Lazard Inc (LAZ) 2012 Q2 法說會逐字稿

Good morning and welcome to Lazard's second quarter and half year 2012 earnings conference call. (Operator Instructions).At thistime I will turn it call over to Judi Frost-Mackey, Lazard's Director of Global Communications Please go ahead..

Good morning, and thank you for joining our conference call to review Lazard's results for the second quarter and first half of 2012. Hosting the call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer, and Matthieu Bucaille, Chief Financial Officer. A replay of this call will be avaiable on our website beginning today after 1 PM. Today's call may contain Forward-looking statements. These statements are based on our current expectations about future events and are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause our actual result, level of activities, 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 Form 10-K quarterly report on form 10-Q and current reports on form 8-K. Lazard accepts 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 in which they are made. Today's discussion may also include certain

non-GAAP financial measures. A description of these non-GAAP and their reconciliation to the comparable GAAP measures are contained in our earnings released which has been issued this morning. For today's call, we will focus on highlights of our performance. Details of our earnings can be found in our press release tissued this morning and in our investor presentations of supplemental information both of which are posted on our website at lazard.com. Ken and Matthieu will be happy to answer your question following their remarks. Before we start, I would like to announce that Lazard will begin holding quarterly earnings calls expanding our current schedule of half year and year end calls. I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Good morning. Thank you for joining our call. I will start with on overview before Matthieu discuss our financial results. Then I will return with some perspective on our outlook, and we will open it up for questions. Six months into the year, Lazard's revenue performance underscores the strength, stability of our low risk, advice-driven business model. Our operating revenue in the first half of the year is at a record high despite the weak macro environment and despite the decline in second quarter revenue. We remain cautious but are encouraged by trends in both of our businesses. In financial advisory our M&A institution advisory operating revenue rose15%in the quarter 16% in the first half.

This is a notable achievement that industry-wide global M&A completions declined significantly in the quarter and first half of the year. We are clearly gaining wallet share. In asset manage operating revenue was down 2% sequentially from the first quarter, yet we have a billion one of net inflows in a turbulent market. Our revenue performance reflects two primary strengths of Lazard's franchise our breathe and our global scale. In Financial advisory the breathe of our business means we do not rely on any one geography or trend. Our results reflect contributions from sovereign advisory, structuring, capital structure advisory, debt advisory, and Lazard middle market. These all overlap with our traditional M&A business. Relationships formed in one of these areas often lead to transactions in another. Our global scale was on full display in the second quarter and first half of the year, Besides the Spanish company on the sale of its stake in the European satellite company to a Chinese buyer requiring the approvals of governments in France and the US and involving our offices in Beijing, Madrid, Paris, and New York.

We advised on the sale of Chilean toll road owned by a German entity to a Canadian entity involving our offices in New York, Madrid, Santiago, and Frankfurt, and we advised a European/U. S./Brazillian beer company on its purchase of a Mexican company involving our offices in New York, Monterey, and San Palo. We are currently advising a middle eastern sovereign wealth fund on its shareholding in a English company in connection with a proposed merger with a Swiss company. This is what sets Lazard apart from our competition. We are the only independent advisor with a global scale that handles large trust quarter transactions covering all industries involving complex balance sheet considerations.

In asset management our revenue goals also gave us a competitive advantage. We have diversified platforms that provide investments to clients of all types around the world. Asset manage continues to see good RFP ativity. We have won significant new mandates this quarter from investors in global, regional, and local strategies across asset classes from all parts of the globe. Despite our strong revenue story, the Firm's net income was impacted in second quarter by legacy compensation cost and by lower 2011 second quarter approvals compared to full-year results. Now, I will turn over the call to Matthieu who will provide more detail on our financial performance.

Thank you, Ken and good morning everyone. Let me offer some color on our revenue and expenses. As Ken mentioned and strategic advisory was the biggest contributor to financial advisory revenue with second quarter operating revenue of $195 million, up 15% versus the second quarter of 2011. Our fees were earned across a broad variety of transactions including the completion of several major mergers and acquisitions.(inaudible) We have also been active in winning new assignments. We are advising on three of the top ten sliders to global M&A transactions announced in the second quarter of 2012.

unavoidable (inaudible) acquisitions of a remaining (inaudible)of a 45% stake in (inaudible) Masterblended 1753. You will find a full length of all transactions on page 7 through 9 of our earnings press release. Our sovereign advisory business maintains a leading position advising governments and sovereign institutions in Europe and throughout developing work. Revenue from capital markets and other advisories declined in the second quarter primarily due to lower corporate finance activity and challenging market conditions. Restructuring revenue also declined in the quarter consistent with the industry-wide decline of corporate restructuring activity. While we continue to be active in many of the most notable restructurings such as (inaudible) with respect to American Airlines, Eastman Kodak, International application of the National Association of Letters Carriers in connection with the US Postal Service restructuring.

In asset management, as Ken pointed out, we currently have good momentum. We ended the quarter with asset under management of $148 billion, up 5% since the start of the year. (inaudible)for the second quarter was essentially unchanged from the full-year average of 2011.

This position of 12 (inaudible) going forward. On a sequential basis our management decreased 2% in line with the change in the US, compared to the second quarter of 2011, the decrease was 12% and reflects both the decline in capital markets over the period as well as to a later extent a slight shift in our mixed asset of the management. Our solid investment performance contributed to the $1.1 billion of net inflows for the second quarter. This was primarily derived from new mandate in global equity, international equities, and a merging market debt for clients worldwide. Moving on to expenses.

First an computation. As we have said, we focused on one computation in managing our business. one computation reflects the cost of all pay including deferrals for the year with respect to which it is awarded to the employees. Our goal is to achieve a compensation ratio of the cycle in the mid to high 15% range. We are making progress and are confident in our ability to achieve this both on an awarded and adjusted GAAP basis. For the full-year 2012, we are assuming an awarded compensation ratio of approximately 60% compared to approximately 62% in 2011.

The second quarter of 2012 our adjusted GAAP computation ratio was 62.7% compared to 62.0% for the full year 2011 and compared to 58.1% for the second quarter of 2011. Explicitly low ratio of 58.1% in last year's second quarter has impacted the quarterly earnings comparison. Our second quarter adjusted GAAP computation ratio reflects different computation awards from 2008. In the first half of 2012, the amortization expense related to the 2008 grant was $23 million. To give you an idea of its impact, this expense which presented 2.4% points of our 62.7% first half 2012 adjusted GAAP compensation ratio. The 2008 grant is the only one with the resting period in excess of three years. We expect our amortization expense to revert to a lower level after the first quarter of 2013. The punitive cost of our legacy compensation issue negatively impacted our earnings in the first half of this year.

Also, our half first revenue was essentially unchanged, 500, at $954 million compared to $949 million one year ago. Our earnings from operations declined by approximately $57 million. This change difference was primarily due to the compensation expense I just described. The impact of the 2008 grant amortization expense was approximately $23.5 million The impact of the lower 2011 first half accruals was approximately 3.5% of our 2011 first half revenues for $33 million. In aggregate this equals $66 million or almost all of the $57 million decline in earnings from operation.

Now on to non-computation expense. Our non-computation cost in the second quarter were essentially unchanged sequentially from the first quarter. However they increased approximately $6 million compared to the prior year period, based primarily on higher(inaudible) higher costs. Non computation costs other than (inaudible) in aggregate were essentially unchanged in the second quarter of 2012 compared to the prior year period. As most of you know, we note margin target in our shareholder letter last April. To reach this target, we are aggressively pursuing comp initiative across computation and non-computation expenses. We will tell you more about this in a year. We expect you will see the positive impact reflected in our 2013 results and beyond. I will now turn the call over to Ken for concluding remarks.

Thank you, Matthieu. Here's a summary of our outlook. Certainty continues to weigh on the economic recovery. We are encouraged by the trends in both our businesses, but we remain cautious. As we have discussed in the past, M&A activity ends on three factors, valuations, availability of financing, and confidence. The first two remain relatively strong. Valuations remain attractive. Financing especially relative to organic growth opportunities, financing is generally available to multinational corporations most of whom have strong balance sheets with ample cash.

Our confidence continues to be uneven due to chronic uncertainty around Europe and potentially around the US physical situation. However in a subpar economic environment any of the multinationals that we work closely with have limited opportunities for organic growth in developed markets. Growing to acquisitions makes sense and it is feasible. We think the M&A cycle will improve in fits and starts, but it is generally headed in the right direction. In the meantime, we are encouraged by our recent activity. We feel we are in a excellent position to weather a choppy M&A market with the breathe of our advisory platform . Our sovereign advisory business continues to be active(inaudible) assignment especially in Europe and Africa.

We see growing opportunities for restructuring and debt advisory in Europe. Our US middle market business had a great first half reflecting the improved financing environment in the Us and global demand for tactical acquisitions. We have leveraged this business through our global network, and we have seen significant cross-quarter activity here. In asset management, we remain confident that we are we positioned to benefit from the secular growth of the global asset management industry. Our business model emphasizes strong local presence around the world, is institutionally oriented, and we expect it to benefit from the continuing demand for high quality investment solutions. Now asset management activity is reasonable. We see investor interests across all our investment platforms including local, International, global, and emerging market equities, emerging market cash as well as fixed income.

In both financial advisory and asset management we are built up globally when macro environment improves, we have capacity across industry groups, across geographies, and across advisory platforms and investment platforms. But we are not waiting for economic recovery. Lazard is well positioned for revenue growth. We are outperforming by virtually every measure on the revenue side in a weak market. Our challenge now is to make the same progress on the cost side. We announced financial targets in our shareholder letter last April including an operating margin of at least 25% by the year 2014.

We have significant cost initiatives underway which should possibly impact 2013 results. We are committed to reaching our targets, even at current activity levels. Meanwhile, we are delivering at our commitment to return cash to shareholders. This April 2010 dividends have increased 60%. 2010, 2011, and 2012 we have offset all dilution from new RSU grants. 2012 we have returned already $243 million in cash to shareholders. And since April of this year, when we announced our target of returning $200 million in surplus cash to shareholders, we have returned approximately $50 million. We still have work to do on the expense side. We are confident the expected initiatives we have underway will bare fruit in 2013 and the results will increase shareholder value.

In the meantime, we are returning significant cash to shareholders. We have considerable operating leverage in both our businesses as macroeconomic environment improves. On the revenue side Lazard is better positioned than it has better been with a broad and deep platform, the best people, and an unrivaled network of relationships with key-decision makers, corporations, governments, and investing institutions around the world.

This concludes our remarks, and we are now happy to take your questions.

Thank you. (Operator Instructions) And we will take our first question from Howard Chen with Credit Suisse.

Hi, good morning, Ken. Good morning, Matthieu.

Hi Howard.

Hello Howard.

Ken, on the advisory side of the business you touched a lot on the international breathe of Lazard. Could you speak a little bit more about what you are seeing by region and your expectations for cross border or outbound M&A .

Sure, starting with the U.S. The U.S. market has been pretty good for us so far this year. Across a breathe of activitying both the large cap due from recent announcements, as well as particularly the mid cap or middle market business. And that is the - - without question, the best market right now for us. But we are seeing a fair amount of cross-border activity, interest at least, as you would expect from multi nationals in Europe into the U.S., in part because of the ability to do deals here and part because it is a way to enter -- to have activity in a market that is potentially growing faster than their home market and also it is a good entry point often times into emerging markets. So that is one tend. In the developing world, it episodic. It is probably a little bit slower from the macro standpoint as it was year ago, but for us we seem to be doing reasonably well. We obviously have seen a little bit of activity out of China as I described earlier, and we have also seen a pickup in interest into some of the markets like Africa, Latin America, and such. And Europe on the M&A front for large caps has not been horrible, but it is a challenging market because it is in Europe where confidence is most challenged.

Great. Thanks for all that color. That is helpful. And then shifting over to asset management. You noted, Matthieu the return deposit of flows and where those came from, but looking forward I was hoping you could characterize the asset management pipeline today, and are we seeing any of meaningful contribution from some of the newer product complexes such as emerging market debt or the real estate business?

Yes, so the intros that you have seen during the quarter(inaudible). We have $1.1 billion net interest. We have a very abrupt platform and this is reflective of, in fact important gross inflows during the quarter across a growth range of provence solutions. Among them, I think you are right. They were a product, such as developing market equities. They were also in the fixed-income side the emerging market debt, but we also had some folding international legacies.

Great. Thanks, so much. The final question for me, the 25% operating margin targets is a fairly strong statement for you and the Board, Matthieu I know you want to leave some of this conversation for later in the year, but was just hoping you and Ken could provide a bit more detail on just how you think about pathway to that 25%? How much of that is revenue driven? How much of that is noncom driven, and how much is driven from the fallaway from prior years awards?

We gave a fair amount of detail in our shareholder letter and the Q&A we published at the end of April about our targets and margins and such. WE have a whole bunch of Issues underway on the cost side both comp and noncomp to achieve that objective. We will defer on speaking about it until later this year. The impact starts to be felt in 2013, and we are pretty confident we will get there.

Okay. Thanks for taking the questions.

Thank you.

And we will take our next question from Joel Jeffery with KBW.

Good morning Guys.

Good morning.

In terms of the contribution from the sovereign advisory, can you just talk about how much that was for the quarter. Do you see this being a bigger piece of your business going forward just given what is going on in the world?

We have never really broken out the specific fees on the sovereign advisory mixed into the M&A and strategic advice line. But it is an important part of our business. I think we a leading market position there. It is a business which was historically was a developing world business, Africa, Asia, Latin America. Obviously over the last few years, it has become an important business for us in Europe, and if the crisis continues it will remain an important business for us.

Touching on a point that Howardhad brought up. In terms of the inflows, you have rebounded nicely this quarter, and you mentioned that RFP activity was up. Is this a turning point for you guys again just to be back in more consistent, inflows in your opinion.

Joel, we have a couple things going for us in our asset management business. First is our performance is good across most of our platforms. Second, is that we have a mix of products which are particularly relevant to the investing universe today. The strength of our platform, internationally the strength of our platform in the emerging markets. So those are two good starting points for us. The increase in RFPs reflect the strength of our platform. The funding of those Raps and our success on those RFPs in a large part are a function of the macro environment and decision making at larger institutions. And We are pretty confident on the things which we control which are performance and the relatives of our platforms, and really the key here is the funding. But generally we feel pretty good about where we stand at the moment in terms of the building of a pipeline here.

Just lastly for me. I want to make sure I think I heard you correctly. Matthieu, When you talked about the amortization expense rolling off from the 2008 issuance, you said that would occur after the first quarter of 2013?

Yes cause this is when the ACP, or the vexing of our (inaudible)takes place during the first quarter. So the addition and amortization that we have from, in particular the 2008 rent, has a full impact of course in 2012, but we will still have a little bit of an impact in the first months of 2013 which is the reason why we are saying that the overall amortization expense will start decreasing after the time.

So that $50 some odd million worth of difference in amortization cost will be spread over the last three quarters of 2013?

No, no. The increase in the amortization is mainly related to the 2008 grant. The 2008 grant impacts on our first half is $23 million. For the full year of 2012, it should be around $14 million. And then in 2013, if you look at the full year of 2013, that would start disappearing. So we should see our amortization expense decrease in 2013 verses 2012.

Matthiew, the first quarter amortization should be about a quarter of what it is this year about $10 million next year. Is that correct?

Yes, probably a little bit lower then that because it is only two months.

Great. Thanks for clarifying that.

And we take our next question from Devin Ryan with Sandler O'Neill.

Good morning, guys how are you?

Hi, Devin.

The advisory revenues look like they are up about 9% in the first half of this year over last year, and it looks like you have a pretty good shot to see as advisory revenues up in 2012 over last year despite what I think will likely be a down year for advisory fees and could be in the double digits for the industry. So obviously that would imply some market share gains. So I want to get some thoughts about how you guys think about your advisory market share? How much do you feel like gaining market share is going to be a function of a shift away from the bullish brackets more broadly, or do you think it is going to come more from something more Lazard-specific?

Couple things. First it is difficult to measure market share in our business. We tend to look at wallet share, as you probably know from our slides, which is what people publish as advisory revenue quarter by quarter and over the year. It is imperfect because it a little bit of apples and oranges considering what most people put in a advisory revenue. For us it is probably it best measure that is out there. And you can really see the gain in our wallet share by looking over the past several quarter last couple years and you can see the difference between us and the first player or the second or third player has really narrowed over the course of the last several periods. So that is a great sign.

Second, look, this is a function really of a couple of things or share needs. One is, we have got an unparallel network of relationships which we really make available to our client with corporations and governments and investment institutions around the world. And that is really the competitive advantage that Lazard brings compared to anyone else. That network is probably equal to or as good or better then any of the large firms and clearly it is much larger and much more developed than the smaller firms. So that is numb one.. Number two, is the demand for independent advice, great independent advice is probably higher today than it has ever been. That is evident particularly in more complex situations which we are obviously there are many today, and that is something that we exsel. And then third is the shear focus that comes from the stability of a platform like Lazard and the inherent strength of our business model compared to some of the large firms. So if you add those three things up, and you really, we appear to be doing so well on the market share gains.

Okay. Great. Thanks for that color and then just secondly within asset management looking at an average field does not tell the whole story. But just looking at where AUM ended the quarter and even on an average basis relative to the management fees in the quarter, management fees were a bit softer then I would have thought just given that level of asset sell. My question is am I reading too much into that, or are you guys seeing some maybe some fee pressure on some of your products, or is it more of just a change in fee structure?

As I say, I probably, I would not read too much into it, but if there is anything to read into it is a slight mix issue which is if you have our larger or higher-fee products loosing a little bit of AUM, relatively speaking it is going to have a little bit more impact on revenue than if the lower-fee products lose AUM, and that is essentially the difference for the quarter.

Okay. Great. Actually just lastly, I just want a quick thought on the hiring outlook. What are you guys seeing today? What is your appetite, and what does the environment currently look like?

We are very comfortable with that. (inaudible)skill at this point. We do not really need to add any additional headcount to really take advantage of any upturn in the macroeconomic environment. If you look at Lazard on the financial advisory side, we feel we have got a reasonably built out platform across all important geographies, industry groups, and really capabilities. So for us, we see something that really allows us to upgrade on a basis which is economic, we will consider it, but otherwise we are pretty cautious on hiring right now. On the asset management side, if we see the right opportunity platform, we will execute on it, but again I think we are pretty comfortable with being able to grown both businesses organicically and take advantage of the improvement in the macroeconomic environment to grow the revenue on.

Okay. Great. Thanks for taking all my questions.

Thank you. (Operator Instructions) We will go next to Chris Kotowski with Oppenheimer.

Good morning. You have a lot of feet on the ground in Europe .So I am curios on your perspective. This has been going on for two years now, and if we assume that there is no easy fix and we are in an unsettled environment for another two or three years. First of all is there a cumulative toll on the large corporate there or is this a process where what does not kill them makes them stronger and that they are rationizing more and more. That is the second question. And then secondly, if we do assume this goes on for two or three years what kind of activities should we be seeing? Should we be seeing inmarket merges of equals? Should we be seeing sales to private equity firms, or would it just be to a dearth of activity?

A broad question. Sort of a macro question, not a Lazard specific question. So let me kind of go at if and try to narrow it a little bit. In terms of the larger multinational Europe, they are not so different from the large multinationals in the US in that large portions of their businesses are located in the United States or developing world. And so and their home markets in many instances are less important to them than they are to their businesses outside of their home market. So you have to think of many of these companies in the same perspective you would think of an U.S. multinational. So in some respects, the impact of the global crisis or the financial crisis in Europe may not be all that different from the way it affects the multinational in the U.S. That is one observation.

The acquisition activity you are going to see in Europe by these multinationals will probably be a bit more geared towards the US and the developing world as opposed to other acquisitions in Europe. That is probably a trend which will unfold and has actually started already. The challenge in Europe is that the midisized smaller companies who do not have access to the financing that the larger companies do and also do not have as much of a global footprint. There you will see more consolidation perhaps in markets and perhaps even some consolidation coming from outside of Europe. That is particular on the consumer-branded area. You can see activity coming from Asia to Europe, and you have actually some activity from the US to Europe on midsized companies because of a specific position or (inaudible)debt in a product or in another geography. So it is hard to generalize, but the multinationals in Europe will probably behave very similar to the multinationals in the US. The smaller midsized companies will probably be a little bit more challenged.

And a Lazard specific question. You had a shareholder returns of $243 million in the first six months against net income of $78 million. And your cash position had historically run roughly 1 to 1 with your debt position and now it is about 750 against the debt of about $1 billion. How do you look at the balance sheet and where do you think the limitations on returns to shareholders are from here? Or what kind of balance sheet rations should we be looking at and that you would you like to maintain?

Just a couple of quick comments on that. Again looking at our balance sheet it is always tough because it is seasonal, the first quarter, first half of the year reflects the payment of compensation related to last year. And then it build up and then cash builds up over the course of the year. So I am not sure the 700 is a good reflection of the average of the outcome for the year. That is one observation. The second is, we are committed. We have already returned the 243 of capital. Part of that is the offset of the RSU dilution, part of it is dividends, part of it is additional return of capital to shareholders through repurchases. AS we said in our shareholder letter we are committed to -- there is probably about $200 million to be identified of surplus cash on the balance sheet which we felt we should return to shareholders by 2013, and we have already done 50 of that, and we are committed to getting the next 150 done over the next period of time.

Okay. Great. Thank you. That is helpful. That is it for me.

Thank you.

And at this time, I am showing no additional questions in queue.

Great. Thank you.

Thank you very much.

And ladies and gentlemen, that does conclude today's Lazard conference call. Thank you for your participation.