Q3 2020 Evercore Inc Earnings Call
Welcome to the Evercore third quarter 2020 financial results Conference call.
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Following the presentation the conference call will be open for questions.
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This conference call is being recorded today Wednesday October 21st.
It's funny I would now like turn the conference call over to your host Evercores head of Investor Relations Howard Miller. Please go ahead ma'am.
Thank you Shannon good morning, everyone and thank you for joining us today for Evercores third quarter 2020 financial results conference call and highly Miller Evercores head of Investor Relations.
Joining me on the call today are Ralph Schlosstein, and John Weinberg, Our co chairman and co Ceos and Bob <unk> our CFO.
After prepared remarks, we will open up the call for questions.
Earlier today, we issued a press release announcing Evercores third quarter 2020 financial results.
Company's discussion of our results today is complementary to that press release, which is available on our website at Evercore Dotcom. 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 call I want.
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 Kobe 19 as discussed in our earnings release. This morning filed on form 8-K. The worldwide COVID-19 pandemic has posed and is expected to continue to pose significant challenges for our business anyway.
Any forward looking statements that we make including those about Kobe 19, and its effect on our business 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 Evercores 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 will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance for detailed.
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 can.
We continue to believe 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'll now turn the call over to Ralph.
Thank you very much Allie and good morning to everyone.
Hard to believe that this is our third earnings call.
Which we are not all together in the same conference room.
For today's call John is in our offices in New York City, which is weak in the office.
I'm in my office and work sell them, a New York and Bob is what's our traders in our office in New Jersey.
Our business thrives on in person collaboration and teamwork and while we have been.
While we have been quite effective and successful over the last seven plus months.
Reading out of 1800 offices around the globe.
We certainly recognize that.
Our business and our culture operate best when we are physically together.
That certainly is our ultimate goal once the virus is no longer a factor in our lives.
In the interim we remain committed to serving our clients with distinction and to collaborating with one another as we implement a gradual return to office around the world.
The first nine months of this year have been bought and I've had significant challenges and uncertainties, but they're also I've been many opportunities to advise our clients on their most important strategic and financial needs.
The strategic investments, we have made to broaden and diversify our capabilities over the past several years have enabled us to serve our clients on a wide array of strategic and financial matters and resulted in solid quarterly and year to date results demonstrating most to our clients and our shareholders.
At Evercore very much there's an all weather firm that can produce good results in a wide variety of environments.
They are unquestionably are still uncertainties ahead, you upcoming U.S. election.
Brexit the path of the virus and the <unk> and the disparity between the financial market recovery and the real economic recovery. So many of our fellow Americans Europeans and others around the globe still unemployed or with their small businesses shuttered.
However, as we see the market for merger activity improved and we continue to see robust activity in capital advisory restructuring underwriting and research and trading we have never been more confident in our ability as a firm to help our clients achieved the most important strategic financial and capital objectives.
Before I comment on our financials I want to provide a brief update on how Evercore has broadly responded to the events of this year and on what we are focused going forward.
As I mentioned, we are beginning to implement a a very deliberate and thoughtful returned to our offices around the globe.
Our transition back is occurring at a measured pace and follows all local government guidelines designed to protect communities in which we work.
The health and safety of our employees and their families remains our paramount consideration.
And the return of any individual has been up their own choice most.
Most of our colleagues continue to work remotely and we anticipate that this will be the case for a reasonable period of time, probably measured in quarters rather than months.
We remain focused on pivoting to meet the needs of our clients and leveraging our broad and diverse capabilities to advise them and the changing economic and financial environment there.
The result is as follows a new M&A activity is being announced in addition to the pre downturn matters that have gone to reengage.
We are seeing continued momentum occurring in our capital advisory business health.
Helping clients raise equity privately and publicly and advising clients on debt opportunities research.
Restructuring and refinancing transactions are continuing and we are having constant dialogue with our clients about their future financing needs.
And finally, we are experienced strong engagement with investors looking for research and our wealth management clients seeking strong financial advice.
Not M&A activity, including underwriting has been a distinct opportunity during the past several months and has become an increasingly important part of our business in the current environment.
We have been able to support clients to enhance their liquidity raise investment capital and shore up their balance sheets, we are.
We're particularly proud of our caps products.
Which is designed to be a an alternative to specs, which we originated during the quarter, which we are in the early stages of building, our convertible securities capability, including enhancing our distribution capabilities and our origination team.
There was a significant increase in M&A announcements in the third quarter and that momentum seems to be continuing in the fourth quarter display.
Despite the many potential uncertainties, which I outlined earlier as we look forward to the remainder of 2020 and an instant 2021, our backlogs are strong and the and we look forward to continuing our momentum in 2021 and finishing this year strongly.
Of course, we remain committed to maintaining our strong and very liquid balance sheet.
Let me now turn to our results.
We're quite pleased with our results for the third quarter and first nine months of 2020.
That's the diversity of our capabilities and the entrepreneurial spirit of our team allowed us to deliver revenues that are essentially flat year over year.
Below average M&A transactions in March April May June.
Thank you to our third quarter advisory results.
However, as you have seen and.
And doubts global M&A volumes nearly doubled in the third quarter compared to the second quarter and increased 38% compared to last year's third quarter in the U.S.
And now in the U.S.
In the U.S. announced M&A volumes increased more than threefold versus the second quarter and increased 55% compared to last years third quarter.
Three each of the three months of the third quarter.
Mobile and U.S. announced M&A transaction volumes were higher than the monthly average of the last two years and in September Global announced monthly volume surpassed $450 billion for only the second time in the past two years.
Third quarter, adjusted net revenues of $408.5 million and year to date adjusted net revenues of 1.36 billion were both flat versus the prior year period as revenues from capital advisory restructuring underwriting and commissions and related fees largely offset the decline.
Revenues from lower M&A activity.
Third quarter advisory fees of $271.2 million declined 16% year over year and year to date advisory fees of 966.8 million declined 11% compared to the prior year period.
Based on the current consensus consensus estimates and actual results, we expect our market share of advisory fees among all public.
Reporting firms on a trailing 12 month basis be 8.3% compare.
Compared to 8.1% at the end of June and 8.3% at year end 2019.
Third quarter underwriting fees of 66.5 million increased more than 275% year over year and the year to date underwriting fees of 181.2 million nearly tripled versus the prior year period.
Diversification of our underwriting business has contributed to a real step up in momentum we continued to invest in that broadening our industry coverage and our product capabilities. We are.
We are working hard to sustain this momentum in the fourth quarter and have a meaningful and diversified pipeline of ipos follow ons and convertible securities.
Third quarter commissions and related fees of $43.9 million declined 6% year over year as the heightened volume and volatility of the first six months of the year subsided year to.
Year to date commissions and related fees of $153.4 million increased 12% versus the prior year period.
Asset management, and ministration fees were $16.6 million in the third quarter and 47.1 million for the year.
To date, an increase of 11% for the nine months and 7%.
I'm, sorry, 11% for the quarter and 7% for them.
For the nine months.
Turning to expenses, our adjusted comp ratio for the third quarter and the first nine months of 2020 is 63.6 so.
The 63.6% the accrual for the first nine months reflects as it has in past years, our estimate for the full year compensation ratio, which includes an estimate of 2020 incentive compensation.
This year, however, as we have pointed out on previous earnings calls there is.
There is higher.
Higher level of uncertainty than in prior years about both the full year revenues and full year market compensation.
Third quarter non compensation costs of $71 million declined 18% year over year.
And year to date non compensation costs up to $30.9 million declined 9% versus the prior period third.
Third quarter adjusted operating income adjusted net income of 77.7 million and 52.6 million declined, 8% and 13%, respectively, and adjusted EPS of $1.11 declined 12% versus the third quarter of 2019.
Year to date operating income adjusted net income of $262.9 million, and 182.2 million declined, 18% and 25%, respectively, and adjusted EPS of $3.85 declined 23% versus the prior period.
We remain committed to our historical capital return strategy in which we return earnings not needed in our business to shareholders through dividends and share repurchases.
Given our solid reasons results for the first nine months of the year, we have which have resulted in good cash flow generation. We are beginning to reap turn to that pre cobot strategy.
Consistent with that view, our board declared a dividend of 61 cents.
A 3% or three cents per quarter increase which is a 5% increase from the prior quarter.
We plan to return to our normal reassessment of the dividend in April of 2021 and two.
And to begin to restart our practice of returning our cash earnings that are not required in the business to investors through share repurchases.
Bob will provide additional detail on our cash cash position in his remarks.
Before I turn the call over to John to discuss the current market environment and to comment further on our investment banking business I'd like to talk about the environment for talent.
We continue to see opportunities to further build out our capabilities and to expand geographically and we are building a pipeline of senior level eight plus talent additions.
This quarter, we welcome Mike Meyers to the farmers in SMB and our equities business help expand the firm's convertible debt underwriting.
Capabilities and distribution capabilities.
We also remain highly focused on developing and promoting our high talent professionals from within the firm.
Finally, we are especially proud of Evercore ISI most recent showing.
Situational investors annual all America research Sir.
Where we were recognized as the top ranked independent firm by a wide margin for the seventh year in a row and ran.
And ranked number two or number three among all firms large or small depending upon how you count.
Hi, Min Evercore ISI as founder and Chairman was awarded the number one position in economics.
Recognition he has earned 40 times.
Furthermore, Evercore ISI claimed a record 39 individual physicians and tight it's 2019 record of 36 key positions. Thanks.
Thank you so much to our institutional investor clients for their ongoing support and kudos to the entire Evercore ISI research sales and trading team for their extraordinary effort.
Formats with that let me turn the call over to John.
Thank you very much Ralph.
After several months of muted merger activity.
Immediately following the onset of the global pandemic I believe that absent a negative event, which could certainly happen.
We are in the early stages of recovery as many of the key conditions necessary for a healthy M&A market continue to improve the equity markets are strong for many sectors access to financing and readily available shred it remains.
CEO confidence continues to improve and there appears to be greater stability in the markets.
As a result of these improving conditions, we are seeing increased opportunities to serve our clients across multiple industry sectors globally.
In financing we have seen.
We have found multiple opportunities to help advise our clients in both equity and debt capital raises.
Despite the rapid government stimulus at the onset of the pandemic and the Swift recovery in the credit markets, we expect restructuring and refinancing activity to stay elevated as leverage remains high across all sectors, especially those that are distressed our re.
Our restructuring group remains busy and continues to work through assignments and advise clients in sectors, most hard hit by the pandemic.
[noise] private capital transaction for sponsors have increased an active in ism assignments are beginning to reemerge again as well well we are not yet back to pre cope at levels. We are encouraged by the current pace of activity.
Returning to our investor clients.
Both institutional and wealth management clients remain focused on the evolving financial markets during the quarter and we continue to provide valuable research insights and wealth management advice. We expect this focus to continue or particularly as we head into the year end.
Trading activity in the third quarter, However has not been as high as the first six months of the year as volatility has subsided.
I'm optimistic about the trajectory of the merger market overall, and I am pleased with our capital raising performance NRG restructuring and debt advisory teams that have stepped up over these months, let me now turn to our performance in investment banking.
I'm encouraged to see activity levels with both corporate clients and financial sponsors broadly increasing across our platform in many sectors.
As announced M&A activity increased during the quarter, we sustained our number one league table ranking for volume of announced M&A transactions over the last 12 months, both globally and in the U.S. among independent firms. Among all firms. We were once again number four in the U.S. and announced volume over the last.
12 month.
As I said, our restructuring and debt advisory teams remain busy our U.S. restructuring group has already completed more transactions year to date than in all of 2019 and has been involved in nine of the 15 largest bankruptcies by total liabilities year to date.
We believe there will be further opportunities to advise our clients throughout what we expect to be an elongated restructuring cycle. So.
The team continues to do a great job partnering with and leveraging the expertise of our industry focused bankers.
And shareholder advisory and activism defense and our private capital advisory businesses origination activity is beginning to pick up momentum there has been a pick up in unsolicited activity and we are pleased to be the financial advisor to Corelogic, which is the biggest hostile situation at the moment.
Our private funds group has successfully adapted to the virtual environment and has been a leader in the space successfully completing virtual fund raises for both existing clients and new clients, where will the relationship has been developed entirely in remote environment.
Our equity capital markets business is performing extremely well, we continue to gain momentum and we are maintaining our focus on building our team.
We served as an active book runner or co manager on six of the 11 largest U.S. ipos in the first nine months of 2020, and we played a key role in 30 underwriting transactions in the third quarter alone we are.
We are very proud to have served as the sole book runner. Our first U.S. book run mandates ever on executive network partner incorporation 360.
Million comps IPO. This unique caps offering was part pioneered structured and developed here at Evercore and bring innovation to the increasingly popular specs market.
Clients continue to look opportunistically to raise capital and we are pleased with the breadth of the conversations and activity, we are experiencing across a broad range of sectors, including including healthcare financial technology and energy.
Well, we also continue to invest in broadening the business and building out the convertible origination team with important strategic hires although it is still early days for us in the convertible space. We have served as an active book runner for helix energy solution groups $200 million convertible bond offering during the quarter.
In our equities business, our investor and corporate clients continue to rely on us for valuable macro and fundamental insights and our traders continue to help our clients execute in volatile markets as Ralph mentioned earlier, we're very proud of the team's institutional investor results.
Our results this quarter demonstrate that our team can produce strong outcomes no matter, what the environment. Thanks to the breadth of our capabilities and the balance of our platform despite not being physically together in our offices.
I'm very much encouraged by the current pace of activity and the momentum we are experiencing in our business I would now like to call turn the call over to Bob.
Thank you John.
Let me begin with a few comments on our GAAP results for the third quarter of Twentytwenty net revenues net income and earnings per share on a GAAP basis were 402.5 million $42.6 million and one dollar and one cents respectively for the.
For the first nine months of Twentytwenty net revenues net income and earnings per share on a GAAP basis were 1.3 billion 130.2 million and $3.09 respectively.
Our adjusted results exclude certain items related to the realignment strategy that began in the fourth quarter of 2019.
At this juncture, we are finalizing all of the required communications.
That remain.
And are associated with the realignment strategy and we are working hard to complete its execution by year end ultimately, we expect to incur separation and transition benefits and related costs of approximately $43 million, which reflect a modest increase in the cost for our.
Prior estimate during the third quarter of Twentytwenty, We recorded 7.3 million. It has special charges, which are excluded from our adjusted results year to date, we have recorded $37.6 million special charges related to the realignment initiative.
As we mentioned earlier this year, 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 is subject to regulatory approval, which was submitted in June and is expected to occur occur. Shortly after that approval is received.
In addition leaders.
Leaders from our advisory business in Mexico announced earlier this month that they are departing evercore to form a new strategic advisory firm Tech Tiv, which we will partner with under a new strategic alliance.
We believe this alliance model best positions the team in Mexico to address client needs and build a diverse and growing array of capabilities.
Our adjusted results in the third quarter and first nine months of Twentytwenty also excludes special charges of 8.1 million and 2.1 million respectively related to accelerated depreciation expense.
Turning to other revenues in the third quarter on the other revenues increased compared to the prior year period, primarily as a result of the gain of approximately $8 million on the investment funds portfolio, which is used as an economic hedge against a portion of our deferred compensation program.
Other revenues for the first nine months of Twentytwenty decreased versus the prior year period, primarily reflecting a net gain of $1 million from this portfolio compared to 9.2 million for the first nine months of Twentytwenty.
Of course, this amount fluctuates as market values move and the continued strength of the market during the quarter drove this quarters gauge.
Focusing on non compensation costs from wide non compensation costs per employee.
Approximated $39000 for the quarter down 17% on a year over year basis. The decrease in non compensation cost per employee versus last year, primarily reflects lower travel and related costs and lower professional fees as we continue to evolve towards more normal operation cost associated with travel.
Professional fees.
And some other expenses will begin to recur.
Our GAAP tax rate for the third quarter was 23.5% compared to 28%.
For the prior year period on a GAAP basis, our share count was 42.3 million shares for the third quarter, our share count for adjusted earnings per share was 47.4 million shares.
Wrapping up and then looking at our financial position, we held 1.1 billion of cash and cash equivalents.
Approximately $100 million of investment Securities were 1.2 million of liquid assets as of September Thirtyth Twentytwenty.
By comparison at September 32019, we held approximately 305 million of cash and cash equivalents and $620 million of investment securities were 920 million of liquid assets.
As we have discussed in the past, we hold cash and investment securities both for operations and to fund our deferred compensation obligations.
The outset of the downturn, we shifted our holdings to a highly liquid portfolio, reducing expenditures and buybacks to maximize our financial flexibility we play.
We plan to begin to reestablish our longer term investment portfolio. So that funds held to satisfy our deferred compensation obligations as well as a portion of our permanent capital base generate a greater return this.
Disciplined investment strategy will result in shifting funds to investment securities relative to cash and cash equivalents we.
We continue to monitor our cash levels liquidity regulatory capital requirement debt covenants and our other contractual obligations, including deferred compensation regularly and as Ralph noted we will begin to return cash earnings not needed to support these needs to our.
To our investors let me.
Let me turn the call back to John.
Thank you Bob just a couple of comments before we go to questions first.
Wanted to take a moment to acknowledge our exceptional team the results Ralph Bob and I, just summarized and the current pace of activity. We are experiencing are direct result of the dedication teamwork collaboration and commitment to our clients that our people have demonstrated throughout this year.
Thank you to our entire team for their efforts on behalf of our clients and for keeping our firm's sustained during a challenging period.
Second during our last call, we talked about the importance of diversity and inclusion that evercore, we remain committed to pursuing our diversity and inclusion goals and I'm proud to share that during the quarter, we added diversity and inclusion as a standalone core value we.
We are committed to holding ourselves both as individuals and as a firm accountable in this important area and we look forward to continuing to make progress.
Finally, as Ralph and I shared with our employees during a recent virtual town hall that we conducted well socially distance in the office. We are all very much focused on finishing the year strongly and preparing for 2021 well.
Well there are still uncertainties ahead, we have now.
We have never been more optimistic about the strength breadth and diversity of our platform to help our clients regardless of the environment now I'd like to invite you to ask questions.
Thank you Sir we will now begin the question answer session. As a reminder, if you have a question. Please press the star followed by the one key on your Touchtone phone.
If you would like to withdraw your question press the pound key.
And you are using speaker equipment, you may need to lift the handset before making your selection.
Our first question is from the line of minimal because taleo with Morgan Stanley.
Hi, good morning.
As you said, we've seen a pretty strong rebound in M&A announcements for the industry as the best.
Yeah based on whats publicly available at least out we've seen an uptake on deals in which a evercore has been advising on as well.
But maybe not to the same extent there we're seeing for the industry as a whole.
So I realize that public data is in fact, a very often it's all the update it with a lag. So I just wanted to make sure that.
Yeah, we have the right takeaway is that we can see the full picture yet, but based on what youre seeing in the pipeline or we should see a nice revalidated completions as we go into the.
Fourth quarter 2021, and maybe as you address that you can talk a little bit about the competitive environment right now given the sorry, a flurry of activity.
Sure.
We feel very good about our pipeline we are.
We are solid our backlog is solid and strong and our dialogues have picked up dramatically.
We feel like we have real momentum in our business and we feel quite good about where we stand art art. Our dialogues are good we have some very very very.
Very strong relationships that continue to have very good dialogues and we and our clients are definitely looking at doing things and so we feel quite good about our market position and competitively or the environment is is is that's always quite rigorous there are people out there.
They're in.
In the merger business, who are doing things I think one of the the interesting thing is that you know clients are very much willing to engage in in dialogue now there's a lot more idea generation going on clients are looking for for opt opportunities to bring their businesses forward.
So we see that the the pace of dialogue and the pace of activity with clients just continues to pick up and we feel like the environment. If it continues is going to continue to to to to give us the opportunities to really find re.
Really good situation for our clients. We also as we said our breadth of capabilities has really given us a whole new dimension of of ways that we can serve our clients both in M&A and beyond and so we believe that we have even more opportunities to be important to our clients.
As they look at us there at that the challenges ahead of them.
Great. Thank you and can you talk.
Can you talk a little bit about the impact the elections are having on deal activity.
Clashed preparing for the possibility of an increase in taxes are you seeing.
More deals being pushed through before you are at or are more clients waiting to see what happens with access before agreeing on a price and deciding sales.
Yes, the elections.
While there certainly on a low.
On a lot of People's minds have really affect that.
Deal activity.
In any material way, except for one which is in a handful of privately held companies.
There has been a desire.
To transact before the end of the year, but.
But other than that.
It's really not having much effect on the overall M&A environment.
Great. Thanks very much.
Our next question comes from the line of Devin Ryan with JMP Securities.
Hi, Devin degree Dick Hi, good morning.
One follow up on some of the last line of questioning just on on activity and backlogs.
The first time, we've heard word strong while windows occur purposeful work.
Word and so when we think about just the the momentum you're seeing in the business I'm, just trying to get a better understanding of.
Whether people are just getting over the fact that.
You can still get travel still restricted and people still aren't meeting in person I've always thought that that's very important to M&A activity. So are people just willing now to buy assets. So I don't see or has there been a shift so now everything is virtual.
Just trying to think about whether the other certain deals and are moving forward and so thats filling up the backlog in one area, but there are still a number of deals that are being held back just because there theres still a risk.
<unk> gone on travel and things are not as active as it normally are there.
Well you know as John said in his remarks.
There has been a real pickup in activity thats obvious from the third quarter numbers and from the numbers that we've seen at the beginning of this.
Quarter.
As well.
There have been.
Transactions that have been done.
Primarily or exclusively remotely.
But we're also seeing that.
That.
Barger transactions.
People still want to interact and have.
Face to face discussions those are done in a safe way with.
Masks, and social distancing and even outside there.
Probably a bit more.
Garden meetings.
For transactions that have occurred in the last 10 years.
But theres definitely.
[music].
Demonstrably will pick up in an interest in strategic and inorganic activity.
The thing that I would add to what Ralph said is that I think and I'm sure you all feel the same way there has been an increasing comfort with the.
The zoom call equivalent where people really believe that they can accomplish almost as much or maybe just as much through.
Through that mode of communication and deals and transactions and.
And and dialogues have taken place in that medium to very effectively and so maybe there's a behavioral change. We believe that we are all going to go back to face to face in the office. Obviously, we really believe in that and also seeing clients face to face, but there is an element of cash.
Comfort with that mode of communication and that mode of actually transacting.
Terrific. Thanks for the color and then just a follow up on on the compensation ratio year to date revenues are roughly flat. The comp ratio is about 550 basis points above last year's level year to date, you appreciate that backdrop throughout the year has been uncertain.
Still is quite uncertain, but I'm just trying to kind of think about whether where we are year to date is more about you being conservative.
With the uncertainty versus mix of revenues versus view on the competitive environment for two.
For talent is really thinking about it.
The implications are this year and then also whether there is any implications. The fact that we're kind of at a higher level year to date through the first three quarters. So that has implications on thinking about maybe the go forward comp ratio in a more normalized.
Revenue environment, especially if the momentum in M&A continues here.
Yeah, I think it has.
All of those factors.
We are.
Notwithstanding the fact that the first three quarters were essentially flat revenues.
We certainly are not we have greater uncertainty as to what the fourth quarter will bring than we do under.
In normal years number one number two as you correctly pointed out and as I.
I did in my opening remarks.
We have very little idea of what.
Our competitors large and independent will do.
With respect to comp.
Compensation at year end and that of course effects.
The majority of our.
All of our team who are not us.
Senior managing directors, who is.
Who's comp.
As is more.
Right.
Through the ups and downs.
Revenue.
And the final question that you asked.
Is that we would.
Not imply.
Imply anything.
From.
The first nine months of this year in terms of what the comp ratio.
Comp ratio will be.
Next year or in following years I think this is a unique and unusual year.
And as we said on earlier calls.
We're focused on a couple of things number one.
We have a great team.
You know, it's a team thats produced over $2 billion of revenue in 2018, and 2019 and in you know more normalized environments, which would seem to be returning to.
You sleep could be just the rail.
He railed again, but certainly at this moment.
Like we're heading toward.
The beginning of a more normalized environment.
And so there is no reason.
We can't.
Reduced results like.
Like that again and again.
18, we had a comp ratio below the 819, we had a comp ratio of 58.2 and.
And you know, we'll obviously when we get to next year, we'll do our very best to.
Estimate.
What it will be.
For the full year of 2021.
I think you should also take into account that.
You know in the last.
Two or three years have been years of.
Reasonably heavy.
Alan investment.
Oh and have some very senior people, including.
My co chief.
Oh chair and co CEO, which has been a phenomenal addition to the firm.
But you know those.
Those investments.
Are flowing through the income statement.
Last year, this year and they start to become.
Inefficiently less and.
Impactful.
In future years, so I wouldnt.
Deduce anything from where we are for nine months.
Any implications at all for 2021 2022 or beyond.
Okay. That's terrific that was the color is looking for thank you.
Our next question is from the line of Richard Ransom with Goldman Sachs.
Hi, good morning, guys.
Perhaps we can talk a little bit about the restructuring business I know this has been a lot of debate.
Oh of how the broad availability of liquidity is going to impact this restructuring cycle six months I guess post the pandemic kind of really hitting.
Hitting what are your thought process. How is your thought process around this restructuring cycle and I guess the key question is when do you expect to see peak revenue recognition from the restructuring business.
Well in terms of the.
Of our business, we continue to see real activity in this as as Ralph and I. Both said our restructuring group is performing extremely well we are involved in many many restructurings and even more dialogues and in fact, our restructuring group gets involved in helping to give advice to.
Any number of clients corporate clients such that there is a there is a tremendous amount of activity going coursing through that group.
In terms of the liquidity in the system, but theres a lot of liquidity in the system and clearly that means that the restructuring cycle elongating in that some of the companies that might have had really struggled.
Have have actually been able to get financing and to.
Clean enough liquidity, such that they're not in complete distress. So with the long gating in terms of calling the the top of the cycle, that's really hard to do.
But what I would say is the activity level continues to be.
Very high for US we feel like we're in very very good dialogs with a much.
Multiples of clients and we anticipate that that activity level and our productivity will continue over the next quarter.
Okay, Great and then perhaps you can talk a little bit about the FCM business I mean that looks like it's on track to make well over $200 million of revenue.
Yeah can you talk a little bit about the trajectory for that business and what do you think is a realistic feasible market share within m. fees. If you think about the medium term lets say three to five years for that business for you.
Well.
When we.
The ISI transaction six years ago, we are.
We articulated.
Three reasons for doing it and.
And probably the most consequential was we felt that we could.
Build a uh huh.
An underwriting business that would have some consequence.
For the firm I was.
I was cautious at that time, I said I thought it would be $75 million to $100 million and I did that based on looking at.
I'm sorry.
Yes.
Stifel and.
Blair and they were all doing 75 to 125 million. So I figured we could do 75 to 100 with the quality of our bankers.
We achieve that level 3 million.
Billion.
Last year, and I would say whats happened this year.
As you know.
A big step function.
Forward.
And there are a number of reasons for that.
First of all as you've certainly seen.
M. activity has been across the board.
Although not.
No it's been up double digit percentages for all firms.
Obviously no firm I think has had the experience that we've had.
Triple digit in.
Increases so I think a couple of things have happened one.
In the period Mark.
March April May June July.
M&A activity was essentially.
Discussions will put on pause and clients were heavily focused on liquidity restoring their balance sheets.
Good ties in there.
Our balance sheets.
And.
Our bankers who are.
Incredibly talented.
Very strong relationships and very entrepreneurial.
Figured out.
That.
Our clients were not going to talk to them over this period of time about.
The next merger disposition or.
Letting of the firm.
And so they engage with clients and produce.
A fair amount of business and so.
The the characteristic of our underwriting business. This year is.
Really good in two respects number one.
A much broader indices.
Industry diversification.
Yes, obviously in the past we've had a very strong.
Healthcare and biotech underwriting practices, we have that again this year.
But.
The interesting thing is that.
Both our health care and our non health care.
Underwriting revenues.
Our ready ahead.
All total revenues for underwriting last year a year.
Year to date, our year to date revenues, so a significant pick up in the diversification.
And I would say there.
Theres also a step function change in.
In what should be.
The run rate.
Our equity underwriting revenues, obviously never make any.
Guidance are forward looking statements and obviously equity underwriting revenues are.
Our always attached to the overall level of equity underwriting.
In the in the markets, but.
If you asked.
Why were asked today, what it should be our aspiration.
It's it's certainly were.
Where where we're headed this year and hopefully beyond and.
Going back to the remarks I made earlier.
In response to the.
Kevin's question.
The.
You know the $2 billion.
2018, we did $2.080 billion of that $64 million with worth of.
Underwriting revenues that year end 2019, we did $2.030 billion of that $93 million.
Underwriting revenue.
Yes.
What I just described comes to pass in underwriting, which I'm pretty confident.
The step function changes in.
In the run rate of that business.
The opportunities for our firm.
In a more normalized M&A environment are pretty.
Pretty significant.
Okay. Thank you very much.
Our next question is from the line of Jeff Harte with Piper Sandler.
Good morning, guys.
Can you give us any more color on the advisory fee revenue mix and I'm kind of saying that from this is another quarter with a really meaningful beat versus expectations that we generally derived from kind of visible transaction data Im just trying to get a better feel as to what's contributing to the strength.
So as a general matter. This you know as we said in our earnings release and in John's comments.
M&A is little weaker.
And you know.
Restructuring capital markets Advisory.
And our little stronger.
We're not going to provide any.
Cremation like that and the reason is.
There.
So much there's so many assignments that we have that involve more.
More than one.
Type of advisory work.
It's not at all uncommon.
And in fact, some of our largest.
Fees this year had restructuring they had M&A.
They had financing advisory.
In some cases, even that hedging advisory so.
To try and parse individual piece, so that it would fit into those buckets.
Just doesn't.
Makes sense and.
So.
The answer is.
Well, it's not.
And it's not because we're trying to hide anything it's just that it's.
It is very difficult at this aggregate them the way that you're suggesting.
Okay. Just it makes it more challenging one of the things are you still looking at are really not getting us close to where we probably should be.
On a related emphasize.
That's helpful.
On a related.
Point should we.
Should we be thinking about potential advisory air pockets coming I guess I'm asking it because advisory down 16% and what could be the completed M&A for the industry low point.
Surprisingly strong I mean is there more of an air pocket the com or the announcement is picking up quickly enough that.
M&A revenues could actually just start going upward from here.
I think we've we've said.
In various forms that.
We expected the third quarter to be.
The weakest quarter from a top line perspective in two.
2020, and sitting here today.
Yes, there is nothing.
That we would look at that would suggest that that will not be the case.
But you know as John said and I said, there's a lot of things.
Things that can happen.
Whether it's the election nerds.
Market volatility or Brexit discussions or.
A myriad of other things, so but sitting here today.
The comments that we made earlier about the third quarter likely to be in the mid year in terms of revenues.
We certainly don't see anything that would cause our views to change on that.
Okay, and then looking at non comp and I don't know that there is an answer here, but can you guys help us at all think about kind of what the outlook. There is going to be coming from the perspective of activity levels are starting to pick up nicely in threeq, we still saw noncomp down quarter over quarter because.
Is there any kind of idea of how quickly that could pick up how much it could pick up and kind of just the outlook there.
Bob.
For sure but.
I think it's there's really.
Could it be two drivers.
Of that number turning one.
As Ralph said Theres, a very active market for talent.
And to the extent there are professional fees associated with bringing some of that talent on board that could drive an uptick.
And then put the building on what John said or our bankers are accomplishing an awful lot.
Virtually.
But travel will return.
Okay, well, while I've got you Bob too is there do you guys cited or can you cite the revenue pull forward from four creek for Q closings, if there wasn't it.
About $20 million.
Okay. Thank you.
Our next question is from the line of Brennan Hawken with GBM.
Thanks.
Good morning, Thanks for taking my question.
[music].
So a question here on some of the comments that you've made.
Earlier on the investments you guys have SMB head count that's actually up.
From recent years and advisory despite the restructuring so.
Interested to hear what you are seeing below the surface and productivity.
What kind of trends are you seeing on these new SMB is that you brought in.
Our how many of them are still in the ramp stage and what kind of color can you provide on that front that would be helpful. Thanks.
Uh huh.
Look the.
Yeah, we have to first of all we have two forms of.
Ramping.
Internally promoted and.
Pete talent, that's joined Us externally.
Uh huh.
Externally.
The best assumption.
Is and if you look at.
29.
2018 and 29.
We had.
Roughly.
25 or so.
Senior managing directors in our advisory business that we're ramping split about equally between external and internal.
The internal ones.
Ones are really they tend to be younger people.
And.
They are building each year.
Fully and growing.
Productivity.
The external ones the best assumption is in the year, we hire them.
Although there there are exceptions to this assumed very little if any revenue.
In their first full year, 50% to 70% of our normal productivity and our second full year and their second full year.
Pretty much normal productivity as long as they are in a sector that is doesn't have a cloud over it.
So hi.
Had we hired for example.
A.
Cruise line banker in 2018, and the first full year was 19, they would not have hit full revenue.
Because of what happened.
So, but absent those things by the second full year, they tend to be ramp.
And this year we've had a.
We generally higher four to eight.
These externally.
It will be probably towards the lower end of that range.
This year.
And you know and really only one or two in in pure.
Advisory so.
The there are more.
Ramp are there.
Are there there are fewer ramping smbs in 2020.
Than there were in 19 and there are 19 than they were.
In 18.
So that you know I think that provides some opportunity for us.
And.
Normal M&A environments, we would hope to see our.
Productivity return to seven.
17, 18 19 levels.
I'd just add just a couple of things to what Ralph said first is and I'd just like to emphasize the fact that hiring people into sectors that are slow it makes it a very difficult environment to be measuring that because ramping in an environment like we've been in the last couple of quarters makes it really difficult and so.
So I think we're going to see a lot more of how these all play out.
As we go forward.
And the second thing I would say is that as you've seen we've we've we've invested quite a bit in our equities business equity capital markets, which.
Which you have seen the the productivity of that group and so.
[music].
That that in of itself will actually.
Help and we're going to continue to hopefully grow that that area and the revenues from that group, which I.
As you've seen have been very very productive and so.
The.
This is the sum and substance of it is we feel very good about the people we have and the peak we brought on and I think as the environment can.
Continues to improve I think.
I think you'll see that these that the that the productivity will will trend upward.
Great Thanks for that.
Certainly.
An unusual environment to ramp.
Which is a very fair point, so just two more things for me.
Well I don't think you mentioned, but if you could give the quarter end SMB count.
And then also how should we it was interesting to hear your comments about the election, not really impacting activity.
This has been a.
Strange year on so many levels.
How should we think about seasonality is it going to be strange for seasonality as well or should we think about.
For Q being atypical source of seasonal strength, particularly given the fact that we've seen some pickup in activity you flagged some smaller deals that are getting done for tax reasons before year end.
How does all that come together.
Well the outlets that would fall into the cat I'll, let Bob give you the the quarter end SMB count, but the second part of your question falls into that.
The third rail, which we never touch which is.
Statements about.
The next quarter.
Revenues or anything of that nature, I think they'll come on Ralph I painted the inside corner on that.
[laughter].
Oh good <unk>.
No I think the statement that we made earlier that.
Things don't.
Change.
We're we're confident that the third quarter will be the low.
The lowest quarter of the year.
Should give you as much as we will cost of the ever give.
So Brendan Theres 114th.
Thank you.
Our next question comes from the line of Steven Chubak with Wolfe Research.
That's your line is open.
Hey, good morning.
So I've had.
I've had a lot of follow ups on some of that comp commentary. So maybe you wanted to ask a more pointed question on the comp ratio.
Just given some of the positive momentum cited in the backlog it really feels like barring a negative macro shock and we should see revenues get back to that $2 billion level in 2021, and just assuming we can get back to that bogey and just given the restructuring actions and the head count reductions that you did late last year, you know can we read.
When we underwrite a return to that sub 60% comp ratio, assuming a 2 billion plus revenue outcome.
You know I think the answer to that is that.
When we're in 2021, we'll be prepared to have that discussion with you.
But that is certainly our objective.
Okay.
Okay, I mean, I guess, what would preclude you from achieving that outcome.
Lower lower revenues lower productivity right with the assumption that the revenues at 2 billion plus because that's the one issue that I guess I and others are struggling to reconcile the comp accrual this year as high as we recognize the revenue backdrop is challenging but if we can get back to a revenue run.
Great in line with 18 19, what is a reasonable comp ratio that we can underwrite you guys have taken a lot of expense actions restructuring actions I'm, just not seeing that those underpinnings in this year's comp trajectory, but I'm wondering for next year could we start to see some of those benefits come through.
Let me sort of go back in history.
And see if I can help you.
What I, what I joined the firm.
Seven and a half years ago, we had a comp ratio of about 15%.
ER margins of 15% in the comp ratio.
67, 66, 68, something like that.
And what at that time, as Roger and I on these calls.
And.
We were of course asked this very same question and the way we answered. It is we said that we believe.
That we can run this business.
Sub 60%.
Or in other words high Fiftys percent.
Operator.
And margins.
You know that are in the mid Twentys.
And we said that we would make steady progress toward that.
We never said, we're going to make get there and.
14, 15 13 17.
And we also said.
If we have an opportunity to hire a disproportionate number of.
A plus.
Talents.
In any given year, we'll do.
We'll do that because it will increase value two to three years out because of the ramp period.
And we'll let you know that.
And so.
You know obviously this has been a.
A very challenging year.
For all kinds of reasons.
And you know I think the statements that Roger and I made back then and that John and I have subsequently endorsed since John joined the firm for.
Four years ago.
We're still.
Comfortable with those.
The only thing I would say is we're not going to ever.
Delayed.
Hey, Chris Sys time.
You know it certainly as a.
A place that we want to arrive and should be able to arrive.
Nothing has changed with regard to that.
Great. Thanks for that additional context Ralph.
Recognizing there is a lot of uncertainty is still we are in.
On the one of the other questions I wanted to ask is just on the some of the comments relating to the spec alternative product. We've obviously seen a surge in fact volumes.
It certainly seems timely that you're launching this now curious what some of the early feedback has been from corporates and maybe whats differentiated about the value prop up at specific offering.
Okay.
Look I think.
Historically, we've had a.
Reluctance.
That would be an understatement to underwrite traditional specs are you know that.
Reluctance.
He has been predicated primarily on the view that there.
There wasn't sufficient alignment.
Tween the incentives for this.
With the sponsor of the stack.
And.
The investors in this way.
The point there is obviously that one.
When a transaction is done there is a big amount of dilution that goes to the sponsor just for doing a deal which is quite different from.
More private equity oriented.
Incentives where.
The returns to the sponsor are tied to the returns to the investors.
So we created gaps funnel.
Which.
Does that aligns the interest of investors and the sponsor to a much greater.
Degree.
And we.
On our first one and we have the second one that we'll be doing shortly.
And.
Having said that.
The market is also evolving.
In the world of stacks and when.
While it says on the in the legal document that the sponsor can get.
20% of the capital.
<unk> outstanding equity of the company when the merger occurs.
Those get negotiated down a lot now so there is more alignment.
By virtue of the merger discussions not by the underwriting but by virtue of the merger discussions.
And.
You know in the last six to 12 months.
Yes merger into a stack has become a.
White legitimate way of taking.
Of introducing a company into the public markets and ultimately taking it public so we're finding increasingly with our clients that are private that.
Sydney ration of.
Uh huh.
Capitalization alternatives.
Includes.
A regular way IPO direct listing merger with this fact or sale of the company.
And so.
You know were.
We're obviously.
Yeah, we've been very active in this fact.
Merger market.
Both representing.
Faxes, acquirers and companies being sold and merged into.
Backs and this is a.
It's becoming certainly a more.
Lids.
Legitimate common way.
Capitalize the value.
Just to underline a couple of things that that Ralph said.
We've we've we've been very in.
Involved in talking to Sac and stack sponsors and in the middle of that market beyond the cap market, we have a lot of expertise in generally.
The the stack Mark.
Market and the transaction itself and so we're participating and we're evaluating whether we build more momentum into.
Our involvement we clearly like our specs are caps product, but we also are looking at a lot of other places where we can as an advisor.
Add value and certainly it's part of an important to our equities advisory business to be experts and facts.
Great very helpful color. Thanks, so much for taking my questions.
Sure.
There appear to be no questions. At this time. This concludes today's Evercore third quarter 2020 financial results Conference call you may now disconnect.
Thank you everyone.
Thank you.
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