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Edited Transcript of EVR earnings conference call or presentation 26-Apr-17 12:00pm GMT

Q1 2017 Evercore Partners Inc Earnings Call

NEW YORK Feb 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Evercore Inc earnings conference call or presentation Wednesday, April 26, 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

* Michael Anthony Needham

BofA Merrill Lynch, Research Division - Associate

* Steven Joseph Chubak

Nomura Securities Co. Ltd., Research Division - Former VP

* Yian Dai

Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP 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 First Quarter 2017 Financial Results Conference Call. (Operator Instructions) This conference call is being recorded today, Wednesday, April 26, 2017.

I would now like to turn the conference over to your host, Evercore's 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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Thank you. Good morning, and thank you all for joining us today for Evercore's first quarter financial results conference call. I'm Bob Walsh, Evercore's Chief Financial Officer. And joining me on the call today are Ralph Schlosstein, President and Chief Executive Officer; and John Weinberg; our Executive Chairman. After our prepared remarks, we will open up the call for questions.

Earlier today, we issued a press release announcing Evercore's first quarter 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 beginning approximately 1 hour after the conclusion of this call for 30 days.

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 their GAAP conciliations, you should refer to the financial data contained within our press release, which, as previously mentioned, is 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, and good morning, everyone. Roger is traveling today and is unable to join the call. I'm in Europe, and John and Bob are in New York. So if we all start talking at the same time, you will understand why. Let me start by saying that we are pleased with our very strong first quarter results. In advisory, we experienced the strongest ever start to a year. The market environment remained favorable and our activity levels were high across diverse industry groups and capabilities, further demonstrating that our investments in talent, broader industry and geographic coverage and broader product capabilities are delivering value to our shareholders.

Our results also demonstrate that our business model of providing senior level, independent, conflict-free advice to clients continues to resonate with these clients. Recruiting is off to a solid start in 2017. We have announced 3 advisory Senior Managing Directors: Masuo Fukuda, who will help expand our position in Japan. Ira Wolfson, who will strengthen our industrials practice and Roopesh Shah, who will add to our expertise in restructure. Ira and Fukuda-san are already in a active dialogue with clients and prospective clients and Roopesh is expected to join us in the next week or so. We continue to have active discussions with a meaningful number of SMD candidates, and we are optimistic that 2017 will be another successful year of talent additions. We ended the quarter with 83 advisory Senior Managing Directors.

Our advisory revenues in the first quarter were $130 million above advisory revenues in the first quarter of last year. Closing [on a] trailing 12 months advisory revenues to exceed $1.2 billion. Based on announced advisory revenues from the 5 large U.S. universal banking firms and Street expectations for the European firms and our independent competitors, we anticipate that our market share of the disclosed advisory revenue pool on a trailing 12-month basis will, again, increase meaningfully this quarter. We continue to grow share in an environment that is not dominated by large deals, demonstrating the depth and breadth of our capabilities and our relationships.

Now let me now briefly discuss our financial performance. First quarter net revenues were $384.7 million, up 50% versus the same period last year, marking the best first quarter in our history and our third strongest quarter ever. Net income was $83.6 million for the quarter and earnings per share was $1.61, up 155% and 156% respectively year-over-year. These results reflect a 10.9% provision for income taxes in the first quarter, as we implemented required changes to the accounting for stock compensation and the associated income taxes in the quarter. Net income and earnings per share, excluding the effects of the change in accounting for income taxes, are $58.3 million and $1.13 a share, a 78% and 79% year-over-year increase respectively. Bob will discuss this accounting change in more detail in his remarks.

Our compensation ratio was 59% for the quarter, which reflects our current full year expectations. We increased the compensation ratio from last year's level to reflect the actual and expected cost of new hires in 2017, including costs associated with SMDs recruited in 2016. As we have said, consistently, if we have the opportunity to hire exceptional talent, we will seize it, despite the near-term negative effect on our compensation ratio and our operating margins, as we believe that these investments in talent increase the intermediate and long-term value of the company. The higher compensation ratio also reflects expectations of a higher compensation ratio in our equities business. Noncompensation costs were $61.3 million or 15.9% of revenues, down 1% versus the prior quarter and up 13% year-over-year. The year-over-year increase reflects headcount additions, principally within our global advisory teams. Operating margins for the quarter were 25.1%.

Now let me conclude my initial remarks by commenting briefly on our equities business. Industry pressures continue to weigh on that business, and we now believe that the lower volatility and the ongoing shift from active to passive managers, along with other pressures will increase the challenge to deliver additional earnings and margin growth over the roughly 3-year remainder of the performance period. Consequently, we have reduced our expectations for earnings and margins from the business and the expected consideration to be paid for the ISI acquisition.

Keep in mind, that 68% of the consideration in that transaction was earn-out. The reduction in earnings and expected share count offset each other and have a nominal effect on our EPS in the quarter. The deal structure was designed to address the uncertainty about the future operating performance of the business. In other words, the transaction structure is working exactly as we had hoped. Bob will discuss these changes further in his remarks.

Let me conclude by saying unequivocally, that we remain strongly committed to the equities business, as we view it a powerful differentiating factor versus our independent firm competitors. And we are confident that our equities business continues to impact positively our overall investment banking franchise, both from a revenue growth and a recruiting perspective.

Let me now turn the call over to John, to discuss our Investment Banking business.

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

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Good morning. Our Investment Banking business had a record first quarter. Net revenues were $366.5 million for the quarter, a 55% increase over the same period last year. The operating contribution was $91.6 million for the quarter, an increase of 88% over the same period last year, driving meaningfully higher operating margin of 25% in the quarter, up from 20.5% a year ago.

Advisory fees were $305.5 million in the quarter, the second-highest in our history and 74% higher than a year ago. For the quarter, advisory revenues include 53 fees equal to or greater than $1 million in comparison with 41 such fees in Q1 2016. The number of fee-paying client transactions in Q1 2017 was 163 compared to 173 in Q1 2016. The composition of advisory revenues for the quarter reflected strong contributions from multiple sectors, particularly energy, TMT, healthcare and financial services.

We are also experiencing continued strengths in energy-related restructuring activity and saw strong activity in capital advisory. We remain active globally, earning 33% of our advisory fees in the last 12 months from clients located outside the United States. We continue to expand our global reach to important strategic markets.

As we announced in a press release last week, Waleed El-Amir joined us as a senior adviser, working with us to expand our footprint in the Middle East and Africa from our newly established office in Dubai. Productivity of our advisory senior management directors was $15.3 million globally for the 12 months ended March 31, 2017, a 27% improvement from the $12.1 million from the same period last year.

For ECM, more accommodating markets helped continue the momentum that we began to see in the back half of last year, with underwriting revenues of $10 million for the quarter. Our team is executing our strategy, participating in a meaningful way in a high-profile transaction, including securing bookrunner mandates on several leading transactions. Looking back at the last few quarters, we have seen good diversity of activity in important sectors, such as healthcare, TMT and energy.

As Ralph highlighted, equities experienced a more challenging start to the year than we had anticipated. U.S. equity market volumes were down 17% year-over-year and this environment of low volatility created headwinds that we believe could be sustained. Evercore ISI contributed net revenues of $54.5 million in the quarter, including $5 million attributable to underwriting. Secondary revenues of $49.5 million were down 13% versus last year, less than the decline in the market volumes. Overall, the business produced operating margins of 15.2% in the quarter.

In a more granular assessment, we continue to advise on many of the leading transactions in the marketplace for the first quarter, including the Conflicts Committee of Williams Partners L.P. regarding its $11.4 billion simplification transaction with The Williams Companies. Takeda Pharmaceutical Company Limited on its $5.2 billion acquisition of ARIAD Pharmaceuticals Inc., Misys on its CAD 4.8 billion acquisition of DH Corp, the Special Committee of the Board of Fortress Investment Group on its $3.3 billion sale to Softbank Group Corp., Old Mutual plc on the sale of a 24.95% stake in OM Asset Management plc to HNA Capital U.S., Attarat Power Company in the $2.1 billion financing of its oil shale power project in Jordan.

We also served as a bookrunner on leading transactions, including the $1.3 billion follow-on offering for Athene Holdings. Our backlogs remain strong, sustaining our momentum. The merger market remains healthy. Announced volumes increased 12% year-on-year globally, principally driven by a significant increase in the volume of transactions in the $1 billion to $5 billion range. The announced volume of transactions greater than $5 billion declined 2% year-over-year in the first quarter. In the U.S., M&A volumes in the quarter increased 4% as a 41% increase in the dollar volume of transactions, smaller than $5 billion, offset a 42% decline in the volume of transactions greater than $5 billion.

Looking at number of announced transactions in the U.S., the number of announced transactions was up 20% year-over-year. Globally, the number of transactions was down 9% as the increase in transaction announcements in the U.S. was offset by greater decline in Europe and Asia. In terms of outlook for M&A in 2017, we see the core elements that drive healthy levels of M&A volume are still in place, namely, historically low interest rates, high equity prices, abundant credit availability and strong business confidence.

We ended Q1 with a healthy number of deal announcements and as we move into the second quarter of 2017, we are optimistic about the M&A landscape. We continue to closely monitor political, geopolitical and fiscal headwinds that could impact the M&A environment. As you are aware, potential changes in Europe, Brexit and healthcare and tax policy in the U.S. could impact M&A environment, frankly either positive or negative in the future. As we stated last quarter, these potential sources of uncertainty have not meaningfully impacted the intensity of the dialogues which we are having with our clients to date.

Now let me turn back to Ralph, to talk about our Investment Management business.

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

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Thank you, John. Investment Management reported net revenues and operating income of $18.2 million and $4.9 million for the quarter. These results predominantly reflect the contributions from our Wealth Management business in the U.S. and the money market Investment Management business in Mexico as well as contributions from Evercore Trust Company. Assets under management from consolidated businesses increased to $8.4 billion in the first quarter of 2017, an increase of 6% from the end of 2016, driven primarily by an increase in assets under management at Evercore Wealth Management to $6.8 billion.

As we have said previously, in Investment Management, we continue to focus on our Wealth Management & Trust business and our Money Management business in Mexico. We do not anticipate making material additional capital commitments to these businesses, other than to the continued growth of our Wealth Management business. Bob will provide further comments now on our GAAP results, our noncompensation costs and other financial matters.

Bob?

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

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Thank you, Ralph. Let's kickoff with our GAAP results. Net revenue on a GAAP basis of $387 million, were a record for a first quarter, just as they were a record on an adjusted basis. Net income attributable to Evercore Partners Inc. was $80.8 million for the quarter, also a record, benefiting from the change in reporting from income taxes and the reversal of expense related to the ISI acquisition LP interests.

Consistent with prior periods, our adjusted results exclude certain items that are directly related to our acquisitions and dispositions, particularly costs related to our equities business. Most significantly, we adjust for costs associated with divesting of LP units and interest, granted in conjunction with the ISI acquisition.

For the quarter, we expensed $4.8 million, related to the Class E LP units and reversed $26.2 million of expense related to the Class G and H LP interests. The expense reversal followed a review of the outlook for the Evercore ISI business, where we've concluded that it would be appropriate to lower the level of earnings and margins that we consider probable of achievement in the future. We expensed $31.7 million related to these equity units and interests in the same period last year. As Ralph noted, our adjusted presentation includes all of the shares we expect to issue for the equities business in the EPS denominator.

Based on our current expectations, we have lowered the number of shares we expect to issue to approximately 5.4 million shares. For consistency with GAAP, we reflected this change as of January 1, 2017. We will continue to evaluate this expectation quarterly. Turning further to equities, the adjusted operating margin for that business, which governs the ultimate payout of the G and H units, was 8% for the first 3 months of the year. As a reminder, the payout for the final tranche of the G interests requires an adjusted operating margin for the full year 2017 of 16%.

Moving to noncomp costs. Firm-wide operating costs per employee were $39,000 for the quarter, down 1% from last quarter and 6% higher year-over-year. The increase was a result of the growth in year-over-year noncompensation costs that are directly -- that are less directly correlated with headcount growth, including occupancy, professional fees and execution costs in the equities business. The expense cost per head for the past 2 quarters is broadly consistent with our operating expectations.

Providing a bit more detail on taxes, our adjusted tax rate for the quarter was 10.9% as compared to 38% in the prior quarter and 37.5% in the same period last year. This decrease is primarily driven by the change in accounting standard related to share-based comp. The tax benefit reflects the tax deduction, based on an average share price at vesting of $78.83 versus an average share price at grant of $49.56, adding approximately $0.48 to adjusted earnings per share. The tax benefit is tied to the vesting of awards and will therefore, always have the greatest potential impact in the first quarter of each year, when the majority of RSUs vest.

For quarters without meaningful vesting of compensation equity, the tax rate is expected to be comparable to previous relevant quarters. Our share count for the first quarter for adjusted earnings per share was 52 million shares, slightly lower in comparison with the prior quarter, due, principally to the change in expectations for ISI, offset by increases associated with new hires from 2016, higher shares resulting from a higher share price and a small increase relating to the change in accounting addressed earlier.

On a GAAP basis, the share count was 45.9 million shares. In the first quarter, we repurchased 1.1 million shares at an average price of $77.99, reducing the dilution of shares granted to employees and new hires in the year and the shares associated with the ISI acquisition. We awarded 2.5 million shares in conjunction with annual RSU awards and remain committed to more than offsetting the dilution associated with annual compensation awards.

Finally, our cash position remains strong as we hold $414 million of cash and marketable securities at the end of the quarter, with current assets, exceeding current liabilities by approximately $437 million.

With that, operator, can we open the line for questions, please?

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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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I just would like to ask something on the reversal and maybe some of the mechanics in comp. So it seems as though what you're saying is, there was a $26.2 million reversal out of comp based on class G and H, which I get it and I totally appreciate the comments from Ralph about how you guys structured the deal and why you guys wanted to go this route. But is it correct to say that without the reversal then, the comp ratio would have been north of 65%, because if I add that to the comp ratio, it looks like it really would have been really high. So I guess, I'm just a little confused, could you maybe help me understand that?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [3]

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Sure, Brennan, it's Bob. Let me take that. The reversal that I described is relevant to our GAAP results. If -- your question lets me remind all on the call, that the accounting that we adopted on an adjusted basis was to eliminate the GAAP expense associated with the vesting of unvested E, G, and H units and interests, but also on day 1 to include all of the shares that we expected to be issued as consideration. So on a GAAP basis, the expense that we recorded is lower than it had been, because we were accruing at a higher rate. That adjustment that you're questioning only impacts the GAAP numbers, it's not in the adjusted. So it wouldn't cause that 59% comp ratio that Ralph talked about to change.

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

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Got it. Okay. Perfect. That really helps a lot. So next question, I appreciate how you've reassessed things and adjust the fully diluted accordingly. I know in the past there's been maybe minimal discussion on the ranges for the H shares, but given that there are a little bit further questions about the outlook there, I believe the upper end of that 3-year average is 17% margin with an operating profit target as well. I want to say it's like $48 million on the maximum side. Can you give us a sense about where the minimum threshold would be, just so we can start to figure out how to frame that?

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

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Yes. Let me make it perhaps easier for you than sort of diving back into those deal mechanics that Ralph and I described endlessly, 2-plus years ago. If you look at what we've expensed for the Hs to date, and this will be in our 10-Q, but you could construct it from the information we've given you today. It would be about $56 million, Brennan. The total maximum expense, okay. And again, this has always been in our 10-Q. It's about $236 million. If you do the arithmetic and the extrapolation, what that will indicate to you is a current expectation of about half of the H interests.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [6]

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Got it. Half of the -- because in -- I want to -- as I recall, the Hs were like, what, 4.4 million in total, right?

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

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That's correct. Another way to look at this, Brennan, is to the -- our best judgment is 5.4 million shares at the moment, and I think, Bob suggested that by virtue of the likely outcome in terms of the adjusted margins secondary revenues only, keep in mind, that the Gs will not -- the last tranche of Gs would not be hit, which is roughly, as I recall, like 360,000 shares or something like that. The rest of the shares are all in the Hs.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [8]

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Right. Because the last tranche of G was like 2017...

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

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Yes. Yes.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [10]

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[Performance] here. Perfect. Okay. Okay. So get that. Thanks for the patience on the deal mechanics. It's just a little chunky and a little confusing. So much appreciated that. Taking a step back, Ralph, I know, you stated your commitment to the business overall, and how important it is strategically how it fits in. So can you tell us about I believe that there was some turnover at the senior level in the equities business recently. Can you tell us about changes that you've been making as far as management goes? And steps that you'll be taking to ensure that you retain the very high-quality research talent that you have in the ISI business?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [11]

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Yes. First of all, the reason I make those very strong statements about its strategic importance is that we are fundamentally an intellectual capital talent business. And the Evercore ISI equities business adds materially to the intellectual capital and talent of Evercore. And just to refresh everybody's memory, when we did this transaction, we said that we expected to achieve 3 things: one, that we would run a profitable equities business. We said not as profitable we thought from a margin point of view, as our advisory business, but we did believe that, that business could be run profitably and we are doing that. Second, that it would add to our underwriting revenues, which it -- clearly is and we're starting to see even stronger results in that regard. I think, it's the -- this week, we're actually involved in 6 equity offerings week to date. And third, that it would add importantly to the rate of growth in our advisory business by making us a more attractive home for advisory bankers, particularly in sectors where equities are very important to their clients, such as biotech, such as healthcare, such as obviously, technology, energy, et cetera. And all 3 of those things have happened, which is why I say unequivocally that we believe this is part of the core strategic capabilities of Evercore and a real differentiator versus every single one of the other independent firms. When we did put the 2 businesses together, keep in mind, we had an equity business, a small one at the -- when we bought ISI. We took the leadership from both businesses and made an executive committee, and we did that to have some period of time of stability so that there would be continuity from both the Evercore side and the ISI side. We're now 2 years, little over 2 years into the transaction, and it gives us the opportunity to rationalize the management a little bit to perhaps bring in some new blood for leadership, to take us to the next level. And we are -- I don't want to be too complimentary to all the analysts on the phone, but we're extraordinarily focused on the very high-quality team and the accord and the enormous respect that our research team is accorded, and I assure you that retention of that team is very much on our mind.

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Operator [12]

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Our next 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 [13]

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So maybe first one here on the backlog. I know that trying to take a snapshot at any point in time could be pretty misleading, and we obviously, only have limited information from the outside. But I do think there's a perception that maybe backlogs for the industry have been shrinking a bit, if you just look at some of the data sources that I think everyone tracks that's kind of been the case. So I'm just trying to reconcile that based on what sounds like a constructive outlook from here -- from you guys. And I guess, really is the conclusion that the backlog interpretation is just timing a very strong first quarter of closings, or does it maybe sound like the high-level data that I think we're all looking at just is wrong.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [14]

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I think the visible backlog, Devin, whether it's for Evercore or the industry, sort of always dissipates, some in the first quarter. I think if what you were seeing externally were the read-through to the business we're managing, John wouldn't have said what he said about our backlogs remaining quite strong. And speaking just for our firm, if you look at the level of activity of announced transactions, even carrying into April, it's been quite broad-based. We've been in multiple sectors, multiple transactions. I would lean more towards John's comments that our backlogs remain strong than (inaudible) logic, but you all know how I feel about (inaudible) logic.

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

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And Devin, I would just add one thing, which I discussed I think on our last call, and that is that the performance of Evercore, obviously, as all of these questions, some of these questions imply is affected by the overall market, or M&A activity. But our performance, very importantly, is also affected by our market share and I think in the last quarterly earnings, I reviewed how during the 4-year period from 2010 to 2013, when M&A activity was flat as a pancake essentially, our advisory revenues grew during that period, every single year in double digits. And this quarter, I think we're going to find that total reported advisory revenues from the publicly traded firms will be flattish, maybe down a little bit and obviously, you can see what's happened with respect to Evercore. So we should never forget that we at least, over the last 6 or 7 years have been beneficiaries of very real gains in market share and that's certainly been the case this first quarter as well.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [16]

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Absolutely, and I appreciate that color. I just wanted to try to dig in a little bit deeper, so that's very helpful. Maybe a follow-up here just on the growth of the firm. And there's been a lot of press around firms bulking up in the Middle East. Obviously, Evercore just opened a Dubai office this quarter. So I'm just curious, how big of an opportunity you see the Middle East developing into? And then, are there any other emerging M&A markets that are maybe becoming a bigger opportunity than you thought a couple of years ago, where it would make sense to actually establish more of a presence?

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

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Yes. You faded out a little bit, but first of all, I'm not sure I'd use the term bulking up. I think we're establishing an office there because we do see opportunities there, both in terms of M&A advisory, Capital Markets advisory importantly, and also there are obviously some of the largest and investment pools in the world in the sovereign wealth funds there. And they have increasingly evolved from investment pools that have invested in funds to investment pools that are investing in individual assets and as a consequence, they're actually starting to look a little bit more like PE firms than pension funds, for example. So that's what drives the opening of an office there. It's an office that we think will be sized to be consistent with the opportunities that we'll see there.

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John S. Weinberg, Evercore Inc. - Executive Chairman [18]

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In terms of other areas that we're looking at, we see for Evercore opportunities in both Asia and Europe. We -- as you saw, we added Fukuda-san in Japan, and we actually see despite the fact that those markets may be showing some weakness right now in the first quarter volumes, we actually see opportunity for us in our brand in both Asia and Europe, and so from our perspective, we're watching those markets, and we are going to continue to very carefully add resources there. Because we think for Evercore, there are real opportunities in both of those markets.

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Operator [19]

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Our next question is from the line of Ann Dai with KBW.

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Yian Dai, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP of Equity Research [20]

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I was hoping to focus in on the equities business a little bit more. So just thinking about first quarter and knowing that this quarter and 1Q '16 are not necessarily apples-to-apples, given the market volatility that we saw last year. I was hoping you could just give us some thoughts on how you think about this quarter's results in the broader context of an annual run rate? So internally, if you're thinking about what's realistic for this year, is it the kind of thing where you're saying, all right, given fee pressures and with MiFID coming, if we can be a couple percent down that would be a good year?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [21]

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Well, we never project forward. So I'm more than willing to talk about this quarter. And you're absolutely correct that there was a lot of volatility in the equity markets in the first quarter last year. There was very little, if any, in the first quarter this year and that led to, as I think John indicated, a 17% decline in trading volume in the equity markets in the first quarter. Our secondary revenues were down less than that. So just as we are in advisory, we're actually gaining market share. How that -- what does that mean for the second quarter and the third quarter and the fourth quarter? I don't think anybody could predict that. No one -- volatility has been in an absolute low over the last quarter or 2. One would normally say that won't stay there forever, but predicting volatility is like predicting the direction of the market, or the direction of currencies and the direction of commodities. There are lots of opinions but no one knows the answer.

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Yian Dai, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant VP of Equity Research [22]

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Okay. I appreciate the color. And you mentioned that there was a higher comp in the equities business this quarter, so I'm just wondering if that is fully a function of lower revenues? Or if it reflects some amount of higher comp, maybe because our net assumptions are coming down and you're having to pay people some more?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [23]

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It's principally a reflection of lower revenues.

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Operator [24]

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Our next line is from Mike Needham with Bank of America Merrill Lynch.

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Michael Anthony Needham, BofA Merrill Lynch, Research Division - Associate [25]

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So first, I think there's a sense that as regulators are replaced by the new administration, there could be some regulatory easing in certain sectors. Okay, so I'm just wondering, are you seeing initial interest from clients in highly regulated sectors becoming more active in M&A dialogue?

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John S. Weinberg, Evercore Inc. - Executive Chairman [26]

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We are seeing the dialogues picking up. But we don't know whether that will lead to activities in those sectors that are above what we thought they would be when we saw things on a flat line. But there's no question that generally the dialogue levels are very high. And in those sectors which have been highly regulated, there is a lot of discussion about what is going to be possible. But I also think that for the most part, executive teams are saying, we need to see a little bit more as to where things are going, because it's still a little bit cloudy. So I guess, the answer to your question is, yes, we do see the dialogues very robust in those areas. We are not sure though that, that's going to lead to much yet, because we have to see where it all plays out.

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Michael Anthony Needham, BofA Merrill Lynch, Research Division - Associate [27]

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Okay. And then as a follow-up. In the energy sector, how much restructuring work do you think is left? Are you seeing more asset sales mergers, recapitalization work happening? And if you are, can you help us try to size that opportunity versus restructuring opportunity?

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

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Let me -- I think we said on this call, a year ago, we were asked by someone, were we worried about our outlook for advisory revenues because energy activity was clearly going to be down in 2016. And I think we responded at that time that we didn't necessarily agree with that statement and that we felt that there would be in 2016, quite a bit of opportunity in the restructuring area and that, that would be followed in 2017 and 2018 by reequivocation and by M&A activity. And I would say, everything that we are -- have seen up to now would suggest that at least that prognostication has turned out to be pretty on the mark.

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Operator [29]

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Our next question is from the line of Conor Fitzgerald with Goldman Sachs.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [30]

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Just maybe a 2-part question on tax reform. One, on the near term and one on the longer term. Just trying to get a sense if you think in the near term there could be a little bit of a headwind on M&A, as some of your clients wait until they have more clarity on how the tax code could impact them for executing on an M&A transaction? And just want to get your updated thoughts on longer term, what you thought a lower corporate tax rate could mean for M&A activity overall?

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John S. Weinberg, Evercore Inc. - Executive Chairman [31]

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Well, it's hard to really predict. I would say that there's no question that right now, some of the very large transactions, there's a lot of discussion about what is the impact on tax. Clearly, there is a great deal of money that is overseas. That if taxes somehow are advantageous, that money may be brought back and become more usable in M&A type things or some, at least more strategy. So I would say that generally, the discussions go something like this. People are looking at strategies. You'll see what I would call smaller transactions. There's no hesitation. People are pulling the trigger and you saw that in the volumes of smaller deals that we talked about previously in our discussion earlier today. I think large transactions will be influenced somewhat by tax policy. And I think that, we're seeing clarifying right now, and it's just a question of how quickly it will clarify enough. But there will be some transactions that -- big transactions that go forward. But your question was, do we see a shading? Will there be some -- are some people waiting and are some people going to accelerate if the taxes are right? And I'd say, to answer both questions, probably there are management teams that are going to wait and see. And to the extent it's advantageous to use cash, I think, you'll see that to actually help catalyze more merger activity.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [32]

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That's very helpful color. And then just a question on MiFID II. I want to get your sense of how you thought that rule could impact your equity business? And just wondering how active your dialogue has been with your buy-side counterpoint at this point in time. And then just from a broader perspective, I know the rule technically only impacts Europe and your business skews more towards the U.S. But wondering, if we should think about the impact of the rule having a more holistic impact on kind of your business globally or limited to Europe?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [33]

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Okay. Let me take that. First of all, the dialogue with clients is obviously very intense around this issue, since it will be implemented January 1 of next year. Second of all, while obviously, it applies only to Europe, we do believe that there will be spillover into the U.S., particularly, as it affects some of the larger integrated global equity investing firms. And then finally, we'll find out next year the ultimate effect. I think there's pretty broad consensus that MiFID II will have at least 2 effects. One is that it's likely to shrink a little bit the fee pool for research and the market share of those who have truly distinguished high-quality research is going to go up. The latter, we clearly benefit from, the former, all firms in our business will be affected by, and how those 2 shake out, I think will take a few quarters to sort through.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [34]

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That's helpful. Appreciate that. And then just a clean-up one on the compensation expense. In your release, I think you mentioned the costs associated with new senior hires that you talked about, but you also mentioned compensating employees for their performance consistent with the market rates. Didn't want to read too much into that, but should I interpret that as the market rate for the same performance has moved higher year-over-year?

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

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No. I think the vast majority of this is driven by our expectations of the impact of hires that we make this year, the seniority of those hires and the spillover because the comp effect of new hires tends to occur in 2 years. So it's a combination of a little bit of leftover from last year's hires and its effect on this year and the hires that we've made and those that we anticipate making during the course of this year. And then secondarily, a minor effect is that the impact of a slightly higher comp ratio in the equities business, which by the way is 1/5 the size of our advisory business, so it doesn't have nearly as much effect on the firms comp ratio in total. But we're being cautious here, because we do see some real hiring opportunities and as we've always said in the past, if we have those opportunities, because they are unquestionably accretive to the intermediate to longer-term value of the firm, we're going to make some modest investments in order to seize them.

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Operator [36]

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And our next question is from Steven Chubak with Nomura Instinet.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - Former VP [37]

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So want to kick things off with a question on the ECM outlook. You noted that the equities business is certainly facing some headwinds on the secondary side. But capital raising an IPO has actually saw a meaningful acceleration not just for you guys year-on-year, but also the broader industry. And thinking a couple of years back, where you talked about being able to generate $75 million to maybe even a $100 million revenue run rate within ECM, more in line with some of your SMiD peers. And over the last 12 months and even just annualizing the latest quarter, suggests around $40 million to $45 million, and you've been running at that level for some time. I just want to get a sense as to whether you're still committed to hitting those targets? And maybe what's the path to closing that gap?

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

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Yes. I think when we did the transaction I said that -- I felt that we, it's not unreasonable for us to assume that we would have a business of that size and scale. I still believe that. I also said at that time, I just couldn't tell you, in which year we might get there. I think it's probably taken a little bit longer than we had hoped. But as John said, the backlogs that we have in that business are encouraging, and I think our activity quarter-to-date is encouraging, and we obviously, don't make forward-looking statements, but we're encouraged by the progress that we're making.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - Former VP [39]

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Got it. And just one more for me on the restructuring business. Recognizing the timing is always difficult to predict, in terms of when we could see some of the energy activity dissipate. There's been a lot of discussion around the consumer retail sector and some of the headwinds that those businesses are currently facing. Do you know if you can give us any insight into how you're thinking about that restructuring opportunity going forward? They don't seem as involved, but at the same time, there are significant challenges that the sector is facing?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [40]

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Is this -- I'm sorry, this is in retail?

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - Former VP [41]

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Yes. Consumer retail. That's right.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [42]

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Yes. Yes. I would say, look, one of the challenges in restructuring and retail is that a larger percentage of the failed situations in that industry wind up as liquidations, rather than restructurings. And we're not in the liquidation business. So while there is clearly stress in that industry, you have to be a fair amount more selective as to which companies that are under stress actually have a viable post-stress opportunity and that is not all of them. And so that is the reason that, while a comparable amount of stress might not produce a comparable amount of restructuring activity.

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Operator [43]

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

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [44]

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Thank you very much, everyone, for your time and attention and look forward to talking to you next quarter.

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Operator [45]

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