高盛 (GS) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen.

My name is Paul, and I will be your conference facilitator today.

I would like to welcome everyone to the Goldman Sachs second-quarter 2005 earnings conference call.

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Also, this conference is being recorded today, June 16, 2005.

Thank you.

I would now like to turn the conference over to Mr. Andrews.

Please go ahead, sir.

Good morning.

This is John Andrews, Director of Investor Relations.

I would like to welcome you to the Goldman Sachs second-quarter earnings call.

Before handing the call over to David let me remind you that today's call may include forward-looking statements.

These statements represent the firm's belief regarding future events, but 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 the fiscal year ended November, 2004.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transactions 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 audiocast is copyrighted material of The Goldman Sachs Group, Inc. and may not be duplicated, reproduced or rebroadcast without our consent.

Without further ado, let me hand it over to David Viniar, our Chief Financial Officer, for a review of today'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 I will take your questions.

Our second-quarter results reflected a weaker trading environment compared to the first quarter.

Net revenues up $4.8 billion were down 25% from the record first quarter but were nevertheless the fourth highest we have ever recorded.

Net earnings were down 43% from the first quarter and 27% from last year's second quarter to $865 million or $1.71 per diluted share.

Annualized return on average tangible equity was 17%.

I will now review each of our businesses beginning with Investment Banking.

Net revenues in Investment Banking were $815 million, down 9% from the first quarter.

Advisory net revenues were down 7% to $386 million, reflecting a decline in completed M&A volume during the fiscal quarter.

Despite this decline the strength of our client franchise in Investment Banking remains undiminished as we ranked first in completed and second in announced M&A for the first five months of calendar 2005.

The general weakness that characterized the capital markets during much of the quarter also led to a 15% decline in industry-wide announced M&A activity.

Nevertheless, we advised on many significant transactions announced during the quarter, including Pernod's $18 billion offer for Allied Domecq, Federated's $17.5 billion acquisition of May Department Stores and BAE Systems $4.2 billion acquisition of United Defense Industries.

Second quarter underwriting net revenues of $429 million were down 10% from the prior quarter.

Equity underwriting revenues declined 39% to $114 million in the quarter, more than offsetting an 8% increase in debt underwriting revenues to $315 million.

Equity and equity-related underwriting volumes declined around 28% for the industry and 13% for Goldman Sachs during the quarter, reflecting difficult market conditions and weak investor sentiment.

We maintained our leadership position in this business, ranking number one in initial public offerings and number two in Common Stock offerings for calendar 2005 to date.

The firm's Investment Banking backlog increased during the second quarter.

Let me now turn to Trading and Principal Investments, which consists of Fixed Income, Currency and Commodities, or FICC, Equities and Principal Investments.

Trading and Principal Investments produced net revenues of $2.8 billion in the second quarter, down 36% from the first quarter.

Within Trading and Principal Investments, fixed net revenues of $1.5 billion were down 39% from the record first quarter.

A number of major markets experienced a significant change in conditions during the quarter, which has the effect of increasing uncertainty and reducing levels of customer activity.

This was most apparent in the credit business as the market absorbed the impact of a sudden widening of spreads after a multiyear period of tightening before reversing direction in most sectors.

Likewise in our commodities business we saw continued volatility without the clear trend in prices that has existed in recent years in the energy markets.

In interest rates the yield curve generally continued to flatten, although we saw several significant shifts, both up and down in long-term interest rates.

In all of these markets price trends that have been driving customer activity either paused or reversed direction during the quarter, making trading conditions more challenging for all market participants.

As I always remind you, we have a diverse group of businesses within FICC, and the second quarter once again demonstrated this.

We saw weaker performances in credit, commodities and interest rates.

However, currencies improved versus the first quarter, and mortgages, benefiting from robust asset-backed markets, performed well despite being down from a strong first quarter.

Within the equities business second-quarter net revenues of $1.1 billion were down 29% from last quarter.

Equities trading was down 55% to $372 million, and equities commissions rose 2% to $733 million.

All of our major equities businesses, both customer-focused and proprietary were weaker during the quarter as global indices were flat to down and customer activity levels were lower.

Average daily value at risk in the second quarter was $60 million down 8% from the first quarter, reflecting fewer opportunities in the market combined with lower customer trading activity.

Principal Investments produced net revenues of $189 million in the second quarter.

This was driven by 107 million of gains from corporate and real estate investments, as well as a gain of 73 million or $0.05 per share related to our convertible preferred investment in Sumitomo Mitsui Financial Group.

At quarter end our investment in SMFG was carried at fair value of $2.6 billion.

Our corporate portfolio had a carrying value of 1.5 billion, and our real estate portfolio 700 million.

We have largely completed the hedging of the first third of our investment in SMFG.

Now I will turn to Asset Management and Securities Services, which reported record net revenues in the quarter of $1.2 billion, up 4% from the prior quarter.

Within this segment Asset Management net revenues were down 8% to $689 million with increased management fees more than offset by decreased incentive fees in comparison with the first quarter.

Assets under management increased to $490 billion with 10 billion of net inflows offset by 2 billion of market depreciation.

Securities Services net revenues increased 29% to a record $489 million in the second quarter.

This reflected higher global customer balances in securities lending and margin lending, as well as seasonally higher activity levels in Europe.

Now I will turn to expenses.

Compensation expense in the second quarter was $2.4 billion accrued at 50% of net revenues.

Non-compensation expenses of $1.16 billion were up 10% from the first quarter.

The largest single driver was higher non-compensation expenses of consolidated entities held for investment purposes, which amounted to $49 million in the second quarter.

Occupancy expense also increased as a result of $16 million of real estate exit costs related to the relocation of our office space in Chicago.

Excluding these items, non-compensation expenses were up 5% versus the first quarter.

Headcount at the end of the second quarter was approximately 20,900, up very slightly from the first quarter.

Our tax rate to date was approximately 30%, giving a rate of 30.5% for the second quarter.

Excluding the effect of audit settlements, our tax rate would have been approximately 33% for 2005 to date.

During the quarter the firm repurchased 15.5 million shares at a total cost of $1.7 billion.

Approximately 20 million shares remain under the firm's authorization.

I've said many times in the past that our business can be challenging to forecast accurately, and the second quarter was no exception.

Changed conditions in credit, commodities, interest rate and equities markets gave rise to a less favorable environment than we saw in our record first quarter.

However, once again our diversity, particularly within FICC, was critically important.

Although several major businesses performed less well, we produced net revenues which by historical standards were very strong.

Some businesses performed very well.

Despite concerns about hedge fund performance, Securities Services had a record quarter by a wide margin, reflecting the robust activity levels in this segment of the market.

Asset Management also performed strongly with net revenues higher than they have ever been outside of the seasonally strong first quarters of 2004 and 2005.

Within Investment Banking debt underwriting benefited from increased mortgage activity that equity underwriting had a tougher quarter given challenging markets.

We take comfort from the fact that our backlog has continued to increase and look forward to growth in strategic M&A activity alongside the very active financial sponsor market.

As with other businesses, we will be relying on continued economic growth in favorable markets.

While there have been some dislocations over the last few months, we have not seen a major change in economic activity, and accordingly we remain optimistic that markets will catch up with performance in the economy rather than the other way around.

Looking forward, we remain very confident in our competitive position in the strength of our client relationships.

We know that we are in a series of businesses that over time have shown excellent growth characteristics despite their sensitivity in near-term market shifts, as well as the business cycle.

As I have pointed out before, changes in our net revenues from quarter-to-quarter can belie the fact that our business has grown in all but two of the last ten years.

This is a testament to the breadth of our franchise, which we believe will continue to be the critical driver for our success.

Thank you, and now I would like to take the questions.

(OPERATOR INSTRUCTIONS) Glenn Schorr with UBS.

Good morning.

Maybe start out with -- in banking.

And you said a couple of times that it's up from last quarter, and you gave a little color.

Maybe give a little bit more in terms of where are we relative to other points in good banking times because some of the other companies that reported had some really positive comments, even talked about record pipelines?

And then maybe follow up with why is it so good?

In other words, what has changed in the last couple of weeks that all of a sudden there is this huge backlog, or has it been kind of subtly brewing and it is just timing?

Okay.

A couple of things I would say, Glenn.

First of all, as you know, we don't disclose the absolute level of our backlog.

But I will say that activity levels in Investment Banking were up quite a bit.

And if the backlog turns into revenue, which we have no reason to believe it won't as long as the economy stays strong, it will be quite constructive for the firm going forward.

The backlog was up quite broadly.

It was not in any one region or business or product.

It was up across the board in all regions, all products, all industries.

I wouldn't say it was really just over the last couple of weeks.

If you look over the course of the year our backlog has been increasing pretty steadily over the course of this year, and go back over the course of last year, as well.

I would say the trend is more activity in Investment Banking, and as CEOs become more confident, more comfortable with the economy, more outward looking rather than inward looking, I would expect we're pretty optimistic going forward.

Okay.

Shift over to Securities Services.

Baird (ph) happens to report their balances average end and period end.

They show a big flow up on period end.

I think a lot of that has to do with convert-arb, but curious to know if you saw that same phenomenon.

And then the other part is I appreciate that you're not going to disclose it, but if you can give us a bigger than a breadbox -- big pickup in Securities Services, how much of that is Goldman's business is doing great, and how much was the seasonal component in the dividend recapture business?

First of all, I don't believe our period end was down.

So if there is anything different, I will get back to you.

But I don't believe it was down.

I believe it was up.

The business would have been at record levels without any of the seasonal increases.

But you know, there was some increase in their due to the fact that there are some seasonal increases in the second quarter, and there are every year because of some of the activity that takes place in Europe.

But it grew very nicely even without that.

Okay, last quick one.

You mentioned fourth best quarter on the revenue front.

I think things actually, if this is as bad as it gets, it's pretty good.

But the problem is equity grows at a pretty fast pace, and so the ROEs have been grinding lower.

And I appreciate that you bought back 1.6 billion, but how far do you take it?

How do you think about balancing the two, especially as the ROEs are probably below where you would like them to be?

That is a very good question.

I actually am surprised it took until the third question for you to ask it.

I thought it --.

Best for the last.

I thought it would be the first one.

As you know, we announced earlier this year -- we have talked about this -- earlier this year a 40 million share buyback.

We have bought back about half of that.

It is over and above what we have been doing, which was just to keep our share count constant from comp.

And it is a balancing act.

We continue to see good growth opportunities in a lot of our businesses, but as we continue to earn money pretty quickly, our capital is growing probably more quickly than we can put it to work.

So we are going to buy back some additional shares over and above just what it takes to keep the share count constant.

We will certainly, I wouldn't say we will necessarily reduce our capital, but we will slow down the growth of it.

But the balance is we continue to see really, really good opportunities out there for growth in many of our businesses.

And so it is a constant thing we look at and balance.

There is no magic answer to it.

Okay.

Thanks Dave.

William Tanona with J.P. Morgan.

Good morning, guys.

I was wondering if you could kind of help us kind of rank order, if you think about your FICC businesses in terms of the order of magnitude of decline that we might have seen in the first quarter to second quarter.

I know you said currencies were up, but if you could kind of help us gauge was it commodities, rates, credit mortgages?

Or what was kind of the sequence in terms of magnitude of decline sequentially?

I am going to be pretty accurate here.

The ranking probably was credit, commodities, rates, mortgages, currencies from biggest decline to increase.

Okay.

Great.

When you think about the environment, it seems like June, while it's still early, seems to be a little bit more of a favorable trading environment, particularly on the fixed-income side relative to the April-May time frame.

Just wanted to get your kind of early read on what the environment trends are like this far in June.

I think what you said was accurate.

It is too early to say.

We are really only two weeks into the quarter.

But it is a bit better.

I would emphasize a bit.

It feels like it is trending in the right way, but it is only two weeks into the quarter, so I don't take a lot of comfort from that.

Okay.

And lastly, in terms of the tax rate, I don't know if you mentioned this or not, but should we assume the 33% kind of for the back half again for the year?

Yes, that's our best estimate as we sit here right now.

Great, thank you.

Guy Moszkowski with Merrill Lynch.

Good morning.

I just wanted to come back to the non-personnel expenses during the quarter, and in particular the consolidated, the non-comp expenses of consolidated investments.

Was there a change in accounting policy or accounting rules there for you?

And maybe you could give us a little bit more color on that, and if there was, do you get to consolidate their revenues, too?

The answer to those two questions are no and yes.

There was no change in rules, but we made a couple of investments in entities, which brought us over the threshold to have to consolidate them.

The reason that we break them out is not really to break out those expenses.

It is that we want to break out the other expenses.

The expenses from the entities that we have to consolidate really are not expenses of operating Goldman Sachs, and we wanted you to be able to see the expenses of, the trends in expenses of operating Goldman Sachs.

You should generally assume that wherever you see an amount of expenses from consolidated entities there is an equal amount of revenues that are within the revenue line.

But they are so immaterial to the revenues and to any line it wasn't worth breaking them out, whereas we just didn't want to confuse anyone because they are half of the increase in expenses.

And so that is why we wanted to show them to you.

And so it is really looking at what is left that is important.

Gotcha.

Just so that I understand the geography, is the revenue in other somewhere?

The revenue is, I believe, largely within FICC trading.

Oh, okay.

It's about around $50 million out of 1.5 billion, which is -- that's why it is so immaterial within FICC trading.

But the investment, the revenue expense from the consolidation is not why we make the investment.

It is really for the capital appreciation that we hope will happen when we ultimately sell it.

Of course.

It's just if there is an offset, that is somehow more reassuring than if it is just a new expense item.

Oh, no, there is roughly an equal offset.

In terms of your guidance on non-personnel expenses, you had said last quarter to think of it as a little bit north probably of $1 billion, perhaps affected by activity levels.

How would you modify that now that you have had to consolidate these items?

Well, that is going to be a number that is going to jump around, the consolidated number.

If you leave that out and you leave out the other charges, you get to a number this quarter where I was off by about $40 million on 1 billion 50, which is closer than my usual predictions.

And I still think we will be around there.

The expenses from consolidated investments is going to jump around as we -- we'll make an investment.

That might go up.

We will sell the investment.

It might go down.

So I think that number will jump around.

I can tell you that given an investment that we have made that we don't expect to sell in the third quarter, and given some of the things we know, I expect that the number will be a little bit north of 100 million next quarter.

But again there will be an equal expense, an equal revenue.

But it could be vastly different in the fourth quarter up or down.

But we will break it out for you so you'll see it every quarter, and you will be able to see what the trend in expenses of actually operating Goldman Sachs are.

Okay, that's helpful.

In Securities Services, can you give us a sense for how much of the improvement that we saw that was pretty impressive, you would attribute to higher short-term rates as opposed to volumes and customer assets in custody?

I actually don't' know the answer to that question.

I will see if we can calculate it and get back to you, but offhand I actually don't know.

But I will tell you there was both.

The increase in short-term rates was there, but there was also we had record volumes, record balances.

So it was a combination of those two factors.

But we will try and break it out and get back to you.

That's helpful.

Thanks.

Finally, on share repurchase, it would appear like the number of shares that you repurchased got pretty close to explaining the reduction of 9 million in the average count.

Obviously it depends on timing.

Was there any effect of the reduction in your share price, as well, because of the equivalents and stuff, or is it really just the share repurchase?

No, it's the combination of the two.

It is both.

One of the hard things about share count is it is affected by share price.

It is going to vary by that, and plus we will have the effect of share repurchase.

Okay.

Well, listen, thanks Dave.

Appreciate it.

Chris Meyer with Morgan Stanley.

Good morning, Dave.

We have heard some comments, not only from yourselves, but from a number of different participants in the fixed income trading business just how difficult the quarter -- the second quarter -- was, and it at least doesn't seem to be coming true in the numbers that are reported thus far.

I wouldn't say 1.5 billion is a bad number at all.

But maybe you can just give us a sense if in an ordinary quarter you would expect three days of revenues to be below your value at risk.

Can you give us a sense in the second quarter how many days in the quarter you have that were below your value at risk?

You'll see it in the Q, but I'll tell you, it was none?

None?

Yes, zero?

So this is -- I mean, we're only talking about an event in the second quarter which was less than like a one standard deviation event?

The quarter was not, despite certain market rumors of big losses that were out there, the issue in the quarter was lack of activity.

And you said it better than I could; it's not that this was a bad quarter in FICC, we had $1.5 billion of revenues, but compared to the really buoyant quarters we had had in the last several quarters where there was so much activity, it was just down from there.

That's useful.

The problem though is that from Lehman and Bear in last two days we've heard that customer activity was the one that was good, and that directional trading was the one that was difficult.

I don't like to comment on what our competitors say.

I will say that -- I'll say two things.

One, they had good quarters, they executed well, they're good firms.

And the other is I would say that the bulk of their business is in a section of the FICC business that is still quite active.

So to the extent you saw weakness, you're saying it was mostly a slowdown in client activity as opposed to trading losses on directional trading?

Yes.

Okay.

And then David, just on equity trading, I've asked you this question before.

It is proving to be, at least the equity trading, but I know we're supposed to combine commissions and trading to get a full sense of the equity business, but the trading business in particular seems pretty volatile.

I know last quarter you said it was strong because Europe and derivatives were pretty strong.

My understanding is that they were still quite strong this quarter.

So can you just give us some sense as to why the equity trading piece of your equity capital markets was down as much as it was?

No.

The equity trading -- I would actually tell you tends to be very levered to the direction of the market.

One of the things you will see, and I think if you go back over the last several quarters you'll probably see this is when the markets are up and customers feel good about the market and the direction of the market, there tends to be a lot more transaction volume.

You see that in the shares business.

You especially see that in the derivatives business.

And a quarter like we just had, where you had stagnant to down markets with pretty negative sentiment, you see people sitting on the sideline.

You will see that pretty much across the board.

You see in the first quarter where we had pretty good markets, you saw (indiscernible) trading results.

If you go back to last year, you will see that our equity trading in the first quarter was quite good, and if you remember back that far, the equity markets were actually pretty good in the first quarter last year.

The middle of last year, the two quarters in the middle you had down markets, very negative sentiment.

And you'll see our equity trading business was down.

There tends to be a pretty high correlation between activity levels and the direction of the markets.

That's helpful, thanks.

Maybe just finally, on that issue, I know you probably won't tell us if you lost money on the Lazard transaction and trading or not, but would that --?

You're correct.

I won't.

Would that show up in the equity trading or the equity underwriting line?

It would have -- we would have wrapped it all together with the fees in the equity underwriting line, but you should not think that there was anything material going on.

Okay.

Good.

Thanks, Dave.

That was useful.

Mark Constant with Lehman Brothers.

Good morning, David.

I just wanted to drill down on a couple of those pieces you have touched on.

One in particular, Securities Services since it was up 42% even year-over-year, so excluding the seasonal effect I guess -- you mentioned rates.

You mentioned balances, but it would seem that the magnitude is bigger than that.

Is there also something about the nature of the business mix during the quarter, positioning during the quarter, or is this normal variance in results there?

Am I underweighting one of the pieces, I guess?

No, it was really just growth in the overall business.

The balances were up.

The average balances were up pretty well.

Activity levels were up.

Our share was up.

The business just continues to do extremely well.

So the higher sort of implicit contribution from net interest income isn't particularly indicative of anything but those balance and rate effects?

Correct.

Okay.

The SMFG mark in the quarter, I assume that you also got some benefit from the hedges you already had going into the quarter, as well as the accretion of the liquidity discount in there, but just to clarify the disclosure for the number that you put in the Q, is that before the expected hedge benefits?

I think it was 245 million for a 10% decline.

I know you say it's not linear, but I think that was the last number in the last Q.

Yes, that includes the effect of the hedges, and you will see in this quarter, obviously we hedged more across this quarter, so you will see it again in the Q.

Okay, so if you hedge more, then that number goes down?

Correct.

Okay.

The principal strategist group I believe I recall in the text somewhere -- I can't find it at the moment now -- but did you say that that was up year-over-year, but if I remember a year ago it was a -- you characterized that it is very, very, very slightly positive.

You remember correctly.

It was up from last quarter.

It was up from a low base?

It was an okay quarter in that business, but it wasn't a terrific quarter.

It was down from the first quarter.

Okay, perfect, exactly.

Thank you very much.

(OPERATOR INSTRUCTIONS) Daniel Goldberg with Bear Stearns.

Good morning, David.

Can you just comment -- the headcount was up about 1%.

We have heard industry-wide there could be some pending reductions.

Any thoughts there in terms of your view for headcount by year-end or into '06?

Sure, no thoughts of pending reductions.

What I have said, and we still think that way, is that we were up about 6% last year in headcount.

Remember all of the campus hires will come on board during the third quarter.

So that is usually where you will see the biggest increase.

And I think that using a number similar to last year for expectations, it will be pretty close.

It will be within a couple of percent one way or the other, if you think mid-single digits.

Okay, great.

Just lastly on the non-U.S. business, some of your peers have talked about some significant contribution from their non-U.S. operations.

Can you just comment in terms of the contribution at Goldman?

The international business continued to be quite strong.

We, although it is hard to calculate sometimes because there are a lot of businesses that are cross-border businesses, a good rough number would be about 40% of our business comes from outside the United States and about 60% in the United States.

And did you see any trends that differed from what we saw in the U.S. in terms of the equity or fixed income businesses?

Not really.

The trends were pretty similar.

Okay.

Thank you.

Michael Lipper with Lipper Advisory.

Good morning.

Could you comment at all on the impact on the appeals court determination on underwriting pricing?

Is that going to have any impact going forward?

I don't think so, but again it is always hard for us to comment on ongoing investigation on how it's going to come up and what the results are going to be.

But we don't see anything changing dramatically.

Thank you.

At this time there are no further questions.

Okay.

This is John Andrews again.

We would like to thank you for joining us today.

The call will be available on replay.

The details to get to the replay are found on the end of the press release.

Thank you.

Thank you, ladies and gentlemen, for participating in today's conference.

You may now disconnect.