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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Evercore First Quarter 2019 Financial Results Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference call will be open for questions. This conference call is being recorded today, Wednesday, April 25, 2018.
I would now like to turn the conference call over to your host, Evercore's Head of Investor Relations, Jamie Easton. Please go ahead, ma'am.
Good morning, and thank you for joining us today for Evercore's first quarter 2018 financial results conference call. I'm Jamie Easton, Evercore's Head of Investor Relations. Joining me on the call today are Ralph Schlosstein, our President and Chief Executive Officer; John Weinberg, our Executive Chairman; and Bob Walsh, our CFO. After our prepared remarks, we will open the call for questions.
Earlier today, we issued a press release announcing Evercore's first quarter 2018 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 For Investors section on 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 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 a detailed disclosure on these measures and the 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's 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 closing.
I'll now turn the call over to Ralph.
Thank you, Jamie, and good morning, everyone. Well, I guess, we have to say that we're reasonably pleased with our start to 2018. The quarter was the best first quarter in our history and one of the best ever by many measures. Advisory revenues represent the highest first quarter in our history and nearly surpassed last quarter, our best Advisory quarter ever. Underwriting revenues were the highest ever for a quarter, and adjusted net income and earnings per share, with the help of a lower effective tax rate, were the best in our history by a significant amount. These results in our view showcased the earnings power of our business in a quarter when most things are generally working well. Obviously, this won't happen every quarter, but I must say it is enjoyable when it does happen.
There is no doubt that the favorable market environment contributed to these results, enabling teams in all of the important sectors and geographic regions that we cover to contribute. But our results also are enhanced by what almost certainly will be a continued increase in our market share of Advisory Fees among all publicly traded firms. I say almost certainly because not all firms have reported yet, but those that have reported, if you take all of the ups and downs, the Advisory Fee pool among those firms, as of today, for the firms who have reported, is roughly flat or actually off a little. So, our more than 20% gain in Advisory revenues will almost certainly lead again to a not miniscule market share gain.
Significantly, we serve clients on a broad array of matters including strategic M&A, activism, restructuring and capital advisory. Our emerging capabilities in capital advisory and activism and defense continue to grow quickly and made a significant contribution in this quarter. Our results in recruiting and cultivating talent were equally exceptional. Five Advisory senior managing directors have committed to join the firm to-date, complementing the six professionals promoted at the beginning of the year. And we still have a number of conversations that are in process with a couple of those very close to completion. 2018 is likely to be another very strong recruiting year, and we'll provide more color on this later in our remarks.
Our sustained momentum encouraged us to accelerate the annual assessment of our capital return strategy to this quarter. Our board has increased the quarterly dividend to $0.50 per share. This increase reflects or adjusts our dividend payout to a more competitive level, and reflects our stronger earnings and cash flow generation. In the future, we plan to keep the annual re-assessment in April as opposed to in October when we have done it previously.
Let me briefly review our results. I'm sure that you have noted a few changes to our presentation of results, particularly in the Investment Banking segment. Our goal here is to more clearly show what is driving operating performance. There were also some changes required by GAAP, and I will let Bob go through those in excruciating detail.
Our first quarter 2018 net revenues were $460.5 million, up 20% versus the same period last year. Strengthened Advisory and Underwriting Fees drove our success this quarter, and John will comment more on that. Commissions and Related Fees were $43 million, down versus the prior year as our institutional investor clients continue to reassess how they consume and pay for research and execution services. We continue to work with clients as this transition evolves, and are adjusting our service delivery and operations appropriately.
In Investment Management, excluding revenues related to the Institutional Trust and Independent Fiduciary business, which we sold in the fourth quarter of 2017, asset management fees and assets under management from our consolidated businesses increased 13% and 11%, respectively. Net income was $113.8 million for the quarter and earnings per share were $2.24, up 36% and 39% respectively year-over-year. Operating margins for the quarter were 27.1%. Our results reflect a 6.3% provision for income taxes in the first quarter.
The tax benefit is attributed both to lower corporate tax rates in the U.S. and the tax reduction that arises when deferred compensation is deducted at a price higher than expensed for accounting purposes. And as you'll recall, this effect showed up for the first time in the first quarter of last year. Our compensation ratio was 59% for the quarter, which reflects our best judgment about our current full-year expectations.
As I noted, we anticipate another strong year for recruiting and have estimated a compensation ratio for the year which reflects that, as well as the residual effect of strong recruiting efforts in 2017 and 2016. Non-compensation costs were $64 million or 13.9% of revenues, essentially flat sequentially and up 4% versus last year.
Let me now turn the call over to John to discuss the current market environment and comment on our Investment Banking operations.
Thank you, Ralph. The market environment remains broadly favorable. We continue to experience a high level of dialog and activity with our clients as economic conditions continue to be supportive of strategic M&A and capital raising. Multiple catalysts including strategic consolidation, activism and sponsor activity, all motivated client actions during the first quarter and are the driver of ongoing discussions that we are having globally. Our backlog remains strong and is diversified globally across each of the key sectors we serve. And demand for capital raising advice and execution remains strong both with our corporate and financial sponsor clients.
Let me briefly review the results of our Investment Banking business in greater detail. First quarter Advisory Fees were $373 million, 22% higher than a year ago and our highest first quarter for Advisory revenues. And Underwriting Fees were $28 million, up 182%, the highest in our history. The composition of Advisory revenues for the quarter reflected strong contributions from multiple sectors and capabilities, with particular strengths in energy, financials, healthcare, and TMT.
We were particularly pleased with the performance of our team in underwriting, participating in 20 transactions with 17 of the 20 as a bookrunner. Activity in healthcare drove our underwriting activity in the quarter. Capital Advisory assignments relating to financial sponsors also contributed to our growth. We ended the quarter with 94 Advisory SMDs. Productivity of our Advisory senior managing directors globally for the 12 months ended March 31, 2018 once again improved from a year-ago period.
Notably, we announced in the quarter that we are advising Energy Future Holdings on its $42 billion Chapter 11 plan of reorganization; The Carlyle Group on the $13 billion acquisition of Specialty Chemicals business of AkzoNobel in the largest ever private equity chemicals LBO globally and the largest European LBO in the last 10 years; CSRA on its $10 billion sale to General Dynamics; Interoute Communications on its $2 billion sale to GTT Communications; and Riverstone Investment Group LLC and USA Compression Partners, L.P. on a series of strategic transactions with Energy Transfer Equity, L.P., and Energy Transfer Partners, L.P.
Before I turn the call back to Ralph to comment on our recruiting for the year, I wanted to highlight one other important development. At our recent board meetings, we welcomed two new directors, Ellen Futter and Sarah Williamson. Both Ellen and Sarah are highly accomplished professionals, and as new directors, will offer fresh perspectives that will help us continue to build our firm.
Now, to Ralph.
Thanks, John. As I mentioned in my opening remarks, we are having considerable success in recruiting as bankers continue to gravitate to our independent advisory model, and to the breadth of capabilities that we can deliver to clients. Five SMD recruits have committed to join the firm as Advisory senior managing directors with one starting during the first quarter, and two more joining the team in April. We expect the other two to join during the second and third quarters following the completion of their garden leave commitments.
We are particularly pleased to be launching a dedicated team in the Consumer and Retail sector, initially led by Adam Taetle and Wilco Faessen. As we have said for many years, we have been committed to recruiting the right team in this important sector and we are confident that we have done just that.
We continue to focus on industrials globally. Eduard Kostadinov has committed to join us from Morgan Stanley in Germany, focusing on this sector for Europe, as well as expanding large company coverage in that country. Discussions with others focused on global industrial sector are also in progress. And we remain focused on building capabilities and expanding our sector and geographic coverage, where we see the right strategic fit.
We have announced one Advisory senior managing director being added to our already strong team in private capital advisory, and that's focused on the raising primary capital for the real estate industry. And we expect to announce shortly another strong addition to our restructuring team, which is, of course, one of our strongest teams. And Peter Brundage has opened a new office in Dallas and is actively discussing our capabilities in this important market.
At this point, it appears likely that we will hire a larger number of advisory SMDs in 2018 than our historic range of four to seven. As I noted at the beginning of the call, our compensation expectations for the year anticipate this higher level of recruiting.
Let me now turn the call over to Bob.
Thank you, Ralph. Let me begin with a few comments on our GAAP results. During the quarter, and in an effort to provide greater comparability to the presentations of our peers, we have reclassified certain balances on our income statements for all periods presented. Investment Banking revenue has been disaggregated into Advisory Fees, Underwriting Fees, and Commissions and Related Fees. Investment Management revenue has been renamed to Asset Management and Administration Fees, which includes fees from our Wealth Management and Institutional Asset Management businesses.
Gains and losses on our private equity investments and at ECB are presented now within other revenue. We have further presented execution, clearing and custody fees as a separate expense line item, reclassifying relevant amounts from other operating expenses and from professional fees.
Also, during the quarter, we adopted the new accounting standard for Revenue from Contracts with Customers, which represents a comprehensive rewrite of the revenue recognition standard. The adoption of this new standard did not have a significant impact on our results for the quarter.
Also, following the adoption of this standard, for U.S. GAAP purposes, we have presented expenses relative to underwriting transactions grossed in the statement of operations, which increases revenue and expenses by $2.1 million for the quarter. These expenses have been presented net in our adjusted presentation, consistent with our historical practice on client-related expenses for both Underwriting and Advisory Fees.
Net revenues, net income and earnings per share on a GAAP basis of $463.6 million, $95.5 million and $2.10, respectively, were a record for a first quarter for us, just as they were a record for us on an adjusted basis. Consistent with prior periods, our adjusted results for the quarter exclude certain items that are directly related to our acquisitions and dispositions. As in prior quarters, we adjusted our costs associated with the vesting of LP Units granted in conjunction with the ISI acquisition. For the quarter, we expensed $3.9 million related to these Class J LP Units.
During the quarter, we incurred $1.9 million of expenses associated with the closing of our agency trading platform in the UK. These costs have been presented in special charges on a U.S. GAAP basis.
Moving on to taxes, our GAAP tax rate for the quarter was 4.3% as compared to 100.7% in the prior quarter and 16.2% in the same period last year. The rate for the first quarter of 2018 as well as the rate for the prior quarter were impacted by the enactment of the Tax Cuts and Jobs Act in December of 2017, which resulted in a decrease in income tax rates in the U.S. in 2018 and is expected to result in a decrease in future years. This resulted in a decrease in our U.S. GAAP and adjusted effective tax rates of 12 percentage points and 13 percentage points, respectively, for the quarter.
Further, the impact of the accounting treatment for stock compensation adopted in January of 2017 resulted in a decrease in the U.S. GAAP and adjusted effective tax rates of 19.1 percentage points and 18.6 percentage points, respectively, for the quarter. Similarly, the impact on the first quarter of 2017 resulted in a decrease in the U.S. GAAP and adjusted effective tax rates of 20.3 percentage points and 26.9 percentage points, respectively.
Lastly, assuming the level and geographic mix of earnings in 2018 is comparable to 2017, we would expect our adjusted effective tax rate to be approximately 19% for 2018, reflecting the lower tax structure of the Tax Cuts and Jobs Act.
Turning to non-compensation costs, firm-wide costs per employee, a metric we focus on, were $38,000 for the quarter, 1% lower sequentially, and 3% lower on a year-over-year basis. Our Q1 share count for adjusted earnings per share was 50.7 million shares, higher in comparison with the prior quarter driven principally by the increase in shares that occurs when our share price increases in a quarter. On a GAAP basis, the share count was 45.5 million shares.
In Q1 2018 we repurchased 1.4 million shares at an average cost of $97.94 per share. $1 million of these repurchases related to the net settlement of stock-based compensation awards and were purchased at an average cost of $99.60 per share. $400,000 were repurchased in open market transactions pursuant to our share repurchase program at an average cost of $93.68 per share. And finally, our cash position remains strong. We hold $504.8 million of cash and marketable securities at the end of the quarter, with current assets exceeding current liabilities by $489 million.
With that, operator, we'll open the line for questions.
Thank you, sir. We will now begin the question-and-answer session. Our first question is from the line of Conor Fitzgerald from Goldman Sachs. Your line is now open.
Hi. Good morning.
Morning.
Just wanted to dig in a little bit on your Advisory revenue which is obviously strong this quarter. If I look at your disclosure for Advisory transaction and Advisory Fees in excess of $1 million, it's up 23% and 29% respectively, and that's in the same ballpark of the 27% growth you saw on Advisory and your Underwriting business but it is lagging by a modest amount. So at least to me that implies that some of your non-transaction fees, whether it's activism and defense or some of your other more recurring type revenue is growing at a pace kind of well north of that lower 20% year-over-year pace. Is that a fair read and can you just comment on some of the strength you're seeing in those businesses?
Those businesses are doing very well but I wouldn't necessarily reach the conclusion based on one quarter of numbers. I think the reality is that at the moment, and as far as we can see – and obviously visibility in our business goes very well for the quarter we're in, a little foggier for the quarter after that and then it starts to get a little misty – but the environment that we're in is very supportive. And as best as we can see, our market share gains in Advisory Fees broadly continue. And the sources of that are traditional M&A activity where we're doing quite well, the activism and defense practice where we really have a market-leading practice, capital advisory restructuring; they're all contributing to the success that we're having today.
That's helpful, thanks. And then there's been an increasing focus this quarter on some of the trade tensions and the potential impact this could have in M&A. Obviously didn't really impact announcements in the quarter which were quite strong. But just curious what you're hearing from your clients and how they're adjusting to the political environment and if you have any sense on whether this could impact their willingness to pursue further M&A.
It's really hard for us to say whether it's going to have an impact. What we have seen is that the dialogues have been very robust. We don't see in our business any pullback in the dialogues that we've been having. And as we look forward, we're quite optimistic about the market. But clearly, there are always factors that come into play.
Thanks for taking my questions.
You're welcome.
Thank you. Our next question is from the line of Jeff Harte with Sandler O'Neill. Your line is now open.
Hey. Good morning, guys. Nice quarter. Touching back on the Advisory kind of revenues, forecasting it from the outside has always been tough to kind of get accurately kind of what we can see. But, I mean, this quarter was much stronger than at least what we could see for visible pipeline kind of transactions suggested in kind of the second best quarter ever. Can you help to reconcile that a little bit better for us or maybe give us an idea of what else to kind of look at because at least – and granted it's only one quarter – but the visible pipeline seem to really undershoot your revenues this quarter.
Yeah. Well first of all, if you're expecting me to apologize for that, I'm not going to. But look, I think the reality is, as we've said many times, that the publicly available visible pipeline is not a particularly good predictor of our Advisory revenues. For example, as you're pointing out, if one were to simply take a historical multiplier of that pipeline, recognizing that our revenues are always well above the visible pipeline, it in and unto itself would not be a good predictor of our Advisory revenues in any particular quarter. Now there are lots of reasons for that. There's lots of things that we do that don't show up in those publicly available pipelines, whether it's the restructuring business, capital advice, and capital raising advice, activism and defense, and quite honestly when we get higher fees or retainer fees for more traditional strategic advisory engagements. And my guess would be, although it is purely a guess, that given the broader nature of our Advisory business the relationship between the publicly available data and what we actually are reporting probably continues to stay wide or widen.
Jeff, it's Bob. We obviously will continue to include on our website any transactions where our clients are comfortable with us making that disclosure. There are circumstances where they're not, and we respect that confidentiality as you would anticipate. I would comment that the lack of transparency was simply exaggerated this quarter.
Okay. Secondly, on the overall environment, we're seeing at least in public data a real ramp up in Europe. I'm wondering if, A, you're seeing that; and then, B, more specifically for Evercore, how you guys are positioned now on Continental Europe as opposed to, say, the UK where I kind of view you guys as always having been historically strong?
Well I think if you look at our business, we have roughly, historically, 33% to 35% of our revenues have come from non-U.S. clients, and that's both in, predominantly in Europe but also in Asia as well. We don't actually see any particular change in that. I think if you look at Evercore versus our two largest competitors in the independent space, Lazard and Rothschild, they were both born in Europe, have been in business for – in the case of Lazard – 165-plus years and Rothschild 200-plus years. My guess would be that in that very narrow point of – if things are picking up a little bit more in Europe than in the U.S., we would still be a significant beneficiary but not as much on a percentage basis as they would. I will say that our own information and our own results do not show a greater pickup in revenues from Europe than in the U.S, and it may be that while there have been some larger transactions announced that the actual payment of fees on those transactions may lag what is going on in the U.S.
I would add that just as in the other focus areas like Consumer and Retail where you saw us very carefully look for people and add where we thought it was appropriate and where we could do it in a slow and steady way, we're doing the same in Continental Europe which is that we are – it is a focus for us. We intend to continue to hire people there but we're going to do it in the way that we always do which is we're carefully, slowly, consistently, hopefully building a really strong business as we go.
And Eduard Kostadinov who we hired from Morgan Stanley is a good example of that. We've been looking for probably three or four years for a second partner in our Frankfurt office. And as we always do, if we can't get an A-plus or an A, we wait and we're very fortunate earlier this year to be able to attract him to the firm. And we are, as John said, certainly focused on continuing to do that.
Okay, thanks. And actually just to touch on the first question, can you guys give us any kind of a relative size for, say, restructuring versus traditional advisory versus capital just kind of to generally size the big contributors to Advisory revenues?
Not really, and the reason for that is not just intransigence or truculence. It's that the line between each of those activities is not a bright line. So, for example, just to give you a couple of examples, not specific ones, but there are many engagements where we are advising a client on an acquisition and we're also providing significant advice to them on the financing of that acquisition, and we may in fact be negotiating that or in fact we might even be participating in helping them raise that. Generally, we don't have separate fees for each of those activities. We negotiate a fee in a broad range of activities that we do for them. Similarly, if you're working with a company that is at the upper ends of non-investment grade or at the lower ends of investment grade, we may be doing a lot of work with them on the structure of their liabilities which is certainly not considered to be traditional in-court or out-of-court restructuring, but it utilizes the talents and the capabilities that we have. So the lines between those various activities are just not – they're very, very blurry. And so we've chosen not to try and identify each and every one of them because it's really hard.
And Jeff, those remarks from Ralph contribute or underlie the first question that you raised which is the composition of fees for the services that we're delivering may, in fact, be broader than what Dealogic has estimated on a transaction.
Yes. Look, we spend a lot of time interacting with people who are interested in joining our firm or exploring, working at an independent model. The one thing that there is universal agreement on the part of the people who we are talking to is a statement which we make to them, which is whatever you believe you could do on an independent platform with your client base in terms of revenues, you can do more at Evercore than at any other independent firm. And when you look at the breadth of capabilities that we have, whether it's our activism and defense practice, our equity capital markets advisory, our debt capital markets advisory, our tax; all of which do two things. One, they allow us to capture broader and more consequential fees from our clients. And second of all, they allow us to operate as the sole or lead advisor for a much longer period of time than would've been the case three or four or five years ago for Evercore, and that is the case for many of our competitors because they haven't made the investments in those capabilities.
Okay. Thanks, guys.
Yeah.
Thank you. Our next question is from the line of Ann Dai from KBW. Your line is now open.
Hi. Good morning. Thanks for taking my question. So you guys mentioned in your comments, and we see clearly, that this was a nice quarter for Underwriting. I completely understand that that activity can be lumpy. It's dependent on the market environment. But if I just think back to some of your prior commentary on ECM, I think you had said a couple of years ago that this business has the potential to be a $75.1 billion (36:06) business in a handful of years. So I guess I'm just wondering does it feel like we're finally reaching that inflection point where you're getting that incremental traction in getting named on deals and getting bookrunner status or should we not read too much out of this quarter and it was just a very good quarter?
Well, we certainly hope so. I guess I would say it feels like the answer to that is that we're making some good progress, and I might add finally. And the source of that progress, while there's some element of being named on more transactions, the bigger factor is moving up the food chain and more frequently being a bookrunner or an active bookrunner which obviously affects our share of the economics in each of these transactions. And if you look at the transactions that we were involved in in the first quarter, I think we were a bookrunner on all but one of them, and that's by the way a combination of also rejecting a fair number of situations where we don't believe we're being provided with a position and economics that are commensurate with the distribution capabilities that we have and the quality of the research that exists in the firm.
I would just add that we would not want to over-represent but we certainly feel like we have momentum. And as you know, when you're starting a new business, success begets success, and the more transactions in which we're a bookrunner that are successful the more of an experience base we have with which to market. And we feel like we have continued to be in places and to be in transactions that are working, and clearly that helps us as we go out and talk to other clients. In addition, we're continuing to look to hire into places where we can add more value in the marketing side of transactions. So in all respects, we're investing and we feel like we're getting some success and we're trying to use that to continue to move forward. So we certainly hope that's the case and we'll see as quarters go on.
Okay, thanks for the color. And just moving to the other side, the equities business. I guess if you look back at your expectations coming into this year, were this quarter's commission trends in line with what you would've expected based on your prior discussions with clients around MiFID? And then secondly, should we be thinking about the commission trend this quarter as reflective of the year-over-year trends we might expect for the full year?
I think there was so much uncertainty that the word expected seems too strong a word to me. I would've probably used the word guessed rather than expected, and they are in line with what we might've guessed or certainly what – and I'll speak for myself – what I might've guessed. It's not at all clear that they are indicative of what we would expect for the whole year. For example, I mean, for the first few weeks of the second quarter they're a little better than what we had in the first quarter relative to last year. But I really think it's very early innings in terms of the impact of MiFID and the realignment of both the research wallet and the form in which clients pay for it. We are deeply committed to having a world-class research capability. We think it's part of the distinguishing ability of Evercore to serve clients and part of the intellectual capital of the firm. And my guess would be, once again a guess, that the answer to your question is not going to be fully revealed in another quarter or two but rather in another year or two.
Makes sense. Thank you very much.
Okay.
Thank you. Our next question is from the line of Jim Mitchell with Buckingham Research. Your line is now open.
Okay, thanks. Good morning. Maybe just diving a little deeper into capital markets advisory. I think that's been increasingly cited as a driver of growth. I think it's a little opaque to us. Can you kind of maybe give a sense of what's the dynamic been, what's been driving that growth? And I guess secondly, how do you feel you're competitively positioned in that space given that it does feel like some of your peers have not been as well-positioned?
Well in the broadest sense, there are two elements to that. The first is what we call our private funds business and our private capital advisory business.
Right.
And both of those businesses are connected to the alternative asset management business. The private funds business raises primary capital. Historically, we've done that for private equity firms, mezzanine and debt firms, and infrastructure firms. And as you saw earlier this week, we added to our capabilities in the real estate area as well by hiring a team of people. So that sort of fills out our primary fundraising capability across the key sectors. In private capital advisory, we are involved in advising clients either on the sale of LP interests in these alternative investment firms or recapitalizing funds, providing liquidity to investors who want to perhaps sell down their interest in one manager and increase their interest in another. And that business is also – so those two are one bucket that's related primarily to the alternative asset management products.
The second broad bucket is the investments that we've made in equity capital markets advisory and debt capital markets advisory, some of which are actually fees related specifically to providing that service to clients. And as I said earlier, many times those activities are bundled into a broader fee that's wrapped together with more general M&A or strategic advisory services. So we know we're getting larger fees from our clients because of the broader services that we're providing and that we know that they value that, and we also know that by providing those services we can be the sole advisor or the primary advisor to our clients for a much longer period of time than might've been the case three or four or five years ago.
Just to add to that. One of the most important parts about capital markets advisory is to make sure that when we're advising clients on, whether it's mergers or acquisitions or other corporate finance matters, that we really have a full view of the different issues and have a perspective that allows us to give the best advice. So in many respects, what we've done is we've invested to make sure that we can really be very comfortable that our advice is comprehensive and thoughtful along all different lines. So this is really, as much as anything else, an investment in the quality of what we're providing clients. As Ralph said, there is economic benefit to having it also, and we've seen that. But at the end of the day, the most important thing for us is to make sure that the quality of the advice we give is excellent.
Great, that's helpful. But is there a greater demand for debt capital markets or equity capital markets advisory than there has been in the past just because of more scrutiny of deals or is it you just taking share from some of the bigger players or are they conflicted out of it? I'm just trying to get a sense of why it's been growing so rapidly and where that's coming from.
Well first of all, if you look back historically the business of equity capital markets advisory and debt capital markets advisory was a more prevalent business in Europe than it was in the United States historically. And there certainly is some, I wouldn't say explosive, but some modest amount of embracement on the part of clients that having an independent advisor at their side when they're obtaining debt financing most specifically is of value to them. I think if you look at the relationship between a lender and a company, it is the single most relationship that has the greatest amount of potential conflict. A lender very simply wants highest fees, highest rate, and toughest terms, and the client wants the opposite. And having an advisor at their side, I think particularly for companies that are not huge companies that are regular participants in the debt markets, I think is an area where there is more acceptance on the part of clients of the value that can be added. I wouldn't call that a deluge but it definitely is a trend.
Okay, that's really helpful. Thanks. And maybe for Bob, one quick question on the tax rate. I think you said for the full year now 19% and I think last quarter you had said 21%. Is that any change to the kind of that run rate of mid-20s, like 25%, or just trying to get a sense of what's driving that because I don't think the – if I kind of use 25% going forward it'd still be kind of close to 21%.
It's just a little bit more clarity on how the new Act is going to work at our business gap. There's no great insight or significant between 21% and 19% now.
Okay. Thanks.
Thank you. Our next question is from the line of Brennan Hawken with UBS. Your line is now open.
Good morning. Thanks for taking the question. First one on capital. Dividend hike was strong, nice to see, very encouraging. Could you just maybe update us on how you think about capital returns and the prioritization of those capital returns? Does the dividend suggest any kind of change there or just improved confidence in your earnings power especially after the tax reform?
I would say it reflects the latter rather than the former. I think if you look back historically, as I think we said in October when we made the last change, because of the strong earnings power of the company over the last few years and our board's predilection to steadily increase the dividend, our payout ratio had drifted from the sort of mid-30s down to the mid to high-20s. And we said that we were intending to recover some of that. And obviously, when we made those changes in October, we didn't know for certain what was going to happen with corporate tax rates. We now do. And I think this is an effort to continue on that path, updated for the changes that did occur in our earnings and cash flow as a result of the change in corporate tax rates.
I might add parenthetically that I think we all feel that April is a better time to consider this issue each year than October because it's sort of a point where you – if you go back to what I said at the very beginning, when we sit here today, we know we have one quarter behind us. We have pretty good visibility as to what the second quarter is going to look like, and we've got decent visibility as to what the remainder of the year looks like. Whereas in October, we have very little visibility as to what the following year. So, I don't know if it was caught but what we essentially are saying is that going forward, our review by the board of our dividend policy, which does occur once a year, will occur in April rather than October.
That makes a lot of sense. Thanks, Ralph. And then, one follow-up here on the cash equities business. I know – I guess you had said that – I don't want to put words in your mouth, but maybe not hugely surprised by the weakness. It does stand in pretty sharp contrast with reported results out of the bulge bracket folks. Obviously, very different business models with derivatives contributing, therefore, balance sheet contributing. But just wanted to dig in a little bit. I believe you made a reference to an intent to review the business as clients change how they pay for research. Could you expand on that, what you mean, some of the broad strokes that you might be considering and when we should expect an update on your plans there?
As I said before, I think the – in my view, it is way too early to conclude how this will all shake out. I think there are two very broad conclusions. One is that the research wallet is likely to be down somewhat, what clients are prepared to pay for research. And I think that's particularly true of the large, global, long-only firms who are affected by MiFID and have concluded that they don't want to maintain multiple ways of compensating firms like ours and the larger firms for research, so they basically adopted the rules that are required by MiFID.
I might add that U.S.-based managers and the long-short managers have not reached the same conclusion. But I think it's almost inevitable certainly among the larger long-only firms that are global that there will be some shrinkage in the research wallet.
On the other hand, I think the second thing that is almost tautologically true is that the share of the research wallet that goes to the highest quality products and services is going to increase. And so, we expect to be effective negatively by the shrinkage of the research wallet and positively by the market share gain for the highest quality research.
And how that shakes out, you all saw the results in the first quarter. As I said, they seem to be a little different in the second quarter, but we're literally not even a month into the second quarter, so I certainly wouldn't reach a conclusion that it will be different in the second quarter. And, look, I think there are – our business model is just very, very different from the business models that you're referring to on the larger firms. Volatility is a very happy thing for balance sheet-oriented firms that are making markets and derivatives and other products of that nature, and that's not our business. We're in the commissions and checks business.
Yes. Thanks for the color.
Okay.
Thanks, Brennan.
Thank you. Our next question is from the line of Devin Ryan with GMP Securities (sic) [JMP Securities]. Your line is now open.
Hey, great. Good morning, everyone.
Morning.
Maybe start with a bigger picture question here, just given the record pace of M&A announcements to start the year. It's a question that we get from clients. But for Evercore, the way we think about it is there's a few things, there's the market share gains that the firm is earning and it sounds like that's where you're focused and that will continue; two, the cycle; and then, three, kind of the secular growth theme of the market.
And so, outside of the market share, which, to some degree, you can control, is there anything on the cycle that would suggest that there's still ways to go here? You were at a pretty healthy level. So, do you feel like the cycle can get quite a bit better or anything that gives you comfort there? And then on the secular, things that you look at to suggest kind of the growth will continue and is still compelling that the pie will grow. Obviously, you have more companies, you have higher market values, you have more advisory businesses, but just trying to kind of think about that as well. So, really the cycle and secular.
Well, first, on the cycle, as we look forward and as Ralph said, it's really hard to look beyond a couple of quarters. We don't see anything that would lead us to believe that things are going to go south or turn down. We actually see that the things look pretty healthy and strong. And really the dialogs we're having, the kinds of issues that our clients are trying to address through M&A, we see that to be constructive, and we think that going forward, it looks like it's going to continue. Now, as I said, it's really hard to go beyond a couple quarters. We all know that things can change very, very quickly. But I think from a cycle perspective, it all looks fine a couple quarters ahead.
In terms of the secular side, what you said is absolutely right, and there are some things that are really, I think, playing into feeling like we have, over time, whether you have a cycle-down or cycle-ups in a secular basis, the M&A business will be healthy. There is clearly a view that this tax clarity has given people some more liquidity. There are some broader trends like technological change, where companies are trying to adjust to technological change and, in many cases, they're doing that inorganically through M&A.
We have had a relative change in the regulatory overlay, which is we're seeing some deregulation, which is giving people confidence. And generally, we think that as companies get bigger, as the economies generally get bigger, there is just more room for people to go out and raise money to do M&A. Clearly, the markets continue to be favorable. If the markets were no longer favorable, that would be a cyclical change, not a secular change. So, I'd say, generally, we feel good about the secular basis of the business. And from a cycle standpoint, we feel like we're on pretty solid footing right now.
Okay. Terrific. Thanks, John. And maybe quick follow-up here. Just on the comp expense outlook and maybe comp ratio as well, understanding there's quite a bit of investment into the business right now with new hires, is there any way to kind of parse through kind of how much of the comp ratio right now is investment in people that just haven't really ramped up, yet? And should we still be kind of thinking about a mid-50s comp ratio as kind of the natural state to the extent hiring were not included in the number?
I mean, if you go back to the dark ages nine years ago when I joined the firm and we had a comp ratio at that time in the mid to high-60s, I made a statement which I would still stick by today that we believe that this business can be run with a comp ratio in the sort of mid to upper mid-50s. And at that time, I said we expect to make steady progress towards that. I never said a – we're going to get to X by this year or that year. And I also said that in any given year or two, if we have the opportunity to make significant investments in human capital, which will produce, in our view, significant shareholder value two to three years out, that we would make those investments and forsake a year or two of progress toward that ultimate compensation ratio.
At the beginning of last year, if you recall, in 2016, we had a comp ratio, I believe it was 57.2%. Is that right, Bob? And at the beginning of last year, we said we had a strong hiring year in 2016, which slopped over to 2017 and we expected that we would have a strong hiring year in 2017, so we started accruing at 59%. And ultimately, we had a lower comp ratio, and we're doing the same thing this year because we expect to have a very high recruiting year. Okay?
Got it. Thank you, Ralph, and yeah, congratulations on a great quarter.
Thanks.
Thank you.
Thank you. Our next question is from the line of Mike Needham with Bank of America. Your line is now open.
Hey. Good morning, everyone.
Good morning.
So, I guess, first, thanks for the comments on the Advisory business. I think there's been a fair amount of focus on it given the beat in the quarter. But I was hoping you could help bridge the gap a little bit more between the public pipeline and what you guys are seeing. Is your pipeline of active advisory mandates higher or lower versus a year ago?
We don't disclose that, but thanks for asking.
Is there anything in terms of like...
(01:03:16) strong.
Just strong. Okay. Okay. So, you're not seeing anything changed and – okay. That's fine. The second question I have is excess cash. It's nice to see the dividend raise and a more normal payout ratio, even with that and buying back some stock to offset the ongoing dilution, I think you'll continue to build cash. So, the $500 million that you guys have, how much of that do you view as excess? Are you fine keeping at this level or, at some point, do you want to take it down?
Mike, we still have some buybacks to do just to offset expected dilution for the remainder of the year. So, we'll earn some cash. We'll deploy some cash. We're paying attention to it all the time. Obviously, as our business grows and as we open offices in new countries where we're regulated, the amount of cash that we hold will naturally grow. But we have things to – we have uses for it and the capital return strategy, as Ralph had said earlier, has not changed.
Okay. And then, just last one on hiring at a healthy pace in the areas that you said you would, are you seeing anything change in the labor market? Have you guys been more willing to pay up for talent? Is it just a sign of the platform being attractive for people? And broadly speaking, are these guys expect to be as high contributors as your existing base?
Well, the answer to the second question is we don't know. We hope so and assume so or we wouldn't have hired them, but you never could be absolutely certain. And the answer to the first question is I think the – what seems to be strengthening is the pull of our – I mean, I've always said that people join us for some combination of push and pull. Push really hasn't changed a lot so I have to assume that the reason we're having the amount of dialogue that we're having is that the pull generally of the independent firms and of Evercore specifically is increasing.
Okay. Thank you.
Thank you. There appears to be no questions at this time. I would now like to turn the floor to Ralph Schlosstein for any closing comments.
Thanks very much, and we will talk to you in three months.
This concludes today's Evercore first quarter 2018 financial results conference call. You may now disconnect.