高盛 (GS) 2006 Q1 法說會逐字稿

Good morning.

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

I would like to welcome everyone to the Goldman Sachs first-quarter 2006 earnings conference call.

After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Also, this call is being recorded today, Tuesday, March 14, 2006.

Thank you.

Mr. Andrews, you may begin your conference.

Thank you, Dennis.

Good morning.

This is John Andrews, Director of Investor Relations for Goldman Sachs.

I would like to welcome you to our first-quarter earnings call.

Let me get a few things out of the way before giving this over to David.

I would like to remind you 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 risk factors in our current annual report on Form 10-K for the fiscal year ended November 2005.

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

Thanks, John and I would like to thank all of you for listening today.

I am very pleased to report a record quarter for Goldman Sachs.

Net revenues were $10.34 billion and excluding non-cash expenses of $237 million related to FAS 123 R, net earnings were $2.6 billion and earnings per diluted share were $5.41.

On the same basis, annualized return on tangible equity was 47% and return on common equity was 39%.

Including the non-cash expenses of $237 million, diluted EPS was $5.08, annualized return on tangible equity was 44% and return on common equity was 36%.

These record results could only be possible with strong performances across a wide range of our businesses.

This again underscores the depth and breadth of our client franchise across multiple products and geographies.

They are also a result of our broad and balanced business model, which enabled us to benefit from high levels of customer activity in many different businesses from Investment Banking and Trading to Asset Management and Securities Services.

We benefited this quarter from investments we have made in our franchise over a long period of time and we continue today to make investments if we hope to benefit from in the future.

Of course one quarter's performance, weak or strong, should never be annualized, but the first quarter demonstrates the power of the Goldman Sachs franchise.

I will now review each of our businesses.

Investment Banking had its second-best quarter ever producing net revenues of $1.47 billion, up 55% from the fourth quarter as activity levels picked up materially.

Advisory net revenues for the first quarter were up 35% to a record $736 million as completed M&A rose 31%.

Goldman Sachs ranked first in completed M&A globally for our fiscal year to date.

A number of important transactions closed during the first quarter, including Telefonica's $32 billion acquisition of O2 and Georgia-Pacific's $20 billion sale to Koch.

We are also advising on a number of announced transactions, including Mittal's EUR$19 billion bid for Arcelor, the $17 billion sale of Albertson's to a consortium and Walt Disney's $7.5 billion acquisition of Pixar and $2.7 billion sale of ABC Radio to Citadel.

First-quarter underwriting net revenues were $735 million with equity underwriting net revenues up 38% to $283 million and debt underwriting up 129% to $452 million.

The biggest driver of the increase in debt underwriting was leveraged loan activity, especially in Europe, and we also saw increased volumes in the investment-grade business.

Our underwriting franchise remains strong as we ranked first in global common stock, as well as IPOs for the fiscal year to date.

During the first quarter, we underwrote a number of significant transactions, including SMFGs $5.3 billion follow-on offering, Lotte Shopping's $3.7 billion IPO, which was the largest ever for a Korean company and Wachovia's $2.5 billion hybrid capital securities offering.

The investment banking environment continues to improve by almost all measures.

Strategic transactions and sponsor-driven activity are producing increased merger and financing volumes on a global basis.

Indeed, several of the largest transactions announced this year are in Europe, which is running ahead of the U.S. in industry merger volumes year-to-date and many of the largest equity financings have been in Asia.

Globally, strong corporate earnings combined with favorable equity and credit markets are resulting in high levels of CEO and investor confidence, which in turn drive activity levels.

Given the pace of completed activity during the first quarter, our investment banking backlog did decline; although it remained significantly higher than it was a year ago.

I will now turn to Trading and Principal Investments.

This comprises fixed income currencies and commodities, or FICC, equities and principal investments.

Net revenues were a record $6.9 billion in the first quarter, up 68%.

FICC net revenues were a record $3.7 billion, more than double the fourth-quarter results and up 50% from the first quarter last year.

This was driven by record performances in credit products, commodities and currencies.

Our customers were very active during the quarter given tight credit spreads, volatility and energy in metals prices, increased demand for commodities hedging and trends in currency markets.

Interest rate products also performed very well while mortgages were flat compared to the fourth quarter reflecting a slowing in customer activity in some parts of the mortgage market.

Overall in FICC, we continue to benefit from our very broad global business, the strength of our client relationships and our disciplined approach to risk management.

Clearly we will not be able to deliver record performances across the FICC complex every quarter, but our results today underscore the advantage our broad platform gives us.

Equities net revenues for the first quarter were a record $2.45 billion, up 75% from the fourth quarter as global equity markets saw higher prices, higher volumes and higher levels of customer activity.

Equities trading more than doubled from the fourth quarter while equities commissions increased 5% to $842 million despite the continued marketwide pressure on commission rates.

Our customer franchise, especially the derivatives business, was the primary driver of growth in overall net revenues; although our principal strategies business also delivered a record performance.

Growth across equities was particularly strong in Asia and Europe, again underscoring the importance of our global reach.

Average daily value at risk in the first quarter was $92 million compared to $80 million for the fourth quarter.

Equities VaR was the largest driver of the increase as we continued to respond to increasing demand from clients that we execute trades on a principal basis.

In Principal Investments, net revenues were $695 million in the first quarter compared to $852 million in the fourth quarter.

Results included a realized gain of $405 million or $0.27 per share related to our convertible preferred investment in Sumitomo Mitsui Financial Group.

Principal Investments also benefited from gains and overrides of $290 million on other real estate and corporate investments.

At quarter-end, our investment in SMFG was carried at fair value of $4.7 billion.

As I have mentioned before, we are fully hedged with respect to one-third of our investment in SMFG.

As of March 9, we have been free to hedge or sell another third of our investment and while we remain very confident in the long-term outlook for both Japan and SMFG, you should expect that over time we will reduce our risk exposure further.

At the end of the quarter, our corporate portfolio had a carrying value of $2.3 billion and our real estate portfolio, $700 million.

Asset Management and Securities Services reported first-quarter net revenues of $2 billion, up 60% from the fourth quarter.

Within the segment, Asset Management produced record net revenues of $1.5 billion, up 89% from the fourth quarter.

This performance included $739 million of incentive fees related to the strong performance of various alternative investment products during calendar 2005 and record management fees of $750 million.

As in previous years, incentive fees are seasonally weighted to the first fiscal quarter.

At the end of the quarter, we had record assets under management of $571 billion reflecting net inflows of $25 billion and market appreciation of $14 billion.

We are pleased with our continuing track record of organic growth in our four asset classes of equity, alternative investments, fixed income and money markets, which underscores the integral importance of the Asset Management business to Goldman Sachs.

In Securities Services, first-quarter net revenues were a record $491 million, up 10% from the fourth quarter as customer balances grew in securities lending and margin lending.

Now let me turn to expenses.

Compensation and benefits expense in the quarter was $5.3 billion.

Excluding the $237 million non-cash charge related to FAS 123-R, the compensation to net revenue ratio in the quarter was 49%.

Let me spend a second addressing our adoption of FAS 123-R.

This rule requires us to expense in the year of grant all stock-based awards granted to retirement-eligible employees.

Previously, we and everyone else in the industry amortized these awards over the relevant service period.

In 2006 and going forward, our compensation and benefits expense will now include the full expensing of all new stock-based grants to retirement eligible people.

However, in addition to fully expensing current year awards, we must continue to amortize awards granted to retirement-eligible employees in previous years.

Therefore, although there is no incremental economic cost to the firm, our 2006 compensation and benefits expense will include both the amortization of prior year awards and the expensing of current year awards.

For 2006, the estimated annual expense of discontinuing amortization of prior year awards is approximately $650 million.

Of this, $237 million or $0.33 per diluted share was recognized in the first quarter.

The majority of the expense related to the continued amortization of prior awards will be recognized in 2006, but we will also recognize some non-cash expense related to prior year awards in 2007 and 2008.

We believe that presenting our results, excluding the impact of this continued amortization of prior year awards, increases the comparability of period-to-period operating results.

Non- compensation expenses, excluding consolidated investments, were $1.25 billion, down 2% from the fourth quarter.

Lower professional fees and market development expenses were partially offset by higher brokerage and clearing expenses.

Head count at the end of the first quarter was approximately 23,600, essentially unchanged from the end of 2005.

Our effective tax rate for the first quarter was 32.8%.

During the quarter, the firm repurchased 19.1 million shares for approximately $2.6 billion, moving approximately 24 million shares remaining under the firm's existing authorization.

In addition, the Board of Directors of Goldman Sachs increased the firm's quarterly dividend from $0.25 to $0.35 per common share.

Our performance in the first quarter clearly reflects a very positive operating environment in almost all of our major businesses and regions.

Corporate and investor clients, the key drivers of our business, have been taking advantage of favorable markets to be active across many different asset classes and products that we offer.

Contrary to the conventional wisdom that different businesses should operate on different cycles, we have seen stronger equity markets at the same time as many FICC markets remain very active.

It is no accident that Goldman Sachs has benefited from these strong conditions.

Our business is very broad both in terms of products and geographic reach.

While at different times we have been described first and foremost as an investment bank, as an equity house or as fixed-income driven; in fact, we have a leading presence in all of these businesses, as well as a large and growing asset management complex.

We are and have always been very focused on our client franchise and believe that by combining it with a prudent risk appetite, we are able over time to maximize both the quality of our client service and the returns we have delivered to our shareholders.

As I sit here today, the business environment remains favorable with economic growth continuing and markets reflecting higher confidence in the future.

We are witnessing a combination of growth in some countries and restructuring in others.

In Investment Banking, while the backlog declined during the quarter, the pace of overall activity continued to grow.

It is clear to all who follow merger announcements that we're seeing strategic deals, including unsolicited transactions, with a frequency and on a scale not witnessed in five or six years.

The growth of private pools of capital invested either directly in private equity or in public securities with an activist mindset has also increased corporate activity levels.

Of course economic growth and market and CEO confidence will continue to be the most important drivers of the investment banking business over time.

Our FICC results reflected high levels of customer activity in favorable trends, especially in credit products, commodities and currencies.

Although outside commentary often focuses on our risk appetite, we believe strongly that it is our customer franchise and willingness to commit capital in a disciplined way to meet customer objectives that distinguishes our performance.

In equities, we are benefiting from our broad business model as customer flow migrates towards trading on a capital committed basis on the one hand and technology-driven agency orders on the other.

Favorable markets have helped us both in our customer business where volume and activity levels correlate strongly to rising prices, as well as in principal strategies.

Our merchant banking business continues to benefit from demands for alternative assets and significant opportunities to invest capital, particularly outside the United States.

As an integral part of Goldman Sachs, the merchant bank is frequently able to leverage our global franchise to identify unique investment opportunities for our funds.

As you all know, the key to success in asset management is performance and product mix.

We are very pleased with the incentive fees that helped drive our net revenue growth this quarter and we think they reflect well on our strategy of building our alternative investment franchise.

However, while incentive fees cannot recur every quarter, our assets under management grew once again with net inflows contributing $25 billion.

Securities Services also grew as customer balances and activity levels remained high.

In reporting such strong results today, a new record for the firm, I can say that the environment for almost all of our businesses continues to be quite favorable but I will also add a note of caution.

Conditions change quickly.

Unforeseen events will challenge the markets.

There will be difficult quarters ahead.

You should not expect it to generate returns of this magnitude every quarter.

However, we are pleased that when our clients are active, our franchise enables us to produce high returns for our shareholders.

I believe that our competitive position is very strong and I remain confident in the firm's ability to serve clients and shareholders in the years ahead.

With that, I would like to thank you all for listening today and I will now be happy to answer your questions.

(OPERATOR INSTRUCTIONS).

Guy Moszkowski, Merrill Lynch.

Good morning.

Just wanted to ask a little bit about the share buyback and capital management.

You repurchased about 19 million shares during the quarter.

I think that was probably more than you had done in most years in the past.

Except last year.

Except last year.

You had about 24 million I think left in the authorization.

You managed by doing the buyback during the quarter to keep the quarter-end shareholders equity about in line with what it was for the quarter on average.

So sort of keeping it steady and mopping up the access.

But it would seem as if you might need to revisit that authorization sometime soon.

When do you think the Board might in the normal course of business take that up?

Well, as you said, Guy, we are down to 24 million shares.

We are continuing to buy back and while we are going to review this constantly and really review our capital versus opportunities out there and make sure we have sufficient capital to take advantage of all the opportunities.

As we start to run out, we will go back to our Board and ask for more authorization to use over time.

And we are -- it is down to 24 million shares.

We are probably a quarter or two from using that up and then we will go back to the Board.

That's helpful.

The other question I had was about the comp ratio.

You pointed out that it was a little bit under 50% if you make the adjustment for the 123-R.

In the past, you've pretty consistently run that at exactly 50 and I was just wondering what the thought process was, what the threshold was that allowed you to bring it down to 49 because in the past, even when you have had a pretty spectacular revenue quarter in the first three quarters of the year, you have still kept it at 50.

Right.

We have generally kept it at 50 until the fourth quarter.

This year -- right now, we are accruing at 49% and we've really just -- when we looked at the revenues and looked out at projections for what might happen for the year versus compensation growth, 49% was the number that looked like a more reasonable number and a more accurate reflection of where comp would come in this year.

Just as long as we're talking about comp, that makes me think about head count.

You pointed out the head count was flat in the quarter and there is some seasonality to that.

Given the business opportunities that you have been seeing though, is there any reason to think that you might modify upwards your head count growth targets, which I think were still sort of in the mid to high single digits?

No, that's still what we're expecting, mid to high single digits for the year.

Obviously we continue to review that during the year, but, as we sit here today, I would still expect it would be mid to high single digits with growth really across businesses and across regions, probably slightly higher growth rates in Asia, and then in Europe and the United States, but growth everywhere.

Ultimately probably more likely high single digits for the year.

Glenn Schorr, UBS.

So you mentioned that not to expect a quarter like this every quarter.

I'm pretty sure your investors will take one of these every like three or four years.

We wouldn't.

The only question I have on a macrolevel is it is impossible to talk about sustainability, but I'm curious to get your particular thoughts on concerns over risk premiums in the market just in general and these activity levels are produced by incredible liquidity across a lot of asset classes.

But if you look at some of the riskier pieces, whether it be high yield spreads or emerging market spreads, we seem to be at levels not approached except at peaks in the past, but I don't know -- I know that we're looking at a very broad sprint across lots of asset classes, but particularly in those areas out on the fringe, I'm curious to get what levels of concern Goldman --.

Glenn, it's a hard question to answer because in some ways we have been having this conversation for about three years.

We have talked really for several years about the fact that risk premiums look low across a variety of asset classes.

They have looked low and they have gotten lower.

And so you know we watch it carefully.

We watch credit spreads carefully.

We watch yield curve carefully, all of which are different forms of risk premiums, but the market has been pretty resilient and even though there have been a couple of events with companies having problems, the market has bounced back pretty (indiscernible).

We know that is not going to always happen.

We know there is going to be a widening of spreads at some point.

We're very careful about it and we're very cognizant of it.

But so far, just keeping an eye on that narrow factor, risk premiums continue to be narrow and have continued to defy many people's expectations over several years.

I think it is fair to say we have to operate our business in the current environment with an eye towards what would happen if it changes and that is really what we have been doing.

The other question I have on a similar concept is in commodities in the past -- obviously it seems like we're in a pretty big secular growth era, but in commodities in the past when you have had a say reversal in a trend, it is typically the intermediaries are in that long of a trend, not (indiscernible) long the trend, yet it doesn't seem to have happened this quarter.

I'm just curious if we shouldn't be thinking that anymore?

In other words, you had a bit of a reversal in price and you seem to have had a phenomenal quarter anyway.

There's a couple of things you have to remember when you talk about the commodities business is that itself is a very broad business.

So people think of the commodities business and you say well what happened to oil prices.

That is one part of the commodities business, which also includes natural gas and electricity and base metals and precious metals and the GSCI and some of our physical power assets.

So it is a very broad business.

Sometimes when you see reversals of trends, we or someone in our position could get caught longer trend.

You also sometimes will see customer activity slow down because customers are trying to figure what the next trend is.

But the business is so broad now that there are just so many pieces to it that even if you see one piece of it reverse a trend that may not have any effect on the other pieces of the business as well.

Cool.

Fair enough.

Congrats.

Chris Meyer, Morgan Stanley.

Just to follow up on Glenn's questions, it's tough to know what your (indiscernible) after this type of quarter, but I guess it must be part environment, part business model, change/improvement that you guys have deployed over the last years.

Maybe just in your mind, what do you think the biggest business model changes are that Goldman has deployed that causes this type of return as something that you can achieve even in a robust environment?

In particular maybe give us a sense of do you think the business model is a little bit more sensitive now to rising asset prices generically compared to business models in the past?

I agree with you.

It is part business model, part environment.

And I think that the keys to our business model are the strength of our client franchise across a lot of products and across all geographic regions.

And if there is a change in it, it is not really a change in the model as much as it has been a growth of the model around the world.

And the strength of virtually every one of our products on a global basis now and being really a leader in virtually every one of our products on a global basis I think has allowed us to both perform well in almost every different type of environment, which is what you have seen over the last several years and when the environment is as good as it was this past quarter across our products then we show strength in all of them and we have a quarter like we had.

I think that is really what has happened is that we have just grown and gotten stronger across products and across regions to have a bigger, more diversified business.

Given that the classic agency business is sort of under pressure from fee-per-trade or whatever you want to call it standpoint and there is this shift towards more principal risk taking.

Do you think the model is now more geared into rising asset prices and yes, there is diversification across asset classes, but do you think generically we do much better in rising asset price environments than not?

I would say it maybe just a little bit differently.

We do better when there is economic growth around the world than when there isn't because when there is economic growth around the world, customers are much more willing to transact, much more willing to do things.

They have more confidence in what is going on and so if you had -- there are a lot of factors that affect our business, but if you had to pick one, if you had to pick one, that would be it.

It would be the economic growth around the world.

And so you have seen very good economic growth around the world.

You mentioned before the pressure of the pure agency basis.

That is another part of our business model.

We have always been willing to combine the strength of our client franchise with a willingness to take risks for our clients and I think that business model, which we have always had, is actually something which our customers and clients want more and more.

We have talked about the easy example of the big mutual fund complex that in the past wanted to shift $1 billion position.

They used to call and say we will sell you one billion for $0.05 a share and we'll buy a billion for $0.05 a share and now they call say make a bid.

That's what we do.

We have always been willing to do that and it plays to our strengths of combining the client relationship and the willingness to take risk.

And there is more of that when there is economic growth around the world and that is what we're seeing today.

David, just drilling down and into FICC.

In '03, we were presented with a steep yield curve, tightening spreads, rising commodity prices and it seemed like at that point $1 billion was kind of a bad quarter and $2 billion was a good quarter.

Now it is almost like $2 billion is a bad quarter and heaven forbid $4 billion is the good quarter.

I hope you don't hold us to that.

Yes.

What has changed there you think in a short space of time that has made that addressable market so much bigger?

It gets back to what I was talking about before.

As the business continues to grow, it is becoming more diversified and maybe most importantly it is growing around the world.

We are seeing trading and client activity in Asia, in Japan, that we haven't seen before.

The markets are becoming as big as Europe and the United States.

So as the business becomes more global, I think gives us more and more opportunities.

And this is trading by local clients, not by U.S. clients in those regions?

Yes and yes.

Okay.

And just finally, David, before I sign off here.

The equity VaR, I think you said was up a lot because of the commitment of capital to facilitate customer business.

Is there also a derivative impact going on there given how strong the growth of that business has been?

Do you mean an impact on derivatives or --?

No.

Just on the increase in VaR.

Is some of it coming from the growth of the derivatives book?

Oh sure, which is mostly client business.

Derivatives business is mostly client business and that is what is driving most of the increase in equities VaR.

Now again, our GSPS business has also been increasing in scale and so the VaR there has gone up too, but if you look at where the increase is coming from, most of that is coming from the customer franchise, which the derivatives is a big piece of that.

Daniel Goldberg, Bear Stearns.

Can we drill a little bit more into the FICC business?

You talked about it I guess in the prepared remarks credit products, commodities and currencies being up significantly, interest rates being higher and mortgages I guess being flat to slightly down.

Any sense of magnitude you can help us out with there at all?

Well, you know we don't disclose the dollars of any of the businesses.

What I said was that each of currencies, commodities and credit products had a record quarter and obviously very, very strong performance.

Interest rate products also had very good performance; it just wasn't a record and mortgages were roughly flat to where they were last quarter.

But we have talked about this before in FICC.

No one business dominates.

There is a lot of strength across the board and this quarter most of the businesses performed at kind of the top of their game.

On the Asset Management side, obviously incentive fees are a big driver in the first quarter.

But maybe walk us through or give us a little bit more color in terms of how if you look at it versus the prior year's first quarter up nearly 500% or so, how we should think about that because alternative assets didn't double or go up 500% in the same quarter.

I'm just trying to get how we get such a significant increase.

Right.

Two drivers of the increase in the incentive fees are largely from alternative investments.

One is the increase in size but the other is the increase in performance.

Our incentive fees in that complex, our investment complex, are a percentage of the performance.

And so obviously you have more assets and higher performance.

It kind of is exponential growth and that's really what happened.

We gained assets and the performance last year was quite good.

So those two things combined.

It is seasonally weighted to the first quarter.

You certainly will not see numbers that big in the second, third and fourth quarters; although you will see some incentive fees.

And then just lastly you mentioned in closing that the environment continues to be quite favorable in all businesses.

Should we take that as March has been pretty much similar to what we saw really in the first quarter?

I think you should take it to be what I said, which is that the environment remains very good.

It has been very good for the first couple of weeks.

You know I won't comment on our results for a couple of weeks.

But you can pick up the papers and you see the merger announcements and the equity underwriting announcements and there are other transactions to go with it and customer volumes continue to be very high.

As you know, next week I could tell you it changed, but as we sit here right now, the environment is still very strong.

Meredith Whitney, CIBC World Markets.

A few questions if I may.

To beat one final horse, which is you have been quoted very often based on, it was your February comments, that the environment is the best you've seen in 25 years.

And I appreciate the caution in your release and in your comments on the call about how you can't sustain these type of returns quarter-to-quarter and we shouldn't expect that.

But outside of Investment Banking, as you stand here today, is there anything different going into the second quarter than there was going into the first quarter?

The short answer is no.

The environment remains as good as we sit here today.

And then my second out of three questions, I limit it to three, is you had a tricky second quarter with the industry last year.

What specifically is different this quarter in terms of -- obviously you can't ever expect an interruption in the credit markets but is there anything tangible you can provide us that is different going into the second quarter this year than going into the second quarter last year, lessons learned, etc., etc.?

That is a very hard question to answer and that is part of my notes of caution that I could sit here today and tell you the market environment feels just as good as it did a month ago, but I could also sit here a month from now and tell you that it doesn't feel as good anymore.

And if you remember that's what happened in the second quarter.

There were a couple of disruptions, a couple disruptions in the credit markets last year in the second quarter and it is very hard.

I could not have predicted them at this time last year and I couldn't predict them at this time this year.

So there is nothing I can point to that is going to be the same or different.

I can only tell you what it is like today.

All things equal then, you could have two quarters in the first half very outsized, at least year-on-year returns.

You will never hear me predict that.

I didn't expect you to.

My third question, third and final question is getting back to the quote "never a better environment in 25 years".

What is most interesting to me is the shortened cycle between investment and harvesting.

And is there any way you can quantify or provide more color in terms of what that does to your returns?

There are -- it depends on what you are focused on.

There are some things where there is a much shorter cycle between investment and harvesting and that would especially be true in financial investments, like investments we make in our merchant bank where you are seeing so much shorter cycles.

But there are some investments that take a long time to come to fruition.

Let's take the asset management business.

We were in that business for many, many years.

When we went public, remember we talked about the fact that we had revenues but we weren't profitable.

We have grown it more and more to the point where now it is obviously a very big and booming business that is very profitable.

But that took years and years of investments to put it where it is.

So I think it really varies.

There are some that have shorter returns and some that have longer returns and we continue to try to invest in our businesses to grow the revenues for the future.

James Mitchell, Buckingham Research.

Just one thing we haven't really talked about is your debt underwriting franchise.

Obviously the revenue growth this quarter was a lot better than what the volumes spoke and that probably reflects really strong growth that you had in leveraged loans.

Could you just talk a little bit about how you see that business evolving from here?

With the M&A activity, should we expect leveraged loan activity to remain high?

Can you continue to grab marketshare the way you have been doing?

Yes.

So far, it remains high.

A lot of that is driven by sponsor driven M&A activity, which is where you see a lot of that.

We have a pretty big marketshare there.

We have good relationships with the sponsors.

We think we do a good job executing for them and as long as we do that, we will continue to get a pretty good share there and as long as that business remains robust, and again you can read about them in paper, that still remains robust, I think the business will continue to perform well.

Is it fair to say that a good part of either the sequential year-over-year growth and the fee revenue line at debt underwriting was leveraged loan related given the growth you had there?

Yes.

(OPERATOR INSTRUCTIONS).

Mike Mayo, Prudential Equity Group.

Can you give some more metrics on your international franchise?

What percent of revenues are international?

What is the margin and what is the growth rate this quarter to the last --?

Sure.

Let me try and answer some of those questions.

You know in actuality, it is very hard to measure international versus U.S. deals because so many of our transactions span both.

So if we represent a company doing a merger between a Chinese company and a U.S. company, where is that deal?

When a European company does a U.S. equity underwriting, where is that transaction?

So we try and make our best estimates.

We do things on a legal entity basis.

We have generally been running at about 60% U.S., 40% outside the U.S.

This quarter, we are probably running at slightly bigger numbers outside the U.S.

So it would be more like 55/45 U.S. and non-U.S. and outside the U.S. continues to be two-thirds to three-quarters in Europe and one-third to one-quarter in Asia of the non-U.S. business.

And there is very little question that the non-U.S. business is growing faster than the U.S. business; although the U.S. business is growing.

If I had to rank them in terms of growth rates, I would say Asia, Europe, the U.S.

If you asked me to predict and you know I don't like to predict, I would expect that there is where you'll see the growth rates going forward.

You will see the Asian business grow fastest, the European business grow second fastest and the U.S. business grow third fastest; although all of them growing.

There will be blips in that, but that's what I expect.

Now as far as changing the percentages, the numbers, the base numbers are very big so it takes a long time to change those percentages.

But that is the direction I think we will head in.

And what was the actual revenue growth rate outside the U.S. fourth quarter to first quarter?

That is something that I think you will see -- on a legal entity basis, you will see that in the Q when it comes out.

And what is the margin outside the U.S. versus inside the U.S.?

It's the same answer.

It will be in the Q.

And one last question.

The equity commissions were up 5%.

Can you elaborate on that a little bit more?

There is not much to say.

As you know, there continues to be pressure on commission rates.

So that increase is really driven by increased share that we're starting to gain.

It is something that we thought would happen over time and it is finally starting to happen but slowly.

At this time, we have no more questions.

This is John Andrews.

We would like to thank you for listening.

This call will be available for replay a little later today.

The details for the replay can be found both on the press release and on our website.

Thanks again.

Thank you all for joining today's Goldman Sachs first-quarter 2006 earnings conference call.

You may now disconnect.