Evercore Inc. Q2 FY2023 Earnings Call

Good morning, and welcome to the Evercore Second Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Evercore management and the question-and-answer session. I will now turn the call over to Katy Haber, Managing Director of Investor Relations and ESG at Evercore. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us today for Evercore's second quarter 2023 financial results conference call. I'm Katy Haber, Evercore's Head of Investor Relations and ESG. Joining me on the call today is John Weinberg, our Chairman and CEO; and Tim LaLonde, our CFO. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's second quarter 2023 financial results. A discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website and an archive of it will be available for 30 days beginning approximately one hour after the conclusion of this conference call. During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make 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 SEC, 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. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which is posted on our website. We continue to believe it is important to evaluate Evercore's performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings. I will now turn the call over to John.

Thank you, Katy, and good morning everyone. The current environment has presented one of the strongest hiring opportunities we've seen in the firm's history. We've capitalized on this by hiring exceptional senior talent who are attracted to our entrepreneurial platform, strengthening our ability to execute on our strategic initiatives. We're pleased to announce that so far in 2023 year-to-date, 11 new senior advisory managing directors, seven since our last earnings call have joined or have committed to Evercore. This new group of SMDs represents talent in areas such as TMT, both in the US and Europe, sponsor coverage, business services, real estate and capital advisory. These are the sectors we have identified as part of our long-term strategic plan. Once the market recovers, these new additions and those to come coupled with our recent promotes from earlier this year will drive significant productive capacity to service our clients. We believe, this positions Evercore for even greater success over the medium and long term. As we've experienced many times before to successfully operate in a cyclical business, we must position ourselves to recovery. We've shown repeatedly that our strength comes from investing through periods like we are operating in today, so we can emerge stronger. Our second quarter results reflect challenging market conditions, which we will discuss at greater length in this call. Although it is still early days, we've recently begun to see an uptick in client dialogue levels in conjunction with improving equity markets, stabilization of interest rates and the first signs of a recovery in the capital markets. Anecdotally, we're encouraged based on what we are hearing from our bankers and we're seeing some of that reflected in increased backlog, which include announced transactions as well as mandates. However, there is still uncertainty in the market, which has an impact on transaction timelines and closing. Additionally, there is a lag between announcements and closings, which impacts the timing of revenue recognition. Now, turning to the quarter. Evercore achieved $505 million in adjusted net revenues, $40 million in adjusted net income and $0.96 in adjusted earnings per share. Broadly, macro uncertainty and higher financing costs continue to weigh on markets, resulting in global announced M&A transactions greater than $100 million in the first half of 2023 down almost 40% on a dollar basis versus a year ago. In our global Advisory business, while M&A activity continues to be slow we started to see increased momentum in client activity. In the quarter, we worked on several important transactions, including Chevron on a $7.6 billion acquisition of PDC Energy and the $5.2 billion sale of Arconic to Apollo. Our Advisory team in Europe performed well given the challenging market conditions, but was down relative to the record quarter achieved a year ago. We continue to see significant progress in our European business as we strengthen both our sector coverage and capabilities. Our leading strategic defense and shareholder advisory business continues to see strong activity as activist campaigns remain at an elevated pace. In restructuring activity remains strong similar to what we've seen over the last couple of quarters driven by liability management as well as our market-leading debtor and creditor practices. Our private capital advisory and fundraising businesses, while experiencing some challenges remain active particularly with respect to continuation funds and private equity fundraising areas in which we are market leaders. Our Underwriting business had a better quarter as equity capital markets started to show signs of strengthening in May and June which were better months as measured by dollar value of issuance than any since November 2021. In the second quarter of the six follow-on offerings that were greater than $1 billion we were a book runner on three. Notably, we were the lead left book runner on GE Healthcare Technologies $2.2 billion deal which was the largest secondary offering in the quarter. We continue to focus on broadening our sector coverage. In our Equities business client interactions across our research and sales and trading platform remain robust with increasing opportunities to talk to clients. Lastly in Wealth Management AUM increased from prior quarter and year-end driven by market appreciation. Long-term client retention and performance remains strong. Tim will provide more details on this shortly. But as you know hiring of additional senior talent coupled with a challenging revenue backdrop put significant upward pressure on our compensation ratio yet we remain committed to a disciplined approach to managing our overall headcount expense base. While we continue to be focused on maintaining a durable balance sheet we remain committed to returning excess cash not invested in the business to our shareholders in the form of dividends and share repurchases over time. Looking forward we are preparing for the eventual recovery in the market and we are cautiously optimistic about the recent shift in sentiment. As we execute on our strategy we believe we are well-positioned for sustained growth and success in the medium and long term. With that let me now turn the call over to Tim to review our financial results and other financial matters.

Thank you, John. Our results this quarter and for this year are impacted by several factors. The first is the environment, which during the second quarter reflected a period of significant economic uncertainty and a challenging M&A and financing environment. This along with the deferral of several significant fees resulted in reduced revenues. The second is more forward-looking and that relates to the significant investment we have made in our business through the addition of a larger-than-normal number of very high-quality SMDs, the cost of which is partially reflected in this quarter and will continue through the remainder of the year and into next year. The cost of course that is absorbed this year likely will be prior to the realization of meaningful incremental revenue. The combination of lower revenues and increased investment in our future contribute to an elevated compensation ratio. The third is the impact of inflation and increased travel which have contributed to higher non-comp expenses. Now here are the results. For the second quarter of 2023 net revenues, net income and EPS on a GAAP basis were $499 million, $37 million and $0.95 per share, respectively. My comments from here on will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our second quarter adjusted net revenues of $505 million declined 21% versus the quarter a year ago. Second quarter adjusted operating income and adjusted net income of $63 million and $40 million decreased 59% and 63% respectively, versus the second quarter of 2022. Adjusted earnings per share of $0.96 decreased 61% versus the prior-year period. Our adjusted operating margin was 13% for the second quarter. Turning to the businesses. Second quarter adjusted advisory fees of $375 million declined 35% year-over-year compared to $576 million of advisory fees in last year's second quarter, which was a record second quarter for us. In accordance with relevant accounting principles our revenue for the second quarter of 2023 includes $59 million from transactions which closed subsequent to June 30 or otherwise had contingent elements at June 30. To compare, we recognized $67 million in the second quarter of 2022 and $18 million in the first quarter of 2023 in accordance with the same accounting principles. Second quarter underwriting revenues of $38 million were up meaningfully compared to the second quarter of 2022 and the first quarter of this year, as ECM activity industry-wide increased significantly, particularly in May and June. Commissions and related revenue of $50 million in the second quarter was down 5% year-over-year reflecting weaker trading volumes as a result of lower volatility. Second quarter adjusted asset management and administration fees of $18 million decreased 1%, however year-over-year AUM increased approximately $1 billion primarily reflecting an increase from marketing. Second quarter adjusted other revenue net was a gain of approximately $24 million of which approximately $12 million reflected the increase in value of our investment funds portfolio, which is used as a hedge for our DCCP commitments. In addition, we continued to generate interest income on our cash balance due to higher short-term rates versus the prior year. Turning to expenses. The adjusted compensation ratio for the second quarter is 67%. The factors that impact our compensation ratio are first and foremost the revenue environment the amortization of prior-year awards and the level of senior hiring also impact the comp ratio. We are excited about our execution to-date on our strategic partner hiring plan and in particular the exceptional quality of these candidates. There is an upfront investment costs although we expect these new SMDs to be significantly accretive to revenues overtime. Considering the time lag that exists between transaction initiation and closing which is when advisory revenue is typically recognized and that many of our new hires do not start until later this year when we will begin accruing compensation expense for them we expect our compensation ratio to remain elevated throughout the year. As we enter the back half of the year, we will adjust accordingly in either direction should our estimates of the underlying determinants of the compensation ratio change. We are continuing to judiciously manage our overall headcount and we are using a disciplined approach to hire additional senior bankers in areas where we see a strategic opportunity. Shifting to non-compensation expenses. After holding our non-comp expenses essentially flat for the past four quarters in the second quarter our non-comp expenses increased to $103 million up 8.5% from a year ago. This is primarily driven by an increase in travel-related expenses due to a higher level of face-to-face meetings inflationary impacts on both travel and communication and information services and higher occupancy-related expenses for which the increase is driven by lease arrangements and costs related to relocating part of our corporate team to a different location. The rate of increase in non-comp expenses we have seen this year-to-date is similar to what we had seen in the prior year. We remain focused on continually monitoring our expenses and managing them tightly in this environment. Our adjusted tax rate for the quarter was 29.6% compared to 27% in the second quarter of last year. Turning to our balance sheet. As of June 30, our cash and investment securities totaled approximately $1.5 billion. We regularly review our cash position with respect to the current business environment and we manage it prudently to ensure we have significant liquidity to implement our strategy including hiring plans to capitalize on opportunities and to assure all our stakeholders that we have financial stability. Year-to-date, we have returned a total of $419 million to shareholders through dividends and repurchases of 2.7 million shares at an average price of $128.01. We have fully offset the dilution from the 2.4 million RSU grants that were issued in the first quarter. And our quarterly weighted average share count has declined by nearly 1.1 million shares compared to last quarter. Our second quarter adjusted diluted share count decreased by more than 1.6 million shares to 42.1 million from 43.8 million a year ago. Looking forward, return of capital will be influenced by the operating environment and our business needs. We have strong capital position and have returned about one-third of our market cap in the form of dividends and share repurchases over the past 2.5 years. As we have stated consistently, we remain committed to building our business through all phases of the economic cycle. History has shown that our firm emerges stronger from challenging environments than when we entered. We are seeing early signs of improved capital markets and more broadly, an increased level of discussions with our clients, reflected in increased backlogs. With our new SMD additions and the SMDs we have promoted internally, which have significantly expanded our footprint, we believe we are better positioned than at any point in our history. With that, we will now open the line for questions.

Thank you. Our first question comes from Steven Chubak with Wolfe Research. Please go ahead.

Hey, good morning.

Good morning.

So, I was hoping to start off just with a question on Equity Capital Markets before getting back in the queue. Just prior to the pandemic, $25 million per quarter was considered a pretty strong quarterly result for that business. You just hit $40 million in a quarter, where the overall industry fee pool is still tracking below 2019 baseline or when people look at it as a more normalized proxy. I was hoping you could just speak to what contributed to the share gains in the quarter. And where do you think this business runs as we enter a more normalized operating backdrop?

We continue to build our Equity Capital Markets business and we are gaining momentum. As you probably know, our league tables have continued to pick up. And right now we're at number 11. And our objective is to be in the top 10. What is happening in our Equity Capital Markets business is we really have more and more connectivity with clients and we've communicated more clearly our capabilities. And as a result, our positions in financings are actually improving. And we're having just much more success in the pitches that we're making. I think we have a lot to offer in a lot of these capital markets transactions and I think clients are embracing that. So what we're seeing is a higher expectation of what we can do. And I think our bankers are out marketing the product quite effectively. It's hard to predict how far up it goes in terms of our revenue potential. I think we're a far cry from where we think we are going to end up. We think that the momentum is very good.

Yes, I would agree with John. I would like to add two points. First, throughout most of 2022 and the first half of 2023, the market has been relatively depressed. Therefore, we expect that when the market does recover, it will reach significantly higher levels than what we have experienced over the past five or six quarters. Second, due to the conditions in the equity issuance market during this time, many earlier-stage companies have been inactive and are now seeking capital to implement their strategic plans and grow their businesses. We hope and expect that as the markets normalize and issuance levels return to typical rates, we will see a number of these companies entering the market.

I'd just add one more thing, which is that one of the parts of our strategy is that we are expanding our reach with respect to different sectors and we are building out our Equity Capital Markets group. And so I think you will see over time a diversification of where we're getting our revenues and equity. And also I think we're going to basically be reaching more clients.

That’s great color. Thanks John and Tim for taking my questions.

Thank you. We'll take our next question from Ryan Kenny with Morgan Stanley.

Hi, John and Tim. Good morning.

Good morning.

Wanted to follow-up on the comments around improved client conversations on the M&A side and an increased backlog. Do you have any metrics you could share on how much the backlog has increased? And is there any difference there on larger deals versus the smaller or more midsized deals?

We can't provide specific metrics on that. However, I can say that our backlog is strengthening and the current activity levels within the firm are very high. When comparing these activity levels to the beginning of this year, it's clear that the market is diverse, with real activity picking up in almost every sector and product. From our viewpoint, it seems like there's a substantial increase. Additionally, we are indeed engaging in discussions about large deals, which is a significant part of our business. The middle market, in particular, is experiencing quite robust activity at the moment. There is a noticeable uptick in the number of companies seeking to sell, and we are actively working on a considerable number of transactions in the sell side. Over time, we expect to see a balance, though one aspect to monitor will be the effect of antitrust regulations on larger deals, which will likely have a greater impact than on middle market deals.

Yes. I want to add that while John discussed the partner hiring at length, we have announced 11 partners year-to-date, following seven last year, making a total of 18. Additionally, we promoted 24 partners internally over the last two years, bringing the total to 42 partners that will be active at the start of 2024. We are optimistic that this will significantly enhance our coverage and strengthen our capacity.

Great. Thank you.

Thank you. We'll take our next question from Brennan Hawken with UBS.

Good morning. Thank you for taking my question. The year-to-date comp ratios have increased to 65%. I understand, Tim, you mentioned uncertainty around that figure in your prepared remarks, which is understandable. However, could you provide some additional insight regarding the comp ratio? Is it correct to say that the year-to-date figures represent your best expectations for the year? I asked this last quarter, and we received a different response from a competitor yesterday, so I would like to confirm that this outlook is based solely on what you know today, without factoring in any anticipated hires in the latter half of the year. Thank you.

Yes. Sure. And thanks for the question, Brennan. And so, as you correctly stated, the first half comp ratio is 65.1% and we do not accrue for new hires until they start. And so since more than half of our new hires this year are expected to start in the latter half of this year, the first half comp ratio would not reflect their compensation. What that would imply is that you would expect to see some drift upward from the 65.1% number. What you notice is in the second quarter, we booked 67% which helped get us bring our initial first quarter comp ratio of 63.5% up to the 65.1% area, which again, would be an accrual number that does not reflect the people who have not shown up. When those new people do arrive and they hit the books though, there's uncertainty around what the final comp number would be, I would expect it to be relatively similar to what you saw booked in the second quarter.

Thank you for that color, Tim. I appreciate it.

Sure.

Our next question comes from Devin Ryan with JMP Securities.

Hey, good morning. How are you guys?

Great. Thank you.

Good. Just want to follow up on recruiting and just the market that we're in right now. So a lot of SMDs that are joining obviously a bit more than normal. And so, I guess two things. One, do you expect just based on conversations that number could grow this year just based on kind of where we sit? And then, what does that window look like here? If the market is improving, is that window maybe starting to shut and so you want to push harder, or do you see this window remaining open into next year or even beyond? Just love to get a sense of kind of the recruiting environment and then how long do you think it could remain as active as we've already seen year-to-date here. Thank you.

Thank you for the question. We are actively engaging with available talent and are excited about some unique hires we've made recently across the firm. The 11 individuals we're discussing are part of our Advisory businesses, but we have many more hires in other areas as well. We are optimistic about the potential of all these individuals. Throughout the remainder of the year, we will keep communicating with very talented candidates. While these conversations may or may not lead to new hires, we are hopeful about finding the right talent. We don’t see the hiring window closing. Although the opportunity to bring in strong candidates is influenced by market conditions, we also believe many individuals are drawn to our model and are eager to join us. This sentiment seems to be shared by others in the industry as well, indicating a generally positive hiring environment. We will keep pursuing top talent as it becomes available. Our focus remains on attracting A-level and A+ talent, and we’ve been pleased with the interest from candidates excited to join us. We plan to maintain these conversations. While I'm uncertain if we'll reach the same hiring levels as in previous years, we will consistently seek excellent talent. Over the past two years, we've had 24 internal promotions and have more than 40 partners developing at this time. Promoting from within is a key focus for us and will significantly influence our productive capacity and revenue potential. In summary, the market for talent remains promising, and we intend to continue our efforts this year.

Yes, I would like to add that approximately 43% of our internal partners have been promoted from within. Additionally, they have shown great success in their roles. This transition has been crucial for our organization as it helps us build sustainable value and achieve high returns on investment in the future. We are truly pleased with this evolution in our company.

Got it. Thank you.

Thank you. Our next question comes from James Yaro with Goldman Sachs.

Good morning, John and Tim, and thanks for taking my questions. Maybe we could just turn to M&A again. Just a bigger picture and then I'll dig down a little bit. On the bigger-picture question what do you think breaks the M&A logjam and brings companies and sponsors back to transaction? What are we missing today? And when do you think that could occur in your best estimate? And then if we just dig down given the continued fundraising weakness among sponsors it'd be just helpful to get your perspective on the debate in terms of whether strategics and sponsors return to the M&A market first and whether you think sponsors could represent a structurally lower level of M&A at least for the medium term that we have seen in recent years?

In terms of what it takes to get the market moving again, we have consistently stated that clarity regarding the macro outlook, stability of interest rates, and a supportive market environment are essential. We are noticing a positive shift in the market with early signs of increased ECM activity and a more stable stock market. Interest rates appear to be stabilizing, and the Fed's measures have been effective. Additionally, leveraged finance is beginning to ease. Therefore, we believe activity is on the rise. Internally, we are experiencing significant activity, and the key question remains what it will take. It ultimately comes down to clarity and stability, which seems to be developing. While it is challenging to predict exactly when things will fully recover, we feel that all necessary elements are in place, and it's simply a matter of time. Financial sponsors currently have $3.7 trillion in available capital, and they are eager to engage in deals. They are focused on identifying the right moment to re-enter the market. Based on our discussions, these sponsors are ready to proceed and are awaiting the appropriate signals. They are certainly affected by access to funding and interest rates, but none of the sponsors we are speaking with seem to feel that they cannot do business at this time. Thus, when the market begins to show signs of movement, we expect sponsors to take action, as holding back is not in their best interest.

Okay. Thanks a lot.

Thank you. We'll take our next question from Brennan Hawken with UBS.

Thanks for taking my follow-up. I just wanted to actually drill down a little bit on that last point about activity. We hear a lot about green shoots. We hear a lot about conversations. But what do you think the lag is going to be until these green shoots in sort of early indications actually turn into a meaningful up-tick in activity? Because that seems to be sort of where the rubber hits the road here and we started to see green shoots in the beginning of the year and then some of the trouble in March set us back and now we're starting to see it again. I think what investors are most struggling with is we just dealing with another head bake here, or is there really the true conviction that's going to lead these to start leading to announcements? And when does that happen? Do you have any sense of that? I know it's a tough question.

Hi Brennan, this is Tim. We do have some insight. When discussing activity levels, I want to break those down into a few categories. It's clear that the phones are ringing again and people are returning to the tables. However, once that initial engagement happens, it can take several months to analyze, hold Board meetings, conduct negotiations, and announce a deal. After a deal is announced, there is yet another period before those transactions actually close. Therefore, I want to emphasize that when transaction or discussion activity increases, we typically won’t see a revenue uptick in the same quarter; it requires time. Additionally, from an investor and analyst perspective, once you observe an increase in announcements, you will subsequently see a rise in revenues from those transactions. This could serve as an early indicator for the research community and investors. On a positive note, the equity market often has a much shorter time frame, and as evidenced by this quarter's results, we’ve already seen some improvement.

Our restructuring business is quite active, leading to immediate revenue generation. Additionally, our activism defense business also generates fees, which are accelerating. While we have various revenue streams, your question about potential delays is important. We do anticipate a lag between the increase in internal activity, public announcements, and when those revenues actually come in, meaning there will be a period of time between each stage.

Okay. What I'm trying to understand is whether the signs of improvement we are seeing are becoming more stable and strengthening, or if we are still in a phase where there is considerable uncertainty. A setback like we experienced in March could potentially halt the progress again.

I'll give you my judgment which is, the activity that we're seeing right now and the conversations we're having right now are much more foundational than the ones we saw in January which I felt were more tentative. Clearly in January and February what we saw is activity levels were building. But in many respects it was bankers' kind of pushing activity forward. Now I really feel like, its market driven that there is real foundational reason for why these things are happening. And I feel much more comfortable that these are really moving forward.

Okay. Thanks guys for the patience with the multiple questions.

Sure.

Thank you. We'll take our next question from Devin Ryan with JMP Securities.

Yes. Thanks. Yes, I just wanted to follow up on some of my commentary on restructuring. Obviously we've been tracking this acceleration as well and Evercore has been very active in that. And so, I just want to talk a little bit about how much of that maybe acceleration of mandates has already been impacting revenue? And then what that trajectory and timing looks like? Is this back-end weighted 2023 story in terms of revenue recognition? Is there a big ramp into 2024 just based on what's already in the system? And then how long do you guys see this lasting especially if the M&A market does start to get some length here? So, just trying to think about that business which has been very healthy but maybe the revenues haven't come through yet? Thanks.

We have seen restructuring activity year-to-date, which was quite significant for us last year. This year, there has been an increase in business activity, although it hasn't reached the peak levels seen during the early pandemic or the financial crisis. The focus has been more on managing liabilities rather than a surge in Chapter 11 cases. The effort in renegotiating existing distressed credits has been positive and rising. We anticipate a maturity wall around 2024-2025, and whether this leads to additional restructuring business will depend on the state of the leveraged finance markets at that time. Historically, M&A activity and restructuring activity have been inversely correlated, but it is possible to see both a strong restructuring market and an improving M&A market in the current environment.

Yes. I would say that the backlog in our restructuring business continues to build. Given the diversity of our businesses, which includes liability management primarily on an advisory basis, as well as creditor and debtor businesses, these factors suggest that it will be a less cyclical business for us in the medium term. With interest rates rising and low credit businesses facing what Tim referred to as the maturity wall, I anticipate significant activity over the next two to three years. The merger market has also started to improve, and concurrently, our restructuring business could become even busier.

Yes. Perfect. Thank you.

Thank you. We'll take our next question from Ryan Kenny with Morgan Stanley.

Hi. I just wanted to dig in on the non-comp side. I heard the comments in the prepared remarks that there was a pickup in travel and lease expenses, and we also saw professional fees pick up. So, how sticky is that increase in non-comp? And should we think about the $103 million non-comp dollars as the right base going forward?

The increase in non-comp numbers was influenced by three main areas, one of which is travel. The rise in travel is positive because we want our partners to engage in face-to-face meetings with clients. Currently, travel is at about 75% of pre-pandemic levels in terms of the number of trips. Adjusting for the increase in headcount since 2019 brings that down to about 60% per person. We expect this trend to remain stable, with a possibility of a slight increase. Additionally, we have seen some inflation in travel costs. The second area affecting non-comp is communication and information services, which have grown in importance during this data-driven era. There has been a slight increase in both the cost of data and the number of users. Lastly, regarding occupancy, as I mentioned in our last call, we are relocating part of our corporate staff to a new building, which is resulting in us paying double rent during the construction phase. This expense will decrease as the relocation progresses. Looking at the non-comp expense on a per head basis, it has been relatively stable over the past few years, with only a minor uptick primarily due to travel. Currently, per head expenses are slightly above where they were during the pandemic, but still below pre-pandemic levels. Overall, I feel we are in a position that meets our expectations, with some minor fluctuations that will likely balance out.

Got it. That's helpful. Thanks.

Thank you. This will conclude today's Evercore Second Quarter 2023 Financial Results Conference Call. You may disconnect at any time and have a wonderful day.