Lazard Inc (LAZ) 2005 Q4 法說會逐字稿

Good morning and welcome to Lazard's 2005 full year and fourth quarter earnings conference call. This call is being recorded today, February 8, 2006. At this time, I would like to turn the call over to Mr. Rich Silverman, Director of Global Communications. Please go ahead, sir.

Good morning ladies and gentlemen and welcome to this conference call to review Lazard's results for the full year and fourth quarter of 2005. Participating on the call today are Bruce Wasserstein, Lazard's Chairman and Chief Executive Officer; Steve Golub, Vice Chairman and Mike Castellano, Chief Financial Officer.

Today's call may contain forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events. They are subject to known and unknown risks, uncertainties and assumptions. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

These factors include, but are not limited to, those discussed in Lazard's filings with the Securities and Exchange Commission. Management cannot guarantee future results, the level of activity, performance or achievements. Moreover, Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made.

Further, investors should keep in mind that Lazard's quarterly revenues and profits can fluctuate materially depending on many factors, including the number and size of completed transactions on which we advised as well as on seasonal factors. Accordingly, Lazard's revenues and profits in any particular quarter may not be indicative of future results. It is for this reason that Lazard does not plan to hold conference calls each quarter, but rather hold them twice a year to review our first-half and full-year results. And now I will turn the call over to Mr. Wasserstein.

Good morning and thank you for joining us to discuss Lazard's results. This morning, we announced strong results across all areas of the firm, exemplifying the strength and vibrancy of the Lazard franchise. We achieved record annual operating revenues of $1.36 billion with M&A revenues increasing 40% to $675 million. Assets under management grew to a record 88 billion at year end. Pro forma net income doubled, up 100% for the full year to $172 million, or $1.72 per share and increased 56% for the fourth quarter to $57 million, or $0.57 per share.

We believe in the Lazard independent advice model and take pride in our team. This morning's results demonstrate the breath and depth of our client relationships. This is our first year end since going public. Since going public, our team has more than delivered on its promises.

A number of the initiatives we undertook during 2005 are gaining momentum. We reorganized our European investment banking business to elevate the role of our next generation of leaders and improve cross-border coordination. In the U.S., we invested in our regional offices where we see significant opportunities for growth. We strengthened our asset management business by hiring professionals in selected growth areas, as well as expanding our research and investment capabilities in Japan. We added substantial new money into our hedge fund business. Total assets in our hedge fund business are now approximately $3.4 billion, including approximately $300 million in our recently launched Japanese [Longshore] Fund.

We continue to believe that Lazard is exceptionally well positioned for the future. We believe we have the right organization and strategy in place to drive continued strong performance.

I will now turn over to Steve who will discuss our business and financial performance in more detail. Steve?

Thank you, Bruce. Good morning and thank you for joining us today. As Bruce mentioned, we are exceptionally pleased with our results for the full year and fourth quarter of 2005. Our financial results clearly demonstrate the productivity of our professionals whom I thank for their performance in 2005 and the strength of our business model. We achieved record annual operating revenues of 1.36 billion, growing 22% for the year, reflecting solid growth in both our financial advisory and asset management businesses.

Our financial advisory business achieved 32% revenue growth to 865 million for the full year 2005 with strength across all businesses, led by M&A. Our M&A revenues increased 40% to 675 million, our financial restructuring revenues increased 8% to 103 million and corporate finance and other revenues increased 12% to 87 million. 2005 was a very strong year across all geographies for our financial advisory business. The 40% increase in Lazard M&A revenues compares favorably to the 34% increase in global completed M&A transactions in 2005.

Lazard's M&A group advised on a number of this year’s major completed transactions, including Nextel's 43 billion merger with Sprint, Mitsubishi Tokyo Financial's 41 billion acquisition of UFJ Holdings and Telecom Italia's EUR21 billion acquisition of Telecom Italia Mobile, which represents three of the five largest completed transactions in 2005.

Our M&A backlog is continuing to build and reflects several important announced M&A transactions, including Super Value's 17 billion joint acquisition of Albertson's; Lafarge and [McQuarry's] 12 billion euro consortium acquisition of Autoroutes Paris (indiscernible) in Rome; Duke Energy's 14 billion merger with Synergy; Jefferson Pilot's 7.5 billion merger with Lincoln Financial; [Avid's] 4.6 billion acquisition from Boston Scientific of (indiscernible) vascular business; Disney's 2.7 billion merger of its radio unit, ABC Radio, with Citadel Broadcasting; Pfizer's 1.3 billion acquisition of [Sanafee Aventis]' worldwide rights to Exubera and Royal Bank of Scotland's 700 million pounds sterling sale of Doncaster's to Dubai International, amongst other transactions.

The financial restructuring group continued its market leadership in 2005, advising on some of the largest and some of the most notable structure restructuring assignments. During 2005, Lazard was involved in six of the seven largest Chapter 11 bankruptcies. In addition, we advised Charter Communications on one of the largest debt-to-debt exchange offers ever consummated in the high-yield markets and assisted the UAW in its negotiation with General Motors in restructuring GM's postretirement health care obligations.

The Parmalat restructuring represented the largest Italian corporate restructuring of all time. A number of our restructuring assignments led to crossover M&A opportunities, such as MCI and its sales to Verizon. Another example in 2005 is our assignment advising the Air Transportation Stabilization Board in both U.S. Airway's Chapter 11 bankruptcy and its subsequent merger with America West.

Relatively recent initiatives in our financial advisory practice, such as our Private Fund Advisory Group, are now contributing to our revenue in a meaningful way. In fact, our Private Fund Advisory Group was the primary driver behind the 12% growth in revenue in 2005 for corporate finance and other part of our financial advisory revenues.

Turning to our Asset Management business, we reported 12% net revenue growth for the full year to 466 million. Management fees increased 9% to 389 million and incentive fees increased 63% to 45 million for the full year. Assets under management increased to our highest level ever of 88 billion due principally to market appreciation.

Several products experienced significant new inflows, particularly our emerging market, global [thematic] equity, U.S. midcap equity and European fixed income products. In the fourth quarter, we experienced modest net inflows overall. We recognize that the key to our retaining and gathering assets is performance.

The strength in our annual operating revenues enabled us to align our compensation costs below the previously articulated target level of 57.5% of operating revenues with the full year 2005 ratio coming in at 57%. We continue to believe that the financial packages for our managing directors and professionals are competitive in the marketplace. Further, we remained committed to containing our non-compensation costs at relatively constant dollar levels, which enables us to achieve the high degree of operating leverage that you see in our financial results announced today. In that regard, our noncomp costs to operating revenues was 18.8% in 2005, excluding the effect of our tax receivable agreement and IPO-related costs, compared 23.4% in 2004. We're very pleased with our 2005 results and are well positioned to continue to benefit from the favorable market conditions.

I will now turn the call over to Mike Castellano, who will provide more details on our financial results.

Thanks, Steve. I will focus my remarks on the pro forma results mentioned in our earnings release since the structure and the financing of the firm changed significantly with our IPO. In addition, because the exchangeable interest held indirectly about our managing directors are expected to be exchanged for public shares over time, pro forma results assuming full exchange of the outstanding exchangeable interest provides the most meaningful comparison among present, historical and future periods. These pro forma results include actual operating results since the date of the IPO and pro forma operating results for periods prior to the IPO to give effect to the new structure.

Some people may be confused about our historical results. But keep in mind that historical results prior to the IPO treat the Company as a partnership for accounting purposes. Therefore, historical results do not include payments for services rendered by our managing directors as compensation expense or provision for U.S. federal taxes for periods prior to the IPO. Therefore, historical results for periods prior to the IPO on May 10 and subsequent are not comparable.

As Bruce and Steve have commented on, annual net operating revenues increased to a record level. Financial advisory revenues increased 32% to 865 million for the full year 2005, the highest level ever, reflecting our increase in our productivity and in industrywide completed mergers and acquisitions. M&A revenues increased 9% to 183 million for the fourth quarter of 2005, offset by a decline in financial restructuring revenues which resulted in a 4% decline in financial advisory revenues to 238 million for the fourth quarter 2005 compared to the fourth quarter 2004.

The fourth quarter of 2005 marked the third consecutive quarter that our M&A revenues exceeded $180 million. The fourth quarter of 2004 was the year's strongest quarter for financial restructuring due to the timing of completed transactions with 44 million of revenues. The third quarter of 2005 with 40 million of revenue was the strongest quarter for financial restructuring in 2005.

Asset management revenues increased 12% and 10% for the full year in fourth quarter of 2005, respectively, to 488 million and 139 million. The annual growth is the result of strength in both management and incentive fees. The 10% increase in asset management revenues for the fourth quarter when compared to the fourth quarter of 2004 was driven by a 54% growth in incentive fees to 34 million compared to the fourth quarter of 2004.

It should be noted that the fourth quarter is the measurement date for most funds subject to incentive fees.

As Steve mentioned, our compensation and benefits expense to operating revenues ratio declined to 57% for the full year of 2005 versus our target of 57.5%. Compensation and benefit expenses increased 21% to 774 million for the full year of 2005, which is modestly less than the 22% annual growth in operating revenue, and decreased 5% to 216 million for the fourth quarter, compared to the pro forma 2004 figures.

With regard to headcount at year-end, Lazard's total employees numbered 2191 worldwide. We continue to experience very low turnover. Total nonprofessional headcount throughout our businesses decreased from 1368 at the end of 2004 to 1240 at year end 2005, reflecting continued cost saving initiatives.

Non-compensation expenses, excluding the effects of the tax receivable agreement, declined to 255 million, or 18.8% of operating revenues, and 71 million, or 18% of operating revenues for the full year and fourth quarter of 2005 respectively. In 2004, the non-comp expenses were 23.4% and 19.5% of operating revenues for the full year and the fourth quarter. The decrease in the ratio was due to the operating leverage from higher operating revenues and cost containment initiatives. This operating leverage resulted in an 83% and 7% increases in operating income for the full year and fourth quarter of 2005, respectively, to 249 million for the full year and 77 million for the fourth quarter of 2005.

The effective tax rate, including the effects of the tax receivable agreement and assuming the full exchange of the outstanding exchangeable interest, was 28% in 2005. The effective tax rate before the exchange of exchangeable interest was 21%.

On a pro forma basis, minority interest, assuming the full exchange of the outstanding exchangeable interest, was $10 million for the full year 2005 compared with 14 million in pro forma 2004. Before the exchange of those exchangeable interests, minority interest also includes our provision for the 62.4% interest in the after-tax results of Lazard Group allocable to those exchangeable interests. This resulted -- this amounted to 123 million and 44 million for the full year and fourth quarter of 2005, respectively, up from 63 million and 27 million, respectively, for the comparable periods of 2004 due to higher profits of Lazard Group in 2005.

Pro forma net income on a fully exchanged basis increased 100% to 172 million, or $1.72 per diluted share for the full year of 2005, and increased 56% to 57 million, or $0.57 per diluted share, for the fourth quarter.

The exceptional earnings growth we experienced in 2005 is the result of several factors, including strong growth in revenues, a decline in compensation and benefit expenses to 57% of operating revenue and the containment of our non-compensation costs. I will now turn the call back over to Bruce?

Thanks, Mike. We have completed what has been by every measure an outstanding year for Lazard. We remain confident in Lazard's competitive position. Our franchise has never been stronger. We have delivered on our promises to date and remain committed to creating significant value for our clients and shareholders in the future.

At this point, we welcome your questions.

(OPERATOR INSTRUCTIONS). Guy Moszkowski, Merrill Lynch.

Good morning. Just a question, a couple of questions on expenses structure. The 57% which you reflected for the year obviously with a significant true-up in the fourth quarter. It is that something which at the current rhythm of business you think that you could sustain going forward? In other words, should we expect that as long as the business volumes are pretty strong, that you're not going to pay out the full 57.5? And along the lines of that, would you expect that you would accrue at the higher level anyway in the first two quarters of the year, and then always have a true-up in the fourth quarter?

Thank you, Guy. Our target is to be within that 57.5%. And I think as we have told people before, as revenue increases, the need to match it dollar for dollar on a percentage basis becomes less. And so if indeed you have very strong conditions, it will be something less than the 57.5%. However for planning purposes, we do use the 57.5%, and therefore, for accrual purposes, will accrue the 57.5% in the beginning and then true up as the year goes on.

Guy, the only thing I would add, this is Steve, is that we will do this as we see how the revenues are like any estimate that you would do quarter to quarter and decide how to accrue based on how we see the flow of revenues that are in the year like you do any other estimate, whether it was an income tax provision or this compensation.

That makes sense. It is helpful though as we think about our models as the quarters unfold to think about whether you will sort of stick to something that's pretty consistent the first few quarters of the year the way Goldman does, and then true it all up in the fourth quarter, or whether you will make adjustments along the way.

I think the other related point in that we were very pleased to be able to pay people in an appropriate manner. So it was not that we were trying to cut back on appropriate pay, we are more than competitive with the street.

Clearly. Let me ask you a question about nonpersonnel expenses. How comfortable are you, given how the fourth quarter annualized at about 70 million or so, so 280 million annualized -- how comfortable are you that you can keep around the 250 or so run rate that you have been forecasting up until now in what's a fairly booming business environment? Should we expect that that number inches up because of investments that you would need to make, for example, in travel and entertainment, et cetera? Or, do you really think that you can stick to around a 250 number, given the outlook that you're seeing for '06?

As you can see in the fourth quarter again '04 versus '05, we're down in the absolute number year-over-year, even though the fourth quarter number each year is higher than the prior three quarters. You also always have true-up in things like travel and entertainment at the end of the year in our business. Recognize that the fourth quarter '05 number includes our public company expense, which we obviously didn't have in the public -- in the arena in 2004. We do think we will be able to keep our non-comp expense at a relatively constant number as we go forward in time. As revenues increase somewhat, you might have some more variable expense, but we think we'll keep it relatively constant.

But it sounds like there is a seasonality in the fourth quarter.

Just to amplify that, because I think the logic of why the number comes out pretty close to the 250 is important. The key ingredients in those numbers are technology and facilities. Those two numbers as we have said before are pretty well under control. They are not variable with revenue growth; that's what creates the operating leverage. In fact, we spend a lot of effort trying to reduce costs on some of those areas, particularly on the technology side.

On the other hand, as you said, as volume increases, travel and expenses increase, although new business expenses that are billed that the firm is consuming becomes proportionately less as there are more transactions, just simply because there are more transactions to which they relate. So to answer your question, there is a true-up in the fourth quarter, so that is true. But remember, it's just on the T&E and it's not directly volume-related because some of the increase in T&E does not flow through to a corporate charge.

That's fair, thanks. Finally, on this tax receivable agreement, is this something we should expect only effect the fourth quarter because essentially it is also is a true-up type thing?

Yes. The tax receivable agreement relates to an agreement that was discussed in the --.

It was in the S1.

-- in the footnote. And all that is, if the public company, Lazard Ltd., actually realizes a lower tax rate because of using the benefits of the step-up in basis resulting from the IPO, part of that benefit would be shared with the private company, LFCMH. It's hard to predict the future. 2005 is a bit of an unusual year because it had -- a third of it's private and two-thirds of it's public. That nuance did results in us feeling that there's going to be some benefit that we will receive from the step-up in basis. Frankly, we don't really expect that to continue for a couple of years.

So I think this is more of a onetime event right now. It is not really a fourth quarter true-up issue, although that is when you do get the best picture of when it's going to be realized. But as we've looked out, the best we can estimate, we really don't expect that agreement to come into effect for a couple of years now.

And if I might -- thank you -- I'd like to ask just a question on the asset management business. It looks like the fee realization rate, apart from the performance fees, dipped a bit in the quarter. I was wondering if there was anything behind that in terms of mix shift or anything you can tell us?

It was pretty consistent. It was the average AUMs and the fees for the quarter were pretty much in line.

Okay. Thank you very much.

And by the way, Guy, just to be clearer, we haven't decided the exact accrual rate on the compensation, but if we determine for the first quarter that the business conditions are similar to the ones we're existing in now, we will accrue at below the 57.5% rate because we feel that, even with the true-up at the end of the year, it would be not realistic to accrue at the higher rate.

That's very helpful, Bruce. Thank you.

Chris Meyer, Morgan Stanley.

Good morning. Bruce, just a follow-up on that question on comp to revenue. We sort of focus on the number, but maybe if you can just discuss the signal you're sending to the market here where, I guess you're talking about the ability to achieve operating leverage in a strong revenue environment on your compensation line. But how much of the lower comp to revenue this quarter that we saw is because you now have a greater level of confidence that the turnover is lower maybe than you thought at the beginning of the year and I guess a higher stock price may help retention more than the stock price that was lagging in the sort of 20s at the beginning of the year?

I think your premise is mistaken. That is, people -- we've had low turnover because basically, people want to be here first. And secondly, the compensation levels as I said are more than competitive with the street. It is nice the stock is performing better, but I think the low turnover would exist in any event.

So you're not sort of signaling the fact there's additional operating leverage maybe over and above what you originally anticipated, not just from a more robust --.

I think the operating leverage really comes from two things. One, we talked about that essentially the non-comp costs are relatively fixed, so there is operating -- as revenue grows, there is substantial operating revenue leverage with that. That is, even assuming a constant compensation percentage (indiscernible) mathematically, a 7% growth in revenue ends up being a 20% increase in earnings, but just mathematically. Number two, so there is a lot of operating leverage. But the second point is also valid that as revenues increase, pay does not as a percentage have to increase at the same pace. So that's also true, as what happened this year.

What about the impact on comp to revenue from a higher incentive fee component of your asset management business? Does that have any bearing on the comp to revenue ratio?

As we said, Chris, starting out, the revenue, the ratio is very similar between both our businesses. We've indicated over time that that might come down somewhat in the asset management business, but we're investing in our asset management business right now. And so we're going to do what we need to through investment.

The last one on this comp question is, the restricted stock, or think it's restricted stock (indiscernible) for part of the compensation package -- that is included in your 57.5 type of target, is that correct?

Yes. As we go forward in time, we will amortize the restricted shares over the vesting period.

But that is not over and above any comp to revenue guidance? It's included --.

It's included in it.

(MULTIPLE SPEAKERS) it will be included in it as we go forward in time.

Just to make sure everyone understands exactly how that works, which is there is a vesting period, say it's four years, we amortize it ratably over four years. That's the vesting period as is the normal accounting accrual policy for the stock.

Bruce then, just on the buybacks, that's also new news this quarter. Can you just -- I appreciate the desire to keep the share count flat when you're starting to now issue stock as part of your compensation. But, how do you think about paying down debt versus buying back your own stock, given that I guess the after-tax part of the debt is fairly similar now to your earnings yield on your stock?

First point is, to the degree that is true, it doesn't account for the presumed growth in the stock. So on the growth rate, it would be accretive to be buying back stock. But as we've said before, the idea here is to offset the stock grants with repurchases, which we said is the broad philosophical point of view over a long period of time. That is, we don't want to be producing an undue amount of stock floating around.

As we've said before, as we look at our free cash flow over time, as we look out over our long-term strategic plan, we will look at whether that is dividends or buybacks or paying down debt or doing a small acquisition. We're going to look at developing a strategic plan for our overall free cash flow over time.

But obviously implicit, and you can see it on the balance sheet and on the financial statements, we are quite confident as to our financial position and at the moment see no particular reason to pay down debt.

And maybe finally if I can, Bruce, the press gives Lazard quite a tough time in Europe about turnover in Italy and lead table rankings. Can you just give us an update on how the restructuring is progressing there and if you have been --?

Sure, no, that's very helpful. Let me splice the question. Let's talk about the rest of Europe and then talk about Italy in particular. As you know, what we did was to reorganize Europe to try to elevate this next generation of leaders. In fact, we have had, as far as I know, no turnover in Europe of anyone we've wanted to retain, other than the discussion on Italy, which we'll talk about. So there is no turnover in Europe. As far as I know, it's zero of anyone we wanted to retain.

The European prose wrote a lot of stories about people who either voluntary or involuntarily retired, and that's their problem, not our problem. In fact, this is a very good year in Europe. You can see that particularly -- the French business was particularly strong, which is exactly the contrary to some of the stories you might have been reading, and you can see that again in the results.

To explain that partly, it's because the nature of our business is broader than what people hint at other firms seem to conduct as a business; that is, we spend a lot of time advising governments, doing private transactions, getting fees for advising corporations on deals that don't occur, and also doing transactions -- a great example of which was the Pfizer Exubera transaction -- that are not traditional asset deals, but are intellectual property type of deals or licenses. So those factors are all there. We are particularly proud of that next generation of leaders. We think we have the best people in the business coming up.

And now let me trying to Italy. Italy has the following characteristics. As you know, we own 60% of Italy. We made a strategic decision to integrate Italy with the rest of Europe; that has a short-term cost. The people who basically wanted to run Italy as it's now run, which is as a separate basically nonintegrated entity, have left. The people who want to run it as part of the greater Lazard where we have the best of local outreach and people and in international perspective, have stayed; we think in the long-term, will be in a stronger position. Indeed, we have already seen the strength of this combined European approach on the cross-border transaction front. Specifically, for example, our activity in Spain this year in the gas pipeline business was very much aided by an international utility team that would not have been able to have been fielded under our prior structure of organization. We had people from Germany, from France aiding that endeavor. So we are very pleased with the progress to date and in fact expect it to accelerate. We are very much dedicated to investing in Italy. We have assumed that next year is a year of building and investing in Italy, and that is fine. We expect our overall European business to be strong.

Great, thank you.

Michael Hecht, Bank of America.

You guys mentioned increases in productivity that are driving better results in this [advisory] businesses. Is there some metric you can point us to in terms of the average revenues or number of yields or deal volume per banker that you saw in 2005 versus 2004, and any color you can give us on where you see that going?

Basically, I think you can do it yourself, which is that there are still prior to promotions, 125-odd advisory bankers. And you can divide the numbers, but you'd see a substantial increase per banker. We've had some promotions at year end and we will see how that has an effect. What we're trying to do, though is not to reach some artificial number, but to provide the basis for growth for the future. So if you think of it that the way, we will continue to have periodic promotions of young people and bring them along. There will be selective hires from the outside, but we think we have a nice base to grow the business. But in [your] terms, there's certainly a growth level in productivity that is over the 30% type of level this past year.

That's helpful. Thanks. Going back to back to the comments on Italy, can you update us on the relationship with Intessa? And I believe there was like a $150 million promissory note in the joint venture, and that use of cash that will come up at some point during the year?

So, we expect -- our strategy is to get out of the joint venture with Intessa at -- and that has a maturity date in 2007, at the and of '07. And we are always in dialogue with Intessa, it's a friendly dialogue. And whether we accelerate that or not is something for mutual discussion. But there have been no arbitration proceedings that have actually been filed and we are in dialogue as to figure out what is in our mutual advantage. But as far as we're concerned, there is no obligation until the end of '07. [Of course] at that time, whatever we have to do to offset by the revenues that would -- the income that would flow in at that point with the business, adding another 40% of the profits.

Okay, great. Another question on the financial advisory segment. Any more color on what's driving strength in the corporate finance and other revenue line there? And any outlook you have for growth in business there?

As I indicated in my remarks, it's principally being driven by a private fund advisory group that started up several years ago and we've had a significant increase in their revenues in '05 over '04. The group basically raises -- does fund-raising for private equity firms and had a very strong year in 2005, and they do that business of '05 in equity firms, as well as hedge funds.

Okay. Just shifting over to the asset management side, I noted that the inflows were -- the flow trends were more positive this quarter. Anything you guys can kind of attribute that to? I know there's kind of a turnaround process underway there to improve investor performance, broaden distribution. But any update or outlook there? Should we kind of see that as a more positive trend, or do you have any color on where you kind of see flows going this year? Are there any large onetime things on the horizon that could impact those trends?

Yes. I think what we have consistently said is, this is a building process and these flows -- we assume no ebb and flow. What we are particularly focused on are the details behind that. That is, the flows to new products where the margins are higher, the performance on the new products, and those have been quite positive. So there's, as we said, a yin and yang to all of this, but we are quite comfortable we're on track for our three-year program.

The only thing I would add to what Bruce was saying was, we've certainly had two areas where we we've gathered assets (indiscernible) gathering assets. Our hedge fund business is up from 2.8 billion at the end of last year, up to 3.4 billion assets under management at the end of '05. And we've had some good growth in Europe in some of the regional products.

Okay, great. Thanks a lot.

Josh Carter, Goldman Sachs.

Just a quick follow-up on asset management. First of all, obviously, the incentive fees were up, and that's very positive in addition to the flows. Is that an indication that performance also continues to improve across the entire platform?

It doesn't necessarily mean across the whole platform, but obviously if the incentive fees are up, it means performance has been up.

Do you have any sense (MULTIPLE SPEAKERS). And do have a sense for how that's tracking year-to-date so far (indiscernible) performance in general?

We're not going to comment upon how we're doing in '06 at this point in time, other than to say, we're continuing to build investment teams to improve our performance record over time.

That's great. You've talked in the past about how on the financial advisory side, you're built out for moderate growth, in line with the M&A to market cap ratio being below historical average. Do you continue to feel that you're built out appropriately, or do you feel like you want to increase hiring in selective areas?

No, I think we're actually -- our infrastructure is well built for still substantial growth. However we do expect to expand in selected areas, and it's very focused as to which areas of expansion. For example, in the United States, if you look at our promotions this year on the advisory side, all of the promotions were either specialty groups or regionals. We named four new managing directors and three were regionals -- two out of the Houston area, one in Chicago and a fellow who is a utilities specialist. So what we're trying do is to fill out our particular areas. We will probably do some selective hiring. We probably will continue to be quite selective in filling out further our junior ranks to some degree, but none of this is going to create a large difference on the expense ratio side of the business. We're also very clearly demanding high performance from the people here and we'll continue to weed how any underperforming people. And in Europe, again, we will have selective hiring.

That's helpful. Thanks. Just a housecleaning item on the non-comp expenses. Premises and professional fees, or occupancy and professional fees, were just a little higher than I was expecting. Was there anything unusual in those numbers, or should those see a decent run rate going forward, given that they are relatively -- at least on the occupancy side, it's relatively fixed?

There's nothing really significant that's unusual in there, Josh. On the premises line, though, we did, you may have known that we did sub-lease a significant amount of space that we had vacant in London. And that transaction closed in the fourth quarter, so there was some transaction fees related to that that went through the P&L, but that's really all.

Great. Thank you very much.

Gentleman, there appear to be no further questions at this time. I would like to go ahead and turn the call back to Mr. Wasserstein for any additional or closing comments.

Thank you all very much.

And that does conclude today's conference call. Thank you for your participation and you may disconnect at this time.