Evercore Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Evercore Second Quarter 2023 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by Evercore Management and the question and answer session. At any time. I will now turn the call over to Katie Haber, Managing Director of Investor Relations and ESG at Evercore. Please go ahead.

Speaker 1

Thank you, operator. Good morning and thank you for joining us today for Evercore's Q2 2023 financial results conference call. I'm Katie 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.

Speaker 1

Earlier today, we issued a press release announcing Evercore's Q2 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 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.

Speaker 1

These factors include, but are not limited to, Those discussed in Evercore's filings with the SEC, including our annual report on Form 10 ks, quarterly reports on Form 10 Q and current reports on Form 8 ks. 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.

Speaker 1

As we've noted previously, our results for any particular quarter or influenced by the timing of transaction closing. I will now turn the call over to John.

Speaker 2

Thank you, Katie, and good morning, everyone. The current environment has presented one of the strongest hiring opportunities we've seen in the firm's history. We've capitalized on this by hiring exceptional senior talent who are attracted to our entrepreneurial platform, strengthening our ability to execute on our We're pleased to announce that so far in 2023 year to date, 11 new Senior Advisory Managing Directors, 7 since our last earnings call have joined or have committed to Evercore. This new group of SMDs represents talent in areas such as TMT, both in the U. S.

Speaker 2

And Europe, sponsor coverage, Business Services, Real Estate and Capital Advisory. These are the sectors we have identified as part of our long term strategic plan. Once the market recovers, these new additions and those to come, coupled with our recent promotes from earlier this year will drive significant productive capacity to service our clients. We believe this positions Evercore for even greater success over the medium and long term. As we've experienced many times before, to successfully operate in a cyclical business, We must position ourselves for recovery.

Speaker 2

We've shown repeatedly that our strength comes from investing through periods like we are operating in today, so we can emerge stronger. Our 2nd quarter results reflect challenging market conditions, which we will discuss at greater length in this call. Although it is still early days, we've recently begun to see an uptick in client dialogue levels in conjunction with improving equity markets, stabilization of interest rates and the first signs of a recovery in the capital markets. Anecdotally, we're encouraged based on what we are hearing from our bankers and we're seeing some of that reflected in increased backlogs, which include announced transactions as well as mandates. However, there is still uncertainty in the market, which has an impact on transaction timelines and closings.

Speaker 2

Additionally, there is a lag between announcements and closings, which impacts the timing of revenue recognition. Now turning to the quarter, Evercore achieved $505,000,000 in adjusted net revenues, dollars 40,000,000 in adjusted net income and 0.96 and adjusted earnings per share. Broadly, macro uncertainty and higher financing costs continue to weigh on markets, resulting in global announced M and A transactions greater than $100,000,000 in the first half of twenty twenty three, down almost 40% on a dollar basis versus a year ago. In our Global Advisory business, while M and A activity continues to be slow, we started to see increased momentum in client activity. In the quarter, we worked on several important transactions, including Chevron on a $7,600,000,000 acquisition of PDC Energy and the $5,200,000,000 sale of Arconic to Apollo.

Speaker 2

Our advisory team in Europe performed well given the challenging market conditions, but was down relative to the record quarter achieved a year ago. We continue to see significant progress in our European business as we strengthen both our sector coverage and capabilities. Our leading strategic defense and shareholder advisory business continues to see strong activity as activist campaigns and remain at an elevated pace. In restructuring, activity remains strong similar to what we've seen over the last couple of quarters, driven by liability management as well as our market leading debtor and creditor practices. Our Private Capital advisory and fundraising businesses, while experiencing some challenges, remain active, particularly with respect to continuation funds and Private Equity Fundraising, areas in which we are market leaders.

Speaker 2

Our underwriting business had a better quarter as Equity Capital Markets started to show signs of strengthening in May June, which were better months as measured by dollar value of issuance than any since November 2021. In the Q2, of the 6 follow on offerings that were greater than $1,000,000,000 we were a book runner on 3. Notably, we were the lead left book runner on GE Healthcare Technologies $2,200,000,000 deal, which was the largest secondary offering in the quarter. We continue to focus on broadening our sector coverage. In our equities business, Client interactions across our research and sales and trading platform remain robust with increasing opportunities to talk to clients.

Speaker 2

Lastly, in Wealth Management, AUM increased from prior quarter year end, driven by market appreciation. Long term client retention and performance remains strong. Tim will provide more details on this shortly. But as you know, hiring of additional senior talent, coupled with a challenging revenue backdrop, put significant upward pressure on our compensation ratio. Yet we remain committed to a disciplined approach to managing our overall headcount expense base.

Speaker 2

While we continue to be focused on maintaining a durable balance sheet, we remain committed to returning excess cash not invested in the business to our shareholders in the form of dividends and share repurchases over time. Looking forward, we are preparing for the eventual recovery in the markets and we are cautiously optimistic about the recent shift in sentiment. As we execute on our strategy, we believe we are well positioned for sustained growth and success in the medium and long term. With that, let me now turn the call over to Tim to review our financial results and other financial matters. Thank you, John.

Speaker 3

Our results this quarter and for this year are impacted by several factors. The first is the environment, which during the Q2 reflected a period of significant economic uncertainty and a challenging M and A and financing environment. This along with the deferral of several significant fees resulted in reduced revenues. The second is more forward looking and that relates to the significant investment we have made in our business through the addition of a larger than normal number of very high quality SMBs, the cost of which is partially reflected in this quarter and will continue through the remainder of the year and into next year. The cost of course that is absorbed this year likely will be prior to the realization of meaningful incremental revenue.

Speaker 3

The combination of lower revenues and increased investment in our future contribute to an elevated compensation ratio. The third is the impact of inflation and increased travel, which have contributed to higher non comp expenses. Now, here are the results. For the Q2 of 2023, net revenues, net income and EPS on a GAAP basis were $499,000,000 $37,000,000 $0.95 per share, respectively. My comments from here on will focus on non GAAP metrics, which we believe are useful when evaluating our results.

Speaker 3

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 2nd quarter adjusted net revenues of $505,000,000 declined 21% versus the quarter a year ago. 2nd quarter adjusted operating income and adjusted net income of $63,000,000 $40,000,000 Decreased 59% 63%, respectively, versus the Q2 of 2022. Adjusted earnings per share of $0.96 decreased 61% versus the prior year period. Our adjusted operating margin was 13% for the 2nd quarter.

Speaker 3

Turning to the businesses. 2nd quarter adjusted advisory fees of $375,000,000 declined 35% year over year compared to $576,000,000 of advisory fees in last year's Q2, which was a record second quarter for us. In accordance with relevant accounting principles, our revenue for the Q2 of 2023 includes $59,000,000 from transactions which closed subsequent to June 30 or otherwise had contingent elements at June 30. To compare, we recognized and $37,000,000 in the Q2 of 2022 $18,000,000 in the Q1 of 2023 in accordance with the same accounting principles. 2nd quarter underwriting revenues of $38,000,000 We're up meaningfully compared to the Q2 of 2022 and the Q1 of this year as ECM Industry wide increased significantly, particularly in May June.

Speaker 3

Commissions and related revenue of $50,000,000 in the second Quarter was down 5% year over year, reflecting weaker trading volumes as a result of lower volatility. 2nd quarter adjusted asset management and administration fees of $18,000,000 decreased 1%. However, year over year AUM increased approximately $1,000,000,000 primarily reflecting an increase from marketing appreciation. 2nd quarter adjusted other revenue net was a gain of approximately $24,000,000 of which approximately $12,000,000 reflected the increase in value of our investment funds portfolio, which is used as a hedge for Our DCCP commitments. In addition, we continue to generate interest income on our cash balance due to higher short term rates versus the prior year.

Speaker 3

Turning to expenses. The adjusted compensation ratio for the Q2 is 67%. The factors that impact our compensation ratio are, 1st and foremost, the revenue environment. The amortization of prior year awards and the level of senior hiring also impact the comp ratio. The market level for compensation primarily as it relates to our non SMB bankers will also have an impact, but we won't have Further clarity on that until closer to year end.

Speaker 3

We are excited about our execution to date on our strategic partner hiring plan and in particular, the exceptional quality of these candidates. There is an upfront investment cost, although we expect these new SMDs to be significantly accretive to revenues over time. Considering the time lag that exists between transaction initiation and closing, which is when advisory revenue is typically recognized and that many of our new hires do not start until later this year when we will begin accruing compensation expense for them. We expect our compensation ratio to remain elevated throughout the year. As we enter the back half of the year, we will adjust accordingly in either direction should our estimates of the underlying determinants of the compensation ratio change.

Speaker 3

We are continuing to judiciously manage our overall headcount and we are using a disciplined approach to hire additional senior bankers in areas where we see a strategic opportunity. Shifting to non compensation expenses, After holding our non comp expenses essentially flat for the past 4 quarters, in the second quarter, our non comp expenses increased to $103,000,000 up 8.5% from a year ago. This is primarily driven by an increase in travel related expenses due to a higher level of face to face meetings, inflationary impacts on both travel and communication and information services and higher occupancy related expenses for which the increase is driven by lease arrangements and Costs related to relocating part of our corporate team to a different location. The rate of increase in non comp We are monitoring our expenses and managing them tightly in this environment. Our adjusted tax rate for the quarter was 29.6% compared to 27% in the Q2 of last year.

Speaker 3

Turning to our balance sheet, As of June 30, our cash and investment securities totaled approximately $1,500,000,000 We have significant liquidity to implement our strategy, including hiring plans to capitalize on opportunities and to assure all our stakeholders that we have financial stability. Year to date, we have returned a total of $419,000,000 to shareholders through dividends and repurchases of 2,700,000 shares at an average price of $128.01 We have fully offset the dilution from the 2,400,000 RSU grants that were issued in the Q1 and our quarterly weighted average share count has declined by nearly 1,100,000 shares compared to last quarter. Our 2nd quarter adjusted diluted share count decreased by more than 1,600,000 shares to 42,100,000 from $43,800,000 a year ago. Looking forward, return of capital will be influenced by the operating environment and our business needs. We have strong capital position and have returned about 1 third of our market cap in the form of dividends and share repurchases over the past two and a half years.

Speaker 3

As we have stated consistently, we remain committed to Building our business through all phases of the economic cycle. History has shown that our firm emerges stronger from challenging environments than when we entered. We are seeing early signs of improved capital markets and more broadly an increased level of discussions with our clients reflected in increased backlogs. With our new SMD additions and the SMDs we have promoted internally, which have significantly expanded our footprint. We believe we are better positioned than at any point in our history.

Speaker 3

With that, we will now open the line for questions.

Operator

Thank you. We will now conduct the question and answer portion of the conference. Please limit yourself to one question only. You are welcome to rejoin the queue for additional questions, time permitting. Our first question comes from Steven Chubak with Wolfe Research.

Operator

Please go ahead.

Speaker 4

Hi, good morning.

Speaker 5

Good morning.

Speaker 4

Good morning. So I was hoping to start off just with a question on Equity Capital Markets Before getting back in the queue, just prior to the pandemic, dollars 25,000,000 per quarter was considered a pretty Strong quarterly result for that business. You just hit $40,000,000 in a quarter where the overall industry below 2019 baseline or what people look at as a more normalized proxy. I was hoping you could just speak to what contributed to the share And where do you think this business runs as we enter a more normalized operating backdrop?

Speaker 2

We continue to build our Equity Capital Markets business and we are gaining momentum. As you probably know, our lead table have continued to pick up and right now we're at number 11 and our Objective is to be in the top 10. When it's happening in our Equity, Capital and Markets businesses, we really have More and more connectivity with clients and we've communicated more clearly our capabilities. And as a result, our positions in financings are actually improving and we're having just much more success in the pitches that we're making. I think we have a lot to offer in a lot of these Capital markets transactions and I think clients are embracing that.

Speaker 2

So what we're seeing is a higher expectation of of what we can do and I think our bankers are out marketing the product quite effectively. It's hard to predict how far up it goes In terms of our revenue potential, I think we're a far cry from where we think we are going to end up. We think that the momentum is Very good.

Speaker 3

Yes. I would agree with that, John. And what I might add is 2 things. 1, certainly what we've throughout most of 2022 and the first half of twenty twenty three was a relatively Depressed market. So number 1, we expect the market to when it does return to be at Somewhat meaningfully higher levels than what we've seen over the last 5 or 6 quarters.

Speaker 3

2nd point I would make is that because of the conditions in the equity issuance market over these last 5 or 6 quarters. There are a lot of earlier stage companies that have been sitting on the sidelines that are looking for capital to implement their strategic plans and grow the businesses. And we have a hope and expectation that when the markets return to more normal levels and issuance levels are more normal, That we'll see a number of these companies coming to market.

Speaker 2

I'd just add one more thing, which is that one of the parts of our strategy Is that we are expanding our reach with respect to different sectors and we are building out our Equity Capital Markets Group. And so I think You will see over time a diversification of where we're getting our revenues and equity. And also I think we're going to basically be reaching more clients.

Speaker 4

That's great color. Thanks, John and Tim for taking my questions.

Operator

Thank you. We'll take our next question from Ryan Kenny with Morgan Stanley.

Speaker 5

Hi, John and Tim. Good morning.

Speaker 3

Good Good morning.

Speaker 5

Wanted to follow-up on the comments around improved client conversations on the M and A side and then increased backlog. Do you have any metrics you could share on how much the backlog has increased? And is there any difference there on larger deals versus The smaller or more midsized deals?

Speaker 2

We really can't give you any metrics on that. I would just say That our backlog is strengthening and there are the activity levels inside the firm right now are running Very high. The comparing the activity levels to the beginning of this year, it's market And really it's diverse. It's pretty much almost every single sector and every single product we're seeing real activity pick So from our perspective, it looks like it's there is a real build. And I think it really is it's really Across the board, in terms of size of deals, we are definitely having conversations with large deals.

Speaker 2

I'd say a big part of our business as you know is middle market and those activities are actually quite robust right now. I think there is no question that the activity in terms of companies that are looking for Opportunity to sell is growing and we have a significant number of transactions which are on the sell side that we are in the Process of working with. I think over time what you'll see is a balance. Although one of the things I think we'll all be watching over time is The impact of antitrust on larger deals, which will certainly be more impacted than middle market deals.

Speaker 3

Yes. And what I would add to that is and I know John touched at some length in his remarks About the partner hiring, but we of course have announced 11 year to date. We did 7 last year, that's 18. We also promoted 24 partners internally over the last 2 years. That's 42 partners that we Didn't have at the beginning of 2022 that we'll be here and up and working hard at the beginning of And we're hopeful that that significantly broadens and deepens our coverage and add some firepower to our capacity.

Speaker 5

Great. Thank you.

Operator

Thank you. We'll take our next Question from Brennan Hawken with UBS.

Speaker 6

Good morning. Thanks for taking my question. So the year to date comp ratios Ticked up to 65. I know, Tim, in your prepared remarks, you talked about the uncertainty Around that number, which is certainly clear. But if you could just add a little color, a handful of questions on the So is it accurate to say that this reflects the year to date reflects your best expectations for the year?

Speaker 6

And No, I asked this last quarter, but we heard a different answer from a competitor of yours yesterday. So I just want to confirm that, that outlook would Include just what you know today and not your expectations of any hires in the back half of a year. Thank you.

Speaker 3

Yes, sure. And thanks for the question, Brennan. And so as you correctly stated, the first half comp ratio is 65.1 percent and we do not accrue for new hires until they start. And so since More than half of our new hires this year are expected to start in the latter half of this The first half comp ratio would not reflect their compensation. What that would imply is that You would expect to see some drift upward from the 65.1 percent number.

Speaker 3

What You notice is in the 2nd quarter, we booked 67%, which helps get us Bring our initial first quarter comp ratio of 63.5 up to the 65.1 area, which again would be an accrual number that does not reflect People who have not shown up, when those new people do arrive and they hit the books, though there's uncertainty around what Final comp number would be I would expect it to be relatively similar to what you saw booked in the 2nd quarter.

Speaker 6

Thank you for that color, Tim. I appreciate

Speaker 3

it. Sure.

Operator

Our next question comes from Devin Ryan with JMP

Speaker 7

Securities. Hey, good morning. How are you guys?

Speaker 2

Great. Thank you.

Speaker 7

Good. Just want to follow-up on recruiting and just The market that we're in right now, so 11 SMBs that are joined or joining, obviously, quite a bit more than normal. And so I guess 2 things. 1, do you expect just based on conversations that that number could grow this year, just based on kind of where we sit. And then, what does that window look like here?

Speaker 7

If the market is improving, Is that window maybe starting to shut and so you want to push harder or do you see this window remaining open into next year or even beyond? Just love to get a sense of kind of the recruiting environment and then how long you think it could remain as active as we've already seen year to date here? Thank you.

Speaker 2

Sure. Thanks for the We are in the process of continuing to talk to talent that is available to us. As you indicated, it's a unique time and we have been able to hire some really unique And we're really excited about it. It's across the firm. The 11 that we're talking about is in our advisory businesses, but we are we have several more that are not advisory related who have come on and we're really excited about the prospect of all those people.

Speaker 2

In terms of What we're looking at for the balance of the year, we continue to be in dialogue with some very talented people. Those conversations as you know may or may not Crystallize into something where people come over, but we are very optimistic about our prospects with respect to finding good people. In terms of the window, we don't see it closing. It's certainly been the Opportunity to hire strong people is somewhat market related, but we also think it is people really looking at the model and wanting to come over and work with us. I know others in the business are feeling the same thing and so it certainly may not be unique to us, but we've really felt like it's been a very positive tone.

Speaker 2

We will continue to hire strong people as they are available to us. As we've always said, we're really looking for A level talent A and A plus and we really have been really pleased with what The people who are very willing and excited about joining us and we're going to continue to have those conversations. I honestly don't see us stopping. I don't know whether we will get to the same level of hiring that we have this year in succeeding in preceding years, but clearly we will always be looking to talk to great talent. As Tim also said, we have 24 internal promotes over the last 2 years.

Speaker 2

We're very focused on promoting from within and We have 40 plus partners all ramping at this point. And so I think that's going to be a really big part of What our productive capacity is and will drive revenue potential and we're going to continue with that. I think, but as I said in terms of summarizing, The market continues to be quite fertile and we're going to continue to stay in it this year.

Speaker 3

Yes. And if I can add one more point to the internal promote comment. It's now the case that about 43% Our partners internally have been promoted from within, number 1. And number 2, They've also been very successful. And that transition was one that was absolutely key to our organization because That's how we build sustaining value and earn high ROIs going forward.

Speaker 3

And we're really pleased with that evolution in our company.

Speaker 7

Okay. Thank you.

Operator

Thank you. Our next question comes from James Yaro with Goldman Sachs.

Speaker 8

Good morning, John and Tim, and thanks for Maybe we could just turn to M and A again. Just a bigger picture and then I'll dig down a little bit. On the bigger picture question, What do you think breaks the M and A logjam and brings companies and sponsors back to Transacti? What are we missing today? And When do you think that could occur in your best estimate?

Speaker 8

And then if we just dig down, given the continued fundraising weakness among sponsors, It'd be just helpful to get your perspective on the debate in terms of whether strategics and sponsors return to the M and A market first and whether you think Sponsors could represent a structurally lower level of M and A, at least for the medium term than we have seen in recent years.

Speaker 2

In terms of the what breaks this and gets things going again, I think we've always said that what really is required is clarity for the macro Grow outlook, relative stability of interest rates and underpinnings of the market and really in improving financial markets where there's more accessible accessibility for funds. Frankly, we do see there's a warming up of the market. ECM activity is beginning to show some The stock market has some stability. Interest rates, at least The view of interest rates is that they are stabilizing and the Fed's actions have been effective and then leverage finance is beginning to vary in the very beginning beginning to ease. So as a result, we think there is Activity internally at our shop, I think we said this, we're seeing a lot of activity.

Speaker 2

And the real question is, What is it going to take? And I think it really is and comes down to clarity and stability, which It's beginning to happen. And so as we look forward, it's really difficult to predict exactly when, but we think All the elements are in place for that recovery and it's just now a matter of time. In terms of the Financial sponsors, frankly, they have $3,700,000,000,000 of dry powder. They are in business to actually And I think that they're very much focused on when can they get back in the market.

Speaker 2

What we've seen in terms of our dialogue is that they are all very much ready to go and they're just looking for the signal. Clearly, they are impacted by accessibility and funding as well as interest rates. But it doesn't appear to us And the conversations that we're having that any of the sponsors feel like they can't do business right now. So I think in many respects when the market seems to start to be moving again, you I think you'll see sponsors moving. I don't think That they're going to be holding back because I don't think really it's going to be in their best interest to do that.

Speaker 2

Okay. Thanks a lot.

Operator

Thank you. We'll take our next question from Brennan Hawken with UBS.

Speaker 6

Thanks for taking my follow-up. I just wanted to actually drill down a little bit on that last point about activity. We hear a lot about green shoots. We hear a lot about conversations. But when do you think the lag is going to be until These green shoots and sort of early indications actually turn into a meaningful uptick in activity.

Speaker 6

Because that seems to be sort of

Speaker 5

where the rubber hits the road

Speaker 6

here. And we started to see green shoots In the beginning of the year and then some of the trouble in March set us back and now we're starting to see it again. And I think what investors are most struggling with is, Are we just dealing with another head fake here? Or is there really the true conviction that's going to lead these to start leading to announcements? And when does that happen?

Speaker 6

Do you have any sense of that? I know it's a tough question.

Speaker 3

Yes. Hi, Brennan. This is Tim. Sure. We do have some sense.

Speaker 3

Look, when When we talk about activity levels, I just want to segregate those into a few different categories. It's absolutely the case that the phones are ringing again and that people are coming back to the tables. But one just needs to bear in mind that once that step happens, it then takes It might take a number of months to do the analysis, hold the board meetings, have negotiating sessions and Get a deal announced and then once that deal is announced, it then takes another period of time for those transactions to close. And so Two comments I would make is when one sees the transaction activity or the discussion activity picking up, That's not something that typically we're going to see an increase in revenues from that in 1 quarter Kind of thing. That takes a little while.

Speaker 3

And then on the second step, the actual closings, I think from the investor Analyst community, when you see announcements occurring, okay, a pick And those announcements, then you'll of course see the following pickup in revenues coming from that. And That's going to be probably a good early indicator for the research community and the investors. Now on the The positive side is the equity market is something where you do see a much shorter timeframe and that's Something where as you can see from this quarter's results, we've already seen some pickup.

Speaker 2

In addition for us as a firm, Our restructuring business is very busy and that is really much more immediate in terms Since the way revenues accrue, in addition, I think our activism and defense business is a generating business, which I think has an acceleration of fees also. So we have streams coming in, but I think that your Question which really is what kind of a lag will there be is relevant because if there's a lag that we can see in terms of the activity that we're feeling inside leading to announcements. And then once there are announcements, then When that revenue actually hits, there's clearly going to be some time between each of those.

Speaker 6

Okay. But like sort of what I was trying to get at is, right now and what you're Seeing in the dialogue, green shoots are there, that's clear, but green shoots are also somewhat fragile. So What I'm trying to get at is, do you feel like right now the green shoots are more durable and sort of strengthening? Or Are we still at a period where there's a lot of fragility and lack of conviction and therefore A setback like we saw in March could definitely cause it all to go on hold again.

Speaker 2

I'll give you my judgment, which is that The activity that we're seeing right now and the conversations we're having right now are much more foundational than the ones we saw in January, which I thought were more tentative. Clearly, in January February, what we saw is Activity levels were building, but in many respects it was bankers kind of pushing activity forward. Now I really feel like it's market driven that there is real foundational reason for why these things are happening and I feel much more comfortable that these are really moving forward.

Speaker 6

Thanks Mike for the patience with the multiple questions.

Speaker 3

Sure.

Operator

Thank you. We'll take our next question from Devin Ryan with JMP Securities.

Speaker 7

Yes, thanks. Yes, I just wanted to follow-up on some of the commentary on restructuring. Obviously, we've been tracking This acceleration as well and Evercore has been very active in that. And so I just want to talk a little bit about how much of that Maybe acceleration of mandates has already been impacting revenue. And then, what that trajectory and timing looks like?

Speaker 7

Is this Back end weighted 2023 story in terms of revenue recognition, is there a big ramp into 2024 just based on what's already in the system? And then how long do you guys see this lasting, especially if the M and A market does start to get some length here? So just trying to think about that business, which has been very Maybe the revenues haven't come through yet. Thanks.

Speaker 3

Yes, sure. And that's right. That's a good question, which is so what we've seen Year to date is restructuring. Restructuring by the way for us last year was a pretty significant And then we've seen some increase in that business activity this year. It hasn't been, as we've said on Previous calls, the kind of peak activity levels one would have seen during the early days of the pandemic or during Great financial crisis, but it's been more kind of what I would call liability management oriented than a kind of large flurry of Chapter 11 And so but that liability management, including renegotiation of existing distressed credits, It's been good.

Speaker 3

It's been rising. There is a maturity wall that's coming in kind of the 2024, 2025 timeframe and the extent to which that creates additional restructuring business will to some extent be a function of to what extent The leverage finance markets are open during that period where it needs to be refinanced and That's kind of a wait and see. And then also as you point out, historically, there's been Some inverse correlation between M and A activity and restructuring activity for obvious reasons. Yes, it's possible That in this current environment, what you could see is a situation where you have Both of strong restructuring market and an improving M and A market.

Speaker 2

Yes. I would say that the backlog in our restructuring business continues to build. And I also would say that

Speaker 5

given the diversity of our businesses, which is liability

Speaker 2

management, which is very of our businesses, which is liability management, which is very much an advisory basis, as well as the creditor and debtor businesses. Really those coupled together I think main that I think it will be a less cyclical business for over the medium term. And really when you look at what's happening with interest rates rising and I think the low credit businesses facing what Kim said was the maturity wall, I think you're going to see a lot of activity over the next 2, 3 years. So I think that the merger market could easily begin to improve as we've all said. And at At the same time, our restructuring business could get even busier at the same time.

Speaker 7

Yes, perfect. Thank you.

Operator

Thank you. We'll take our next question from Ryan Kenny with Morgan Stanley.

Speaker 5

Hey, just wanted to dig in on the non comp I heard the comments in the prepared remarks that there was a pickup in travel and lease expenses, and we also saw professional fees pickup. So how sticky is that increase To non comp and should we think about the $103,000,000 non comp dollars as the right base going forward?

Speaker 3

Right. And so, look really that what you saw in the increase in the non comp numbers was a combination of from 3 different areas and one of them was travel. Now The increase in travel is a good thing as we've said before, which is that we want our clients getting out Pardon me, our partners getting out and having face to face meetings with clients. If you compare Where our travel is now to where it was pre pandemic. We're at about in terms of number of trips It's about 75% of pre pandemic levels.

Speaker 3

If you were to adjust that for the Increase in headcount from 2019, that would drop down to about 60% per person. And so we expect that to at least hold steady, if not have a little bit of upward pressure. We also, of course, A little bit of inflation on travel costs. The second area was communication and information services and that As we all know and we've read endlessly, we're in the data age and that's critical to the services we provide and to our clients. And there's been a little bit of escalation in the cost of that data as well as a little bit of expansion in the number of people using it.

Speaker 3

And then thirdly, in occupancy and I had mentioned this in our last We're relocating a portion of our corporate staff to another building. While we're in Process of doing construction work on the new lease site, we're having to pay double rent. So that portion We'll come down a little bit. If you look at our non comp expense and this will just help you think about this a little bit. Our non comp expense on a per head basis, it's actually been remarkably flat for really the Several straight years.

Speaker 3

And there's been a slight uptick. That slight uptick was due to the primarily to the travel. And so where we are today on a per head basis is just slightly above Again, due to increased travel to where we were during the pandemic, but still a little bit below where we were prior to the pandemic. And so that's kind of a long way of saying it feels to me like we're about where I would Expect us to be and where we should be with some minor gives and takes that will probably balance out.

Speaker 5

Got it. That's helpful. Thanks.

Operator

Thank you. This This will conclude today's Evercore Second Quarter 2023 Financial Results Conference Call. You may disconnect at any time and have a wonderful

Powered by Quartr

Key Takeaways

  • Evercore added 11 new Senior Advisory Managing Directors year-to-date (including 7 since the last earnings call) across TMT, sponsor coverage, business services, real estate and capital advisory to bolster its senior talent platform for medium and long-term growth.
  • In Q2 2023, Evercore reported adjusted net revenues of $505 million and adjusted EPS of $0.96, reflecting a 21% revenue decline and 61% EPS drop year-over-year due to weak M&A activity and deferred deal closings.
  • Management noted early signs of market recovery with increased client dialogues, stabilizing interest rates, stronger equity markets, rising ECM activity (including three $1 billion+ follow-on offerings) and a growing transaction backlog.
  • The firm’s compensation ratio rose to 67% in Q2 (65.1% year-to-date), driven by new senior hires, timing of revenue recognition and inflationary cost pressures, and is expected to remain elevated through year-end.
  • Evercore maintains a strong balance sheet with $1.5 billion in cash, has returned $419 million to shareholders year-to-date via dividends and share repurchases, and reduced its diluted share count by 1.6 million shares over the past year.
AI Generated. May Contain Errors.
Earnings Conference Call
Evercore Q2 2023
00:00 / 00:00