Lazard Inc (LAZ) 2007 Q2 法說會逐字稿

Good morning and welcome to Lazard's first half and second quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Following the remarks we will conduct a question-and-answer session. I will provide instructions at that time. (OPERATOR INSTRUCTIONS).

This call is being recorded and will be available via Lazard's website.

At this time I will turn the call over to Judi Frost Mackey, Lazard's Senior Vice President and Director of Global Communications. Please go ahead.

Thank you. Good morning and thank you for joining this conference call to review Lazard's results for the first half and second quarter of 2007. Participating on the call today are Lazard's Chairman and Chief Executive Officer, Bruce Wasserstein; Vice Chairman Steven Golub; and Chief Financial Officer Michael Castellano.

A replay of this call will be available on our website, www.Lazard.com, beginning today after 1 PM Eastern time.

Today's call may contain forward-looking statements. Any forward-looking statements are based on our 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 including our annual report on Form 10-K; quarterly reports on Form 10-Q; and current reports on Form 8-K.

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 revenue and profits can fluctuate materially depending on many factors, including the number and size of complete transactions on which we advise as well as on seasonal factors.

As such, Lazard management believes that annual results are the most meaningful.

Accordingly Lazard's revenue and profits in any particular quarter may not be indicative of future results. It is for this reason that Lazard hosts conference calls twice per year to review our first half and full-year results.

I will now turn the call over to Mr. Wasserstein.

Thank you for joining us to discuss Lazard's 2007 first half and second quarter results. This morning we announced record first half operating revenues of $827.7 million. We reported Financial Advisory revenue of $467.6 million and Asset Management revenue increased to a record $308.6 million. We reported net income of $116.5 million on a fully exchange basis or $1.00 per share for the first half of 2007. Net income for the second quarter was $61.5 million on the same basis or $0.53 per share.

We continue to make impressive achievements in our Asset Management business. Assets under management grew by 44% over the past year to a record $135 billion. We grew our total Asset Management revenues by 24% in the first half of 2007 and also achieved record management fees for the first half and in the second quarter of 2007.

We are actively pursuing expansion of our Asset Management business through acquisitions, new investment products, including merchants banking, new hires of individuals and teams and upgrading our current platforms for future growth.

Our Financial Advisory business backlog, which is weighted toward the second half of the year, has momentum. We are advising on a large number of announced transactions. Steve Golub and Mike Castellano will collaborate on the status of our financial advisory and Asset Management businesses.

We are now in the second year of our five-year strategic plan; and we are preparing for the future by building a platform for long-term growth. Although markets and our results will fluctuate from year-to-year, our strategy continues to be to deliver an average annual earnings per share growth of over 20% during the term of this plan, while investing in our core Financial Advisory and Asset Management businesses.

We have built up the financial foundations for growth through our recent equity and debt financing and have bolstered our management infrastructure. We are pleased with our progress but there is always more work to do. We are now in the acceleration phase of our strategic plan and will continue to expand geographically by product and by industry.

For example, over the past three months, we expanded our Financial Advisory business through several initiatives. These initiatives will expand our footprint in vibrant markets and will bring our clients additional access into Central and South America, Russia, and Central and Eastern Europe as well as Asia-Pacific and Australia and the U.S. middle market.

Specifically in May we announced expansion plans in Latin America with our intention to acquire a 50% interest in MBA. MBA is a financial advisory firms with offices across Central and South America. This acquisition which is expected to close in the first half of 2008 complements [Signa Tora] as Lazard, our successful joint venture in Brazil.

In June we signed a joint cooperation agreement with Raiffeisen Investment to provide M&A advisory services in Russia, and Central and Eastern Europe. Raiffeisen Investment is the M&A advisory business of Austria's largest banking group. The agreement strengthens Lazard's access to nearly 30 new markets across the region.

In July, we announced a new growth initiative focused on the U.S. middle market through the planned acquisition of Goldsmith Agio Helms, a specialist investment bank focused on financial advisory for mid-sized companies. With the closing expected by the end of this month we will have added to our geographic footprint, especially in Minneapolis, Los Angeles and Chicago. We will also provide access for Lazard's current Financial Advisory clients to mid-sized private companies in the U.S.

Yesterday we expanded our business in Australia by acquiring Carnegie Wylie & Co., Australia's leading independent financial advisory firm. Carnegie Wylie is located in Melbourne, Sydney and Brisbane with a team of more than 20 professionals. The firm provides mergers and acquisitions' advisory service and manages a private equity fund.

This acquisition, effective immediately, will allow us to build our business faster in the Australian and Asia-Pacific markets.

Lazard is a premium financial services firm committed to excellence, independence, intellectual rigor, integrity and creativity for our clients on a global scale. Our reputation is built on this commitment. Our unique business model has strong operating leverage and continues to focus on a healthy balance between our Financial Advisory and Asset Management businesses. Both businesses operate on a global scale and our geographic product and market footprint continues to expand.

Markets will go up and down short-term and are cyclical in the longer-term. Conditions fluctuate. M&A is not one homogeneous business; it varies by geography, industry and the structure of deals.

In recent weeks the markets have been volatile and there may be a near-term recalibration of the pricing and structure of transaction. But there is also offsetting factors. There is also a clear emergence of global investors such as those from China, Singapore, India, Brazil, the Middle East and Russia.

We believe globalization will continue to accelerate. There will also be increased opportunities for strategic investors. We believe the secular trends toward the greater flow of assets will continue.

As a firm, we feel comfortable with the current environment. In fact we believe some deflation of enthusiasm is a good thing long-term for our clients and for the market.

Our firm is well-balanced. Lazard is well-positioned because of our diversity by geography, industry and client base on the advisory side. In fact, adverse conditions tend to reinforce the demand for our world-leading restructuring practice. Asset Management, which is a significant component of our business, continues to be strong.

There is a need to differentiate the impact of changing events on quite different firms. Lazard is not in the subprime business. We are not a public hedge fund. We don't have a significant principal trading book or hanging bridge loan.

We believe we have limited exposure to a softening of leveraged buyouts. Indeed, in times of uncertainty, intellectual capital and good advice are most valuable. As Michelle [Debede] once told me, "At Lazard, good advice hasn't gone out of style in 160 years."

We are a proud firm and will continue to evolve to reap positive returns for our clients, our firm and our shareholders.

Steve Golub will now discuss our business and financial performance in more detail.

Thank you, Bruce, and good morning, everyone. As Bruce mentioned, I will elaborate on our Asset Management and Financial Advisory businesses, highlighting specific results and transactions.

Lazard's Asset Management business continues to produce strong results with steady growth. Assets under management grew to a record $135 billion with net inflows of $14.2 billion for the first half and $2.6 billion for the second quarter of 2007. Lazard has now reported positive net inflows in six of the last seven quarters.

We also recorded record first half operating revenues in Asset Management of $308 million and record second quarter operating revenues of $161 million. 24 and 25% increases, respectively, over the 2006 period. The first half and second quarter of 2007 represents our highest half year of quarterly management fees ever at $272.9 million and $142.2 million in their respective periods.

Our Asset Management business continues to experience new levels of growth and success. Our strategy for the Asset Management business focuses on actively pursuing its expansion through acquisitions, new investment products, new hires, and upgrading our current platform for future growth.

Our Financial Advisory operating revenue of $467 million for the first half of 2007 and $245 million for the second quarter included M&A revenue of $360 million and $164 million in the respective periods. As we indicated at the end of our first quarter, Financial Advisory backlog for completion of transaction is expected to be weighted towards the second half of the year including many assignments that are not public.

For this reason, among other factors, our results are measured best on an annual basis rather than on any single quarter. In fact, to disclose value of client transactions that have closed since July 1 is already higher than the disclosed value of client transactions that closed during our entire second quarter.

During the second quarter, notable transactions that were completed include Fadesa Inmobiliaria's €6.9 billion merger with Martinsa; the $2.4 million billion merger of Disney's radio unit ABC radio with Citadel Broadcasting; Fairfax Media's A$2.9 billion merger with Rural Press; VIASYS Healthcare's $1.5 billion sale to Cardinal Health; USI Holdings Special Committee and it's $1.4 billion sale to Goldman Sachs Capital Partners; Thales's €1 billion combination with Alcatel-Lucent's transportation and security assets; and Stedim's $1.2 billion merger with Sartorius Biotechnology, among others.

Our M&A backlog continues to build as we assort by clients to provide independent strategic advice on a large number of transactions around the world. These include such notable, recently announced transactions as Groupe Danone's discussion with Kraft to sell its $7.2 billion Biscuits and Cereal business and its €12.3 billion offer for Royal Numico. Resolution plc's 8.6 billion merger with Friends Provident, Penn National Gaming's $8.9 billion sales to a group for private equity investors; Microsoft's $6 billion acquisition of aQuantive; PPG's €2.2 billion offer for SigmaKalon; Arrow International's $2 billion acquisition by Teleflex; American Standard and it's $1.8 billion sale sale of its Bath and Kitchen division and its spinoff of WABCO; and we are advising Emap in its review of its strategic options.

We're also continuing to work on other major transactions such as Barclays €67.5 billion merger with ABN Amro, the largest bank merger in history; Acciona and its agreement with Enel concerning their €43 billion joint management project for Endesa; TXU's $45 billion sale to a private equity group and KeySpan's $11.8 billion sale to National Grid.

Our restructuring groups' completed assignments include Eurotunnel, Lake at Las Vegas, North Atlantic Trading Company, SunCom Wireless, and the sale of New Century Financial's loan servicing operations.

The group continues to work on assignments including Insight Health Services, Collins & Aikman, Tower Automotive, and Movie Gallery and has been retained to advise the UAW in connection with its ongoing discussions with Chrysler over its retiree health care obligations.

As part of our long-term strategy, we invested in our corporate finance business last year and we are experiencing growth in that area. Such growth is primarily driven by the fact that we advised on a number of recent capital market transactions including Special Purpose Acquisitions Corp. IPO transactions or SPACS for our Aldabra 2 Acquisition Corp's IPO; Columbus Acquisition Corp's IPO and Apex Bioventures Acquisition Corp's IPO.

We also served as placement agent of private equity for Virgin America to start an airline. Our Alternative Capital Finance Group has also advised on a number of private investment and public equity or PIPEs transactions and registered direct or RD offerings. Notable assignments during the first half of 2007 include a PIPES for Adaltis, and common stock RD offerings for Towerstream and Cyclacel.

The results of our strategic plan are taking shape and we believe we are well-positioned for long-term growth.

Mike Castellano will now provide more details on our financial results.

Thank you, Steve. I will cover some highlights of our 2007 first half and second quarter results along with supporting financial information regarding revenues and cost.

The highlights include records in our operating revenue of $827.7 million for the first half of 2007 and $439.5 million in the second quarter. We also reported records in our assets under management of $135.4 billion, record Asset Management operating revenues of $308.6 million for the first half and $161.6 million for a record second quarter.

We achieved record Asset Management fees of $272.9 million and $142 million in the first half and second quarter, respectively, and record Asset Management inflows of $14.2 billion for the first half of 2007.

As Bruce discussed earlier, we have made a number of acquisitions that will serve as a platform for future growth in our financial advisory business. The planned acquisition of Goldsmith Agio Helms and the acquisition of Carnegie Wylie included a combination of cash and equity consideration, as well as a significant contingent earnouts payable in equity.

Aggregate 2006 pro forma revenues for Goldsmith and Carnegie Wylie were approximately $115 million. We expect the combined impact of these two acquisitions to be nondilutive this year and accretive thereafter.

For the first half of 2007 Financial Advisory operating revenue was $467.6 million compared to $484.2 million for the first half of 2006. And $245 million for the second quarter compared to $262.1 million for the second quarter of 2006. These results reflect increases in our Corporate Finance group and our Restructuring group and decreases and completions of our clients' mergers and acquisitions transactions.

M&A revenue was $360 million for the first half and $164 million for the second quarter of 2007, compared to $392 million and $198 million for the corresponding 2006 period.

Financial Restructuring revenue increased to $38.7 million for the first half of 2007 from $34.6 million for the first half of 2006 and increased to $29.1 million for the second quarter of 2007 from $21 million for the second quarter of 2006.

Corporate Finance and other revenue increased to $68.6 million for the first half of 2007 from $57.7 million for the first half of 2006, and to $51.6 million for the second quarter of 2007 from $43 million for the second quarter of 2006.

As Steve mentioned, the growth in Corporate Finance and other revenue was principally driven by our participation in various financing transactions including SPACs, PIPEs and other capital raising business. Asset Management operating revenue increased 24% to $308.6 million for the first half of 2007 and increased 25% to $161.6 million for the second quarter, reflecting growth in management fees and other revenue. Management fees increased 26% to $272.9 million and 27% to $142.2 million for the first half and second quarter of 2007.

The second quarter of 2007 represents the highest quarterly management fees achieved in our history. Assets under -- average assets under management increased 38% in the second quarter to $130.1 billion. At the end of the second quarter 2007, assets under management increased to $135.4 billion or 23% over year-end 2006, due principally to net inflows of $14.2 billion as well as market appreciation of $10.4 billion for the first half of 2007. Assets under management have increased 53% since the end of 2005.

Our Compensation and Benefits expense to operating revenue ratio measured $56.7 million for the first half and second quarter of 2007, compared to 57% for the comparable 2006 period. Compensation and benefits expense increased 8%, $469 million and 6% to $249 million for the first half and second quarter of 2007 which is modestly less than the 9% and 7% increases in operating revenue for the same periods. Non-compensation expenses were $154 million or 18.6% of operating revenue and $83 million or 18.9% of operating revenue for the first half and second quarter of 2007, respectively, compared to $126 million or 16.5% of operating revenue and $68.1 million or 16.6% of operating revenue for the comparable 2006 periods.

The percentage of non-compensation expense to operating revenue and vary from quarter to quarter due to fluctuations in revenue among other factors. The increase in non-compensation expenses primarily reflects one-time VAT and other recoveries the first half of 2006 as well as increases and expenses related to increased business activity, including fund administration and services associated with the growth in assets under management; investments in our businesses, including recruitment costs, travel, and other market development costs; and finally the impact of the strengthening of the euro and the pound and other currencies against the U.S. dollar.

In addition, the second quarter of 2007 occupancy and equipment cost includes a provision of $4 million relating to leases on abandoned spaces. The effective income tax rates for the first half and second quarter of 2007 were 22.3 and 22.8%, respectively. On a fully exchange basis the effective tax rate for the first half and the second quarter of both 2007 and 2006 was 28%.

For the first half of 2007 Lazard's net income assuming full exchange of exchangeable interest increased -- increased to $116.5 million from $115.4 million for the first half of 2006. Net income for common share diluted, assuming full exchange of exchangeable interests, was $1.00 per share for the first half of 2007 compared to $1.11 the first half of 2006.

The average common shares outstanding on a fully exchange basis increased 13% to 118.5 million from 104.6 million in the 2006 first half due primarily to the issuance of 8 million -- 8.1 million common shares in December 2006 share offering and the diluted effects of the equity security unit and of a convertible note issued in May of 2006.

For the second quarter 2007, net income assuming full exchange of outstanding exchangeable interest was $61.5 million or $0.53 per common share diluted compared to $62.9 million or $0.60 per share diluted for the second quarter of 2006. Operating revenue for the second quarter of 2007 increased 7% to 40 -- $439.5 million compared to $410.8 million for the second quarter of 2006.

Operating income was $89.2 million for the second quarter of 2007 compared to $84.7 million for the second quarter of 2006.

Operating income in the second quarter of 2007 includes approximately $4 million, representing our interest and net proceeds from the sale by LFCMH Holding of a portion of its interest in [Tamyear Gordon]. And also a provision of approximately $4 million relating to the leases on abandoned space.

Operating income in the first half of 2006 included a gain of approximately $5.3 million from the termination of our joint venture relationship in Italy. Net income before exchange of exchangeable interest increased 29% to $55.7 million for the first half of 2007, compared to $43.2 million for the first half of 2006.

The 29% increase exceeds the 1% increase in income, assuming full exchange of exchangeable interest, as the minority interest represented by the exchangeable interest declined as a result of the secondary component of the equity offering December 2006.

Net income per common share diluted for exchangeable interests was $0.98 compared to $1.10 for the first half of 2007 and 2006, respectively. Net income before exchangeable interests increased 24% to $29 million for the second quarter of 2007 or $0.52 per common share diluted compared to $23.5 million or $0.59 per common share diluted for the second quarter of 2006.

This concludes our remarks. Thank you again for joining us and we will now take your questions.

(OPERATOR INSTRUCTIONS) Michael Hecht with Bank of America.

First question I just wanted to touch on, I mean the backlog of deals you guys noted in the commentary obviously continues to kind of build and be at nice levels. But there seems to be a concern out there that a lot of deals are going to get pulled.

Can you talk about whether you see this as a risk and maybe differentiate between the financial buyer (inaudible) backlog and the strategic buyer backlog right now?

You know, we've got in the release what we talked about is we all know we have a lumpy business and the completed transactions will vary quarter to quarter. And you need to look at our business on an annual basis. It is best measured on an annual basis. We try to put -- we did put in that the volume of transactions that [quarterly] in the month of July exceeded our whole second quarter closings.

And so we've had an acceleration of the volume of closings. Beyond that obviously we have listed all the announced plus pending transactions that we have in and we have been saying all year -- well, since the end of the first quarter that our backlog is waiting for completed transactions towards the second half of this year.

But what we've also seen in the month of July is that the number of announced transactions that we've had has continued to increase and build in the backlog as has the industry generally. And as Bruce indicated in his remarks and our press release, we have limited exposure to leverage buyouts, relative to the marketplace.

And then, appreciate the comments on some of the strategic things you guys have been doing the last few months here. As you think about things you would like to add incrementally now on the M&A side, either geographically or by market segment or by industry and also kind of same thing on the asset management side, any more color on areas you would like to focus in within the Asset Management business -- either inquisitively or organically?

I think we've discussed before that what we want to do is to have deep global presence in both of these areas. So on the Asset Management side I think as we've said we will achieve that objective by acquisition, lift outs, greenfield developments, whatever way is effective. And what we will do is continue to innovate new products.

If you look at our recent history, a large part of the growth has come from our ability to adapt and anticipate the marketplace; and so some of the innovations on emerging markets, global schematics, things of that sort have been very helpful to us. We would like to have a wider range of alternative products. We would like to develop further quantitative products; and we want to eventually develop in more depth our existing private Asset Management businesses, globally in greater depth.

So I think there's -- much has been done but we all see a lot of opportunity on the asset management side. On the Advisory side, you could do it yourself. You can take the world by industry, geography, and say, "Where are we strong? Where are we weak?" Wherever we are weak we want to be strong.

What we've done though in the past few years is invest rather heavily in setting up the template for expansion. And what you see going on in Australia is a model of what we would like to achieve globally again, whether by acquisition or by hiring people or our own development; and I think we are in a great position to do that.

That's helpful. Thanks. Then just looking for any more color on the backlog of corporate finance transactions you see in the kind of alternative capital finance business and then also any color on how your fund raising business did in the second quarter? Whether this was a driver at all in Q2? And any outlook as we look into the second half in terms of seasonality for that business and the volatility in the markets we have been seeing?

We don't comment in terms of specific breakdowns on the backlog but I'd say this to you to, in terms of our Private Fund Advisory Group also that's a somewhat lumpy business like our M&A business and it depends on when the closings are on the fund raising as to what quarter it will be in. We are very happy with our alternative capital finance group. They are -- we have had a growing business both in PIPEs and registered direct offerings and our Private Fund Advisory Group has been a growing business for us, as well, and we think it will continue to do so.

We think what we have invested in both of those businesses will reap rewards as we move forward and provide platforms for future growth for us.

I think there's one added point which is that there is a sizable growth market in the advice side of corporate finance structuring and placements that are outside the conventional public market group. And as you get more distress in the public market, that increases. So one of the features about Lazard is, if you go back historically you can see that there is a balancing system here by its structure. Because when there is more distress what you find is that our world-leading reorganization activity becomes more active, but it's also true in some of these financing activities that we have been more active in that area. An example from the past was when we did a lot of advice-related utility industry when it was in distress.

So we think we are well-positioned for growth in that area. But there is another point which is there is a good business for us in advising very large corporations on the increased complexity of financial markets; and we are continuing to explore and develop more advisory products that relate to the structure of people's balance sheets and how to deal with a changing world.

Last question and I'll get back in queue. But just can you touch on how kind of confident you are in the operating leverage in the model from here just given where we are in the year and with the backlog. And should we expect it to be a combination of comp expense leverage and non-com expenses.

Thanks for the comments on the acquisitions and how you expect that to impact EPS this year and next year. But just specifically should we expect any incremental noise in the P&L around the comp ratios that relate to some of the recent deal activity?

I think we can say to you that we think our models will continue to yield attractive results out over time both -- and we will be able to achieve that both through the comp line as well as the non-com line. Even though you look at the six months and you see the non-com expense operating revenues percentage-wise is up over the prior year.

A good deal of that comes from investment that we've made in our businesses. To give you an example, we have an outsourcing expense for fund administration. It is obviously going to go up as our assets under management goes up. We have been investing in our Financial Advisory side and marketing and development of our businesses.

We do think you can't look at that, indicated that again in the earnings release on a quarterly basis. You really need to look at it on an annual basis as you see the revenues low-end over the back half of the year.

That's helpful. Thanks. Congratulations on nice results.

(OPERATOR INSTRUCTIONS) There are no further questions. This concludes Lazard's first half and second quarter earnings conference call. Thank you again for joining us today.