Lazard Inc (LAZ) 2012 Q3 法說會逐字稿

Good morning. Welcome to Lazard's third quarter 2012 earnings conference call. This call is being recoded. At this time, all participants are in a listen-only mode. Following the remarks, we will conduct a question and answer session, and instructions will be provided at that time. (Operator Instructions). At this time, I will turn the conference 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 third quarter and first nine months of 2012. Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer, Matthieu Bucaille, Chief Financial Officer, and Alex Stern, Chief Operating Officer. A replay of this call will be available on our website, lazard.com, beginning today after 11 AM Eastern Daylight Time.

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 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 within our 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. 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.

Today's discussion may also include certain non-GAAP financial measures. A description of these non-GAAP financial measures, and their reconciliation to the comparable GAAP measures, are contained in our earnings release which has been issued this morning.

For today's call, we will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and in our investor presentation of supplemental information, both of which are posted on our website, lazard.com. Following their remarks, Ken, Matthieu, and Alex will be happy to answer your questions.

I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Good morning. Thank you for joining our call.

Entering the fourth quarter Lazard's nine-month operating revenue is near peak levels. While the macroeconomic environment remains challenging, our performance year to date underscores the strength of our independent, advice-driven model. Our M&A and strategic advisory business is up 5% for the year, despite a drop in third quarter, and even as the global M&A market of completed transactions declined 26%. Currently, we are advising on four of the top ten M&A transactions announced this year. All four are cross-border, demonstrating Lazard's global breadth.

In asset management our global business is at peak levels. AUM, as of September 30, is at $160 billion, near its record high. Operating revenue is up 7% over the second quarter. Our investment platforms across the world continue to perform well. We have higher demand for our products across asset categories and geographies from new and existing clients.

Trends in global financial services continue to favor Lazard. First, as the universal banks and integrated investment banks undergo secular changes to their business models, we are gaining market share as measured by advisory fees. Before the financial crisis, the difference between market share between Lazard and the market share leader was approximately four to one. The difference today is roughly two to one.

Second, as more than one-third of global M&A actions become cross-border, we are the only independent advisory firm with truly global scale to serve clients. Smaller firms need to invest heavily to gain similar scale, and still not have the tightly-knit network that Lazard has developed over decades.

Third, as investors demand diversified investment solutions, our asset management business is well positioned to win mandates with innovative offerings, and strong investment returns across our platforms.

Fourth, as investment markets evolve in the developing countries, our asset management business should benefit from its global footprint, broad array of solutions, and respected brand.

But we're not relying on these positive trends alone. We are driving efficiencies and enhancing operating leverage by reducing our expense base, and we are orienting the Firm's growth towards areas where we see greatest potential return. Growth initiatives include organic expansion, hiring, opportunistic hiring, and deepening relationships across both businesses. In financial advisory, we continue to develop our range of advisory capabilities. We are expanding our relationships in client boardrooms by providing advice in areas such as capital structure and corporate preparedness. These services dovetail with our general M&A practice, and solidify our role as our client's most trusted financial adviser.

We are also growing with our advisory clients in developing markets. In the third quarter, we integrated our Brazilian operations based in Sao Paulo. We created Lazard Africa to leverage our sovereign and corporate expertise in this rapidly growing region for our clients in both developed and developing countries. In asset management, we are encouraged by the continued strong demand from clients around the world. In our emerging markets platform, we continue to gain traction in our developing markets, multi-asset, and small-cap strategies.

Our multiregional platform has produced strong patterns of performance resulting in several mandates. In local equities, we have won mandates in UK equity, US equity, and Australian equity strategies. And in fixed income, we have seen robust demand in emerging market debt and global fixed income offerings. Lazard Asset Management is extending its global footprint with new offices -- one that recently opened in Zurich and a planned opening in Singapore.

In sum, we are aligning Lazard so we are at the right places, with the right people, to help our clients capitalize on opportunities anywhere in the world. We are building value for our shareholders by allocating our resources to areas with the highest growth potential. We are taking steps to run more efficiently in a challenging market environment, and we have significant operating leverage to outperform as the global economy improves.

Matthieu will now provide some color on our third quarter results in capital management, followed by Alex who will talk about our cost-saving initiatives.

Thank you, Ken.

Our nine months operating revenue is near the peak level which was set last year. Third quarter operating revenue was down 5% compared to the prior year. In financial advisory, the third quarter decline in M&A and strategic advisory reflected lower market activity, although we outperformed the market. Restructuring was also down 10% from last year third quarter, reflecting the general decline in corporate restructuring.

On a nine month basis, financial advisory revenue is up 1% from the prior year, driven primarily by M&A and strategic advisory. Asset management revenue increased in the quarter on higher management and incentive. Management fees are up 4% sequentially, and 1% over the prior year third quarter. AUM increased up 8% sequentially $160 billion, and was up 18% over the prior year third quarter. In the third quarter, average AUM was $157 billion. This bodes well for management fees in the future.

Now, we'll turn to expenses starting with non-compensation expense. We had an improvement this quarter, reflecting in part the early stages of our cost-saving initiatives. Non-compensation costs in the third quarter declined 4% from the prior year, and 10% sequentially from the second quarter. This reduction was primarily due to lower professional fees and business development expenses. However, we expect to see most of the benefits from our cost saving initiatives in our non-compensation expenses in 2013. Although we may see some seasonality and volatility in the next few quarter, we anticipate the trend line to be favorable.

Regarding compensation expense -- we focus on awarded compensation in managing our business. Awarded compensation reflects the costs of all pay, including deferrals, in the year in respect to which it is awarded to the employee. And bonuses, which are the bulk of compensation, are not set until year end. Our goal is to achieve a compensation level over the cycle in the mid to high 50s percentage range from both an awarded and GAAP basis. The cost-saving initiatives announced in our press release are significant steps toward achieving this goal.

For the third quarter of 2012 our adjusted GAAP compensation ratio was 62.7%, compared to 62.0% for the full year of 2011 and compared to 59.3% for the third quarter of 2011. Our third quarter adjusted GAAP compensation ratio also continues to reflect deferred compensation awards from 2008, which had a four-year vesting period. Our awards since 2009 have a three-year vesting period. As previously stated, we expect our amortization expense to revert to a lower level in 2013.

Regarding capital management, one of our stated financial goals was to return $200 million in surplus cash to shareholders in 2013. As of today we've achieved this goal one year ahead of schedule through share repurchases above and beyond moves made to offset potential dilution from year-end stock plans. Year to date, we have returned $432 million to shareholders through dividends and share repurposes, including the $200 million in surplus cash.

Alex will now provide more details on our cost initiatives.

Thank you, Matthieu.

In our April shareholder letter, the Firm set financial targets, including an operating margin based on GAAP and awarded compensation of at least 25% in 2014, even at current activity levels. We stated that to achieve this goal, we would take measures to reduce the Firm's expense base, and that these measures would result in implementation costs. A great deal of planning has gone into our cost initiatives. We are confident they will result in increased profitability with minimal impact on Lazard's revenue growth.

We are focused on several areas. One, organizing support functions to leverage efficiencies across business segments and geographies. We have identified significant opportunities for streamlining legacy operations. Two, reducing investments and staff in areas of low return so we can devote more resources to areas with greater long-term growth potential. Three, renegotiating or exiting certain third-party contracts such as data services and real estate. Deflationary tends in the financial services industry are a tailwind as we drive down costs from third parties. These initiatives will primarily impact our support functions and financial advisory business and will not affect our core asset management businesses.

Once these initiatives are completed, we anticipate approximately $125 million in annual savings from the our existing expense base, of which approximately $85 million is expected to come from compensation and $40 million from non-compensation expense. The majority of the initiatives are expected to be completed during the fourth quarter of this year. As a result, we anticipate two-thirds of these savings will be realized in 2013, with the full impact realized in 2014.

We estimate implementation expenses associated with these initiatives will be between approximately $110 million and $130 million, the significant majority of which will be incurred in the fourth quarter of 2012 and the remainder in the first half of 2013. Approximately 75% of the implementation expenses are expected to be in cash. The noncash expense will primarily reflect the acceleration of certain restricted stock unit grants.

We expect these initiatives will have a limited impact on our 2012 expense base. However, we anticipate our 2012 awarded compensation ratio will be somewhat less than 60%. In addition, we expect to meet an operating margin of approximately 21% or 22% in 2013 on both a GAAP and awarded basis, creating a clear path toward achieving our target of a 25% operating margin in 2014, all at current activity levels.

Ken will now conclude our remarks.

Thanks Alex.

In the shareholder letter last April, we focused on three objectives to drive shareholder value -- revenue growth, cost discipline, and efficient use of capital. Our announcements today position us to achieve all three. For revenue growth, the steps we've taken put us in a better position than ever. The breadth and depth of our global network will remain unrivalled. We are reallocating resources to areas where we see the highest potential for return. We see substantial growth opportunities, and we have the financial flexibility now to capture them.

In terms of cost discipline, we are already seeing results. We are confident our initiatives will improve profitability with minimal impact to revenue growth. We are making progress toward achieving our target operating margin of 25% in 2014, even in the event that we remain at current activity levels.

Regarding capital, we beat our target of $200 million in surplus cash to shareholders in 2013. We continued returning in capital, in share repurchases and dividends, $432 million year to date. As we achieve our objectives we're creating value for shareholders, of whom Lazard employees are the single largest group. We are confident the actions we are taking will significantly benefit our firm, our clients and will create shareholder value. In short, we are managing the Firm to the same standard of excellence as the advice and solutions we have always provided to our clients.

We're happy to take questions.

Thank you. (Operator Instructions). We'll take our first question from Joel Jeffery with KBW.

Good morning Guys.

Good morning Joel.

Good morning.

I apologize if I missed it earlier. Did you give -- can you just repeat if you gave the guidance for awarded comp in 2013?

In 2013 what I said, or what Alex pointed to, was the operating margin target of 21% or 22%.

Oh. I apologize for that.

And then I have got a question. In terms of the asset management business, incentive fees were certainly a bit stronger than what we were looking for. Can you talk a little bit about what was going on there and the sustainability of those at these levels?

Incentive fees were stronger in the third quarter than they were in the second quarter because of the anniversary date on a few contracts that we have and led to have higher incentive fees on a few strategies. With respect to generally, the incentive fees for the fourth quarter, it's really very much too early to tell anything. I think we'll have to see where the market goes.

Okay. Great. And then in terms of the cost savings on the non-comp side, is the additional $40 million inclusive of the declines we saw in the current quarter? Or is that something on top of what we saw this quarter?

This is Alex. It's on top. It's going to be spread across several areas from technology and IT to professional fees and occupancy. What we're really seeing -- we're seeing deflationary trends in the financial services industry that are a tailwind as we drive down costs from some of these third parties.

Joel, just to answer your question. It's on top of what you saw on the third quarter.

Okay, great. And just lastly, do you have any comment on the announcement about some of the board departures this morning?

I'm sorry? Can you repeat the question?

I'm sorry. In terms of the -- it looks like Gary Parr and Vernon Jordan are resigning from the board? Can you give any comments on that?

Oh, sure. First of all, they are not departing the Firm. Both Gary and Vernon are both highly engaged in client activities and are very much involved in everything that goes on in terms of the Firm's strategy as well, particularly Gary with his deep understanding of the financial services sector.

Look, what we're addressing here is the following -- one, we added a new director today, Andy Alper. That I think we targeted in our shareholder letter -- we said we'd add two new directors this year. He's the second. The first was Dick Parsons. And in the case of Vernon and Gary, I think we're just trying to reflect the governance environment we live in, which is to have more outside directors. Both of them will provide ongoing advice to the board as advisory directors and I don't think we're going to miss a beat.

Great. Thanks very much.

Okay.

Thank you. We'll go next to Howard Chen with Credit Suisse.

Hi, good morning everyone.

Hi, Howard.

Hello, Howard.

Ken, on the advisory environment, you're always helpful in framing where you think we stand on market optimism, valuation, and financing. So I was hoping to get an update there. And just, can you compare and contrast what you and the team are hearing from buyer versus seller and maybe across the different regions of the advisory business?

Sure. I'd be happy to.

Look, I kind of use the same framework, you've heard us use the same framework for the last few years. Valuation, financing, confidence.

Valuation, generally still pretty reasonable even as a result of the market, the stock market pickup over the last several months or so. When you compare our valuations to organic growth opportunities, it's still pretty favorable.

On financing, aside from the small midsize market in Europe, generally speaking financing is pretty favorable as well across geographies.

Where the issue exists, which has been the case for the better part of the last four or five years, since the advent of the crisis, is around confidence. And here it's really a function of a couple things. One is there's still uncertainty about the macroeconomic performance and overall globally. Second, I think the impact of the fiscal cliff in the U.S. has probably tamed activity. Whatever happens in the presidential election is going to result in a lot of attention being addressed to this issue and if it gets behind us, that's going to have a pretty positive impact we believe on CEO confidence, especially given the fact that the macroeconomic environment in the US seems to be improving.

With regard to Europe, what I think is happening is on one side there's been some positives, which is the actions of the ECB and the overall policy approaches over the summer were in part what's behind some of the market recovery, the stock market recovery. I wouldn't say confidence has improved dramatically in Europe, but at least it sets the ground for things stabilizing a bit. But the macroeconomic environment in Europe remains very difficult.

And then, with regard to, broadly speaking, the emerging markets, bottom line is if the US gets a pickup in activity it really will lift a lot of these markets as well, which is something we haven't seen for quite some time. So overall, it all comes back to confidence right now.

Okay. Thanks, Ken, for that update. And then, shifting gears, just to clarify the $125 million in saving targets and that 21% to 22% operating margin target in a similar revenue environment -- that implies to me that you're dropping the $125 million to the bottom line rather than reinvesting a part of that back into the business. Is that fair to say?

Don't forget in our base compensation level, we have reinvestment in there. We have recruiting in our base compensation level. So that is true.

Oh, okay. Just to confirm that that $125 million is a net figure.

Correct.

Okay. Thanks. And then Matthieu, you noted the $200 million target being achieved on capital return a little earlier. Now that you've gotten there, how do you think about the next set of goals on capital management/capital return? How should we be thinking about that?

Our business method, as you know, generates a lot of cash. So we intend to continue pursue active capital management policies, but we will continue to have a balanced approach to our capital management policies. We have a strong rating with our financial services company and we want to keep those attributes. We had set ourselves three objectives. One was to buy back $200 million to distribute, $200 million in stock and cash for shareholders one year ahead of time. Two other objectives -- one is to buy back shares to utilize the brands, we'll continue to do that. And we will continue to deploy our excess cash towards return to shareholders and debt reductions.

Okay. Many thanks.

Thank you. We'll go next to Devin Ryan with Sandler O'Neill.

Good morning guys. How are you? Just a question on the countercyclicality of the restructuring and the M&A businesses. Restructured revenues have been tending around $30 million the last couple quarters. I clearly understand that results are still going to be lumpy going forward. I just wanted to think about it if, as the M&A environment does improve, do you see restructuring activity in revenues potentially declining even further from these levels, structurally? Or do you feel like we're starting to get to a point where we're leveling off in terms of activity and potential revenues as well?

Sure first it is a difficult environment to predict what's going to happen because you've kind of got a lot of different forces at work. On the one hand, if we get past some of these confidence issues and the macroeconomic environment improves, that will obviously drive M&A activity. On the restructuring side, a lot depends on different markets. As an example we may see macroeconomic improvements in the US, you may so more confidence among multinationals globally, but you still may have a fair amount of restructuring opportunity with small and medium sized firms, particularly in Europe. It's a little difficult to predict right now. I think, generally speaking, this feels like -- I wouldn't say bottom because you never know -- but it feels like we're stabilized at the restructuring point, and the leverage is probably more on the M&A side going forward than the former.

Okay. Great thanks for color. And also appreciate all the additional color on the expense initiatives. Just to be clear I want to make sure I fully understand -- the expense save targets are exclusive of any benefit of kind of the lower RSU amortization expense essentially rolling off this year.

That's correct.

Okay. Great. Thanks very much.

Thank you. We'll go next to Alex Blostein with Goldman Sachs.

Hey guys, good morning.

Just to follow up on Howard's question on capital management. Matthieu, could just maybe get a little bit more explicit in terms of how you guys are thinking on a forward basis. Clearly you've returned more than you've expected this year, but when you're looking out into 2013, maybe you can give us a sense of the amount you're looking to return on an annual basis given the fact that you guys are generating a lot of cash flow. What would be the mix for buybacks versus dividends?

And I guess, just as a follow up to that, I wonder if earlier amortization of some of the RSUs, given that you're letting some people go -- would that result in a step up in the share count and would you guys be also kind of willing to offset that with a buyback to keep the share count flat? Thanks.

That's a mouthful. This is Ken.

Let me just start with big picture. We generate more cash than our net income because our cash tax rate tends to be lower than our stated tax rate. That probably continues. So therefore I think you have to start and how much cash generation there is in the business, which is pretty substantial -- not only has been substantial as a result of what we're doing, where we are now, it should continue to be substantial and obviously improves in the environment as that improves.

With regard to return on shareholders -- I think if you go back and look at our record over the last few years, we have been very focused on returning capital to shareholders. We've done that through share repurchase. We've done that through an increase in dividend. We've done this through a reduction of surplus cash. Our expectation is that as we continue to generate cash, we're going to share as much of it as we can with shareholders. And the real question is the balance between trying to maintain a stable rating and a strong balance sheet. We are a financial services firm, but I think you kind of see that we've been very active on this.

With regard to any of the share issuance, we're going to offset that with share buybacks. If we have the opportunity to do more than that we will. The choice between share dividend and share repurchase is a function, a little bit, of the environment. That is, where share price is, where tax policy is, and just the favorability from the perspective of different shareholders. And so we're just very attuned to this right now.

I'm sorry, and then the preference for buyback versus dividend kind of a similar mix on a forward basis, or is there a preference for --

I think the best you can do is say what exists now is a good reflection of the future. But that said, we're very cognizant of the tax efficiency of dividends versus share repurchases, there's a lot of potential changes that are expected going forward. So we're going to take a careful look at the before we change policies.

Got it, helpful. Ken, I wanted to follow up on the just the M&A discussion. It feels like there's clearly a couple of important catalysts over the next three to four months between the elections and the fiscal cliff, et cetera. Do you see resolution whatever it may be as an actual catalyst here at least with the US election on people kind of pulling the trigger and making decisions because they know who will be in the White House? Or do you think this is more of a confidence issue and the resolution around fiscal cliff would be more important?

First what's interesting is to see is how there's sort of a divergence between the performance of the stock market, which of course could change any day, but we can't predict, but the performance of the stock market and the M&A cycle. Usually they're pretty tightly aligned. Here we've seen some divergence. We think it's primarily driven by the confidence issue about pulling the trigger on big deals, confidence in boardrooms. My own view is that this is more about resolution of the cliff than it is about the candidate, but that different people have-touch different views.

Got you. Sorry, just one more for you guys. Solid flows this quarter was hoping you guys could give a little bit more color on where, what strategies you're getting traction in -- two good quarters in a row of organic growth. So maybe you could spend a minute on what type of strategies as classes and geographies.

So the answer is solid flows in the quarter, you're right. They're really across the platform. They're in emerging markets, we had some inflows in developing markets, we noticed in small capital emerging markets. In international equities, we had also some good successes because of the strong performance of our business. Local strategies also we had some intros US, UK, Australia, and then also fixed income. We had some good influence from fixed income, from global fixed income and also as we've mentioned in past calls a lot of good success in the emerging market debt.

Good sounds like a pretty broad base. Thank you guys for taking all the questions.

Great.

We'll go next to Brad Hopkins from UBS.

Good morning. Thanks for taking my question.

Good morning.

Quick one on asset management, following up on that last question I guess. If you could add some color on what trends you're seeing in RFPs and maybe how you could characterize institutional investor risk appetite and how that's changed since the central bank actions that we saw in the third quarter that would be great.

Let meet start with second question first, which is post-central bank central actions. Generally speaking the tolerance -- in other words risk has improved since the central bank actions. It's obviously introduced more liquidity into the market, and given people some confidence that we're -- it's not over but we're past the point in time where we're likely to have another Lehman-like event, which helps a lot in terms of allowing people to start thinking about investing in the future, which obviously has direct impact on equities which has been favorable for us.

And with regard to your second question about the types of strategies and such, I think we feel like we're in the right place at the right time. RFPs are up significantly since the earlier part of this year and with regard to strategies, we seem to be where the flows are going, which is global, emerging markets, equities and those are both very strong areas for us.

Great. I'm sorry if I missed this before -- but on the advisory side I know we don't get to see all the pipeline. Can you comment on how the pipeline looks and give us some color on that?

We never really directly talked to backlog and pipeline. Let me just kind of give you some feel for our business today. We're today on the large deals we're involved in four of the ten largest deals globally that are pending. Our market position, we feel, has improved pretty dramatically over the past few years. If you go back to 2007, I think we were compared to the largest advisory fee market share entity, we were four to one. Today we're about two to one so that's a pretty significant improvement over that period of time. And if you look at the breadth of the things we work on. You have to keep in mind while large cap M&A is very important, we have a thriving middle market practice particularly in the US, and we have a breadth of activities across the capital structure from sovereign debt advisory, which is obviously in great demand at the moment, restructuring, and balance sheet advice to companies. And so we benefit from an improvement in the M&A cycle. Particularly large cap M&A, that's very lucrative, but we also have a whole bunch of other areas where we get to develop advisory fees.

Thanks. That helps. And then just tucking in on some of these cost savings here announced. If we back out and you guys kind of walked through the math on the $125 million and how that gets you into the low 20s, does that imply that there's some revenue growth assumptions for you guys hitting the 25% that gets you the rest of the way there? Or is it that you'll just assess where we are in the revenue outlook in a year and then if you need to, cut more to get to your target?

Let me very direct about it. $125 million, two-thirds of it will benefit us in 2013, which we believe gets us to this 21% or 22% operating margin target. Even if we're still at activity levels that exist today. And the full impact of these cost savings in 2014 plus you know this continuing cost discipline we have in the business today, we're confident will get us to 25%. Again, even if, not projecting it and hoping it's not the case, but even if we're all stuck at these macroeconomic activity levels that exist today. Again, to hammer it home we're not going to be relying on revenue growth, and we think the actions we've taken should get us there.

Okay. Of the $30 million roughly, using the midpoint of your $110 million to $130 million costs you'll incur in the third quarter. The $30 million that's non-cash, should we assume that's all RSU amortization? How much of that comes out of the roughly $195 million weighed out, is amortized, or have visibility amortizing in 2013?

This Alex. It is primarily acceleration of RSUs. We're not breaking down the acceleration piece right now.

Okay. Is it probably reasonable to assume that a good deal of that would come out of the 2013 schedule though?

Yes, we're saying two thirds of the benefits next year.

Got it. You use that same math. Makes sense. And then, I guess last one from me -- can you give us some more color on how making cuts like this, cutting $85 million from comp and $40 million from non-comp and having business development expenses drop this quarter. How can that not impact your revenue growth outlook and maybe color on what markets you're pulling back from and what you continue to view as attractive markets?

It's Alex. I think if you look at areas that we're focused on, we're overstaffed relative to the foreseeable market opportunity. There's certain businesses or groups with lower return prospects and there are resources that we can better share infrastructure, support resources that we can better share across some of our businesses and geographies. We have an organizational structure that reflects the Firm's long history of separate operating entities and there are quite a bit of efficiencies to be gained there. What we said is that these initiatives are going to be primarily focused on support functions and financial advisory. Don't forget, half our business is asset management.

Sure. You also said that most of the asset management wouldn't be impacted by this. Right?

That's right.

Sure. I think the point that Alex is making is that roughly half our business today is asset management, half our revenue is asset management, and the core asset management businesses are largely unaffected by this exercise. The other half of the business is going to be the financial advisory business and the cuts there. The cuts are focused on financial advisory and support. Support, we don't believe, has any impact on revenue. And with regard to the advisory businesses, this is a real a focus on things which we don't think are going to really impact revenue. We've been very careful about thinking about that. It also frees up some resources and reallocates them to areas where we think there's potential for more growth.

Okay. I guess following up on that, of the $85 million or so that's in comp how much is coming from producer roles versus support. Can you guys break that down?

This is obviously a people service business, a people business. This is all just underway. I think you'll find it becomes more evident as we get through the fourth quarter.

Okay.

Okay?

Thanks.

Thank you. Go next to Douglas Sipkin with Susquehanna.

Thank you and good morning.

Morning.

So just to follow up a little bit more on the prior question. I mean obviously, I appreciate the color around the cost-cutting initiative. But it does by and large feel like it's related to comp. I think the number you provided is about 70%. So when are you guys going to provide a little bit more detail in terms of what type of reduction on MD headcount we'll find? And then, secondly, and I hate to sound brash, but how can we get confidence that this is sort of the last so-called restructuring. I just sort of go back to 2009, and granted that was a tough environment and I count maybe three or four quarters where we have one of those so-called impact events. I'm just wondering, how does an investor or an analyst get confidence that this fourth quarter $110 million to $120 million impact is in fact the absolute last one that we're going to see and we're moving to smoother sort of consistent results going forward?

Look good question. Fair question. We put out a shareholder letter in April, which detailed the fact that we were going to take a very capital look at our cost structure. We also made it clear in that letter that to accomplish that, given the nature of our business and the fact that there's a lot of amortization of past awards, that that was likely going to result in a charge. So there should be no surprises here that if we're going to take costs out that there's going to be a charge associated with this.

As to whether this is the last one or not -- everyone has to reach their own judgment. Our view is straightforward on this, which is that we are trying to take the initiatives necessary to reduce the cost base in a way that we achieve the objectives we set out in the shareholder letter which is a 25% operating margin on a GAAP and awarded basis in 2014, even if we're still at the current activity levels we have today. We're not anticipating that, but even if we're stuck there, that's what we're going to achieve. If you do the math on these cost initiatives, I think you'll find that we get to 21%, 22% next year with about two-thirds of it coming in between the rest of the initiatives heading in 2014 and cost discipline around this place that now exist, we are comfortable that we are going to get to our margin targets in 2014. And we think the kind of things we have done all of a minimal impact on revenues. And as Alex and I pointed out in the last question, half our business, asset management, the core asset management activities are unaffected. The other half, on financial advisory, we think we've really taken a careful look at where revenue is likely to come from in the next couple of years. And we really feel like we've focused on the kind of things which won't impact that.

Great. Thank you and then just to follow up. I mean why not, I guess if you're sort of trying to clean it all up in the fourth quarter, why not pay the prepayment penalty or the premium on your debt and throw that into the mix? I'm just saying from the standpoint of cleaning the decks clear, why not do that too in the fourth quarter?

You know what, that's a great question. And as you can imagine, we're pretty good at corporate finance here, hopefully. And that's one of the things we kind of pride ourselves on, and if we could do this in a way which is NTD, neutral to positive, we would have done it. When you cut through it all, it was very expensive.

I appreciate that. I mean, obviously, economically, it never made that much sense and that's why you guys didn't do it because the rates are so low. But I guess, just given the nature of what's transpiring with your operating model, maybe it sort of did make sense. I appreciate that.

It's math. You know what, unfortunately in the end, it's math and we're into the substance, not the form on this. And this is just something which we've studied endlessly for the last few years. Why would a business like ours have 7% debt outstanding when, if we didn't need it? This is just something that we have to deal with in the next couple years but we want to do it in a favorable way where we're generating benefits for shareholders.

Great. And just a final, one more on the M&A business, you guys continue to put up pretty good numbers on the financial advisory side in a tough tape. It does feel like, just looking reading the papers it does feel like it is a tougher regulatory environment for structuring and getting big deals done. Do you think that it specific to the transactions that are actually getting announced, or is there sort of a bias that exists now with governments around the world maybe towards shutting down or preventing or stymying bigger type transactions. Because just feels it's more deals that I've noticed that get shot down.

I think that is more anecdotal than it is a trend. What I mean by that is in our experiences so far that larger impact on M&A activity comes from confidence about the macroeconomic environment and sometimes government policy issues, but not necessarily antitrust. The antitrust environment in the US, even though there have been some deals shot down, it's pretty predictable. There hasn't been any wholesale change in the ways deals are looked at. People in a couple instances this year, late last year, pushed the envelope on one deal in particular. But generally speaking, the big deals that are out there seem to be getting done. Maybe there's a little more complexity at times, but I think that reflects the macroeconomic environment than it does the regulatory environment.

But that's one person's view.

Great. Thank you for taking all my questions.

Okay.

Thank you, Doug.

Thank you. We'll go next to Jim Mitchell with Buckingham Research.

Hi, good morning. I just want to follow up on the math that you talk about on the cost savings initiative. I know it's been beaten to death. I think the disconnect that's been talked about that the edges is if you take the $125 million from the current revenues, you get to probably 22%. Is the difference between 22% and 25% is the expectation that amortization expense goes down from here? I just want to make sure that's the clear difference there.

25% in 2014 you mean?

Yes. Like I said, if you say that revenues don't have to go up from here to get 25%, if you take the $125 million out, you don't get to $25 million. I'm assuming that 300 basis point difference or so that I calculated anyway is amortization declining from current levels as well?

Again. There are two different places you start from -- one is on the awarded operating income which I think we're trending around 18 on an LTN basis and then you have the GAAP numbers. The simplest is awarded and then we can work backwards to GAAP, okay?

On the awarded, the $125 million, if you take two-thirds of it you get to the numbers we're talking about for the 21% or 22% for 2013 and I think if you finish the math and take the other third in you get pretty much the numbers we're talking about for 2014. On the GAAP fees you get, this year, as a result of the steps we're taking you'll get to again the same range for 2013 and again probably the same range for 2014. Obviously GAAP is a little bit more sensitive to revenue environment, but not much. At this point. And obviously on the GAAP side we're getting some benefit from the fact that we've been much more disciplined about deferrals. They've been consistent over the last three years. You can take a look at the investor decks that we have out. And they show a pretty steady decline in the amortization expense because we no longer have the full year in there, and that we've been disciplined over deferrals over the last three years. So I think that should get you to the same place.

No, that's fair. Just that you had a $50 million increase this year in amortization. We don't really have your projections for next year, so I was hoping you could give us some kind of expectation on the GAAP basis.

The simplest way to think about it is you've got the 2008s, which were $54 million in 2011 and they were $40 million in 2012, and will probably be around $5 million in 2013. That's a big piece of it. And then another piece of it obviously as a result of these actions, the amortization expense associated with the people that will leaving will be eliminated as well.

Okay. Fair enough. I can run through those numbers. Just one other question --

I think for now it will work, and then obviously offline Matthieu and Kathleen can help you work through them.

Sure. One last question on the share count. You had been stepping up the buybacks, but you're still seeing the share count down 1% to 2%. Is there ever an ability to get that down at a more rapid pace?

The share count is a function of how many new shares we issue, we're actually committed to offsetting that dilution. The other part of the share count is the esoteric nature of accounting for RSUs and treasury stock. I mean I assume you know how that works.

Certainly if your stock price goes up that's a good thing.

It is, but except it tends to increase more shares. The fact we have got a lot of capital and we've got an aggressive buyback program, hopefully we can address some of that, but for some of it, it is just a function of the share price.

But the share price has been reasonably flat for the last year or so I would hope it would go down a little more, but I get your point. Okay, thanks.

Thank you again. (Operator Instructions) We'll go next to Ken Leon with S&P Capital IQ.

Couple questions. First on looking at areas for cost savings, before on previous calls, Ken, there was always talking about how flexible resources are between businesses, restructuring and advisory. But, significantly, there's Europe you have a large position there. The outlook may not be improving for some time. So is that really the thrust of looking at your statements of moving to areas other than maybe Europe for new growth areas?

Look, we're not going to detail where we're doing the cost cutting office by office or activity by activity. Again, a lot of that becomes evident when we're finished with this. And you'll deserve an answer then. The second part of it is -- look, regearing efforts around where there's growth is important. Some of it happens naturally at Lazard, some of it is a focus of our efforts, but the business evolves. We were primarily an M&A business, 10 or 12 years ago, focused just on large cap, heavily focused on just the US and Europe. Today we have a breadth of activities that expands across the capital structure, capital advising for healthy companies, restructuring for unhealthy companies, sovereign debt advisory for countries. It's a big part of our business today.

Look at the breadth of activities between large cap and other areas of the M&A market. Today we have a thriving mid-market business in the United States. If you look at the flows across the M&A markets, historically they've been, if you go back 10 or 15 years ago they had been concentrated in geographies. In fact, in Europe, it was the deal activity cross-border in Europe, not so much outside of Europe. Today it's remarkable the flows that occur across geographies. And so one of the things we're doing here ask really realigning our opportunity set with where the activity is. And some of that really is a focus on the markets that are going to be most active and how to gear efforts and the markets to complement that. What's happened over the last few years for us is Europe has become a hub for emerging market activity, probably more so than it's ever been, and more so than probably any firm in the world is for us that just reflects a change in markets.

So when we think of producers putting aside geography, should we be thinking about the flexibility you have between advisory and restructuring and not worry so much what the line item is for restructuring on your report?

I think you could think about it -- that probably is one way of looking at it. Another way is across the spectrum of M&A activity, whether it is mid-cap large, and also broadly speaking across geographies. One of the things we've introduced into this this system over the last few years is a hell of a lot more flexibility. And as a result of that, we think we have the ability to really streamline a lot of our activity and execute a lot better, a lot more effectively, with a lot more productivity, and that's what this is about.

Two other questions. First, tax rate, Matthieu, was there any guidance on tax rate?

Tax rate is slightly up versus last quarter but it's mainly just an adjustment to our full-year view on the tax rate. Some changes in the geographical mix and then a few discrete items that create a little bit of lumpiness from one quarter to another.

And my last question for Ken is -- a lot of attention in June, the summer with Nelson Peltz. Has there been ongoing conversations like any other shareholders, or any take in terms of their position?

We have a handful of very large shareholders in the business today. We have spent a lot of time since year end last year speaking with all of our shareholders, and really spending time understanding how they think about the business, what they want us to do in the business, and we're listening very carefully to all of them.

Okay. Thank you very much.

Thank you.

At this time I had like to turn the conference over to Mr. Ken Jacobs.

I want to thank everybody today for the conference call and if you have questions, obviously our team is available.

Thank you.

And ladies and gentlemen, thank you for your participation. This does conclude today's conference call.