actually blown a little bit in the face of that wind, as I described earlier I do think that's the right assumption. So improvement in SMD and productivity -- SMD productivity and productivity per total employees come from an uplift in the market as a whole. And sadly spreading Roger or Bob's or my comp over a few more SMDs or a few more people doesn't provide any real operating leverage.

Bob Walsh

And, Alex, the other point I would just add for color is again we look at cost per employee as the key measure as we are managing the cost base. As Roger noted, as we grow we are adding employees. So we get some growth in the absolute amount of cost. The cost picked up a little bit this quarter but not at any levels that are going to be significant in the context of your question.

And let me just add one thing, we've said pretty consistently -- I know I've said many times -- that we expect over time that this business can get to the 25% plus operating margins. That to us and the way one gets there is with non-comp expenses of 16% to 20% and with a comp ratio of 55% to 58%, 59% where we are today. And we have made, as we have promised, steady progress toward that goal.

We've also been very clear that, as Roger said in his comments, the investments that be make in people cost us margin and they increase the comp ratio somewhat. We feel very strongly that those are the right things to do for the long-term value creation in the business, and, as I said in my quote in the press release, we are constantly balancing the investments that we need to make in people which flow right through the income statement long before revenues materialize with our desire to make continued steady progress towards our ultimate margin goals. We've also said that if it ever occurred that we had an unusual opportunity to add talent that was truly extraordinary we might slow our progress towards that 25% plus goal because it would be helpful to long-term value creation. Very long answer -- I'm sorry but that's the way we think about it.

No. I appreciate it. It makes total sense. Sorry, one more for me -- I hate to be the tax rate guide but anything you guys incrementally can provide into the back half of the year as to in terms of what kind of tax rate we should be thinking about?

We look at it every quarter. We are required to be thinking ahead when we do it, Alex. So it's a function of two variables. Mix of revenue, how much is international in particular, and the performance of the businesses where we have minority holders. This is our best estimate today and we will continue to watch the performance of those two variables.

Okay. Thanks for the time, guys.

Joel Jeffrey, KBW.

Just in terms of some of the larger deals we've seen it seems like a lot of these have been driven by these sort of inversion transactions. Now that there's sort of discussions in the government about either reducing those are eliminating them, I just wanted to get your thoughts on the likelihood of that happening. And specifically could any changes be sort of applied retroactively, as has been discussed in the media?

Well, it doesn't appear likely at the moment, including reflecting on yesterday's hearing in the Senate Finance Committee. That legislation to limit or prevent inversions will occur in 2014. That does not seem likely. On the second question, historically in terms of tax legislation retroactive dates have been rare. In other words, bills are introduced all the time where the effective date of the bill is proposed to be the date of introduction -- the day it's introduced. It is not common however that those retroactive dates make it into the final bill. Not never, but not common. So those are my comments on it.

Okay. Great. And then, Ralph, in terms of the private equity revenues that you guys generated this quarter -- I appreciate some of the color you gave before, but -- and I know this is a volatile revenue line but in terms of some of the valuation adjustments, is this likely to continue going forward or is this -- were there certain sort of one-time events that occurred this quarter that make it unlikely to repeat?

I will let Bob give a more detailed answer. But I would just make one comment. Our private equity business is really small, and so it literally -- these are mark-to-markets on relatively very small investments that we have in these funds which the general partner always has to make investments. The only place we have these now in Mexico. As all of you know, our US PE business has been in wind down for some time and we are hopeful that the last investment will be sold at --

Tonight. (laughter)

Or tomorrow.

But certainly by the end of the year. Nothing to add in terms of Ralph's comments on predictability. Just to round out the portfolio a little bit. We still do have a small stake in Trilantic and that contributed as well this quarter.

Okay. Great. And then just lastly for me in general in terms of advising a client on a sort of defensive stance as you did with AstraZeneca, could you talk a little bit about -- just in general -- how the fee structure for a transaction like that is structured? Is it based on a successful defense? Is it based on a flat fee? Just any color you could give would be helpful.

Since Roger was involved in that, let me answer -- no.

It sounds trite but the compensation in every transaction, whether it's a merger or whether it's on the sell side, the buy side, defense, and so forth, it's really handcrafted, customized. And it's very difficult to generalize. Even if we wanted to tell you, which we don't, it would be very hard to.

Great. Thanks for taking my questions.

Douglas Sipkin, Susquehanna.

I just had two questions, one on the institutional or underwriting franchise. Obviously, you guys have proven that you can make it work and we've seen some good results. It does feel like you have some quarters where underwriting or advising on underwriting can actually make a difference. So I'm just wondering now that you have had some experience with this, is this an area where maybe you'd be looking to also expand? I know you guys constantly talk about your MD goals on the advisory side, but would you consider maybe getting a little bit bigger in this area or making some investment in this area given that it's actually been pretty reasonably good for you guys?

Keep in mind that all bankers work on underwritings. There's not a separate underwriting department in banking. So, I'm not sure where your question was going in that regard but, no, there's not an underwriting department at the investment banking level, and, no, we don't have a group of bankers who work only on underwritings and then another group that works only on mergers, and then another group that works only on takeover defense and so forth. It's one group of bankers and if your client -- if an underwriting is relevant to your client you work on it. Obviously we have specialists in terms of our equity capital markets group, but I just want to clarify that.

I would still call it an inceptive effort here. We've made a fair amount of progress in our equity [underwriting] revenues but they're still small relative to our advisory business -- M&A, restructuring, capital markets -- advice and we would hope that we would continue to have -- to experience meaningful growth in our equity underwriting business both as we move up the food chain effectively by having -- getting a little bit more of a higher percentage of the fees in underwriting as we prove ourselves out more. And also by participating in a broader array of industry transactions as our clients become more and more aware of our capabilities in this area.

Great. I guess maybe let me rephrase it a touch because I don't want to confuse you. Effectively I guess I just got the impression that some of the M&A bankers pushed when their opportunities for underwriting and maybe some didn't. I guess are you seeing, given your success, that a greater percentage of maybe traditional advisory guys are now saying, hey, we know what, I can do this, too? Are you feeling a greater percentage of the MD count is pursuing this is little bit more than maybe when you first started it?

I would steer you away from that thesis. I don't really think that's accurate. Look, there are bankers who works in industries where underwritings are much more common than other industry. But in terms of the premise of your question, no. That's not really the way it works here.

Okay. Great. That's helpful. No, thank you, that's fair. And then just a little bit of color on the wealth management. I saw you increased your ownership interest to basically 62% from 51%. Maybe can you shed a bit of light on how that transpired. Was that contractual or was that a decision you guys made? And maybe just a little bit of an update around that.

It was contractual and there is one more contractual purchase that will occur in 2018. After that it's contemplated that Evercore will own 75% and the employees will always on 25%.

Great. Thanks for that color.

Hugh Miller, Sidoti.

So, appreciate all the discussion around the overall market environment -- all very, very helpful. Just had a couple of quick questions that were more granular. One of which, with regard to the managing director side, obviously gave us your expectations for recruitment. As we think about kind of the net headcount and the potential for whether or not there may be some directors that would go to the senior advisor role, is that something that you would anticipate for the year?

Not between now and end of the year, no.

Okay. So that should be likely a net figure increase as well. And then one question with regards to the flows for the asset management business, if you could just give us some color -- I apologize if I didn't get it -- but on the market appreciation versus the flows.

I mean we had inflows in both our wealth management and in our institutional money-management business. In terms of the precise numbers, Bob, do you want to --?

The appreciation was just under $500 million; the net flows were about $350 million.

Okay. Great. Appreciate that. And then just one other question in the asset management business. You gave us great color around the investment banking side. The cost and in that business did come in a bit leaner than what I was looking for. I was wondering if you could provide any color there and if there was anything that was maybe an unusual expense benefit or something like that in the quarter?

Hope we didn't disappoint you.

The ratio had more to do with top line than the expenses, as we talked about earlier in banking.

Yes. Okay. I appreciate it. Thanks so much.

Jeff Harte, Sandler O'Neill.

A few for me. First with the improvements in the operating environment -- and it may be too soon to answer, but do you notice any change in kind of the recently hired SMDs ramp-up trends or potential rental trends as far as generating revenues?

No.

Okay. Secondly a couple of things on Europe -- one, I know we hadn't seen kind of all the geopolitical risk increase really impacting conversations. Is that still the case? Are you sensing any kind of a spillover to M&A conversations in Europe from Ukraine and the Middle East and places like that?

Ukraine hasn't been a big M&A market historically.

I'm thinking more of the potential of that becoming a problem for Europe -- either losing energy or potentially going to war.

We've never done a call for an hour. So, please excuse us.

Now you finding out what happens to Evercore when you have an hour-long meeting. It disintegrates. We keep them short here. I think the answer, though, to your question is no. I pointed out in my own comments that European M&A volume in dollar terms in the second quarter tripled and the Ukraine crisis has been unfortunately at a high level of prices for some time now. So, I think you can look at the numbers and say to yourself, it doesn't appear to be the case that that's having an effect.

Okay. To the extent Europe recovering is obviously good news, how do you guys view your positioning there as far as covering Europe -- kind of geographies and industries? Are there holes to fill? How comfortable are you with your coverage of Europe right now?

I would say we have a good business in Europe. I think other than the two independent firms that are born there, Rothschild and Lazard, I would say we have the best independent franchise of any other firm. But nonetheless, we were a firm whose origins are in the US which after all is the largest M&A environment if you are going to have origins some place, this is the place to have them. And as a consequence I think we have percentagewise more opportunity to grow there than we do in the US market where our business is a little bit more mature.

Okay. And finally, just on the non-comp side, acquisition and transition costs went from essentially nothing to a more meaningful number this quarter. Anything behind that? Or how do we think of that line item?

We are always looking at different opportunities in the business. This quarter we spent a little bit more time looking at an opportunity or two than usual.

Okay. So it's somewhat one time in nature, the jumping to $1 million plus?

As I said, we are always looking at things but yes, it's less frequent that there is a big number there.

Okay. Thank you.

Michael Wong, Morningstar.

I believe your European senior managing director headcount has actually decreased over the last several quarters. Do you believe -- or do you plan to increase that going forward as the European environment is improving? Or is maybe the human capital environment becoming too competitive over there, so it's harder to hire or keep talent?

First of all we did make last year a conscious decision because of our concern about the European market not to aggressively hire in Europe -- that was in 2013. So we had -- of the hires that we made last year, none were in Europe. And we did have one person who has chosen to pursue a different career, which we were very supportive of. So that's the degree of the change. And as I indicated in my opening remarks, one of the senior managing director hires that we have made, this person has resigned but we haven't announced who it is and what they do, but one of those is based in Europe.

Okay. And in the institutional securities business, fairly good revenue but it's still running in the red for the first half. Is the expense base a reflection of your full-year accrual or budgeted expenses, so you would expect your revenues to be a little above that in the back half of the year? Or possibly based on your view of maybe your underwriting pipeline?

I think the headline is we would expect the revenues more or less being equal to be towards the back half of the year. There was a modest amount of front-weighting of some of the cost but it's really revenue driven.

Okay. And a quick last question -- so in general with your historical and currently still strong position in large transactions I'm a bit surprised that your outlook is so cautious. So doesn't the current large deal-heavy environment actually play to one of your empirical strengths?

Yes it does, but we are just trying to be realistic about the environment. Again, let's not give you the wrong impression. It's improving, as I said, slowly healing -- that's my favorite phrase. So, it's getting better and, as I said, the outlook, I think, over the foreseeable future is good. In other words, we should see further improvement. But if you do look at the deal count numbers, in the spirit of just practical reality, they are flat. So there's a lot of room to run, as I said. So, we are cautiously optimistic, but we also are trying to paint an accurate picture of the market. If you read a lot of press accounts you would think that the market is was hotter than a firecracker and the biggest boom since a long time. And it's doing better but it's not at that level of extraordinary-ness yet. That's all.

Okay. Thank you for taking my questions.

Vincent Hung, Autonomous Research.

Hi, good morning.

There is a very bad spot for an analyst who stands between us and dinner. Go ahead -- I'm sorry.

Yes. My first question is, just on your [content] backlog. You said on unrisked and risked backlogs are strong, but how does this relate to what you said in Q1 where you said it was at record levels?

They're strong. That's what -- all I care to say about it. That's all.

Okay. And then TMT, [FIG] and energy had been typically very strong sectors for you on a revenue basis but when I look at the announced deal volume for you guys compared to last year it's down quite meaningfully. I don't know if you can give us a bit of color into your outlook for M&A in those sectors?

Well those are strong sectors. But the sector that, of course, has been so much in the headlines has been health care and you've seen the series of very substantial transactions -- a number of them inversion-centered transactions in healthcare. But our energy, FIG, and TMT strongly are. Obviously -- but anyway, they are.

Okay. And I guess just related to that, so, yes, as to say, we've had a lot of these tax inversion health care related deals. Do you think a lot of these large deals as having spillover effects into sectors is acting as some sort of bell ringer for companies and management in other sectors to contemplate larger deals?

That's a version of a question that we talked about earlier. I just think it's fundamentals. I mean I don't really, myself, meet with too many companies who wake up in the morning and say, wow, look at that other deal over there -- I guess I better do one. I don't think that's the way most companies think. It's fundamentally driven by fundamentals -- specific corporate strategies and so forth.

Okay. And the last question for me is can you just give us a bit of color around the revenue concentration for this quarter?

It continues to be as you would expect, highly diversified.

Okay. So nothing particularly outside this quarter.

I would point Roger's remark earlier about the number of these over $1 million. It continues to increase; it's very broad-based.

Okay. Great. Thank you.

Brennan Hawken, UBS.

Sorry guys, I tried to remove myself. This has dragged on for a while.

Now that you are here, come on in for lunch.

Since I am in, I guess I will just pound on a few ones real quick. Can you give any color on how much of the professional fees line is tied to employees working on a consulting arrangement. That was really helpful color on the non-comp front.

I don't think we should get into that level of detail. It's the first time it's been an interesting number, Brennan. Probably gave some color on it.

Okay. Fair enough. And then it looks like cash is building on the balance sheet. Is that just maybe you guys getting started a little early this year on building towards year end, or is there more dry powder for some buybacks here in the back half?

Both.

Okay. And then last one -- I think you guys said that it was $20 million in cap markets advisory, right? How much of that is included in the in the institutional equities revenue?

As we've said consistently, when we deal with underwriting -- and a significant amount of the $20 million was underwriting, about half goes into capital markets. I don't want to get into greater detail than that.

So it's no different than the half. Okay that's helpful. And then I guess last one, you referenced expense control in institutional equities, but the expense run rate seems to be meaningfully higher the last few quarters. So can you help us understand what's driving that and whether or not there's any flexibility there for you guys?

The main driver has been the addition of heads. I would just come back to our cost per person which is the main metric we focused on; has gone up a bit. Some of that is influenced by these quarter specific matters in travel and professional fees that we talked about today. It's pretty steady, Brennan.

Okay. Thanks for the color.

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

Nothing to say, I've left for lunch.

Thanks, everybody.

See you next quarter. Bye-bye.

This concludes today's Evercore second-quarter and first-half 2014 financial results conference call. You may now disconnect.