高盛 (GS) 2007 Q2 法說會逐字稿

Thank you and good morning.

I would like to welcome you all to our second-quarter earnings conference call.

Let me remind everybody that today's call may include forward-looking statements.

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

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

For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in our current annual report on Form 10-K for our fiscal year ended November 2006.

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.

Let me now ask David Viniar, our CFO, to review the firm's second-quarter results.

David?

Thanks, John.

Good morning.

I would like to thank all of you for listening.

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

I am pleased to report another strong quarter.

Second-quarter net revenues were $10.2 billion; net earnings were $2.3 billion; and earnings per diluted share were $4.93.

For the quarter, return on tangible equity was 31.2% and return on common equity was 26.7%.

While not as uniformly strong as the first quarter, most of our businesses continued to benefit from the favorable operating environment in the second quarter.

Despite choppy conditions and lower volatility in many markets, we still had our fourth-best FICC quarter, our third-best equities trading quarter, and our best quarter ever in Investment Banking, equities commissions, Asset Management fees, and Securities Services.

The strength of our franchise is particularly evident when you consider that year-to-date net revenues and earnings have grown in double digits over last year's remarkable results.

Let me now review each one of our major businesses.

Investment Banking produced record net revenues of $1.7 billion in the quarter, slightly beating the first quarter's results.

Second-quarter Advisory revenues were $709 million, down 18% from the first quarter's record $861 million.

Merger activity continued to accelerate during the quarter, as both strategic and financial sponsor clients remained very active.

Goldman Sachs again retained its leadership in mergers, ranking first in global announced M&A for the calendar year-to-date.

We advised on a number of important transactions that closed during the quarter, including the $62 billion spinoff of Kraft Foods and the $13 billion acquisition of Hutchison Essar by Vodafone.

We are also advisor on a number of important announced transactions, including the $59 billion acquisition of Endesa by Enel and Acciona; Alcoa's proposed $33 billion acquisition of Alcan; and the $27 billion acquisition of Alltel by an investor group that includes TPG and Goldman Sachs Capital Partners.

Underwriting revenues were $1 billion, 18% above the first quarter.

Debt underwriting revenues grew 11% to a record $654 million and equity underwriting revenues grew 35% to $358 million.

Financing activity remained robust through most of the second quarter.

Although market uncertainty dampened equity financing in the early part of the quarter, activity levels accelerated as the major equity markets recovered in April and May.

Debt financing remained robust, particularly leverage finance, as interest rates remained low, credit spreads tight, and acquisition activity was high.

During the second quarter, we participated in a number of significant transactions including the $8 billion equity issuance by VTB, one of Russia's largest banks; the $2.6 billion equity follow-on by Taiwan Semiconductor; the novel $1 billion 144A IPO by Oaktree using our proprietary GSTRuE platform; and the $1.1 billion high yield issuance for Cognis.

Our Investment Banking backlog increased during the quarter and reached a new record level, surpassing for the first time the prior record set in the second quarter of 2000.

Let me turn to Trading and Principal Investments.

This comprises FICC, equities, and principal investments.

Net revenues in this segment were $6.6 billion in the second quarter, down 29% from the record first quarter.

FICC net revenues were $3.4 billion, 27% below the record first quarter.

Strength in currencies and rates was offset by sequential declines in commodities, credit, and mortgages net revenues.

Commodities and credit still had strong quarters; but with reduced volatility and customer activity, they were unable to match the first quarter's results.

Mortgages had a weak quarter as the subprime sector continued to be challenged.

Equities' net revenues for the second quarter were $2.5 billion, down 19% from the record first quarter.

Equities' trading net revenues fell 35% to $1.4 billion, essentially equal to the third best quarter ever, despite the challenging equities markets in late February and March.

Our derivatives, principal strategies, and cash equities businesses all produced strong revenues but had lower sequential revenues, reflecting the less robust environment compared to the first quarter.

Equities commissions, however, were up 17% to a record $1.1 billion.

Given the continued decline of average commission rates in cash equities, we believe our growth here underscores that we continue to gain share in this business.

Turning to risk, average daily value at risk in the second quarter was $133 million, compared to $127 million for the first quarter.

The increase in VaR was mostly in the interest rates category and largely reflected higher volatility in parts of the mortgage market.

Let me now review Principal Investments.

Second-quarter net revenues were $784 million, down from the record $1.7 billion produced in the first quarter.

Corporate and real estate principal investing produced net revenues of $973 million in the second quarter as the business continues to benefit from a favorable environment for both investing and harvesting.

Partially offsetting those revenues were losses of $125 million and $64 million, respectively, on our ICBC and SMFG investments, as the common stocks of both companies were down in the quarter.

The combined ICBC and SMFG results lowered diluted earnings per share by $0.14 per share in the quarter.

Asset Management and Securities Services reported second-quarter net revenues of $1.8 billion, up 13% from the first quarter.

Asset Management produced net revenues of $1.1 billion, down slightly from the first quarter as growth in management fees was offset by a decline in incentive fees.

Management fees in the second quarter were a record, however, exceeding $1 billion for the first time.

Assets under management increased to a record $758 billion at the end of the second quarter.

The $39 billion increase consisted of net inflows of $18 billion and asset appreciation of $21 billion.

Second-quarter results in Securities Services were also a record, with net revenues of $757 million, up 44% sequentially.

These results reflected the seasonally stronger second quarter and continued growth in customer balances.

Now let me turn to expenses.

Compensation and benefits expense in the second quarter was $4.9 billion, accrued at 48% of net revenues.

Second-quarter non-compensation expenses, excluding $100 million of expenses related to consolidated investments, were $1.8 billion, a 5% increase from the first quarter.

The sequential increase largely resulted from higher brokerage and clearing fees.

Headcount at the end of the second quarter was approximately 28,000, up 4% from the first quarter and 6% year-end 2006.

Our effective tax rate was 32% in the second quarter and 33.3% for the first half of 2007.

That compares to a 33.6% tax rate for the first half of 2006.

During the quarter, the firm repurchased 5.4 million shares for approximately $1.1 billion.

We currently have approximately 34 million shares remaining under the firm's existing stock repurchase authorization.

In general, there were mixed trends in the quarter.

While the equities markets recovered following a weak start, several businesses saw reduced volatility and risk appetite from our clients versus a very robust first quarter.

On the other hand, corporate and financial sponsor activity accelerated to record levels.

Despite these mixed trends, our second-quarter results again underscore the broad earnings power of Goldman Sachs and the strength of our franchise.

We are a leader in virtually all the businesses in which we compete and have a significant global presence.

Most importantly, and the basic reason for our success, is our extraordinary focus on our clients.

Of particular importance as we look forward is our global presence.

We believe our global Capital Markets franchise is second to none.

As I have noted before, many of our greatest growth opportunities are outside of the US, in new markets and with new clients.

This was again demonstrated in the second quarter w hen our international businesses accounted for approximately 52% of Goldman Sachs' net revenues.

So while I cannot predict the short term, we remain bullish on the prospects for Goldman Sachs.

There are substantial growth opportunities around the world in virtually all of our businesses, and we are well positioned to take advantage of them.

With that, I would like to thank you again for listening today, and I'm now happy to answer your questions.

Good morning, David.

Good morning, Guy.

First of all, I was wondering if you could give us a little bit more of a flavor for the generation of the $909 million in corporate and real estate gains.

I don't know how much you can tell us about the mix between mark-to-market versus realized, domestic versus international, and sort of corporate versus real estate.

The one thing I would tell you, Guy, it was predominantly corporate.

That is really the only one of those questions I am comfortable answering.

Okay, fair enough.

How about on the inc -- the decrease, rather, in Asset Management incentive fees that we saw versus the two benchmark quarters.

Can you give us a sense for what drove that?

Sure.

It has been fairly widely publicized that we have had a disappointing performance in some of our hedge funds within the alternative investment segment, Asset Management.

That is what drove the incentive fee decline.

Okay.

The comp ratio which was 48% versus just under 50% in the year-ago quarter, should we consider that to be a result of a shift in business mix relative to the comparable quarter?

Or some sort of change in your internal accrual policy?

Now, I hate to mention this, but don't forget last year had the impact of 123(R).

But I would not expect -- there is no shift in policy or business mix or anything; 48% is our best estimate as we sit here today of what the accrual needs to be.

Okay, thanks for that.

Maybe you can give us a sense for what impact you are seeing currently in terms of the recent sort of post-quarter-end interest rate shift in the market.

How that is affecting different aspects of your business.

In conjunction with the increase in interest rate VaR that you reported, is that creating either issues or opportunities for you?

A couple things.

I am going to start with your last question.

Remember, the increase in interest rate VaR last quarter was almost exclusively driven by the increase in volatility in the mortgage market.

It had nothing to do with increased positions.

Now, that does increase risk, and so risk was higher because of it; but that is really what drove the increase in the interest rate category in VaR last quarter.

A couple things I would say.

First of all, by historical standards, interest rates are still pretty low.

The second thing I would tell you is if you go back after the last -- over the last couple years, you will see in each of them a short-term spike in interest rates.

Now, I can't value if this is a short-term spike or not, I don't know.

But you have seen that before.

And you have seen equity markets initially reacted badly to interest rate increases but have since recovered a fair amount.

So as long as we -- you saw the numbers this morning.

There is really no indications of a big pickup in inflation.

As long as we continue to see that type of benign environment, as long as we still see good, available liquidity and credit, and that leads to good economic growth, then I don't think it has got much of an effect on our business.

Great.

Thank you, David.

That is really helpful.

Glenn Schorr with UBS.

Good morning.

A couple quickies.

One is, you have announced the Wind Energy -- Horizon sale; you have announced interest to get bids [in] sale of the Cogentrix components.

Obviously, great investments; we expect great returns.

Is it a little weird that you are selling while everyone is buying?

Especially given that I think you have a good, long-term, secular outlook on commodities business in general.

I think -- look, we are quite opportunistic on when we buy and sell assets.

The Horizon sale, we just think it was the right time to sell that particular asset.

We have announced that Cogentrix is for sale.

When we bought the assets, the intent was to keep them for a longer period of time; but the markets are such that, again, it seems to us to be right to sell those particular assets.

There are other assets within the commodities world that we're looking to buy at this time.

So we are just being opportunistic when we think it makes sense to buy and sell certain assets.

Simple enough.

Anything in the strength in the commission line, I agree with your earlier comment in terms of, boy, something must be going right while there is so much commission compression, for you to be able to have a 17% sequential rise, 16% year-over-year.

Is that -- you mention market share gains.

Is there any thoughts you can give us in between both, say, the cash business, derivs?

Is there a clearing component that flows through this line that is picking up?

Just any other color would be interesting.

No, it is really just an increase in share, and it is really across both cash and derivatives.

Any comment on high touch, low touch?

Not really.

Okay.

Then last one is, this is unlike the last three or four years.

Your comp accrual is now up 6% year-to-date and your headcount is up 6% year-to-date.

You don't have that big cushion, nor does anybody else, that you have enjoyed in the past.

How do you think about that as you run through the rest of the year?

I mean, I know your answer is going to be some version of we think we are fine here.

But anyways, any thought there?

You answered the question.

We never thought (multiple speakers).

Okay, next question.

We never thought we had a big cushion.

We always accrue our compensation as our best estimate of where we think we are going to have to pay people.

It is sometimes difficult to estimate, because we pay a substantial portion of our compensation in year-end bonuses.

But we are accrued as we think is appropriate right now.

Okay, I'm done.

Thank you.

Joseph Dickerson with Atlantic Equities.

Thanks for taking my question.

I just have a quick question.

You elaborated -- you made a comment on the higher brokerage and clearing fees.

I am just wondering if the 35% year-over-year increase there is in any relation to the changing market structure both in the US and Europe.

No, it is really just increased volumes.

That is really all it is.

Can I ask another question?

Is there any degree to which you're competing with the exchanges now?

You know, do we compete with the exchanges?

I guess, I would say there are a lot of exchanges around the world; and in certain places, where we may think that exchanges are not being competitive in the prices they charge us, we and others in our industry might get together and try to form a consortium that performs services in competition with certain exchanges at better prices.

Thanks, David.

That is helpful.

Mike Mayo with Deutsche Bank.

Good morning.

Can you comment more on the growth for non-US versus the US?

What was the linked-quarter growth rate and the relative margins?

Well, let me deal with the first part of it.

You know, our non-US revenues were a little bit over 50% in the first quarter and were roughly 52% in the second quarter.

You know, it is always hard to look at one quarter versus the next, because a transaction or a couple of transactions, a big principal investment, an ICBC gain -- I mean, there is big things that could cause that to move around a little bit.

So I wouldn't pay too much attention to 52 versus 51 versus 49.

But what I would tell you is that we continue to see our international businesses growing faster than our US businesses.

Not to say that our US businesses aren't growing.

If I order them I would tell you -- and this is consistent with what we have seen probably for the last five years -- is our US businesses growing; our European businesses are growing faster; and our Asian businesses are growing even faster.

And I expect that that will continue.

What percent of new headcount is outside the US?

It is the same answer to what I just gave you.

It is on a percentage basis much heavier in Asia.

It will then second in Europe and last in the US.

China, I know that is the long-term position you have, but there have been some changes recently, whether it is with private equity or I guess the bond business.

Can you comment on what you're doing there?

Nothing different.

Again, we consider China to probably be the single biggest growth opportunity as a firm, given the size of their economy, the fact that the government in China very much is committed to a modern financial system.

We are seeing more and more companies accessing the public markets.

We are seeing companies merge and do strategic transactions.

We think that the opportunities there are still every bit as good as they have been.

Lastly, again, the margins for US versus non-US?

We don't comment on that.

All right, thank you.

Roger Freeman with Lehman Brothers.

Good morning.

I just wanted to ask you a question on the mortgage business.

Obviously recognizing a smaller piece of the business for you, but [Baer] just reported that their mortgage revenues are actually up in the quarter.

Assuming you take more principal risk in the business, if a question would be was this mostly a mark issue, and is it a result of closing the quarter a little bit earlier, or positioning for further spread widening during the quarter if it didn't happen?

I can't comment on Baer.

I don't know about them, they do what they do.

For us, it was a tougher quarter.

You know, it was a combination of lower volumes, more difficulty in getting structured transactions done, and retained positions that were going to go into some of the structured vehicles being worth less.

Worth less, not worthless.

Right.

I don't suppose you can comment on how much the business was down sequentially.

No.

But as you said, the thing I want to put this in overall context, when you look at mortgages as in the context of Goldman Sachs, it is just not that big.

In the FICC complex where we have five big complexes -- you know, credit, rates, commodities, currencies, and mortgages -- mortgages is probably the smallest.

Right, okay.

Understood.

The tax rate for the quarter was lower.

I might have missed your commentary on that.

Is there anything particular about that?

Is that the higher international mix?

Yes, geographic mix.

If you look first-half/first-half it is pretty close, the quarter-over-quarter geographic mix.

Okay.

In the VaR you talked a little bit about the interest rate VaR increasing.

The commodity VaR came down a lot.

Anything to comment around that?

Is it just the lower activity overall?

I think you also mentioned that business was (multiple speakers).

Yes, lower volatility, lower activity levels.

Okay.

Then, I guess lastly, just on the Asset Management, obviously there has been sort of publicized weakness around the Alpha Fund.

Are there redemptions coming out of that?

You know, there have not been substantial redemptions.

That fund, while it has not performed great, I think people who are investing in the fund understand that it is a high-risk, very volatile fund.

It is fully invested.

It is doing what it has told people it will do.

It has had over the life of the fund quite good performance, but recent weakness.

So the withdrawals have been minor.

Got it, okay.

Thank you.

Douglas Sipkin with Wachovia.

Good morning.

I just want to follow-up on the last question.

Obviously, you mentioned the redemptions have been relatively small, if any, at the global [off].

I was just surprised to see the alternative flow number sort of be zero, considering we are hearing all about these increased allocations.

Is there anything specific to this quarter or some seasonality in your alternative asset management business that we should be aware of?

Again, just because I think this was your worst, I guess, net flow number that you have disclosed in the alternative segment.

So any more color would be helpful in that area.

There is not really much color to add.

It was flat over the quarter.

We are still pretty optimistic on the business.

We are still adding new products to the business.

I think over time, you will see that grow.

There were just no -- it was net flat during this quarter.

Great.

Then just your perspective.

Having a pretty substantial private equity business [with] inside the organization, just Goldman Sachs' view of sort of how things might change, if at all, with some of your private equity competitors coming public.

I don't know if you guys see that as a positive or negative for the business.

Any color around how you guys are thinking about a potentially pick-up in some of your private guys coming to the public markets?

I don't think it will affect the private equity business at all.

In most cases, it is their management companies that are going public.

The funds themselves are still private funds.

I think they will continue to do business exactly as they have.

They are in some ways competitors, but they are very, very important clients.

Our private equity business tends to partner with other private equity firms in almost every circumstance, and I don't think that will change at all.

So then I guess, the fact that maybe they will have a little more permanent source of capital and their relying on, I guess, sort of the investment banks, you are not seeing that as a risk at all?

No, I actually don't think -- remember, it is the management companies that are generally going public, not the funds themselves.

So I don't think it is going to change things at all.

Okay, great.

Thanks for taking that question.

No problem.

Meredith Whitney with CIBC.

In the context of all of the private equity money that hasn't been utilized yet, and in relationship to your very strong sovereign relationships -- in the papers recently people have said they can't afford not to do business with Goldman.

Does the competitive advantage grow as people have to go outside of traditional markets to deploy that capital, for you?

I don't know if it grows.

I feel like we have talked about the fact that we think we have a competitive advantage, a bigger competitive advantage outside the United States even than we do inside the United States in some places, given our commitment there, how long we have been there, our brand.

So I think it is helpful to us in making investments outside of the United States, given our brand and our commitment in those places.

I am not sure it is a bigger competitive advantage, but it is certainly part of our competitive advantage.

Well, would you characterize the barriers to entry into, let's say, the emerging markets areas obviously outside of Europe and the USA as higher?

I think it is -- I think you need to be there.

You need to be there for a while.

You need to have people on the ground.

You need have to have good relationships.

Otherwise the risks are certainly higher.

It doesn't mean people can't do it.

But you have to be very careful what you are doing.

Okay.

Then just the last question, in terms of if you could roughly quantify the amount of investments you are making in terms of your -- in all of your funds that are in emerging markets versus rest of world.

I can't.

But I can tell you that it is a big focus, but investments tend to be small.

So we tend to make larger numbers of smaller investments, given the risk in those markets.

Got it, okay.

Thanks.

Michael Hecht with Banc of America Securities.

Good morning.

How are you doing?

Just to follow up on Guy's question on the comp ratio.

What was the comp ratio a year ago, excluding 123(R) that we should think about as the comparison to the 48% so far this year?

It was 49%.

49?

Okay.

Yes.

Okay, thanks.

I just wanted to -- another growth focus I think I have heard you guys talk about recently is just widening out your Investment Banking footprint to middle market companies.

Just wondered if you would give any color on how the traction is going there.

Sure, I have said that and we have talked about that as being a strategic initiative, and we think it is going well.

You know, the Investment Banking business in general is quite robust right now.

Looking at companies under the top tier that we usually deal with is a very important source of new business for us.

Then is the thinking that the middle market is just less well served?

I guess what has changed over time here to make you more aggressive there?

The couple of things that have changed are, one that you mentioned, that it is less well served.

Also, the need within that market not just for advice, but also for capital.

You know, our strategy of being an advisor, a financier, and an investor, fits right in with what companies in that segment of the market are looking for.

Okay, great.

Then, I thought the Oaktree transaction this quarter was interesting.

Just wondering if you could comment on how your backlog of kind of private market transaction looks on what sounded like a pretty successful transaction for Oaktree.

Look, I can't give specifics on that, but we are very proud of that transaction.

Okay.

Then just last question.

Any big shift in VaR at the end of the period versus the average, which was kind of up a bit overall?

You know, quarter-over-quarter versus the downtick in trading revenues?

That will be disclosed in the Q.

It was -- give me just one second.

You know what?

It was pretty close to the average at the end of the quarter.

You will see -- you will see higher early in the quarter, lower in the middle quarter, and about average at the end of the quarter.

Okay, got it.

All right, thanks.

Roger Freeman with Lehman Brothers.

Just a follow up.

I think you have already touched on it.

I want to just ask about this GSTRuE as well.

Do you think this is something -- if you can answer -- that is sort of suited for the private equity industry?

Or looking to go public?

Or you also pitching this to other client bases as well?

I think it could have application for various types of companies, not just private.

Okay, All right.

That was it.

Thanks.

At this time, there are no further questions.

Great.

This is John Andrews again.

We would like to thank you for listening in today.

This call will be available on replay on our website in an hour or so.

Otherwise, thanks again for taking your time.

Ladies and gentlemen, this does conclude today's Goldman Sachs second-quarter 2007 earnings conference call.

You may now disconnect.