Evercore Inc
NYSE:EVR
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Evercore Inc
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Fourth Quarter and Full Year 2017 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 opened for questions. [Operator Instructions] This conference call is being recorded today, Wednesday, January 31, 2018.
I would now like to turn the conference over to your host, Evercore's Chief Financial Officer, Bob Walsh. Please go ahead, sir.
Good morning and thank you for joining us today for Evercore's fourth quarter and full year 2017 financial results conference call. I am Bob Walsh, Evercore's Chief Financial Officer. And joining me on the call today are Ralph Schlosstein, our President and Chief Executive Officer, and John Weinberg, our Executive Chairman.
After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's fourth quarter and full year 2017 financial results. The company's discussion of our results today is complementary to that press release, which is available on our website at evercore.com.
This conference call is being webcast live on the Investor Relations section of the website and an archive of it will be available for 30 days beginning approximately one hour after the conclusion of this call.
I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. These factors include, but are not limited to those discussed in Evercore's filings with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements.
In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. Additionally unless otherwise indicated these financial measures exclude the impact of the enactment of the Tax Cuts and Jobs Act that was signed into law on December 22nd of 2017. For detailed disclosures on these measures and 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 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.
Morning, everyone. 2017 was another successful year for Evercore, driven by yet another year of very strong growth in our advisory business. We finished the year ranking first in both the U.S. and the Global League Tables based on the dollar value of announced transactions among independent firms.
Fifth in the U.S. among all firms and seventh among all firms globally. These are the highest year end rankings attained by our firm in our history. While all firms have not yet reported we expect to end the year with an advisory market share based on revenue of at least 6.7% among all firms, large and small that report advisory fees separately. That's an increase from 6% last year.
We are also gaining market share among all publicly traded independent advisory firms. Our 2017 performance demonstrates the broad capabilities of our franchise. We are advisors of the two largest M&A transactions announced in 2017. The largest transactions across multiple sectors including retail, U.S., REITs, transportation, U.S. Telecom and the second largest media transaction.
We advised on three of the five largest activist defense campaigns globally in 2017 and our currently advising companies on activist defense representing $1 trillion of market cap.
We also advised on the largest public market takeover ever announced in Singapore and were named as the best M&A advisor in Singapore for the third consecutive year. Revenues from capital advisory services, including underwriting grew over 60%. Our global presence widened with new Evercore offices in Asia and the Middle East and our sector team strengthened significantly, especially in general industrials.
Our results this year are a testament to the strength of our team and our steady investments in talent, both in recruiting senior talent to the firm and in developing and promoting high quality senior talent within the firm.
2017 was again a strong recruiting year with the addition of seven senior managing directors and senior advisors in advisory, with a particular focus on our general industrials practice.
Our strategy has enabled us to better serve our clients and to deliver the senior level trusted and wide ranging advice on which our clients depend. We will continue to invest in best in class talent and believe that we are well positioned at the start of 2018.
We have promoted six of our talented advisory managing directors to senior managing director, the largest group of internal promotions in our history. We did that earlier this month.
We also announced the addition of an advisory senior managing director in the consumer sector and we expect to announce the addition of another advisory SMD later this week.
While it is still early in the year it is quite possible that 2018 will be another year of significant investment in new talent. As we look to deepen our footprint in key verticals and to continue to broaden and deepen our geographic capabilities.
In equities, we remain committed to maintaining the highest level of excellence in research and client service. In 2017, our research team was once again very highly rated by institutional investor. Third among all firms on an un-weighted basis and second on a weighted basis to JPMorgan.
We continue to invest in the business, adding two senior research analysts in 2017, along with the addition of Mike Paliotta as CEO who joined in the fourth quarter last year.
In investment management we completed the sale of the Institutional Trust and Independent Fiduciary business of ETC, eliminating a source of potential conflicts with our advisory business and further focusing our investment management strategy on wealth management. We ended the year with $9 billion of assets under management in our consolidated businesses.
Our strong results enabled us to deliver significant value to our shareholders, returning more than $361 million of capital in 2017, through increased dividends and the repurchase of 3.9 million shares at an average price of around $75.
Let me now briefly recap our firm-wide financial results. Evercore's full year 2017 results reflected very strong performance in our investment banking business globally, as well as a reduced tax rate driven by appreciation in our share price. We delivered our ninth consecutive year of growth in both adjusted revenues and earnings.
For the year we achieved record adjusted net revenues and adjusted net income of $1.626 billion dollars and $276 million respectively. 2017 adjusted earnings per share were $5.45, an increase of 26% over the same period last year. Without the benefit of the reduced tax rate, which is primarily in the first quarter of each year, EPS would have been up approximately 15%.
Adjusted operating margins were 26.2% - excuse me, for the full year with a full year compensation ratio of 58.5%. Our non-compensation ratio improved in 2017 at 15.3% of net revenues for the full year versus 16.3% in 2016. This is a result both of rising revenues and continued cost discipline.
For the quarter, adjusted net revenues were $465 million, a quarterly record of 5% versus the same period last year. Adjusted net income in the quarter was $78 million with adjusted earnings per share a $1.55. In each case the best fourth quarter in our firm's history. These results are up 5% and 8% respectively from the prior year.
The adjusted operating margin was 28.8% for the quarter comparable to 28.7% from one year ago. The fourth quarter compensation ratio was 57.3% versus 57.2% last year and the non-comp ratio was 13.8%, slightly down versus the same period last year.
Finally, let me comment for a minute on the recently enacted tax legislation. Overall the updated tax code will provide a meaningfully positive impact to Evercore through a reduction in our ongoing tax obligations. If the tax code changes had been enacted at the beginning of 2017, Evercore’s 2017 adjusted earnings per share would have increased by approximately a $1. Bob will discuss the impact of the tax reform in greater detail in his remarks.
The increase in after-tax earnings provides us with additional capital to continue to invest in the capabilities to serve our clients, as well as additional capital to invest in our strategic and financial objectives, including very importantly returning capital to our shareholders.
Let me now turn the call over to John, who will discuss the current market environment and comment on our advisory results.
Thank you, Ralph. Market conditions for M&A remained favorable in the fourth quarter of 2017, as the drivers for a healthy level of activity remained in place. Low interest rates, available credit, high equity prices, synchronized global growth and strong business confidence.
Multiple catalysts, including strategic consolidation activism and sponsor activity all motivated client activity during the fourth quarter. This resulted in steady performance in key metrics.
The number of transactions announced globally in 2017 increased 2% year-on-year, while dollar volume of announced transactions decreased 1% versus the 2016. Announced volumes declined 16% year-on-year in the U.S. However, the number of transactions increased 13%.
The decline in volume was driven by a decline in the announced value of transactions greater than $5 billion. While default rates remained at record lows, the size of the leverage finance market is at record levels and continues to grow, sustaining restructuring activity across selected industries globally.
U.S. equity issuance increased 4% in 2017 relative to the prior year. U.S. equity trading volumes continue to decline in 2017 and were down 10% year-over-year. This trend coupled with reduced research budgets and MiFID II regulatory changes are creating headwinds in the sell side marketplace.
Let me quickly review the results of our Advisory business in greater detail. First full year advisory fees were $1.3 billion, 21% higher than a year ago and the highest in our history. For the fourth quarter, advisory revenues of $374.8 million are up 8% year-over-year.
The composition of advisory revenues for the quarter and the year reflected strong contributions from multiple sectors and capabilities. As Ralph mentioned, we are advising on the two largest M&A transactions of the year, Qualcomm Incorporated on Broadcom Limited $129 billion unsolicited takeover and the Board of Directors of Aetna and its $77 billion sale to CVS Health.
Capital Advisory grew rapidly as we experienced the strongest results in our history for our businesses focused on primary and secondary transactions for private equity and alternative investment firms.
Underwriting revenues increased $44.7. In restructuring, we continue to see opportunities concentrated in select industries, principally in retail and energy. We ended the year with 87 advisory senior managing directors. The productivity of our senior - of our advisory senior managing directors globally for the 12 months ended 12/31/17 once again improved from a year - from the year ago period.
Strategically we expect to build on our momentum. With our recent talent additions as key sectors, such as industrials, we are now more comprehend - we now more comprehensively cover the more important verticals in M&A, deepening the foundation of our Advisory business.
We also see the opportunity to add to our global strength and are particularly focused on increasing our scale in Europe. Since the beginning of 2016 we've added 15 advisory senior management directors on a net basis, through promotions and recruiting. Our internal promotions have impacted our senior level coverage across a range of industry verticals, in particular industrials, healthcare and TMT.
In addition to boosting our sector coverage, we have also enhanced our capital advisory services. Similarly, senior level external recruits have strengthened a broad range of client offerings. We now have a market leading strategic shareholder advisory group and activist’s defense team.
In addition, we added strength in capital markets, financial institutions, industrials and restructuring. Geographically in Europe we are in position - a position of strength, building upon our acquisition of Lexicon Partners, with a steady addition of talent, both from external recruits and internal promotions.
These new SMDs are actively working to build pipelines and to add productivity, driving future growth. Of note, most of the senior managing directors are still in the ramp-up phase of productivity, with plenty of room to grow as they mature on our platform. We will continue to add talent, adding depth and breadth to the sectors we cover and the capabilities we offer to our clients.
As we look ahead to 2018, we continue to be encouraged by strong global economic growth, potentials of strategic actions by our clients given the U.S. tax reform and by increased participation from financial sponsors. There is an expectation by many that 2018 will bring large cap and global cross-border M&A and drive the market, as well as stronger volumes in Europe. Our backlog continues to be strong.
Now let me turn back to Ralph to address equities and investment management.
Thanks, John. Evercore ISI contributed net revenues of $63.9 million in the fourth quarter, including $7.3 million attributable to underwriting. For the full year the business contributed net revenues of $226.1 million, including $21.4 million attributable to underwriting.
While equities did benefit from the usual positive seasonal patterns in the fourth quarter, the overall environment continues to remain challenging due to a number of factors, including lower volatility, the continued shift from active to passive products, and the evolving regulatory environment in Europe.
We are working closely with all of our clients, including those that are affected by MiFID II. To ensure that we provide the highest quality research, trading execution and client service. We strongly believe that having excellent research capabilities and an excellent exit equities business is fundamental to our investment banking strategy, making us more relevant to our advisory clients and placing us in a much stronger position than any of our independent advisory firm competitors to help our advisory clients navigate their relationship with the largest institutional investors globally.
Investment management business reported adjusted net revenues and adjusted operating income of $16.4 million and $5.2 million respectively for the quarter. For the full year adjusted net revenues were $70.6 million and adjusted operating income was $19.2 million.
The full year adjusted operating margin was 27.2%. These results predominantly reflect the contributions from our wealth management business in the U.S. and the strong performance of our investment in ABS.
Assets under management from consolidated businesses increased to $9 billion at the end of the fourth quarter, an increase of 12% from year end 2016. In 2017, we took additional steps to sharpen the focus of our investment management business by selling the institutional trust and independent fiduciary business of Evercore Trust Company. The sale which closed in the fourth quarter.
As we've said consistently, our focus continues to be in this sector on building our wealth management business and on enhancing our money management business in Mexico. Bob will now discuss our GAAP results and several other financial matters. Bob?
Thank you, Ralph. Net revenues on a GAAP basis were $540 million for the quarter and $1.7 billion for the year, just both a record - they were a record on an adjusted basis.
Following the impact of adjustments related to the Tax Cuts and Jobs Act in the fourth quarter, we incurred a net loss attributable to Evercore Inc. and a loss per share on a GAAP basis of $19.4 million for $0.50 for the fourth quarter respectively.
Net income attributable to Evercore Inc. and earnings per share were $125 million or $2.80 for the year, each record for a full year GAAP purposes. Consistent with prior periods, our adjusted results for the quarter exclude certain items that are directly related to our acquisitions and dispositions, including costs related to our equities business.
As in prior quarters, we adjusted our costs associated with divesting of LP Units and interests granted in conjunction with the ISI acquisition. For the quarter, we expensed $2.7 million related to the Class E LP Units and $3.7 million related to the Class J LP Units.
The performance for the final tranche of the Class G LP interests ended December 31st of this year and the performance target was not achieved. On December 31 2017, we restructured our investment in G5 our affiliate in Brazil such that going forward this investment will no longer be accounted for under the equity method.
This transaction resulted in the reclassification of $16.3 million of cumulative foreign currency translation losses from other comprehensive income which is reported in - within stockholders equity to a reduction in other revenues in the fourth quarter in our U.S. GAAP results.
As Ralph mentioned, we sold the Institutional Trust and Fiduciary business of Evercore Trust Company in October. This following closing adjustments generated a pretax gain of approximately $8 million in the fourth quarter in our U.S. GAAP results. In conjunction with the sale transaction, our U.S. GAAP results also reflect $3.9 million of special charges, principally associated with transition of employee’s of that business.
Moving on to taxes. Our GAAP tax rate for the quarter was 100.7%, as compared with 32.4% in the prior quarter and 40% in the same period last year. Our GAAP tax rate was 59.1% for the full year, as compared to 44.5% for 2016.
As was noted previously, these rates for the fourth quarter and full year of 2017 were impacted by the enactment of the Tax Cut and Jobs Act in December which resulted in a decrease in future income tax rates in the US.
Consequently our tax provision on a U.S. tax basis for the quarter includes a charge of $143.3 million, which primarily represents the estimated re-measurement of our net deferred tax assets, principally associated with temporary differences from the step-up in basis associated with the exchange of partnership units, deferred compensation, accumulated other comprehensive income and depreciation of fixed assets and leasehold improvements.
This charge, as well as a related reduction in the liability for amounts due pursuant to our tax receivable agreements of $77.5 million which is reflected in other revenue on a U.S. GAAP basis resulted in an increase in our effective tax rate of 59.3 percentage points for the quarter or 27.1 percentage points for the full year from what those rates would have otherwise been.
Likewise our adjusted effective tax rate, which excludes the impact of the enactment of the Tax Cuts and Jobs Act was 37% for the quarter compared to 37% for the prior quarter and 38% in the same period last year.
The full year adjusted effective tax rate is 31.3% which compares to 38% for 2016. The impact of the new accounting for stock compensation, which was principally reflected in the first quarter resulted in a decrease in the adjusted effective tax rate of 0.4 percentage points for the quarter and 6.4 percentage points for the year.
Lastly, assuming the level and geographical mix of earnings in 2018 is comparable to 2017 and our share price on the vesting date for prior equity grants is at or near 2017 levels, we would expect our adjusted effective tax rate to be approximately 21% reflecting the lower tax structure of the Tax Cuts and Jobs Acts.
The adjusted effective tax rate would be approximately 25% excluding any impact of share price changes on the deductions associated with share based compensation.
Trying to wrap up, non-compensation costs on a full year basis the non-compensation costs per employee were approximately $153,000 in 2017 flat to prior years. The Q4 adjusted earnings share - the adjusted share count for earnings per share was 50.4 million shares higher in comparison with the prior quarter, driven principally by the higher share price in the quarter and the normal amortization of shares under US GAAP. We did not repurchase any shares in open market transactions in the fourth quarter. On a GAAP basis, the share count was 39 million shares for the quarter.
As Ralph mentioned, we repurchased 3.9 million shares or units at an average cost of $75.02 for the year, more than offsetting the shares issued for year end compensation and to attract talent over the past 12 months.
We did not draw from the $30 million line of credit. During the quarter, our cash position remains strong. At the end of the year we hold $738 million of cash and marketable securities, at December 31st with current assets exceeding current liabilities by approximately 536 million.
Let’s now turn the call back to Ralph.
Let me close with a couple of thoughts. First, as John mentioned, as we enter 2018 the environment is very good for our business. At this time all of the conditions are in place for another strong M&A year. Obviously we can't predict the future, but the conditions that are in place today should support another strong year in our Advisory business.
Second, the investments that we have made and continue to make in new talent and new capabilities should position our firm for another year of growth and market share, something that we have been able to achieve in each of the last nine years.
Finally, we are unique among all independent firms in the breadth of services that we offer to our clients. We strongly believe that the broad array of services that we offer our clients will continue to support our industry leading productivity.
We’ll now open the floor for questions.
Thank you, sir. [Operator Instructions] Our first question is from the line of Brennan Hawken with UBS. Your line is now open.
Good morning, guys. Thanks for taking the question. Just want to follow up Ralph on the - one of the comments that you had made on – in both the prepared remarks and in the release on the plans to invest a portion of the tax benefits on capabilities.
So you guys highlighted last year before we got tax reform that you were intending to increase hiring. So I'm just trying to differentiate - understand whether there's any change of plans now or really this is just an extension of how you are already thinking of approaching the business? Thanks.
I would look at it as an extension of how we are already approaching the business. Obviously we have more free cash flow, but this is not a firm that says okay, if cash flow goes up 20% investment in people has to go up 20%.
We're going to make the right investments you know, that are consistent with building long-term shareholder value in this company based on our judgments with respect to that and those will be essentially unaffected by the change in tax code.
Terrific. Very clear. Thank you. And then my follow up would be on thinking about 2018 and again, Ralph you - sort of setting up here in some of your comments at the end they are saying that you continue to expect to grow market share here in the year which is certainly encouraging, especially on the back of a strong market share gains here in 2017.
So when we look at the flow of metrics that we've got in the public pipeline data and thinking about how that might translate into the profile of revenues for the year. And I know you guys just love to comment on this type of stuff, but I'm going to try anyway.
First half 18, you know, looks probably a bit softer and then with based on announcement activity you know, the likelihood of a stronger pickup and a stronger finish to the year, just at a higher level, is that generally how we should be thinking about modeling you guys or is there something else going on that might cause that to be an even worse indicator than it has been in the past? Thanks.
Well, Brennan, at a high level or at a low level or even middle level, we're not really going to help you on that.
Oh maintenance, come on. You do it to me every time.
On 2000 feet right on the ground there are 50,000 feet. I think you know John spoke accurately that our backlog is strong and as you well know the publicly available data does not always mirror the - what we - the breadth of our backlog.
Okay.
It’s as simple as that.
Sure, that's fine. And let me just take the phrase at a different way. Your fourth quarter results were a lot stronger than we were modeling certainly from the public data. Were there contributions from restructuring? What was some of the contributions from the businesses that we might have trouble, at least from a historical context, so then maybe we can frame how to think about things in the coming months better?
I would say that the fourth quarter strength was pretty much across the board both within the advisory business by geography and by industry and in our capital raising businesses. So it was you know, each of the – and restructuring also had a decent quarter. So you know, it was the firm doing what it's supposed to do.
Okay. Thanks.
Our next question is from Mike Needham with Bank of America Merrill Lynch. Your line is now open.
Hey. Good morning, everyone. I was hoping to I guess drill down on some of the comments you made about tax reform. Clearly your go for tax rate is going to be higher, cash generation is going to be higher and it sounds like you might do a mix of like capital return and reinvestment, to the extent that you have like a list of things that you know, maybe you didn’t have the cash to commit to in the past. One of those couple of things on the list you know, specific things that you would allocate that money to you know over the next two years?
Yeah, let me be really clear on this. You know, each year we have never been you know, in our view constrained by cash in terms of the investments that we can make, whether it was at a the old tax rate or the new tax rate. You know, I think many of you have followed us for a long enough period of time that you know, we have a set of priorities in terms of capabilities that we want to build, when we find A plus talent that meet those requirements or those objectives and we're able to convince them to join us, we hire them and if we can't find you know, A plus or A talent, we wait.
The fundamental thing that drives our investment decisions is our ability to find A plus or A talent that is we'll be able to perform on our platform and that is amenable to joining us.
You know, I think I've said since I started doing these calls almost nine years ago, that when we do have an opportunity, as we did last year to invest a little bit more in talent because of the availability of talent and in some cases the expense of talent, we're going to do that.
And you know, having you know, notwithstanding that we've kept the - you know, the compensation ratio which is ultimately you know, reflects those investments in a relatively narrow range mid to high 50s. Ultimately I think that's you know, certainly we expect that to continue to be our objective.
Okay.
And you know, look we're not going to - you know, we have consistently had a policy of excess cash flow being returned to our shareholders in the form of dividends and share repurchases. And I don't think that you should expect any change in that policy.
Okay, thanks. And the other is just on you know the activist defense, it sounds like the pipeline is pretty good. Can you talk about the - I guess how the fees in that business compare to merger advice. And I'm just trying to get a sense for it's a pretty big number you guys gave for the pipeline. You know, how much of a contribution that might be this year? Thanks.
Well, clearly a very strong activist defense business gets us into many situations. Last year I think you saw that we were involved in the whole food defense which ended up in the long run being part - we were then part of selling whole foods to Amazon.
The comparison of activist defense fees really is - it is quite variable and as you can imagine there are many different types of activist advisory business that we can have. In some cases it's an advisory business where nothing really is ongoing, in other cases something very hot happening and we're very much in the middle. So fees go up and down.
The other thing I would say with respect to the activist defense and the merger fees is that, it's very much – its product of the activity level generally in the market, and when the activity level is high those build.
And from our perspective the activist and defense business has been a very good business for us. It puts us in the middle of a lot of different situations, open lots of doors for clients and therefore it really contributes to the overall profile we have with clients and allows us to really play a larger role with the strategic bearing for a client.
Okay. Great. Thank you.
Our next question is from Devin Ryan with JMP. Your line is now open.
Thanks. Good morning, everyone.
Hey, Devin.
Maybe a question here or just European expansion. So obviously you know, the European M&A markets have really hardly recovered post financial crisis compared to healthier markets elsewhere. It does seem to be positioned better here moving forward, but expansion in Europe is clearly going to be a priority for Evercore over the next several of years.
So I'm just trying to maybe get a little better sense of how you guys would frame the upside potential in Europe as a market. And then also from a market share perspective you know, how you feel like Evercore is positioned and then how much bigger you can be if you maybe, you talk about your market share as a firm, the overall market that how you feel like you are in Europe as a market share and what that can go to?
Well, I think you're correct that if you look at our business compared to the two other firms that do well in excess of a $1 billion in advisory revenues. We are the strongest in the U.S. and both of those firms have stronger businesses in Europe.
Now you know, I would argue that's not terribly surprising since that for two reasons. Number one, one of them is been in business for roughly a 165 years and the other for roughly 205 years. And second they were both born in Europe. You know, we have by far the largest European business among the U.S. began you know independent firms.
So the gap between the historical European firms and Evercore represents clearly an opportunity for us. You know, our approach to that is going to be exactly the same, as it has been here in the U.S. in trying to fill you know, our capabilities in certain sectors.
I think probably since I've started on these calls we've talked about the importance you know, our desire to deepen our capabilities and strengthen our capabilities in the general industrials, in the consumer sector. And you know, last year we made some really important hires in general industrials and this year we made an important hire in the consumer sector.
So you know, Europe is very much on our radar, but once again we will - the pace of those investments will be driven by the availability and amenability of talent joining us, not - we are just not a firm that says you know, we have to be in this sector in Europe and we're going to hire the best athlete we can find. We're a firm that waits to get someone that we are highly confident we'll be productive on our platform.
Said it different way. We are focused on Europe, but we're going to grow responsibly and as has been the practice of the firm as Ralph said, we really only hire people who we think are A plus players and as a result it may take time, but we're very focused on thinking about our footprint in Europe, expanding our footprint in Europe. We have a very good business there now and we just plan to add on to it.
Okay, terrific. Thanks for all that detail. Follow up here will just be on the restructuring business and I caught the remark that the business performed well in the quarter. So I'm just trying to get a sense of, is that energy running its course or whether you're seeing you know other types of activity there.
And just how you're feeling about that business more broadly over the next year or two here and the back up that we're in because obviously you report overall advisory results you know, break it out by business, I am just trying to think about how high that bar is to overcome from what sounds like a pretty good ‘16 and ‘17 in the business?
Well, you know, I guess I'd make a broader statement and that is you know, our shareholders are very fortunate to own a diversified portfolio of geographies, industries and product capabilities. And in the past, you know, people have gotten a little bit hung up, on a couple of years ago it was - we have a good energy practice and you know, energy prices were weak you know, doesn't that portend a weak year for Evercore?
And the answer to that ultimately turned out to be and by the way we were somewhat prescient in saying that all of you that you know, energy activity move from M&A to more restructuring and you know, quite honestly we didn't see much of a decline in our energy revenues in the year that was in question, I think it was 2016 if I recall correctly.
So we have a real key diversified business. It's diverse by geography, it's diverse by industry. You know, interestingly enough it's diverse by people you know, every once in a while somebody has something going on in their life, an illness or something that causes their productivity to fall off a little bit in that year.
And so I honestly wouldn't get particularly hung up on this product or that product or this sector or that sector. What drives our business more than anything is the overall environment. And it does affect different sectors, in different ways and we you know, as we always have we're not going to give you granularity on sectors and products and revenues by each of those.
But you know, none of these things is - you know, as we look forward at the beginning of 2018 you know, is a sufficiently material headwinds that we would sit here and say either that that would cause me to recant the closing remarks I made.
Got it. Understood. Well, appreciate the perspective and congratulations on nine years of growth. I think that might summit off. Thanks.
Thank you.
Our next question is from Conor Fitzgerald with Goldman Sachs. Your line is now open.
Good morning. Just looking to get an update on how some of the conversations you're having with clients on potentially pursuing M&A has changed, post tax reform and if you could give us a sense of where the outlook for M&A has change most over the last say six months ago by sector or geography that would be helpful as well?
Well, I think that that clearly tax reform has - if nothing else built on confidence levels that we've already saw were strong going into the end of the year. There is no question that there are many companies that are looking at a build-up of cash and there's also I think very importantly this combination of a build-up of cash, plus a view that the synchronized recovery around the world is going see good for business activity. So there's no questions that it's - that people are if anything even more confident than they've been, decision makers that is.
In terms of geographically, I think that you really will see it across the board. I think. Europe is definitely in a recovery mode. The confidence levels and the activity levels in Europe by all indications seem to be strong. And I think that you will see that evidence itself.
I think that in terms of sectors you know, most of the sectors are feeling good. Obviously there are - there's lots of conjecture and you saw in January some activity where in the healthcare sector, in pharma specifically there is - there's a view that you can bring cash back and that will actually give people more flexibility.
So what I would say is that if anything the tax scenario has improved what was already a quite strong mental headset with respect to strategic in organic growth, that's really being felt worldwide. In the U.S., we believe there will be - you know, as we said there will be activity, and many say it will grow and it's hard to point to anything that says that's not true.
And clearly in Europe there's a recovery mode and a lot of the important players in Europe are really starting to say they're ready to really engage more seriously. So it's really across the board actually.
John, that's helpful. Thanks. And then just are you hearing any concerns about valuation come up now more than you did say 12 months ago. It's obviously been a debate in the equity markets to start the year just given the strong performance. Any hang ups you're hearing from corporates there about pursuing M&A just given more valuations are?
You know, there's no question that as the market goes up things get more pricey. Frankly, as people have more cash and as there's more optimism that probably drives up prices also. Frankly, we don't see any hesitation with respect to - that the market is too pricey for strategic M&A different than what there was in the past four or six months.
There is always an evaluation as to whether paying a certain price still yields the right hurdle rates to do acquisitions. As prices get higher those – that analysis starts to actually have people consider things differently. But right now we don't see levels at the point where people are hesitating. They're looking at it with the same kind of optimism.
Now not every company who has an acquisition target is going to pay the price of that acquisition target will need to be paid for to get. But I think over time what you're seeing is that that corporate management teams feel like the levels are solid, that they're not - they're not hesitating because of the levels. And I think that really right now you have a pretty good set of factors that really invite for the M&A activity to be robust.
That’s very helpful, thanks. And then Ralph just one quick follow up for you, appreciate all your comments and clarifying remarks you've made around reinvesting in the business, post tax reform. Just one clarification there, were any of your comments about reinvesting in the business, about sharing some of the benefits of tax reform with your existing employees?
I think what - you know, what we do and have done every year since I've been here is we've paid our employees competitively with the marketplace and we have had virtually no turnover in terms of people voluntarily of their own volition leaving Evercore to go to other firms in our industry.
Obviously people from time to time decide this is not the industry in which they work. You know, we're going to continue to compensate our employees competitively, regardless of the tax rate.
That's helpful. Thanks for taking my questions.
Our next question is from Steven Chubak with Nomura. Your line is now open.
Thanks. Wanted to start off with a question on capital management and Ralph I appreciate the comments on maintaining a discipline surrounding investment and growing responsibly even with a tax benefit.
I'm just wondering in light of the tax windfall, whether your capital measuring [ph] priorities have changed at all, just in terms of how you're thinking about buybacks or potential M&A?
And I'm wondering at these levels whether you have any appetite to accelerate share repurchase, to maybe even drive the share count lower just given the positive commentary around the outlook, as well as a tax windfall?
I think we've been very consistent for nine years. We make investments that we feel will generate an increase in the per share value of this company two to three years down the road. And that's how long it takes for these investments to either produce positive returns or to turn out not to be successful.
We are in the unusual position, which I guess now every company is going to be in because that all of our investments pass immediately through the income statement because there are people investments.
So we've been very clear that you know, as was the case last year that when we see an unusual plea high level of opportunity to make investments we're going to make those investments because we genuinely believe that they will increase the per share value of the company two to three years down the road.
After those investments, we have consistently returned more than 100% of our earnings and roughly 100% of our free cash flow to our shareholders in the form of dividends and share repurchases. I honestly don't see any change in what we've done historically caused by the tax legislation.
And Steven just to add a point on repurchases, it’s been very explicit. It's our objective to offset the dilution that comes from both those equity grants and an investment to new hires through repurchases and we remain absolutely committed to doing that.
And you know, the share count does bounce around a little bit. And Bob can explain why.
Oh please not in this call.
In response to the share price, but if you actually - if you added up shares outstanding and RSU's that are vested or unvested or pending, the share count has not been growing, it's been growing because of the increase in the share value.
Take his word. No, I appreciate that dynamic and even more appreciate the fact that Bob didn't go through it on the call.
I do too.
Okay. Just one more for me on the underwriting business, I guess you know, taking a step back and looking at the strong revenue momentum you've seen across not just traditional M&A, but even the ancillary businesses, such as restructuring and capital advisory.
That really strikes us as the one area where in relation to target that you outlined at the time of the ISI deal that you're still punching below your weight so to speak. And I'm just wondering has your thinking evolved in terms of the revenue opportunity in that business. And is that one of the areas where you're maybe looking to make additional personnel hires or investment in order to gain additional market share?
I would agree with your characterization that you know, it's been slower. The underwriting business specifically has been slower to ramp up than we had had hoped. And you know, we are selectively adding talent in our Advisory business and a little bit in the equities business as well in the sectors where we believe there will be high you know, primary and secondary equity activity.
You know, one month doesn’t have a quarter or a year make, but certainly the indications for the first quarter - for the first month of this year would suggest we're starting to see a little bit of a benefit from those investments.
I would say one thing that we probably underestimated was the virulence of you know the people - the firms with whom we compete in that business to maintain their position and I think probably some of that is a function of the fact that you know, if there is - the underwriting spread is ultimately a zero sum game.
If we go from 5% to 10% or 10% to 15% or 10% to 20% of the underwriting spread in a particular transaction somebody else is going in the opposite direction by exactly the same amount. I would contrast that to the Advisory business where you know, if we're co-advisor with a large firm you know, the total fees aren't 2x, but they're not 1x either. And so you know, there are probably no more protective people in this entire industry than the prognosticators in equity syndicate.
Okay. Appreciate the color, Ralph. Thank you very much.
Our next question is from Vincent Hung with Autonomous. Your line is now open.
Hi. It looks like the seasonality of equity commissions from 3Q to 4Q look to be higher than in previous years. Is there anything to call out that?
It was comparable.
Got it. And any color around the impact from MiFID II, how you’re seeing now that’s implemented?
You know, it's too early to tell really. I mean, I think we - you know there's nothing that's happened that would seem - on the call last quarter we said we expected that the overall pool of payment for research by institutional investors would decline, but that we expected because of the quality of our research, our market share would increase and how that would ultimately affect the aggregate level of revenues. We weren't sure and I don't think we have anything you know enough data at this point to make a further observation.
Thanks.
Our next question is from Ann Dai with KBW. Your line is now open.
Hi. Good morning and thanks. And a couple more questions for you on the equities business. The first being around comp. So as we look out and think about the last scrunches of ISI lockups busting, can you just take us through your thought process behind compensation in that business and how do you ensure retention of key players as lockups come up.
It just seems like it's still a very competitive environment for top talent despite the pressure to the commission pool. So is there some sense that you have to wrap [ph] those longer term incentives or provide guarantees of some sort. And is that already incorporated in the higher comp ratio that you moved to earlier this year?
I think we're really comfortable that we are competitively compensating the people in the equities business.
Okay. And also on the trading side, could you just talk a little bit about the decision to shut down your European trading desk, really what impact were you seeing as MiFID went into effect and what was the cost benefit analysis in making that decision?
Pretty simple. We didn't have sufficient volume there to justify the level of personnel and by the way this was a - you know, a pre-MiFID observation which was only - not even accelerated, but highlighted by MiFID.
And Ann to just amplify a little on Ralph’s comments. With the substantial preponderance of execution service that we provided to those clients was in U.S. Securities and we continue to do that. The action in London really focused on executing in European names where we were subscale.
Got it. And is there any kind of meaningful cost saver, any impact to run rate going forward on expenses?
It's such a small part, I wouldn't characterize it as meaningful.
Okay. Thanks so much.
Our next question is from Jim Mitchell with Buckingham Research. Your line is now open.
Hey, good morning. Maybe just a quick question on the - you talked about financial sponsors potentially being a bigger part of ’18 and beyond. How do we think about - I think I've had some questions from investors about higher interest rates and how that impacts the business, it does seem to me that historically there hasn't been much correlation. But just maybe your perspective on how higher interest rates could affect deal flow if we were to see that happen this year?
Well, there's no question that interest rates do affect financing. A very big part of the decision making for financial sponsors really is can they make their returns, and so much has to do in each specific case about each particular investment and when they look at how they make - how they look forward in that investment the things that they can do to improve that investment, can they reach the returns given the costs that they undertake, interest being a big part of that.
As you know there is a very large pool of capital that has been collected and has actually been relatively quiet as prices have gone up, sponsors haven't been buying. Having said that, there is huge pool of capital that is ready to go to work. I think that every single deal, every each institution makes an independent decision about whether they can reach those returns, interest rates if they go up will have an impact on the cost.
But as we've seen historically, the private equity business goes throughout the cycle. And that just because expenses go up or costs go up from interest rates doesn't stop that. A lot of it depends on the business environment and whether businesses will actually improve. And some of that has to do with business activity.
So as you as we've talked about the recovery around the world of businesses and the volumes that businesses are able to drive that will have somewhat of an offsetting impact to the cost of interest.
So I would just say that that generally you can't really make a generalization other than to say that strong business environments definitely invite increased activity and sponsors will I think follow up on that.
Okay. Thanks. That's helpful. And maybe just more a question on the comp ratio, I appreciate sort of the range you target in the long-term, but as we think about another potentially large investment year in new hires in ’18, can you at least kind of hold the line with this ‘17 or how do we think about the comp ratio in the more near term?
I think we'll have a view on that in the next quarter.
Okay. Fair enough. Thanks.
Our next question is from Jeff Harte with Sandler O’Neill. Your line is now open.
Hey, guys. I guess a little bit of a follow on of the sponsor question, when we're thinking about tax reform are there any specific sectors in which you'd expect to see kind of like this proportionally large kind of fit?
Well, I think in the earlier answer we were talking about the fact that there are certainly some trap cash in overseas that is coming back and that really impacts healthcare to a large extent. Also in tax, the same thing. You know I think all - it's really a company specific impact across the board. And I think there's no reason to believe that if companies have more cash and access to cash that they won't really be able to act on whatever strategic goals they have.
So you know, without really going any further in terms of trying to prognosticate the future, really what I would say is that there's just no question that across the board in most sectors there is more capability to do things because of the fact that people have more cash and then comes down to individual management teams and their objectives and their aspirations and their confidence level with respect to their business.
Okay. And can you help us quantify the size of the addressable market for advisory fees. I guess, I kind of come back to - I struggle a bit with market share expansion potential going forward now that you guys are you know, is big in the top five players as you are?
Okay. The only thing we can observe is the public companies that report their advisory fees separately. That's every single large firm with the exception of Barclays which for some reason chooses not to do that and all of the public independent firms. So when we say we go from 6% in 2016 to 6.7% at least in 2017 that's what we're doing, no more no less.
When we look at our market share among the independent firms, its Evercore is revenues over the revenues of the other public independent firms. There is really no good place to get data on the aggregate advisory people.
And the - what all of you struggle with is that there are the sources like Thompson Reuters and Deal Logic [ph] but they're - you know they show a relatively small portion of the aggregate pool and aren't particularly helpful.
Thanks.
There appears to be no question this time. I would now like to turn the floor to Ralph Schlosstein for any closing comments.
All right. Thank you very much. You took five minutes longer than normal, so hopefully that won't show up as lower earnings in this first quarter. See you guys.
Thanks everyone.
Bye.
This concludes today's Evercore fourth quarter and full year 2017 financial results conference call. You may now disconnect.