Evercore Inc.

Good morning and welcome to the Evercore third quarter 2024 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Evercore management and the question and answer session. In order to ask a question, please press the star key followed by the number one on your telephone keypad. I will now turn the call over to Katie Haver, Managing Director of Investor Relations and ESG at Evercore. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us today for Evercore's third quarter 2024 financial results conference call. I'm Katie Haber, Evercore's head of investor relations and ESG. Joining me on the call today is John Weinberg, our chairman and CEO, and Tim Lalonde, our CFO. After our prepared remarks, we will open up the call for questions. Earlier today, we issued a press release announcing Evercore's third quarter 2024 financial results. Our discussion of our results today is complementary to the press release, which is available on our website at evercore.com. This conference call is being webcast live in the For Investors section of our website, and an archive of it will be available for 30 days, beginning approximately one hour after the conclusion of this call. During the course of this conference call, we may make a number of forward-looking statements. Any forward-looking statements that we make are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ maturely from those indicated in these statements. These factors include but are not limited to those discussed in Evercore's filing to the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. I want to remind you that the company assumes no duty to update any forward-looking statements. In our presentation today, unless otherwise indicated, we will be discussing adjusted financial measures, which are non-GAAP measures that we believe are meaningful when evaluating the company's performance. For detailed disclosures on these measures and the GAAP reconciliations, you should refer to the financial data contained within our press release, which is posted on our website. We continue to believe that it is important to evaluate Evercore's performance on an annual basis. As we have noted previously, our results are, for any particular quarter, are influenced by the timing of transactions closing. I'll now turn the call over to John.

Thank you, Katie, and good morning, everyone. We're pleased to be doing this quarter's earnings call from our London headquarters. We had a strong quarter as our revenues continued to build. The firm generated approximately $740 million in adjusted net revenues, up 28% versus the prior year period, driven by continued improvement in both the macroeconomic environment and capital markets. The interest rate picture has begun to clarify as the Fed lowered rates for the first time since rapid rate hikes began in early 2022. We believe we are in the midst of a recovery, albeit gradual, which will pave the way for a healthy multi-year cycle across the advisory and capital markets businesses industry-wide. Although uncertainty persists, particularly with respect to the upcoming U.S. election and geopolitical tensions, broad market activity and our internal metrics continue to strengthen, further supporting our robust backlogs and positioning us for what we believe can be an active 2025. As we have discussed throughout the year, we expect to see activity levels continue to gradually increase over the coming months and into next year. However, the exact timing of when that impacts financial results is hard to pinpoint, as this uncertainty could impact the timing of transaction announcements and closings. As the M&A market looks poised to return to more normalized levels, the investments we've made in our businesses have resulted in a stronger, more diversified firm, which positions us for growth over the medium to long term. Turning to talent. 2024 has so far been another successful recruiting year. Year to date, eight investment banking senior managing directors and one senior advisor have started at or have committed to join the firm. Three of these eight SMDs committed since our last earnings call and will be joining either later this year or in early 2025. We have a strong pipeline for external recruits, and we are continuing to add high-quality senior talent to our firm. Among the three newly committed SMDs, one will be building a new product group focused on structured finance, while the other two will be joining our financial institutions and sponsor coverage teams respectively. Additionally, our new senior leaders in France started last month, and we are excited about increased levels of client activity and dialogues driving our expanded presence in Europe. In our equities business, we've added to the depth of our research coverage with a top-tier research analyst to lead coverage on the FinTech and IT services sectors. Now, let me briefly turn to the quarter. Despite typical summer seasonality and a rise in equity market volatility in late summer, Evercore experienced strong activity in nearly all of its businesses in the third quarter. In strategic advisory, we advised on a number of notable and complex transactions, including TIH on the $7.8 billion sale of its retail insurance broking division, McGriff Insurance Services, to Marsh McLennan Avenue Capital Group and Naveen Asset Management on their $3.4 billion sale of minority equity interests in Vistra Vision to Vistra Corp. and CVC on its acquisition of a significant ownership position in Epicor from Clayton DeBellier and Rice. These transactions are representative of some of the areas we've been investing in, including financial services, software, energy transition, and capabilities that serve our sponsor clients. The European advisory team has gathered strength throughout the year with a strong third quarter. While we are continuing to see progress, the improvement in the European M&A market still lags the U.S., and uncertainty in the region remains. In line with trends we've seen in the second quarter, our financial sponsors business has continued to see internal dialogue levels build momentum. We believe that further interest rate cuts and continued pressure from LPs to return capital will stir sponsor-related activity. This is a critical driver to the broader M&A recovery. Our strategic defense business remains busy as global activist campaigns continue at historically high levels. Reliability management and restructuring practice remains quite active. As such, we believe 2024 will be a strong year for this business. Liability management continues to be the primary driver of activity, and we expect to see strong activity levels continue into 2025, even as the merger market recovers. Our industry-leading private capital advisory businesses delivered another quarter of strong performance with a robust pipeline as we approach the year end. The continued success of this business has been in part due to our longstanding relationships with GPs and LPs and the decline in cash back to LPs from the drop in sponsor-related portfolio company exits. While the fundraising market typically experiences a summer slowdown in the third quarter, our private funds group is in dialogue with several new funds and activity for this group continues to broaden. We expect fundraising activity to improve as M&A market levels continue to increase. The underwriting business ended the quarter on a strong note as issuance activity increased in September. In the quarter, we were lead left book runner on Diamondbacks Energy's $2.6 billion follow-on offering, which was the third largest U.S. follow-on offering of the year and Evercore's largest lead left book run deal to date. is clear that our commitment to broadening our sector coverage and enhancing our role in transactions yielded results. Notably, we participated in the tech IPO research so far this year, having been a book runner in five of the eight U.S. tech IPOs. We anticipate continued activity in the equity capital markets across the medium to longer term. However, in the short term, the upcoming U.S. election coupled with normal seasonality may narrow windows of opportunity for issuers. We remain optimistic that the IPO market will be more active in 2025. Our equities franchise experienced the strongest third quarter in nearly a decade. Importantly, this month marks the 10-year anniversary of the Evercore and ISI merger, and we are pleased with the performance this business has achieved over the last decade, expanding Evercore's breadth and differentiating us from our peers. In wealth management, our assets under management reached $13.9 billion, driven by strong market appreciation and client engagement. Before I turn it over to Tim to discuss the financial results, I want to wrap up with a few points. We continue to believe we are in a gradual recovery, and we remain confident that both the market and our results will steadily improve as the market gains further clarity and confidence over the coming quarters. As we look to 2025 and beyond, we remain committed to the execution of our long-term strategic roadmap while carefully managing our expense base. As demonstrated by our recent hires this past quarter, we are committed to not only expanding our industry and geographic reach, but also deepening and diversifying our product and coverage capabilities across adjacent areas. We continue to enhance our client coverage breadth and depth, including investments in covering large, mid, and small cap public and private companies, as well as financial sponsors. We believe we are well positioned as the market recovers and are optimistic about Evercore's prospects in the years ahead. With that, let me turn it over to Tim. Thank you, John. Our third quarter financial results are consistent with the gradual recovery we have conveyed in recent earnings falls and are seeing in the markets and in our businesses. We continue to make strategic investments in our firms, and are balancing that with attention to expense management with our focus on providing exceptional client service and building value for our shareholders. We remain committed to improving our expense ratios, recognizing that revenue growth also plays an important role in achieving that. We continue to expect gradual improvement in our margins over the near to medium term. With that, I will now discuss our third quarter financial results. For the third quarter of 2024, net revenues, operating income, and EPS on a GAAP basis were $734 million, $122 million, and $1.86 respectively. My comments from here will focus on non-GAAP metrics, which we believe are useful when evaluating our results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results can be found in our press release, which is on our website. Our third quarter adjusted net revenues of $740 million increased 28% versus the third quarter of 2023. Third quarter adjusted operating income of $135 million increased 63% versus the third quarter of 2023. Adjusted earnings per share of $2.04 increased 57% versus the third quarter of last year. Our adjusted operating margin was 18.2% for the third quarter, up from 14.4% in the third quarter of last year an improvement of approximately 385 basis points. Turning to the businesses, third quarter adjusted advisory fees of $593 million increased 27% year-over-year, reflecting further improvement in macroeconomic and market conditions. This is consistent with the number of advisory fees greater than $1 million, which rose by 30%. Our third quarter underwriting fees were $44 million, up 43% from a year ago, demonstrating improved diversification across sectors and active engagement in several large, high-profile follow-ons. Commissions and related revenue of $55 million in the third quarter, nearly our strongest third quarter to date in this business, was up 12% year-over-year, reflecting strong trading commissions and subscription fees. Third quarter adjusted asset management and administration fees of $21 million increased 14% year-over-year, primarily driven by our record AUM, which benefited from market appreciation during the quarter. Third quarter adjusted other revenue net was approximately $26 million, which compares to $10 million a year ago. Approximately two-thirds of the other revenue was interest income, and about one-third was a gain on our DCCP hedge. Turning to expenses, the adjusted compensation ratio for the third quarter is 66%, compared to 68% a year ago, a 200 basis point improvement. This quarter's ratio represents our best judgment of the accrual for this quarter, taking into consideration our view of full-year revenue and compensation expense when factoring in SMD hiring, headcount levels, expected market levels of compensation at year-end, and other relevant factors. Our third quarter results were consistent with our expectations for the quarter, Thus, the compensation ratio remains stable relative to the prior two quarters. As I mentioned at the outset, we are striving to make improvements in our comp ratio. However, we also continue to invest in building our firm, and so improvements will occur across the near to medium term. Next, non-compensation expenses in the quarter were $117 million, up 15% from a year ago, and the adjusted non-comp expense ratio for the quarter is 15.8% compared to 17.6% a year ago, an improvement of 180 basis points. The non-compensation expense increase from a year ago is primarily driven by three items. First, an increase in travel and related expenses as client-related travel continues to normalize. Professional fees, which reflect higher recruiting and consulting fees, as well as higher client-related activity. Note that the reimbursement for certain client expenses is reflected in the revenue line. Third, communications and information services expenses, related to technology expenses for existing and new platforms, as well as increased rates and subscription costs related to higher headcount. Our non-comp expenses on a per-employee basis were up 9% versus the prior year, but down nearly 8% from the prior quarter. In the historical context, our non-comp expense per employee is up less than 6% compared to third quarter in 2019, the pre-COVID year, or a compound annual increase of about 1.1%. We have made improvements on our non-comp ratio over the last three consecutive quarters, and we expect to continue to do so into year end. Our adjusted tax rate for the quarter was 28.9 percent compared to 27.6 percent in the third quarter of last year. Turning to our balance sheet, as of September 30th, our cash and investment securities totaled $1.8 billion. which is approximately $200 million higher than last year's level at this time. In the first nine months of the year, we returned a total of $529 million to shareholders through dividends and repurchases of 2.2 million shares at an average price of $189.69, of which approximately 400,000 shares were repurchased in the third quarter. In the first nine months of this year, We have returned more capital than we did throughout all of 2023, and we remain committed to our capital return philosophy. Our third quarter adjusted diluted share count was 44.5 million, up from 43.4 million in the prior quarter, an increase of 1.1 million shares. The increase in our share count was largely due to the impact of our higher share price on unvested awards, which are accounted for under the Treasury stock method, and the investing of previously issued awards offset by buybacks. It is important to note that from quarter to quarter, significant changes in our average share price can have a material impact on the adjusted diluted share count. This was apparent from the second quarter to the third quarter as our average share price increased 22% from $194.59 to $238.02. As we have stated before, while uncertainty in the economic and geopolitical environment remain, we believe we are in the midst of a gradual recovery. and that internal and market indicators, coupled with improvement in the macro backdrop, position Evercore well for the remainder of 2024 and beyond. With that, we will now open the line for questions.