Evercore Inc. (EVR) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Partners First Quarter 2012 Financial Result Conference Call. [Operator Instructions] This conference call is being recorded today, Thursday, April 26, 2012. I would now like to turn the conference call over to your host, Evercore Partners' Chief Financial Officer, Robert Walsh. Please go ahead, sir.

Good morning. Thank you. Hi, good morning, everyone, and thank you for joining us today for Evercore's First Quarter 2012 Financial Results Conference Call. I'm Bob Walsh, Evercore's Chief Financial Officer. And joining me on the call today are Ralph Schlosstein, President and Chief Executive Officer; and Roger Altman, our Chairman. After our prepared remarks, we will open up the call for questions. Earlier this morning, we issued a press release announcing Evercore's first quarter 2012 financial results. The company's presentation today is complementary to that press release, which is available on our website at www.evercore.com. This conference call is being webcast live on the Investor Relations section of the website, and an archive of it will be available beginning approximately one hour after the conclusion of this call for 30 days. I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted pro forma or non-GAAP financial measures, which we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and their GAAP reconciliations, you should refer to the financial data contained within our press release, which as previously mentioned, is posted on 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's important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings both in the Investment Banking and Investment Management sides of our business. I'll now turn the call over to Ralph.

Thanks, Bob. And good morning, everyone. As we have said many times in the past, our results are not easily judged on a quarterly basis as quarterly revenues and earnings are driven by the timing of deal closings, over which we have virtually no control. In some quarters, like the third quarter of last year, we had a number of unexpected closings, which produced record revenues and earnings in that quarter. In the first quarter of this year, the opposite happened with closings postponed into April producing disappointing revenues and earnings for the first quarter. While our results for this quarter fall short of our expectations, the good news is that the fundamentals of our business remain quite strong. First, as we have often said, our business is best judged not on the basis of one quarter's results but on the basis of longer periods. On this basis, our trailing 12 months banking revenues are a record $424.4 million, the third consecutive quarter that we have set such a record. So while this quarter fell a little short, our Advisory business continues to grow, despite the weaker M&A environment generally. We are doing this, of course, by taking share from our competitors. Moreover, our backlogs in our Advisory business on both a risk and unrisked basis have never been higher, which bodes well for the second quarter and the rest of the year. Finally, some of the transactions that slipped from the first quarter to the second quarter have since closed. So we expect Advisory revenues to be well in the excess of $50 million for April alone. So while M&A volumes have been weaker for the last 3 quarters, we continue to gain market share when measured on a trailing 12-month basis, even though our revenues this quarter fell a little short. Broadly speaking, the overall environment for our business was not great in the first quarter. Both announced and closed M&A transactions were down globally and more specifically in the U.S. Nonetheless, we maintained our position in the M&A league tables continuing to rank #8 in announced transactions in the U.S. and #14 globally and #1 among independent firms in the U.S. Equity trading volume was down more than 20% in the quarter, but we gained share in our Institutional Equities business as our transaction revenues increased by 2% versus the prior quarter despite the 20% overall decline in volume. Our Equity Capital Markets’ team completed 7 transactions in the quarter, 9 year-to-date, which helped raise $3.2 billion for our clients, including the first transaction as a lead manager for a third-party client. We also completed a $600 million follow-on offering in Mexico for Fibra Uno, the successful REIT that we helped launch at the end of 2011, which was the first REIT ever underwritten in Mexico. Our investment management business benefited from the rise in the equity market, which largely offset outflows in our Institutional Equities business due to historical underperformance. Our performance in these products improved in the first quarter of this year. Our Wealth Management business increased assets under management to $3.5 billion as investment performance in all key products exceeded benchmarks and as the business benefited from both client inflows and market appreciation. And we are making real progress in attracting new senior Managing Directors in our Advisory business, which Roger will discuss in more detail. Let me very quickly go over the numbers. First quarter 2012 net revenues of $105.5 million were essentially equal to revenues in the same period last year and down 5% from last quarter. Net income was $4.3 million for the quarter with earnings per share of $0.10 a share. And these results are down significantly from the first and fourth quarters of 2011. Our compensation ratio was 63% for the quarter and 60% for the trailing 12 months, in line with the past year. Noncompensation costs were roughly equal to the fourth quarter, reflecting higher facilities costs as we continue to transition to new offices in London, which is occurring in the second quarter and expanded offices in New York to accommodate growth in our Advisory business. Due to our lower revenues, noncompensation expenses as a percentage of revenues were elevated, but they remained essentially unchanged on a per person basis. Let me now turn the call over to Roger to comment on the M&A environment broadly and our Advisory business some more.

Good morning, everybody. We had $85 million of total Investment Banking revenue for the first quarter of 2012. That's up from the $80 million of the first quarter of 2011 but down from the $90 million of the first -- fourth quarter last year. As Ralph said, this figure is lower than we expected as of a few weeks ago because we, as so often happens in this business, experienced slippage in closing dates on 3 particular deals and a few minor ones between the first quarter and the second quarter. And that's why, as he said, April is obviously going to be extremely strong. Moreover, our backlog, and we review this constantly and always on a risk-adjusted basis, is at an all-time high and it's well up from the level of a year ago. I might add it's higher on a U.S.-only basis, which washes out the impacts of the Lexicon acquisition and it's also higher on a global basis. Parsing the quarter, about $85 million of Investment Banking revenue; $73 million of it related to Advisory; $7 million of it related to equity sales and underwriting; $2 million was our Private Funds Group; and $2 million, our investment in Brazil. We realized 17 fees of $1 million or more during the quarter. That's essentially the same as the first quarter a year ago, down from -- however, from the 26 figure, which applied in the fourth quarter of last year. 54% of our Advisory revenue for the quarter was realized from non-U.S. sources, and I might say, we like that. Revenues per partner on a rolling 12-month basis were $7.4 million globally. That's up from $7.1 million a year ago, down a bit, however, from the fourth quarter figure of $8 million. In terms of headcount. At the end of the first quarter, 506 total Investment Banking personnel, of which 432 are Advisory. That's down slightly from last year's fourth quarter total, but it's up a lot from the pre-Lexicon figure of about 280 a year ago. In terms of partners, there were 56 investment banking Senior Managing Directors in the firm at the end of last quarter, 54% of those are Advisory, SMBs. That figure actually is down 4 from a year ago as a number of Senior Managing Directors have converted to Senior Adviser status. I might add that we are continuing to recruit steadily new banking partners. We have announced 2 so far. Randy Sesson, who will head European transportation based in London; and Steve Wellington, who will join our Restructuring Group also based in London. We do expect to announce others over the short to medium-term. And in general, you can expect that we will ultimately add for 2012, at the same rate we generally have been adding in recent years. The comp ratio for last quarter in Investment Banking was 64%. That's abnormally high because of the revenue slippage I referred to. It compares to essentially 59% for the first quarter a year ago. Over the last 12 months, the comp ratio in Investment Banking was 60%. Non-comp costs were up in absolute terms as you would expect with a higher total headcount, but we're not up on a per banker basis. In terms of market share, Ralph alluded to this, the firm maintained its leadership position, again, first among all independent firms in terms of announced deals in the first quarter in United States and eighth among all firms. And the only firms ahead of us are the universal banks and bank holding companies. Let me say a word about the global M&A environment. 2012 is off to a slower than expected start in terms of global M&A volume in dollar terms. It's off 33% in terms of announced transactions versus the first quarter of 2011. There are a lot of competing explanations for this as it was not widely expected, I would say, throughout the industry. The most logical explanation in my view is this one: That beginning last August and extending through the middle of December, all of us saw very volatile financial markets, very poor credit market conditions and deal activity came to a screeching halt. Given lead times, it takes a while to restart it. But the fundamentals, at least in my experience, are positive for global M&A volume. We've talked about this many times. Low interest rates, generally rising equity prices, abundant credit availability, improving business conditions at least in the United States and most of the world, excluding Europe and generally good levels of management confidence. On that basis, it's my own view that the year will steadily improve in terms of global volume. You saw 3 important European deals announced on Monday morning. You saw the Suburban Propane deal, on which we're advising, announced this morning. We'll see. There are no guarantees. But that's my best expectation.

Okay. Let me briefly talk about our other businesses. The equities business continues to add clients and grow revenues. This quarter, the business generated $5.2 million of revenues, a 10% increase in comparison to last quarter, driven by increased underwriting activity and modestly higher secondary revenues. Expenses were $6.6 million for the quarter, down significantly versus the levels of the fourth quarter of last year, which, you will recall, were elevated by concentrated comp expenses associated with new hires. We remain committed to our goal for this business to begin to contribute to operating profits this year and are hopeful that market volumes and capital markets activities will improve sufficiently, so that this is actually achieved in the second quarter. Our Private Funds business was successful in closing one capital raise during the quarter and is actively working on several mandates with closing targets during the second quarter and the remainder of the year. This business is also expected to contribute to profitability this year. Investment Management. Operating income for the Investment Management business was $1.4 million, up from $850,000 last quarter. assets under management decreased 1% to $12.9 million -- $12.9 billion, excuse me, as we continue to experience outflows in our Institutional Asset Management business, which were largely offset by market appreciation. Our Wealth Management business continues to perform well, increasing assets under management more than 9% for the quarter to $3.5 billion. And performance improved in virtually all of our institutional businesses and our Wealth Management products. Let me conclude by saying that while we are unable to predict, as Roger said, the timing of a resumption in the M&A recovery, we are confident that all of the conditions are in place today for that recovery to occur. And we have never been more confident in our ability to increase our market share in all of our businesses and most particularly in the Advisory business. Our recent partner hires from last year are starting to make meaningful contributions to our success. And the recruiting environment, both from large firms and from other independent firms, has never been better for Evercore. And while these additional partners can have a dampening effect on our margins and on our compensation ratio in their first year at the firm, we're confident that making the right new partner hires consistently adds to the value of Evercore. Let me now turn it over to Bob, who will discuss a couple of financial issues.

Thank you, Ralph. Both Roger and Ralph have commented on our noncompensation costs. So I won't elaborate further other than to highlight that the facilities consolidation in the U.K. is on track. And we should be out of our old offices and therefore, eliminating those costs beginning -- at the end of the second quarter, so the cost reduction beginning in the third. You'll have noted that our tax rate in the first quarter is at 38%, reflecting expectations of increased profitability both in the equities and Wealth Management business and greater international profit contribution. Our financial position remains strong. The fundamental change in our balance sheet reflects lower cash and marketable security positions associated with the payment of bonuses in the first quarter with no other significant changes. And finally, during the first quarter, we repurchased approximately 530,000 shares, and our board has declared a dividend of $0.20. Now with that, operator, if you would open the line for questions, please.

[Operator Instructions] Our first question comes from the line of Devin Ryan with Sandler O'Neill.

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

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

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

Well, are you asking about us? Or are you asking about industry?

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

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

Okay, great. And just in terms of hiring, you guys have added a couple senior bankers so far this year. And in recent interviews, I think the goal is to double the senior banker headcount over the next 5 years. So that would imply adding more than 10 bankers a year. So is that a new target? I know that you maybe don't specifically target hiring, but how should we think about the level of hiring that you may do over the next couple of years here?

You should think about that as a something that the FT imputed from a statement that I made, which is not something that we ever said. Our hiring policy remains exactly what it's always been that when we can find A+ or A talent that can move the needle at Evercore, we try very hard to hire them. Historically, we've added 4 to 6 Senior Managing Directors or partners a year. Last year, we were fortunate enough to hire 7. We typically shoot to hire 4 to 6. The environment this year might allow us to do a little bit better than that again as we did last year. But what was really said to the FT was that over the next 5 years or next 3 to 5 years, we would like to be mentioned in the same breath as the other 2 global independent firms, Lazard and Rothschild, which are today somewhat bigger than we are. And there's no reason why we can't achieve that goal. But being in the same breath doesn't necessarily mean equal to them in terms of revenues and nor does it mean doubling of our partnership.

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

Based on my 20-plus years experience in investment management, I would say that flows tend to lag performance. So even after performance stabilizes, outflows still continue but at a lower rate. So I would not prognosticate at this point that, that is behind us. I think you need a couple or 3 or 4 quarters of outperformance before things stabilize, and then ultimately turn around.

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

Going back to the record pipeline commentary. You talked about how kind of the uncertainty in the second half of last year really dragged on announcements and whatnot. And I assume that the record pipeline you're talking about isn't all announced. Are you now seeing the increase in your...

Let me just clarify something. By definition, none of it’s announced. And by the way the word pipeline, it’s up to you, but I wouldn't use that word because that means different things -- different things to different people. We never use that word. I just said our backlog is at an all-time high, and it's higher on a U.S. basis, which washes out the impacts of the Lexicon acquisition. It's also higher globally. And by definition what's in the backlog hasn't been announced.

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

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

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

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

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

Okay. And then finally in asset management, we were expecting a larger revenue bump from the full quarter inclusion of ABS. Could you speak to kind of the drivers there? And can there be a larger amount coming in over the next 2 quarters?

Well, keep in mind, ABS is not consolidated. So therefore, the only thing that shows up as our share of their income net of the intangible expense. So it's not that big a number. That's why it's not a big number.

Yes, Patrick, we have roughly 600,000 intangibles that we were required to recognize in conjunction with that and we have not eliminated those in our adjusted pro forma presentation. So that...

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

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

Well, we have 3 concentrations from a research point-of-view, so far, which are TMT, FIG and transportation. So those are the areas where the firm has the most vertical capabilities, if you will, between banking and the equity side. But we’ve had a particularly strong period in transportation- and shipping-related equity financing. That's a sector which is really amenable to our approach, and we've done very well there. Evercore probably has the leading, for example, shipping, banking practice anywhere. But transportation and shipping, I would say, is the #1. We're doing financial institutions offerings right now. But those are the 3 sectors in which we're focused right now and which we're working in.

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

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

This concludes today's Evercore Partners First Quarter 2012 Financial Result Conference Call. You may now disconnect.