Evercore Inc. (NYSE:EVR) Q1 2024 Earnings Call Transcript

Evercore Inc. (NYSE:EVR) Q1 2024 Earnings Call Transcript April 24, 2024

Evercore Inc. misses on earnings expectations. Reported EPS is $2.02 EPS, expectations were $2.2. EVR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Evercore First Quarter 2024 Earnings Conference Call. Today’s call is scheduled to last about 1 hour, including remarks by Evercore management and the question-and-answer session. [Operator Instructions] I will now turn the call over to Katy Haber, Managing Director of Investor Relations and ESG at Evercore. Please go ahead.

Katy Haber: Thank you, operator. Good morning and thank you for joining us today for Evercore’s first quarter 2024 financial results conference call. I am Katy Haber, Evercore’s Head of Investor Relations and ESG. Joining me on the call today is John Weinberg, our Chairman and CEO; and Tim LaLonde, our CFO. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore’s first quarter 2024 financial results. Our discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website and an archive of it will be available for 30 days beginning approximately 1 hour after the conclusion of this call.

During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make 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 in Evercore’s filings with the SEC, 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, which 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 is posted on our website. We continue to believe that it is important to evaluate Evercore’s performance on an annual basis. As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closing. I will now turn the call over to John.

John Weinberg: Thank you, Katy and good morning everyone. We have started 2024 on a strong note, having advised on 5 of the 15 largest global deals announced in the first quarter. Based on the current competitive landscape and our success so far this year in announced transactions, Evercore finished the first quarter among all firms, ranked fourth in the global league tables and third in the U.S. Consistent with our commentary from a few months ago, we continue to see momentum build as client activity levels remain high. Additionally, the dollar value of industry-wide global deal announcements, particularly of larger sized transactions has increased. We also continue to see the broader market environment improve, including significantly increased equity issuance and leveraged finance volumes, indicating better financing availability for transactions.

This has led to a further build of our backlogs. That said, activity levels in smaller to midsize transactions have been less robust. And while it is encouraging to see a significant increase in larger deals, the timeline to close these transactions can be longer and the process more complex. As for sponsor activity, we have seen sizable transactions in April and we believe sponsor activity should continue to gain momentum. We continue to watch the trajectory of interest rates, which may have some impact. Overall, our first quarter financial results do not yet meaningfully reflect the improvement in the announcement activity levels, which we expect to see realized in revenue later this year and into next. That said, we continue to closely monitor the geopolitical, economic and regulatory environment, which could further alter the trajectory of the recovery.

As we have discussed at length last year, we hired our largest class of investment banking senior managing directors in the firm’s history and we are pleased to have all 11 new SMDs now at Evercore, including one who joined us in January, who covers the real estate sector. Building on that momentum, we recently hired an investment banking SMD, who has committed to join later this quarter to cover the asset management sector. We will continue to recruit A+ talent into areas where we see significant opportunities, including those of geographic, sector and product white space. We currently have a strong pipeline of high-quality candidates though it is too early in the year to know the outcome of many of these discussions. In addition to our externally hired SMDs, we started the year off with a class of 7 promoted investment banking SMDs. This newly promoted group, coupled with our other ramping SMDs, continue to be critical to our future growth.

In our equities business, 3 SMDs have joined, including our Chief Strategist of International Political Affairs and Public Policy, our new Head of Sales, and a senior analyst covering semiconductors. Now, let me briefly discuss the quarter. There were several highlights in our investment banking business during the first quarter. We advised on some of the most notable transactions that have been announced year-to-date, including General Electric on its spin-off of GE Vernova for $37 billion; Synopsys, on a $35 billion acquisition of Ansys; CD&R on its acquisition alongside Stone Point Capital of Truist Insurance from Truist Financial for $15.5 billion; Global Infrastructure Partners on its $12.5 billion sale to BlackRock; and Chesapeake Energy on its $11.3 billion combination with Southwestern Energy.

Our European advisory team had a slower start to the year, and deal closing time lines remain elongated compared to years past. However, we are seeing an encouraging pickup in deal announcement activity, and we expect that to be significantly more heavily weighted in our results toward the second half of the year. Our strategic defense and shareholder advisory business started the year on an active note, as the team continues to maintain leadership in many high-profile defenses and expand its footprint. The momentum in our liability management and restructuring practice has continued in the first quarter. While credit markets have been accommodative, lower-quality credits still face financing challenges, which will continue to drive activity.

Our private capital advisory and fundraising groups have had an active start, and the pipeline continues to grow. While the fundraising environment industry-wide has faced some headwinds, our business has performed well. Our teams once again continued to be recognized for their achievements, including having been named Secondaries’ Adviser of the Year in the Americas and Europe and Placement Agent of the Year by Private Equity International. Turning to underwriting. Both the market and Evercore have seen a robust return of activity in the market generally and the beginning of a recovery among IPOs. Our first quarter results in this business represented our best quarter since the fourth quarter of 2021. Our activity in the quarter was diversified across sectors, including health care, tech and consumer.

Evercore was a book runner on two of the three largest IPOs in the quarter, including Astera Labs’ $820 million offering, which is the best-performing IPO year-to-date among IPOs greater than $50 million. Our equities business had a solid quarter despite operating in the market with the lowest levels of volatility to start the year since 2017. Our sales and trading teams remain highly engaged with our clients, especially with our increased ECM activity. Our research analysts continue to produce some of the best content on Wall Street and hosted numerous high-impact and differentiated corporate access events for clients. Lastly, in Wealth Management, we ended the quarter with a record AUM of approximately $13 billion and long-term performance and client retention rates remain very strong.

Looking forward, we remain optimistic. We have a stronger and deeper team of professionals than at any time in our history. The economy to date has been more stable and resilient than broadly anticipated, though we continue to monitor it closely. The capital raising environment has shown signs of strengthening, and we are experiencing a pickup in transaction activity. This environment should provide a solid foundation for Evercore as we continue to execute on our strategy, and we believe we are well positioned for sustained growth and success in the medium and long term. With that, let me now turn it over to Tim, who will discuss our financial results in more detail.

Tim LaLonde: Thank you, John. Through the end of the first quarter, we saw several themes play out, many of which we have discussed on our previous earnings call. Global announced M&A activity on a dollar volume basis in the first quarter was up 42% year-over-year, and U.S. M&A volume on the same basis was up 81%. Larger transactions have led the way. With the total number of deals announced globally above $100 million, down 7%, but the number of announced deals over $1 billion is up 47%. Evercore has played a meaningful role in that, with, as John said, advising on 5 of the 15 largest global transactions year-to-date. Our larger announced transactions are generally expected to close in the latter part of this year and into the following year.

Given this dynamic, our first quarter financial results do not yet fully reflect the increased momentum we are experiencing. Overall, we continue to feel positive about the trajectory of the broader M&A, capital markets and financing environment as our backlogs continue to build, and we expect to see greater revenue strength in the second half of this year and into the next year. I will now discuss our first quarter financial results. For the first quarter of 2024, net revenues, operating income and EPS on a GAAP basis were $581 million, $84 million and $2.09 per share, respectively. My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website.

Our first quarter adjusted net revenues of $587 million increased 2% versus the first quarter of 2023. First quarter adjusted operating income of $91 million decreased 22% versus the first quarter of 2023. Adjusted earnings per share of $2.13 decreased 1% versus the first quarter of last year. Our adjusted operating margin was 15% for the first quarter, in line with our operating margin in the last couple of quarters and we had a net tax benefit this quarter for which we will provide additional commentary. Turning to the businesses. First quarter adjusted advisory fees of $431 million declined 7% year-over-year. While our advisory fees were lower versus the prior year period, we believe the trajectory of the business today is much better than a year ago.

After 2 difficult years, our first quarter underwriting revenues were $56 million, up 143% from a year ago. Commissions and related revenue of $48 million in the first quarter was flat year-over-year, primarily reflecting higher subscription fees partially offset by lower trading commissions. First quarter adjusted asset management and administration fees of $20 million increased 17% year-over-year, primarily reflecting an increase in AUM. First quarter adjusted other revenue net was approximately $33 million, which compares to $27 million a year ago. The primary driver of the other revenue reflects higher interest income earned on short-term investments. The balance primarily reflects gains in our investment funds portfolio, which is used as a hedge for our DCCP commitments, as equity market values increased in the quarter.

Turning to expenses. The adjusted compensation ratio for the first quarter is 66%. It is still early in the year, and so this figure represents our best current estimate based on things like expected revenue, headcount, market levels of compensation at year-end and other relevant factors. But our visibility on full year revenues at this point in the year is still limited. It is important to note, however, that we are striving to make improvements in our compensation ratio and to appropriately balance this with our plan to continue building the firm in an effort to best serve our clients and create value for our shareholders in the medium and long-term. Shifting to non-compensation expenses. They were $109 million this quarter, up 14% from a year ago and up 2% from last quarter.

The increase from a year ago is primarily driven by three things: First, professional fees increased, reflecting higher client-related expenses, including certain billable fees which were collected but not offset in this expense line. Second, travel and related fees reflected an increase in client engagements and consequently, an increase in the number of flight and hotel bookings in this quarter compared to a year ago. As we have said previously, though we work hard to manage our expenses, increased activity with our clients is a good thing, and we expect to see a corresponding increase in revenues. Third, Communications and Information Services expense increased due to continued investment in IT services to support firm growth, including certain technology initiatives as well as higher license and research fees.

However, to provide some perspective, I would mention two things: First, our non-comp expenses have been roughly correlated with our employee headcount. And on that basis, our non-comp expense per employee is up from the first quarter of 2019, the pre-COVID year, about 5.6% or a little more than 1% per year. Second, we anticipate that our full year non-comp expense ratio should be consistent with or compare favorably to our pre-COVID non-comp expense ratio. Our adjusted tax rate for the quarter was a benefit of 9.3% compared to an expense of 15.2% in the first quarter of last year. The tax rate for this quarter reflects a tax benefit associated with the vesting of stock compensation awards similar to a year ago and most prior years prior to that, which is why our first quarter effective tax rate typically is lower than that of subsequent quarters.

This year, we received a greater benefit as our stock price appreciation was higher than last year, and in fact, than in any prior year. We would anticipate that our effective tax rate for the remaining three quarters of this year should be similar to what we have experienced in prior years in those periods. Turning to our balance sheet. As of March 31, our cash and investment securities totaled nearly $1.4 billion, which is down approximate from approximately $2 billion at the end of last year, due to the payout of bonus compensation in March and repurchase of 1.5 million shares. We continue to maintain a strong cash position, taking into consideration the current economic and business environment, cash needs for the implementation of our strategic initiatives, including hiring plans and preserving a solid financial footing.

We remain committed to our goal of returning excess capital to our shareholders. In the first quarter, we returned a total of $309 million to shareholders through dividends and repurchases of 1.5 million shares at an average price of $177.04. Consistent with historic practice, in the quarter, we bought back stock through net settlements and in the open market, offsetting the dilution from the RSU grants that were issued in the quarter as part of our annual bonus compensation process. Additionally, our Board declared a dividend of $0.80 per share, an increase of 5% from the prior dividend declared. Our first quarter diluted share count was 43.7 million, essentially flat from the prior year and prior quarter. As John mentioned, it is still early in the year, but we are pleased with our position thus far.

Based on our increased backlogs and building on the momentum from announcements in the last couple of quarters, we have confidence in the trajectory of the market recovery and in our results as the year progresses. We also expect to see improvement in our comp and non-comp ratios this year and into the future. We believe we are well positioned to continue to execute on our strategy and deliver strong performance. With that, we will now open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question will come from Devin Ryan with Citizens JMP. Please go ahead.

Devin Ryan: Hey, thanks. Good morning, John and Tim. How are you?

John Weinberg: Good, Davin.

Devin Ryan: Good. I just want to ask a question, digging a little bit more around what you’re seeing in the sponsor community. I know in the prepared remarks, you talked about sponsor activity picking up. But then on the other hand, interest rates could play a factor. So I just wanted to talk a little bit about what you’re seeing with that client segment. And how much the mood has shifted with sponsors just with maybe the view that we’re going to be in a higher for longer interest rate environment and how that’s kind of evolved over the last few months. So just like how the tone has changed with that group and whether their enthusiasm has been shifting with that interest rate change as well? Thanks.

John Weinberg: Thank you, Devin. It’s interesting. I think the sponsor community is becoming more set on moving forward than has been in the past. And I think part of it is that there’s just an intensity level that they need to get back to business. I think that there is clearly going to be a higher for longer that there is – that people are looking at. But I think that there’s a lot of dynamics in and around the sponsor population that really is going to play into how the deals go forward. And I think our observation would be that the activity levels are very high, and there is a real intention to start making things happen. One very important factor is the LP community, which really is very much of the view that they would like to see transactions happen and get some capital returned, frankly, so they can put capital back to work.

It’s been a long time since they’ve really had really healthy returns and they really need that. GPs are thinking about how they raise funds. And I think generally, there is a view that it’s important to start really showing activity. As you know, there’s about $3.8 trillion of dry capital ready to go. And I think that really the sponsors are feeling like they need to move. Our experience with the sponsors is that there’s a level of intensity and intention that we haven’t seen for quite some time. So our view is that it’s going to pick up. Clearly, rates will have some impact. I certainly don’t want to paint a picture that that’s not important. But I think that there are some other factors that play here that are going to make sponsors push much harder.

Devin Ryan: Yes, that’s great color. Thanks, John.

Operator: Thank you. Our next question will come from Brennan Hawken with UBS. Please go ahead.

Brennan Hawken: Good morning, thanks for taking my questions. I’d like to clarify on the Tim’s comments on the non-comp ratio. So when you say pre-COVID, if I take a look at the average of years 2013 to ‘19, I get to about 17%. Is that the sort of approach that you would suggest? Or were you looking at a narrower band of years? And how should we interpret that? Thanks.

Tim LaLonde: Yes, and thanks for the question, Brennan. If you look at the pre-COVID years, it bounced around a bit, and some of it depends on how the revenue is. And honestly, we think we can do better than that is what we’re anticipating.

Brennan Hawken: Okay…

Tim LaLonde: To depend, of course, to where the revenues fall out, right, because that’s part of the equation. But we think we can do better than that.

Brennan Hawken: Okay. Okay. So we should more think about it like the range of the pre-COVID years rather than like just a average?

John Weinberg: Yes.

Brennan Hawken: Thanks for clarifying.

Operator: Thank you. Our next question will come from Steven Chubak with Wolfe Research. Please go ahead.

Brendan O’Brien: Good morning. This is Brendan O’Brien filling in for Steven. So I guess I just wanted to touch on the election. I mean, last quarter, it sounded like you and your peers have yet to see the election have any noticeable impact on your dialogues with clients. However, with the election, at least in the U.S., now just 7 months away, I want to get a sense as to whether that has changed at all? And if you see any risk of the election having a dampening effect on M&A activity in the back half of the year?

John Weinberg: It’s always hard to look forward that far. Having said that, if you look at past elections, they haven’t really had a major impact on the merger market generally. Now that can always change, and this could be different. Our premise really in the way we’re thinking about the world is that it’s not going to change, with respect to how people think. Now there are other factors that we are looking at very closely, whether it’s how the market performs, the geopolitical stability, how – what’s going to happen with inflation, those are all things that are important and obviously, interest rates, which we’ve already mentioned, will be something that I think will have a real impact. But with respect to the election, we’re not looking for that to have really major game-changing impact.

Brendan O’Brien: Great. Thanks for taking my question.

Operator: Thank you. Our next question will come from James Yaro with Goldman Sachs. Please go ahead.

James Yaro: Good morning, and thanks for taking my question. You did talk about continued strength in restructuring in the quarter. Maybe if you could just help us contextualize your outlook for this business over the course of the balance of 2024 and maybe into 2025, given higher for longer interest rates.