高盛 (GS) 2003 Q4 法說會逐字稿

Good morning, my name is Paul and I will be your conference facilitator today. I would like to welcome everyone to the fourth 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 answer a question during this time, simply press star then the number 1 on the telephone keypad. To withdraw your question, press the pound key. As a reminder, ladies and gentlemen, this call is being recorded today, December 18, 2003.

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

Paul, thank you, and good morning. This is John Andrews, Director of Investor Relations at Goldman Sachs and I'd like to welcome you to the fourth quarter earnings conference call. I may make a few cautionary remarks and then turn over to David.

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 the forward-looking statements.

For discussion of some of the risks and factors that could affect the future results, please see the description of 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 third quarter of fiscal 2003. I would 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 posted on the investor relations of our website, gs.com. This webcast is copywrited material and may not be duplicated, reproduced, or rebroadcast without our consent. I'll now hand it over to David Viniar to review the quarter's results and full year. David?

Thanks, John. I would like to thank all of you for listening today, and I would also like to take this opportunity to wish everyone happy holidays. Before I discuss our earnings, let me say a few words about our other announcements today.

As you have all heard, the New York Stock Exchange has announced that John Thain, our President and Chief Operating Officer, will become its next Chief Executive Officer. After an extremely distinguished 24 year career at the firm, John will be continuing the Goldman Sachs tradition of service in his move to this critically important institution. I've worked very closely with John for many years and I can say without hesitation that the New York Stock Exchange is very fortunate to have him as their new leader. I'm proud to have worked so closely with the person who has been chosen to head one of the most important institutions in the world. Lloyd Blankfein, until recently one of our vice chairman will replace John as President and Chief Operating Officer of Goldman Sachs and continue as a member of our board.

Many of you have had time to meet Lloyd in the year since we went public and will understand why we are excited to have him continue and expand his leadership role at the firm. Finally, Bob Steel will step down as Vice Chairman early next year after 27 years at Goldman Sachs. We are very happy that we'll continue to benefit from his leadership and relationships as an advisory director of the firm. Goldman Sachs has a long tradition of leaders moving into public service and we are fortunate in having a very deep bench of talent within the firm to take the places they leave.

Now I would like to review our results and afterwards take your questions. We are pleased with our fourth quarter results which capped off a record year for several of our businesses. Quarterly net revenues of four billion dollars were up 7% from the prior quarter. Net earnings of $971 million or -- I'm sorry, net earnings were $971 millions or $1.89 per diluted share. Annualized return on average tangible equity in the fourth quarter was 24.6%. For the full year net revenues of $16 billion or 14% above fiscal 2002 while diluted earnings per share of $5.87 were 46% higher. Return average tangible equity for the year was 20%.

I'll now review each of our businesses. As many of you saw in our 8-K filed last week, we made changes to our business segment reporting commencing with today's earnings release. Simply put we made three principle changes. We reclassified equity commissions from asset management and security services to the equities component of trading in principal investments. We reclassified merchant banking overrides from commissions to principal investments, and we reclassified the matchbook from security services to fixed income currency and commodities. I'll follow this new format in my comments.

Net revenues were $647 million, a 6% decrease from the third quarter. Full year net revenues were $2.7 billion down 4% from fiscal 2002 reflecting continued weakness in investment banking activity. Advisory net revenues for fourth quarter were $303 million, essentially unchanged from third quarter.

Although Global announced M&A increased significantly during the quarter, completed M&A declined 19% for the industry. Goldman Sachs, once again, ranked number in announced and completed M&A on a global basis for calendar 2003 through November. We also advised on seven of the ten largest announced and completed transactions.

During the fourth quarter a number of important transactions closed including the $7.1 billion sale of Sears Credit Card Business to City Group and [Rippa Woods] 262 billion yen acquisition of Japan Telecomm.

Key announced transactions included Banc of America's $49 billion acquisition of Fleet Financial, [Anthem's] $16 billion merger with Well Point and St. Paul's $16 billion merger with Travelers.

Fourth quarter underwriting revenues of $344 million were down 10% from the third quarter. Equities underwriting net revenue declined 4 percent to $189 million, while debt underwriting was down 17% to 155 million.

As with M&A, our underwriting franchise remains very strong. Goldman Sachs ranked first in worldwide equity and equity-related offerings as well as in worldwide RPOs for calendar year through November. During the quarter we underwrite a number of significant transactions including service $400 million IPO, Hutchinson [indiscernible] $5 billion global [indiscernible] and Bristol Meyer Squibb's' $1 billion convertible offering.

The firm's investment banking backlog increased significantly during the fourth quarter, but only slightly from the end of 2002.

Let me now turn to trading and principal investments which consists of fixed income currencies and commodities, or FIC, equities and principal investments. Trading and principal investments produced net revenues of $2.6 billion in the fourth quarter up 12% from the prior quarter.

Full year net revenues were $10.4 billion up 21% as FIC enjoyed another record year and equities and principal investments net revenues improved from fiscal 2002.

Within trading and principal investments, FIC net revenues of $1.1 billion were up 29% from the third quarter, reflecting stronger performances in our currencies and mortgages business. For the full year FIC generated net revenues of $5.6 billion, 20% above 2002's record results.

Within the equities business, fourth quarter net revenues of $1.2 billion were up 6% from last quarter as equities trading improved 14% to 502 million and equities commissions remained flat at $663 million. The equities trading performance was driven primarily by increased net revenues from principal strategies partially offset by lower net revenues from our equities products groups. For the full year equities produced net revenues of $4.3 billion up 7% from fiscal 2002.

Turning to risk. Average daily value at risk in the fourth quarter was $57 million, down 11% from the third quarter. Looking at the components of VAR, average interest rate VAR declined significantly while equities in currency VAR rose and commodities VAR was essentially flat. These changes show, once again, that we regard risk as a scarce resource like people in capital which we allocate based on our assessment of the available opportunities.

Principle investments produced net revenues of $321 million in the fourth quarter. This number is primarily driven by an unrealized gain of 173 million or roughly 15 cents per share on our convertible preferred investment and [indiscernible] financial group.

Principle investments also benefited from the recognition of merchant banking overrides and gains from other corporate and real estate investments. At quarter end our investment in SMFG was carried at fair value of $1.7 billion, our corporate portfolio had a carrying value of $1.3 billion and our real estate portfolio was about $800 million.

Now we'll turn to asset management and security services which reported net revenues in the quarter of $778 million up 2% from the third quarter. Fiscal 2003 net revenues were $2.9 billion up 14% from 2002. Within this segment, asset management net revenues were up 7% to $513 million reflecting higher average assets under management and a full quarter's contribution [indiscernible].

Total assets under management increased 2% from the prior quarter to 373 billion giving market appreciation of 12 billion partially offset by net outflows of 4 billion. This includes a net outflow of $8 billion primarily equity assets related to British coal pension schemes which implements at a planned program of diversification among managers in 2003. I would note that we remain the largest active manager for British [Gulf].

Year-over-year assets under management were up 7% and net revenues rose 12% to a record $1.85 billion.

Security services net revenues were $265 million in the fourth quarter, down 7% from last quarter but still the second best performance in this business.

Now I'll turn to expenses. Compensation expense in the fourth quarter was $1.4 billion giving a full year ratio of compensation to net revenues of 46.2% down from 48.2% in 2002. As in previous years, a portion of our compensation was equity based and for the first time full year results include the expensing of options.

Non-compensation expense of $1.2 billion was 34% higher than in the third quarter, largely reflecting three specific charges. First, in amortization of identifiable and tangible assets, we took an impairment charge of $168 million primarily in respect of option specialist rights. To be clear, these option specialist rights do not relate to the Stock Exchange specialist business. Second, in professional services and other we recognize the provision of $55 million for a number of litigation and regulatory proceedings. Third, we incurred exit costs of $20 million associated with reduction in the firm's global office space, primarily falling in the occupancy expenses line.

Full year non-compensation expense including various fourth quarter charges I've mentioned as well as similar expenses earlier in the year was up 10%. However, if you exclude these items, non-compensation expense for fiscal 2003 would be approximately $3.55 billion, a small decline from last year.

You will notice a new item on our income statement called "Cost of Power Generation." In October we closed our acquisition of East Coast Power including the [Linden] power plant and this number which was $11 million in the fourth quarter includes all the direct costs of the firm's power plant operations as well as associated depreciation and amortization.

Head count at the end of the fourth quarter was approximately 19,500, same as third quarter and down 1% compared to the end of 2002. Excluding the impact of the [Ako] acquisition, head count was down 7% during fiscal 2003.

Our tax rate for fiscal 2003 was 32.4% down from 35% in 2002. This reflects an increase in tax credits as well as a decrease in state and local taxes. During the quarter the firm repurchased 1.4 million shares making a total of 12.2 million for fiscal 2003 and leaving approximately 8.6 million remaining under the firm's existing authorization.

In conclusion, 2003 turned out to be a more favorable operating environment than we expected at the beginning of the year. Interest rates remained low, the yield curve steep, credit spreads continued to tighten and global stock markets improved. Economic growth has resumed in most economies and CEO confidence has improved compared to this time last year.

As we look out to 2004, we remain optimistic that the indicators point to increased corporate activity provided that economic growth continues, stock markets remain favorable and we don't suffer from external shocks. As our leadership in the important businesses show, our investment banking franchise is as strong as ever; however, it is important to remember that investment banking activity remains at low absolute levels and every, any recovery is more likely to be gradual than rapid.

In our trading businesses, as always, we are dependent on the level of activity in the global markets. Goldman Sachs has an exceptionally strong franchise across fixed income currency commodities and equities markets as our results this year demonstrated, but there is no such thing as a trading backlog and we cannot predict activity levels in the future. Of course, whatever the environment, we at Goldman Sachs will remain absolutely committed to our clients and our shareholders in taking advantage of the opportunities that arise. Thank you, and now I'd like to take your questions. Question & Answer

[Caller Instructions] The first question is from Guy Moszkowski with Merrill Lynch.

Hello, David.

Good morning, Guy.

Just a question about the compensation ratios. Obviously you were able to come in for the year at a 46% level which is pretty good. Help us with thinking about the direction of that ratio if there is a change in business mix next year. If the business mix were to shift in favor of equities and M&A, would you expect that compensation ratio to shift or should we only expect the ratio will shift one way or the other if the actual total dollars of net revenues goes up or down significantly?

Very hard to predict where the ratios will come out. As we have said, we expect our ratio will be 50% plus or minus a few percent. You expect that in higher revenue environment that ratio to be down a little, in lower revenue, up a little but it's very, very difficult to predict and I would be misleading you if I thought I could be more accurate than that.

Based on where we see the profitability of the equities businesses and the merger businesses trending, is there any reason to think a business mix shift, in and of itself, causes a difference in that ratio or not?

No. I don't think so. I think as you remember, we live in a competitive environment. We have to pay competitively and all of our businesses are in competitive environments. I wouldn't think a business mix shift would necessarily change the ratio.

That's helpful. Thank you.

Next question is from Henry McVey with Morgan Stanley.

Can you hear me?

Yes, I can, Henry.

On the compensation, I want to make sure we have the accounting right. In the prospective method you would have expensed options for '03 on the restricted stock, it would have been whatever the vesting schedule is knowing that in the prior years, like '01, there was a greater bias toward options and restricted stock?

Everything you said up until that very last phrase about knowing in '01 was definitely accurate. Yes, we expensed options on the prospective method and we expense all of our equity based compensation the same way which is over the service period and our RSUs have always been expensed over the service period, so it would include whatever was vested this year and appropriate amounts from prior years that were appropriate from the service period and this year.

If you had more of an options bias in the prior years and only have to do prospectively for options in '03, right?

Where we had options in the past, those would not have been expensed, and where we had RSUs, those have been expensed consistently through time.

And just on the regional perspective, can you give us color between U.S., Europe and Asia in terms of where you saw the pickup or the declines?

The truth is it's been consistent, Henry. Our business mix has tended over the last several years to range between a third and 40% outside the U.S. and between 2/3 and 60% within the U.S. It might move a little bit quarter to quarter but it's consistent within our businesses. I would say nothing particularly different this quarter.

And a final question, I guess two questions, one is bigger picture. If you look at the asset management and security services becoming a bigger part of the business relative to banking and other things, does that continue to be an area of buildout and with that it looks like to me the fee mix this quarter, we calculated the ratio, last year it was 45 basis points, this year it was 56. What's driving that higher margin shift and is that sustainable?

Two things. First we clearly want to continue to grow our asset management business. It is important to us. It has been growing nicely.

We are one of the more successful firms at gathering assets, so that is clearly a positive development. I wouldn't say that we are doing it at the expense of investment banking or anything like that. Investment banking has obviously gone through a slow period. We would expect when the markets pick up that that pick up as well.

What I would tell you if you look at the mix of our assets, you'll see the asset class that declined was money markets which is the lowest fee-paying asset where the ones that increased more with the higher fee [background noise]. Again, that's something we hope would continue.

Nothing in terms of performance fees that's a good run rate?

There are some performance fees in there but nothing unusual.

Thanks.

Our next question is from Glen Schorr with UBS.

Thanks.

Good morning.

[Indiscernible] obviously has been really good the last two months but last time--last four quarters it's down two up two, at any point given that these heights that were announced, do you consider and can you hedge your position?

First of all, what you said is true. It is volatile. The last couple of quarters have been good. If you look between quarters, there are times it hasn't been as good as the end of the quarters. One of the reasons we want everyone to know what that position is and you can calculate it, it's a large position and it is what it is. We have restrictions on what we can do as far as hedging goes. There are some methods we could use to hedge it, but right now we are comfortable with where we are.

Fair enough. Loan and loan commitments, I don't know if I missed it, did you comment or could you comment on directionally and throw some numbers on it, that's great, on a quarter to quarter basis?

Talking about on Williams street?

Total, actually.

Total amount of our loan commitments has not changed much. It's constant to where it's been the last several quarters and it feels like that's where it should be for now.

That was a bit of a setup. The question I have then is as equity continues to grow and profitability is strong with the better outlook, what does the world need to look like for you to contemplate giving back, returning some of the capital, because clearly that's one of the drags right now obviously fixed incomes taking on a lot of the balance sheet. Is that the answer?

I think what the world would need to look like is for us to get back capital is for us to not have opportunities to employ our capital well. We certainly do not see that now and we don't see that in the foreseeable future.

First of all the FIC environment remains good. That could change but right now you still have low interest rates, deep yield curve, narrow credit spreads, volatile currency markets, volatile commodity markets, so you have a very good environment in FIC.

As the equity business picks up, we expect certain parts of equity business, principal investments, real estate principle investments, we think that there will be ample opportunities for us to employ our capital in high returns. If that changes, we'll give it back.

Fair enough. Last one. Now this might seem off the wall because I don't agree with it, but the ICI came out without even checking with its members and suggested eliminating steppouts essentially, which to me you guys stand to be a great beneficiary of in the future because I don't think---but bottom line if ICI gets their way and you can only pay firms for research in their own dollars, does that have any material impact for Goldman?

You know, you're talking about basically unbundling and paying directly for research and execution. I said this before, I can't judge whether I think that's really going to happen. It certainly has not gained all that much momentum although people thought it would. We are happy for people to pay us for our services so we know what the services are valued--how the services are valued by our clients.

My point is given your great execution platform, I thought you stand to benefit on a go forward if the world unbundles and I guess the ICIs comments made it seem you can't do steppouts, and I thought that would be a net bummer for Goldman.

We are very happy the way the world is now. If it continued, we would continue to operate as we have been operating and continue to have the leading equities franchise. If it changed, we would adapt.

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

I notice you took a good will impairment during the quarter for some specialist--option specialist [steroids]. When you made that decision to recognize that impairment, did that coincide with a broader review of spear leads good will or a kind of year end thing, a process you look at or something along those lines?

Let me be clear and I apologize if I was confusing. The impairment charge was for intangible assets, not good will. Intangible assets relating primarily to option specialist rights. We acquired a series of option specialist rights as part of spear lead and as part of some other acquisitions and those are intangibles that amortize over time, not good will and we did a review of those and we found that given some of the changes in options trading platforms they were impaired--were no longer [indiscernible] where we had them on our balance sheets, so we took an impairment charge there.

Good will on the other hand we do test good will. We do the appropriate calculation to make sure there's no impairment of our good will including the good will from spear leads. We have done that test, and there is no impairment.

That's encouraging. Also you mentioned that your banking backlog was up which was meaningful during the quarter but not so much from year end. Any color where the improvement from the backlogs came during the quarter or why it was not up more year over year? Is it because fixed incomes doesn't look as good?

The reason it was not up as much for the year, it was a pretty slow year for investment banking transactions and it declined further----the volume of transactions declined further as the year went on through the first three quarters so our backlog was declining with it until the fourth quarter when things started to pick up again. In the fourth quarter we started to see a pickup in transactions across the board, both merger transactions as well as equity underwriting transactions.

Could you volunteer an order of magnitude in M&A or equity?

No.

Thanks.

Our next question is from Richard Strauss with Deutsche Banc.

Good morning. Is Bob Steel going to be the interim head of second equities trading in the period where Lloyd becomes number two and before he steps down next year?

No. Maybe officially for a period of a few days but otherwise, no. Bob will be stepping down as a Vice Chairman kind of at the same time John is going to the Stock Exchange and Lloyd is becoming the new Chief Operating Officer.

Have you announced who is going to replace Lloyd and Bob in that role?

We have not made that announcement, but as you especially know, we have a lot of good people in those areas, extremely active in the day-to-day management.

Right. And looking at the decrease in VAR, does that---presumably there's a 30% decline in your VAR related to interest rates. On the one hand you could say you probably left a lot of---or you left revenue on the table this time. You made a strategic decision. Is this a change in view in terms of how you view the fixed income markets going forward?

No. I'll say a couple of things. First of all, we have always left money on the table when we weren't bigger in places that did well. We at all times look at what we think the opportunities are. As you know our risk is going to decrease and increase over time and shift from place to place where we see the opportunities.

It doesn't mean we have any shift in philosophy. It only means we saw on average fewer opportunities in the interest rate area in the fourth quarter than in the third quarter. Doesn't mean we won't see more in the first quarter. It's a fluid business. We move our risk around like we move our capital and where we see opportunities, well put our resources.

Thank you.

Our next question is from Mark Constant with Lehman Brothers.

Is the British coal diversification process done now?

As far as we know, yes.

The revenues from the east coast, our arrangement, are those in FIC PTs?

Yes, they are.

And in terms of tax rate among the other things impossible to predict in your business, is there any known reason why we should expect it to be materially higher or lower in '04 vs. '03?

No, we know nothing to cause us to think it will be different than where it was at the end of the year.

Can you give us a subjective sense as to how a percentage of total compensation for the year, equity as a percentage of total and options, has the percentage of equity changed?

I can be more accurate on the second question than the first and it's easy. Options were a very, very small percentage of compensations this year and what the percentage of equity was, I actually don't know it off hand but we can get back to you.

Thank you very much.

And, ladies and gentlemen, press star then the number 1 on your telephone keypads if you would like to ask a question. Our next response is from James Mitchell with Buckingham Research.

Two quick questions, one on the security servicing side. Margin debt and stock borrow and stock loan numbers were up this quarter, so I wonder why you had a fall off there. And equity trading, you had a good quarter while the volatility in the U.S. was down, was it more international driven or arbitrage driven or what?

I'll do them in order. In security services, if you go back and you look at our quarterly revenues and security services, you will always see a pop in the third quarter and it is the one part of our business where there is a bit of a seasonal pop. A dividend season in Europe and some of the financing trades. Security services business tend to be done in the third quarter. The second best quarter we have ever had. If you normalize for the third quarter pop, you actually see things continue to improve.

And equities trading, one thing we said, principle strategies positive in the quarter, the thing that is good for us is that activity levels in general in the equities business are increasing and have been increasing throughout the course of the year and when activity levels are higher, our clients want to do things---they want to buy, they want to sell, they want to hedge, and that generally will lead to better trading results for us.

Was it stronger in general versus U.S.?

Nothing specific there.

Thanks.

You're welcome.

We have a follow-up response from Mark Constant with Lehman Brothers.

I was trying not to be greedy there.

that's okay. Ask away.

Is there a particular reason when you reconcile the P&L allocation for investment banking to the segment pieces, the net interest income and implied net interest income contribution on the segment side seemed unusually low this quarter, it had been running 90-100 million and it looked like it was around 20-25 this quarter. Just securitization activity?

Mark, I hate to end without answering your question but the truth is I don't know. As you know, we talked about this. It is a way we have to present our financial statements, but we look at all our businesses on a net revenue basis. Whether things are done in cash or done in derivatives--whether it's interest or trading, it doesn't matter to us. We look at the total of our positions and whether they are doing well or poorly. For my own point of view, I don't focus on the net interest piece, I look at the net revenue piece, but I'll have someone do some work and get back to you on it.

We shouldn't see that as a function in any way necessarily of changes in the mortgage business, for example.

Not necessarily.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Andrews, do you have closing remarks?

I'd like to thank everyone for calling in. This call will be available on replay. The details you will find at the end of your earnings press release and would like to wish everyone happy holidays.

Thank you, ladies and gentlemen, for your participation. That does conclude today's call. You may now disconnect.