Evercore Inc (EVR) 2016 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 2016 financial results conference call.

(Operator Instructions)

This conference call is being recorded today, Wednesday, July 27, 2016. 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 all for joining us today for Evercore's second quarter 2016 financial results conference call. I'm Bob Walsh, Evercore's Chief Financial Officer. And 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 today, we issued a press release announcing Evercore's second quarter financial 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 for 30 days beginning approximately one hour after the conclusion of this call.

I want to point out that during the course of this conference call we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include but are not limited to those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the Company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures which are non-GAAP measures that we believe are meaningful when evaluating the Company's performance. As you may have noted in our press release, we have modified the description of these measures, eliminating pro forma from the captions. For clarity, we have only changed the captions. The amounts and the principles used are consistently presented and applied.

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 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. I'll now turn the call over to Ralph.

Thank you, Bob, and good morning, everyone. Before we begin, let me note that Roger is joining this call from outside the office while Bob and I are in New York, so we apologize in advance if the repartee between Roger and me is a little less entertaining than normal.

Let me start by saying that we are very pleased with our results for the second quarter and the first half of 2016. Net revenues for the first half of 2016 were up nearly 20% versus 2015. Earnings were up more than 35% year-over-year, and earnings-per-share were up 39% versus 2015. By any measure, we believe that we have had quite a strong start to the year.

In advisory, we continue to see activity from multiple sectors, including healthcare, TMT, financial services, transportation, and energy. Healthcare in particular has been a strong sector globally for Evercore this year as we ranked number one in the league tables in the dollar value of announced transactions among all firms in the first half of 2016. And our teams have focused on restructuring, activism and defense, M&A, and capital raising also are all busy. While most of the independent firm competitors have yet to report their results, we anticipate that our market share of the disclosed advisory pool for the past 12 months, among all firms, will be between 5.5% and 5.7%, up from 5.1% at the end of 2015 on a trailing 12-month basis and 5.3% at the end of the first quarter.

Underwriting activity rebounded as we delivered our second best quarter for underwriting revenue driven by the continued migration of our role in underwritings from co-manager to book runner. Evercore ISI continued to perform well, delivering an 8% year-over-year increase in secondary revenues for the first half of 2016 versus the first half of 2015.

In Investment Management, we continue to focus on our wealth management and trust business and our money management business in Mexico. Last week, we announced our plans to sell our Mexican private equity business and transfer control to its principles following approval by the LP advisory committee and regulatory approval which should take two to three months.

Finally, we returned $188 million of capital during the first half of the year to our shareholders, including repurchasing 3.4 million shares at an average price of $47.56, offsetting the dilution from the roughly 2.6 million shares issued for bonus equity and new hire awards for 2016 to date and further offsetting the shares associated with the acquisition of ISI. Let me briefly go over the adjusted numbers and Bob will provide additional comments on comparable GAAP measures in his remarks.

Second quarter reported net revenues were $348.3 million, up 30% versus the same period last year, a record for the second quarter and our second best quarter ever. Net income, also a record for the second quarter was $53.4 million with earnings-per-share of $1.04. These results are up 57% and 60% respectively from the second quarter last year. Operating margins were 26.1% for the quarter, reflecting both strong revenue growth and cost discipline and non-compensation expenses, which increased less than 2% in comparison with the prior year. Our compensation ratio was 57.6% for the quarter, consistent with the first quarter compensation ratio.

For the first half, we achieved record revenues and net income of $605.5 million and $86.2 million, up 20% and 35% respectively. Earnings-per-share for the first half increased 39% to $1.67, the best first half in our history by far. Operating margins in the first half were 24.1% versus 21.6% for the first half last year. Let me now turn the call over to Roger who will comment on our Investment Banking performance and the M&A environment generally.

Good morning, everyone. Evercore's Investment Banking business had a record second quarter on both the revenue and the operating profit lines. Investment Banking revenue for the second quarter was $325 million. That compares to $237 million a year ago or a 34% increase on a year-to-year basis. Operating profit was $84.5 million, up from $53 million a year ago, or a 60% increase. And our operating margin in Investment Banking was 26%, up from 21.7% a year ago. The comp ratio was unchanged at 57.9% on a year-over-year basis, although improved from the recent first quarter.

For the first half, Investment Banking revenue was $562 million, up from $458 million a year ago, that is a 23% increase. And also for the first half, operating profit was $133 million, up from $100 million a year ago, a 34% increase. This represents the best first half on the Investment Banking side in the firm's history.

Now, breaking this down. Within the heading of Investment Banking revenue, advisory fees reached $251 million for the second quarter, up from $169 million a year ago. That's a 32% increase. That's our highest second quarter ever on advisory fees and the second best quarter we've ever had, as Ralph just said, for the firm as a whole. For the six months, advisory revenues were $426 million, up from $324 million a year ago, also a 32% increase.

Our second quarter advisory revenue included 58 fees equal to or greater than 1 million, up from 42 such fees a year ago; 58 versus 42. And for the six months, those totals were 99 for the 2016 first half up from 77 for the first half of 2015. The total number of fee-paying clients was 201 for the second quarter, that's a record for any second quarter, up from 179 a year ago. And for the half, those numbers were 296, also a first half record up from 261.

On the underwriting side, our equity capital markets and debt capital markets teams completed 13 underwriting transactions for the second quarter which raised $4.3 billion for clients. Underwriting revenue for Evercore was $13.2 million in this last quarter. That was down from 21.2 million a year ago, but this drop-off is actually a bit smaller than that which most of the giant firms experienced on a year-over-year basis. And some of that traces to the extreme financial market volatility that we saw earlier in the year.

I should add that our second quarter advisory fee total included another $13.2 million for advice related to 20 completed capital raising transactions. In other words, we had $13.2 million of underwriting revenue, another $13.2 million for advice relating to capital raising, so $26.5 million of second quarter fees from Capital Markets activities. I might also note that Evercore served as an active joint book runner on the MGM growth IPO which was the largest IPO in the United States during the first half of 2016. And, finally, to finish the breakdown of Investment Banking revenue, we also realized $57 million of commission and fees from Evercore ISI during the second quarter.

Now, from a market share and competition point of view, Evercore had a particularly strong first half. We ranked first in dollar volume of M&A in the US, which is the world's biggest market, among all independent firms with Lazard coming in second. Globally, we ranked third among independent firms behind Rothschild and Lazard, in that order.

In the most active sectors, healthcare, energy, and technology, to name three of the biggest, we were number one among independent firms by a large margin. And as Ralph said in healthcare, which probably was the most active single sector in the world in the first half in M&A, Evercore ranked first in the world among all firms ahead of Goldman Sachs, ahead of JPMorgan, Morgan Stanley, and so forth for the first six months. And on total market share, while we don't yet have all of the data because some firms haven't yet reported their second quarter results, it appears that our share of the global advisory fee pool reached an all-time high around 5.6%.

On productivity, our global productivity per SMD in the second quarter was $12.6 million. That's a very high figure, up from $12 million per SMD a year ago. And as most of you know, that's always calculated on the same rolling 12-month basis we've historically used.

On recruiting and headcount, we added on a net basis 46 bankers around the world in the second quarter. Further, we recruited two additional SMDs externally in that quarter, Dan Ward who is joining our energy group shortly and will add a great deal to that, and Mike Palm who will head a new packaging, paper, and forest products banking group for the firm. And we finished the quarter with 81 SMDs around the world.

Finally, a comment or two on the M&A environment. The first half of 2016 was really quite healthy in terms of M&A volume, even though it was down from the record levels of 2016. There's quite a bit of commentary about how M&A may not be as buoyant as it was, and that may be true against 2016, which was an all-time record, but by medium-term historical standards it's very strong.

For the first six months of 2016, global-announced volume in dollar terms was down 19%. In the US, this total was also down 19% for the half. Completed M&A volume for the first half in dollar terms was down 3% year-over-year. In the US it was down 6%.

But while Evercore is performing very strongly and doing obviously a lot of things right in order to report these record results, we couldn't be doing this well if the environment wasn't a pretty good one. So if you step back and think about what are the conditions that make for good transaction markets, you see that we have most of them. We have ultra-low interest rates, we have robust credit availability, we have all -time high equity prices, and we have relatively decent business confidence, at least in the United States.

Now, there has been considerable speculation, everyone has done it, relative to the impact of Brexit and whether that may lead to a downturn in UK transaction volume or European transaction volume. It's pretty early to make any judgments, but so far we've seen no evidence of that, at least in our business. So on that note, Ralph, I'm going to turn it back to you and Bob.

Okay. Thanks very much, Roger. Let me just talk about equities and Investment Management and then Bob will talk about a number of financial matters.

Our equity's business, Evercore ISI, contributed revenues of $122.0 million in the first half of the year, including $7.8 million attributable to underwriting, which is half of our overall underwriting activity. Secondary revenue was up 8% over last year, driven by higher volume resulting from elevated market volatility and continued growth in our electronic platform. Overall, the business produced operating margins of 20.7% for the first half of 2016 compared to 16.6% for the first half of last year.

For the quarter, Evercore ISI contributed $63.7 million of operating revenue, including secondary revenue of $57.2 million. Operating margins for the second quarter were 21.7% compared to 17.8% for the second quarter last year. We continue to invest in this business adding research coverage for insurance and home building, strengthening our trading team and energy and special situations, and broadening our sales coverage in Europe.

With respect to Investment Management, for the second quarter, Investment Management reported net revenues and operating income of $23.5 million and $6.6 million respectively, producing an operating margin of 28%. For the first half of 2016, net revenues were $43.7 million and operating income was $12.6 million. Year-to-date, operating margins were 28.8% compared to 19.4% last year, as we reported it.

The operating margin for the first half of last year, if Atalanta Sosnoff is reflected on the same basis as our presentation in 2016, was 24.2%. These results reflect the contributions from our Wealth Management and Trust Businesses which continue to perform well, managing over $8.5 million for clients, as well as the realization of $5.6 million of carry income from our private equity investments in our Mexican PE business.

As I mentioned earlier last week, we announced our plan to sell the Mexican private equity business to a newly-formed entity, Lisco Partners, which is controlled by the principles of the business. We will receive consideration in the form of revenue share of management and performance fees in the future and will continue to invest modestly in the next two funds consistent with the carried interest we will receive in those funds.

We will also provide support to the business and transition which will be for up to 18 months. This transaction will allow the PE business to continue to grow, free up the potential conflicts associated with ownership by an advisory firm, and is consistent with our intent to continue to focus primarily on growing our Investment Banking business. Bob will provide further comments now on these actions and other financial matters, including our GAAP results, non-compensation expenses and financial position.

Thank you, Ralph. Just picking up on the sale of the Mexico private equity business. For this sale, we expect to generate a nominal gain at closing with the remainder of the consideration realized over time as the economics are related to fee streams and carry that are contingent in nature. As Ralph mentioned, closing is conditioned on both the consent of the limited partner advisory committees of the funds and approval of the regulators in Mexico, and our current investments in the funds will remain with Evercore.

Moving on. In June we entered into a loan agreement with PNC Bank securing a $30 million line of credit which has replaced the $50 million line that we previously had. The terms of the new line are substantially consistent with those of the one that was replaced. Also in June, we successfully secured shareholder approval for our stock incentive plan. The new plan allows Evercore to grant an additional $10 million in equity awards which is critical to sustaining our growth.

As I mentioned briefly, we've made some changes to the presentation of our adjusted results and added more disclosure in response to new SEC guidance on this topic. Revenues on a GAAP basis of $350.7 million were a record for a second quarter just as they were a record on an adjusted basis. Our results on a GAAP basis reflect earnings of $0.55, which were not a record primarily due to the ISI acquisition-related compensation expenses which are explained further in our earnings release.

In addition, our GAAP results reflected an effective tax rate of 47.7% for the quarter versus our adjusted rate of 37.5%. Our GAAP-effective rate is impacted by the non-deductible nature of the ISI acquisition-related compensation expense.

Our adjusted results for the second quarter exclude certain costs that are directly related to our acquisition, particularly our equities business. Most significantly, we have adjusted for costs associated with the vesting of LP units and interests granted in conjunction with the ISI acquisition.

For the quarter, we expensed $20.6 million related to this equity, which is consistent with the continued positive performance of Evercore ISI. As a reminder, our adjusted presentation includes all of the shares that we expect to issue for the equities business in the EPS denominator. Our forecasts that drive that number of shares expected did not change in the quarter.

The negative balance, which you will see in acquisition and transition costs on a GAAP basis, reflects the reversal of a legal accrual associated with the settlement of the matter that I mentioned in the fourth quarter call. Other revenue includes a $1.2 million FX translation gain relating to an intercompany balance between our US and UK entities. This balance has been settled in the third quarter. The adjusted operating margins for Evercore ISI which govern the ultimate payout of the G and H units for the equities business are 15.1% for the first six months, up from 13.1% for the first half of 2015.

Just moving briefly to non-compensation costs. As you know, our primary gauge of non-comp cost is cost per employee. We continue to make progress on this metric with firm-wide operating costs per employee of $37,200 for the quarter which is 7% lower than the second quarter of 2015. For the first six months of 2016, the firm-wide operating costs per employee was $74,000, which is 5% lower than the first half of 2015.

Our share count for adjusted earnings-per-share was 51.2 million shares, a decrease of approximately 800,000 shares from Q1 2016. This decrease principally reflects share-repurchased transactions. On a GAAP basis, the share count was 43.6 million shares.

As Ralph mentioned, we are committed to continuing to return capital to our shareholders, and we repurchased 1 million shares in the quarter. And, finally, our cash position remains strong as we hold $316 million of cash and marketable securities at the end of the second quarter with current assets exceeding current liabilities by approximately $335 million. I'll now turn the call back to Ralph for closing comments.

Thank you, Bob. Before I open the call up for questions, let me just make a couple of comments. First, I want to address a little -- with a more lengthy issue of Brexit and its potential effect on our business. Let me make a couple of points on this issue.

First, it's going to take quite a while to play out. The process does not start until the UK triggers Article 50 of the Lisbon Treaty which the new Prime Minister, Theresa May, has said will not happen before the beginning of next year. Once Article 50 has been triggered, it will be up to two years before the negotiations are completed. So we are looking at a process that will take roughly 2.5 years or more to play out.

Second, as Roger has indicated, we have seen no material effect on our deals and progress and on our backlogs. A couple of very small deals slipping a little and nothing of substance postponed. Third, while the decline in the value of the pound will reduce the revenue from pound-denominated engagement, it is worth noting that we have a proportionately higher percentage of pound-denominated expenses than pound-denominated revenues, so the effect on profitability will be extremely limited. Finally, we have set up a task force of senior advisory and research professionals to monitor this issue as it unfolds so that we can respond to any challenges it presents to our firm and so that we can seize any opportunity that it offers.

Second, let me conclude by noting, again, that a number of encouraging things have happened at Evercore in the first half of 2016. Our revenue growth, and particularly our advisory revenue growth, was strong in the first half of the year, outpacing all of our larger competitors who have already reported their second quarter results and likely outpacing the revenue growth of large and independent firm competitors who have not yet reported their results. As a result, as Roger indicated, Evercore's market share advisory revenues among all public firms, which stood at 5.1% at the end of 2015 and grew to 5.3% on a trailing 12-month basis at the end of the first quarter, likely equaled or exceeded 5.5% at the end of the second quarter. As Roger indicated, our best guess at this point is 5.6% or so.

Our secondary revenues in the equities business also grew at 8%, a much faster pace than our competitors. While our revenue growth was strong, our growth in operating income and net income was even stronger, primarily due to our ability to limit the growth in non-compensation expenses, as Bob just alluded to. So we are actually getting some operating leverage which is showing up in our improving margins.

Finally, our earnings-per-share increased by even a larger percentage than our net income, as our share repurchase program provided additional EPS leverage. Very importantly, our backlogs would suggest that our momentum absent unexpected intervening events, should continue for the remainder of the year.

Let us now open the call up for questions.

Thank you, sir.

(Operator Instructions)

Our first question is from the line of Brennan Hawken with UBS. Your line is now open.

Good morning. Thanks for taking the question. Appreciate all of the commentary on M&A and the ingredients that are in place to drive continued activity. I guess what I'd ask is, we've seen those ingredients before, in fact very early on in the cycle all of those ingredients were in place but yet risk, appetite, and confidence were missing and it seemed like, Roger, from your commentary, that was the one area that was a little bit uncertain at this point. So, can you give us any additional color in that regard based upon your dialogue with companies? And when we think about year-to-date decline in announcements as you guys laid out, how should we think about 2017 and then the cycle beyond that point?

Well, the real point, essential point, is that M&A markets remain very healthy and the key ingredients, as you use that term, for buoyancy in M&A are in place. As I said in my comments, business confidence levels, particularly in the United States, are relatively good and so there isn't currently the type of hesitation or uncertainty, from a confidence point of view, that would cause hesitation in M&A volumes. M&A volumes compared to 2016, as I said, are a bit off, although only 3% on a completed basis year over year but by recent historical standards they're really strong, as I said. Evercore is doing a lot of things right in terms of executing, but we couldn't have results like these, which by any objective standard are very strong, if the underlying transaction market environment wasn't good; and it is good. And as long as these ingredients remain in place, and I don't see anything right now that suggests they won't for the short to medium term, we should see continuation of strong transaction volumes. And as Ralph said, our backlog certainly suggests that.

Okay. Great. So -- and I totally appreciate that and also generally agree that you guys have been executing very well in the environment. I wasn't trying to imply that with the question. I was just -- I guess I was just trying to think about the level of dialogue and whether or not that's changed. And, one of the interesting things that we've seen adjust here, is that when we get announcements, sometimes the acquirer's stocks don't react quite as positively as we saw a few years ago; and I just was curious whether or not that was having an impact on management teams as they assess what to do in the environment and whether or not that's causing any [loss]?

Well, I think the fair answer is, no, it isn't.

Okay.

It's a good question. It's a good question you're asking, but it isn't. Impacts on acquirer's share prices, as you, I'm sure know just by asking the question, vary a lot. You see periods of time where acquirer share prices generally go up on announcement, you see periods of time when they generally weaken a bit. This period right now is a reasonably balanced one on that metric, but the answer to your question is, no. Market reactions to mergers today are not causing would-be buyers or sellers to hesitate. They're not.

Terrific. Terrific. Thanks for that. And then one more maybe minutia or specific granular question here. It sounded like, Bob, in your comments ISI margin, I think you said year-to-date it was [15.1] and I believe we were at [16.2] last quarter. Number one, do I have my numbers right? And, if so, what drove that quarter-over-quarter decline and what's your out look for margin for the rest of the year? Do you have one?

Well, let me deal with history. As you know, we try not to give forward looks. The quarter-over-quarter was a revenue mix question. How much is high touch? How much is low touch? What I would say about the business is they've really done a great job keeping focused on their non-comp costs. They've gone up a little bit, but it's a function of significantly higher volumes driven by the success of the electronic platform. That's something that we'll continue to work on, but that's a long-term initiative driven by long-term contracts. So net-net, a little bit of cost, but it's cost driven by higher volumes on the electronic platform and that drives higher revenues but of course at a lower rate.

Just to be clear, Brennan, those are the margins for the calculation of the transaction, not the reported margins, which are stronger, because they include our underwriting revenues as well.

Right, right, right. No. Understood but a fair point to clarify on. And so there's no -- what I meant by the outlook question -- I should have rephrased it. I didn't mean to be implying I was poking around for guidance, more rather, asking about how you feel about guidance with business at this point. I know you guys have had a few rounds of adjustments in staffing and such and was just curious whether or not you felt as though -- you felt good about the positioning and whether or not there were any other changes that you guys were planning on making in the foreseeable future there?

With all due respect, Brennan, I think that is poking around for guidance.

All right. I guess that's one way of looking at it.

We feel very good about how we're positioned relative to our competitors. We've been able to attract very high quality talent. In the one instance where we had a replacement and we've added some very, very highly regarded both research and distribution professionals. So we -- our aspiration in our two biggest businesses, the advisory business and the equities business, is to be the employer of choice for the most talented people in those particular businesses. And I think we're demonstrating that we are making some not immaterial progress with respect to that.

Okay. That's fine. All I was trying to do was ask about how you felt about how the business was positioned. I don't really feel like that's guidance.

And, Brennan, on a humorous note in addition to Roger's response to your question, having had some personal experience with this, I will point out that the first day share price reaction to an M&A deal is not always accurate in terms of the value it creates for a company.

Yes. Those become ongoing debates for sure. All right, guys, thanks for taking the time.

Our next question is from the line of Connor Fitzgerald with Goldman Sachs.

Good morning, and thanks for taking my questions. I guess cueing off with kind of the underwriting backdrop, you obviously had a strong quarter, like you mentioned. I guess just given the rally we've seen in the equity markets, do you think there's a lot of kind of pent-up demand that can continue that momentum into the back half of the year?

Well, the first half of the year activity broadly was down quite a bit and the mix was also sort of adverse not only for us but for all firms in the sense that more than 50% of the equity underwritings that were done in the first half of the year were block trades which, of course, we don't participate in at all. We are seeing a building backlog there, but obviously the translation of that backlog into real activity does depend on the market. So it's one of these things that is not, like everything in our business, can't be predicted very confidently for very long.

Thanks. And then I know you mentioned --

I would point out one thing that the third quarter comp last year was because of the dislocations in China. There was almost no underwriting activity last year in the third quarter. So beating last year's third quarter will be like jumping over a string on the ground.

That's helpful. Thanks. And then I know you commented that your bankers and restructuring were busy. I was just hoping you could provide a little more color there. Maybe how much kind of those revenue streams are up year over year or something to kind of help us size the magnitude of what you mean by busy.

We don't break that out. We never have and it's just not our policy to do that, but you can imagine that energy-related restructuring levels are very high.

That's helpful. And then just a last one on the hiring front. I know there's been another round of kind of restructuring in some of the European banks. If you could just give your outlook for kind of hiring in the back half of the year that would be helpful. Thank you.

As a general matter, hiring tends to be concentrated in the first few months of the year. So we may have one or two walk-ins as we have had in the last couple years in the second half of the year who initiate conversations with us for one reason or another. In those cases, more typically associated with something that caused dissatisfaction of their current firm. But you should assume -- we generally have hired four to seven people in our advisory business during the course of the year. I think in the first quarter we said we expected that our hiring this year would be probably [be a little] towards the lower end of that range. We've hired four, and I would still expect that we'll be at the low to mid end of that range.

That's helpful. Thank you.

Our next question is from the line of Ashley Serrao with Credit Suisse. Your line is now open.

Good morning. Apologies if some of this has been asked, I've been bouncing between two calls. So the first one, I just wanted to get your thoughts on the impact that the US elections are likely to have on M&A, if any. And then also I know you noted that BREXIT hasn't really had an impact on the M&A business in terms of the negative impact, but curious if you are seeing the depreciation in the British pound for more M&A dialogues?

Well, on the first part, we're not seeing any impact at the moment of the impending US election on transaction volumes. There's no impact at all. I'm not smart enough to know whether that might change or not, but I'm dubious that it will. I don't think so, but so far nothing. Ralph, if you want to comment on BREXIT.

Look, I think it's too early to tell with respect to the impact on the pound. If you look at how the British equity markets have performed, today the FTSE 100 is above -- in pound terms, above where it was the day before the vote. The FTSE 250, interestingly enough, the sort of the next tier of companies, is still below in pound terms and obviously, because of the depreciation of the pound is even cheaper, as is the FTSE 100, because of the depreciation of the pound in terms of -- in dollar terms or in euro terms. So things are, from a currency point of view, a little cheaper in Britain, a little bit more the case in this mid cap, small and mid cap world. But I think it's too early to tell whether this will have any meaningful effect on inbound activity in the UK.

Okay. And then as you think about the hiring needs in both the advisory and the equity franchises, noted that on advisory side on the lower end of that four to seven range but in terms of needs, what sectors would you like to add today? And maybe some thoughts on where do you see opportunity to build in the long-term?

Well, I think first of all we have to discuss or reiterate our hiring philosophy. Clearly, we have some holes in our coverage, probably the most -- two most notable are consumer globally and some of the larger general industrials companies and we are always looking for people who can perform excellently on our platform who can also fill in that coverage. But what is different about Evercore, I think from most, if not all other firms, is that we only hire, even though we have holes, when we find someone that we feel highly confident that they will be successful on a platform where they're competing solely on the basis of their ideas, their intellectual capital, and their relationships without the benefit of a balance sheet.

So if you sat in our management committees over the last five years, you would have heard the consumer being at the top of the list of sectors that we would like to be more active in. But we haven't found a person yet or a team of people who we feel can successfully execute on our platform. So we wait. We're not one of these firms that says we have to cover everything. We want to make sure that the things that we cover, we cover at the absolute highest quality of excellence. And there are a limited number of people who can do that.

Great. Thanks for taking my questions.

Our next question is from the line of Steven Chubak with Nomura.

Hi. Good morning.

Good morning.

So, Ralph, I want to actually kick things off with a bigger picture question on longer term performance targets. I can recall a few years back when you'd spoken of an aspirational revenue goal of about $1 billion over the course of a year and taking a step back, if I look at your advisory business ex-equities, you're actually running at about 950 and it looks like based on some of the positive backlog commentary and what we can see in some of the public data, you're probably -- you're on pace to hit that goal barring any negative shocks by year-end. So certainly an impressive achievement taking a step back. I wanted to get a sense of how you're thinking about this strategic direction and maybe more specifically establishing longer term objectives for the company based on maybe more specific revenue or market share goals?

Okay. Well, first of all, I'm not going to comment on your supposition. Okay. So don't interpret anything that I say as a comment on that. But, look, we have laid out for our firm one very simple goal. We want to be the most elite global independent investment banking advisory firm in the world. Eliteness is, in my view, has two very important contributors. The most important is consistent level of excellence.

There's actually a measure in our view of eliteness in our industry and that is the revenues that are paid by your clients, per senior managing director. And as Roger indicated, on a trailing 12-month basis, we're at $12.6 million. We actually have, interestingly enough, six of our partners are in Mexico right now, which is a very depressed market. So if you look at our activity per partner in the markets that most of our competitors are in, we're actually stronger than that $12.6 million.

If you look at our public independent competitors, you will see that, that metric compares extremely favorably to any of their numbers and in many cases it's double or more what our competitors are experiencing. So, as I said in the answer to your earlier question, we want to maintain that level of eliteness. So there are -- it takes a, we believe, a relatively special banker to succeed at the average level of our senior managing directors.

Second thing, obviously, that has to be focused on if that is your objective, is the scale of your business compared to your competitors. And I think we take comfort from the fact that if we look just at last year, so I avoid making any forward-looking implications, our advisory revenues were about $860 million. Our largest competitor did about $1.28 billion. So they were roughly -- we were roughly 67% of their revenues and they were 50% higher. So to me --

Ralph, you might point out that you're referring to our largest competitor among independent firms.

Independent firms. I'm sorry, Roger. Good point. And so for me, I sometimes comment facetiously internally, that in 2000 for Cisco to justify its valuation, which was roughly 90 times earnings at the time, they would have had to capture 150% of the global router market. Obviously, something that was not likely to be achieved. We have the benefit of having a direct comparable with exactly our business model in the advisory business that's doing 50% more revenues.

So for us, I think that's a good intermediate-term goal of what we would hope to achieve over time. Obviously, adjusted for the environment that you're in. If you're in a really depressed M&A environment, Lizard did as little as $1.1 billion or so of revenues the period after the financial crisis. But certainly we have a fair amount of room to grow.

Thanks, Ralph. And despite your hesitancy to give some explicit targets, that perspective was quite helpful, so I appreciate that.

Okay.

I wanted to touch on the expense story for a moment, not to parse the language in your prepared remarks too much, but we saw really strong margin progress in the first half which is quite nice. You noted that you were staying very disciplined on non-personnel expense but made no mention of comp. I was wondering how we should think about comp leverage in the business given this lower pace of SMD hiring expected for this year and just the robust revenue growth, as well as, the constructive outlook that you highlighted earlier?

I would say that, first of all, the most important metric that you cited really needs to be looked at on a two-year basis, not a one-year basis. And that is the new hiring. So, when we do hiring, it obviously has a depressive effect in the year that people join because, as we've said many times, and there are exceptions to this, but the best assumption about someone's revenue contribution in the sub year is zero and there are exceptions to that, fortunately. And in the first full year the best assumption is somewhere between 50% and 75% of a normalized SMD production. So while we had a -- while we'll probably be at the lower end -- the mid end of the range in terms of number of hires this year, last year we had ten.

So the comp effect of that still is flowing through this year's income statement in terms of its effect on the comp ratio. So that's a subtle difference in assumption from the assumption in your question. And, look, I think we've said, not infrequently, that we believe that the business can operate with comp ratios in the mid to mid high 50s, 55% to 57.5%, 58%. We're in that range today.

And then the mitigator upward and downward is the impact of new hires either the prior year or the current year. This is our best judgment of where we'll be for the full year. Obviously, when we get to the fourth quarter of every year we do real hard person-by-person analysis, and we sometimes find that our best judgment is a little bit high or a little bit low and I think you've seen that in the last couple of years in our Q4 numbers.

Thanks for that detail, Ralph. And then just one quick modeling question for me relating to the equities trading or commission expectations in the back half. I know last year we had actually seen a pretty strong seasonal pattern which actually bucked the trend with industry volumes where revenues were quite a bit stronger on a commission side in the back half. I didn't know if we should expect a similar pattern this year or should we assume more direct language with institutional volumes?

Well, that makes two of us. We don't know either.

Fair enough. Thank you for taking my questions.

Our next question is from the line of Vincent Hung with Autonomous Research.

Hi.

Good morning.

Any color that you can give on how specific client segments such as strategic buyers, strategic sellers, and financial sponsors, see the M&A environment right now?

Well, I mentioned in my comments that three of the most active sectors are healthcare, probably the most active for the first six months -- the date is not perfect -- tech, and energy. And you would -- if you wanted to be comprehensive, you would add the broad category of general industrial to that and you might put consumer on there also. But those are most of the biggest sectors, and they have been so, for the past two, three, or four years, not just this past year. I would note that tech is especially active. Tech has gone from a sector which perhaps five or six years ago was moderately active to one that is very, very active today, one of the very biggest. But those are some of the sectors that are the most active.

Okay. But nothing really to call out between buyers and sellers?

No. I mean, every transaction is different. Every transaction has its own rhythm, its own set of variables. They're [generous].

Okay. Just piggybacking on Steven's question on the commission. Just as a reminder, 4Q is the best quarter, right, for the equity business given the way the billing works?

That's certainly what we saw last year.

Thanks.

Our next question is from the line of Jim Mitchell with Buckingham Research.

Good morning.

Good morning.

Maybe we could talk about non-M&A. You guys highlighted and gave some nice color on capital advisory. You also mentioned restructuring activists advisory. How should we think about that going forward? Usually it's, what, typically a 12-month kind of time frame to realize restructuring fees. Should we expect that to continue to grow from here? How should we -- I guess, give us anymore color on the non-M&A side would be helpful.

Let me make two points. Evercore has been steadily broadening its investment banking platform. If you stop and think about it, we're the only independent firm which is a leader in M&A. We're number one among independent firms for the first six months, which is a leader in restructuring. We believe we're one of the top three in the world in restructuring, and which is a leader in cash equities and equity capital markets. We're the only independent firm with that three-pillared platform.

Now, within those pillars, especially the broad category of M&A, you really have a lot of different categories. You have activist defense, you have takeover defense, for example, and you have various types of strategic advisory services that don't necessarily result in an M&A deal. But we don't know where M&A volume is precisely going to go. As I said earlier, we think the ingredients are there for continued healthy volume. We don't know precisely where restructuring volume will go. A lot of that is being driven today by energy-related distress. So I can't answer your question beyond what I just said.

Okay. Fair enough. But any thoughts on the energy restructuring side given that energy prices rebound a little bit? Has that changed the dynamic at all or is it still pretty active?

It's quite active.

Okay. Fair enough. And just maybe on the healthcare side, we have seen a couple of deals challenged by the DOJ. Does that put any kind of -- you noted that's as a particular strength of yours. Has that give you any pause or dialogue or concerns around that industry?

Not that I'm aware of. I attended a board meeting out in New York yesterday with a healthcare company and we looked very carefully at all these levels of regulatory challenge and volumes of M&A and so forth during that discussion yesterday. Again, every transaction is unto itself. And when you get -- when you begin to dig in on a potential transaction, you're able with a requisite legal advice, to make a judgment as to whether you think that transaction will or will not face regulatory challenge.

So the vast majority of transactions, whether they're in healthcare or any other sector, don't face regulatory challenges, but you're referring obviously to Aetna, Humana, and Anthem Signa and those two have been challenged as of the past two days by the Department of Justice. But broadly speaking, I don't know what the percentage would be, but 95% of transactions we work on don't face regulatory challenges. And if regulatory challenges were causing hesitation, you wouldn't see the level of M&A volumes you're seeing and you wouldn't see backlogs like you're seeing. So it's not causing hesitation, generally speaking.

Okay. That's helpful. And then just maybe one last question on the share count. Bob, you guys -- the pace of buybacks seems to be pretty healthy. Do you think given your outlook on the second half in cash flow, do you think that pace can continue? And then maybe if you can help us, remind us, on what's included in a diluted share count for ISI relative to the maximum.

So let me take the second question first. In the beginning of the transaction there were a bit more than 8 million shares that could have gone in. We put in just about 7 [million shares], just a little over, and none of that has changed. The actual mechanics have reduced the ISI number down from the 7 [million shares] because of the mechanics of the deal, some of the ease invested, they have been converted into (technical difficulty) shares, et cetera. But nothing has changed in terms of the aggregate day one assumptions or expectations.

In terms of what may or may not happen with buybacks for the second half of the year, I couldn't comment specifically. What I would say is that nothing has changed in our philosophy, which is, we think the buyback shares to cover any equity granted as part of the bonuses to offset shares of new hires and then we are working to reduce the dilution that was caused by the ISI acquisition, as Ralph noted. We made some progress in reducing that ISI-related dilution in the first half, and we'll see how cash and the market looks in the second half and be opportunistic.

All right. Fair enough. Thanks for the help.

Our next question is from the line of Devin Ryan with JMP Securities.

Hi, Devin.

Hi, good morning. And thanks and congratulations on the strong quarter. Most has been asked. Just a couple quick ones here. So you touched on the energy space and sound optimistic. I'm just curious. We've seen a bounce in price this year. Is that creating a shift in activity from structured M&A? And really does it create a pause in activity as clients digest the move or maybe have more breathing room with better energy prices? Just trying to think through the different scenarios for oil prices and which one is maybe better or worse for activity in the industry for you guys.

I think you're trying to be a little more scientific than it may be possible to be. It's a good question, but I'm not sure it lengths it lends itself to a precise answer. As to a pause, we're not seeing that. Right now, transaction volumes in energy are diversified, meaning there is a considerable amount of restructuring volume but there's also a considerable amount of M&A volume. And the sector is really quite healthy even though the mix has shifted to one more balanced between M&A and restructuring than the one that was M&A dominated 2 years ago. But as to a pause, no. What is going to happen and the correlation between volumes and oil prices, I don't know anybody who knows the answer to that. I don't really think there is an answer. At least we don't know it.

Devin, the one thing I would add is that we do believe over the next three years there will be some combination of significant restructuring activity, significant re-equification, and significant consolidation. And as Roger went through earlier, we're really literally the only firm in the world that can take advantage of all three of those and also has a very strong energy practice. So we see this as something that's quite good for Evercore generally.

Got it. Okay. And maybe just a quick followup from the earlier question, trying to think about where the firm is and the growth trajectory and kind of putting some of the past comments and aspirations around that. So you guys are, obviously, consistently taking market share but moving forward as you think about continuing to do that. From a geographic perspective, do you like the balance today or as you continue to kind of have to take market share, do you think you'll have to expand maybe more outside the US, so that the overall percentage of the firm kind of migrates towards the broader industry balance there?

Well, I think the answer to that question is, no. Do we need to increase the global share of our total business in order to increase our market share, the answer is no. Whether we increase it anyway, that remains to be seen. I hope we do, but that's not necessary. There are broad, powerful forces here in terms of the migration of talent and clients and revenue from the giant platforms to the independent platforms. And they are causing, together with our good execution, Evercore's market share to rise and I might add, the market share from other of a series of other independent firms to rise and those forces are going to continue for the time being, at least. Probably for a long time, and they are enabling us to, again, together with good execution to increase our market share. And I think our market share will continue to increase whether or not this global share of our total revenue goes up.

I agree with Roger's response. It happens that our two -- the two largest global independent firms one of which has been in business about 165 years and one that has been in business over 200 years, have businesses where their revenue mix is a little more oriented towards (technical difficulty) as opposed to us But I don't think that, that necessarily in anyway suggests that if we're to get to their scale that our geographic mix has to mirror theirs. I think we have actually a decent shot this year of having the largest independent advisory revenues in the US, notwithstanding, that we'll still be smaller than at least one of those two firms.

Got it. Yes, my question wasn't whether you had to, to grow market share. It was more of a question of do you want to mirror the industry mix or just the broader industry mix, but that's helpful color. Thank you very much.

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

If there are no more questions, it looks like we have successfully filibustered again. Even when we're not in the same room.

Yes. It's a tried and true filibustering strategy which we have down pat.

All right. Thanks, everyone.

This concludes today's Evercore second quarter and first half 2016 financial results conference call.