Q1 2020 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Evercore first quarter 2020 financial results Conference call. During today's presentation. All parties will be in listen only mode. Following the presentation. The conference call will be open for questions. If you have a question. Please press the star followed by the one under Touchtone telephone. Please press star girls for operators just didn't.
But at any time for participants using speaker equipment and may be necessary to pick up your headset before making your selection. This conference call is being recorded today Wednesday April 22nd 2020, I would now let's turn the conference call over to your host Evercores head of Investor Relations Holly Miller. Please go ahead ma'am.
Thank you Stephanie.
Morning, and thank you for joining US today Forever course, first quarter 2020 financial results conference call and tally Miller Evercores head of Investor relation.
Joining me today on the call today, our Ralph lifetime, our President and CEO, John Weinberg, our executive Chairman and Bob Walsh, our CFO.
After our prepared remarks, well open up the call for questions.
Earlier today, we issued a press release announcing Evercores first quarter 2020 financial results.
The company's discussion about results today is complementary to the press release, which is available on the website at Evercore dotcom.
The conference call is being webcast slide in the four investor section of our website and an archive of that 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, including with respect to cobot 19.
As discussed in our earnings release. This morning filed on form 8-K worldwide coal bed 19 pandemic has negatively affected our business and is expected to continue to negatively and significantly affect our business.
At this time it is uncertain how long are business will be negatively affected by cobot 19, and the associated economic and market downturn.
Any forward looking statements that we make including those about Qubic 19, and its effect on our business are subject to various risks and uncertainties.
There are important factors that could cause actual outcomes to differ materially from those indicated any statements. These factors include but are not limited to those discussing evercore filings with the FCC, 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'll be discussing adjusted financial measures, which are non-GAAP measures that we believe a meaningful when evaluating the company's performance.
For detailed disclosure on these measures and the GAAP reconciliation you should refer to the financial data contained within our press release good posted on our website.
We continue to believe that it is important to evaluate evercores performance on an annual basis.
As we've noted previously our results for any particular quarter are influenced by the timing of transaction closing.
I will turn call over in Iraq.
Thank you very much Allie good morning to everyone.
It is certainly a very different world today compared to our last earnings call in January.
The vast majority of our for its working remotely we are conducting our earnings call from widely varied locations.
Comments on our first quarter results in a few minutes, but first I want to talk about our for and how we have approached the cobiz 19 and that Mike from both an operational.
No standpoint.
Our goal global team has performed extraordinarily well and very challenging conditions and adapted quickly to our remote working arrangements. Despite working for more than 1800 offices globally, we are effectively communicating with our clients at each other.
Roger Jotted I could not be more proud of our entire team.
As we settle into our current work arrangements and acclimated to the current environment, John Roger and I and the rest of the management team are focused on for very important priorities.
First assuring the health and safety of our team and their families.
Second pivoting our services to address the evolving needs of our corporate institutional investor and wealth management clients.
Third operating collaboratively effectively and securely leveraging the technology in both new and old ways.
For maintaining a strong and liquid balance sheet.
Yeah economic issue is the United States and much of the World faces today is the rapid at unprecedented increases on employment and the equally rapid decline in economic activity.
This fiftyx related to unemployment or truly sobering.
22 million Americans alone I've lost their lives their jobs excuse me in the last four weeks and millions more around the world had been similarly affected.
All of us at Evercore fields easily for those who are out of work because of this pandemic their hardship pains us.
Sharp increase in unemployment, obviously pre sages a substantial decline in global GDP, probably starting in the first quarter and most certainly steep decline in the second quarter and potentially for third quarter as well.
We have seen governments and central banks response.
And then that aggressive and unprecedented way with monetary and fiscal stimulus to mitigate and ultimately reverse the economic decline.
We are confident that overtime economies around the world.
But it will take time and the recovery almost certainly will not be as sharp as the decline.
As a consequence, we expected our business will be negatively affected in the coming quarters.
And our advisory business M&A is our largest revenue contributor and we expect that business to be negatively affected for some period of time.
As John will describe in his remarks to conditions typically required for strong M&A activity currently are not president.
Additionally, equity underwriting has versus virtually disappeared since mid February so we anticipate a strong return once markets stabilize similar to what we saw in the second and third and fourth quarters of 2009, following the depth of the global financial crisis.
These are the negatives on the other hand, the current environment has created opportunities for us as we have rapidly redirected our advisory efforts to adjust to the evolving needs of our clients.
Since that we have made in our platform over the last several years, most to broaden and diversify our capabilities and to expand our coverage of key sectors and geographies have significantly expanded the scope of our expertise.
Our allowing us to continue to provide independence and trusted advice to our clients on the topics that are most relevant to them today.
Our restructuring.
And the equity capital markets advisory businesses are going flat out.
Additionally, the volatility and increased trading volume of the equity markets has driven a strong increase in secondary revenues in our equities business.
These businesses are smaller than our M&A advisory business and it will take time before the increase in revenue related to restructuring and debt and equity capital markets Advisory activities are recognized as a consequence the increase in activity in these areas will not come.
We have enough or be have sufficient scale to offset the expected near term weakness in M&A.
Normally at this point I comment on our backlog.
It's way too early in this dislocation to know the overall effect on our backlogs as they are in transition.
Restructuring is dead advisory is building rapidly well M&A transactions are currently being delayed postponed or put on hold as buyers and sellers to assess the duration and severity of the downturn.
Dialogue around M&A. However, certainly has not halted as the dialogue with financial sponsors is increasing and well capitalized and liquid companies are opportunistically exploring either want sought after assets for a new ideas.
While we cannot be sure of the duration in severity of the downturn.
Believes that its a relatively young and highly entrepreneurial from we're ready for the challenges presented by the current environment and that we have already responded effective.
If we continue to work collaboratively adapt to the changing needs of our clients and communities. We will emerge from this period well position for future long term growth and market share gains.
We now talk about our financial performance in the first quarter.
Reported the second best first quarter revenues in our history indicative of the revenue generating power of our franchise and our business model in a more normal times.
Adjusted net revenues of 435 million increased 4% versus the first quarter of 29.
In aggregate, our total revenues of 436 million from our investment banking businesses.
Buys re underwriting and commissions increased by 10% versus the first quarter of last year.
Advisory fees of 359 million, our largest revenue source increased 10% compared to the first quarter 2019, and held up very well compared to our larger competitors, almost all of whom experience.
Well digit declines between 10 and 20% in their advisory revenues.
As a general matter previously announced transactions closed as expected in the quarter.
These results are especially impressive considering the fact that the dollar value of announced M&A transactions globally declined 24% in the first quarter and the dollar value of closed M&A transactions fell by 37% compared to the quarter a year earlier.
Due to the strength of our advisory revenues compared to the declines experienced by our larger competitors.
We expect to increase again, our market share, but by three fees among all publicly reporting firms on a trailing 12 month basis.
8.6% from 7.9% for the 12 month period, ending March 31, 2019, and from 8.3% at the end of 20 Nike.
Underwriting fees were 21.1 billion a decline of 22% from the first quarter of 29 team.
This business had a very strong start to the year, but as cobot 19 began to spread activity in this business essentially halted in mid February.
Commissions and related fees of 55.4 million increase 32% versus the first quarter of 29 team for our best first quarter since 2016.
Our equities feed benefit is from the heightened volatility and equity trading volumes associated with the market downturn that began in mid February asset management at administration fees from our consolidated businesses were 15.3 million.
An increase of 7% versus the first quarter of 2019.
Our first quarter compensation ratio of 62% was impacted by the revenue decline in other revenue caused by the shift from gains to losses associated with the investment portfolio that hedge as a portion of our deferred cash compensation plan.
Compensation ratios for the first quarter of 2020, and 2019 are essentially the same when the impact of these gains and losses are excluded.
We historically have reflected a compensation ratio in the first quarter based on our best estimate for the full year revenue expectations and compensation or requirements and reassess that compensation ratio each quarter to address changes in these expectations.
Given the uncertainty of the current environment, our first quarter compensation ratio is reflective only of our first quarter performance.
We will reevaluate the appropriate amount of compensation.
And our compensation ratio on a quarterly basis as we always have but the likelihood of change, we'll certainly be higher in the current year than in other years due to the highly uncertain environment for the next two to three quarters.
Not compensation costs were 82.8 million up 2.7% from the first quarter of 29.
The increase reflects higher occupancy costs and expenses associated with certain technology initiatives, many of which are supporting our successful work from home operations today.
Increase in these costs was partly offset by lower professional fees and travel expenses.
As we had reported to you before we have started a number of initiatives to reduce costs at the end of last year and these results begin to demonstrate our progress Bob will comment further on this.
Adjusted operating income and adjusted net income of 82.5 million and 57.8 million declined 14% in 29%, respectively and I'm.
Adjusted earnings per share of $1.21 declined 27% versus the first quarter 2019.
Again, our change in operating income was affected meaningfully by the changes in the value of the hedges for our deferred compensation plans rather than any change in our compensation philosophy and the larger change and net income and earnings per share was a significantly affected by the higher tax rate in the first quarter of 2020 as compared to.
2019, Bob will discuss this in his remarks.
We remain focused on our capital management Henry.
Strategy and returned $178.1 million to shareholders during the quarter through dividends and the repurchase of 1.8 million shares at an average price of 76.57 cents.
76 hours and 57 cents.
Commitments to offset the dilution associated with equity grants has been substantially completed for the year.
So any additional share repurchases and twentytwenty will be dependent on future earnings and maintaining our strong liquidity position.
Our board declared a dividend of 58 cents consistent with prior quarters and reflective of our results for the quarter.
Our board and management will continue to evaluate the dividend on quarterly basis as the effective cobot 19 virus on revenues becomes more clear.
Although the current expectation absent a steep decline in revenues at a significant reduction in our cash position is that our current dividend will be maintained.
Our first quarter results demonstrate the continued strength of Evercore is franchise and more normal times in each of the last two years, we have generated revenues in excess of $2 billion, an experienced operating margins that averaged in excess of 25%.
These results were produced by essentially the same team that we have on the field today and we really don't see any reason why those results can't be repeated when enormous when more formal and less disruptive conditions return.
Let me down turn the call over to John to discuss the current market environment and to comment further on our investment banking business.
John.
Thank you Ralph.
The market environment.
For much of the first quarter continued to be supportive of M&A and strategic capital raising transactions in most sectors and geographic regions.
As such the rapid change in environment associated with the global spread of co bid 19 is not generally evident in our first quarter results.
As Ralph mentioned earlier, many of the transactions, we announced continued to move towards completion throughout the quarter.
Yet today, the conditions necessary for a healthy M&A market, including stable equity valuations readily available credit and CEO confidence and optimism do not exist.
Demand for restructuring and more broadly debt advisory and liability management device has dramatic dramatically increased in the current environment as companies focus on their most immediate liquidity needs financial sponsors continue to have record levels of dry powder, but with valuation so uncertain. It is difficult for.
Them to put money to work at the moment, however opportunities for innovative assignments do exist and our investment and build out of our financial sponsors team continues.
The cash equities business tends to perform better when volatility and volumes increase the VIX spike dramatically late in the first quarter and it remains elevated.
Clearly three weeks into the second quarter, we faced challenging conditions Ceos are assessing a volatile and uncertain environment and dialogues are more focused on operations and liquidity requirements as opposed to strategic growth initiatives.
It's still early in the market remains high and valuations are influx.
Many activists have dial back on large campaigns and are starting fewer new.
Paralleling the M&A slowdown.
And access to public capital is challenging.
Despite these more challenging conditions, we are confident that the breadth and capabilities.
That we have positioned us well with clients to evaluate all situations and our independent advice model will be increase of increasing value in the current environment.
We are focusing our efforts on maintaining constant and high quality dialogues with our clients to assist them in the areas, where we currently where they currently seek advice and are working hard to build relationships with new clients looking to broaden their relationship with an independent advisor.
When the markets begin to show sustained stability, we believe that we will begin to see an increase in proactive attention to strategic matters. Until then we are actively communicating and engaging with all of our clients to help them navigate the current environment.
And be there for them when the eventual recovery comes.
Our performance during the first quarter was solid despite increasingly challenging conditions as the quarter progressed and came to a close.
We sustained our number one ranking for volume of announced transactions over the past 12 months, both globally and then the U.S. among independent firms among all firms. We were once again number six globally and number four in the us.
We continue to advise on a large number of the most prominent M&A assignments of the quarter, including three of the four largest transactions in the United States.
Our underwriting business had a very strong first six weeks of the quarter and we're pleased to have served as a joint bookrunner on two of the top three largest ipos to price during the quarter. However activity has significantly decreased since mid February.
Our private capital advisory business performed well during the quarter and completed assignments already in progress.
Our equities business.
At a very strong quarter as a result of the heightened volatility and volume associated with the market downturn precipitated by cobot 19.
The strategic investments in senior talent, we made last year have contributed to our success.
We've been able to increase our connectivity with investors and advisory clients.
And provide valuable insights during a period of significant market dislocation.
Our health care analysts are digging deep into the science of Cobot, 19, and collaborating with our macro and other fundamental analyst to determine investment implications across many different sectors.
Our macro analysts are also providing insights and government stimulus programs and the overall state of the economy's worldwide.
We've also found more ways to connect with institutional clients and interactions are 35% higher than in prior periods.
Our advisory clients have had an intense interest in our research and over the past month, we've added more than 1800 corporate executives to our research distribution.
As we enter a slower market for M&A activity, and a more and more restructuring debt advisory and liability management focused environment, our businesses pivoting to meet the changing needs of our clients.
With a number of sectors end markets badly impaired by Cobot 19.
Our industry M&A bankers are collaborating with our restructuring and debt advisory teams to meet increased activity in these areas.
We've spoken about our flexible business model in the past and we're seeing it in full effect now.
The solutions, we are exploring with our clients are broad based involving both in and out of court bankruptcies exchange offerings, and amend and extend agreements and private placements the breadth of experience and talent of our independent team.
Enables us to help clients analyzed and execute their strategies and solutions.
Well major activist campaigns have dialed back.
Our shareholder advisory business has been working with clients to help them understand the issues there currently facing including potential stealth accumulations by activist and hospital Raters capital return decisions.
What to do about guidance and balance sheet and liquidity issues.
Many of our private capital advisory assignments are currently on hold as investors are sidelined in a resetting their expectations. We believe many funds.
We'll need help raising money and managing their portfolios as markets stabilize.
Let me briefly touch on our talented team.
Our greatest asset, it's our people and everyone at Evercore has been working incredibly hard and diligently to make sure. The from is fully functioning in our current remote working environment and then make sure that our clients are well served in this difficult time.
Our efforts to uphold our core values of client focused integrity and teamwork remains central to everything we do.
We're pleased with our two new advisory SMTC, we've recruited so far in 2020, and we will remain open to opportunistically, adding other high quality individuals.
Who can bring value to our clients.
We're extremely proud of the promotions across all levels that were announced during the first quarter.
As we move forward, we're very much aware of the difficult Road ahead, we will continue to work together in support of our clients through this downturn in the inevitable recovery. We're confident that if we continue to collaborate and communicate with each other and adapt quickly the changing needs of our clients we will emerge from this downturn.
And well positioned for future opportunities.
Let me now turn the call over to Bob to discuss our GAAP results and other financial matters.
Thank you John.
For the first quarter Twentytwenty that revenues net income and earnings per share on a GAAP basis were 427 million 31.2 billion.
34 cents respectively.
Net revenue of approximately $40 million was recognized in the first quarter as transactions that closed at the beginning of the second quarter.
Twentytwenty for comparison purposes, such revenue was approximately 34 million in the first quarter of 2019 and 3 million for the first.
Quarter of 29 team.
Consistent with prior periods, our adjusted results exclude certain items that relate to our acquisitions and dispositions and also include the full share count associated with those acquisitions.
Our adjusted results also exclude charges associated with the realignment strategy announced in January.
Specifically, we adjusted for costs associated with divesting of class Jay LP units granted in conjunction with the ISI acquisition.
The quarter, we Expensed 1.1 million related to those units.
Adjusted results for the quarter also exclude costs related to the realignment strategy that began in the fourth quarter 2019.
As we noted last quarter, we expect to incur separation and transition benefit and related costs of approximately $38 million 22.1 billion of which was recorded as special charges in the first quarter Twentytwenty.
Those charges are excluded from our adjusted results.
Last quarter, we noted that we are continuing to pursue opportunities to restructure operations in certain smaller markets.
We have entered into an agreement with the leaders of our business in Mexico to purchase our broker dealer there.
Which principally provides investment management services.
Completion of this sale, which is subject to regulatory approval is expected to occur by the end of Twentytwenty.
We continue to review additional opportunities in smaller markets.
And to these opportunities could result in further chargers in twentytwenty pursuit to completion.
Adjusted results for the quarter also exclude special charges of 1.5 billion related to accelerate accelerated depreciation expense for leasehold improvements and our business realignment initiatives.
Finally during the quarter, we adopted the new accounting guidance for credit losses.
The option did not have the material impact on our results.
As we noted other revenue in the first quarter declined significantly compared to the prior year period as a result of losses on the investment fund portfolio, which is used as an economic hedge against a portion of our deferred compensation cash compensation program obligations.
This amount fluctuates as market values fluctuate and the significant market decline during the quarter drove the loss.
As you will recall for prior discussions this loss is offset by lower compensation expense over the term of these wars.
Turning to non compensation costs are firm wide non compensation cost per employee was 44.1 thousand for the first quarter down 6% on a year over year basis.
Increase in non compensation cost per employee versus last year, primarily reflects lower professional fees and travel and related expenses.
We began reviewing our non compensation costs before the Covance 19 pandemic became an issue.
We continue to adopt our operations in response to the current downturn and remain focused on reducing our non compensation expense.
We are cutting.
Non essential costs, including in areas pertaining to travel and entertainment research and subscriptions and deferring certain capital projects. So that we are well positioned throughout the downturn as well as in the inevitable recovery.
Our GAAP tax rate for the first quarter was 25.8% compared to 9.1% in the prior year period.
The effective tax rate is affected by a number of permanent differences, including non deductible treatment of certain compensation expenses.
The principal driver of the year over year difference in the effective tax rate is a lower deduction associated with the appreciation of the firm's share price upon vesting of employee share based awards above the original grant price.
As the firm's share price at the time investing in Twentytwenty was more in line with the share price where those at the time of grant.
On a GAAP basis, our share count was 42.3 million shares for the first quarter.
On an adjusted basis, the share count was 47.7 million down versus the prior year period, driven by share repurchases and a lower average share price.
Finally.
We hold.
Absolutely $588 million of cash and $264 billion and investment securities as at March 31 Twentytwenty.
With our current assets exceeding current liabilities by approximately $880 million.
By comparison at year end, we held 634 million of cash and 624 million an investment securities.
Sequential decline is in line with the seasonal trend driven by bonus payments in the first quarter.
As we continue to navigate and the downturn, we're focused on maintaining our strong and liquid balance sheet and we continue to monitor cash levels liquidity regulatory capital requirements.
Covenants and our other contractual obligations regularly.
I'll turn the call back to route for some closing remarks.
John and I would like to close the call by extending our thanks to our clients for selecting us to work with them in this new challenging environment.
To our investors and other other stakeholders for supporting US as we continue to execute our strategy.
And to our employees.
Performance and resiliency.
Been extraordinary.
Hello, Evercore celebrated its 25th anniversary in March we have never faced the dislocation like the one we are facing now we have spent the last 25 years building a firm that has a broad range of capabilities and products to serve our clients in all kinds of markets, including the one that we are in now.
We look forward to your questions. Thank you.
Thank you ladies and gentlemen, if you have this question at this time.
As a reminder to your question. Please press the star followed by the one key younger Touchtone phone than you would like to withdraw your question. Please press the pound key if you're using speaker equipment, you may need to lift the handset before making your selection.
Our first question.
It's from Michael Brown with KBW. Your line is open.
Hi, good morning, guys.
So it's just the hoping to start out just given the combined decades of experience on the call hoping to get some initial thoughts on how this downturn compared to prior ones, particularly the financial crisis, and if we use prior cycles as a proxy how do you.
That's the phases of this recovery to play out for M&A, which areas will be kind of the first ones to recover.
Let me start and then I'll turn it over to John.
I think the financial crisis.
There was obviously bank.
Balance sheets, and all financial institutions were.
Severely.
Impaired.
There was a terrific book written.
Hi, Ken wrote off then Carmen Reinhart, which basically.
I Love. It was this time is different.
The point that it made was that recoveries from.
Financially induce.
Recessions.
Our longer and shallower than those that are caused by other factors.
So if you look at the recovery from the financial crisis.
The first four years after the financial crisis, M&A was essentially flat at a little over.
Two trillion dollars.
A year.
And the so the recovery in the economy and the recovery in M&A.
Was.
Slow and longer and we had actually the longest period of.
Positive.
M&A activity after the financial crisis that we've ever had extending until.
Actually through the last.
Year.
Here.
My own expectation is that the recovery will occur.
We're quickly than it did in the financial crisis.
And and more sharply than it did in the financial crisis.
But exactly when that occurs.
None of us.
No and the reason that I say that is.
As I said in my opening remarks.
There is an unprecedented amount of.
Fiscal and monetary stimulus that is being.
Thrown at the economic.
Problems created by the pandemic.
We have not yet had a reported quarter of down GDP.
Yes, we have two trillion dollars of fiscal stimulus.
Yes, and a massive amount of monetary stimulus.
These will work.
It will just take.
Some time and as I said in my opening remarks, I don't expect the recovery to be as sharp as the decline, but ultimately without amount of monetary and fiscal stimulus.
We will have a recovery and it certainly won't take.
Three or four years for that to happen, let me turn it over to John and he can talk about the M&A market.
Yeah, I would say that that the stimulus as Ralph said is clearly a very very big force in terms of what's going to happen with respect to the economy in the flow of funds and that is certainly going to help a lot although as we looked at the world.
Consumers and.
Many people and certainly a lot of the middle market has been impaired fairly substantially and so the power of the consumer that has driven the market as it has is is going to be.
Somewhat muted over the next year or two or hopefully less.
Less than that but that clearly going to be a part of it on the M&A side.
We think there will be a recovery because there are still many strong companies out there who are very interested in looking at gross and opportunity in fact in a lot of our dialogues. We're just we're talking to strong well capitalized companies, who are just waiting for there to be some firming before they start coming back and low.
Looking very aggressively at the market.
We believe theres a lot of dry powder.
Ready to go to work in the financial sponsors side, and they're going to be looking very very carefully and whats available. So we could easily see we could easily see the merger market recovering.
Maybe even up all the.
Immediately, but certainly we can see real keynote transactions beginning to happen in some of the dialogues that we're having worked are clearly along those lines.
It will take time, though to get back to where we were in my opinion I think fit that it's it's there are there are there are a whole sectors that are really needing time to recover and so it will not be broad based it will be pockets of quality opportunities that come up but it will begin.
As soon as the markets really begin to firm.
And capital becomes accessible.
We should we think that there will be deals that will be starting to happen in the in the not too distant future.
Okay. Thank you.
And I appreciated the color on the compensation ratio.
For the balance of the year I understand there's significant uncertainty there.
But if we assume a significant decline in revenues over the next couple of quarters.
How would you approach.
Compensation on how should we think about really with fixed comp costs are from some of the balance of the year and just given the environment has shifted significantly since the realignment announcement do you expect that you may actually need to make deeper head count reductions to reflect the change in the environment.
Well first of all.
With us working remotely we certainly have.
No plans.
While that is in place to do any adjustments.
Headcount.
So let's be clear about that with respect to the comp ratio for the rest of the year.
[music].
When we get to the ended the year.
We will.
As we always do we have to pay our people competitively.
'cause that's the team of people that.
When things.
Return to normalcy, which they inevitably will.
We'll be.
Able to produce the 2.2 billion plus dollars in revenue and 25.
Percent margins so.
We will.
I have to pay competitively I would expect that compensation.
Across the board in investment banking in the large firms and independent firms.
It will come down consistent with.
The.
Weakness in revenue that I think everyone anticipates.
Through.
Much of the remainder.
This year.
So.
When you put all of that together.
If if revenues are considerably weaker.
The next two or three quarters, and we have really no idea.
How much weaker.
Yes.
You should expect that will have.
Negative effect on our.
Quarterly and full year.
Compensation ratio.
The key here is.
For us to be able to keep the valuable.
Team that we have together and we will do that in a way that.
Isn't as absolutely protective as our of our shareholders as we possibly can.
Okay. Thank you for taking my questions.
Yes.
Thank you and our next question comes from the line of go non go forward with Morgan Stanley. Your line is open.
Hi, good morning.
You mentioned that your restructuring capital markets advisory in equities businesses are.
Doing well under partial offsets to the weaker M&A environment.
I was wondering if you could give us a sense of any early indicators you are seeing.
Especially on the restructuring side and if there any numbers you can help us put around the opportunities.
[music].
John you want to our I'll start with this.
We generally.
I have never given.
Not precise numbers on restructuring or equity or debt.
That capital Advisory and the reason we haven't is that.
They are not bright lines.
Yeah.
Between.
These activities.
So very often there is a fee that we get in connection with the merger, but part of it is for debt advisory part of it is for equity capital markets Advisory and part of it is.
The transaction itself.
So we've never broken out our advisory revenues, but as I did say.
In my opening remarks.
The largest component.
Our.
Advisory revenues is M&A.
And so.
And environment like the one we're in today where M&A.
Slows down fairly significantly.
And the other activities.
Pick up fairly significantly.
They they aren't in scale equals M&A, so they're not going to offset that.
Decline in M&A and our advisory revenues.
And.
Certainly with respect to restructuring.
The revenues.
Tend to be takes a little while to come in so when you get hired on a restructuring assignment you have monthly retainers, but there are relatively modest compared to the success fees that ultimately occur and those success fees generally come.
Six to 18 months.
[music].
Down the road as the situation.
Yes.
Resolved so.
Both.
The magnitude.
And the timing of the pickup in these activities.
Even though they are quite substantial and we're really happy that we have them.
Is not going to be sufficient to offset the weakness in M&A activity.
I would just add to what Ralph said is that.
Even though we've done a great deal to leverage our capabilities in both restructuring that advisory in terms of.
Getting many of the individuals and the and strong bankers in the advisory business focused and helping on those.
No that opportunity will will be significant and building, but it clearly doesn't have the same scale that our merger business does and so as Ralph said, it's not going to offset but clearly we are building and we continue to have very high quality assignments in those areas.
Got it and then separately you said that you would maintain your current dividend and absent those steep decline in revenues or the cash position.
Are there any specific guidepost that we should be looking at I mean, it you have about 600 million in cash it feels like.
You have a significant buffer but just.
You asked about.
How long the stress would have to persist before you start review your capital actions.
Well I think we said exactly what we meant we had a strong cash position.
Board and management.
Paid dividends.
This quarter.
I would expect to continue to do that is.
As long as our cash position.
Stay strong it doesn't have to stay exactly where it is today.
To do that and anything.
On that would be.
Bullish on our part I think.
Got it thank you.
Thank you.
Next question comes from the lineup Brennan Hawken with media your line is open.
Hey, good morning, guys. Thanks for taking my questions.
Like to start on.
On cash and liquidity.
[music].
Bob I think you suggested that the drop.
In both cash and.
Puttable Securities similar to the typical of decline.
Which makes sense when should once you some both up.
Is the Mark that you guys took the nearly 30 million is that in the investment Securities line.
And then.
So therefore, you should we think about the balance.
That being.
Basically spoken for and therefore, not part of the accessible.
Could it be are there other calls on any of that liquidity can you give us a sense about how much of your liquidity is actually.
Completely free versus.
Reserved either via explicit for implicit requirements.
Bob you want to take that sure.
I think that number I would look at.
In the context of your question is there was 800 and.
$80 million of working capital.
So that that pulls in all of those liabilities.
That.
Have have some claim if you will have on.
On on the on the cash in the investment Securities. So.
During the year as Ralph said, we're going to think very carefully about compensation.
And and how that has to build and we're going to watch.
That 880 million of working capital.
Very carefully week to week quarter to quarter.
But we've we've got liquidity.
Okay.
So does that working capital.
Tally net out the I believe.
Most recently disclosed $127 million invested cash comp, which would be an obligation over the next two years.
If you hit it nets out to the portion that's been accrued as a liability to date again as comp built during the year the liability that includes.
We'll build for a portion of that 120 that's.
That's currently on vested.
Okay. So it will reflect the current portion of that.
Okay got it Thats fair.
And then.
So just totally get how difficult it is to try to assess the environment right now I mean this is complete we unprecedented.
So I.
I guess my question.
The only reason I'm asking is I'm trying to parse it couple of the different comments, because obviously all of you have a wealth of experience through many cycles and you all have your own different perspectives on the on matters. So you probably an I get the sends you were sort of opining on your own views, which are probably going to.
Be different rate you pull five different people all well.
Rich in deep experience and they'll have different views on how this is going to workout, but when you think about the concerns that are on many.
Ceos mines your primary clients mines, and you think about riding out the liquidity during this current downturn.
What do you think is a reasonable timing.
For when they're going to start looking at M&A and I get that there will be seen strong companies that are going to be in a position where they're already starting to think about it those are going to be exceptions, though right not not to rule on we're talking about.
When do you think we get to that pivot period, where you'd actually broadens out and starts to too.
Reflect a shift in the market writ large deck that can lead to the sort of move in M&A announcements that would actually.
Resulting in lifting that is broad base.
Feasible to gas now.
Your your question.
Appropriated fully.
Cited the difficulty answering it.
And.
I don't know if you remember back to the most of your probably too young to remember the 1992.
Residential campaign, but.
Bill Clinton that is advisors basically said, it's the economies.
And the answer to your question is the virus.
Not usage.
But if you could tell me what the path of.
Auction significant reduction.
Fear.
About.
The virus.
We could respond more accurately to your question and unfortunately, none of us note.
The answer to that I think the best way to answer is to say that.
We often talk about the conditions that are necessary for a healthy.
M&A environment and those are.
A strong and supportive equity market.
Liquid.
And active.
Debt markets.
Clear visibility as to the future direction of the economy.
And CEO confidence.
And.
Certainly.
The last two.
Our not.
Present today.
The debt markets are.
So largely disrupted for more levered activity.
And the equity markets have.
Recovered a fair amount anticipating.
Pretty strong recovery in the economy and.
Corporate earnings, which we don't know for sure.
Will happen because.
Is that going back to my initial comment is really about.
Virus.
So.
I'm.
Very confident.
That is.
Unprecedented actions that the.
Fiscal and monetary.
Already taken.
Stimulus fiscal stimulus.
He is.
More than double.
What we incurred what was put forth in the financial crisis, and it's going to grow.
It's going to grow by another 400.
The summer.
This week.
And we haven't even had a down quarter.
Order of GDP yet.
So these things are going to work.
And the virus will determine how quickly.
We get back to work.
Yeah.
The only thing that I would add to that is that so much of what happens here.
It's really going to be determined by really.
It happens.
With respect to the health and science, because if we have.
A rapid recovery, if we if we somehow Ken inoculate people and get people in the economy back going that we'll have a real impact but if.
It's a second wave and if we continue to have to struggle with this.
That will definitely impact People's view of the market and people's confidence level and so so much of this is really going to be determined by.
Factors that exists.
Outside of the basic merger.
Ingredients that we've always looked at before.
I think it would be you think it would be wrong to think that we're going to get over this quickly, though it's going to take some time.
Yes.
Thanks for that John and don't worry Ralph.
Outside analysts so I understand the day to day risk of being called.
Stupid no big deal.
[laughter].
So I thought you would enjoy seeing the uptick in our.
Secondary equity revenues, though.
I did note that that was a solid nice job nice job.
[music].
One last one from me.
A bit unusual or at least it's a little different.
Versus the last downturn.
To have evercore cutting staff in the beginning of the downturn.
You know how do you. Obviously this was done and decided before then all of this happened and so you are already.
Thinking about repositioning the business.
Does it does a potential plan to adjust.
The size your workforce or adjust expenses.
Should that factor into how we normally think about evercore as more of an aggressor.
Yeah.
Potential downturn, how do you balance.
Protecting shareholders as you referenced earlier with building on the franchise and adding to long term capabilities. As you also effectively did in the last downturn.
Well, what we're focused on.
Always.
Yeah.
The value of the company.
Two three years out.
And.
As I said in my opening remarks.
18 and 2019.
With essentially the same team on the field.
We generated over $2 billion revenue.
And.
Margins that averaged.
In excess of 25.
We're set so.
We're certainly not going to.
To cut into.
Muscle or bone that would.
Impair our ability.
To achieve those kind of results.
Or better.
When the.
M&A markets.
Recover.
I would say that what we did toward the end of last year and at the beginning of this year.
It was really.
A.
A modest adjustment.
Sometime.
Companies that have had a.
Pretty remarkable tenure growth record.
The period of time.
10 years, ending at the end of 2019.
Our advisory revenues grew on average mid to high.
Beans.
Our headcount through.
Yes, low teens.
Our.
Margins pretty much expanded every year.
Through that period of time.
And when you grow at that pace.
You inevitably.
Make.
Some modest investments that didn't pan out as you would hope either in people are.
Locales.
And.
I think looking forward.
I've said internally, if we grew with the rate of.
Topline.
Advisory growth that we grew over the 10 year period.
Ending at the end of last year.
In five years, we would be the size of Goldman Sachs Advisory business and in 10 years, we'd be twice the size of Goldman Sachs Advisory business.
Im pretty confident that's not going to happen.
In our advisory business.
So.
The.
The adjustments that we made we're really targeted toward.
People, who we think.
80.
A plus a standard that we like to maintain.
Our firm or businesses.
Which are quite modest.
But.
Our business.
SCB for example that Bob discussed is one of those were.
The returns.
You know weren't sufficient.
For our standards so.
That affected a relatively modest part of our business.
The second thing I would say is that.
When you're growing at the pace that you are growing at and your margins are.
Each year.
Your.
You focus a little bit less on.
Every.
Paperclip and.
Bagel.
And.
The environment that we anticipated, we anticipated slower growth or just because in the law of large numbers as I, just outline and that kind of environment.
You have to focus more on the paper clips in the vehicle.
Okay. Thanks for that color.
Thank you and our next question comes from the line of Matt Code with Autonomous Research. Your line is open.
Hey.
Good morning, guys.
I hope, you're all making it through this tough time as far as you can and thank you for the question.
This one's a little open ended but I was hoping hoping given the great number of conversations you have with various business leaders across the country and globe.
I bet you can provide your take on any potential ramifications. This crisis could have on M&A activity once the economy begins to recover.
You want to take that yeah.
Thanks for the question.
We.
Clearly what is going to be very important part of whether M&A can get going is exactly what Ralph said, which is what are the underlying conditions and the conditions being do you have stability in the markets do you have access to financing and.
The future look good for companies, who might want to acquire and if you get those in place.
Companies will begin to think about how they can move forward and grow.
There are clearly industries broad industries that are impaired and will be impaired going forward.
And those industries many of them.
We'll need to do significant borrowings both.
From the government, but also in terms of distressed financings in part of what they'll need to do is to get is is to build back their capabilities and so.
As the merger market improve.
Improves or as the conditions go into place, there's a whole group of sectors that really won't be able to participate so.
That the companies that are healthy and have been able to come through this is in a very good way they will be the first ones to be able to do M&A financial sponsors.
This will also be looking for opportunities.
And there is clearly so much dry powder in the equity side that when the leverage finance markets are open and when there is a predictability to it when could easily see those companies both those.
Sponsors both large.
In small being looking looking at deals up and down the size spectrum. So those are the those are the participants that will be involved but you ask is there are there some conditions that are going to in effect impact the merger market and I honestly think that it's going to be the fact that there are there.
There are many sectors that won't be participating certainly in the early stages of any merger recovery.
Awesome. Thank you appreciate the color.
Then just one quick one just given all your commentary on maintaining that strengthen the balance sheet and just.
Fair to assume that just in the near term the buyback will be shut up.
We have basically completed.
The amount of buyback that we need to.
Offset.
Any issue.
This year.
Action with.
Yearend bonuses.
For 2019 at in connection with.
New hires in Twentytwenty.
So.
For the.
Unless until we have more clarity.
As to.
Our revenues over the next.
Couple of quarters, I think Thats a fair assumption.
Okay, all right. Thanks, guys.
Thank you and our next question comes on the line.
Devin Ryan with JMP Securities. Your line is open.
Great. Good morning, everyone hope everyone is going well.
I guess the first question.
Let me get some some perspective on the energy space, specifically clearly evercore is a leader there its experiencing sort of its own issues not all tied.
To the health crisis, we go back to 2015 2016.
Clearly a different backdrop, but the deals shifted from M&A to more restructuring centric but.
Your revenues actually held up.
Quite well is just more of a timing differential and.
Ultimately you still came back with a very good performance. So I'm just curious if you're seeing a similar dynamic in.
In terms of how deals are shifting your clearly there's going to be more restructuring, but just any more perspective around how you see kind of advisory needs in that space developing and ultimately kind of how that could affect results for the firm.
I think that.
So far.
Our energy revenues.
At the last five years.
I have been.
Fairly consistent.
Source.
Revenues in terms of what types of transactions.
Has very.
Quite substantially.
As you correctly say from M&A.
Restructuring and we're certainly in an environment where.
Restructuring.
Huge.
Okay.
Our.
Of our energy.
Activity.
But.
We don't really.
Don't normally haven't seen historically huge fall off.
In energy.
And there's been stress.
In that market and the reason is that we have we're fortunate to have a.
With a strong energy and a strong.
Restructuring practice.
Those.
Two.
Sustained revenues in that sector during periods of stress.
Okay. Thanks, Ralph.
I'm sorry go ahead, the only thing I would add to that is that this is a.
This is a shock as I think you said and others have said like really no. Other that we've seen now we really do feel well positioned to actually help clients.
Both clients that are looking to to be opportunistic, but also clients that are struggling.
But we've not seen.
Something like this even in the oil patch before.
And so on the energy side, it's really looking and talking to clients and we're getting clarity as we speak but it's still quite early.
The one thing that Ralph said I would.
That I really do believe is a very important factor which is.
We do have the muscle memory of being able to pivot back and forth restructuring M&A strategic.
And so our people are will first in this.
But so much of it is playing out as we speak.
Okay, great. Thanks, Sean.
And then just my follow up here.
Emcare covering evercore for.
Sometime in the prior cycle as well I mean, theres not a I'd argue affirm that scaled better coming out of financial crisis than Evercore. Your revenues were up five times from the prior peak and.
So kudos for.
The success, there and I just want to make sure I'm getting the takeaway here right in terms of being opportunistic I mean is the expectation at this moment that there's going to be a pretty good increase in that day or a plus talent that to open the moving Joe as we've seen before and if that is the case.
How you guys are currently.
Just thinking about balancing the opportunity to accelerate growth and kind of have another stair step if you will.
Coming out of this versus managing the comp ratio one is still delivering earnings to the extent the revenue backdrop is tougher to try to kind of put it all together make sure.
Taking away kind of the right messenger.
Yes, there's there's so many.
The imponderables.
To answer that question.
How are.
The larger firms, particularly going to compensate their people this year.
How quick.
Recovery.
And.
Also the.
The strength.
Relative strength.
The other firms who are competing.
For talent.
The initial reaction of talent.
Environments like this is.
To be motivated a little bit by inertia and to be cautious.
So I would.
We expect.
Yes hiring activity this year.
Among all the independent firms not just evercore.
And we've seen.
Historically until there is greater clarity as to what the forward.
Market looks like.
You know I do think if you look at over that 10 year period that.
I discussed a little earlier you referred to.
We grew.
We grew.
Three revenues on average mid to high teens.
The average dollar amount that.
Advisory revenues grew was 130 $140 million.
A year.
My own view.
Personal view as once things.
As we return to normalcy.
They'll be first of all a recovery.
In M&A activity.
And then I don't see any reason why we can't continue to grow.
At that dollar.
Volume plus or minus.
On average obviously.
Okay.
I'm going to do that year end year out.
But we would anticipate that coming out of this we will continue to gain market share.
John you want to add anything.
I think that that is clearly what we're focusing on which is how do we responsibly gain market share.
They're coming through this.
And I agree with Ralph said that the biggest thing is that we're going to be opened for business in terms of talent, but that we're going to keep the bar high and it would be our intention to find some good people, but we're certainly not going to stretch we're going to do it only if we find the right people and so.
It really it really does depend but we definitely have a view that coming through this if talent, which we think is really strong is available I think we're going to want to.
Bring that talent and our team.
Great appreciate it.
Thank you and our next question comes on the line. This Steven Chubak with Wolfe Research. Your line is open.
Hi, good morning, hope everyone's doing well.
No appreciated all the color regarding the global M&A picture I was hoping to drill down a bit.
Just more in terms of what you're seeing across the different geography.
I was hoping you could speak too.
Your expectations for the outlook.
Activity us versus Europe.
And maybe what your expectations are also just for cross border M&A, just given very case in shape of recovery across the different geographies.
Hi.
Yeah I'll start that.
There's no question that really this this crisis and this virus and what has happened to economies.
Does not have a regional or geographic bias, it's it's really been everywhere.
And I think the real question is where do the conditions from up first.
And in some respects that has to do with.
Where has fiscal and monetary support been the fastest and strongest and it would be my observation that.
States in many respects has been.
Very very strong in terms of how they've created support for the economy and really bolstered the market.
So I think that one could say that it is it is clear that the conditions.
Could easily get better because there's so.
Much central support.
United States.
In Europe that it goes country by country.
But there will be a firming up and the central governments the governments and the end to end the end SCB are clearly, creating support and so there will be recovery.
In those markets, but it'll be one by one and it and we'll have to see how that goes and in terms of cross border.
I think that will take some time, but I do think that there will be as we've talked about earlier on this call there will be a sense of opportunism from the strong.
Companies, both in Europe, and the United States that are going to be looking at companies that they have aspire to or where they think theres a good fit and they'll be looking at that but as we said earlier on this call. None of this is going to be fast, it's hopefully going to be an intentional and will.
In overtime.
But I think that it's going to take some time for this to really fully play itself out and for the activity level in a broad sense.
Really begin.
That's really helpful. And then maybe just a question for on the non comps.
No. It was a touch elevated this quarter, but I'm also mindful, though soc that covert stress did not really materialized in fairness until later in the quarter and certainly have to make necessary investments in tact to support the work from home transition I'm. Just wondering how we should think about the percentage of non comps that are variable versus fixed.
Fixed and the resulting trajectory of noncomp per employee over the remainder of this year.
Bob you want it.
Yes Stephen.
Again, let me deal with the second part because as you know we think.
We think of non comp per employee.
As the right metric.
And as Ralph said.
For the full from is paying attention to non comps now.
We.
We had started to work on it.
The end of last year and had a lot of momentum going in so I would expect the trajectory.
Of Noncomp per head to be going.
Now for as long as this environment.
His dictating how we operate.
Any sense as to the mix of fixed versus variable non comps.
Okay.
Leases occupancy depreciation think of those as fixed.
Think of everything else is moving with a heads.
And and and as I said moving down at this point.
Great and just one more quick follow up I know you touched along the balance on one item that you didn't address where the debt covenants.
Now with the from being subject to the Max.
Leverage ratio of two times under your existing covenants I'm, just wondering how you're managing the business to avoid potentially breaching that up or down to any sort of mitigating actions you could say axis is shifting more of the comp.
Way from cash and towards more share based awards.
You you've hit on one of the levers.
That's available to us to manage that.
We've actually.
There's a list of five or six or seven the things that.
We will help us navigate that.
Yes.
It's which ones were going to pull when and how is going to be a function of.
Revenues evolving and how the business environment evolves, but at this point again.
Very comfortable with liquidity, we have and we're going to do.
Number of things to sustain that level of liquidity and as long as we do that that covenants in good shape.
Great. Thanks for taking my account.
Oh that it said.
It's a trailing 12 months.
Sure.
So given the strength of the.
Fourth quarter last year in the first quarter this year.
It really doesn't even.
Become an issue until the fourth quarter.
This year.
The only in the circumstances with a very very deep decline.
In revenues and where we don't make adjustments of the sort that Bob.
Talking about it as response.
Great. Thanks for clarifying that Ralph Thanks for taking the questions.
Thank you and our next question.
And our final question is from Jeff Harte with Piper Sandler Your line is open.
Hey, good morning, guys, most things have been covered.
A couple of details from revenue recognition kind of pull forwards a number of large deals closed. So the first few days of April.
I'll just some of those revenue show up and first quarter.
They did and Jeff you have one of your people go back to the transcript we ran through the first quarter tally fourth quarter last year in first quarter year ago. So.
Okay, Alright, because we're just apart.
And secondly can you give.
Any more color on kind of level and makeup of quiet dialogues I guess I'm trying to get a feel for correct underlying suite.
See suite desire to desire to and focus in acting strategically relative to what we've seen in prior recessions would it seems people are really Hawker down I mean, how much.
More interested our C suites and kind of still looking your strategic things today, even though they obviously QED act on them in the near term.
Well, we're seeing the dialogues and our people are spending a lot of time on the strategy discussions.
There's no.
Question, though that that that these dialogues are not near term.
But there clearly once where people are looking carefully.
In terms of differentiating it from other recoveries, it's really hard because we really we really don't know how quickly the can.
Additions that are going to get people feeling confident about making these acquisitions and really moving forward strategically we don't know when that's going to happen.
The quality of the dialogue is high we are talking to very high quality companies about things that they would like to do.
And so I think we feel really good about the fact that those dialogues are happening, but as you know very well.
The difference between having those dialogues and then moving to Actioning.
That is a read that as that is so that is the big question.
I.
What we think is it's going to take some time to get to the Actioning phase, but the dialogues are happening.
Okay. Thank you.
There appears to be no questions at this time I would now like to.
Turn the floor to route Ralph wash sign for any closing comment.
I just want to thank all of you for spending the time with us and we look forward to talking to you again.
Lie when.
Hopefully a future will be a little bit clearer than it is today. Thanks.
This concludes todays Evercore first quarter 2020 financial results Conference call you may now disconnect.
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