Evercore Partners' (EVR) CEO Ralph Schlosstein on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Evercore Partners (EVR)

Evercore Partners Inc. (NYSE:EVR)

Q2 2014 Earnings Conference Call

July 23, 2014 8:00 AM ET

Executives

Robert B. Walsh – Chief Financial Officer

Ralph L. Schlosstein – President, Chief Executive Officer & Director

Roger C. Altman – Executive Chairman & Co-Chairman of the Board

Analysts

Devin Ryan – JMP Securities

Steven J. Chubak – Nomura Securities International, Inc.

Alex Wilson – Goldman Sachs

Joel Jeffrey – KBW

Douglas Sipkin – Susquehanna Financial Group

Hugh Miller – Sidoti & Company LLC

Jeffery Harte – Sandler O'Neill & Partners

Michael Wong – Morningstar Research

Vincent Hung – Autonomous Research LLP

Brennan Hawken – UBS Securities LLC

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore’s Second Quarter and First Half 2014 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference call will be open for questions. (Operator Instructions) This conference call is being recorded today, Wednesday, July 23, 2014.

I would now like to turn the conference call over to your host, Evercore’s Chief Financial Officer, Bob Walsh. Please go ahead, sir.

Robert B. Walsh

Good morning, and thank you for joining us today for Evercore’s second quarter and first half 2014 financial results conference call. I’m Bob Walsh, Evercore’s Chief Financial Officer and joining me on the call today are Ralph Schlosstein, President and Chief Executive Officer; and Roger Altman, our Chairman.

After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore’s second quarter and first half results. Company’s presentation today is complementary to that press release, which is available on our website at evercore.com.

This conference call is being webcast live on the Investor Relations section of the website and an archive of it will be available beginning approximately one hour after the conclusion of this call for 30 days.

I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements.

These factors include, but are not limited to those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements.

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

We will refrain from repeating the information included in the press release and focus instead on the key opportunities, challenges and changes in our business. 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.

Ralph L. Schlosstein

Thanks, Bob, and good morning, everyone. We’re very pleased with our second quarter operating results as we delivered record quarterly revenues with a balanced contribution from both our Investment Banking and our Investment Management business. Throughout the first half of the year, the market environment continues to improve and our competitive position has remained strong.

Announced transaction volumes are up significantly as large M&A transactions have returned and we’re advising on several of the most significant ones, including the sale of Shire to AbbVie, the defense of AstraZeneca against the non-solicited proposal from Pfizer, and the restructuring of Energy Future Holdings, the largest restructuring in the market today.

Revenue per advisory Senior Managing Director on a trailing 12 months basis was $10 million, consistent with our long-term through the cycle targets. We remain in attractive destination for some of the best talent in the business. We have announced the addition of three new Senior Managing Directors already this year and have reached agreement with two more in the past week and hope to reach agreement with another in the next few days, more on that in the coming weeks.

Assets under management for the Investment Management business increased to $14.6 billion, reflecting our seventh consecutive quarter of growth. And we’ve returned $113 million of capital to our shareholders year-to-date, repurchasing 1.7 million shares nearly completely offsetting in the first six months of the year, the dilutive equity effect of the equity bonus awards paid earlier this year.

Let me very quickly go over the numbers. First, the second quarter, second quarter net revenues of $217.3 million were the highest quarterly revenues in our history, and we’re up 5% from the same period last year and up 46% from last quarter. Net income was $30.7 million for the quarter with earnings per share of $0.66. These results are up 4% from the prior year and 109% in comparison to the first quarter of 2014.

Operating margins were nearly 24% for the quarter and our compensation ratio was 58% for the quarter. Non-compensation costs were $39.1 million, up from both the second quarter of last year and the first quarter of this year. The increase in non-compensation expenses was affected by the general growth in our headcount and the pickup in our business activity, more on that later. In the quarter, we’ve returned more than $42 million to our shareholders including repurchasing 572,000 shares.

With respect to the first half, first half net revenues of $366.2 million were also a record for the first half and were up 2% from $359 million in the first half of last year. Net income was $45.4 million for the first six months of 2014, down 2% compared to the same period in 2013.

Operating margins were 21.2 % for the first six months, compared to 22.5% for the first half of last year. Our compensation ratio was 58.7% for the first half, compared to 59.3% for the first half last year. And non-compensation cost were 20.1% of revenue, compared to 18.2% for the same period last year.

Our margins and our non-compensation expenses for the first half were negatively affected by an increase in our non-compensation costs resulting from the steady addition of new talent as well as an increase in client-related expense in the second quarter.

The client related expenses are often precede the signing of engagement letters and the recognition of revenue, just as the announcement of M&A transactions precedes closing. So over the coming quarters, we expect that the ratio of non-compensation cost to revenues will normalize.

I’ve stated many times in the past, in good times and bad, our business is best viewed over a longer periods than three months or even six months, and we should not be judged on a quarter-by-quarter basis as we do not have control over the timing of the closing of transactions or the timing of signing of engagement letters.

Finally, for the last 12 months, net revenue is $767.3 million on a trailing 12-month basis ended June 30 were also a record and the compensation ratio for the last 12 months was 58.9%.

Let me now turn the call over to Roger.

Roger C. Altman

Good morning, everyone. You can see that the Investment Banking side of the firm did well in this past quarter. Revenue of $189 million was the best second quarter on the banking side that the firm’s ever had and the second highest quarterly revenue ever, 5% above the second quarter a year ago and 50% above the first quarter of 2014.

For the first half of the year, revenues were $315 million that’s also the highest six months total we’ve ever had and slightly better than the first half of last year. Operating income for the second quarter was essentially flat versus a year ago and our operating margin in banking was 23.6%. The bulk of this past quarter’s Investment Banking revenue was, of course, as it always is advisory fees.

We did have however within those totals about $20 million of revenue related to advising on capital market transactions and that’s a growing part of our business. The equity side of Evercore, which we include in our Investment Banking totals, contributed $12 million of the $188 million total for the quarter. That was up from the first quarter primarily reflecting better underwriting revenue.

Across the board, we realized 40 fees equal or greater than 1 million that compares to 38 a year ago. That’s in the quarter. And for the six months, total was 72, up from 64 last year. Total fee paying clients in the quarter were 150, essentially the same as a year ago, and up from 116 in the first quarter. 36% of our second quarter banking revenue was earned outside the U.S. That’s the ratio we’ve been experiencing for some time now.

Ralph referred to our productivity, something we watch closely, average revenue per SMD was $10 million on the same rolling 12-month basis we always use and that figure has been quite consistent really in recent quarters. And our comp ratio, in banking, 59.4%, down slightly from a year ago and from the first quarter.

We’ve also done well rather recently in terms of market share. We advise on the biggest deal this year that’s the successful takeover defense of AstraZeneca vis-à-vis the Pfizer offer, Ralph referred to that; also we just announced $52 billion agreement for AbbVie to acquire Shire, fourth largest deal of the year globally; we are also doing, as he said, the largest bankruptcy; and a variety of other large transactions, including the merger agreement involving our client TW Telecom, $7 billion to $8 billion.

You may remember that our share of the total reported people has been rising consistently for several years. It will take a little while for all that data to come in for this past quarter, but that trend is likely intact. On recruiting, I think, to say, it’s a Steady Eddy.

We are again going to add either five or six Senior Managing Directors on the advisory side this year. That’s been our pace for quite a few years as those of you follow us know. Three of them are done and, as Ralph said, done in terms of completed in every sense, the others are imminent. Very key to technology banker in Silicon Valley or from media and internet banker also in that Valley, international oil and gas banker in Houston and we’ll have other announcements shortly.

Recruiting is the future, so that progress is vital. Remember that if we didn’t recruit any new SMDs, our short-term P&L would be better, but our long-term P&L would be worse. Those are important to keep in mind the effects of this recruiting, very important aspect of what we do. I want to say Ralph has done a great job in this regard because I just have to interview with them, he actually have to negotiate with him. We have 583 total bankers at the end of the second quarter, up from 563 at the end of the first quarter.

A couple of comments about the market broadly. This was a strong first half for global M&A. Announced volume in total dollar terms was up 73% over the 2013 first half. The U.S. was strong, up just above that figure, but results were really strong in terms of dollars across the board. For the second quarter specifically, U.S. announced volume doubled and European volume tripled.

It’s important to note that these increases in dollar volume are concentrated or have been concentrated so far in larger transaction. In fact, all of the higher volume that I just referred to you has occurred in the category of deals greater than $5 billion per transaction. That’s important because this strong upward trend in dollar volume diverges from the other measures that everybody uses, which is the number of transaction.

The number of announced transactions in the first half was flat versus 2013 on a global basis. Now we are pleased to see this increase in dollar volume, it’s positive for us. We’ve always had very high rankings in terms of revenues per SMD and so forth. So that is good for us. But you also have to be realistic about the market. It’s healthy, but there’s a lot of room to run and it’s not yet extraordinary. And that’s one reason I’m reasonably optimistic that volumes can and will improve further at least in terms of the number of deal and that’s a very important metric.

Now, why is this all happening, this improvement on the dollar side among larger deal? I think it’s happening for very basic reason and the question you could ask is why do they take so long to happen? U.S. growth is slowly improving, but steadily so, credit remains abundant and extraordinarily cheap, equity values are higher and higher, and confidence at the whole is slowly healing.

Many of those factors albeit not so much on the equity side have been in place for sometime although they are strengthening and the one great mystery about markets always, at least in my experience is, when the turns occur, which is always harder to figure than the very long-term direction. Though the transaction market around the world is healthier and I think it’s likely to improve somewhat further over the foreseeable future.

Back to you.

Ralph L. Schlosstein

Okay, let me just talk briefly about our Institutional Equities business and Investment Management. Our Institutional Equities business generated $11.4 million in revenues, a 16% increase in comparison to last quarter, driven principally, as Roger said, by higher underwriting activity.

Expenses were $12.7 million for the quarter, up 13% versus the prior quarter. Year-to-date, the business generated $21.2 million in revenues essentially flat to the same period last year. We now have research coverage on 339 companies and serve more than 400 clients. Our equity team continues focus on sustaining revenue growth and maintaining strong cost control.

In Investment Management, operating income for Investment Management for the second quarter was $6.9 million and net revenues of $28.5 million as positive valuation adjustments and the recognition of carried interest contributed $4 million to our revenues. Operating margins were 24.3%.

In the first half of the year, net revenues were $51.3 million and operating income was $10.1 million and operating margins 19.8%. As it’s under management and as I mentioned earlier increased 5% to $14.6 billion and our Wealth Management and Institutional Investment Management businesses both experienced net inflows in the quarter and also benefited from appreciation in the market. And in particular, our Wealth Management business continues to perform well, increasing assets under management 4% for the quarter to nearly $5.4 billion.

Bob will now provide further comments on our non-compensation costs and several other financial matters.

Robert B. Walsh

Thank you, Ralph. As has already been noted in the call, our non-comp costs show an increase in the quarter. Let me give you some color on the two more significant items. First, as Ralph has noted, the most significant increase is driven by new business related costs, which principally show up in travel line, so I won’t comment on that further.

Secondarily, you’ll see an increase in cost associated with professional fees. This increase results from compensation due to a small number of our senior advisors that work under consulting arrangements rather than employment agreements. This increase relates directly to business produced by these individuals and resulted in a corresponding decrease to compensation expense in the period.

In the bigger picture, our costs for the 12 months ended June of 2014, our cost per person, which is a key measure we manage to, was approximately $127,000 person, that’s up slightly from prior periods. Taxes, our adjusted pro forma tax rate for the first half was 36.7% compared to 38% for 2013. As we have indicated before, changes in the effective tax rate are principally driven by the level of earnings in the business and businesses with minority owners and earnings generated outside of the U.S.

In terms of our capital, our board declared a dividend of $0.25 per share for the quarter and as previously noted, we’ve repurchased 572,000 shares in the quarter or 1.7 million year-to-date.

The share count on an adjusted basis was 46.9 million shares, a decrease of approximately 300,000 shares versus Q1. The decrease reflected the effect of our share repurchase activity as well as the effect that a change in share price has on both the Mizuho warrants and unvested RSUs. The average share price for the quarter was $54.87. Finally, our cash position remains strong as we hold $229 million of cash in marketable securities with current asset exceeding current liabilities by approximately $259 million.

So, let me turn it back to Ralph.

Ralph L. Schlosstein

Okay, let me just conclude with a few comments about the overall M&A environment in our business. As I observed many times on this call, it is a mistake to judge M&A activity or Evercore’s performance on the basis of one or even two quarters. Consequently, the measure of M&A activity that I prefer is the trailing 12 months dollar volume and the trailing 12 months number of announced transactions.

For 15 consecutive quarters ending the first quarter of 2014, this measure was essentially between $2.2 trillion and $2.6 trillion were essentially flat. In the second quarter of 2014, the most recent quarter, this measure was $3.06 trillion. The first time it has been above $3 trillion since the third quarter of 2008.

By contrast, as Roger pointed out, the number of announced transactions on a trailing 12-month basis, number of transactions, not dollar volume, which is a more important driver of advisory revenues, is still essentially flat.

So the logical question, which Roger talked about, is, are we really seeing the beginning of a long expected recovery in M&A activity? And let me make a couple of comments on this. First, there is no question, it’s mathematical that the first half of 2014 was stronger than the first half of last year, which I might point out was a particularly weak six month period.

The dollar volume of announced transactions, as Roger said, was up approximately 70% or around $700 billion and, as Roger pointed out, this increase incurred exclusively or almost exclusively like 97% in transactions larger than $5 billion.

The number of announced transactions, which once again is a more important driver of revenues, was essentially flat. The dollar volume and the number of closed transactions as opposed to announced transactions also was still essentially flat, which has resulted in essentially flat revenues for the industry as a whole.

If the momentum of announced transactions that we saw in the first half continues, we would expect that announced transactions will be followed in future quarters by increased closings and some increase in industry revenues.

With respect to Evercore, we just finished our strongest quarter ever in terms of the number of announced transactions and, as Roger indicated, our backlogs on both risked and unrisked basis remains strong. So if the industry-wide momentum continues, we would expect that this trend could have a positive effect on industry revenues and if we sustain or continue our market share on Evercore as well.

Obviously, the existence of any inceptive recovery and its strength is always difficult to predict and it’s equally difficult to predict if this recovery occurs whether industry-wide and Evercore revenues will begin to be affected in the second half of this year or next year. One thing we can say confidently however is that it is always easier to predict the past than the future.

Thanks very much. We will now take any questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Devin Ryan with JMP Securities. Your line is open.

Devin Ryan – JMP Securities

Hey, good morning, gentlemen. How are you?

Ralph L. Schlosstein

Hi, good morning.

Devin Ryan – JMP Securities

Just want to come back to the, I guess, the comments around greater deal value, but flat deal count. I really appreciate all the color, but I just want to be clear in terms of the view at Evercore. I mean is it, in your view, there’s more function of just the cycle and big deals are going to drive that domino effect within industry, so it’s more just a matter of timing before more deals follow, or is there actually some dynamic where the smaller companies or smaller deals in your opinion aren’t occurring if something needs to change that we see that broader participation in the market?

Roger C. Altman

I think it’s a matter of slow healing. So, at least in theory, as Ralph said, the deal count should improve, I personally think it will improve, but I don’t think it will be in any explosive fashion. Because, as a whole, as I said, the market is better, but it’s not extraordinary and has a lot of room to run. And I think you’ll see a slow improvement on the deal counts side following this surge on the dollar side.

Devin Ryan – JMP Securities

Okay. All right, great. And then with respect to the view that the environment is improving and Evercore is at least maintaining market share and then hopefully growing market share that would also imply that revenues per SMD should be improving from $10 million to something higher. So can you help remind us where –?

Roger C. Altman

I think you go to be careful about that and I will tell you why. As we’ve talked before, there is a maturity curve over every time you might like in terms of new SMDs such that it’s the rare new person who joins the firm, and we said we will probably do five or six this year, who joins the firm and hits a homerun on the first week or month or quarter, that doesn’t happen very often.

It takes a while for anybody however good he or she is to their stride in a new firm and become fully productive and that take – it varies obviously. With individuals it can take a couple of years. So if you take a conservative assumption that new hires take a couple of years to hit full stride and you are hiring say six year and we have, I think, Bob correct me, we have 53 SMDs in banking today.

Robert B. Walsh

Today.

Roger C. Altman

Today, okay. So let’s say we will have hired at the end of this year, six, and last year is six, just for illustration here. You got a fairly high percentage of your total SMDs that are in the early stages of their maturity, and that depresses the SMD numbers, right? So you just have to keep that in mind. We’re big on recruiting if you know, as I said, it’s the future of the firm, but it has that effect. So you just have to keep that in mind.

Devin Ryan – JMP Securities

Understood. And I guess maybe that this is the backdrop to the extent there is some opportunity and then maybe the answer is that you think $10 million is just going to be the number even in an improving environments to the extent MD production still has room for some improvement from here and again I don’t think you necessarily get back to your pre-peak levels, but can you just help maybe help us think about where the incremental margins would go, because I’m assuming that past $10 million…?

Roger C. Altman

Ralph will answer that, but one comment on what you just said. I don’t want to imply that our productivity figures cannot improve, they can improve. I just want to say that you have to keep in mind when you think about the relationship between revenue per SMD and the broad environment that this is extra factor of newer partners that you just have to take into account. I personally think our productivity figures may improve. But I don’t want to give you the impression that I’m down on that, I’m not, I just want to just explain how the dynamic works. So, Ralph, go ahead.

Ralph L. Schlosstein

Yeah, Devin, first of all, following up on Roger’s comments, in what has been an essentially flat environment, as I described earlier, our productivity has gone up from about $8 million to about $10 million for SMD. We don’t have a conclusion as to why that has occurred. My hypothesis is that it’s occurred because it’s Evercore’s brand and repute has been become were broadly know.

It’s a little bit not a lot, this is a hugely competitive business, but a little bit easier to get at that and our batting average is a little bit higher. And whether that improvement in productivity per SMD continues in a – if the environment remain flat, I don’t think anybody has any idea.

The second part of your question with respect to if we did have a truly stronger environment, we would expect that that would have, as Roger said, some effect on productivity per SMD and the marginal profitability of that is quite a bit higher than the operating margins on the first $10 million of profitability.

So I’ve often said when speaking to investors and others, the only operating leverage in this business is when productivity per SMD goes up that does widen your margins.

Devin Ryan – JMP Securities

Okay. Appreciate that. And then just lastly on the non-comp expenses, just want to make sure that we are clear here. Does the uptick also imply that there was an actual uptick in the phase of engagements, which I’m assuming we haven’t seen fully in the public domain yet, were there something unusual about expenses tied to a particular engagement or particular engagements in the quarter or something that may not reoccur if we are just thinking about environment where the run rate in new engagements is flat. I’m just trying to kind of phrase through the comments on the non-comp.

Ralph L. Schlosstein

I think, as we said, it’s a function of both a higher level of activity, it’s not any single engagement, but also we don’t control an engagement letters are finalized.

Roger C. Altman

Yes. Just to be clear, and I’m certainly not the accountant, but in the vies of the accounting here, expenses can’t be a sign to a deal until an engagement letter is actually signed. So if we have expenses incurred on it working with the client without an engagement letter signed those show up as firm expenses rather than those that can be built the clients.

Ralph L. Schlosstein

And keep in mind that as we add more people, I just said we have more bankers than ever in the firm, pretty meaningful increase quarter-over-quarter here. Those figures called up with the pre-engagement letter costs are going to go up because we have more people.

Devin Ryan – JMP Securities

Yeah. Understood. Okay, I appreciate all the color.

Operator

Our next question comes from the line of Steven Chubak with Nomura. Your line is open. Steven, your line is open.

Steven J. Chubak – Nomura Securities International, Inc.

Hi, good morning.

Ralph L. Schlosstein

Hi, good morning.

Roger C. Altman

Good morning, Steve.

Steven J. Chubak – Nomura Securities International, Inc.

So I was actually hoping to ask a follow up on the non-personal side. And Ralph I do appreciate the detailed commentary on what drove the increase in non-personal expense. You did mention that you expect the ratio or the expense to normalize in the back half of the year. I’m just thinking you can clarify your statement there. Should we expect that the full year ratio is going to be in line with the, I guess, somewhere in the middle of the range of the 16% to 20% that you guide to and which is actually were a fell out last year, so around 17.6%, so how we should think about that for the reminder of the year?

Ralph L. Schlosstein

Steven, that’s a reasonable way to think about it. Of course, the variable that always drives that ratio is printing the revenue.

Steven J. Chubak – Nomura Securities International, Inc.

Sure. I suppose the expectation is that given the strength that we’ve seen on the revenue side that ultimatly that would translate into higher operating leverage. And so one of the questions that’s been asked quite a bit this morning from clients is whether we can actually expect to see any improvement off of that 17.6% base that we saw last year or given that that was already in line with the targeted range that presumably that would be a reasonable expectation in terms of the run rate going forward?

Roger C. Altman

Look I think the – we did have, as we said, some lead up work in the second quarter and we do expect that to normalize. We’ve said that we expect it to be in the 16% to 20% range. We definitely expect that this year as well. We don’t ever provide a view because we can’t as to whether it’s going to be above or below 17.6% this year because, as Bob said, the expenses that we are going to incur we know pretty damn well, the revenues, we don’t, and those are the primary driver of whether that ratio will be above or below 17.6% this year.

Ralph L. Schlosstein

So that’s all we can tell you.

Steven J. Chubak – Nomura Securities International, Inc.

No, understood, I appreciate the color. And also on the – in terms of the commentary you guys have given on the M&A front and I appreciate the extensive detail you provided. Ralph in the past year you’d actually talked about, similar to the guidance you guys had just given, the slower growth backdrop actually yield to a more call it retracted M&A recovery versus what we experienced in prior cycles.

But given the strong pick up in volumes, not necessarily transactions completed or announced, but volumes this year after a four year period of stagnating growth has this altered your outlook at all in terms of how the current cycle may fly out? Should it be more reasonable to expect another two years of growth still more consistent with the 5 year to 7 year pick up that we’ve historically or could this still be call it an 8 year to 10 year cycle?

Ralph L. Schlosstein

Since I can’t see forward, I’m going to let Roger answer that one.

Roger C. Altman

I mean that question comes back to the observation that Ralph and I both each may, which is that the M&A market as I said is healing, but I would say slowly. And so I think the premise of your question is right. It’s a little bit like the economy as a whole, the U.S. economy. It’s been recovering so slowly that it may be able to grow for a longer period of time than one normally seen. I think that’s true for the M&A recovery too.

Steven J. Chubak – Nomura Securities International, Inc.

Okay, great. And then just one last one for me. Just trying to better understand what’s driving the large deals that we’ve seen over the last – for the last few months that have been announced. And one of the things that we’ve been hearing is that recent flurry of large deal activity has really been more a function of deal momentum call it versus a improving fundamentals as some of the transformational mergers in certain sectors have effectively forced their competitors to respond in kind. And the response has been by pursuing their own combinations. I didn’t know if you expected to see a similar dynamic play out in some of the other sectors and whether that was a sustainable catalyst over a multi-year horizon?

Roger C. Altman

My answer to you is I don’t think that’s the way it’s working. The increase in large transaction at least my man’s view is traces to more fundamental factors than the one you just talked about.

Steven J. Chubak – Nomura Securities International, Inc.

Okay.

Roger C. Altman

I mean I’ve said on these calls for three years or so, that the elements of our recovery in M&A were in place and yet we didn’t see it and now we are seeing it. And as I said in my own prepared remarks, to me, after all these years in the business, I’m looking at markets as a whole, the great mystery of markets is when the turns will occur, no one knows that rather than the long-term directions.

So arguably there should have been an improvement couple of years ago, but anyway there wasn’t. And now I do think it traces to the fundamentals that I ticked off rather than the type of what, I will call, micro factors you referred to. I think it’s fundamental.

Steven J. Chubak – Nomura Securities International, Inc.

Okay. Understood. Thanks for the color and congrats on the record revenue quarter.

Roger C. Altman

Thank you.

Ralph L. Schlosstein

Thank you.

Operator

Our next question comes from the line of Alex Wilson with Goldman Sachs. Your line is open.

Alex Wilson – Goldman Sachs

Hey, good morning, guys. So first question is on the competitive dynamic. I think one of the things we saw so far this year is the bigger banks market share in M&A lend scheme has stepped up relative towards than in the past. Just curious to hear your thoughts and is this just the function of the deals that have been announced or something else perhaps a higher emphasis on the business relative to some other parts of the business that these firms have tried to go after in the past? And then I guess more importantly how does that impact comp discussions and competition for talent?

Ralph L. Schlosstein

Alex, I think there are many ways to measure market share probably the two that are used most frequently in the public or the one used most frequently in the public is the share of announced deals on a dollar volume basis. And I guess I would make a couple of comments. First, while some of the large firms have indeed done well because some of the larger transactions have involved some amount of significant financing and they also are still big factors in the business. On an overall basis, I think the market of the independent firms such as Evercore has continued to strengthen.

Roger C. Altman

If you just look at the rankings for the first six months, just in terms of the simplest measure, what number of wrongs on the top 10 are occupied by independent firms, I think, it’s higher than ever.

Ralph L. Schlosstein

And then the second thing, which is in some respect as important or important and certainly is ultimatly what we uses to pay our shareholders and our employees is our market share of advisory revenues. And as Roger indicated that has been growing quite healthily over the last five years.

Last year, our market share of – and we watch this, we monitor this very carefully. There were 13 firms that were public and report their advisory fees separately and that include all of the large firms with the exception of Barclays for some reason and Greenhill, Lazard, Evercore, Blackstone.

Our market share among those 13 firms grew from 1.3 – this is of revenues, reported revenues, grew from 1.3% to 5.2% from 2008 to 2012. We don’t really know what our market share is in the first half of the year because not everyone has reported yet. And second, with the Moelis going public early in the second quarter, there now will be 14 firms, which we can measure our market share against.

So, we don’t have enough data that conclude at this point whether we are going to hold market share, gain market share or lose if we lose a little, sometimes that can bounce around just from one deal or two deals. But, over the longer cycle, I think we feel there is still a fair amount of room to run in the market share gains for the independent firms generally and for Evercore particularly.

Alex Wilson – Goldman Sachs

Got it. That makes sense. Thanks for all the color there. And the point on comp, so I guess, as M&A cycle heats up, presumably competition for talent does as well. Have you guys noticed any meaningful shift in that dynamic over the last six months or so?

Ralph L. Schlosstein

Yeah, the only thing I would observe is that anything that’s said about investment banking comp in July is not worth the air that it went over or the paper it was printed on.

Alex Wilson – Goldman Sachs

Okay. Bob one question for you. So without trying to kind of pinpoint you guys to a margin target, I understand over the near term things can definitely fluctuate a ton. But as you think about the business, call it a medium-term right, so call it like a year to two years and let’s says consistent with your guys view that this M&A cycle has still decent runway thinking in a maybe low-to-mid-double-digit kind of growth in the revenues. What kind of operating leverage do you think we could anticipate from the construct of the business that you have?

Ralph L. Schlosstein

As I said before, truly the only operating leverage in this business is – it comes from increases in productivity per Senior Managing Director and productivity per employee. And notwithstanding our experience over the last three years, which has actually blown a little bit in the phase of that wind, as I described earlier, I do think that’s the right assumption.

So improvements in SMD and productivity, SMD productivity and productivity per total employees come from an uplift in the market as a whole and sadly spreading Roger or Bob’s or my comp over a few more SMDs or a few more people doesn’t provide any real operating leverage.

Robert B. Walsh

And, Alex, the other point I just add for color is, again, we look at cost per employee as the key measure as we’re managing the cost base. As Roger noted, as we grow, we are adding employees, so we get some relatively absolute amount of cost. The cost ticked up a little bit this quarter, but not in any levels that are going to be significant in the context of your question.

Ralph L. Schlosstein

And let me just add one thing. We’ve said pretty consistently, I know, I’ve said many times that we expect over time that this business can get to 25%-plus operating margins and that to us – and the way one gets there is with non-comp expenses of $16 million to $20 million and with a comp ratio of 55% to 58%, 59% whatever where we are today. And we have made, as we’ve promised, steady progress towards that goal.

We’ve also been very clear that, as Roger said in his comments, the investments that we make in people cost us margin and they increase the comp ratio somewhat. We feel very strongly that those are the right things to do for the long-term value creation in the business.

And as I said in my quote in the press release, we are constantly balancing the investments that we need to make in people which flow right through the income statement long before revenues materialize with our desire to make continued steady progress toward our ultimate margin goals.

We’ve also said that it ever occurred that we could – we had an unusual opportunity to add talent that was truly extra ordinary we might slow our progress towards that 25%-plus goal because it would be helpful to long-term value creation. Very long answer, I’m sorry, but that’s the way we think about it.

Alex Wilson – Goldman Sachs

No, I appreciate it. It makes total sense. I’m sorry one more for me. [He] (ph) could be the tax rate guy, but anything you guys incremental can provide into the back half of the year in terms of what kind of tax rate we should be thinking about?

Robert B. Walsh

We look at it every quarter. We are required to be thinking ahead when we do it, Alex. So it’s a function of two variables, mix of revenue, how much is international, in particular, and the performance of the businesses where we have minority holders. This is our best estimate today and we’ll continue to watch the performance of those two variables.

Alex Wilson – Goldman Sachs

Okay. Thanks for the time, guys.

Operator

Our next question comes from the line of Joel Jeffrey with KBW. Your line is open.

Joel Jeffrey – KBW

Good morning, guys.

Ralph L. Schlosstein

Good morning.

Roger C. Altman

Good morning.

Joel Jeffrey – KBW

Just in terms of some of the larger deals we’ve seen, it seems like a lot of these have been driven by the sort of inversion transactions and now there is sort of discussions in the government about either reducing those or eliminating them. I just wanted to get your thoughts on the likelihood of that happening and specifically could those – could any changes be sort of applied retroactively as has been discussed in the media?

Roger C. Altman

Well, it doesn’t appear likely at the moment including reflecting on yesterday’s hearing in the Senate Finance Committee that legislation to limit or prevent inversions will occur in 2014 that does not seem likely. On the second question, historically, in terms of tax legislation, retroactive dates have been rare. In other words, bills are introduced all the time where the effective date of the bill has proposed to be the date of introduction, the date it’s introduced. It’s not common however that those retroactive dates make it into the final bill not never, but not common. So those are my comments on it.

Joel Jeffrey – KBW

Okay, great. And then, Ralph, in terms of the private equity revenues that you guys generated this quarter I appreciate some of the color you gave before, but – and I know this is a volatile revenue line. But, I mean in terms of some of the valuation adjustments is this likely to continue going forward or is this – was there certain sort of one-time events that occurred this quarter that make it unlike to repeat?

Ralph L. Schlosstein

I’ll let Bob give a more detailed answer, but I would just make one comment. Our private equity business is really small. And so it – literally, these are mark-to-market fund, relatively very small investments that we have in these funds, which the general partner always has to make investments. The only place we have these now is in Mexico. As all of you know, our U.S. PE business has been in wind down for some time and we are hopeful that the last investment will be sold…

Roger C. Altman

Tonight.

Ralph L. Schlosstein

…or tomorrow.

Robert B. Walsh

But certainly by the end of the year. Yeah, so I have nothing to add in terms of Ralph’s comments on predictability. Just to round out the portfolio a little bit, we still do have a small stake in Trilantic and that contributed as well this quarter.

Joel Jeffrey – KBW

Okay, great. And then lastly for me, in general, I mean, in terms of advising a client on a sort of defensive stances you did with AstraZeneca. Could you talk a little bit about, just in general, how the fees structure for a transaction like that is structured? Is it based on a successful defense? Or is it based on a sort of flat fee? Just any color you could give would be helpful.

Ralph L. Schlosstein

Since Roger was involved in that let me answer, no.

Robert B. Walsh

Yeah, I mean, it sounds trite, but the compensation in every transaction whether it’s a merger, whether it’s on the sell side to buy side, defense and so forth. It’s really handcrafted, customized, and it’s very difficult to generalize. I mean even if we wanted to value, which we don’t, it will be very hard to.

Joel Jeffrey – KBW

Great. Thanks for taking my questions.

Operator

Our next question comes from the line Douglas Sipkin with Susquehanna. Your line is open.

Douglas Sipkin – Susquehanna Financial Group

Thank you, and good morning to all. Just had two questions. One on sort of the institutional or the underwriting franchise. I mean, obviously, you guys have proven that you can make it work and we’ve seen some good results and it does feel like you have some quarters where underwriting or advising on underwritings can actually make a difference.

So I’m just wondering, now that you’ve had some experience with this, I mean is this an area where maybe you’d be looking to also expand? I know you guys constantly talk about your MD goals on the advisory side, but would you consider maybe getting a little bit bigger in this area or making some investment in this area given that it’s actually been pretty reasonably good for you guys?

Robert B. Walsh

Keep in mind that all bankers work on underwritings. Now there is not a separate underwriting department in banking. So I’m not sure where your question was going in that regard, but, no, there is not an underwriting department at the investment banking level and no we don’t have a group of bankers who work only on underwritings and then another group that works only on mergers and then another group that works only on takeover defense and so forth.

It’s one group of bankers and if your client is – if an underwriting is relevant to your client, you work on it. Obviously, we have specialists in terms of our equity capital markets group, but I just want to clarify that.

Roger C. Altman

I would say that this is a – I would still call it an inceptive effort here. We’ve made a fair amount of progress in our equity underwriting revenues, but they’re still small relative to our advisory business, M&A, restructuring, capital markets advise. And we would hope that we would continue to have, to experience meaningful growth in our equity underwriting business both as we move up the food chain effectively by having – getting a little bit more of the – a higher percentage of the fees in underwritings as we prove ourselves out more and also by participating in a broader array of industry transactions as our clients become more and more aware of our capabilities in this area.

Douglas Sipkin – Susquehanna Financial Group

Great. I guess maybe let me rephrase it a touch because I don’t want to confuse you. I mean, effectively, I guess, I just got the impression that some of the M&A bankers pushed when there are opportunities for underwriting and maybe some didn’t. I guess are you seeing, given your success that a greater percentage of maybe traditional advisory guys are announcing, hey, you know what? I can do this too. I mean, are you feeling like a greater percentage of the MD count is pursuing this a little bit more than maybe when you first started it?

Robert B. Walsh

I would steer you away from that thesis. I don’t really think that’s accurate. Look there are bankers who work in industries where underwritings are much more common than other industries. But in terms of your question, no, that’s not the way it works here.

Douglas Sipkin – Susquehanna Financial Group

Okay, great. That’s helpful. No, thank you. That’s fair. And then just a little bit of color on the Wealth Management. I saw you increased your ownership interest to 60% – basically 62% from 51%. Maybe can you shed a little bit of light on how that transpired? Was that contractual? Or is that a decision you guys made? And maybe just a little bit of update around that.

Ralph L. Schlosstein

It was contractual and there is one more contractual purchase that will occur in 2018 and after that it’s contemplated that Evercore will own 75% and the employees will always own 25%.

Douglas Sipkin – Susquehanna Financial Group

Great. Thanks for that color.

Operator

Our next question comes from the line of Hugh Miller with Sidoti. Your line is open.

Hugh Miller – Sidoti & Company LLC

Hey, good morning

Roger C. Altman

Good morning, Hugh.

Ralph L. Schlosstein

Good morning.

Hugh Miller – Sidoti & Company LLC

So, I appreciate all of the discussion around the overall market environment, all very, very helpful. Just had a couple of questions that were more granular. One of which with regards to Managing Director side, obviously, you gave us your expectations for recruitment. As we think about kind of the net headcount and the potential for whether or not there maybe some Directors that would go to the Senior Advisor role. Is that something that you would anticipate for the year?

Ralph L. Schlosstein

Not between now and the end of the year, no.

Hugh Miller – Sidoti & Company LLC

Okay. So that should be likely a net figure increase as well for –?

Ralph L. Schlosstein

That’s correct.

Hugh Miller – Sidoti & Company LLC

Okay. And then one question with regard to the flows for the asset management business. If you could just give us some color. I apologize if I didn’t get it, but on the market appreciation versus the flows?

Ralph L. Schlosstein

I mean we had inflows in both our wealth management and in our institutional money management business. And in terms of the precise numbers, Bob, you want to…?

Robert B. Walsh

The appreciation was just under $500 million and the net flows were about $350 million.

Hugh Miller – Sidoti & Company LLC

Okay, great. Appreciate that. And then just one other question in the asset management business. You gave us great color around the investment banking side. The cost in that business did come in a bit leaner than what I was looking for. I was wondering if you could provide any color there and if there was anything that was maybe an unusual expense benefit or something like that in the quarter?

Ralph L. Schlosstein

Hopefully, disappoint you. It had more to do with the ratio; it had more to do with top line than the expenses…

Hugh Miller – Sidoti & Company LLC

Great, okay.

Ralph L. Schlosstein

…as we talked about earlier in banking.

Hugh Miller – Sidoti & Company LLC

Yeah. Okay. I appreciate it. Thanks so much.

Ralph L. Schlosstein

All right. Thank you.

Operator

Our next question comes from the line of Jeff Harte with Sandler O’Neill. Your line is open.

Jeffery Harte – Sandler O'Neill & Partners

Good morning, guys. A few for me. First, with the improvements in the operating environment and it maybe too soon to answer, but do you notice any change in kind of the recently hired SMDs ramp up trends or potential ramp up trends as far as generating revenues?

Ralph L. Schlosstein

No.

Jeffery Harte – Sandler O'Neill & Partners

Okay. Secondly, couple of things on Europe. One, I know, we hadn’t seen kind of all the geo-political risk increase really impacting conversations. Is that still the case or are you sensing any kind of a spill over to M&A conversations in Europe from Ukraine and the Middle East and places like that.

Ralph L. Schlosstein

Well, Ukraine hasn’t been a big M&A market historically.

Jeffery Harte – Sandler O'Neill & Partners

I’m thinking more of the potential of that becoming a problem for Europe, either losing energy or potentially going to war.

Ralph L. Schlosstein

We’ve never done a call for an hour. So please excuse us. We are finding out what happens to Evercore when you have an hour long meeting. It disintegrate, yeah, we keep it short here. I think the answer though to your question is, no. I mean I pointed out in my own comments that European M&A volume in dollar terms in the second quarter tripled and the Ukraine crisis has been unfortunately at a high level of crisis for some time now. So I think you can look at the numbers and say to yourself it doesn’t appear to be the case that that’s having an effect.

Jeffery Harte – Sandler O'Neill & Partners

Okay. To the extend Europe recovering is obviously good news. How do you guys view your positioning there as far as covering Europe kind of geographies and industries? Are there holes to fill? How comfortable are you with your coverage of Europe right now?

Ralph L. Schlosstein

I would say we have a good business in Europe. I think other than the two independent firms that were born there, Rothschild and Lazard. I would say we have the best independent franchise of any other firm, but nonetheless we were a firm whose origins are in the U.S. which after all is the largest M&A environment if you’re going to have urge in some place, this is the place to have them. And as a consequence, I think, we have percentage wise more opportunity to grow there than we do in the U.S. market where our business is a little bit more mature.

Jeffery Harte – Sandler O'Neill & Partners

Okay. And finally just on the non-comp side. Acquisition and transition costs went from essentially nothing to a more meaningful number this quarter. Anything behind that or how should we think of that line item?

Roger C. Altman

We are always looking at different opportunities in the business. This quarter, we spend a little bit more time looking at an opportunity or two than usual.

Jeffery Harte – Sandler O'Neill & Partners

Okay. So it’s not – okay, so it’s somewhat one time in nature the jumping to $1 million plus?

Roger C. Altman

Look, as I said, we’re always looking at things, but, yeah, I’d say, it’s less frequent that there is a big number there.

Jeffery Harte – Sandler O'Neill & Partners

Okay. Thank you.

Operator

Our next question comes from the line of Michael Wong with Morningstar. Your line is open.

Michael Wong – Morningstar Research

Good morning.

Ralph L. Schlosstein

Good morning.

Michael Wong – Morningstar Research

I believe your European Senior Managing Director headcount has actually decreased over the last several quarters. Do you believe or do you plan to increase that going forward as the European environment is improving or is maybe the human capital environment becoming too competitive over there so it’s harder to hire or keep talent?

Ralph L. Schlosstein

First of all, we did make last year a conscious decision because of our concern about the European market not to aggressively hire in Europe and that was in 2013. So we had – of the hires that we made last year, none were in Europe and we did have one person who has chosen to pursue a different career which we were very supportive of. So that’s the degree of the change, and as I indicated in my opening remarks one of the Senior Managing Director hires that we have made this person has resigned, but we haven’t announced who it is and what they do but one of those is based in Europe.

Michael Wong – Morningstar, Inc.

Okay. And in the institutional securities business fairly good revenue, but it is still running red for the first half. Is the expense state the reflection of your full year accrual or budgeted expenses so you would expect your revenues to be a little above that in the back half of the year or possibly based on your view of – may be you are underwriting pipeline.

Robert B. Walsh

I think the headline is we would expect the revenues all else being equal to be – towards the back half of the year. There was a modest amount of front weighting of some of the cost, but it’s really revenue driven.

Michael Wong – Morningstar, Inc.

Okay. And quick last question. So in general with your historical and currently still strong position in large transactions, I’m a bit surprised that your outlook is so cautious, so some of the current large deal have the environment actually played to one of your integral strengths.

Ralph L. Schlosstein

Yes it does. But we are just trying to be realistic of the bumpy environment and again, let’s not give you the wrong impression. It’s improving as I said slowly healing, that’s one of my favorite trade. So it’s getting better and as I said the outlook I think over the foreseeable future is good. In other words we should see further improvement, but if you do look at the deal count numbers the spirit of just practical reality. They are flat.

So there is a lot of room to run as I said. So we are cautiously optimistic. But we also trying to maintain accurate picture for the market. If you read a lot of press accounts you think that the market was under their fire cracker and the biggest boom, I don’t know since this is a long time and it is doing better. But it is not at that level of extraordinary. That’s all.

Michael Wong – Morningstar, Inc.

Okay. Thank you for my taking my question.

Operator

Our next question comes from the line of Vincent Hung with Autonomous. Your line is open.

Vincent Hung – Autonomous Research LLP

Hi, good morning.

Ralph L. Schlosstein

Good morning, Vincent.

Robert B. Walsh

There is a very bad spot for analyst to stands between us and dinner. Go ahead. I’m sorry.

Vincent Hung – Autonomous Research LLP

Yes, my first question is I just have gone your comments on the backlog and you said unrisk and risk backlogs are strong. But how does this relates what you said in Q1, where you said it was at record levels.

Robert B. Walsh

They are strong. That’s what I – all I care to say about it.

Vincent Hung – Autonomous Research LLP

That’s okay.

Robert B. Walsh

All right.

Vincent Hung – Autonomous Research LLP

And then TMC stake in energy have typically been very strong sectors for you on a revenue basis. So when I look at the announced deal volumes for you guys compared to last year, it’s sound quite meaningfully. I don’t know if you can give us a bit of comment on outlook of M&A in those sectors.

Robert B. Walsh

Well, those are strong sectors. But this factor that of course has been so much in the headlines has been healthcare. And you’ve seen series of very substantial transaction the number of them inversion center transaction have been healthcare. But our energy big and TMC strong they are, I mean, obviously, we – I know where they are.

Vincent Hung – Autonomous Research LLP

Okay. I guess just related. So, yes, as you said, we’ve had a lot of these tax invasion healthcare related deals, but do you think a lot these large deals is having spillover effects to effect this? Is it acting as some sort of borrowing at the companies and managements on effect just to concentrate larger deals?

Roger C. Altman

That’s a version of a question that we talked about earlier. I just think it’s fundamental. I mean I don’t really myself (indiscernible) with too many companies who wake up in the morning and say, wow, look at that other deal over there. I guess I better do one. I don’t think that’s the way most companies think. It’s fundamentally driven by fundamental – specific corporate strategies and so forth.

Vincent Hung – Autonomous Research LLP

Okay. And the last question from me is, can you just give us a bit of color around the revenue concentration for this quarter?

Roger C. Altman

It continues to be, as you would expect, highly diversified.

Vincent Hung – Autonomous Research LLP

Okay, so nothing particularly outside this quarter.

Robert B. Walsh

I would point to Roger’s remark earlier about the number, these are over $1 million, continues to increase. It’s very broad based.

Vincent Hung – Autonomous Research LLP

Okay, great. Thank you.

Operator

Our next question comes from Brennan Hawken with UBS. Your line is open.

Brennan Hawken – UBS Securities LLC

Sorry, guys. I tried to remove myself. This has dragged on for a while.

Ralph L. Schlosstein

Now that you’re here, come on in for lunch.

Brennan Hawken – UBS Securities LLC

Since I mean I guess I’ll just pound on a few ones real quick. Can you give any color on how much of the professional fee line is tied to employees working on a consulting arrangement? That was really helpful color on the non-comp front.

Roger C. Altman

I don’t think we should get into that level of detail. It’s the first time it’s been an interesting number, Brennan.

Brennan Hawken – UBS Securities LLC

Okay.

Roger C. Altman

We gave some color on it.

Brennan Hawken – UBS Securities LLC

Fair enough. And then it looks cash is building on the balance sheet. Is that just maybe you guys getting starting a little early this year on building towards year end or is there more dry powder there for some buyback share in the back half?

Roger C. Altman

Both.

Brennan Hawken – UBS Securities LLC

Okay. And then last one. I think you guys said that it $20 million in cap market’s advisory, right? How much of that one is included in the institutional equities’ revenue?

Roger C. Altman

As we’ve said consistently, when we deal with underwriting and significant amount of the $20 million was under writing, about half goes into capital markets, but I don’t want to get into greater details on that.

Brennan Hawken – UBS Securities LLC

It’s fine. So it’s no different in the half. Okay. That’s helpful. And then, I guess last one. You referenced expense control in institutional equities, but expense run rate seems to be meaningfully higher the last few quarters. So, can you help us understand what’s driving that and whether or not there is any flexibility there for you guys?

Roger C. Altman

So the main driver has been the addition of heads and I would just come back to our cost per person which is the main metric we focus on, has gone up a bit. Some of that is influenced by these quarter-specific matters and travel and professional fees that we talked about today. It’s pretty steady.

Brennan Hawken – UBS Securities LLC

Okay. Thanks for the color.

Roger C. Altman

Thank you.

Operator

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

Ralph L. Schlosstein

Nothing to say. I’ve left for lunch.

Roger C. Altman

Thanks, everybody.

Ralph L. Schlosstein

See you next quarter. Bye-bye.

Operator

This concludes today’s Evercore second quarter and first half 2014 financial results conference call. You may now disconnect.

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