Lazard Inc (LAZ) 2008 Q2 法說會逐字稿

Good morning, and welcome to Lazard's first half and second quarter 2008 earnings conference call. This call is being recorded. At this time all participants are in a listen-only mode mode. Following the remarks, we will cutting a question and answer session. Instructions will be provided at that time. (OPERATOR INSTRUCTIONS)

At this time I will turn the call over to Judi 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 2008. Participating on the call today are Lazard's Chairman and Chief Executive Officer, Bruce Wasserstein, Vice chairman Steven Golub and Chief Financial Officer, Mike Castellano. A replay will be available on our website, www.lazard.com beginning today after 1:00 p.m. eastern time.

Today's call may contain forward-looking statements. Any 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 express 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 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 on 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 completes transactions on which we advised as well as 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. If is for this reason that Lazard's 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. This morning we reported record first half and second quarter results for our operating revenue, our Financial Advisory revenue, and our asset management revenue. We also reported a second quarter record in M&A revenue. We are pleased with the performance of our business in these turbulent times.

Our core operating business of Financial Advisory and Asset Management achieved strong results, despite the ongoing softening of these markets. We are also focused on the long-term. We continue to invest in our business while providing our clients with strong experienced teams of top talent. Our professionals are sought after by both strategic buyers and sellers as well as Asset Management clients in this uncertain environment.

We have continued to hire senior talent, have been opening new offices and entering new regions. We continue to develop new Asset Management products. Although the outlook for market activity for the remainder of the year remains unclear, we are confident of the vitality of our firm and we believe our intellectual capital business model will continue to succeed.

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

Thank you, Bruce and good morning, everyone. Net income on a fully exchanged basis decreased 31% to $80 million or $0.71 per share diluted for the first half of 2008, compared to $116 million or $1 per share for the first half of 2007. Net income on a fully exchanged basis increased 5% to $64.4 million or $0.54 per share diluted for the second quarter of 2008, compared to $61.5 million or $0.53 per share for the second quarter of 2007.

As Bruce mentioned, I will elaborate on our core operating business revenue, which includes both our Financial Advisory and Asset Management businesses. Our core operating business revenue increased 9% to a first half record of $848 million and grew 15% to a second quarter record of $467 million. This follows the first quarter of 2008 where our core business grew modestly over the first quarter of 2007 and follows the full year of 2007, during which we reported record results.

Financial Advisory operating revenue increased 7% to a first half record of $501 million, and increased 18% to a second quarter record of $289 million. M&A operating revenue increased 9% to $391 million in the first half of 2008 and increased 37% to a second quarter record of $225 million.

As I stated in our press release this morning, the volatile environment heightens the need for our experience, diversity and global breadth to meet and overcome the challenges for our clients. During the second quarter, we completed a number of important transactions. These include Trane's $10 billion sale to Ingersoll-Rand. Resolution's 500 billion pounds sterling sale to Pearl Group, [Zinofex's] Australia's $600 billion merger with [OxyAnna.] [Louise Dreyfuss's] EUR $2 billion share in its remaining stake in [Neufsagatel] SSFR.

Quanex's $1.7 billion merger with [Gadeux] and the spinoff of IT building products business to shareholder and Bear Stearns $1.4 billion sale to JPMorgan Chase, among others.

We continue to serve as independent strategic advisers on many precedent setting, cross-border and exceedingly complex transactions including serving as lead adviser to InBev in its $52 billion acquisition of Anheuser-Busch, the largest cash M&A transaction in history. [Das de France's] recently completed EUR$44 billion merger with Suez, forming a world energy leader in gas and electricity.

The Hass family trust in the $18.8 billion sale of Roman Hass to Dow chemical, one of the largest chemical transactions. The independent directors of KKR private equity investors in its combination with KKR. The raw bank of Scotland group $7 billion sale of Angel Trains through a consortium of global infrastructure and investment funds led by Babcock and Brown and APP Pharmaceuticals $5.6 billion sale to [Prosenius] strengthening the combined German American entity leadership in injectable hospital based markets.

Financial restructuring operating revenue was $48 million for the first half of 2008 compared to $38.7 million for the first half of 2007 and was $32.7 million for the 2008 second quarter compared to $29 million for the second quarter of 2007. Notable restructuring assignments completed in the second quarter of 2008 included advising plastic engineered products in connection with chapter 11 bankruptcy and asset sales.

Movie Gallery on strategic issues, credit and negotiations and development of a plan of reorganization in connection with its emergence from bankruptcy and AIP Worldwide Services in connection with the out of court restructuring of its bank debt among others. We continued our work on a number of other restructuring assignments both in and out of court in the second quarter of 2008. We are advising on chapter 11 restructuring assignments with Tropicana casinos and resorts, TOUSA, Wellman Inc. and several others.

As is typical as our restructuring group we also have a number of non traditional strategic assignments including advisorily work for Central Properties Limited, Taragon Corporation, WCI Communities. The UAW in implementing its VBA settlements with GM Ford and Chrysler. Vertas Inc and the journal register company, among others Corporate finance and other operating revenue decreased to $62 million for the first half of 2008, compared to $68 million for the first half of 2007. And decreased to $31 million for the second quarter of 2008, compared to $51 million for the second quarter of 2007.

These results were due you to a decline during the second quarter in the value of fund closings by our Private Fund Advisory group and public offerings advised by our Equity Capital Markets group.

Our Equity Capital Markets transaction assignments in the second quarter of 2008 including advising Eurotunnel among others on follow on capital raising transactions and advising on a number of convertible security including [Forendale] Pharmaceuticals Our alternative capital finance group also has serves as placement agen on a number of private investment and public equity transactions including [Trikeo] Marine and on registered direct offerings including [Dendron] Corporation.

Turning to our Asset Management business, our Asset Management business has continued to do well and is providing a wider range of investment solutions for our clients. We're also continuing to expand our Asset Management business both by geography and by product. Asset Management operating revenue increased 13% to a first half record of $347 million and 11% to a second quarter record of $178.8 million for the first half and second quarter of 2008, respectively.

Management fees increased 15% to a first half record of $315 million and 10% to a second quarter record of $157 million for the first half and second quarter of 2008, respectively. Assets under management at the end of the second quarter were $134 billion. With net inflows in the second quarter of $2.6 billion, Lazard has now achieved positive net inflows in the nine of the last 11 quarters.

Mike Castellano will provide more details our financial results.

Thank you, Steve. Bruce and Steve have addressed the key elements of our business results and success. Additional details can be found in our earnings release. However, I would like to clarify a few points regarding our operating revenue, corporate revenue, compensation, non-compensation expenses and our capital position, and then we'll be happy to answer your questions.

First, although we are pleased to report that this year's record first half and second quarter revenues are stronger than the same periods of 2007, the second half of the year remains uncertain because the cost of the markets remain unprightable. We expect that Financial Advisory revenue and income will continue to fluctuate from quarter to quarter and that the result patterns may differ from year to year. This is why it is always best to measure our results on an annual basis, particularly in this uncertain market.

Corporate operating revenues were a negative $13 million in the first half of 2008, compared to income of $51 million in the first half of 2007. The 2008 corporate revenue was adversely impacted by markdowns and losses previously reported in the first quarter 2008. However, our corporate operating revenue was a positive $26 million in the second quarter 2008, compared to $33 million of corporate operating revenue in the second quarter of 2007.

The 2007 results included a gain of $9 million representing our interest in the net proceeds from the sale of LCM Holdings of a portion of its interest in [Tenure Gordon]. The improvement in the second quarter operating revenue -- corporate operating revenue compared to the first quarter of 2008 was primarily due to reducing the volatility of our portfolio of debt securities, to more closely align it with our long-term hold strategy.

For example, the portion of the portfolio designated as trading was reduced to $243 million at the end of June, down 47% from the end of 2007 and down 9% from the end of the first quarter of 2008. The ratio of compensation and benefits expense to operating revenue remains stable at 56.7% for the first halves and second quarters of both 2008 and 2007. The ratio of non compensation expenses to operating revenue was $23 million -- was 23% and 19.7% in the first half and second quarter of 2008, compared to 18.6% and 18.9% in the respective 2007 periods.

The ratios for the 2008 periods exclude the effective amortization of intangibles related to the acquisitions completed in the second half of 2007. Next I would like to discuss our capital. On May 15, 2008 Lazard settled the forward purchase contracts underlying the equities security units or ESUs for $437.5 million in cash and issued 14.6 million shares of common stock.

Also on May 15th, Lazard group settled the remarketing of its $437.5 million of senior notes underlying those ESUs, by repurchasing the remarketed note for a total of $438.6 million. At June 30, Lazard reported total shareholders equity of $353 million. Equity on a fully exchanged basis was $526 million. During the second quarter, Lazard purchased 1.245 million shares of common stock for an aggregate cost of $46 million and our remaining share repurchase authorization at June 30 was $243 million

We are pleased that during the quarter we have further strengthened our financial position by retiring the $437 million of senior notes, significantly increasing stockholder's equity and maintaining our cash positions at over $750 million while continuing to invest in our businesses. In conclusion, we believe that we are well positioned in these markets. Thank you for joining us today and we'll now take your questions.

Thank you. (OPERATOR INSTRUCTIONS) And we'll take Pershant Bhatia with Citi. GO ahead your line is open.

Hi.

Good morning, Pershant.

Good morning. Just in terms of the competitive landscape. In the past you've been fairly aggressive in investing during downturn and I guess is this downturn to some extent going to result in maybe acceleration of your investment plans. Are you seeing good opportunities to pick up talent from competitors that maybe you haven't seen in the past?

Hi, this is Bruce. Definitely that's true. We continue as I said in the remarks. We continue to invest in the future and obviously our strategy implicit with accumulation of cash and the preparedness that we've had was thinking that this sort of environment might be the case and that we would see some opportunities come up both on the personnel and possibly acquisition side.

But we're going to look at things very carefully and really we have to be very discriminating as to what adds to the franchise. So we are looking at opportunities very carefully and we'll continue to do so. They're clearly obviously a lot of people who would like new jobs out there and we have to determine whether that's to our long-term advantage.

I would just add to Bruce's comments. You can see some of the hirings we've announced in both our businesses, Asset Management and Financial Advisory. On the Financial Advisory side recently you seen us announce we hired two senior guys to head up our aerospace and defense team in Mark Richter and Bill Farmer and we've expanded out our market business and hired several people and opened an office in Charlotte.

We continue to invest in our businesses as we see appropriate and you can see some of that show up in our increasing in our non comp expense. One of the reasons for it is we've been adding offices around the globe and both from acquisitions and adding officers.

That's especially true, it's Bruce. In Asset Management where you may have noticed we added new teams of people and obviously their productivity there's a lag time between hiring and productivity but you put your finger on it. That is our strategy.

Okay. And then just you've interacted with a lot of pools of capital that have invested in the financial services space here. Just wondering. Have you seen a shift or some kind of evolution in their appetite to continue in investing in financials over time or how is that changed as some of the financial stocks have continued to go down post getting capital from external sources?

Yes. The financial world is an interesting subject for us. We made the decision globally a while back to continue building the team to create what we think is one of or the eminent financial services practice globally. And you may have noticed publicly, but also on matters that are non public, we are involved in a very high proportion of the work going on in the financial services world.

What is clear by observation is there are investors who want to take advantage of opportunities in that world and we continue to deal with them. I think the issue for people as you've seen in the past week is when is the opportunity the right timing? But there are sources of capital out there. In a way to look at it is that there's a large pool of contingent capital, but you have to be at a point where the bid and the ast meet.

The only thing I'd add it's Steve is we're going to see an increasing trend and you see it now capital raising through asset sales by financial institutions. And you'll see an increasing trend in that vein over time here now.

Okay and just on the alternative side. We've seen somewhat of a slowdown industry wide in terms of hedge fund flows. It looks like your flows are actually picking up and seeding new alternative strategies. Just curious, where are you finding the demand from on the clients' side. What particular types of strategy and what are they looking for you to do for them?

I think although we have a list of strategies we're interested in investing in. The fact is you need the right exact team that would fit well with our structures. So basically it's a mix between what works strategicically and what works in terms of finding the right people. But certainly absolute returns, things that are thematics in some sense.

Our new area is wrapping around a larger quantitative capability around our traditional products and creating new generation of products overall a part of our focus, but as you can imagine we spend a huge amount of time anticipating what in the next five years people will want around the globe.

And by the was it does differ by geography the styles, the preferences and mixes and what we try to do is to anticipate that and create records for our products so that they can prosper in that environment so that's partly what you see is funding some of the growth strategies.

Okay and one final question. I think there had been a mention a few months ago on considering building out of a little bit more wealth management type business. Any progress on that or what stage are you at in that initiative?

All ideas are welcome, but we are, yes, continuing to develop that at a -- I would call it a deliberate pace, but we are continuing to develop that for the long-term. If you were to say -- and again it's a measure of the way we think about things, but if you looked at the ten-year future of Lazard, I think we would have a very significant wealth management program.

Okay, great, thank you very much.

Thank you very much. And we will go next to Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

The first question is a little impressionistic. Given your results given some of the landmark transactions you have in the pipeline given the success of Asset Management. Why do you appear of taking such pains to have a very muted tone about the outlook?\

Let me try -- this is Steve, Guy. Let me try to answer that for you. We obviously had record revenues in both businesses in our second quarter. I only add to that, that in the month of July we announced over $100 billion that we worked on announced transactions of over $100 billion and we also closed a number of transactions in July.

So we have seen a continuation of what we had in the second quarter. Things like the Gaz de France transaction close and obviously that had been in our pipeline for a while. We have seen some deals take longer to close and so you get to the issue of is something going to close in December or January, doesn't change the fundamentals of the vitality of the firm or the focus on the firm for the long-term, but obviously change the results in a given quarter.

Given the volatility out there. It doesn't say at all that we think the level of discussions out there have changed. We've continue on see the business on the announced side and the completion side in July continue to trend that we saw in the second quarter.

But we would very much rather overachieve than overpromise to you. And so, it's in that vein that you know we've tried to deliver on what we said to people. I really do think we're in this mode of wanting overachieve rather than overpromise given this environment.

I think if you go back and look at the records since we've been a public company, we've been -- when we talk about future prospects of the industry, they've been reasonably accurate, it is a very volatile environment and we in no way, are trying to create any negative implications.

Because as Steve says, in fact the short-term data's positive. It's just that realistically it has been an uncertain environment and we're very aware of that because we can see the write-off that has been going on and some of the issues to come for other people, but this firm's fortunately in very good shape.

Guy, the only other thing I would add is look we're in this volatile environment right now and that heightens the need for the kind of model we have. The independent trusted adviser. The experience our people bring to the table. The diversity of our practice.

The global breadth of our practice will help to meet the challenges of our clients and we are seeing that. We are seeing active discussions. It's not like we're saying that we see a change in the level of discussions that are out there at all, but the timing of the revenues just more uncertain in this kind of environment, but vitality of the model we think is there.

But also there's a premium on the level of skill needed for complex difficult transactions and situations versus if you would, the commoditization of the business. So, it in many ways the environment fits our comparative skills.

Okay, that certainly helped clarify a little bit. Thanks. May be you can give us a sense of the nature of the flows you're seeing in the Asset Management, the $2.5 billion. Are you seeing more from new clients or from existing accounts? Is it coming more from US or from international clients and finally may be a sense for the products that are receiving the flows?

I think the flows, Guy, it's Mike Castellano here. The flows are coming from some of the areas that we've seen very active in the past where we have very strong both absolute and comparative performance.

And one of the things that we mentioned is that they are seeing one of the trends being people looking for more of an absolute performance. Things like a thematic themes if you will. Pardon the repetitiveness. But that kind of a product where, you're not looking at one industry or companies within industries but you are looking for more of a theme across different sectors. We've been very successful in that as many people know and have been attracting a number of assets

We've also had one of the top-ranked emerging market products and so there continued to be flows in there. And with some of the newer products that we've been seeding, you see for the first time in a while a little bit of a pickup as you look at the products spread on the Asset Management we have in the earnings release.

The alternative products or the hedge funds have finally begun to begin to pickup seeing some of the benefits of the products and the teams we've been creating and bringing in.

But it's also fair to say that the prospects are very exciting globally. That is not only do people want to invest in emerging markets, et cetera, but we are actively seeking businesses and business from sovereign funds in Asia, the Middle East, et cetera. And have focused on that and think our prospects are bright.

But in terms of what you actually saw in the first quarter, the first half. Can you give us a sense for the breakdown as to domicile of client. Is it mostly non US clients bringing you fresh assets or still mostly US clients and again are we seeing money coming to you from new clients or more from existing accounts adding?

It is a little bit a combination of both, Guy, and one of the things they talked about is you go back five years let's say, Lazard's client base was heavily weighted towards the U.S., although our specialty was more in international products. And one of the strategies that we started and [Asheesh Butani] who as you know has been running the business, had been accelerating. Has really taken the idea, okay, if we've got the strength in international products, let's build out our capability to attract internation clients.

So we've expanded our business in the UK, Germany, regional products in Australia and Japan and that strategy is, and our marketing efforts there have been successful. So the point now where you've seen in the data we put out and posted in our website in the past we basically now got a 50/50 balance of clients that are US versus international.

You might see a little bit more again skewing towards the international side. Over the next couple of years because again that's been our new -- relatively new area of focus for marketing. That's not to say we haven't gotten new clients from the US side as well, but you just see a little bit more coming out of the international because of the marketing efforts we've put in there.

If you think about atrecious strategy, Guy, it's really to provide a wider range of investment solutions for our clients across the board and try to expand by product and geography.

And as Mike said take a look at the website we'll put up later that we do every quarter I think it will give you a feel for the trends.

Thank you very much. And we will go next to Michael Hecht with Banc of America.

Good morning, guys. How are you doing.

Good morning, Mike.

I was hoping you could give us more color on the geographic split your M&A revenues in Q2 and also how much is your business coming from pure strategic assignments versus maybe versus assignments that have a financial sponsor leg involved? And then I am just trying to get a sense, both whether international assignments are holding up better than the US and how the dropoff in private equity is impacting your business, thanks?

If you looked at our business we've certainly been trying to expand into that section in the rest of the world. We've been trying to grow. If you look year to year in any given year. Business has been 50/50, Europe, North America.

It has trended more in the first six months towards North America. You'll be able to see it up on the website later today in terms of the specifics on it. It does give out mix, but there's no particular trend there. It has been a little weighted more towards North America.

We have continued to see active opportunities as we indicated in the first quarter among strategics where the Euro was approaching 160, where the private equity folks have been off to the side and looking at opportunities here in the United States and globally.

And we're going to continue to see companies looking at that, both Pan European for European companies and looking towards the US and looking globally. We think those trends and discussions will continue.

Just to add, a.m. fly, Steve's remarks. Basically the US/Europe balance is pretty much whether it varies by quarter really is not significant. It's pretty much where it's been. It's been about a 50/50 mix. In the end, we, in the US, we've added a Middle Market component, which we may globalize. So you get temporary aberrations in the statistics but I think it's also important to emphasize that we're very pleased with our acquisition we made in Australia.

And I think it's interesting on your sorts of questions because that business is more resource driven and infrastructure driven and things of that sort and it's on somewhat a different cycle basis than other businesses. So if you look at our businesses overall, I know it's confusing to people because people think of M&A as a homeogenous business and the advisory roll that different banks play is homeogenous, but it's not.

We're in a special niche of the business which is the high end strategic advisor and as Steve said earlier as times get more complicated, actually the demand for that service becomes higher. Whether it's in restructuring or anticipating the need for changes in strategy.

That's the first point. Second point our base of business is essentially broadly the strategic part of the M&A business and so the ups and downs of financial sponsors effect us less than other people.

There isn't an effect but it effects us less. You can see that if you go through the publicly-stated results of other firms on Financial Advisory revenues, you'll see there is quite a difference between our results and other results. Partly driven by those two factors.

One the niche that we're in, in the market in terms of the service we offer and secondly, the nature of the client -- the nature of the client base. So that gives you some flavor of our approach.

Thank you and we will go next to [Eric Nei]l with T. Rowe Price. Please go ahead.

yes, just a quick question for Mike. Can you help us think about the non comp expenses going forward, sort of the 99-ish million that you did this quarter. What kind of ins and outs should we expect in the back half of the year and into 2009?

Hi, I think. Good morning, Eric.

Good morning.

Certainly the increase from last year is effects as we talk a little bit. We did the two acquisitions in the second half of the year in Australia and the Middle Markets. Comparisons year to year have to allow for the fact that it's in this year but not last and then sort of the movement of the continued weakening of the dollars impacting the absolute level of expense.

I think you're stripping out the amortization of the intangibles, which is in that 99 for about $3 million. You would have seen in the 10-Q in the first quarter and you'll see again in this one. That's going to significantly taper off now.

Like in the past 10-Q we talked about another $800,000 this year versus 3.7 in the first half of the year and it will continue to be at that much lower level now for the future. So the core non comp expense closer to something like 97. That's probably as good an estimate to look at because we're going to continue to invest in the businesses, whether that's in recruiting, in marketing efforts.

We're taking advantage now as we've talked about in terms of our business model. Now people are seeing the differentiation of what we've been talking about of our model versus some of the others and we're certainly going to be using this as an opportunity to expand our marketing effort in that which will come through on the expense line and you're seeing some of that already.

And the other thing is. We're continuing to look at outsourcing some of the thing we've done internally. Which has been shifting and will shift expense from comp down to non comp and you saw a little indication of that this morning.

You may have seen State Street put out an announcement that we've signed an agreement with them to outsource some of our back office functions that support the investment management business. The Asset Management business.

Not huge shift of cost but they'll be another impact that's going to have that sort of 99-level, may be a little higher being that I would think in the near term to be the run rate because I think the worst thing we could too is to really not take advantage of the current market to continue to differentiate ourselves.

Thank you very much. And we will go next to Michael Hecht with Bank of America. Go ahead, your line is open, sir.

Sorry I was on mute. Hi guys, can you hear me?

Yes we can, Mike.

Okay, sorry. Just to follow-up on color of the backlog on other corporate finance transactions including your alternative capital finance business and then also on the fund raising business. Any outlook there? Second half is usually not bad for capital raise but I think there's been a lot written and focus on slowing pace of flows for alternatives including hedge fund and private equities. So , just any color you're seeing

Backlog, Mike this is Steve. The backlog has continued to be pretty good. I mean the issue runs to what I was earlier. The something you see in the Private -- Private Fund Advisory group is an example.

The strength of the business is there, whether a deal happens to close in December or January in terms of the fund raising. That backlog has been very strong. Could it take a month or two longer to close something? Could, but generally the activity's been good.

Thank you very much. (OPERATOR INSTRUCTIONS) We will go next to Guy Moszkowski with Merrill Lynch for a follow-up question.

Hi. The capital moves that you talked about are really a conversion of a mandatory convertible with no really cash impact one way or the other isn't that correct?

That's correct.

Okay. I did notice that there was a decline of about $28 million in the AOCI in the quarter. On the other hand, you refer to reduction in the volatility of the debt securities portfolio.

I mean is that related to AOCI change? Did you -- were you able to make changes so that you didn't have the same kind of market-to-market volatility? Was there some recovery in the marks from the first quarter in that corporate bond portfolio? What color can you give us on that?

That really didn't have anything to do with the -- I'm sorry. Had nothing to do with the AOCI portfolio. What's happened is that with the conversion of those equity security units and the additional -- and I apologize for getting a little technical -- and the conversion of that into equity. The minority interest that relates to LAZ,MD is a highly positive number.

And so when I said earlier that our equity on a fully exchange basis is 526 compared to what you see is the stockholder's equity that's because we'll include for that number $173 million of equity related to LAZ, MD which is showing up in minority interest

A portion of that ended up being a reclassification out of OSCI. So, it's just really the technical geography of it. We think still that's the right measure to look at it because as I'm sure you're aware, Guy, coming next year the new accounting rules will say those two numbers for non-GAAP reporting will be combined anyway.

So we have the dilemma of -- which is an excellent point, Guy, we have the dilemma of the way we see it economically and the way the accounting standards will see it next year are different than the way we have to report it today. But that's why we stated as on a fully converted basis.

Thank you very much. And we have a follow-up question from Michael Hecht with Banc of America. Go ahead.

Hi, guys just two quick follow-ups. First on -- with the lock offs on the LAZ,MD shares that came off in May. I mean seeing an uptick in attrition? Can you give us a sense where the MD on the Financial Advisory side on headcount ended the quarter, I think it was around 155 I think at the end of Q1 and just specifically any plans to increase that What's the outlook for the increase and that for the second half of the year?

Okay. I think what we're basically doing here is there certainly are no massive attrition plans. We'll continue to as any manager would, continue to cold prioritize, hirer and the net effect on personnel has been that we have over the last year or so increased the number of people, professionals, working in both Asset Management and the M&A side.

But it is obviously an opportunity to accelerate our high quality recruiting program. As far as attrition. It's very limited. We don't expect the divesting of units et cetera to have any impact.

And people understand that because much of the pay is done in shares, even if people sold in the secondary, the amount of employee ownership will land up in very similar because of the accumulation of shares overtime. It will balance out over some period of time. For the continuing MDs.

Mike, what Bruce is saying they're basically saying is that people receive as part of their compensation restricted stock units which vest over time. So if you took our secondary we did in November '06, even though people sold some shares to get some diversification, most of the senior people end up having more shares today then they did then.

Because they're getting shares in the form of restricted stock units and if you look at our headcount numbers and you'll see then in the 10-Q, you' see they're up year-over-year. We've continued to invest in both businesses.

Thank you. (OPERATOR INSTRUCTIONS) And there appear to be no additional questions or comments. At this time I'll turn the conference back over for any additional or closing remarks.

Thank you all for joining us today for our results. Have a good day

And this concludes today's conference call. Thank you for your participation and have a great day.