高盛 (GS) 2003 Q3 法說會逐字稿

Good morning, my name is Paul and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the third quarter 2003 Goldman Sachs earnings conference call.

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

After the speakers' 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.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Andrews, you may begin your conference.

Good morning, this is John Andrews, Director of Investor Relations for Goldman Sachs.

I'd like to welcome you to the last leg of this morning's earnings marathon call sessions.

Let me start with a few comments, then I will hand you to our CFO, David Viniar.

I'd like to remind everybody that today's call may include forward-looking statements.

These statements represent the firm's belief regarding future events that, by their nature, are uncertain and outside of the firm's control.

The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those 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 in our current annual report on form 10-K for our fiscal year ended November 2002 and item 5 in our quarterly report on form 10-Q for the second quarter of fiscal 2003.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog.

You should also read the information on the calculation of non-GAAP financial measures that is posted on the investor relations portion of our website, www.gs.com.

This call is copyrighted material of the 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 like to thank all of you for listening today.

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

Our third quarter results reflect a continuation of the relatively stronger equities markets of last quarter which positively affected a number of our businesses, together with a more challenging FICC environment than we saw in the first half of fiscal 2003, quarterly net revenues were $3.8 billion and net earnings were $677 million, or $1.32 per diluted share, down 3% from the second quarter.

Annualized return average standard equity in the third quarter was 17.8%.

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

Net revenues in investment banking were $687 million, up 4% from last quarter.

Despite a more favorable timing to market, announced and completed M&A activity declined significantly from the second quarter.

Equity underwriting volumes increased but remain at very low absolute levels and debt new issues also declined.

Advisory net revenues for the third quarter were $304 million, up 18% from the second quarter.

We were pleased to retain our number one position in both completed and announced global M&A for calendar 2003 to date.

During the third quarter, several important transactions closed in which we were an advisor, including TNK's $7.6 billion sale of oil assets to BP, Credit Lyonnais' $16 billion sale to Credit Agricole and Merck's $6.8 billion spinoff of Medco.

Announced transactions included the $5.5 billion sale of Pechiney to Alcan, Ripplewood's $2.2 billion acquisition of Japan Telecom from Vodafone and the $5 billion sale of Sears Credit Card business to Citigroup.

Third quarter underwriting net revenues of $383 million were down 4% from the second quarter as a significant increase in equity and equity linked underwriting revenues was more than offset by lower debt underwriting.

Once again, Goldman Sachs ranked number one in common stock as well as all equity and equity-related offerings for calendar 2003 to date.

We were the underwriter on a number of important transactions, including IPO's for Yell, Bank Austria Creditanstalt and Citadel Broadcasting, secondary offerings for Chubb and Hewitt as well as large high-yield offerings for Calpe and Vivendi.

During the third quarter, our investment banking backlog decreased; while we continue to see a higher level of corporate confidence and increased dialogue about strategic activity, we cannot predict if and when these will lead to transaction announcements.

Let me now turn to trading and principal investments which consist of FICC, equities and principal investments.

Trading and principal investments produced net revenues of $1.6 billion in the third quarter, down 20% from the second quarter.

With in-trading and principal investments, FICC generated investments of $828 million, down 48% from second quarter.

While credit products, interest rate products and commodities all posted strong results, the rapid steepening of the yield curve led to a substantially weaker performance in the mortgages business than we have had in recent quarters.

In addition, the performance of currencies was significantly weaker.

I have noted many times before that the FICC businesses are unpredictable and change more rapidly than others and the third quarter demonstrated this clearly.

However, the fact that we generated more than $800 million of net revenues in this quarter, despite weak performance in mortgages and currencies, highlights the diversity of our FICC franchise.

Equities trading net revenues were $441 million, essentially unchanged from the second quarter.

World equity markets continued to strengthen during the third quarter although we were, of course, affected by the usual seasonal slow down in August.

Turning to risk, average daily value at risk in the third quarter was $64 million, up 8% from the second quarter.

Looking at the components of VAR, average interest rate and commodities VAR increased during the quarter, equity VAR was flat and currency VAR declined.

Principal investments had net revenues of $346 million for the third quarter.

This number was primarily driven by an unrealized gain of $277 million, or 18 cents per share, on our convertible preferred investment in Sumitomo Mitsui Financial Group, as well as an increase in the fair value of our corporate investment portfolio.

As I've noted in the last two quarters, we mark our investment in estimates via market and you may see further unrealized gains or losses in future periods as SMFG share price changes.

At quarter end, our investment estimate view was carried at fair value of $1.4 billion, our corporate portfolio had a carrying value of approximately $1.2 billion and our real estate portfolio, approximately $800 million.

Now, I will turn to asset management and security services which reported net revenues in the quarter of $1.5 billion, up 13% from the second quarter.

Within this segment, asset management had record net revenues of $481 million up, 19% from the second quarter.

This reflected increased assets under management, as well as a contribution from the completed acquisition of Ayco.

Total assets under management were a record $365 billion reflecting net inflows of $10 billion across all asset classes, $5 billion of market appreciation and $4 billion from the acquisition of Ayco.

Security services had record net revenues of $326 million in the third quarter, up 17% from the second quarter.

These results reflected the more favorable tone in global equity markets which contributed to increased activity levels and higher customer balances in this business.

Commissions increased 8% from the second quarter to $684 million.

This was primarily driven by slightly increased activity levels in our global shares business.

Now, I'll turn to expenses.

Compensation expense in the third quarter was $1.9 billion accrued at 50% of net revenues.

Non compensation expense of $898 million was down 2% from last quarter reflecting decreases in occupancy and depreciation/amortization partially offset by an increase in brokerage and clearing expense.

Last quarter, as you will recall, we took a $36 million charge in our occupancy line related to reductions in our global office space while this quarter, there were no similar charges.

Head count at the end of third quarter was approximately 19,476 up 6% from last quarter and down 1% fiscal year to date.

This number includes slightly over 1,000 employees from the Ayco acquisition.

Excluding Ayco, head count would have been essentially unchanged during the third quarter and down 7% fiscal year to date.

Our tax rate for fiscal 2003 to date was 33%, down from 34% for the first half.

This reflects an increase in tax credits and a change in the firm's geographic earnings mix.

During the quarter, the firm repurchased 3.2 million shares leaving 9.9 million under the current Board authorization.

In conclusion, the third quarter appeared to confirm some of the trends we commented on at the end of the last quarter.

We continue to see an improved tone in the equities market globally which helped our results despite the usual seasonal slow down.

In investment banking, activity levels remain stubbornly low but we believe that the drivers of future activity are intact provided that we continue to see economic growth and favorable market conditions.

Dialogue with CEO's are more active, although we cannot predict whether transactions would follow, I would note, again, that revenues will typically lag increased M&A announcements by two to three quarters.

In FICC, we certainly saw the effects of a rapid move in mortgages and a less favorable environment in currencies but we are encouraged by the continued strength in other parts of this diverse franchise.

Asset management continues to execute well and also benefited from improved equities markets.

Finally, we are pleased to deliver this performance while seeing non compensation expenses decline and firm head count remain flat on a like for like basis.

As always, we cannot predict the environment for our businesses with any certainty but I'm very confident in the strength of Goldman Sachs franchise and our long term prospect for success.

Now, I'd like to answer your questions.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question is from Henry McVey with Morgan Stanley.

Good morning.

Good morning, Henry.

Just a couple of quick questions, on the FICC, you said currencies and mortgages, can you be just more specific in terms of was it all across mortgages and then the offsets you said there were other parts of the business that did well, was that high yield?

Can you give us some granularity there?

Sure, as much as I can.

In mortgages, the big issue in mortgages was we have a large customer franchise, we do big customer trades, we did some big customer trades, we were left with inventories relating to those trades when the market moved pretty substantially against us.

That was really the mortgage issue and theother businesses were pretty strong.

The interest rate products business which includes swaps and governments, the credit products market was strong and the commodities market for us was strong, very strong.

So, those three businesses continued to perform very well.

Just a couple.

I assume on the mortgages it's more commercial than residential?

Yes, that is true.

Then just a couple others, on, the tax rate moved around and then typically you get a little bit of relief on the compensation.

Can you provide us with what your official outlook is there?

Our tax rate through the first three-quarters was 33%.

My expectation, going forward, is that it will be, you know, low 30's.

So, I see no reason it should be anything materially different from where it is and compensation, we're accruing at 50% because we don't know anything that should cause us to believe it is going to be different.

Where it actually comes in, at the end of the fourth quarter, as you know, lots of compensation is done at year end, so, if it is different we'll change it in the fourth quarter but there is nothing that makes us believe that today.

Just a final question, did it look like the prime brokerage business picked up, you said you had record results in securities services.

What were you seeing there that gave you the sequential year-over-year acceleration?

Sure, more activity as the markets improved, greater customer balances.

Good.

Thank you.

You're welcome.

Your next question is from Guy Moszkowski with Merrill Lynch.

Good morning, David.

Hi, Guy.

Was there any concentration in terms of timing during the quarter of the issues that detracted from fixed income performance relative to what we saw last quarter or was it the trades that you talked about, was it mostly in, you know, August, late August, anything like that?

If you look at the environment, it's pretty easy to see that things were much more attractive in the first half of the quarter than they were starting, you know, towards the end of July and going through most of August.

Okay.

So, it was pretty much sort of over that period that this has happened?

Yes.

You talked about a decline in the back logs, generally, in one line in the release.

Can you give us a little bit more color on what you're seeing there?

Yeah.

You know, a couple of things I would say and I don't want to either overplay or underplay this.

Our backlog was down, you know, we calculate our backlog on a revenue basis and it is based on transactions debt we have already, you know, assignments have already been given with, you know, probabilities of closing and revenue.

One thing that you need to think about is that in the current environment, a lot of financing transactions actually happen without ever going into the backlog because they tend to come up and be done rather quickly.

So, it is a little bit less relevant than it has been in the past but, again, I don't want to minimize it and, you know, one thing as I said, while we are seeing a lot more dialogue, we have not seen an increase in activity in the merger market.

Announced volumes were down again in the quarter and so the pick up in economic activity has not yet translated into transactions.

Fair enough.

How has VAR trended, if you can comment on this at all, since the end of the quarter, particularly in debt markets?

I can't comment on how it trended since the end of the quarter but, you know, it did trend down over last quarter which is why, although it was higher on average, we said we saw greater opportunities in the first half of the quarter than in the second half.

Fair enough and then, finally, are you expecting or is there any reason for us to expect seasonal slowness in fixed income in the fourth quarter that we have often seen in the past or is there some reason to believe that, at least from a customer activity point of view, that would not happen this year?

It is always very hard to predict what is going to happen in the FICC business but, you know, when you look environmentally at FICC right now, although, you know, probably not quite as bouyant as it was in the first half of the year, when you look at the FICC environment right now, you still have low absolute levels of rates, a steep yield curve, a Fed that has signaled as well as they can that their policies are going to be benign and narrow credit spreads.

So, you have a pretty good environment and we are still optimistic about the business, though it is very hard to predict.

Great, thanks very much, David.

You are welcome.

Your next question is from Glenn Schorr with UBS.

Thanks, hey Dave.

Hey, Glenn.

I see in the footnotes, William Street, it looks like there was a little bit more funding in the quarter or issued to new clients, is that correct?

No more funding but William Street did more transactions.

More transactions, like 400 million worth, something like that?

The total transactions that are done through, kind of at the end of the quarter, is somewhere a little bit north of $2 billion.

Okay, and is there if I reason to expect then, further funding?

I guess that's transparent to us anyway.

You'll see it when it happens.

We do them publicly, so you will see it.

I noticed the private portfolio didn't change in the principal investment line but the markets were better, the convert obviously did great, the public piece went up with the market.

Is that just is, as there's haircuts that kind of help that smooth that over time, or were there actual transactions in the private piece?

Our policy on public's is our definition of fair value there is we will only mark something up if there is a demonstrable reason for us to do it.

So, either it has to become public, has to be sold, or there has to be a third-party transaction in the company at a higher valuation.

We will mark them down if we believe that they are impaired but only mark them up if there is a transaction that shows us that.

So, you would typically not see very much upward change in the private portfolio.

Great.

That's excellent.

Switching over, in VAR, you guys are the only ones that do a 95% confidence level disclosure.

Just in general terms, if I were to think about it from 95 to 99 to make it apples to apples with other disclosures, in terms of magnitude, increases it 20%, 30% increase?

First, I actually think most people do 95%, so I think it's relatively consistent but I'm not positive but let me get back to you and give you the exact numbers

No problem.

Your comments on Sumimoto, you mentioned 18 cents.

Do you apply like a 50% margin to that, is that how you get there?

We apply comp and taxes.

Comp and taxes, got it.

Just like everything else.

Super.

Last tid bit.

Have you had much success and I think you guys have been pursuing some execution-only brokerage relationships, whether it be through the client side or the boutique side, is that a trend that continues to develop?

I know you've had some success there.

We have, over the past several years, entered into some agreements with certain brokers to have them sell some of our products and that continues to be a way for us to occasionally access the retail market without having to build up a big retail expense base and so I think we will do that opportunistically where we think it makes sense

Got it.

But not a humongous contributor but a trend?

As you said, not a humongous contributor but we'll do it where we see it opportunistically, I don't think it is going to be a really, really big business for us but it is something we will do if it is attractive.

Got it.

Thank you very much for the 12-minute intro.

You're welcome.

Again, ladies and gentlemen, as a reminder, if you do have any questions, press star then the number 1 on your telephone keypad.

Your next question is from Mark Constant with Lehman Brothers.

Good morning, David.

Good morning, Mark.

Wondered if could you help me reconcile, I thought this had worked perfectly in the past and maybe I'm missing a piece, the unrealized gain of $277 million for SMFG against the change in the carrying value, I think it was like 25 million greater this quarter, was there an incremental investment or is that apples and oranges in some way?

Yeah, the biggest difference and if you want off line, I'll walk you through it exactly, has to do with currency translation.

Our investment is in yen, not in dollars and so there's a difference between how we recognize the P&L and the carrying value.

So, we would see a commensurate change in the carrying value in yen denominated debt as opposed to the...?

That's exactly right.

Got it.

If we looked at your, the net trading revenue histogram that you always have, the nature of what you were discussing about the moving rates and the inventories in the mortgage positions, would that have a more leftward skew than usual this quarter, is that a fair assumption?

Yes.

Okay, and this may be the hardest in the bunch.

Any comment you can make with respect to all the inquiries around the NYC and specialists business, not from the standpoint of, you know, specifics but more so as your sense that they are, as opposed to maybe what we're reading in the paper, doing more of a reasonable diligence or do you really have the sense here that they're talking about meaningful structural market structure type changes as a result of these inquiries?

I'm sorry, I really can't comment on something that's, you know, ongoing investigation.

All I can say is, as usual, we cooperate with whatever investigations are going on and it's kind of early to tell.

Okay.

Thanks.

You're welcome.

Your next question is from Richard Strauss with Deutsche Banc.

Good morning, David.

Good morning, Richard.

Just a couple of questions here.

I just want to make sure that this is not prop trading that maybe fell flat during the quarter because I'm just trying to reconcile from your comments with some of your competitors.

For instance, one of them said that actually they were covered quite nicely in the mortgage market because the new coupon attracted a new class of investors and also, there was a lot of writing off of hedges among corporate clients and there was a lot of activity from that way and I assume they had big inventories as well, so maybe you could just comment on the prop side of this business, too?

Richard, first, as you know, we don't break down the difference between prop trading and customer trading and it's sometimes hard to break it down.

Some of the transactions, for example, that, you know, I was mentioning, we do a trade with a customer and end up with inventory, we end up with risk but we're sitting there with the risk and, you know, for the period of time we have the risk, is that a prop trade or a customer trade?

Hard to say.

They start with customer trades.

Their position is that it's not like we had a view on the market and that's the case here but we do customer transactions, we had ended up with inventory and the markets went against us and that's largely what happened during the quarter in the mortgage business.

Okay and then also, if we look at your spread income it went up another 6% to actually over to about $920 million now.

The increase there, is that mostly related to FICC, or is that equal?

I mean, you had big gains in securities services as well, how should we think about that?

When you say our spread income, do you mean our net interest?

Yes, your net interest FICC.

We don't spend a lot of time on that because when we really view our revenues, we view it inclusive of the interest net and that's the way we run the business.

So, we can try and get back to you but that's not something we spend a lot of time on.

Okay, the 20% increase in the rate component of your VAR during the quarter, I assume that that really reflects your view, your bullish view you went over in the beginning of the call in terms of when the Fed is going to move, the steepness of the yield curve that you continue to think that this is, I mean, that is basically the bet that you're making?

No, what it largely reflected, Richard, is that we saw, remember, this is an average number.

We saw greater opportunities in those areas in the early part of the quarter and I think you'll see that we saw fewer opportunities later in the quarter.

Okay and then finally, with regard to the, you know, Eric Mendich leaving, Phil Murphy, I realize it's the time of year where a lot of the partners make decisions to leave but maybe you could just give us some color in terms of how does this year's departures stack up with previous years?

I don't think you're going to see anything unusual.

You know that the partners at Goldman Sachs leave.

If you go back over our history, you will see a relatively consistent percentage that leave over every two-year cycle, some in the interim year, some at the end of two years, and, you know, it's not a bad thing for Goldman Sachs when partners leave.

Our partners work very hard, they only work a certain amount of time and we have a very, very good group of people always waiting to come up and take their spot.

Before we went public, the problem was when partners left, capital left with them.

That doesn't happen now, so this is just part of the normal turnover that we have in the partnership of Goldman Sachs, so I don't expect anything unusual.

We're always sad, in a way, when senior people like Phil and Eric leave but we know they're not going to work forever.

Thank you.

You're welcome.

Your next question is from Michael Lipper with Lipper Advisory Services.

Good morning.

Good morning.

Can you shed some light on what's going to be different for you owning Ayco than past owners?

Do you expect to handle them differently?

The truth is, the answer to that question is no, we do not expect to handle them differently.

We think they have a terrific business servicing their customers and clients and we're going, you know, it is going to run largely independently and continue providing the same services as they have always provided before.

We think it's a very good fit with our private wealth business.

We think we will, therefore, be able to offer more attractive services to customers than we're able to before because of Ayco but it's going to offer the same services, just hopefully to more customers.

Thank you.

You're welcome.

Your next question is from Steven Gravis with Dreyfuss.

Good morning, David.

If I could just follow up on the mortgage issue, I'm sure you don't want to discuss a figure but can you give us sort of a bread box size for how that spike in rates might have impacted you and secondly, I'm wondering why that inventory wasn't hedged, given the strong enduring business that you have.

Two things, you were right at the beginning of your comment, I can't give you a number but it obviously did not make the results as attractive as they have been in the past and hedges are less than perfect.

And, you know, you saw big gaps between what happened in the mortgage markets in some of the markets where things are hedged.

Just by eye balling it, considering your FICC went down, you know, 30, 40% regardless of which way you want to compare it, I mean, obviously other things were involved in that but it seems like a pretty sizeable less than perfect hedge.

Again, I don't want to over or understate this.

That was not the only thing that happened in the mortgage business and, you know, we had trades that, as I said, went against us, the currency business was also off.

So, I don't want to overstate that it was just caused by a few trades but that was the primary driver in the business.

So, was it half of the shortfall?

Steve, we don't go into that detail.

I mean, the problem is, you know, without information to the contrary, I think we all look at this and say, you know, see Goldman Sachs is a proprietary hedge fund and that you went the wrong way.

I'm trying to understand whether there's a different explanation?

It's interesting and I'll, look, we have told you repeatedly, even though I say our FICC business has probably out performed in almost every quarter for the last several years, that is not going to happen every quarter.

Our business involves taking risk, it's very hard to separate out prop risk versus customer risk.

As you said, we had the risk, the risk was not caused by us wanting to take a view on the market, it was caused by largely customer trades but we still had risks.

You know, maybe we could have sold it sooner, maybe we could have hedged it better but we didn't and so, you know, it was, as I said, less attractive results.

Thanks, David.

You're welcome.

There are no further questions at this time.

I'd now like to turn the conference back over to Mr. Andrews.

I'd like to thank everybody for calling in today.

If you have any questions, feel free to phone us up separately.

Thank you, ladies and gentlemen, for your participation.

This does conclude today's conference, you may now disconnect.