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Edited Transcript of EVR earnings conference call or presentation 24-Apr-19 12:00pm GMT

Q1 2019 Evercore Inc Earnings Call

NEW YORK May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Evercore Inc earnings conference call or presentation Wednesday, April 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jamie Easton

Evercore Inc. - Head of IR & MD

* 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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* Brent Ryan Dilts

UBS Investment Bank, Research Division - Equity Research Analyst of Large cap banks and brokers, asset managers and trust banks

* Devin Patrick Ryan

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

* Hang Leung

Wolfe Research, LLC - Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* Michael Anthony Needham

BofA Merrill Lynch, Research Division - Associate

* Michael C. Brown

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

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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 2019 Financial Results Conference Call. (Operator Instructions)

This conference call is being recorded today, Wednesday, April 24, 2019.

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

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Jamie Easton, Evercore Inc. - Head of IR & MD [2]

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Good morning, and thank you for joining us today for Evercore's first quarter 2019 financial results conference call. I'm Jamie Easton, Evercore's Head of Investor Relations. Joining me on the call today are Ralph Schlosstein, our President and Chief Executive Officer; John Weinberg, our Executive Chairman; and Bob Walsh, our CFO. After our prepared remarks, we will open the call for questions.

Earlier today, we issued a press release announcing Evercore's first quarter 2019 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 For Investors section of the website, and an archive of it will be available for 30 days beginning approximately 1 hour after the conclusion of this call.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to, those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements.

In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which, as previously mentioned, is posted on our website.

We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we've noted previously, our results for any particular quarter are influenced by the timing of transaction 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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Thanks, Jamie, and good morning, everyone. John, Bob and I are joining you from London today. We hosted our board meeting here yesterday focusing in part on the changing political and regulatory landscape here in Europe and also on our strategies to continue to grow our European business profitably.

Before we review the quarter in greater detail, let me broadly comment on Evercore and the competitive environment in which we currently are operating.

We ended 2018 in an extraordinarily strong position: the highest global advisory revenues among all firms behind Goldman Sachs, JPMorgan and Morgan Stanley, and #1 among all independent firms, both in advisory revenues globally and in the league tables, which, of course, measure the dollar value of announced transactions. And we were #1 both in the U.S. and globally in 2018.

As all of you know, we have consistently observed that we believe the best way to judge our business is not on a quarterly basis but on a trailing 12-month basis. While our large and independent competitors have not all reported, we fully expect to maintain our same position in advisory revenues on a trailing 12-month basis at the end of the first quarter and among independent firms to maintain our #1 position in the league tables both globally and in the U.S., both on a trailing 12-month basis and on a year-to-date basis.

The first quarter of 2019, while below last year's exceptional results, is the second best first quarter in our firm's history in terms of adjusted revenues and earnings per share. As you may have seen from the publicly available information, April has been a quite active month for Evercore for both completions and announcements. This activity and our current backlogs suggest to me that our positive momentum coming out of 2018 will continue.

In the first quarter, we had balanced contributions from all of our businesses, and we continue to build our backlog of strategic advisory underwriting and capital markets advisory assignments. So far this year, we are fortunate to have advised on some of the largest and most complex assignments globally, including 3 of the largest transactions announced in the first quarter and 4 of the 6 largest transactions announced year-to-date.

In addition, our ongoing focus on adding to and developing our exceptional talent, coupled with the steady broadening of our product and geographic capabilities, continues to position us well for long-term growth and success. Earlier this year, we promoted 7 very talented professionals to Senior Managing Director in our advisory business, the largest class of internal promotions in our history. This year, we expect to have another strong external recruiting year, having already announced that 3 new advisory senior managing directors are joining the firm. And we have added significant senior talent in our equity research business as well. So we continue to invest materially in our future growth.

Let me turn now to the quarterly financial results. The first quarter net revenues were $419.8 million, down 10% versus the year ago period. In Investment Banking, advisory fees were $326.1 million, down 14% versus the first quarter of last year. Underwriting fees were $26.9 million, down 11% versus the year ago period. Commissions and related fees were $41.9 million down 3% versus the period -- the first quarter last year. In Investment Management, asset management and administration fees were $14.3 million up 3% versus the year ago.

Net income was $81.7 million for the quarter down 28% versus the year ago period, and earnings per share were $1.66, down 26% versus the year ago period.

The operating margin for the quarter was 22.8% versus 26.7% in the record first quarter that we had last year.

Our compensation ratio was 58% for the quarter, consistent with last year after adjusting for the reclassification of certain transaction-related expenses. Recall we changed our presentation with respect to these issues in the fourth quarter.

Non-compensation costs for the quarter were $80.6 million, up 12.8% versus the year ago period primarily due to the increased headcount but also due to increased occupancy costs and higher professional fees and client-related transaction expenses. The increase on a per employee basis was nominal, validating what I just said that headcount growth was primarily responsible for the increase in non-comp expenses.

As I said earlier, our advisory backlogs are strong, and we remain very confident in the positive momentum of our Investment Banking and Investment Management businesses.

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

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

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Thank you, Ralph, and good morning.

The overall market environment for our services remained strong, and our levels of engagement and activity continue at a high level. In most sectors, activity levels are high, focusing on both M&A and strategic and capital advisory assignments more broadly. There remain a few markets where companies are taking financial headwinds. These are largely unchanged from 2018. Here, restructuring, debt advisory and other strategic advisory assignments are more prevalent for us.

This environment favors the diversity of our business model. We continue to have strong dialogues across most sectors and disciplines. For example, we are seeing opportunities for strategic consolidation in sectors like health care and consumer, for restructuring in retail and energy and for capital raising in both the public and private markets. In addition, we continue to see healthy levels of sponsor activity.

The equities environment continues the trend that began in 2017 as clients reduced the volume of research they receive and refined how they both pay for research and the level of payment. Quality continues to be an important differentiator.

Now let me briefly comment on our Investment Banking results. Our momentum from 2018 has carried over to 2019. We are pleased that we advised in 3 of the top 5 deals in the first quarter, including the largest deal to date, Bristol-Myers Squibb's $90 billion acquisition of Celgene. We also advised on the U.K. deal -- the largest U.K. deal of the quarter, which is RPC's sale to Berry Global Group.

Our ECM momentum continues. And while activity is strongest in health care, our pipeline is broadening in terms of sector reach. In Q1 2019, we participated in 18 equity underwriting transactions, 16 of which our role was as bookrunner. Advisory revenues for the quarter remained diverse and reflected contributions from multiple sectors and capabilities, including financial, health care, technology, media, telecommunications, activism and capital advisory. We earned 69 fees greater than $1 million in the quarter in comparison with 63 in the year ago period. In short, our momentum remained strong but the distribution of fees by size was different this quarter. Ralph noted that we have very little influence over the timing of fees being earned.

Our debt advisory and restructuring teams remain very productive as they continue to focus on refinancings, liability management and debt capital advisory globally. And we also continue to expand the breadth of capabilities we offer to the financial sponsor community.

Our recruiting efforts are off to a solid start in Investment Banking. We ended the quarter with 105 active senior advisory and managing directors. As Ralph mentioned, we announced 3 advisory SMD hires so far in 2019: Zaheed Kajani, who joined our technology practice in January; John Startin, who will join later in April to lead our metals and mining group; and Andy Richard who will join in July to focus on real estate. We also have one additional SMD committed to join the firm later in the year. We are in active discussions with additional talent candidates who we hope will come and build our franchise further and make up the 2019 recruiting class.

Evercore ISI is also busy building and enhancing teams. The senior research team is growing with the additions of Amit Daryanani in IT hardware; and David Palmer in Consumer Food and Restaurants, who will both join this spring. Greg Melich also rejoined us at the start of the year to cover retailers.

In addition to the research team, we continue to develop Evercore ISI's leadership team. We look forward to welcoming a new Head of Sales, Larry Sibley, in June as Bill Foley transitions into a role of Vice Chairman at Evercore ISI.

We remain committed to providing our clients with world-class independent research and investing in and enhancing our intellectual capital, which strengthens our ability to best serve our clients globally.

Now let me turn the call over to Bob to discuss our GAAP results and other financial matters.

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

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Good morning. Beginning with GAAP results, net revenues, net income and earnings per share on a non-GAAP basis were $415.3 million, $67.2 million and $1.52, respectively, for the quarter.

Consistent with prior periods, our adjusted results for the quarter exclude certain items that principally relate to our acquisitions and dispositions and also include the full share count associated with those acquisitions. Specifically, we adjusted for costs associated with divesting of Class J LP units granted in conjunction with the ISI acquisition. For the quarter, we expensed $4.1 million related to the Class J LP units.

Our adjusted results for the quarter also exclude special charges of $1 million related to accelerated depreciation for leasehold improvements in our New York headquarters.

Other revenue. Other revenues are up significantly from the first quarter of 2018. This increase primarily reflects gains on the exchange-traded funds we use as a hedge for our deferred cash compensation program obligations. This amount will move around a bit in volatile markets.

Turning to non-compensation costs. Our firm-wide non-compensation costs per employee were $46,700 for the quarter, down 7% from the prior quarter and 2% higher on a year-over-year basis, principally reflecting elevated occupancy costs, as we have been discussing on prior calls. Just to note again, in the fourth quarter, we revised our adjusted presentation to eliminate the netting of revenue and non-compensation expenses related to client-related expenses, expenses associated with revenue sharing engagements with third parties and provisions for uncollected receivables. This adjustment brought our results more in line with our U.S. GAAP presentation and the presentation of our peers and has no impact on operating income, net income or earnings per share.

With regards to taxes, our GAAP tax rate for the quarter was 9.1% as compared to 23.9% in the prior quarter and 4.3% in the same period last year. The rate for the quarter was impacted by the accounting treatment for stock compensation, which resulted in a decrease in each of the U.S. GAAP and adjusted effective tax rates of 14.1 percentage points.

Similarly, the impact on the first quarter of 2018 resulted in a decrease in the U.S. GAAP and adjusted effective tax rates of 19.1 and 18.6 percentage points, respectively.

Our Q1 share count for adjusted earnings per share was 49.3 million shares, lower in comparison with the prior quarter driven principally by share repurchases. On a GAAP basis, the share count was 44.2 million shares for the quarter.

Our cash position remained strong with $552 million of cash and marketable securities at March 31, 2019, with current assets exceeding current liabilities by approximately $691 million.

We did adopt the new accounting guidance on leases during the quarter, which replaced the existing lease guidance. This resulted in the recognition of approximately $219 million of lease liabilities on the balance sheet at the end of the quarter, along with associated right-of-use assets. There was no meaningful impact to our income statement as a result of this adoption of this accounting standard.

Let me now turn the call back to Ralph for closing remarks.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [6]

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Thank you, Bob.

I wanted to close the call with a few comments on capital management and balance sheet management more broadly. Let's start with the new news.

Yesterday, our board increased our dividend to $0.58 per quarter, a 16% increase, in line with the average increase in the dividend since we went public and very consistent with the increased earnings power of our business.

While our board has voted for steady, double-digit annual dividend increases, we will continue to focus on share repurchase transactions, both for net settlement and in the open market, as the principal means of returning capital to our shareholders. We remain committed at a minimum to offsetting the dilution associated with both annual bonus equity and new hire grants, and we'll also use repurchase transactions to return to our shareholders earnings that are not distributed through dividends or invested in the future growth of our business.

A couple of you have observed that the aggregate level of share repurchases have declined in 2018. I want to assure you that this does not in any way reflect a change in our capital return strategy. Rather, a couple of things were at work last year and early this year.

First, we put aside cash for a onetime cash needs to purchase additional interest in our Wealth Management business and our capital -- private capital advisory business and to expand our main office in New York City.

Second, we reduced our reliance on RSUs, or restricted equity awards, in both our annual deferred compensation and new hire programs. These deferred -- these -- instead, we are referring -- relying on deferred cash awards to a greater extent. These deferred cash programs effectively require that cash be set aside and invested in accounts selected by our employees. Very simply, for a portion of our deferred incentive compensation, instead of issuing shares in the form of RSUs and then repurchasing them, we are investing a similar amount of cash in deferred investment programs.

This change to the mix of deferred compensation is changing how we use cash. At year end, you saw a large cash balance. That balance declined in the first quarter, as it has always, as bonuses have been paid and as we have hedged the market exposure associated with our deferred cash compensation plans and include cash set aside for future settlement of these plans.

Importantly, this change has not resulted in any material change in the ownership of Evercore on a fully diluted basis by our senior professionals as we hold meaningful positions in the company, all consistent with our share ownership requirement for senior managing directors.

As I noted a moment ago, we continue to invest in growing our business by recruiting new talent for our team. This investment is now expanding beyond people to include both facilities in which our current team can work and more recently in technology. These investments to date have been funded almost exclusively through our earnings. As I think it's fair to note, our current scale clearly supports funding some of these investments more efficiently through a more balanced mix of debt and our cash earnings, and we expect to look into this further as the year progresses.

In summary, we have not changed our core principles at all regarding capital return. However, as we are -- have grown, we have experienced some onetime uses of cash and are adapting both how we invest in our business to drive future growth and how we manage our balance sheet and cash flow.

Thanks very much. Sorry about that long explanation. Now we're prepared to take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from 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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So maybe just starting with Europe since you're over there. Would just love to get a little bit of perspective around, I guess, the current environment. It just -- it's been a slow start to the year in terms of announcements, and I'm curious kind of what you're seeing today. What could change the backdrop of what your expectations are there over the intermediate term? And then just how kind of the backdrop or maybe slower backdrop is helpful if at all to recruiting?

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

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Sure, I think if you look at the M&A environment generally, the dollar volume of announced transactions in the first quarter was down mid-teens, and the number of announced transactions globally was down in the high 20s. In Europe, it was actually a little bit more pronounced.

The interesting thing is if one looks at our backlogs, they're not really consistent with the announced activity in the first quarter. And to be completely blunt about it, we expect this year could be a pretty good year. We certainly don't see anything in our dialogues with clients that suggest that it won't be. And we're also seeing -- we would expect to see that our market share would continue to progress positively. So the phenomenon we're seeing is that activity for the first quarter was slower. That seems to have picked up in the second quarter. Our dialogues with clients and our backlog don't suggest anything that would remotely suggest a slowdown. But even if there is a modest decline in activity, it's a little bit like the discussion we had last year about the effect of MiFID on our equities business. It clearly shrank the pool of dollars available for research, but our market share gained. And how those 2 factor out, it's hard to predict at this point.

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

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I would just add to that by just saying that our dialogue levels and our interactions with clients are remaining at a very high level and our backlogs remain strong. So really, across the board in Europe and more broadly, we feel quite constructive about where we are right now.

Second part of your question was about recruiting. And we have a very consistent approach to recruiting, which is we look around the world for the people who we think are going to add to our business. So we look at -- we look for opportunities to bring in people who are A-level players, and we keep those dialogues fun. Often, those dialogues start years before, and we continue those. And we're very much on a consistent frame from our standpoint. Recruiting continues to be very high -- a very high emphasis for us, and we feel like it's a very constructive -- continue to be constructive environment for us in Europe and more broadly.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [5]

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Okay. And then maybe a follow-up here just looking at the equity commissions line, another relatively slow start. I'm curious if it just feels like normal seasonality in the business. Or does it still feel like there's some pressure lingering in the businesses as MiFID II effects continue to evolve? And the other side of that, you're seeing some really strong equity underwriting contribution. I know that's become an important part of the plan there as well. So just as you think about the equities footprint overall, even if commissions weren't to recover, would you still look to expand that business given all the other benefits to Evercore and a lot of the success that it seems like you're having in equity underwriting and banking more broadly?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [6]

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Yes. Yes, we -- as you saw and as John detailed, we made some pretty consequential senior additions to the talent pool in that business. And as you noted, the equity underwriting got off to a good start in the first quarter. And in a way, it's a little bit better than it looks on a quarter -- first quarter-to-first quarter comparative basis because last year, we participated in a quite significant transaction in Mexico. And given the economy there, we had no underwriting revenues from Mexico this year. So our underwriting revenues in the U.S. are actually up nicely, and our backlogs in that business are up nicely as well.

When we did the Evercore ISI transaction, I think I cited as one of the reasons that we were doing it is that we felt we could build a very healthy equity underwriting business. And I've said without defining a year in which that would occur I thought that would be a $75 million to $100 million a year business for us. Given the success that we are now having, I've set a much higher goal for us.

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Operator [7]

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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, BofA Merrill Lynch, Research Division - Associate [8]

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So my first question is on other ways to get paid in advisory. Over the last year or so, what have been the biggest contributors to revenue outside of traditional M&A advice? And what contributor has been growing the fastest?

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

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Well, last year, as I think everyone noted, our advisory revenues were up 32%, which I think, if I'm not wrong, was the largest increase of any large firm or independent firm in the entire industry. And that increase reflects interestingly strength across the board. We had significant increases in the U.S., in Europe and in Asia. We had significant increases in M&A, in restructuring, capital markets advisory and our capital raising team of businesses. So -- and we've -- I think -- and 1,000% consistent in terms of never identifying precisely how much revenue was in the various forms of advisory services that we provide, and part of the reason we don't do that is the lines are pretty blurry. How do you distinguish restructuring from capital markets advisory, from strategic advisory when all of those options may be considered when you're working with a company. So -- but the reality is we're really experiencing strength and growth in all of our practices, including the strategic shareholder and Activist Defense.

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John S. Weinberg, Evercore Inc. - Executive Chairman [10]

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Yes. As we've really built out our capability with respect to things that we can provide clients, what we've really been able to do is, I think, grow in a multiple of areas. As Ralph said, we don't specifically break things out, but areas like debt advisory and activism and defense and capital raising are all elements that we've been able to bring to existing client relationships and new client relationships to really build the revenue base, and the possibility for revenue base grows for the firm. So we have any number of ways that we can assist and work with clients now increasingly, and that's really been the strategy, which is to be able to bring more important advisory elements to our clients.

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

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And we apologize if that makes your job harder because the links between geologic and our revenues aren't as tight as they have been in prior periods.

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John S. Weinberg, Evercore Inc. - Executive Chairman [12]

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I'd probably say we acknowledge.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [13]

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Well...

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Michael Anthony Needham, BofA Merrill Lynch, Research Division - Associate [14]

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Okay. Fair enough. Second one on talent and hiring. Has competition from the large investment banks changed at all? Some of the management teams have commented recently they're focused on growing or retaining their investment banking businesses. And I've heard that in certain cases, some areas, competition just for like comp levels is increasing a little bit. Just curious to get your view on it.

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

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I would say -- I think I've said this in the past that almost everyone who joins us, there is some combination of pull and push. The pull, I would argue, has gotten stronger in each of the last 3 or 4 years, and that's certainly reflected in the number of dialogues and the intensity of dialogues with -- and the willingness of people to talk to us about Evercore and our business model. And that pull is really centered around the desire to spend 100% of your time working with clients on the matters that they consider most important: their strategy, the M&A they may undertake to execute their strategy, activism, capital markets structure and, of course, equity. If you're a CEO, the 2 things you focus on are your strategy and the M&A you might execute to implement that strategy and your equity. So that pull and the culture and the collegial work environment we have here is pretty sustained, and I would say in each of the last 3 or 4 years that's intensified rather than going in the other direction. So that's a good thing for us. I would say that the larger firms as a general matter have gotten better at identifying the bankers who would be most of interest to us, who are the ones who do focus on these high-value-added activities. But from what we've seen, comp hasn't really changed materially at the large firms and certainly not in a way that would make people less accessible to us.

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John S. Weinberg, Evercore Inc. - Executive Chairman [16]

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My own personal experience in talking to many of the candidates that we are looking at and talking to and recruiting is that there's generally a very positive view of the firm. And I think that what we have found is that more than anything, what people are looking at is the quality of the experiences they're going to have when they come. And I think what we've been able to demonstrate for people is that coming to work at Evercore is a highly favorable and a really good place to be and to practice your craft. And I think that when we talk to people, that is evident. And so our conversations have been very constructive, and the environment feels very constructive. In terms of the big firms, it's really hard to know. There are some big firms out there who are also hiring good people. We really -- we have found that very good people want to come, and our conversations in the past and currently seem to be going quite well.

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Michael Anthony Needham, BofA Merrill Lynch, Research Division - Associate [17]

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Okay. And maybe just -- I'll just ask one more modeling question. Was there any material deal pull forward for deals that closed in April into the first quarter?

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [18]

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Yes. It was inconsequential but a little bit more than $2 million.

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Operator [19]

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And our next question comes from Brennan Havden (sic) [Brennan Hawken] with UBS.

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Brent Ryan Dilts, UBS Investment Bank, Research Division - Equity Research Analyst of Large cap banks and brokers, asset managers and trust banks [20]

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This is Brent Dilts on for Brennan. Just understanding... just understanding that M&A is a lumpy business, could you talk a little bit about just where we are with comps? I mean last year was a good year. So how should we be thinking about comps? I mean it seems like you're still pretty optimistic given the backlog. So just anything around the comps just to set expectation or level set from here.

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

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Well, we commented that our backlogs are strong and that they are not consistent with the dollar volume or number of announced transactions in the first quarter. And as I commented in my opening remarks, from everything we can see, the strong momentum with which we exited 2018 will continue. Do I expect our advisory revenues to go up 32%? No. But we certainly see a continued strong momentum in our business. And I can't end without saying make sure that Brennan knows how much we missed him on the call.

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Brent Ryan Dilts, UBS Investment Bank, Research Division - Equity Research Analyst of Large cap banks and brokers, asset managers and trust banks [22]

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Will do.

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

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The other point I would add is as both Ralph and John indicated, in addition to a constructive view in terms of the business opportunity, they have an equally constructive view in terms of the recruiting opportunity. So as we sit here at the beginning of the year with some degree of uncertainty as to what the revenue picture will ultimately be and some degree of uncertainty as to exactly how many candidates we'll successfully recruit, we've begun the year with our best judgment, which happens to be effectively the same judgment we had at the beginning of last year. And we'll see.

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

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Yes. And I would point out, as we have, as John and Bob and I all have in the past, at the beginning of the year, we're giving you our best judgment of what the comp ratio will be for the full year. And we -- obviously, when we have more information, we modified it, as we did last year and the year before, as we got toward the end of the year. But I would also say that I've said a number of times in the past that we are going to continue to invest to create intermediate- to long-term value in our business. We still see significant opportunities to grow, whether those are geographic, filling in more in certain industries or deepening our capabilities in certain product areas. And if we do, at some point, enter a downturn, which I'm absolutely confident will happen at some point in the next 2 decades, if we do have to enter that period of time at some point, we will likely be talking to you about investing through that cycle to have an even stronger market share when we come out.

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Brent Ryan Dilts, UBS Investment Bank, Research Division - Equity Research Analyst of Large cap banks and brokers, asset managers and trust banks [25]

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Okay. Appreciate that. And on a similar topic, if there is a downturn and given the dividend hike this quarter, is there -- does that reflect any change in how you're thinking about expenses in a downturn? Or just where you may be investing? I mean it sounds like you still want to keep the hiring pedal down, especially if there's opportunity in the downturn. But just how should we think about the dividend versus like expenses of hiring in a downturn?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [26]

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Well, I think our goal would always be to maintain or to grow modestly the dividend regardless of the environment. But I -- you can make a categorical statement. There are a lot of people who made categorical statements in 2007 who ate their words in 2008, and we don't want to do that.

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John S. Weinberg, Evercore Inc. - Executive Chairman [27]

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We don't intend for dividend policy to restrict us from being able to recruit highly talented people when they're available in the cycle. And so we will continue to make sure that we have the provision of firepower, the balance sheet around the cash flow to be able to recruit good people whenever they become available because our strategy is to continue to grow the talent level of the firm.

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Operator [28]

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

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [29]

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Maybe just talk a little bit about SMD headcount growth. It's really accelerated, both gross and net basis, the last 3 years. Seems like internal promotes are becoming a bigger part of that. Last year, close to 50%. This year could be close to that. Is the internal pipeline of SMDs given the -- sustainable at this pace? And I guess how confident are you in generating the same level of productivity from all these new hires that you've been generating over the last few years?

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

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Well, internal promotes are always going to be a little lumpy just like external hires are. I think as a general matter, if you look at the stock of our advisory SMDs now, it's roughly 1/3 are internally promoted. That's up from 10%, 11% 8 or 9 years ago. And if you look at the flow last year, it was almost 50% internal promotion. I happen to feel, and I know John agrees, that this is a very healthy thing. That is ultimately how we create a self-sustaining enterprise. We have a terrific backlog of talent that would be eligible for promotion over the next 1, 2, 3 years. I have no idea since we have a committee now that's a group of 2 or 3 who decide promotions and we won't know until late next year how many make it. The one point I would also add, and then I'm sure John will have some observations as well, is that our productivity from our internal promotes is virtually identical to that of the people that we hired externally. And that's after we've sorted through those who weren't a perfect fit with our business model, which, fortunately, there have been fewer and fewer of those in more recent years. So we have a very rigorous process, and that rigorous process has served us extraordinarily well.

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

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My perspective on this is that if you think about what we've really tried to accomplish is we've tried to have -- continued to increase the talent level of the firm and to continue to build to increase our capabilities with respect to advising clients in more things that are relevant to them. And if you think about it that way, you realize that we need to continue to add good people, and those good people can come through promotion, which is really a desirable way to do it because, as Ralph said, if we can continue to develop and promote great people, that's a tremendous way to actually drive SMD growth but also looking outside for highly talented people who want to come and join the team. And we continue to have real opportunities, and there's more white space for us to really fill with the talent group. So I think Ralph and I anticipate that we will continue to keep adding people as they -- as good people become available, and we don't really see a limitation to that at this time.

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

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Jim, it's Bob. Just to put a point on Ralph's comments on productivity, clearly when we look back in time, as Ralph noted, the productivity for our internal promotes has matched that of those we had hired externally as they've ramped up and they've evolved over time. As your question noted, we've had a very large class this year and the year before, so we're watching the productivity ramp of those 2 classes carefully, as we always do. It's too soon to articulate performance for them. But as Ralph said, the standard and the expectation is the same.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [33]

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Right. I would imagine the ROI on internal promotes is pretty good, too. Okay. Maybe just a follow-up. You guys have laid out a lot of white space to grow with these hires. Is there any kind of priority? Is it that Europe is kind of dead on its back, that's an opportunity set to kind of take advantage of that and build for the next maybe rebound there? Or is it hey, we want to fill out restructuring? Is there any -- is it just -- (inaudible)? Or is it -- there's some focus on where you are investing the most?

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John S. Weinberg, Evercore Inc. - Executive Chairman [34]

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We have identified areas really across the board that we think have need for investment from us. But as we've said, we're only going to grow in places where we can put A-plus talent into work on it. And specifically on Europe, we've been here. We've been talking about the business plan here. There are tremendous opportunities here for us. And our -- we really like our business model, and we very much like the people we have who are driving our business here, and we think there is room to grow. Now we're going to grow responsibly. We're not going to kind of crash in with a whole number -- a huge number of bodies and look at things that are uneconomic. We're going to actually do as we've done consistently, which is that we look for A talent, we bring the A talent into places where we think there is white space and we match it. There is definitely opportunity in Europe, and we've been discussing that and we're on a path to continue to grow here. But also, in really virtually all of our businesses, we have opportunities. We are -- we're not that big and we're growing. And I think our brand is continuing to have resonance with clients. And so I think there are increasing opportunities really across the board. And so we're going to continue to look at it that way. I don't think there is really a limit right now to us. So the real constraint for us is we go slow because we're very careful. We hire one person at a time.

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Operator [35]

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And our next question comes from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [36]

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So just to approach the kind of where you're investing question in just a slightly different angle, so what we're kind of hearing from the largest banks is that they're actually looking to expand coverage into smaller-cap companies. So in the past, you've really kind of talked about focusing on deals that would generate a fee of about $1 million or more. So as you kind of talk about broadening coverage, would that also include moving down cap and working on deals that could generate lower fees?

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [37]

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No. I think, if anything, a little bit more in the other direction. We welcome the competition. We think we have a very good and balanced across-market-cap business model while our -- obviously, as John indicated, we're in 4 of the 6 largest deals announced so far this year, so we obviously have a meaningful presence in large-cap companies. But if you look -- I have no idea what it is this year, year-to-date. But if you look historically in our mean deal, or mean -- the average size of transactions we announced, it's $2 billion to $3 billion. And if you look at the median, it's $600 million, $700 million typically in any given year. So I think one of the things that's pretty unique about our franchise among the independent firms is that we have a strong presence in large-cap transactions, but we also do a lot of transactions.

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John S. Weinberg, Evercore Inc. - Executive Chairman [38]

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What I found when I came here was that the -- this firm was more focused on quality rather than size. And so we were very willing to do business with high-quality companies that may not be big. And so there's a very strong business in the middle market at Evercore. Having said that, we also have a strong business in the upper middle and in the large-cap market. And I think that if anything, what we're trying to do is just continue to build on all levels. I think we provide real service to middle market companies because we know them well and we've done that business for quite a while. But we also, as we've said, are building out services to serve the very large-cap companies and get involved in some of their most important things. And that's the strategy, to really maintain it on all of the different levels.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [39]

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Great. And just for the M&A environment, you had touched on consumer and health care really being kind of strong verticals so far this year. Which verticals conversely have been kind of quieter this year for you guys? And then also, we saw a large deal in the energy space last week. And so with oil kind of drifting closer to $70 a barrel, do you really expect a pickup in energy-related M&A? Are you kind of seeing a pickup in conversations in the energy space?

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John S. Weinberg, Evercore Inc. - Executive Chairman [40]

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Our energy people are very busy right now. They're in -- they are running very, very hard. So in -- with respect to the energy vertical, I think, obviously, the volume levels have intensified, but we seem to be in a lot of different situations right now. And it -- the activity level in that area continues to be high maybe because our bankers are working really hard to create -- to provide value for clients. I would say in terms of our business, we pretty much see a pretty healthy set of discussions across the board. I mean I couldn't say that in terms of the activity level, that there's any group that's really quiet right now for us.

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Operator [41]

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

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Hang Leung, Wolfe Research, LLC - Research Analyst [42]

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This is actually Sharon Leung filling in for Steven. So I just wanted to ask on the non-comps. Just how did you think about the trajectory of non-comps going forward? You had cited the non-comp per employee that was up a little bit year-on-year. Just looks like some of that uptick is related to fixed expenses. You had also cited some of the investments in facilities. So just wanted to get a sense of how that should traject going forward and if we should expect that kind of uptick to continue.

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Robert Brien Walsh, Evercore Inc. - Executive VP, Senior MD & CFO [43]

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So as I said in my remarks, the headcount growth remains the primary driver of non-compensation expenses for us. The fact that the average for the quarter per employee is up a little bit is consistent with the discussion we've had for more than a year that we're investing rather significantly in facilities. So we've added square footage at a rate faster than we've added people. That will normalize but probably over a couple of years. So heads are the driver. As I did mention, the change in presentation of client-related transaction expenses will introduce a little bit of variability both from our underwriting and our advisory engagements. Certainly, it had a modest impact in the first quarter. But the driver, as it has been, is going to be the growth of the business and adding heads.

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Hang Leung, Wolfe Research, LLC - Research Analyst [44]

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Okay. Great. And then just a quick follow-up on the restructuring outlook. I know you had cited strength in the retail and energy sectors. Just wanted to get a sense of what your outlook is for that business going forward and what the backlog looks like at the moment.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [45]

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Well, as I said in answer to another question, that our advisory revenues last year were up in every category, including restructuring, notwithstanding the fact that default levels are at almost all-time lows. So I think we've been able -- we've added talent in the restructuring area. We think we are well positioned to capitalize on a pickup of activity when that inevitably happens. But other than relatively isolated sector activity like retail or like we saw in energy 2 or 3 years ago, there certainly is no broadscale pickup in distressed companies at this point in time.

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John S. Weinberg, Evercore Inc. - Executive Chairman [46]

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And the other thing I would add to that is that what we have done is, to our traditionally strong debtor business, we've increasingly engaged with clients on the creditor side. So we've really added an element to the way we cover clients, and that, we think, may lead over time to more velocity, more business in the restructuring business generally.

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Operator [47]

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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 remarks.

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Ralph Lewis Schlosstein, Evercore Inc. - President, CEO & Director [48]

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Thank you very much for your time, and we look forward to talking to you in 3 months. Thank you.

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Operator [49]

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Ladies and gentlemen, this concludes today's Evercore First Quarter 2019 Financial Results Conference Call. You may now disconnect. Everyone have a great day.