高盛 (GS) 2003 Q1 法說會逐字稿

Good morning, my name is Paul.

I will be your conference facilitator today.

At this time, I'd like to welcome everyone to the first quarter 2003 Goldman Sachs Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

To withdraw your question, press the pound key.

Thank you, Mr. Andrews, you may begin your conference.

Good morning and welcome to the Goldman Sachs First Quarter Earnings Conference Call.

Today's call may include forward-looking statements, these statements represent the firm's belief regarding future events that are uncertain and outside of the firm's control.

The firm's actual results and financial condition may differ, possibly materially from what's indicated in the forward-looking statements.

For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of certain factors that may affect our business and our current annual report on form 10K for the fiscal year ended November 2002.

I'd also direct you to read the forward-looking disclaimers in our quarterly earnings release particularly as it relates to our backlog and you should also read the information on the calculation of non-GAAP financial measures.

It is posted on the investors relations portion of our website, gs.com.

This audio cast is copyrighted, materials of Goldman Sachs Group Inc. and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chief Financial Officer, David Viniar, will now review the firm's results.

David?

Thanks, John.

I would lake to thank all of you for listening today.

Before I begin my comments on the quarter, all of us at Goldman Sachs are acutely aware of the situation in the Middle East as we make our announcement today.

Our thoughts are with our employees, clients, their family and friends and all the troops who find themselves in the region at this time.

I will now give a brief review of our results and then take your questions.

We're very pleased with the first quarter, which reflects outstanding results in FICC and group performance in other businesses despite the continued challenging corporate and geopolitical environment.

Quarterly net revenues of $4.2 billion were up 45% from last year's fourth quarter.

Net earnings were $662 million or $1.29 per diluted share.

Annualized return on average tangible equity in the first quarter was 18.3%.

I will now review each of our businesses starting with investment banking.

Net revenues in investment banking were $718 million, a 37% increase from last quarter.

We achieved these results despite industry wide declines in global completed M&A and global common stock offerings with IPO activity at extremely low levels.

On the positive side, there was significant convertible issuance and debt offerings grew in virtually every category with global high yield increasing dramatically from the depressed seen in fourth quarter.

Advisory net revenues for the first quarter were $337 million, 13% above the fourth quarter.

While we were pleased to see this improvement in quarterly revenues, there continues to be no sign of a recovery in the advisory business with global announced M&A only up 8% from a very weak fourth quarter.

Our continued strength in this tough environment is illustrated by Goldman Sachs once again ranking number one in announced and completed M & A on a global basis.

During the first quarter, several important transactions closed, on which we an advisor including the $12 billion sale of TRW to Northrup Grumman, Synaire's [ph] $9 billion merger with Telia and the $8 billion sale of American Water Works to RWE.

In addition, a number of significant transactions were announced during the first quarter, including Credit Aggrecult's $17 billion acquisition of Credit Lee & A and T & K's industrial holdings $8 billion agreement with B Fay [ph].

First quarter underwriting negative revenues of $381 million were up 70% from the very weak levels of the fourth quarter.

While primarily equity activity remained muted across the industry with very limited IPO issuance, other underwriting business was active in the first quarter, including convertibles, high yields and mortgages.

Goldman Sachs was number one in equity and equity underwritings for the quarter.

We underwrote several large convertible transactions, including a $4.5 billion offering by Tyco, Deutsche telecom's $2.3 billion euro offering and a $345 billion Japanese yen deal for Sumitomo Mitsui Financial Group.

In high yield, we underwrote a $1.5 billion senior notes offering for Georgia Pacific and a $1 billion offering for Haughton Miflin.

In the first quarter, our investment banking backlog decreased.

Continued concerns about the outlook for the global economy are being exasperated by the situation in the Middle East and it's potential impact on growth.

This uncertainty remains a significant barrier to any meaningful recovery investment banking activity in the near-term.

Let me now turn to trading and principal investments, which consists of fixed income currencies commodities or FICC, equities and principal investments.

Trading and principal investments produced net revenues of $2.15 billion in the first quarter, more than double the prior quarter.

Within trading and principal investments, FICC generated record net revenues of $1.9 billion, up from $793 million last quarter.

The environment for FICC in the first quarter was very strong.

Interest rates remain near record lows, mortgage flows were strong, credit spreads generally tightened, primary issuance continued at very high levels and economic and geopolitical uncertainty led to heightened volume and volatility in currency and commodities markets.

We able to benefit from this environment because of the breadth of our FICC franchise.

We saw strong or record performances in every one of the major businesses within FICC, including the interest rates businesses, credit businesses from investment grade to high yield and distressed as well as mortgages, currencies and commodities.

In equities trading, we're facing a tough operating environment in the quarter with very low levels of primary activity and reduced volumes in volativity in the secondary markets.

In spite of this, net revenues at $349 million were up 71% from the fourth quarter, affected by the very weak markets of September and early October.

This improvement was driven by increased net revenues in equity derivatives and equity arbitrosh.

Now I turn to risk.

Average daily value at risk in the first quarter was $53 million, up 15% from the fourth quarter of 2002 as we took advantage of increased trading opportunities in various markets.

As I said before, we consider risk capacity to be a resource, like people and capital that we allocate carefully based on where the greatest opportunities lie.

Consistent with this approach, you will see that the components of VAR changed from the prior quarter like they did last year.

While VAR is one measure of risk, I want to remind you that we utilize a broad set of risk management tools.

Principle investments produced negative net revenues of $77 million in the first quarter.

Of this negative, $33 million related to our corporate and real estate investment businesses where we took writedowns on the investment portfolio.

The carrying value of our corporate portfolio at the end of the first quarter was approximately $1 billion, while our real estate portfolio was approximately $750 million.

An additional unrealized loss of $44 million or roughly 3 cents per share, was taken on our convertible preferred investment in Sumitomo Mitsui Financial Group.

As you know, this investment is carried at fair value, currently $1.23 billion, which is derived from market data such as SMFG's common stock price and credit spreads and which incorporates impact of transfer restrictions as well as downside protection on the conversion price.

Now we'll turn to asset management and security services which reported net revenues in the quarter of $1.3 billion, down 4% from the fourth quarter.

Within this segment, asset management achieved record net revenues of $455 million, driven by increased incentive income.

Total assets under management were down slightly at $346 billion, as $4 billion of net flows -- net inflows were offset by $6 billion of market depreciation.

We continue to be very pleased with the performance in this business in the difficult equity environment.

Security services net revenues were $251 million in the first quarter, up slightly from last quarter's $246 million.

Commissions declined 18% from the fourth quarter to $612 million.

The decline was caused primarily by lower volumes in customer activity levels, particularly in our global shares businesses.

Now I'll turn to expenses.

Compensation expense in the first quarter was $2.1 billion, accrued at 50% of net revenues.

Noncompensation expense of $1 billion was up 8% from last quarter as declines in most expense categories were more than offset by increases in occupancy as well as professional services and other expenses.

On occupancy, as I said before, we manage our space by balancing current and potential future needs.

In the first quarter, we incurred exit costs of $97 million associated with reductions in the firm's another global office space.

The largest single portion of which related to the firm's exercise of an early termination on the lease in Tanhover Square in New York.

Higher professional services and other expenses included a provision of $100 million for a number of litigation regulatory proceedings.

Head count at the end of the first quarter was approximately 19,000, down 4% from last quarter and 14% from the first quarter of 2002.

We said at the end of last year, we expect our head count will likely remain roughly flat this year, provided we see the beginnings of a recovery during this fiscal year.

Obviously, we constantly reassess our head count in light of the operating environment.

Our tax rate for the first quarter was 35%, the same as for the full fiscal year in 2002.

During the quarter, the firm repurchased 3.9 million shares, leaving 15.7 million under the current board authorization.

In conclusion, we were extremely pleased with our first quarter results.

With increased net revenues, earnings and record performances in several businesses.

However, we remain very cautious on the near-term outlook.

The evolving geopolitical situation is weighing heavily on the markets and we're no more able to predict the pattern of future events than you are.

Rapid movement in energy prices, driven not just by events in the Middle East, but also by the situation in Venezuela, may have far-reaching economic consequences.

At the same time, we have not yet seen any signs of strengthening in the major world economies.

While we continue to see clients opportunistically accessing capital markets, we are conscious this could change rapidly.

The overall equities environment remains depressed and given this backdrop we continue to see risk aversion among corporate CEOs and investors.

With that said, the first quarter demonstrated the strength of our franchise.

We benefited greatly from the breadth of FICC businesses, we continue to grow our asset management revenues and we remain the number one advisor on global mergers and acquisitions and underwriter of equity and equity [INAUDIBLE] securities .

We will continue to serve our clients in these difficult times and work hard to ensure we're active in the businesses that presents the greatest opportunities.

Just as important, we remain confident that the long-term trends driving Goldman Sachs businesses are unchanged.

And finally, our thoughts are, again, with all of those putting their lives at risk in the Middle East at this time.

Now we'd like to answer your question.

At this time I'd like to remind everyone in order to ask please press star then number 1 on your telephone keypad.

Again that's star then the number 1 on your telephone keypad.

Your first question is from Michael Freudenstein with JP Morgan.

Hi.

Good morning, Michael.

How are you?

Good, thanks.

Just trying to get a sense for -- obviously our industry is suffering from both cyclical and secular challenges right now and -- and so I guess from the standpoint of the cyclical, that ones very hard to call, on the secular front, can you give us a sense, I guess institutional equities in particular is a business undergoing some changes both because of the, you know, the change in activity levels but also some of the regulatory changes, maybe give us a sense of where Goldman Sachs is or how you're thinking about making changes in your institutional equities platform.

Well, you know, we are still quite bullish on the equities business in the long-term.

We believe we have probably the broadest equities franchise while volumes -- volumes are quite depressed right now, activity is quite depressed.

We don't believe this is a secular change.

We believe this is a cyclical problem and that the markets will come back.

The activity levels will come back and will continue to be a very good business going forward.

Okay.

Thank you for that.

And just, you know, from the standpoint of your other challenges in the business from the standpoint of, you know, capital commitments on the part of both, you know, issuer clients and investor clients.

You've addressed some of that with the transaction you did with Sumitomo.

Are there any other changes or things you think Goldman may need to do to be able to grapple with the changes?

No, we have always said that we will commit our capital where we think it is important for our clients and where we think it is important for us and where we think the risk and reward make sense.

That we continue to believe that the highest margin most important businesses are rewarded by our clients based quality of execution and expertise in relationships, not on commitment of capital.

One of the reasons why we continue to be number one in the highest margin products, but we do commit capital, we commit it when we think it's necessary and when the risk and reward make sense.

Great.

Thank you.

You're welcome.

Your next question is from Riley Tierney with Fox-Pitt Kelton.

Hi, guys.

Obviously, the revenues were amazing, you know,the quarter.

I was kind of focused on expenses and, you know, there seems to be fairly, you know, sizeable increase in other, which is something with professional services.

Could you -- it sounds like it took a couple of specific charges or additions to reserves during the quarter.

Can you talk about that in general?

Sure it really was one specific charge, it was $100 million provision for basically for legal fees for -- or for litigation costs.

Which appears in the professional services and other line.

And that was for, you know, as you know, we -- we accrue our legal expenses when they are probable and estimatable and we needed to increase that by $100 million in this quarter.

David, also, you mentioned there was an adjustment to the Sumitomo evaluation, can you tell me what that was?

Sure, like everything else we have, we mark the position in SMFG to market.

We own a private convertible preferred, so it does not trade, but we look at various observable inputs, like the stock price, the credit spreads, the transfer restrictions as well as the downside protection we have on the convertibility and, you know, based on those, we -- we come up with an objective way of valuing it and it was down, the value was down about $44 million in the quarter.

Okay.

Thanks very much.

You're welcome.

Your next question is from Henry McVey with Morgan Stanley.

Good morning.

Hey, Henry.

Just a couple of quick questions.

One it looked like the currency bar was up 47% year-over-year but you said in the disclosure that trading in that area -- or results in that area were down.

Is there anything we should know there?

No, again, in the press release, we compare to where they were last year's first quarter.

We said it was down from last year's first quarter.

Now, last year's first quarter, I believe was a record quarter.

So, you should not read into that that currencies had anything other than a very strong quarter, just not quite as strong as last year's first quarter.

You talked about the Sumitomo writedown, I assume that the seize you got from doing the convertible would almost more than offset the writedown.

Whatever we earned would be in the underwriting line.

Okay, and then just could you update us on the subsidiary, is it called Williams?

Where you are in terms of the funding and use of that?

We -- we are in the process of raising the funding right now.

Uh-huh.

And the expectation on that closing is?

Next couple of weeks.

Okay.

Within the next month.

All right.

And then just a couple other quickies, the -- on the -- you got the share count that you listed, the May and the June, have you done any testing just to judge demand in terms of that coming out?

As you know, this has been well planned out, well thought out.

This was not a surprise, we knew exactly what was going to free up last year, this year and next year.

We put programs in place to make sure that there would not be a big, you know, run to sell, we have volume limitations on what can be sold.

Virtually everybody who is getting free shares already has free shares.

If they wanted to sell them, they've been able to sell them.

We don't think this will have a very big affect.

Okay.

And a final one on the noncomp, you said, I think you said noncomp excluding the one-timers would have been flat.

It you're giving some guidance going forward, excluding real estate, which seems to be quarter-to-quarter, would you expect flat to down or how should we think about it?

We are continued to be quite focused on this.

All of what we call the low-hanging fruit is gone.

Uh-huh.

So, it's going to be hard to reduce those expenses dramatically, but we're very focused, line by line on continuing to reduce our noncomp expenses.

And are there things do maybe in Europe, bringing things more back to London or are we at that point where you want to take stuff out in terms of satellite offices...

I think we're really at the, you know, looking at the, you know, the last dollars we can save.

Okay, thanks, guys.

You're welcome.

Your next question is from Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

First question is on commodities.

In your -- your characterization versus the year-ago, you talked about that being basically flat.

How would that -- how would the commodities revenues compare to the fourth quarter?

What I would say about commodities is that it was a strong quarters, it's what I would say about all the businesses in effect.

But it was a -- it was a strong quarter in commodities.

They're up from the fourth quarter of last year.

And it was a very strong quarter in the commodities business.

Fair enough.

You -- you mentioned VAR and I -- I have to say, again, I appreciate the disclosure that you give us in the quarterly release because we don't really get that anywhere else.

The interest rates number, is that inclusive of whatever your VAR would be on credit spreads?

Yeah, I believe so, yes, Guy, that would be within the interest rate category.

Fair enough.

That's where it is.

Okay.

Security services, you had a pretty good year-over-year growth.

If you compare that to the -- the clearance business at Bear Stearns, you could see some evidence of some pretty meaningful price pressure there, I thought.

Are you also experiencing some pricing pressure there and you're just sort of offsetting it with volume and new clients?

What's going on there?

There has been pricing pressure in that business for a while.

There continues to be pricing pressure.

We don't think it's dramatic pricing pressure, but there is some and we do continue to gain market share in the business.

Great.

And finally, your comment about head count, you mentioned that you're down 4% versus the year-end and yet you reiterated the guidance that you would expect to be roughly flat by year-end, if you saw any signs of improvement, should we therefore assume that as soon as we see some signs of improvement you would be rehiring that 4% in some way?

No, here's the way to think about it.

We're down 4% in the first quarter.

As you know, we do a -- you know, most of our hiring from business schools and universities, those people will start during the summer.

Right.

They're not on board yet.

And so, you know, those will in some ways offset it.

And, you know, we will have to see how the year unfolds.

You know, we're still hopeful we will be roughly flat.

I said before, there is probably more risk on the downside than the upside on that.

Thank you very much, appreciate it.

You're welcome.

Your next question is from Mark Constant with Lehman Brothers.

Good morning, I'm trying not to ask you questions I know you can't answer, but there's one I wanted to clarify a little bit just so I can understand.

On the SMFG investment --

Yep.

-- you referenced an economic hedge.

If, I believe this quarter the dollar went down during the yen, would it support the value of the convert, so we would se a smaller, this $44 million is net of the favorable currency conversion, but then I would assume there would be loss on the economic hedge, maybe in principle transactions or something, is that how it works?

No, the hedge is pretty small.

It was basically a currency hedge, Mark.

It's all in there.

It's all in the $44 million line, it's reflective, it's not distorting any other line item?

It's all going to run through principle investments including the effect of that?

It's not being distorted.

Okay.

Thank you.

You're welcome.

Your next question is from Jeff Hart with Sandler O'Neal.

Morning.

Two questions.

One smaller, maybe simpler.

In the equity options market making business, can you -- can you just discuss a little bit whether competition continues to intensify there?

If you're seeing a little bit of an abatement as market share consolidates?

I, unfortunately, that business is a somewhat depressed business now, there is -- there is a lot of competition, spreads are very narrow and, you know, again, it's not a very big business for us, but that business is in a depressed state right now.

Okay.

And as I look --

We're not seeing signs of it getting better right now.

Okay.

As I look forward, this goes for the peer group as well as Goldman Sachs, I'm looking at return levels for the industry, where we're at and may be going.

I wanted to run by you and see your thoughts were as far as what would be required to start boosting Roes back up north of 20%.

Not that they go back to 30%, I have trouble getting there looking at revenue growth and expense controls.

Could you envision a capital structure change or the capital intensity we're experiencing now may be fixed income, cyclical-related as opposed to long-term secular trends?

One of the things you have to remember is the less capital intensive, higher ROE businesses, like investment banking, are in very depressed states right now.

I think what you need to see the returns starting to go up again would be some of the businesses including the merger business, the equity underwriting businesses, recover and go back to, you know, their trend line levels, which we think is going to happen, it's just a question of when.

Would that then imply a reduced need for capital in that environment?

And maybe more share buybacks or something along those lines as opposed to continued earnings being obtained and balance sheet growth?

Very hard to say.

It will depend on what's happening in the capital intensive businesses, but, you know, we expect all of our businesses to grow and so we would just hope that the capital, the less -- the capital intensive businesses continue to grow and the less capital intensive, higher ROE businesses, start to grow faster than they have been.

Okay, thanks.

You're welcome.

There are no further questions at this time.

Mr. Andrews, do you have any further comments?

We'd just like to thank everybody for calling in today and putting with this morning's marathon of conference calls.

The conference call will be available on replay within an hour or two.

The details can be found on the Investor Relations section of our website.

Thank you.

Thank you, ladies and gentlemen, for your participation.

You may now disconnect.