Evercore Inc. (EVR) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore Fourth Quarter and Full Year 2014 Financial Results Conference Call. During today’s presentation, all parties will be in listen-only mode. Following the presentation, the conference call will be opened for questions. [Operator Instructions] This conference call is being recorded today, Wednesday, February 4, 2015. 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 2014 financial results conference call. I am 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 fourth quarter and full year 2014 financial results. The 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 1 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 their GAAP reconciliations, you should refer to the financial data contained within our press release, which as previously mentioned, is on our website. We will refrain from repeating the information included in the press release and then 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 have noted previously, our results for any particular quarter are influenced by the timing of transaction closings. I will now turn the call over to Ralph.

Thank you, Bob, and good morning, everyone. 2014 was another record year for Evercore, our sixth consecutive year of significant growth in net revenues and earnings. We once again made significant progress on our strategic objectives. While not all of our competitors have reported their results yet, we expect to gain market share again in advisory revenues, our seventh consecutive year of market share gains. The productivity of our advisory partners improved by nearly 8% to approximately $11 million of revenue per advisory Senior Managing Director. We recruited 6 advisory Senior Managing Directors in 2014 and we have already announced the addition of another one in 2015. And on Monday, we announced the promotion of 6 advisory Senior Managing Directors, our largest group of internal promotions indicative of our strong commitment to investing in and developing our own senior talent. And also on Monday, we announced an investment in Luminous Partners, a newly formed advisory firm in Australia, which will enhance our ability to serve our clients in that important geography and to generate additional revenue in that part of the world. We now have a scaled equity business after the successful closing of our acquisition of ISI on October 31 last year and the combined business delivered solid results in the last two months of the year. Our wealth management business again delivered above benchmark investment returns and we finished the year with assets under management over $5.7 billion. And we have returned significant capital to our shareholders increasing our dividend for the seventh consecutive year repurchasing sufficient shares to offset the dilutive effect of shares granted for bonuses and new hires on accumulative basis over the past 5 years and returning over $185 million to our shareholders through both share repurchases and dividends. Now, let me quickly go over the numbers. First, our results for the full year, we achieved record revenues of $912 million in 2014, an increase of 20% over last year as we further closed the gap between our firm and our larger competitors. Expenses of $701.7 million increased 20% also from last year reflecting our sustained investment in our business and the higher level of revenues. Full year net income was a record $124.3 million, up 20% from 2013 and earnings per share for the year were a record $2.59, up 15%. The full year compensation ratio was 59%, down modestly from last year driven principally by the improving operating performance of our early stage businesses. Our non-compensation ratio was up normally during the year to 17.9% reflecting the higher level of non-comp expense in our combined equities business. Full year operating margins were 23.1%, essentially flat versus last year. As we discussed last quarter the announcement of the ISI acquisition caused revenues in our equity – our legacy equity business to decline materially for a few months. This fact makes the comparative review of our year-over-year operating margins somewhat challenging. If we exclude the results of the equities business from both 2014 and 2013 and the associated acquisition costs, our operating margins would have been 25.6% in 2014, compared to 24.4% in 2013. So, absent the noise of our equities business created by the ISI transaction, we again made good progress in our operating metrics. Now the fourth quarter, we had record fourth quarter net revenues of $320.9 million, up 50% from this period last year and 43% from last quarter. Net income was $45.9 million with earnings per share of $0.90. Our operating margins for the quarter were 25.2%. Our second best result in the past 6 years. Our best set – excluding the equities business fourth quarter net revenues were $273.5 million, up 35% from the same period last year and 26% from last quarter. Even without equities, this would have been a record quarter. Net income was $42.1 million for the quarter with earnings per share of $0.91 compared to $0.71 for the same period last year and $0.74 last quarter. Operating margins for the quarter would have been 27.6% compared to the 26.2% for the same period last year and 26.3% last quarter. Let me now turn the call over to Roger to comment on our investment banking performance and the M&A environment more broadly.

Good morning everyone. As you can see investment banking had a record quarter and a sixth consecutive record year. For the quarter net revenues were $294 million, a pretty remarkable figure if you put it in the context of Evercore’s 20-year history. It’s first time we have had a quarter exceed $200 million, let alone one, which almost reached $300 million. Those revenues were up 48% from the third quarter and 59% from the fourth quarter a year ago. For the full year, $804 million of revenue, up 23% from 2013; operating income for the quarter $77 million, up 61% for quarter three and 75% from the fourth quarter a year ago; operating margin 26.1% for the quarter; for the full year, operating income $187 million, up 24% from 2013. For the quarter, the firm received a record 63 fees greater than $1 million apiece, that compares to 50 such fees in the third quarter and 51 for the quarter a year ago. And for the full year, we saw a record 173 such fees, up from 132 such fees last year, quite a major increase. For the year, the total number of fee-paying clients was 418, up from 358 in 2013. Let me say a word about the breakdown of fourth quarter investment banking revenue and I want to try to go slowly here. So, everyone has a chance to understand this, because it’s a different picture now with ISI. As I said, there was $293 million of fourth quarter investment banking revenues. That included $44 million of revenue from secondary market equity sales, in other words, commissions and commissions sharing agreements, $44 million. In round numbers, $9.5 million of underwriting revenue, in other words, $44 million, then $9.5 million and $28 million in fees related to equity capital markets advisory, debt capital markets advisory, our private funds group and our private capital advisory businesses. Those are all overall advisory businesses, which relate to capital raising. So, one more time, $44 million in secondary market equity sales, separately $9.5 million in underwriting revenue, separately $28 million in fees related to raising capital, all as part of the $293 million of fourth quarter revenue. I hope that’s clear. Let me remind everybody that all of this revenue, all of it is in the form of fees. Evercore does not use capital in any of its businesses on a day-to-day basis or any other businesses. This is all fee income. Turning to productivity, our average revenue per Senior Managing Director rose to $11 million globally, that’s 9% above the third quarter, 7% above the fourth quarter a year ago. As you know, we do these calculations on a rolling 12-month basis and I was just reminded that this is the highest productivity per SMD in 7 years. And Evercore is always strong in this category. In terms of personnel, the number of bankers across the firm grew by 177 in the quarter. That’s driven almost entirely by the closing of the ISI acquisition. Total investment banking headcount, all investment banking headcount is 918 at year end. We added two additional Senior Managing Directors in the fourth quarter, recruited laterally. Mark Hanson, who is now co-heading healthcare services based in New York and Swag Ganguly focused on debt capital markets advisory based in London. We once again added 6 new Senior Managing Directors in 2014 recruited laterally. And we just promoted 6 new SMDs internally for a total of 12 new investment banking partners on the advisory side in 2014. And as those of you follow us closely know, we have been recruiting 5 to 6 to 7 new partners externally each year and we believe that will continue in 2015. We have been doing that very steadily for many years. Ralph referred to market share we believe that our market share increased again in 2014 although all of the data has not yet been reported. Let me say a word or two about the M&A market. 2014 was a strong year for us. Globally, the dollar volume of announced transactions was up 47% to $3.4 trillion, very strong. The U.S. totals rose even higher 51% to $1.5 trillion. Completed transaction volume rose 16% to $2.4 trillion on a global basis and 31% to $1.1 trillion on a U.S. only basis. Now, if you think about those numbers and what it tells you is what’s particularly changed in 2014 was average deal size, because you can see that the dollar volume total rose between two and three times the rate of increase that the total number of deals did. And so that was what was really different in 2014 larger deal size. So, in terms of the outlook, I don’t see any reason, absent an exogenous shock, why 2015 should not be another good year in global M&A and in U.S. M&A, interest rates remain stunningly low, credit availability relatively high, stock market levels high, and at least in the U.S., business conditions are quite a bit better than they were a year ago. There are always ups and downs in individual sectors. We have all taken careful note of the oil price fall of course, but our backlog is good and I don’t see any reason why as a whole 2015 should not be another good year in global and U.S. M&A and also for Evercore. I will turn this back to Ralph.

Thanks, Roger. Let me talk just a little bit about the equities business and investment management. First, the equities business and as we suggested, the equities business for the quarter was effectively a tale of two cities. In the period prior to October 31, the results of our legacy equities business continued to be soft although they benefited modestly from the increase in volatility in October as did all equity businesses. As I mentioned in our third quarter earnings call, the ISI team performed strongly in October reporting its best results for a single month in its history up to that point. While the period of time since closing is short, two months, we are very pleased with the results of the combined business following the closing. In the last two months of 2014, we earned revenues in excess of $44 million in the equities business, including more than $40 million from secondary activities, all agency as Roger pointed out and more than $4 million attributable to underwriting, half of our firm-wide underwriting revenues producing operating margins of approximately 10% in those last two months. In the last two months of 2014, revenues for the business were roughly equal to the total revenue earned by the two businesses when they operated separately in November and December of last year. So, the early indications are that one plus one will equal at least two. The cost structure for the business is as we anticipated higher than our targeted levels and our equities team is working hard to bring our cost into line. Investment management, our investment management business delivered a mixed year in the quarter. Net revenues were $104.6 million, up 2% from last year. Operating income was $18.1 million, delivering an operating margin of 17.3%. Operating income for the investment management business for the quarter was $4.1 million on net revenues of $27.1 million. Assets under management decreased 3% to $14 billion in comparison to the end of the third quarter, although assets under management increased 3% from last year. Net outflows for the quarter were $538 million. Those were primarily, however, in our Mexican liquidity funds as they represented over $500 million of those outflows. We also suffered a little bit from the deprecation in the peso, which cost roughly $165 million of net assets under management in the quarter. Our wealth management business is performing extremely well adding talent, clients and assets under management. It had its second extremely strong year in a row of investment performance and wealth management assets increased more than 16% for the year ending 2014 with $5.7 billion. Our affiliated asset managers continue to focus on investment performance and client service. And we are encouraged that the pace of outflows in those businesses has essentially abated. Bob will now provide further comments on our non-comp costs and several other financial matters. Bob?

Let me just make one, it’s Roger, comment. Make sure you understand what Ralph said at one point there. He referred to the cost structure in effect of ISI. What he meant was ISI’s cost structure historically has been higher than Evercore’s. One of the many reasons we like this step is because we are going to bring it into line with ours. That’s part of the plan. There is nothing new there. There is no news there.

Yes.

I just want to make clear that’s just part of the plan exactly what we have been saying all along.

Okay, just a few quick points. Our adjusted results for the fourth quarter exclude approximately $1.1 million of special charges in acquisition and transition costs that are directly related to our equities business and the acquisition of ISI. In addition, special charges, includes a charge relating to the write-off of deferred consideration associated with the disposition of Pan, which occurred last year and was reported as a discontinued operation at the time. As Ralph indicated, non-compensation costs were elevated in the fourth quarter, principally due to the higher costs from the combined equities business. We have eliminated approximately $3 million of annualized non-compensation costs from that business and are working hard to achieve further reductions. Our adjusted pro forma tax rate for the year is 37.8%, essentially flat when compared to 2013. As we have indicated before, changes in the effective tax rate are principally driven by the level of earnings in businesses with minority owners and earnings generated outside of the U.S. Our share count for adjusted purposes was 51.3 million shares, an increase of approximately 4.6 million shares from Q3. This increase reflects the inclusion of 4.7 million shares associated with the acquisition of ISI. This is at the midpoint of our initial expectation. The offsetting decrease is due to a change in our average share price. Our average price for the quarter was $50.06. Finally, our cash position remains strong, as we hold $390 million of cash and marketable securities with current assets exceeding current liabilities by approximately $300 million.

Okay. This is Ralph again. Let me conclude by making just a few remarks. First, our full year and quarterly results reflect the strength of our business model and our commitment to disciplined investment in our future growth. 2014 was a particularly important year for Evercore on the investment front. First, we added 6 new Senior Managing Directors in our advisory business as Roger indicated similar to the investment we have made in past years. Second, we purchased ISI and merged it into our inceptive equities business. We undertook this transaction, because we believe that the agency-only equities business is an attractive business in and unto itself. And because we thought this transaction would add to the growth rate in our investment banking business both by increasing our equity underwriting revenues and by enhancing our ability to attract additional advisory Senior Managing Directors to our platform. While we are only three months into this transaction, the early financial and anecdotal results are encouraging. First, secondary revenues in the last two months of 2014 were over $40 million, which is roughly equal to the total secondary revenues of the two businesses last year. Equity underwriting revenues during that period – 2-month period, which are by definition much more long lumpy, exceeded $8 million, a significant increase from our prior activity. While we certainly would not advise annualizing two months of results, you have heard us comment many times not to annualize a quarter or a half year, we do believe that these results to-date are encouraged. The early evidence suggests that the hoped-for effect on our advisory revenues may over time also materialize in both of the ways that we had anticipated. First, the pace of equity underwriting activity seems to have picked up this year for Evercore. And second, it appears that our very strong equities business will be an added inducement for certain advisory bankers to join our firm. Notwithstanding the early encouraging results, we still have much to do both in increasing our secondary and underwriting revenues and in addressing the excessively high non-comp costs in our equities business and as Roger said this is nothing new, we talked about this when we announced the transactions last August. We expect to make progress on reducing these expenses throughout the course of 2015, as we said last August. Although the full effect of these reductions will not be felt until 2016. Third, let me also say something about SMD productivity. Most certainly we are encouraged by the uptick in our productivity in 2014 to $11 million per Senior Managing Director, the highest level we have achieved since 2007 and the highest by far among all of our publicly traded competitors. As Roger also said we are pleased that we promoted six of our Managing Directors to Senior Managing Director earlier this week. We are extremely proud of this fact as it validates our commitment to developing and promoting our own talent. Two things are worth mentioning here. We had an unusually high number of candidates qualified for promotion this year. In the next couple of years, we would expect the number of internal promotions to return to more normal levels. Second, it is possible that these promotions might cause a slight drag on average Senior Managing Director productivity in 2015. All things being equal, as it would not be realistic to expect these six new SMDs to increase immediately their revenue production by amounts equal to our average production levels last year. In other words they were here last year we shouldn’t expect that each of them is going to have $11 million increase in their production this year. Nothing significant here, but at least it’s worth mentioning. Finally, we expect to continue our policy of returning through dividends and share repurchases more than 100% of our adjusted earnings, once again, purchasing enough shares to offset the issuance of RSUs to current and recruited professionals and also to offset part of the share issuance in connection with the ISI transaction. Thank you for all – thank you for your attention. We will now answer any questions that you have.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Ashley Serrao with Credit Suisse. Your line is open sir.

Good morning guys.

Hi, good morning Ashley. Thank you for publishing on us.

You’re welcome. So I wanted to focus on the ISI acquisition, you are a few months in, can you just talk about how conversations are going with the core proceed suite in terms of just thinking about Evercore as an avenue with greater potential for ECM activity. And then how are those bankers who have traditionally been indifferent to having an ECM capability in their toolkit adapting?

Well, I think that in both cases it’s going to be a process, it’s not a light switch that goes on and all of a sudden everybody recognizes that we have these capabilities. But where – the early signs are extraordinarily positive. And in both respects the clients are very pleased to see that there is a firm out there that has both A+ advisory capabilities and A+ equity capabilities. And I think most of our clients would say the two things that they consider strategic in terms of their interactions with Wall Street are M&A and equity. And we are now in the unique position among all advisory firms to be relevant to our clients on both of those matters. And that is getting a good reception and as Roger has pointed out a number of times in the old days, the Paleolithic [ph] era there were firms that like an Alex Brown or H&Q or DLJ, that had a big comparable suite of capabilities that were extraordinarily well received by corporate executives. And on the banker side, we have by virtue of the way we have built the firm a mix of people in terms of their historical experience with equities. We have some people who have our classic M&A bankers who haven’t done equities for quite a while. And then we have because of our recruiting efforts and not inconsequential number of bankers here who have equity experience in their relatively near past. So, we do have a bit of a proselytizing effort here, but one thing that’s absolutely true about bankers is that if they have a very high-quality capability that can be a value to their clients, they learn about it and they discuss it with their clients. So, long answer, I would expect this to be a 2-year or 3-year process, not a light switch, but we are very optimistic about what we had hoped for.

Thanks for the color there. And then I heard your comments around exogenous factors in your M&A outlook, so I wanted to follow-up with a two-part question on the European M&A landscape. One, I know it’s early, but curious if you are able to provide some thoughts on what QE means for M&A? And two, while Greece is by no means a hotbed for M&A activity, how is the ongoing political drama impacting CEO confidence in the region?

Maybe we should have lunch, so we can cover that. I don’t know what impact if any, the European Central Bank decision towards quantitative easing is going to have on M&A levels. Whatever effect it has, it would likely be a delayed effect. As far as Greece is concerned, I don’t see any impacts at this minute on the M&A outlook, either in Europe or around the world that you can trace to the current drama in Greece. So, that’s the best answer I have on that.

Alright.

Europe in general is in a difficult macroeconomic condition and so it’s likely to be a slow recovery in Europe.

Okay, thanks for the color and taking my questions.

Thank you.

Thanks, Ashley.

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

Hi, good morning.

Good morning.

I was wondering if you could just give us a little bit color on what you are seeing within the energy M&A vertical. And whether or not there is kind of a difference in tone of discussion between clients regarding their near-term appetite to consummate M&A versus raising capital?

Well, it’s still early to judge the true impacts of the oil price fall on investment banking activity in the energy sector. There is a huge debate, for example, as to how long these lower oil prices and for that matter natural gas prices persist. Some people think they are going to persist for some time. Some people think, not long. And one’s view on that has a lot to do with one’s view on the outlook for one’s business depending upon the business you are in and so forth. In addition, there are a lot of companies both in the industry and for example, financial sponsors. We are very keen to take advantage of this environment and be buyers. And then there will be certain amounts restructuring activity that wouldn’t have occurred otherwise. But my real answer is it’s really too soon to judge what the effects are going to be on both the volume of the business and the mix of business as a firm, a whole firm, not just energy, our backlog is good. So, write this minute, so all of our comments about what 2015 should look like, take all this into account. And the energy sector not just for us, but for everybody remains very, very busy, very busy.

Okay, I appreciate the color there. And as we take a look at kind of the global M&A backlog data, as you talked about in the prepared remarks last year was really dictated by the rise of mega cap deals, it seems like there is a little bit of initial signs of a potential shift towards more middle-market activity with a pickup in the number of transactions in the backlog for the industry. I was wondering if that’s something that you are starting to see that shift more towards a little bit more middle-market activity and any color on that?

First of all of it’s useful to keep in mind that the preponderance of transactions that occur for Evercore or any other firm in the business occur in the mid-cap and upper mid-cap sector, that’s just where the majority of deals are and have been for a long time, I mean very long time. And so your thesis that there is going to be more deals in the upper and the mid-cap and upper mid-cap sector next year or this coming year, sorry 2015 is really an old one not a new one. I mean that’s generally true historically. I don’t think 2015 is going to be particularly different than 2014. I think you are going to see a certain number of quite large transactions, but there are always relatively few of them. Even in the year when they rise. The number of really, really large deals is always very few. I mean 15 of them around the world, something like that if you are talking about really big ones. So but I think the mix of deals in 2015 probably is going to look like 2014, I don’t see any reason why there won’t be at least a few megadeals because of the macro conditions I referred to in my earlier remarks. So I guess the essence of my answer is I don’t think the mix in 2015 is going to be different particularly than it was in 2014.

Okay, that’s helpful. I appreciate the color. As we think about kind of the ISI operating margin 6% excluding the ECM business and 10% including that, I believe it’s the 6% mark that’s relative to the 12% performance threshold for 2015. And if that’s the case, how should we be thinking about the achievement of that 12% threshold relative to where it stands now in terms of top line growth versus cost reduction?

The – you should assume that the 12% will be hit and obviously nothing is absolutely set in gold, in stone and the world can change. And the reason I say that so confidently is number one and Bob if these numbers are not perfectly correct, please correct me. Given the two months period that we are talking about here which the comp ratio was a little North of 60%, we have – and that’s just – it’s not a function of anything other than that’s what happened to fall into that two months period in terms of the total second half year or half of the year comp. So we in our contract we have 55% economic comp ratio. So that alone will get us to the 12%. We also have taken a number of steps already in reducing non-comp expenses, which when carried through the full year of 2015 will also contribute to an improved – an improvement in that secondary only margin. So we are operating here with the absolute presumption that that will be achieved.

Sure and as we think about that threshold is it based off of the 6% figure which doesn’t include the impact of ECM to get to that level or is it based off of the total figure, which was the 10% threshold or the 10% metric?

The 6% threshold is the right one to focus on and the one comment I would add to Ralph’s is there is a lot of constructive work going on in terms of the cost structure of the business we do have to earn the revenues.

Okay. That’s helpful. Thank you. And you guys had alluded to the promotion of the 6 internal Managing Directors to SMD and can you give us a little color based on historical performance, we realized that they are not going to be able to achieve the type of productivity that we would see ahead of someone else who is bringing on their full book of business, but historically what have you guys seen, how long does it take them to kind of achieve that type of a level, and what percentage of that productivity is roughly historically in line with what they do in year one?

Let me refer to a comment we have made many times over the years. When we recruit externally a new partner, this is now on the external side it typically takes depending on individual around 3 years for them to hit their full stride and full productivity 2 to 3 years. So, this ramp that Ralph talked about quite appropriately applies to externally recruited partners, not just internally recruited ones. We have said that many times on these calls. So, the same basic dynamic applies to the internally promoted ones. And it’s really the same phenomenon whether you recruit a new partner from the outside or a new partner from the inside it takes 2 or 3 years for them to hit their maximum. So, we just added 12 partners. And Ralph is observing the 12 partners on top of a total now of 68. Okay, 12 as a percentage of 68 is a pretty good number. So, you are going to have a contingent, that’s going to take 2 to 3 years to hit their full stride. That’s the long and then short of it. It’s not new and it’s – we have been dealing with that ever since the beginning of the firm.

And just to add one modest tweak to that, my comment was a pure mathematical tautology, okay. These 6 people were here in 2014. They were not sitting on their thumbs waiting to be promoted. They were working and they made a contribution to revenues. So, when they don’t – when they become Senior Managing Directors in 2015, they don’t magically produce an incremental revenue equal to what our average SMB productivity is. That’s just a mathematical tautology.

Sure. I understand. Thank you very much. It’s helpful.

Our next question is from the line of Steven Chubak with Nomura.

Hi, good morning.

Good morning.

Sorry about that. So, first question I have is on Bob, your guidance that you provided on the non-comp side, you had indicated that there is about $3 million of savings that you have already extracted from the equity side of the business. Should we assume that, that $3 million relates exclusively to the brokerage side? And I suppose I am just trying to derive what the pro forma margin would have actually looked like in the quarter, not only if you make the comp adjustment, but also ascribe credit to the savings that you have already extracted from the business?

I think as Ralph said, if you look at the revenues we earned for the 2 months apply to 55% comp ratio and reduced the non-comps for the savings we have identified. In that scenario, we think that the margins would hit the 12% perhaps better.

Okay. And how much more in the way of incremental savings should we expect by year end or exiting 2015?

Yes. So, Ralph’s comment was we won’t really see the full benefit in that business until 2016. We will be taking the cost out during the course of the year. And as we have said before, we think you will start to see the numbers reflect those savings more visibly in the second half versus the first half, but the business as we said after we closed was running non-comp ratio in excess of 30%. We don’t see it. We don’t see that business moving sub-20% for a variety of reasons, the way the rest of our business has performed. So, Steven, why don’t we just sort of pick the midpoint as a conversation point?

Okay, that’s helpful. And then I was curious whether there was any earnings drag specifically from the U.S. dollar strengthening that we saw in the quarter. I know some of your competitors had alluded to that, granted you are a bit more geared to the U.S. side, just wanted to gauge whether there was any impact?

It wasn’t significant.

Okay, alright. That’s it from me. Thank you for taking my questions.

Thank you.

Our next question comes from the line of Alex Blostein of Goldman Sachs.

Great. Hey, good morning everybody.

Hi, Alex.

Hello. So, sorry to beat the dead horse here, but Bob maybe just easier for us to as we think about the starting point Q1 2015 being kind of the first cleaner quarter. Anyway we can just kind of get the non-comp run-rate dollars and then just kind of think from – think of that as a starting point in the savings from there?

We are…

Or non-common institutional equities, that’s the best way, sorry.

Well, your question had quite an impact outside of the room, so we just fell over. Now, as I think we have talked about as much of the cost structure on that business as we want to get into.

Okay. And the question just on the operating leverage in the sort of core M&A advisory business, your comment on 25.6% was – are those pretty interesting, so essentially you guys are seeing the advisory business running at a pretty meaningful margin ex-institutional equities? Given Roger your comments on the backdrop for revenues and the promotes that you have done this year, how should we think about I guess the progression of that 25%, 26% operating margin in the advisory business into 2015?

I think that’s a pretty good margin. If we were to stop investing in the business and investing in the business is hiring, you would expect it to go up. We don’t expect to do that and to try and ascertain a margin for this business is like to asking us to predict revenues or asking us to predict any number of other things, which we have visibility on for one or two months not a full year. I think we are as we have said many times, we expect to make steady progress towards margins for our whole business that are 25% or north and we have consistently done that and we intend to continue to do that. However, if we do get the opportunity to invest a bit more than we have historically….

Meaning recruiting.

Recruiting, that the pace of that might be slowed, but that is unquestionably in our view good for our shareholders over the longer term and we expect to keep you fully informed of the pace of that investment during the course of the year as we have in the past.

Yes, understood. And then my last question just on the equity capital markets revenue, quite good results in underwriting even with ISI in the run-rate only for essentially two months. Can you guys speak to just the conversations you started having with corporates and once this deal got completed and how much having this combined business contributed to the ECM revenues that you put up in the fourth quarter and maybe a point on market share as well as we move forward?

I want to make a broader point then come to your question. This is just a personal observation. I have been in the business very long time. I think there are three great businesses in investment banking from a margin point of view, M&A, restructuring, and equity financing, especially IPOs. Now, Evercore is solidly in all three of them and ultimately will be a leader in all three of them, real leader. So, that’s the sort of very, very long-term rationale for how we have evolved the firm on the advisory side. There are sectors. Technology is one, energy is one, real estate is one, transportation is one, where the equity financing intensity is much higher than in certain other sectors. That’s just the way it’s been since the dawn of time. And so the quality of conversations depends on the sector and the relevance of equity financing to the sector, but this is a very, very long-term investment we have made here. I think it’s going to take quite a long time although I expect it to be steadily upward for us to spread the word into every corner we want to and to cover everybody we want to where the equity financing intensity factor is high enough. But there is no doubt that the firm is enhanced in terms of its relevance to clients by this move, by the way, both in terms of research as well as equity sales and equity financing capability, not just the latter. So, it’s just an unadulterated plus, and assuming we can make the cost structure come in line with ours, which we expect to. This should be a really major, major strength of the firm going forward. That’s all, I really can say about it. The only thing I would add from a granular point of view is, we did a little – roughly $25 million of underwriting – equity underwriting revenue in the U.S. and in 2013 we did roughly $20 million – almost $28 million in 2014. And the way that those numbers can be positively impacted is two-fold. Number one, because of the much broader research coverage we have and the much dramatically increased distribution capability. We have an opportunity to compete for equity underwriting positions in a broader number of industries. And then the second thing is, because of that stronger research capability and stronger distribution capability, we have the opportunity to play a more important role or in other words, get a little bit bigger piece of the economics in those equity underwriting. So more of them and more economics in the ones in which we participate. And obviously, it’s very early days, but we are seeing evidence of both of those occurring.

Great. Thanks for all of the color.

Our next question comes from the line of Brennan Hawken with UBS.

Hi, guys.

Good morning.

Just real quick, could you – is it possible to give us the legacy Evercore equities revenue this quarter?

One month, like less than $3 million or something like that, yes.

Just for the October, $3 million?

Yes, just for October. Yes.

Okay. And then when we think about ECM bankers, we saw that you guys hired one here, how many more are you thinking you are going to need to hire and generally what’s your expectation for how long before you think you see a big impact on those numbers?

We will, as we have always, had – have a measured disciplined pace of expansion. Obviously, we have a lot more to do there. And as we all know, activity in our business generally is human capital, people intensive. So, if we hope to – and I am not saying this is what we expect to do, but I am just saying, if we had hoped to double ECM revenues, it’s not unreasonable to expect a comparable, maybe somewhat less because we definitely are not in the, if we build that they will come business model around here. But you have got to expect, some comparable expansion in the people committed to that activity. And so, I think we had five people in our ECM business before we announced this transaction. And it wouldn’t be unreasonable to expect that increased by 50% to 100% during the course of the year, but that’s hardly going to be a massive material effect on our financials to be honest with you, which is why Roger said quite correctly that the equity underwriting business is one of the very high margin businesses in investment banking.

Okay. Thanks for that. And then helpful color on the M&A environment certainly. Just we have seen some pretty volatile markets here in 1Q and we saw some bouts of volatility there in 4Q, any concern about some of the deals that have been announced actually getting to close given that and also as we think about the U.S. dollar strengthening, what knock-on effects do you see in the advisory market there?

First of all, on closings, apart from a few transactions that require regulatory approval, where there are some uncertainties there, I don’t see any of the recent volatility impacting the rate of transactions, which closed, no. So, the answer to that is no. In terms of the dollar strength, I have seen no evidence yet that it’s impacting M&A volume. The real question there will be whether some companies large ones that are experiencing big FX headwinds and therefore lower earnings are going to be more cautious or not. And I just can’t judge that, I don’t know, but I don’t think so far there is evidence that, that will change the relatively good outlook that we talked about for 2015 at least not yet.

Okay, great. Thanks for the color.

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

Hey, good morning guys.

Good morning.

Just going back to your comment about the increase in the number of promotions you made this year, you said that the increase was primarily due to a number – increased number of being more – being eligible this year. Just kind of wondering if you can talk a little bit about what would make someone eligible for the promotion? And two, is there in anyway an impact from increased competition for bankers driving that increased promotion number?

Well, the answer to the second question is no, you can see that Evercore has been very consistent on it’s recruiting in 2014 in terms of external recruiting, a really strong year. So, we are not seeing any greater difficulties in recruiting bankers externally than we did a year ago or 2 years ago or 3 years ago. And internal promotion is just a function of talent. We promoted 6 this year, because we have some amazing people that are ready. Next year, as Ralph said, probably a lower figure, because our historical figure is quite a bit smaller than 6, but that’s the thoughts about – we are optimistic about our business. We have great talent internally. We have access to terrific talent externally. We have a very, very strong recruiting hand in general and ISI enhances it. So, there you go.

Okay. And then just on ISI, I think on your last quarter’s call, you kind of made the comment that you might be a less stringent in terms of the headcount levels, but would review it again after the first 2 to 3 months. And since we are kind of at that level, I mean, when you think about cost reductions going forward, is there any anticipated headcount reductions at this point or are you happy with where you are?

I would say that we are a little higher than we thought we were going to be last August. And we continually look at that to make sure that we have a pure muscle business.

Okay, great. And then lastly from me, just in terms of the contribution at ISI, I mean, can you guys give us a sense for how much of that was coming from macro strategies versus more stock-specific research?

The answer is no, we can’t do that and it’s not that we are truculent, although we are, I am, at least some of us are. It’s just that when you sit there and work with an institutional investor, they don’t tell you X percent of your – what they are compensating you comes for macro versus stock, but we are not going to break that out as an ongoing matter anyway.

Fair enough. Thanks for taking my questions.

Yes.

Our next question comes from the line of Devin Ryan with JMP Securities. Your line is open.

Thank you. Good morning and congrats on the strong quarter.

Thank you.

I guess, just coming back, just a couple of follow-ups here. Coming back to the detail on the energy vertical, I appreciate that information, but I am trying to put that in context. When you speak to the strong backlog, is that what has already been announced? And then are you seeing any impact from deals that maybe have gone cold before they got to announcement meaning there could be a bit of an air pocket here in revenues just as deals don’t get to announce from it given the volatility? That’s part one. And part two, just with respect to the mix, are you seeing anything yet that would fall on to the restructuring bucket that’s resulted from lower energy prices or is it going to take longer in your opinion to get to that type of activity?

First of all, my comment about backlog would pertain to the firm as a whole, same comment we often make. I said our backlog is good for the firm as a whole. Second of all, I have not myself seen any evidence and I work closely with our energy team of deals that were in stream in midstream and then went cold on account of this. So, the answer to that is no, but that’s just my perspective. And thirdly, has there been some – is there evidence that there will be some increased restructuring activity tied to energy and the answer to that is yes, but I don’t want to overplay that. It’s such early days in this. I mean, the real way to think of it is too soon to tell. I mean, that’s really the essence of it, but those are the answers.

I would just make one other comment on our business as a whole. We are an incredibly diversified firm at this point. And while we might hypothesize, it would only be hypothesizing since there is no evidence yet that the volatility in energy prices could have some effect on short run M&A activity in the energy sector. The history would suggest that it then picks up at the whatever the new oil price or gas price is, but the broader point is that in any given year, there are going to be sectors that do a little bit better and sectors that do a little bit worse. And we had a terrific year last year and yet I could identify for you parts of our business either due to the level of business activity in a sector or the fact that we just happened to miss a couple of really important things that didn’t make their normal contribution. And quite fortunately, I think for our shareholders and for Roger and Bob and I sitting in the seats that we sit in, at this point, we own a diversified portfolio of exposures by industry, by geography and that’s quite beneficial to our shareholders.

Okay, great. I appreciate that perspective. And then maybe just coming back to the commentary on recruiting and all the detail there, can you give us any additional information around where you are having conversations today? And then I guess specifically, are you getting any closer to entering the general industrials vertical, I know that’s been an area that you would like to do through kind of the right A level banker hire?

No, we can’t give you any more color on our recruiting. And second of all, we have many of the pieces of the general industrial footprint. We have a defense – a very good defense and aerospace group, automotive group and some others. What we have been looking for is someone would head the whole thing and that’s just a question of when we find the right person. Evercore, as you probably know, if you follow us, has been very patient over the years in terms of waiting for the right person and that paid off well for us. That’s all we can say.

Got it. Okay. Thank you very much.

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

Hi, good morning.

Good morning.

First question is…

You know you are from Autonomous by the way.

Thank you. What were the full year 2014 secondary revenues for ISI?

We don’t have that. We didn’t know them for 10 months. I think what I have said in my remarks was if you take the prior periods activity for our two businesses separately that what we have done in the 2 months when we were together is essentially the same, okay. We gave information on what their historical numbers were when we announced the transaction in August and we are not in the business of reporting on the financial information of companies that we didn’t know before we own them.

Okay. And you said you have eliminated the $3 million of annualized non-comp expense already, is that just a case of eliminating the shared expenses between ISI and legacy equities business?

They are real cost, I guess.

Okay. And I think I have asked this question before, but I might as well give it another shot. So, the MDs that you hired in the past few years, can you give me a sense of how many yet to be fully ramped up in productivity terms?

No.

Okay, thanks.

Our next question comes from the line of Douglas Sipkin of Susquehanna.

Hey, Doug.

Yes, good morning, guys. How are you? So, just two questions, one a little bit more on sort of the equities business and taking some of the comments to heart, I mean about being sort of a almost risk-less business, I guess, thinking about that business, though I mean would you guys ever consider doing on – at least on the secondary underwriting side bought transactions, because I know that’s just pretty prominent these days?

No.

Okay. No, that’s helpful. And then, maybe shed a little bit of color on the…

You didn’t hear that. The answer is, no.

No. Thank you. Loud and clear, I got that. And then shed a little color on business that looks like it’s doing very well for your guys, maybe the ECM and debt advisory business, maybe you can talk a little about the trends you are seeing here, the macro drivers and sort of what’s driving the nice trends in this business?

As a general matter, we have not and never will give information on individual sectors, industries, geographies, business lines. I will go back to what I said. You own a broad portfolio of fewer advisory activities. And in any given quarter or any given year as a function of macro conditions, industry conditions, and skill at Evercore, one or another of those are doing really well and some of them are doing less well than they did the year before. You put it all together it’s a pretty good mix.

Okay, great. Thanks.

Yes.

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

Thank you for your attention. And the nature of this business is we are back to baking bread on January 1 and see you next quarter. Thank you.