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Edited Transcript of EVR earnings conference call or presentation 23-Oct-19 12:00pm GMT

Q3 2019 Evercore Inc Earnings Call

NEW YORK Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Evercore Inc earnings conference call or presentation Wednesday, October 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hallie Elsner

Evercore Inc. - Head of IR

* John S. Weinberg

Evercore Inc. - Executive Chairman

* Ralph Lewis Schlosstein

Evercore Inc. - President, CEO & Director

* Robert Brien Walsh

Evercore Inc. - Executive VP, Senior MD & CFO

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Conference Call Participants

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* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* Jeffery J. Harte

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Michael C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Steven Joseph Chubak

Wolfe Research, LLC - Director of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) This conference call is being recorded today, Wednesday, October 23, 2019.

I would now like to turn the conference call over to your host, Evercore's Head of Investor Relations, Hallie Elsner. Please go ahead, ma'am.

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Hallie Elsner, Evercore Inc. - Head of IR [2]

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Thank you, Demetria. Good morning, and thank you for joining us today for Evercore's Third Quarter and 9 Months 2019 Financial Results Conference Call. I'm Hallie Elsner, Evercore's new Head of Investor Relations. Joining me today on the call are Ralph Schlosstein, our President and Chief Executive Officer; John Weinberg, our Executive Chairman; and Bob Walsh, our CFO. After our prepared remarks, we will open up the call for questions.

Earlier today, we released a press release announcing Evercore's third quarter and 9 months 2019 financial results. The company's discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live on the For Investors section of the website, and an archive of it will be available for 30 days, beginning approximately 1 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. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to, those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which as previously mentioned, is posted on our website. We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closing.

I'll now turn the call over to Ralph.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [3]

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Thank you, Hallie, and good morning, everyone. As many of you know, Jamie Easton, our very first Head of Investor Relations, is fulfilling a long-held entrepreneurial dream and starting her own business. We are rooting for Jamie to succeed in her new venture, and we are very fortunate to have recruited Hallie to take on this important role going forward. Recruiting Hallie was just one of our important accomplishments this quarter.

We have continued to grow our business, though, year-to-date revenues increased at a considerably slower rate than last year's rapid pace. Despite slower growth, we have had the best first 9 months of net revenue in our history, and our backlogs remain strong in each of our businesses. I'm excited about the opportunities that we have to continue to take market share in each of our businesses in the coming months.

Throughout the year, we have continued to invest in talent and capabilities, consistent with our long-term growth objectives. Seven advisory senior managing directors have joined the firm during 2019. The 4 SMDs added during the third quarter, expand our coverage of financial sponsors and the retail sector, and strengthen our global presence, both in Canada and Israel, where we recently opened our 20th advisory office. Our total number of active and announced advisory senior managing directors is currently 111.

We have one additional senior managing director committed to join in 2020, and our dialogue with potential recruits remains strong. We also remain very active with developing and mentoring our current bankers across all levels, and the promotion of our own talent will continue to be a growing source of new senior managing directors.

Our market position in advisory has never been stronger as we have gained market share, climbed the league tables and advised on a high proportion of the largest announced transactions this year. We believe that our business model of broad sector and geographic coverage with highly valued and diverse advisory capabilities is well suited to the current environment, and we remain optimistic that our long-term momentum will continue. John will review the current environment and our advisory performance in more detail in his remarks.

Our Equities business has added 4 senior research analysts this year, reflecting our continued commitment to this business as well. We are particularly proud of our standing in Institutional Investor's recent annual survey, in which Evercore ISI was recognized as the top-ranked independent firm in U.S. Equity Research for the sixth consecutive year. Overall, Evercore ISI placed second on a weighted basis, and #4 in terms of number of ranked analysts, marking the sixth year in a row that the team placed in the top 5 among all firms. We also were tied for the most #1 ranked analysts with JPMorgan, and over 90% of our analyst roster was ranked, which we believe is the highest percentage of any firm of size and demonstrates our commitment to excellence throughout our organization.

Our wealth management team once again grew assets under management. Assets under management from our consolidated investment management businesses were $10.3 billion at the end of the quarter, up 4% from this time a year ago.

Finally, and very importantly, we have continued to focus on returning capital to shareholders. $336.5 million has been returned to shareholders during the first 9 months through dividends and repurchases of 3 million shares at an average price of $84.22. Our adjusted weighted average share count for the quarter is down 5% relative to the third quarter of 2018, reflecting our ongoing buyback activity.

Additionally, we completed a private placement of approximately $206 million aggregate principal amount of unsecured senior notes in the third quarter. The proceeds of this offering will be used to fund investments in our business, including facilities and technology and for other general corporate purposes.

Let me now turn to our quarterly and year-to-date financial results. Our investments in our business continue to drive our growth. Third quarter 2019 adjusted net revenues were $408.5 million, up 6% versus the third quarter of 2018, primarily driven by an increase in advisory fees as well as higher underwriting fees. Revenues for the first 9 months were $1.36 billion, up 4% compared to the same period last year.

In Investment Banking, advisory fees were $321.2 million in the quarter, up 5% year-over-year. For the first 9 months, advisory fees were $1.09 billion, an increase of 4% from last year when our advisory revenues surpassed the $1 billion mark for the first time for the first 9 months.

Advisory revenues were negatively affected as several transactions with meaningful fees were delayed and have closed or are expected to close in the fourth quarter rather than the third quarter. The good news is that, in each case, these were simply delays in closings, not postponements or cancellations of previously announced transactions.

As we have discussed in the past, our results in any given quarter are always affected by the timing of transaction closings, something over which we ultimately have no control. As a consequence, a longer-term perspective, as we have pointed out many times, always provides a more complete view of our results.

Equity Capital Markets continued its momentum with $17.6 million of underwriting fees in the quarter, an increase of 54% year-over-year. Fees of $61.4 million year-to-date declined 2% from the first 9 months of 2018. Despite the somewhat choppy issuance environment, our ECM business remains solid and the diversity of client sectors continues to expand, and our backlog continues to grow.

Commissions and related fees were $46.8 million in the quarter, a 3% increase versus the third quarter of 2018. Year-to-date, commissions and related fees were $137.4 million, down 1% from the same period last year. Our team continues to work hard in this challenging environment to ensure that we are compensated appropriately for the value that we deliver to our clients.

In investment management, asset management and administration fees from our consolidated businesses of $14.9 million were flat versus the third quarter of 2018, and year-to-date fees of $43.9 million increased 2% compared to last year. Our compensation ratio was 58% for the quarter versus 57.5% for the same period last year. Noncompensation costs for the quarter were $86.6 million, up 12% versus the year-ago period. Noncompensation costs for the 9-month period were $253.9 million, up 13% versus the prior period. This increase reflects continued growth in personnel as well as investments made to support, over the long term, our growth, particularly around additional space and technology.

Net income was $60.5 million for the quarter, and EPS was $1.26, down 4% and up 2%, respectively, versus the third quarter of 2018. The difference being caused, obviously, by the reduced share count. Net income for the first 9 months was $243.2 million and EPS was $4.99, down 6% and 3%, respectively, versus the 9 months of 2018. The operating margin for the quarter was 20.8% compared to 22.6% in the third quarter of 2018. Our operating margin for the first 9 months was 23.4% compared to 25% for the first 9 months of 2018.

Let me now turn the call over to John to discuss the current environment and comment further on our Investment Banking business.

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John S. Weinberg, Evercore Inc. - Executive Chairman [4]

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Thank you, Ralph. The current environment continues to drive demand for high-quality independent advice that addresses a range of strategic and financial challenges as clients' priorities and needs vary by sector and region. The fundamental drivers of M&A remain in place, equity valuations are strong, credit is readily available, activist engagement with corporates is high and disruption of traditional industries continues.

Client discussions and interest in pursuing strategic transactions remains high, but closing of transactions has been taking longer than in the past. The U.S. market remains the most active with the highest level of activity in the TMT, industrials, health care and energy sectors. There is also strong demand for capital advisory services as companies seek additional equity and debt financing.

An elevated level of leveraged debt outstanding over time drives strong demand for liability management and restructuring advisory services. Our debt advisory and restructuring teams continue to be fully engaged, and particularly strong levels in energy, retail and TMT exist. Our broad range of capabilities and ability to advise clients with differentiated teams positions us well to help clients with their most important strategic and financial issues.

The environment for cash equities remains challenged as we continue to see clients reduce the volume of research they receive and refine both how they pay for research and the level of payment. Quality remains an important differentiator for Evercore ISI, and we believe that clients will compensate us appropriately for the value we deliver in our research. As Ralph mentioned, the recent Annual Institutional Investors Survey results demonstrate our commitment to quality across our research footprint.

I'd like to highlight some more details on our advisory and underwriting businesses. We continue to be pleased with the results of these businesses and their ongoing momentum. We finished the 9 months ranked fifth globally and first among independents in the league tables for announced transactions based on dollar volume. Our gap relative to other independent firms is substantial. We are projected to once again increase our market share of advisory revenues among publicly reporting firms on both a trailing 12-month basis and a year-to-date basis.

We currently estimate our year-to-date market share to be 7.7% relative to 7.1% at the end of the first 9 months of 2018 and 8.2% for the full year 2018. We have maintained our #4 global ranking in advisory fees on both a trailing 12-month basis and a year-to-date basis.

Year-to-date, we advised on 4 of the 5 largest global transactions and all 5 of the largest 5 transactions in the United States. Additionally, we advised on 10 of the 25 largest transactions globally. One key to this success is our ability to bring the many resources of the firm to help our clients to achieve their strategic and capital structure objectives. Complex transactions often require both strategic and financing expertise or collaboration across multiple sectors, and we've continued to invest to expand this expertise.

Advisory revenues for the quarter were diverse and reflect contributions from multiple sectors and capabilities, including TMT, Energy, financials and Capital Advisory. We continue to see significant momentum from our newer industrials and consumer teams.

Additionally, we made further progress this quarter on a number of initiatives focused on increasing penetration with large-cap and financial sponsor clients. Our M&A teams remain busy and active. Activism and capital advisory remains strong, which has resulted in increased mandates for us. Our debt advisory and restructuring team and their industry and financial sponsor partners continue to be fully engaged and active in helping companies solve their capital structure challenges. As the market for these services has evolved, we've continued to expand the scope of our capabilities, offering a broad range of debtor and creditor advisory services to our clients, both in-court and, very frequently, out of court.

Our underwriting business continues to gain momentum, and we are encouraged by the scope of the business. In the third quarter, we were an underwriter on 18 transactions, of which we were the book runner on 10. Our business is increasingly diverse as these transactions spanned 8 different industries.

Equally importantly, we are increasingly active across the capital structure with underwritings and private placements, including equity, convertible debt and debt capital raises. The increase we saw in commissions and related fees in the third quarter reflects both the quality of our product but also the management team's focus on achieving a return on our investment in the business. We remain excited about the opportunities in front of us, our ability to continue to take market share in our 2 major businesses and our vision for the firm going forward.

I will now turn the call over to Bob to discuss our GAAP results and other financial matters.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [5]

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Thank you, John, and good morning. Beginning with our GAAP results. For the third quarter, net revenues, net income and earnings per share on a GAAP basis were $402.2 million, $43.3 million and $1.01, respectively. For the first 9 months, net revenues were $1.35 billion, a record for the year-to-date period, just as they were a record on an adjusted basis. Net income and earnings per share were $192.3 million and $4.43, respectively. Net revenues of $2.3 million was recognized in the third quarter, were transactions that closed in the fourth quarter.

Consistent with prior periods, our adjusted results for the quarter exclude certain items that principally relate to our acquisitions and dispositions and also include the full share count associated with those acquisitions. Specifically, we adjusted for costs associated with divesting of Class J LP Units, granted in conjunction with the ISI acquisition. For the quarter, we expensed $4.6 million related to these Class J LP Units. Our adjusted results for the quarter also exclude special charges of $1 million related to accelerated depreciation with leasehold improvements and $0.4 million of acquisition and transition costs.

Turning to other income. Other revenues were down for the third quarter but up significantly for the first 9 months in comparison with 2018. These changes primarily reflect gains or losses on the exchange-traded funds we use as a hedge for our deferred cash compensation program obligations. This amount will continue to fluctuate in volatile markets.

Looking to noncompensation costs. Firm-wide noncompensation costs were -- per employee, were $46,800 for the quarter, down 5% from the prior quarter and up 1% on a year-over-year basis. As Ralph mentioned, the increase in noncompensation costs principally reflects the addition of office space and related depreciation to accommodate future growth and investments in software targeted at enhancing operating efficiency and the security over the intermediate term. We had approximately 1,900 employees at the end of the third quarter.

Our GAAP tax rate for the quarter was 28% as compared to 22.8% in the same period last year. The third quarter share count for adjusted earnings per share was 48.1 million shares, lower in comparison with the prior quarter, principally driven by share repurchases. On a GAAP basis, the share count was 42.8 million shares.

Finally, looking to our financial position. We hold $304.7 million of cash and $620.1 million of investment securities at September 30 with current assets exceeding current liabilities by approximately $894 million. Investment securities include funds from our recent debt raise and investing a portion of our minimum cash requirement and requirements for our upcoming bonus payments.

With that, operator, we'd now like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Brennan Hawken with UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [2]

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So understood your comments on the business being lumpy. Is what we saw here in the third quarter, just to say it plainly, is it similar to what we saw last year, right? I seem to remember, third quarter of '18, timing was also an issue, made the quarter look a little bit soft. Now of course, you guys followed that up with a pretty remarkable fourth quarter and finish to the year. So is it similar to that? Or is there something else happening where we're starting to see a little bit of slowing velocity in the market and the timing of deals getting slowed down? I'm just trying to delineate here whether or not this is normal lumpiness or maybe a little bit of slowdown mixed in, too?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [3]

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Okay. Well, I think the M&A data for the year-to-date are available to everyone. They're off low double digits, both in the dollar volume of transactions and in the number of transactions. So there's definitely a little bit less activity in the market as a whole. Evercore continues to take market share. So the story in the advisory business, I think, is very similar to the story that we discussed last year in the first quarter as it pertained to our Equity business, where we said that the wallet will shrink a little due to MiFID, but we expect, because of our -- the quality of our research that our market share will gain. So I think that's what's happening.

And with respect to the third quarter specifically, it's exactly what happened in the third quarter of last year. We had a number of transactions that we expected to close in the third quarter, were right on the cusp. And as I said in my opening remarks, those were delayed and are -- have closed or are expected to close in the fourth quarter. So it's very much a timing issue as we see it and not a serious fundamental change in the activity in our primary business.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [4]

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Okay. And then, Bob, you might have mentioned this, I could have missed it, but what was the pull-forward from October into the third quarter for revenue this quarter?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [5]

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$2.3 million.

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Operator [6]

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And our next question comes from the line of Devin Ryan with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [7]

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So my question is a little bit of follow-up just on some of the maybe the overarching kind of views around the M&A backdrop. I mean, there's a lot of macro events that the market is watching right now. And just trying to think about what you guys would maybe point to as a catalyst to either improve activity or what would be a bigger concern? We have the Brexit situation in Europe. You have China trade deal. You have a presidential election kind of moving closer here. So I'm curious kind of what the biggest topics are that you're talking to clients about and maybe what the factors are that you think have slowed activity a bit? And what could drive maybe a reacceleration or change kind of for the broader backdrop?

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John S. Weinberg, Evercore Inc. - Executive Chairman [8]

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Well, I think that what we have found is that CEO confidence is down slightly, but we have found that our dialogues have been every bit as frequent and robust as they've been in the past, and we've really found that there continues to be real activity to look for growth, and that's what companies are doing. And so there is still a real desire from companies to be thinking aggressively about how they move forward and how they grow.

Having said that, there are current -- crosscurrents in the market. And I think everyone is aware of them and focused on them. In terms of catalysts for activity, certainly something dramatic that happened would slow things down. Right now, what we're seeing in terms of our activity levels is that, that things are as Ralph described, which is, we feel like the activities are every bit what they were. And our dialogues and the frequency and the number of dialogues are where they have been. And so our activity levels continue to be strong, and we feel like we continue to have a lot of activity that we're serving right now.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [9]

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The only thing I would add, Devin, is that the uncertainty is obviously the enemy of M&A activity and ultimately advisory revenues, and we've had 2 sources of uncertainty that you identified: Brexit and trade. They seem to be on the path to resolution.

And I would point out that -- and this is building on John's remarks, that a slow growth economy is a real good environment for M&A activity because, as John pointed out, when companies have relatively low organic growth, and keep in mind, revenues are driven by the -- by nominal growth in GDP, not inflation-adjusted real growth. And we're in an environment where real growth is low and inflation is low. So nominal growth is very low compared to historical levels. And that kind of environment, as John pointed out, causes companies to look for growth inorganically, which obviously, we're a beneficiary of.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [10]

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Got it. Helpful. And then just a quick follow-up, maybe for Bob. If possible, just any way to get any more context around or quantify the level of business that was expected in the third quarter that ended up slipping into the fourth quarter. Anything you could provide there I think would be helpful as we're getting some questions on it. And whether, I guess, also, you're seeing any deals that were maybe expected in the fourth quarter slipping into the first quarter of next year just based on the same dynamic?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [11]

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Well, clearly, on the last question, I don't have a clue because it's October. As we said in our remarks, there were several larger fees that we had expected would close in the third quarter, and they did not. So I don't -- I can't give you more than several or large, but hopefully, you can run with that.

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Operator [12]

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And our next question comes from the line of Steven Chubak with Wolfe Research.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [13]

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So looking at the results through the first 9 months, despite mid-single-digit revenue growth, some of the share gains you cited, the operating margin did contract about 160 bps. I recognize there are some investments you're making in noncomps and new personnel. I was hoping you could speak to your philosophy around the commitment to managing profitability while continuing to invest? And in particular, we're getting a bunch of questions on how to think about handicapping or managing the risk of deferral headwinds if the environment softens further?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [14]

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Okay. Let me take a crack at that. First of all, when you have -- we've said consistently on these calls for the last 10 years-plus, first, Roger and I and now John and I, that we will continue to invest to create long-term value in our -- the per-share value of the company. And we intend to do that through good environments and more challenging environments because, ultimately, that's what will create the greatest per-share value, which is the only thing we focus on over the intermediate to longer term.

So we are in an environment where top line revenues have grown more slowly. We've had to make investments in both space and technology to accommodate the investments that we are making. And I think what we've always said is that, in reasonably good environments, we expect to be able to manage this business in a way that the margins are in the mid-20s. And that's for full years, obviously, not for part years. And in weaker environments, obviously, it'll be somewhat lower than that. And in strong environments, as we had last year when advisory revenues grew 32%, we were, as I believe, 28% -- north of 28%.

So obviously, we're not immune from lesser activity in either of our businesses. But as I said at the beginning of -- in response to Brandon's question, yes, we do see that we are continuing to take market share. And certainly, the long-term per-share value of the company, the growth of that is predicated on us continuing to invest in talent in our business. So we will continue to do that.

It's also true that when you have a -- it's tautological that -- when you have a consistent deferral policy, which we've had over the last many years, and you have a growing business, it's tautological that the amount of deferral in each subsequent year grows a little bit. And we certainly do have that phenomenon here.

I don't know, Bob, if you want to add anything to that?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [15]

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No.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [16]

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Okay. That's very helpful color, Ralph. And just one follow-up from me. I think -- I believe, previously, you had alluded to an expectation that there could be lumpiness in individual quarters, but that revenues should -- there would be higher in '19 versus '18. Recognizing it has been a softer environment, can you update us on your confidence that you should still be able to deliver on that objective?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [17]

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Well, first, I'm virtually certain I never said that. And so therefore, I'm not going to provide an update on something I never said.

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Operator [18]

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And our next question comes from the line of Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [19]

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So I just wanted to follow up on the timing-related issues this quarter. Could you just kind of speak to what the factors were that drove some of the timing issues there? Was it just kind of the market volatility, some of the market dislocations that we saw during the quarter?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [20]

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Really, as you would anticipate, each was bespoke and unique to the transaction, ranging from factors precedented to closing public deals to private companies, prioritizing transactions versus other actions they were taking. So each was bespoke, nothing systemic.

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John S. Weinberg, Evercore Inc. - Executive Chairman [21]

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And as we've always said, this business is lumpy, so in any normal period, there will be transactions that do span over a quarter just because of the lumpiness of the business and really the timing in which they fall. And so it's always going to be the case that there is going to be an unevenness as to how some of the big closings happen.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [22]

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Okay. Great. And then the incremental senior note borrowing this quarter. Can you just give us some additional color as to how that will be used? So I understand it's mainly for investment spend, but can you just give us some color as to where that spend will go towards and particularly on the tech side? And then does this also imply a bit of a shift in the capital return strategy. I mean, you've taken out 5% of shares year-over-year. Is there a potential for that to continue or even accelerate from here?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [23]

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I'll let Ralph respond to, we're not going to use borrowings to change the capital return strategy. But in terms of the deployment of the funds, as we've been talking about, really all year, we've made significant and are making significant investment in the expansion of facilities to accommodate growth in personnel, most significantly, in New York City, but in Houston, Menlo Park, in other cities in both the United States and in Europe.

And in terms of technology, we're working on a number of projects to enhance the efficiency of that business, from analytic tools for our most senior bankers to enable them to provide advice to clients on a more accelerated basis to tools that make our younger people more efficient so a range of technology projects.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [24]

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Yes. And I would say that you can look at the first 9 months of the year to see a continuation of our capital return strategy. Historically, we've tended to pay out, either in the form of dividends or share repurchases, an amount at least equal to our net income. We didn't do that, I think, last year because we've funded some investments, including the year-end purchase of our -- part of our wealth management business and our private capital advisory business, which we now own 75% and 100% of.

But as a general matter, it has been our policy to return at least what we make in adjusted reported net income. We've done that as well for the first 9 months of the year, and we expect that to continue to be our policy, absent some inorganic investment, which we don't really anticipate, which would be a use of cash.

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Operator [25]

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And our next question comes from the line of Jim Mitchell with Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [26]

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Maybe just (inaudible) discussion around SMD headcount. I think over the last less than 2 years, you're up 28% in your advisory business. That's a lot of new SMDs. Could you talk to -- is that still -- in terms of the distribution, I think, in your presentation, you talked to how 19% of current SMDs are outside of strategic M&A. Is that -- is the distribution of those SMBs becoming more and more outside of strategic M&A? And maybe you could describe some of the areas where that's going? Or are we still seeing opportunities across the board?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [27]

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I would say that if you look back 5 or 7 years ago, we would have had a smaller proportion of our SMDs in the Advisory business outside of industry groups or a smaller proportion in what we might consider product capabilities than we do have today. But I would expect that, over the last couple years, that probably hasn't changed very much, and I would not expect that it would change tremendously in the future.

I often say that we're in every business that the large firms are in where you compete solely on the basis of ideas, intellectual capital and relationships, and the only source of revenue is fees. And to the best of our knowledge, we're in all or almost all of those businesses that are not industry coverage today. So we have debt advisory. We've always had a restructuring business. We have equity capital markets advisory. We have hedging advisory. We have tax. We have activist defense. The person we're adding early next year is a specialist in corporate restructuring as opposed to financial restructuring, splits, spins, Morris Trust, reverse Morris Trust, et cetera. But with that addition, I think we're -- unless, John, you have a different view, pretty filled up in terms of our product or expertise capabilities.

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John S. Weinberg, Evercore Inc. - Executive Chairman [28]

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No. I completely agree with Ralph. And I would just state that, if you really look at how we've grown our SMDs, you can look at the Consumer Retail Group, the Industrial Group, which we've recently, over the last 3 years or so, grown substantially. The new addition to adding an SMD in Israel. Those were all production areas. Those were all M&A advisory type situations. And really look at the activity and our deal flow, you'll see that those partners and those groups have begun to generate real activity and revenue for us.

And so we've continued to invest in the areas where we're advising clients and we're able to execute transactions. So Ralph, absolutely right in terms of the fact that we have thought about the content businesses and making sure that we have the content and the service to really provide a balanced, diverse set of advice for our clients. But also, we continue to be very focused on adding people who can get right to the industry sectors and actually give direct advice on M&A.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [29]

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And I would add one other thing that the uptick in the growth in the number of senior managing directors is driven more by internal promotions than it is by external hires. We've been pretty consistent over the years in hiring 4 to 7 external SMDs. This year, as I indicated, we hired 7 in the Advisory business. But the last 2 years, we've had, I believe it was, 8 and 7 internal promotions, which is quite a bit higher than we've averaged over the years before that. And those, of course, don't have the same impact on investment dollars that the external hires do.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [30]

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Jim, it's Bob. Just to make sure we're clear on the point, though, as you look at the teams in terms of capabilities, there's significant opportunity to expand our footprint across all of those. We've invested significantly in restructuring. We're seeing the results of those investments. And I'm confident if Ralph or John found several more exceptionally talented restructuring bankers, we'd be looking for an office for them.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [31]

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Right. I mean, I think the question you get a lot from investors is as you -- I think John mentioned in terms of the balance, is there any way to help us think about within the strategic advisory revenue bucket how much is sort of some of these nontraditional, whether it's restructuring, Capital Markets advisory to think about the size of that business relative to the whole?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [32]

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We've never broken that out. We have given you headcount as a means to think about that. Productivity is staying reasonably constant across the different environments. And Jim, as you know, and as we've talked about with investors for all these years, our approach to serving clients is teams, to bring together coverage teams, sector teams and specialists to work together to meet the business needs. So we don't spend time tracking our restructuring number, a debt advisory number. We want everyone to work together to not break it into pieces. So the number of heads we've given you is a good proxy for that with productivity being constant. And again, there's opportunity to grow those capabilities right in parallel as we grow our sector and coverage teams.

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Operator [33]

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And our next question comes from the line of Jeff Harte with Sandler O'Neill.

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Jeffery J. Harte, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [34]

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A couple from me. One, you commented a few times about the backlog remaining strong. Could you give us any color on where the backlog stands kind of to where it has been in the relative past because the visible pipeline we can look at -- it looks like it's slowed some.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [35]

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Yes. I will repeat what we said. John said it. The backlog remains strong. We very consciously resist pointing out ups and downs. The only thing I will say is that we track a number of things: our unrisked backlog, which is the value of -- if everything that we were working on would happen; the risk backlog, which assigns a probability to each one of those matters, which sounds -- I know I think I've said this before, when I first came here, I thought to myself and probably articulated publicly that we're in a business where things happen or don't happen. So a 25% or 50% probability on something doesn't -- if you add them all up, doesn't seem to make a whole lot of sense, but it tends to be a pretty good predictor of future activity. And then, of course, the most leading indicators that we track are new engagement letters, and the most leading is new conflict clearances. Those are all remain strong.

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Jeffery J. Harte, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [36]

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Okay. And secondly, just on deal size. I mean, you guys have been really killing it on megadeals, especially to any other non-bulge bracket player. But when we look at your market share rank in kind of that $1 billion to $10 billion size transaction bucket, it's been stickier and kind of sitting in the mid-teens. Can you talk a bit to how important improving the market share in that kind of $1 billion to $10 billion bucket is to the next leg up in revenue growth for you guys?

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John S. Weinberg, Evercore Inc. - Executive Chairman [37]

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Well, we clearly are investing time and effort in making sure that we cover companies that are going to be in that zone with respect to deal size. And we've spent a lot of time making sure that we cover the companies in a comprehensive way that we're giving them advice that we're thinking about strategy with them. And so we clearly are focused on it. And it goes with the implication of your question, we do believe that's important. So we are definitely investing time and effort on that. And clearly, we would very much like to continue to grow our business in that category.

With respect to the large deals, we feel very fortunate and happy about where we've been on those. There is absolutely no way to predict that you will continue to be able to do that other than the fact that we think the quality of our calling efforts and the quality of our relationships continue to improve. We spend more time on it. We spend more effort on it. And we believe that we are making progress. And so your question is well taken, and we're very much focused on it.

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Operator [38]

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

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [39]

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Thank you all for being onboard, and we very much look forward to seeing -- or hearing you and talking to you on the fourth quarter call. Thanks very much.

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Operator [40]

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This concludes today's Evercore Third Quarter 2019 Financial Results Conference Call. You may now disconnect.