Evercore Inc. (NYSE:EVR) Q4 2023 Earnings Call Transcript

Evercore Inc. (NYSE:EVR) Q4 2023 Earnings Call Transcript January 31, 2024

Evercore Inc. beats earnings expectations. Reported EPS is $2.02, expectations were $1.63. 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. Today’s call is scheduled to last about one hour, including remarks by Evercore management and a 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 on Evercore’s fourth quarter and full year 2023 financial results conference call. I’m 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 fourth quarter and full year 2023 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 one 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 a number of 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 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 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 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. Good morning everyone. 2023 was a year of significant investment for Evercore and the firm gained momentum, which had continued into 2024. Despite the challenging market environment, we’ve continued to strengthen our franchise by investing in and diversifying our business. We hired our largest class ever of Advisory Senior Managing Directors and we expanded our client relationships and coverage universe. Our competitive positioning and strategic focus provided us with the opportunity to hire this new group of exceptional talent and we expect to continue investing in our business in 2024. Over the past decade, we’ve broadened and deepened our capabilities which have significantly transformed the firm.

Aside from being a market leader in the M&A business, which has always been core to what we do, we’ve invested heavily in virtually all of our businesses in which we’ve built real scale. This build-out has led to a significant diversification of our revenues. In fact, in 2023 more than a third of our revenues came from non-M&A sources. This growth has provided us with the ability to comprehensively service our clients in nearly all areas of investment banking, which has positioned us once again as the fourth largest investment bank globally based on Advisory Fees. We believe we are better positioned today than at any other point in our history. Today, our internal backlogs continue to strengthen. When coupled with a better market environment, and our current and ramping SMD base comprised of both external hires and internal promotes, we expect to see higher activity levels and an increase in our firm’s productivity over time.

We are now a month into the new year, and we’re encouraged by what we see. Activity and confidence levels have continued to improve, building off momentum we saw towards the end of last year. So far as a firm, we’ve been very active and involved in some of the largest and most notable transactions to date. We remain hopeful that 2024 will present an improved operating backdrop for the M&A and capital raising markets. However, it is still early days and we continue to closely monitor the geopolitical and economic uncertainties that could alter the timing and strength of an M&A recovery. As a result, we expect the recovery to be a slow build. Before I discuss our businesses, I want to touch further on our hiring activities. We’re pleased with our 11 newest Advisory SMD additions, bringing on board some of the highest quality bankers in their respective areas of expertise.

These include technology in both US and Europe, sponsor coverage, business services, industrials, real estate and capital advisory, all areas of strategic significance to Evercore. Looking at 2024, we will continue to be active in the market and recruit talent based on our strategic needs, while maintaining our high standards. Additionally, developing talent from within remains critical to our strategic build-out. We begin 2024 with seven newly promoted SMDs in our Advisory business across various sectors and capabilities, as well as one in our Equities business. This expanding group of high quality bankers will allow us to provide enhanced coverage and service to our growing client base. About 40% of our Advisory SMDs had been promoted from what’s inside the organization, and we are committed to further growing this group.

Let me now spend a couple of minutes on highlights from the quarter and year. As we previously discussed, our full year financial results reflect a challenging operating environment. Tim will discuss our financial results and metrics in detail in a few minutes. In the fourth quarter, confidence levels and credit availability started to improve. M&A activity subsequently picked up notably with some large transactions. Nevertheless, in 2023, industry-wide M&A announcement activity remained below historical levels, particularly among sponsors. For the year, global announced M&A activity based on deal value was down almost 20%. If for Evercore specifically announced global M&A activity as measured by deal value was up over 40% versus the year prior, due in part to announcements late in 2023.

In the fourth quarter, we advised on several transformative transactions, including Chevron on its $60 billion acquisition of Hess, U.S. Steel on its sale to Nippon Steel for $14.9 billion and NFP on its sale to Aon for $13.4 billion. In 2023, we were involved in four of the 10 largest deals, all of which were announced in the second half of the year. This momentum has continued into the first few weeks of 2024. We have advised on three of the largest announced global strategic transactions, including Synopsys on its $35 billion acquisition of Ansys, which is the largest deal year-to-date. Additionally, we advised global infrastructure partners on its sale to BlackRock for $12.5 billion and Chesapeake Energy on its $7.4 billion merger with Southwestern Energy.

As we mentioned in our last earnings call, we continue to make progress on our sponsor coverage efforts. For the last several years, 30% to 45% of our Advisory revenue has been sponsor related, including deals in our private capital businesses. Our European Advisory Group had a solid quarter and year despite continued macro and geopolitical challenges. The team has a very healthy pipeline as we enter 2024, yet execution and closing time lines remain elongated. We continue to focus on further expanding in the region and we are excited about the opportunity set there. Our private capital advisory and fundraising businesses finished 2023 on a strong note. This was driven in part by robust continuation fund activity in which we are the market leader.

In the fourth quarter, we also priced our first ever collateralized fund obligation security, which marks the successful addition of a new product capability. Additionally, our private fundraising group had its second best year ever. Demand for our private capital advisory businesses continues to grow. Our strategic defense and shareholder advisory business had a strong year as activist campaigns continued near record levels, both in the US and internationally. As markets remain challenged and interest rates elevated, our restructuring business had another strong year. Activity in the fourth quarter continued at a robust pace in a large part driven by liability management activity among sponsors. We’re beginning 2024 with a strong pipeline for opportunities.

In underwriting, the market and our business did not yield the level of activity or results many were hoping to see in the fourth quarter or for the full year. In the year, we were a book runner on nearly all of our underwritten equity offerings. Of note, we were the left lead book runner on a $2.2 billion offering for GE Healthcare Technologies. We remain focused on improving our market share by continuing to diversify across sectors and products as well as elevating our underwriting position on deals. Our equity franchise closed out the year with its strongest fourth quarter performance in the last five years. Despite continued low volatility and market volumes, we recently announced the additions of top-ranked analysts in the biotech, consumer and technology sectors as well as in public policy.

Lastly, in Wealth Management, our assets under management ended the quarter at $12.3 billion, which is the highest month-end AUM point since the businesses inception. While 2023 was another challenging year for the industry and Evercore, we are proud of what we’ve accomplished. As we begin a new year, we’re excited for the opportunities that lie ahead for the firm. We remain focused on executing our strategic plan by continuing to invest in, expand and deepen our capabilities and products as well as further enhancing our intellectual capital. With that, let me turn the call over to Tim.

Tim LaLonde: Thank you John. Our fourth quarter results reflect further stabilization in the operating environment and an increase in activity levels for several areas of our business as well as some seasonality. In 2023, we generated over $2.4 billion in net revenues in one of the most challenging financial markets since the global financial crisis. As John mentioned, our diversified revenue streams have provided significant support and strong results in the last quarter, and throughout much of last year. We ended the year on a solid note, and we continue to see activity levels strengthen, particularly among larger situations. However, it is important to note from a timing perspective that many of these larger transactions are not expected to close until the latter part of this year and into the following year.

The impact to financial results is not immediate, but will build and be recognized over time. I will now discuss our fourth quarter and full year financial results. For the fourth quarter of 2023, net revenues, operating income and EPS on a GAAP basis were $784 million, $118 million and $2.03 per share, respectively. For the full year, net revenues, operating income and EPS on a GAAP basis were $2.4 billion, $359 million and $6.37 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. Fourth quarter adjusted net revenues of $790 million declined 6% versus the fourth quarter of 2022.

On a full year basis, adjusted net revenues of $2.4 billion declined 12% compared to last year. Fourth quarter adjusted operating income of $124 million decreased 43% compared to the fourth quarter of 2022. Adjusted earnings per share of $2.02 decreased 42% versus the fourth quarter last year. For the full year, adjusted operating income of $385 million decreased 47%, and adjusted earnings per share of $6.46 decreased 46% versus the full year 2022. Our adjusted operating margin was 15.7% for the fourth quarter and for the full year. Turning to the businesses. Fourth quarter adjusted Advisory Fees of $660 million were down 6% year-over-year. Adjusted Advisory Fees were $2 billion for the full year, an 18% decline compared to 2022. By our estimates, we have increased our market share again this year.

Fourth quarter Underwriting Fees of $19 million were down 57% compared to the fourth quarter of 2022. For the full year, Underwriting revenues were $111 million, down 9% versus last year. Equity issuance for last year was well below normal levels and for the fourth quarter, issuance activity did not experience the strong pickup that we had hoped for. We have a strong team in place and believe we will see a pickup in our revenues as the markets begin to normalize. Commissions and related revenue of $56 million in the fourth quarter were up 4% year-over-year, which, as John mentioned, reflected our strongest fourth quarter in the last five years. For the full year, Commissions and related revenue of $203 million were down 2% compared to 2022.

Fourth quarter adjusted Asset Management and Administration Fees of $19 million increased 13% year-over-year, while full year revenues of $73 million increased 3% compared to 2022. Fourth quarter adjusted other revenue net was a gain of approximately $37 million, which compares to a gain of $18 million in the fourth quarter of 2022. For the full year, adjusted other revenue net was a gain of $98 million compared to a loss of $9 million last year. As I mentioned on prior calls, the significant swing year, year-over-year, was driven by two primary factors. First, approximately two-thirds of the net gain we recognized was interest income due to higher short-term rates in 2023 and 2022. Second, the balance was from gains in our investment funds portfolio, which is used as a hedge for our DCCP commitments as equity market values increased significantly in the year.

The large difference between last year’s number and this year’s is primarily due to returns in the equity markets. These gains were partially offset by minor foreign currency adjustments. Turning to expenses. The adjusted compensation ratio for the fourth quarter was 70.8%. Our full year reported adjusted comp ratio was 67.6%. Our full year comp ratio is consistent with the commentary I provided on last quarter’s earnings call. When I mentioned, we expected the second quarter ratio of 67% and the third quarter ratio of 68% would be generally representative of our full year estimates. As I mentioned on last quarter’s earnings call, the increase in our compensation ratio is a byproduct of the weaker revenue environment, amortization of prior year awards, the onboarding of our new senior hires and the market level for compensation.

We had a strong recruiting year in 2023 and we do not begin accruing for our new hires until they arrive. Most of our new advisory SMD additions joined late in the year, and we recognized their compensation from the start date through year-end, which contributed to the higher fourth quarter ratio. We will continue to strive to make improvements on our compensation ratio. Ultimately, it will depend on the timing and magnitude of improvement in the environment and our revenues, among other factors. Shifting to non-compensation expenses. Fourth quarter non-comp cost of $107 million were up 11% from a year ago. For the full year, non-comp costs of $407 million also were up 11%, primarily driven by increases in travel and related expenses, higher license and research fees as well as other operating expenses.

As a reminder, our non-comp expenses from a year ago reflected a reversal of a liability, which meaningfully decreased our non-comp expense in 2022, resulting in a larger increase year-over-year. Without the net impact of this, the increase in non-comp expense would have been approximately 8%. The other significant impact was travel expense, which accounted for about 4 percentage points of the 11% increase. These two items, the expense reversal and the travel expense normalization accounted for the majority of the increase. While our non-comp expenses per head were higher relative to the prior year, they still were about 4% lower than in 2019, the pre-COVID year. Our adjusted tax rate for the quarter was 25.3%, down versus last year. The full year adjusted tax rate was 23.4%, also down slightly relative to the prior year.

Turning to our balance sheet. As of December 31, our cash and investment securities totaled about $2 billion, which is up from $1.6 billion at the end of last quarter. 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. For the full year, we returned a total of $523.5 million to shareholders through dividends and repurchases of 3 million shares at an average price of $129.04. Our fourth quarter adjusted diluted share count increased to 43.4 million. Relative to a year ago, our share count is down slightly. Our capital return philosophy has not changed.

We remain committed to repurchasing shares to offset the dilution from our RSU year-end bonus grants. Beyond that, we strive to return capital through dividends and share repurchases based on our cash needs and strategic goals, coupled with our ability to maintain a durable balance sheet. As John mentioned, our backlogs are strong. We are seeing strength and momentum across a number of our business lines, and we look forward to what this next year will bring. With that, we’ll now open the line for questions.

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Q&A Session

Operator: Thank you. We will now conduct the question-and-answer portion of the conference. [Operator Instructions] Our first question comes from James Yaro with Goldman Sachs.

James Yaro: Good morning, and thanks for taking my question. So if I look at completed revenue this quarter versus the Dealogic, the magnitude that’s not explained by the Dealogic did reach a fairly large magnitude in the fourth quarter. So maybe you could just speak to which of the non-M&A Advisory businesses performed so well in the quarter and then the sustainability of these? And then specifically, just on the restructuring backdrop, obviously, financing and financial conditions have improved towards the year-end and into January. So how should we think about the ability for restructuring to remain at an elevated level into 2024?

Tim LaLonde: Sure. So let me start with the Dealogic question. And so that — the way they calculate that is they look at deal announcements and then they have an algorithm that estimates revenue. And so there’s two areas for potential discrepancy. One is, to the extent, the algorithm differs from the actual revenue. And that’s, of course, going to happen in almost every case, although I know they’re hoping for a portfolio effect where across a large number of transactions that’s relatively close, but it’s not always as you’ve seen. Second thing is it doesn’t pick up our capital advisory business. And so the capital advisory business, of course, includes PCA and PFG and real estate capital advisory as well. And those businesses really had a very strong year and a particularly strong quarter. And that would perhaps have widened any normal discrepancy you might have seen.

John Weinberg: Let me pick up because the question on restructuring business. The restructuring business had a very good year last year and bookings going into 2024 are quite strong also. We actually feel very good about our prospects going forward. The business is really diversified. It’s liability management and also we’ve built out our creditor business as well as our strong traditional debtor business. So generally, we think that, that business will continue its momentum. It’s one of the businesses that we think will have strength going into the year and through the year.

Operator: Our next question will come from Jim Mitchell with Seaport Global.

Jim Mitchell: Hey, good morning. Just maybe a question on the headcount and investments. You guys — it was a heavy investment year but if you look at net headcount growth, I think it was sort of on the SMD side, mid-single digits, total head count 4%. So how do we think about the implication for productivity? And how are you thinking about net hiring in 2024? Thanks.

John Weinberg: Well, our — the way we think about hiring is that we are looking at all the areas where we think we have strategic imperatives, and we move into that. We have a very strong pipeline going in with respect to hiring. We will make decisions as we go. We are also trying very hard to make sure that we are being responsible about headcount. And so we’re really making sure that we manage people coming in and also there are some that are leaving in the process. I think the best way to think about our head count is that we’re going to actually grow where we think it’s actually going to be productive for the firm, and we are definitely in the market, and we’re going to continue to be responsible in managing our numbers going forward. We clearly are trying to make sure that we grow commensurate with our opportunity.

Operator: Our next question will come from Ryan Kenny with Morgan Stanley.

Ryan Kenny: Hey, thanks, good morning. So just want to clarify on the comp ratio comments when you said that you expect to continue to improve on the comp ratio. Was that against the 67.6% number for the full year or against the 70.8% number for the fourth quarter? And any thoughts on where you want that ratio to head towards this year? Thanks.

John Weinberg: Yeah, sure thanks, Ryan. The short answer is both. I think the 70.8% fourth quarter number was unusually high, and that was due to some extent to the back-end loading on the arrival of our new SMDs. With respect to the 67.6%, we’re absolutely striving to improve on that. And as we all know, there are a number of factors that feed into what the comp ratio is, most important of all is the revenue environment. So certainly, to the extent that the landscape, we think, is improving. And hopefully, our revenues, along with that, we would expect to see some improvement there.

Operator: Our next question will come from Steven Chubak with Wolfe Research.

Steven Chubak: Thanks, good morning. Wanted to start-off with just a question on the election, how that’s impacting willingness for both strategics and sponsors to transact? And maybe just more broadly what are some of the biggest potential risks that could derail the M&A recovery and 2024 whether geopolitical, election or macro in terms of what you’re hearing from C-Suite?

John Weinberg: To date, we don’t think that there is really anything regarding the election that is putting a damper on people’s willingness or interest in strategic dialogues and doing deals. We think that, in effect, in the past, elections haven’t really had a major impact. We don’t know what’s going to happen this year. Obviously, it’s a different year, and it’s certainly a different election as it is every election. But we don’t really see anything right now with respect to the election. The really big concern is actually more than anything else geopolitical. Obviously, there could be economic impacts also if the economy somehow backs up. But I think the thing that people would classify as the biggest risk going into this market right now is the geopolitical risk, which I think is heightened in many respects. I think most people would actually agree with that. And I think that’s the thing that we’re all watching.