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Edited Transcript of EVR earnings conference call or presentation 27-Jul-17 12:00pm GMT

Q2 2017 Evercore Partners Inc Earnings Call

NEW YORK Feb 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Evercore Inc earnings conference call or presentation Thursday, July 27, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

* Conor Burke Fitzgerald

Goldman Sachs Group Inc., Research Division - VP

* Devin Patrick Ryan

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

* Jeffery J. Harte

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

* Michael Anthony Needham

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

* Sharon Leung

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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 Second Quarter and First Half 2017 Financial Results Conference Call. (Operator Instructions) This conference call is being recorded today, Thursday, July 27, 2017.

I would now like to turn the conference over to your host, Evercore Chief Financial Officer, Bob Walsh. Please go ahead, sir.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [2]

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(technical difficulty) Chief Financial Officer, and joining me on the call today are Ralph Schlosstein, President and Chief Executive Officer; and John Weinberg, our Executive Chairman. Roger Altman, our Founding Chairman, is traveling.

After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's second quarter and first half 2017 financial results. The company's discussion of our results today is complementary to that press release, which is available on our website at evercore.com.

This conference call is being webcast live on the Investor Relations section of the website and an archive of it will be available for 30 days beginning approximately one hour after the conclusion of this call.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and 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 reports 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 to their GAAP reconciliations, you should refer to the financial data contained within our press release, which, as previously mentioned, is posted on our website.

We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings.

I'll now turn the call over to Ralph.

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

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Thank you, Bob. Good morning, everyone. As we noted in our earnings release this morning, we are pleased with the second quarter results as they represent the eight consecutive quarter of year-on-year growth in revenues, adjusted net income and earnings per share. Our Advisory business continues to be the principal engine driving our growth. Trailing 12 months Advisory revenues are $1.245 billion, up 32% from the 12 months ended June 30, 2016. As a result of this performance, we have gained significant market share versus all public firms that report their Advisory fees separately, including, obviously, all the large firms, and also versus the public independent firms.

Our trailing 12-month market share grew over the last year from 5.3% to an estimated 6.7% versus all public firms and from 17.5% to an estimated 19.3% versus all public independent firms. And the reason we estimate is that not all firms have reported yet. We estimate that we have the sixth or seventh largest advisory franchise in the world in terms of revenues and that we rank significantly higher in the U.S. We are one of only 3 global independent investment banking advisory firms with well in excess of $1 billion of Advisory revenues.

Our market share gains have been fueled by the extraordinary talent of our senior Advisory professionals, who again generated industry-leading productivity, and also to the residents of our independent, senior-level teamwork-oriented Advisory model with corporate and financial leaders, with boards of directors and with private equity investors. We continue to invest significantly in our future growth and success by promoting talent from within and by attracting significant new talent to both our Advisory and equity businesses.

In Advisory, we expect to hire at or above the top end of the 4 to 7 Advisory senior managing directors that we normally have hired each year. And with the addition of Paul Stefanick, who will join us at the beginning of October, we will have 5 former investment banking heads serving our clients at Evercore. And we remain strongly committed to returning more than 100% of our earnings each year to our shareholders through dividends and share repurchase. In the second quarter, we repurchased 2 million shares at an average cost of $72.99, bringing total shares year to -- repurchased year-to-date to 3.1 million shares at an average price of $74.76. With these repurchases, we already have offset the shares issued for year-end compensation in February of this year and have made a significant dent in offsetting shares issued to attract new talent and for the ISI acquisition.

Let me now recap briefly our firm-wide financial results for the quarter and year-to-date. Second quarter net revenues were $372.7 million, up 7% versus the same period last year and a record for the second quarter. Adjusted net income, also a record for the second quarter, was $53.8 million and earnings per share was $1.6, also a record for the second quarter. These results are up 1% and 2%, respectively, from the second quarter of last year, which was also a very strong quarter. For the first half, we achieved record revenues and adjusted net income of $757.4 million and $137.4 million, up 25% and 59%, respectively. First half earnings per share were $2.68, an increase of 60% over the prior period.

You will recall that we adopted the new accounting standard for stock compensation awards at the beginning of the year, which lowered our reported tax rate and increased our earnings in the first quarter. Excluding the effect of this change, earnings per share in the first half increased 31% to $2.19, still by far the best first half in our history. The accounting change had a nominal effect on our second quarter results.

Our compensation ratio was 59% for the quarter and the first half. As we noted last quarter, we increased the compensation ratio modestly from last year to reflect the anticipated cost of new hires in 2017 as well as the expectation of a modestly higher compensation ratio in our Equities businesses. Non-compensation costs were $60.8 million or 16.3% of revenues, down 1% versus the prior quarter and up 7% year-over-year. The year-over-year increase primarily reflects headcount additions within our global Advisory business.

Operating margins for the second quarter and first half were 24.7% and 24.9%, respectively, in line with prior year results. As we have discussed in the past, quarterly revenues are influenced by the timing of transaction closings. I would reiterate, as I often do, that it is important to evaluate our performance on a trailing 12-quarter basis -- 4-quarter basis, 12 months.

Let me now turn the call over to John to discuss our Advisory business and the M&A and market, generally.

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

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Thank you, Ralph, and good morning. Our Investment Banking business had a record second quarter and first half. Net revenues were $356.7 million for the quarter, a 10% increase over the same period last year. For the first half, net revenues were $723.2 million, a 29% increase over 2016. The operating contribution was $89.2 million for the second quarter, an increase of 6% over the same period last year, and $180.8 million for the first half, a 36% increase. Our operating margin was 25% in the quarter and the first half. Advisory fees were $292.7 million in the quarter, the highest second quarter in our history and 17% higher than 1 year ago.

For the quarter, Advisory revenues include 61 fees equal to or greater than $1 million in comparison with 58 fees in Q2 of 2016. Advisory revenues in the first half of 2017 include 114 fees equal to or greater than $1 million, up from 99 fees in the first half of 2016. The number of fee-paying client transactions in quarter 2 of 2017 was 192 compared to 210 in quarter 2 of 2016. The number of fee-paying client transactions in the first half of 2017 was 296 matching the number of fee-paying client transactions in the first half of 2016.

The composition of Advisory revenues for the quarter reflected strong contributions from multiple sectors, particularly energy, TMT, health care and financial services. We're also starting to see an uptick in the number of general industrial and consumer mandates, reflecting our investment in talent and the broadening of our capabilities over the past years.

In restructuring, we continue to be active in energy and across many other industries and believe that the recent sell-off in the price of oil, from that we may see an increase in energy restructurings. We saw healthy activity in the capital Advisory business in the quarter and the first half, particularly in corporate debt and equity and for alternative investment fund.

We remain active globally, earning 30% of our Advisory fees in the first 12 months from clients located outside the US. We continue to expand our global reach to important strategic markets. Productivity of our Advisory Senior Managing Directors was $16.2 million globally for the 12 months ended June 30, 2017, a 29% improvement from the $12.6 million for the 12 months ended in June 30, 2016. For ECM, we remained active with underwriting revenues of $9.2 million for the quarter. For the first half, revenues were $19.1 million, up from $16.5 million in the first half of 2016.

Year-to-date, we participated in 27 underwriting transactions, up from 18 in the first half of last year. Importantly, we continue to make progress in migrating our role to bookrunner and have 12 bookrun deals year-to-date with a solid pipeline of bookrun assignments.

In the second quarter, we announced 2 additional Senior Advisory Managing Directors. Paul Stefanick will join the firm as a senior leader focusing on large multinational clients and Tannon Krumpelman will strengthen our financial services practice in the U.S. So far this year, we have announced 5 new Advisory Senior Managing Directors helping us achieve our strategic objectives of expanding sector coverage and broadening our global footprint. Active discussions with other highly talented candidates are ongoing, and we expect to have a strong recruiting year. As Ralph stated, adding new Advisory Senior Managing Directors at or above the high end of our expected range of 4 to 7 new recruits per year. We ended the quarter with 85 Advisory Senior Managing Directors.

Our strong results, continued investments in talent and a favorable market environment allowed us to maintain a strong position in the Advisory league tables among independent firms. Year-to-date, we are #1 among all independent firms in the U.S. in the dollar volume of announced transactions, and we are #3 globally, somewhat behind Rothschild and Lazard.

M&A market conditions remain favorable in the first half of 2017. The dollar volume of announced transactions in the $1 billion to $5 billion range increased 13% globally in the first half of 2017, while the number of such transactions increased 14% versus last year. The number of the very largest transactions, greater than $5 billion, was essentially flat through -- flat this year to-date, though the dollar value declined year-on-year. Looking to the second half of the year, we are optimistic about the M&A landscape and continue to believe that the core elements that drive healthy level of M&A volume remain in place; low interest rates, high equity prices, available credit, growing economy and strong business confidence. As always, we will monitor developments that could impact the strength of the M&A markets, including political dynamics that may negatively impact the stability of key global markets.

In other relevant markets, credit markets remain broadly accommodative, allowing borrowers to extend maturities and M&A transactions to be financed. U.S. equity issuance increased 25.6% in the first half of 2017 relative to the prior year. U.S. equity trading volumes declined 12% in the first half of 2017. Fees paid for U.S. equity research continue to decline. In this environment, our teams are active, and we continue to advise on many of the leading transactions in the marketplace, and our backlog remains strong.

Let me now turn the call back to Ralph to discuss the equities and Investment Management businesses.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [5]

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Thank you, John. Let me start by reviewing the equity business and a number of strategic decisions we have taken that we believe will positively impact our future performance. Evercore ISI contributed net revenues of $58 million in the quarter, including $4.5 million attributable to underwriting. Secondary revenues of $53.5 million were down 6% versus last year, less than the decline in the broader market volumes. Overall, the business produced operating margins of 19% in the quarter. For the first half of 2017, the business contributed net revenues of $112.6 million, including $9.5 million attributable to underwriting. Secondary revenues of $103 million were down 10% versus last year, again less than the decline in the overall market volumes. The business produced operating margins of 17% for the first half of the year.

The equities business continues to deliver on the strategic objectives established at the time of the acquisition of ISI. Our leading research capabilities have enhanced our Advisory recruiting efforts in key sectors, including technology, energy and health care, and they have meaningfully strengthened our relationship with many corporate entities. They also have strengthened meaningfully our ECM capabilities. The business continues to contribute positively to our operating earnings through a -- though at slightly lower margins than we had hoped. This is driven in part by lower trading volumes in the U.S. equities business in total and in part by declining research budgets of our clients.

In this challenging environment for the U.S. cash equities business, we are gaining share in the fee pool. Our research products continue to be highly valued by our clients, and we believe that the market will continue to present opportunities for us to selectively add exceptional talent, as we did in July, with the addition of Josh Schimmer to launch coverage of the small and mid-cap biotech sector. We remain in active dialogue with others and believe the business will continue to gain share and further enhance the overall performance of Evercore.

Seizing the opportunity to add talent selectively, thus, however, create a challenge under the performance considerations structure put in place at the time of the ISI acquisition, specifically accretive investments in talent have the effect of building value over the longer term, but deluding the H exchange ratio over the 3-year measurement period from 2017 through 2019. In order to address this potential conflict between Evercore's desire to build value in this business and the financial interests of our key employees, we have concluded that it is best to fix the exchange ratio with the existing H interest at 47%, while retaining all of the other elements of this equity, including the service vesting requirements. This ratio represents a fair exchange value and is slightly lower than our expectations of share issuance at the end of the first quarter and will result in the aggregate consideration being issued in connection with the ISI acquisition of 5.3 million shares considerably below the original 8.2 million max.

Let me now briefly turn to Investment Management. Investment Management reported net revenues and operating income of $16 million and $2.9 million for the quarter. For the year-to-date, net revenues were $34.2 million and operating income was $7.8 million. The year-to-date operating margin was 22.9%. These results predominantly reflect contributions from our wealth management business in the United States and the money market Investment Management business in Mexico. Assets under management for consolidated businesses increased to $8.7 billion in the second quarter, an increase of 3% from the first quarter of this year. As we have said consistently, our focus with respect to Investment Management remains on building our Wealth Management business and on enhancing our money management business in Mexico.

Earlier in the quarter, we announced the sale of our Institutional Trust and Independent Fiduciary business to Newport Group, a portfolio company of the private equity firm Stone Point Capital. This business was initially acquired in 2009 and had become one of the leading Institutional Trust and Independent Fiduciary businesses in the country. We decided to sell the business for one simple reason: potential conflicts with our Advisory business were impeding its growth. We are confident that Newport Group will provide an ideal home to serve the clients of this business in an exceptional manner and a great home for the outstanding professionals in this business.

Bob will provide further comments on our GAAP results as well as our noncompensation costs and several other financial matters.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [6]

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Thank you, Ralph. Starting off with our GAAP results, net revenues on a GAAP basis are $370.5 million and $757.7 million, were a record for a second quarter and 6-month period just as they were a record on an adjusted basis. Net income attributable to Evercore Partners Inc. was $18.2 million for the quarter and $99 million for the 6 months. Consistent with prior periods, our adjusted results exclude certain items that are directly related to our acquisitions and dispositions, including costs related to our equities business as well as impairment charges relating to our investments in G5 in Brazil and the sale of the Institutional Trust and Independent Fiduciary business, as Ralph just discussed.

As in prior quarters, we adjusted for costs associated with the vesting of LP units and interests granted in conjunction with the ISI acquisition. For the quarter, we expensed $5.7 million related to the Class E LP Units and $11.3 million related to the Class H LP Interests.

During the quarter, following a sustained period of economic and political instability in Brazil and after concluding that the expected recovery in the M&A markets would be delayed for the foreseeable future, we updated our assessment of our carrying value of our investment in G5, resulting in an impairment charge of $14.4 million. Also during the quarter, we incurred an impairment charge of $7.1 million related to the goodwill in our Institutional Asset Management business reporting unit following our commitment to sell the Institutional Trust and Independent Fiduciary business.

You will recall that historically, the Institutional Asset Management reporting unit initially included Atalanta Sosnoff, Evercore Trust Company, Evercore Asset Management and Evercore Casa de Bolsa. At the time of the restructuring of our investment in Atalanta Sosnoff, we allocated the goodwill from that acquisition among Atalanta Sosnoff and the remaining businesses in the reporting unit. We are recognizing an impairment charge in this quarter as the fair value of the Institutional Asset Management business, when the Institutional Trust and Independent Fiduciary businesses excluded, is lower than the remaining book value, including goodwill. We anticipate reporting a gain on the sale of the Institutional Trust business in our GAAP results at the time of the closing of that sale.

Turning to equities performance and the unit exchange. The adjusted operating margins, which governs the ultimate payout of the G and H units with the equities business was 11.5% for the 6 months, up from 8% in the first quarter. Following our quarterly review of the outlook of the Evercore ISI business, we concluded that at this time, it wouldn't be appropriate to adjust the number of shares that we included in the second quarter in our share count denominator related to the equities business. That, of course, will change in the third quarter. In July, our board approved the exchange of all of the outstanding Class H LP interests for 1.95 million Class J LP units. The Class J LP units contain the same service vesting terms as the Class H interest. These units do not have performance thresholds and the holders are entitled to vote on shareholder matters going forward. This transaction was executed at fair value.

Turning to financing. In June, we successfully renewed the line of credit on the same terms as the expired line. Noncompensation costs on a firm-wide basis, looking at it, our employee were 38,000 for the quarter, down 3% from last quarter and up 1% year-over-year.

Turning to taxes. Our adjusted tax rate for the quarter was 37.9% as compared to 10.9% in the prior quarter and 37.5% in the same period last year. As Ralph mentioned, we adopted the new accounting for stock compensation awards at the beginning of the year, which increased our earnings in the first quarter. Excluding the effect of this change, earnings per share in the first half increased 31% to $2.19. The share count on an adjusted basis for the second quarter was 50.6 million shares, lower in comparison to the prior quarter, principally driven by share repurchases. On a GAAP basis, this share count was 44.7 million shares. Ralph had mentioned the shares repurchased in the open market in his remarks. At June 30, we had remaining authority to repurchase 4.5 million shares.

And finally, our cash position remains quite strong as we hold $469.6 million of cash and marketable securities at June 30, with current assets exceeding current liabilities by approximately $404 million.

With that, we will turn the line over to you and take any 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 Devin Ryan with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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I guess first question here is just on some of the ancillary Advisory activities that maybe don't fit in the box as much as maybe M&A, Advisory, and you guys are doing a lot more of that. Can you just talk about the opportunity with some of these businesses, like capital structure, Advisory and capital advisory and activism defense? And just help us think about, if you can, the fee pools? Because you still don't have that many bankers allocated to those areas, but I think they're contributing maybe more than they have in the past. So just trying to kind of reconcile because I think that's harder for all of us to wrap our arms around since those deals were captured as well.

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

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All right. Let me start by talking a little bit about the strategy and then try to be a little responsive to your question. I think I've articulated and John has certainly and Roger completely agreed with this, I sometimes glibly say that we're in every business that Goldman Sachs is in that meets the following criteria: you compete solely on the basis of your ideas; your intellectual capital and your relationships; and the only source of revenue is fee revenue. That strategy has the impact of allowing us to serve our clients on a broader array of issues than we might have been able to do 4 or 5 years ago. So we've added equity capital markets capability, and that gives us the ability to advise our clients on how strategic things that they undertake might affect the value of their equity, how they might finance those activities through the equity markets. We've added debt capital markets advisory capabilities, which has the same effect on the debt side as opposed to the equity side. We've added deep capabilities in the tax area since many transactions have tax implications or tax complications. So for our standard M&A or restructuring advisory client, we have an ability to advise them much more broadly, not just on the strategic transaction itself but on capital structure and on financing of that transaction. That does 2 things: the first thing it does is in circumstances where we are the initial or the first trusted adviser to a client; it allows us to maintain a sole advisory position for a much longer period of time because the expertise that traditionally may have been more resident in a financing firm or a large financing firm, we have very senior people who come from those backgrounds who can assist our clients to a far greater degree than would have been the case historically. So in that circumstance, it leads to us being able to protect our position for a longer period of time or perhaps all the way through the transaction, and therefore, to earn the entire fee as opposed to a shared fee. What it also does is it presents opportunities for us to get compensated where we are in fact raising capital to facilitate transactions that our clients might undertake. So for example, we had a transaction, actually I think it was closed this quarter, not a huge deal, I won't go through the companies, but it was a $700 million market-cap company buying another $700 million market-cap company. We raised $150 million dollars of equity in a pipe for them. We negotiated -- I think, it was a $550 million debt facility. We actually advised them on hedging the currency exposure because this company that they bought happened to be in a different exchange and it had a different currency. And the net effect of that was that what otherwise might have been a transaction where we would have earned x, as a percentage of the size of the transaction, we aren't closer to 2x because we got compensated for providing -- raising the capital that facilitated the transaction. So the capabilities that we develop allow us to be a much richer adviser to our clients so that we can sustain a trusted advisory position and a sole advisory position for a much longer period of time, and they also provide us with some -- from time-to-time some not inconsequential fee opportunities as well.

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

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The only thing that I would add to that is that, for example, in something like the business we have on the activist side, what that really does is it allows us to build deeper, more consequential relationships with clients. And also with that capability, we can have more access to senior management teams and board. And so where that will translate is necessarily into market share. So one way to think about some of these businesses is that these capabilities will, according to our strategy and plan, allow us to increase market share.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [5]

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I would -- I'm sorry to add one other thing to what John's comment is that the activist's practice and it's sort of the activist part of that, it is most visible to the external world. But the way we have thought about that is that the connectivity with institutional shareholders is becoming increasingly important to our corporate clients who are public. And so that connectivity, which we have through our banking team, and obviously as the only independent firm that has a research-based equity business, allows us from time-to-time to assist our clients in their communication with their institutional shareholders, whether that communication is surrounding an activist, situation or whether it's surrounding a transaction that they hope to undertake that may require some explications to their shareholders. So we do look at that -- the ability of Evercore to play that role on behalf of our clients as a significant advantage of the firm.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [6]

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Okay. Terrific color. And then just with respect to the change in the structure of the equity units relative to the ISI transaction, I guess the question is why do it at this moment? You obviously made a decision in the first quarter to change the assumption, but not -- why not continue to see how it plays out and then reassess versus do it at this time? Just curious on a timing perspective? And then just want to make sure that I understand the actual share count, for modeling purposes, it just goes down by 100,000, if that's correct?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [7]

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Yes. The answer to your second question is yes, very simply. It goes down by 100,000. And the reason we did this is very simply -- we do believe and see that over -- with some of the changes in the equity markets that there will be some opportunities for us to perhaps invest a little in the business to create value that may not be immediately manifest, just like any investment we make in this business winds up costing money at the outset, whether it's in banking or in research. But what we didn't want to be in a position of was where the firm was prepared to make and felt we could earn a good return by making some additional investments in that business and have the effect of those investments be that they were reducing the consideration that would have been paid to professionals who we have working in that business, who are really important to us. And so we just felt that at this point in time, we were better off fixing the consideration and running the business to create value 2 to 3 years out, just as we do in our Advisory business rather than having everyone in that business counting every bean and marking to market their equity with every hire we make. So it's really to eliminate that potential source of tension.

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Operator [8]

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And our next question comes from the line of Conor Fitzgerald with Goldman Sachs.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [9]

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Just wanted to follow up on some of your comments around restructuring. I think you mentioned seeing a pick up given the recent move in energy prices or that you could. I just want to clarify the period you were referring to when you talked about activity picking up. Is that more a comment around more restructuring lines for the back half of 2016 or kind of the peak of the first half of last year? And then maybe more broadly on the same point, some of your peers have talked about restructuring being a headwind for their revenue growth from here. I know your business mix and your stage of growth in that business is a little different. But would just like to hear your comments on whether you think that can be a growing line item for you from here?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [10]

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I think our remarks were really focused on the energy business particularly that there had been a wave of energy restructuring and the energy price had recovered somewhat, then it fell again, and it fell to levels that we've thought there could be not a second wave, maybe a second high ripple. And now in the last few days since we drafted this press release, energy has recovered a little bit. So I think our view on the restructuring business is not dissimilar from what you articulated as the comments of our competitors. We think it's a very solid business right now. Given the debt markets and the equity markets, it certainly doesn't seem like that will be a source of growth in our Advisory revenues over the next 2 or 3 quarters, but we also see it as a healthy business at the moment.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [11]

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Okay. That's helpful. And then I did want to circle back to the ISI deal. One of the big selling points at the time of the deal was that the consideration was dependent on the financial performance and as you mentioned the financial performance has been tracking below expectations. So just given some of the uncertainties this business faces over the next several years, just wondering why you wouldn't keep some of that downside protection for shareholders?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [12]

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Well, I think you always have to balance a little bit more downside protection, which we might have gotten. I mean, at 47%, we're already well below half -- the consideration that was going to be due under the Hs versus the tension that, that might have created between the people who we consider the core of the franchise and the firms' desires. And we didn't want to be in a position with a lot of change going on in the equities business that we were frozen strategically for 3 years so that we could deliver the absolute max under the Hs. I think -- that's a judgment call, I feel very strongly that it's the right call. I think it's also fair to say that the mechanism has largely worked at this point. We had 8.2 million shares of original consideration. We're now down to 5.3 million. The share price that the deal was struck versus today's operating income, it's roughly 7x pretax. If you use even today's share price, it's a little below 10x pretax versus today's operating income. So we've -- by the reduction of 2.8 million shares, we've effectively received the lion’s share of protection that we hope to get, and we just made a judgment that whenever modest additional protection was available to us, that, that was offset by the benefits of having everybody rowing in the same direction and having a certainty of the consideration be visible to our key professionals.

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Operator [13]

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And our next question comes 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 [14]

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One more on the ISI here to start out. You made reference to the fact that you want to do -- adjust this structure to allow for some investment. Is there something specific that you all are considering? Or is that more of a broad kind of vague statement just in case?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [15]

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It's a broad vague, vague statement. No, look, I think, Brennan, as you know, as everybody on this call knows better than anyone, there is a lot of change underway in this business. There are some cyclical issues clearly in terms of the low VIX and low trading volumes. But there are some very big secular issues and changes brought on by MiFID II by the move from active to passive. And we do think that there will be selective opportunities for us to, a, either reposition our business or to add very, very high-quality talent. And the research businesses is going to become, in our view, very much like our Advisory business, that the best talent will win. And if we have opportunities to add really high-quality talent, the nature of that is just as it is in our Advisory business, it flows right through the income statement, it depresses exactly the metrics that we're used to calibrate the Hs. And we just didn't want to be in a position where we could hire a fantastic II -- or ranked analyst with really good future economics for us and have the people working in the business say, "Well, this person is great. He'd be a great colleague, but that's going to cost us x dollars." That's not a good dynamic. And since the vast majority, and I do mean that, the vast majority of the protection that was built into the structure has already taken place. We just felt that the benefit of taking what I just described off the table versus whatever modest additional decline in consideration might result that we were better off fixing it. It's that simple.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [16]

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Yes, I totally appreciate that. In the spirit of some of those changes that you identified in that business, have you guys considered switching to a subscription model? I mean, your research talent is clearly very, very strong. And trading capabilities with a strict adherence to no balance sheet use are limited in how much they can actually monetize, right? So why not reduce some of the investment on the trading side and shift over to a subscription model or largely a subscription model which could allow for possibly better economics by reducing costs without hurting your top line very much?

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

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I think, Brennan, those are all really good questions. And I think our current posture is to very, very carefully and thoroughly monitor what is going on in both the evolution of the business and the speed with which that evolution occurs. My suspicion is that at some point, unless the regulatory world changes a lot, that our business, at a minimum, will take on some elements of the subscription model, a minimum payment from every client for receiving the breadth of our research and some tiering of clients depending upon the degree to which they utilize our intellectual capital. So these are things that we're right in the middle of discussing and thinking about, and I would say that our discussions and thoughts are broad and looking toward the long view. That's not a very specific answer, but I am giving you credit for good questions.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [18]

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Okay. I guess I'll take what I can get. One question, if I could, just on the core business, which really was impressive this quarter. Can you talk about the level of dialogue? We hear that Europe is picking up. We hear that there's a little bit of reticence in the U.S. given policy uncertainty. Are you seeing some of that reticence hold back your -- the willingness to announce a deal? Are dialogue still robust? Could you give us just maybe a little color on that front?

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John S. Weinberg, Evercore Inc. - Executive Chairman [19]

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Sure. We're seeing very healthy dialogues. And I would say that whereas there is some reticence in terms of what could happen with the environment and certainly the political underpinnings in that phase, there is no question that there is consistent recovery in Europe and the United States. And as a result, the confidence level at the CEO level as well as the access to markets are at very healthy levels. And so we think that there is, in place, the seeds of a very healthy next quarter and 2 quarters. Having said that, there is uncertainty with some of the wins, whether it's tax or whether it's political. So those are things that will play against that. But our dialogues are very healthy right now, and we're feeling very optimistic about the assets we're having to big companies and also the fullness of those discussions.

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Operator [20]

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And our next question comes from Steven Chubak from Nomura Instinet.

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Sharon Leung, [21]

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This is actually Sharon for Steven this morning. Just wanted to ask about some of the businesses in Advisory. You've noted in the past kind of a 90-10 split between Advisory and restructuring. And just given the growth in some of the other businesses, such as -- some of your other businesses, how we should think about that rate down moving forward?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [22]

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Well, I'm going to beg to differ that we've never ever articulated a split between restructuring Advisory and every other part of Advisory. But I think the -- if you look at the relative contribution that restructuring has made to our Advisory business over the last decade, the periods of peak contribution were obviously in 2008 and 2009 and 2010, and the last couple of years have been not the absolute lows but have been more towards the lower end as a percentage. And I think as we indicated in response to an earlier question, we don't see that changing in the immediate future because the financial markets are quite accommodating. And while there are sectors where there are stress, energy being one of them highly geared to the commodity price, retail being another, and retail is an interesting one because if you'll note, it's not an infrequent occurrence that the result of a retail restructuring is a liquidation of the business, which is not something that we are normally deeply involved in. So there certainly is not the economic environment -- economic weakness on a widespread basis that would cause restructuring to become a more meaningful part of our Advisory revenues at this point.

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

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The other thing that I would add is that we've continued to invest in our restructuring efforts. And I think our view is that this is a very important part of our business and that having high-quality professionals out there talking to companies and addressing situations is very positive. And so if part of your question was, is the relative strengths and importance of that business going to be an important part of the capability would bring the clients and really our financial performance, the answer is absolutely yes. And it continues to be a very important strategic initiative to us, and we feel really good about the team we've got on the field right now.

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

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I suspect as you saw, we hired Roopesh Shah earlier this year from Goldman. He ran restructuring at Goldman. If I'm not mistaken, I think we're the only independent firm that has hired a partner in restructuring this year.

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John S. Weinberg, Evercore Inc. - Executive Chairman [25]

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Operator, do we have more questions?

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Operator [26]

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And our next question comes from Michael Needham with Bank of America Merrill Lynch.

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Michael Anthony Needham, Keefe, Bruyette, & Woods, Inc., Research Division - Former Associate [27]

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So I guess first on your push in industrials and consumer. I think on your prepared remarks, you said there are some early signs that you're winning deals in those areas. Those are sectors you haven't had a lot of dedicated bankers, but they're big people. Can you just update us on where the team stand today? How long do you think they're going to remain kind of subscale? Is it -- you're making a big enough push that the team's gets filled out relatively quickly.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [28]

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Sure. I would start by saying that you saw that we hired Paul Stefanick who is a major banker in the industrials area. And we have several other conversations, and we've also continued to organize so that we have an effort that is really focused on clients who are participating in activities in the industrial side. You saw that we hired Ira Wolfson, and so we're really starting to build out that team. On the consumer side, we have capability. And clearly, there are things like our activists effort, which have really allowed us to enter in. So for example, you saw our participation in the whole foods situation, and it's an impending sale to Amazon. And that's just an example of the kinds of activities that we're starting to play in. And you know, the more experience you get in sectors and start to build up momentum, the more dialogues become available to you, and that's really what we're seeing. And so we continue to be focused on those areas. We will continue to build them out, but we see really good progress. And you can rest assure that we're continuing to focus.

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Michael Anthony Needham, Keefe, Bruyette, & Woods, Inc., Research Division - Former Associate [29]

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Okay. Got it. And one more on, I guess, progress versus the bigger picture from goals. I think you like -- one of the goals is top 5 adviser in M&A, capital markets, Advisory and restructuring. You've obviously made progress, particularly in M&A Advisory. I'm just wondering how much bigger does the firm need to get to reach that top 5 consistently. I think the last 12 months are particularly strong. You put up 300 million Advisory fees-ish for the last 4 quarters. That was like maybe you'd hit in 4Q in past years. I think some people might be discounting the strengths. So I was just wondering, are these market share trends going to continue from here.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [30]

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Well, if you look at our position, we are -- if you look at the end of the first quarter, trailing 12 months, we are #7 in the world in Advisory revenue; #6 is Rothschild, they are about $95 million ahead of us; #5 was BofA, they were about $125 million ahead of us; and #4 was Lazard, which is about $160 million ahead of us. Rothschild hasn't reported yet. And BofA and Lazard, actually, have very strong second quarters. So I'm a little surprised actually, but I suspect that the gap between us and Lazard and us and BofA will be a little wider on a trailing 12-month basis at the end of the second quarter, which is why you don't ever focus on one particular quarter. If you look at our Advisory business versus BofA, for example, in 2015, we did 56% of the revenues that they did in Advisory; and in 2016, we did 85%. So that was a pretty large move. My hope is that over the next 2, 3 years, the momentum that we've had, which is pretty consistent, will allow us to get in the top 5 or top 4 among all firms globally in the Advisory business. Our position in the U.S. is already top 5, because both Lazard and Rothschild report their Advisory fees by region, we don't, but we know our business is bigger than both of theirs. And in the case of the BofA, we only can estimate what share of their revenues are in the U.S. versus outside the U.S. of their Advisory revenues. So this is a tourist business, not a hair business. We need to make steady progress. The key to study progress is continuing to internally promote our strong up and coming talent and define A+ professionals to fill the holes that we have in our business. And we still have a -- the last question referenced consumer in general industrial side. I think as John indicated, we're going to make a fair amount of progress this year in closing or strengthening our capabilities in general industrials. I think -- since I've been here, which is now a little over 8 years, consumer has been on at or near the top of the list of priorities, and we haven't found the right team yet. The one thing that is different about Evercore is if you're are a big firm and your consumer team leaves, you have to go out and find the best consumer team you can get because a big firm without a consumer team is unacceptable. In our case, because what we do is not easy, we have to find a team that can actually compete really effectively using only their ideas, their intellectual capital and their relationships. And that's a very limited number of people, and so the posture we have always taken toward recruiting is, if we can't find an A+ or and A, we wait. It's damn frustrating to be sitting here and talking about consumer for the eighth consecutive year, but hiring a B+ really isn't going to move the needle in terms of revenues, and we've learned that from experience.

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Operator [31]

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Our last 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 [32]

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Just a couple of cleanups, I think, for me. The third-party trust business being sold, can you help us size the actual business being sold a little bit this far? And what kind of impact it'll have or could have?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [33]

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Yes, Jeff, we don't break down numbers to that degree of detail. I guess I would contextualize it as the Investment Management businesses that we have don't dictate the results of our firm really at all. And this is an interesting but not a driving part of those businesses.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [34]

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We will be paying taxes only, sadly.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [35]

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Much for the CEOs to grin.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [36]

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Much to my grin.

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Jeffery J. Harte, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [37]

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And though this was kind of touched on, but the growth has been approximately, you move into a top 5 or 6 revenue market share and the fact that I'm asking this question is kind of a compliment to you guys, but I mean, as you move up to 1 billion, 2 billion, 3-plus billion, at what point in time does the law of large numbers start to kind of drag more on your growth rate? Or is there really that much opportunity left out there once you crack the top 5?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [38]

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Well, the only thing I would say is that there are some pretty fundamental changes going on in the role of Advisory. I think if you look at so far this year or this quarter, 1, 2, 3, 4, including ourselves, independent firms have reported, all 4 of them have had very powerful increases in Advisory revenues for the first half of the year. And the 5 U.S. firms have reported and 4 of them were kind of flattish and one of them, BofA, actually had pretty strong quarter, also Citigroup had a pretty good quarter off of a relatively low base. But if you look at the share, the whole independent group is taking share from the whole large group. And I think that, that raises questions, in my mind at least, what is the ceiling on Advisory revenues for an independent firm, and I think that ceiling, in my view, continues to rise. And it continues to rise because more and more very, very talented people are willing to consider practicing their craft at an independent firm. And it continues to rise because we did what -- we've done what we've done, and this is -- John has been extraordinarily instrumental in getting us to focus on this and to recalibrate a little bit, but we probably have meaningful client relationships with 1/3 of the largest companies in the country and around the globe. So they are notwithstanding our success and our growth. There are meaningful companies that we've had anywhere from casual to no interaction with. And so those, without telling you about big swathe, consumer industrial, there are just a bunch of companies that we have real opportunity with. And over the next couple of years, 3 years, the number of those with whom we have casual or no interaction is going to go down, and that presents clearly opportunity for us to grow. I also think that the resonance of our model, truly independent, no conflict, huge commitment to confidentiality, is really important, increasingly important, to clients. If you look at the whole foods transaction that John mentioned earlier, that was announced on a Friday, on the day before whole foods went down 6% in share price because the whole sector went down because Kroger announced disappointing earnings. And if you want to be amused, turn on, get a tape of CNBC the morning that, that deal was announced, and there was not a peep about that deal until the press release went across the tape. And Jim Cramer, I think, it was -- said, "Oh my God." And so clients hugely appreciate that because leaks in transactions are the pain of every CEO on board because you want to get these things on a confidential basis. So I think there are things about our model, which I said at the outset, that have real resonance, and I do think they continue to create opportunity for us, but John's the real expert in this, so I'll let him make the last remark.

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John S. Weinberg, Evercore Inc. - Executive Chairman [39]

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No, I would say that from our perspective and looking at it, there really isn't a ceiling for us at this point and certainly not within any kind of distance that we could imagine at this point. It's really going to come down to focusing the right people on the right opportunities and continuing to work hard. It will be very, very competitive as it always is, but there really isn't a limit at this point as to how big we could get in terms of market share in the revenue side. We'll never be a competitor for the top 2 or 3 or 4 on the league table side because we're not providing balance sheet. And as you all know, in league tables, balance sheet can often be one of the things you trade off to get league table credit. But as we look at the landscape and our opportunities, the opportunity set continues to be very rich, and we're very excited about it. But as you know, in this business, it is very competitive, and we've got to compete well and win.

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Operator [40]

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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 [41]

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Okay. Thank you all for your attention. And I know it was really tempting to be on the Lazard call, but we appreciate you showing up for ours, and we'll see you in October.

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Operator [42]

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This concludes today's Evercore Second Quarter and First Half 2017 Financial Results Conference Call. You may now disconnect.