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#Good morning and thank you for joining us today for Evercore's first quarter 2016 financial results conference call.
I'm <UNK> <UNK>, Evercore's Chief Financial Officer, and joining me on the call today is <UNK> <UNK>, our President and Chief Executive Officer, and <UNK> <UNK>, our Chairman.
After our prepared remarks, we will open up the call for questions.
Earlier today we issued a press release announcing Evercore's First Quarter 2016 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 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.
Of note, when we reference comparative results during the call, we will be evaluating 2015 results as if our investment in Atalanta Sosnoff was reported using the equity method of accounting rather than on a consolidated basis.
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 <UNK>.
Thank you, <UNK> and good morning everyone.
We're generally pleased with our first quarter results.
As all of you are aware, the first quarter typically is a seasonally lower than other quarters, but this was the best first quarter in our firm's history with revenues up 11% year-over-year on a comparable basis.
As we mentioned in our fourth quarter conference call, some of the trends that were emerging in late 2015 are in fact carrying over into 2016.
We are experiencing an increase in distressed M&A and restructuring activity in select sectors such as energy and other commodity related areas, while at the same time sustaining M&A activity in other sectors including healthcare, tech, media telecom and financial services.
We continue to believe that 2016 could be one of those unique years in which we see reasonably strong M&A activity coupled with a pick-up in restructuring activity.
Our equities business benefited from volatile equity markets and increased equity trading activity in the beginning of the quarter, contributing to an 8% year-over-year increase in secondary revenues, which is distinct from many of our larger competitors.
Conversely, ECM activity was weak in the quarter due to the volatility in equity markets in the first two months.
However, ECM activity has picked up at the end of the quarter and that momentum carried over into the second quarter as we are into our largest ECM fee to-date in the first three weeks of April.
Recruiting is off to a solid start with the addition of four Senior Managing Directors in Investment Banking, three in Advisory and one in Equity Research.
We continue to have discussions with candidates, though at this point in the recruiting cycle we anticipate that our hiring class will be in our historical range of 47 Advisory Senior Managing Directors, but below the record 10 Advisory SMDs that we hired last year.
Based on the announced earnings from our peers this quarter, we anticipate that our market share among all publicly traded investment banking firms of advisory revenues will grow, as will our market share among the publicly traded independent firms.
We have consistently demonstrated our ability to grow market share when M&A markets are strong and when they are a little less strong, as they were in the first quarter of this year.
In Investment Management, we continue to focus on our wealth management and trust business and our money management business in Mexico.
In February, we enhanced our capabilities with the opening of Evercore Trust Company in Delaware; we also completed the acquisition of the remaining minority interest in our money management business in Mexico in January and are making progress on our cost reduction programs in that business.
We successfully issued $170 million of fixed rate senior notes at an average interest cost of 5.25% during the quarter through a private placement and used a portion of those proceeds to repay the $120 million variable rate senior notes that we borrowed from Mizuho.
Very importantly, we returned $123.1 million of capital to our shareholders during the quarter, including repurchasing 2.3 million shares at an average price of $46.61, substantially offsetting the dilution from shares were bonus equity awards in 2015.
Let me briefly go over our financial performance.
First quarter net revenues were $257.2 million, up 11% versus the same period last year, on a comparable basis, which is pro forma as <UNK> mentioned or the deconsolidation of Atalanta Sosnoff due to the restructuring of that investment.
Net income was $32.8 million for the quarter, with earnings per share of $0.63.
These results are up 10% and 13% respectively versus the first quarter of last year.
Earnings per share was up by a greater percentage than net income due to our aggressive share repurchase program.
Operating margins were 21.3% for the quarter, up marginally from the first quarter of last year.
Our compensation ratio was 57.6% for the quarter, which is reflective of our current full year expectations.
Non-compensation costs were $54.4 million, up from the first quarter of last year due to headcount growth, but down in comparison with the fourth quarter of 2015.
Non-compensation costs represented 21.1% of our revenues compared to 21.5% in the first quarter last year.
Let me now turn the call over to <UNK> to comment on our Investment Banking performance and the M&A environment generally.
Thanks, <UNK>.
Our equities business contributed revenues of $58.3 million in the quarter, up over 5% from the first quarter in 2015, including $1.2 million attributable to underwriting.
Secondary revenue, as I mentioned earlier, was up 8% over last year as a result of both the greater volatility and higher volumes in the first quarter.
And also our continued improvement in the esteem and accord that we are held by the largest institutional investors around the world.
Overall, the business produced operating margins of 19.7% in the quarter, compared to 15.2% in the first quarter of last year, despite the softness in ECM.
This is a function of both the strong secondary revenues and the success of our cost reduction activities.
We remain focused in this business on controlling costs, while making measure investments to drive the future growth of our business.
In Investment Management, for the first quarter Investment Management reported net revenues and operating income of $20.2 million and $6 million respectively, and produced an operating margin of 29.8%.
These results reflect the contributions from our wealth management and trust businesses, which continued to perform well now and now have in the case of wealth management $6.5 billion of client assets.
And in Mexico, assets under management were MXP31.5 billion at the end of the quarter, flat versus the first quarter of 2015.
<UNK> will now provide further comments on some of these actions, our non-compensation costs and other financial matters.
Thank you, <UNK>.
Let me begin with a bit more detail on two points that were previously mentioned.
First, with respect to the acquisition of the 28% minority interest in Evercore Casa de Bolsa that occurred in January and we invested approximately MXP120 million at the time, converting ECB to a wholly-owned entity.
Just for context, ECB is our Mexico entity, providing Investment Management services, it is also the subsidiary we used to participate in underwriting transactions in Mexico.
As we previously indicated, the investment facilitate cost reduction initiatives, which are currently underway.
Secondly, with respect to the financing that <UNK> mentioned, we placed $170 million of fixed rate term debt with six insurance companies and retired the $120 million variable-rate loan with Mizuho.
The notes have a weighted average maturity of about 8 years, ranging from 5 years to 12 years and a weighted average interest rate of 5.257%.
In conjunction with the placement of the notes, we have a commitment to reduce our line of credit to $30 million.
Following the restructuring of the line of credit, we will have debt financing of approximately $200 million, essentially consistent with our position in 2015 before Mizuho exercised the warrants they held.
Turning to our adjusted results, they are presented on the basis that is consistent with prior periods for the quarter and exclude certain costs that are directly related to our equities business and other acquisitions.
Most significantly, we have adjusted for costs associated with the vesting of equity granted in conjunction with the ISI acquisition.
In the first quarter we expensed approximately $32 million consistent with the continued positive performance of Evercore ISI.
As a reminder, our adjusted pro forma presentation includes all of the shares we expect to issue for the equities business and the EPS denominator, our forecasts that drive the number of shares expected to be issued did not change materially in the quarter.
As you know, our primary gauge of non-compensation costs is cost per employee.
We continue to make progress on this metric with firm-wide operating cost per employee of $36,400 for the quarter, which is 5% lower than Q4 and 3% lower than Q1 of last year.
Turning to the equities business, the adjusted operating margins which govern the ultimate payout of the G and H units for the equities business was 16.2% with the first quarter up modestly from the fourth quarter of 2015.
During the quarter, approximately 371,000 Class G units were exchanged for Class E units as Evercore ISI is satisfied with the performance threshold with these units for 2015.
Focusing on taxes, our adjusted the pro forma tax rate for the first quarter was 37.5%, a slight increase from the first quarter of 2015.
As we've previously discussed, our effective tax rate changes principally due to the level of earnings in businesses with minority owners and earnings generated outside of the US.
The elimination of minority interest balances for ECB and Atalanta Sosnoff drove an increase in the rate, which was offset by growth in the expected profitability of other non-wholly owned businesses.
Our share count for adjusted pro forma earnings per share was 52 million shares, a decrease of approximately 950,000 shares from Q4 2015, this decrease principally reflects share repurchase transactions, which as <UNK> mentioned, we repurchased 2.3 million shares for the quarter.
In addition, our Board of Directors has refreshed our share repurchase authorization such that we now have authority to repurchase $450 million in shares or 7.5 million shares.
And finally, our cash position remains strong as we hold $338.4 million of cash and marketable securities at March 31, 2016 with current assets exceeding current liabilities by approximately $327 billion.
With that operator, we can open the line for questions.
Well, <UNK>, as you know, on an adjusted basis, we have put in all of the shares into the share count that we expect to issue and we are taking out the compensation expense.
So, as we have said consistently, our view was that the business should be in a position on the basis of our cost reduction strategies to realize the G units.
They achieved the 2015 tranche, <UNK> has consistently called those the bread crumbs on the ground, and sort of showed them the past to running a successful business.
And as you saw, the results for the first quarter of 2016 are also consistent with ---+ are well above the level needed to earn those units.
So, the question remains, how will the business perform over the 5-year term.
We built 5-year forecasts to estimate how many of the Hs would come into ---+ would ultimately turn into shares that were issued and the business is performing pretty much on that plan.
And <UNK>, I mean, my observation would be for those that have reported, actually our year-over-year revenue results in advisory are ---+ were comparable or better.
Well, Steve, our private capital, our private funds business, those are inherently more back-loaded, but if you look at the independent, virtually all of them have that business today.
We framed it over a two-year to three-year horizon, which is the same framing that we used in the prior authorization, which was 7 million shares.
So we've pumped it to 7.5 million shares.
Yes, for the time horizon, it will work.
It's actually more reverting to what we've done historically.
Last year was an extraordinary year, I think we've said as long as long as I've been here and probably as long as we've been public that we hope to hire four to seven Advisory SMDs a year that's been the practice every year.
We've also said that if circumstances evolved in a way that we had an opportunity to hire more high quality SMDs that we would seize that opportunity.
Last year we did that both because we had the opportunity to hire a little bit more in the industry practices and also, let's not forget that we were ramping up our ECM activities, two of the ten that we hired last year were in ECM, which was not a hiring area in the past.
So it's really driven more by the reversion to our historical practice and last year was the anomaly.
Dan, the other point, that you would have seen in the press release is, we're also adding talent in research, Tom Gallagher, has committed to join us, covering insurance and we see a lot of supply there to build out that business over time as well.
I think our practice will be the same as it's been for the last several years, which is we think carefully about our expectations at the beginning of the year, which is much reflected here.
And we'll adjust the comp ratio as the year plays out as you point out particularly as revenues are realized, but this is our best thinking today.
And the reason it's been a smaller piece of the restructuring pie is there wasn't a lot of restructuring activity in energy and the largest restructuring EFH, we're the lead restructuring advisor.
So, I think we are ---+ as the activity has picked up in the energy sector, the restructuring activity, the fact that we have both a strong energy banking relationships and a very strong restructuring practice has obviously benefited us.
We ended last year with 79.
Two have joined and one of our SMDs at the end of the year has moved to [Senior Advisor].
Operator, can you hear us.
Operator, can you fix this busy signal.
Hello.
Operator (multiple speakers)
Do we have another question.
I guess, I would differ a little bit with your premise that we've grown where others have pulled back.
I think we've been very consistent in, first of all, staying only in the advisory fee-based business.
So every business that we're in is a business where we compete solely on the basis of our ideas, our intellectual capital and our relationships and where the only source of revenue is fee.
So, for example, the big banks are pulling back from FICC businesses, fixed income, commodities and credit.
And we have absolutely no intention of ever entering those businesses.
What we have always done is sought to find uniquely talented people who can produce high revenues, and we have the highest per partner revenues in the industry, as <UNK> alluded to.
And we are consistently looking for senior professionals who can do that on an intellectual capital-based and relationship-based business like we have.
And to be honest with you, wherever we can find those people and in whatever businesses they are, we're going to open a discussion with them.
We're never going to be finished with efficiency initiatives.
Well, we accomplished a 2015 program that focused on information services, it focused on travel, it focused on technology.
And as <UNK> said, we're never done this year, so we're heavily focused on our trading platform, our trading costs, our clearing infrastructure, but at the same time we'll make some investments to improve on the operating platform a bit, particularly focused on trading, so there'll be some puts and takes [in efficiency].
Look, there was a burst of activity, obviously tied to the decline in energy and other commodities, which has been highly focused in energy and materials related and commodities related businesses.
And the question that you're asking is, have we seen spill over into other sectors.
And the answer is, there is clearly restructuring activity in other sectors, but there hasn't been a pick-up in that level of activity and there is always a level of activity related to companies that have high amounts of leverage and particularly in a slow growth economy that are growing their topline and bottom line at a pace that would support that leverage.
But in terms of a March pick-up in activity, that's really isolated today in the energy and materials and commodities related sectors.
No, the answer is no.
I mean, we don't live in quite as the antiquated roles such that investors and you guys and everybody else can differentiate between what's an inversion and what is it.
So the answer is no.
The answer is, first of all we have no idea whether it continues over the next 6 months, 12 months, 24 months, because so much of that is driven by public policy within China, which changes not infrequently and which obviously has a material effect on what you just discussed.
We have a sufficient position in China to serve our clients, highly professionally and whatever they want to do in China.
We have not sent an army of people to Beijing and Shanghai to scour for additional M&A transaction.
Great.
Thanks everybody for your time and attention and we'll look forward to talking to you next quarter.
