Lazard Inc (LAZ) 2012 Q4 法說會逐字稿

Good morning, and welcome to Lazard's Fourth-Quarter and Full-Year 2012 Earnings Conference Call. This call is being recorded. At this time all, participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time.

(Operator Instructions)

At this time, I will turn the call to over 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 full year and fourth quarter of 2012. Hosting the call today are Kenneth 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 by 10.00 today.

Today's call may contain-forward looking statements. These statements are based on current expectations about the 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 in Lazard's filings with the Securities and Exchange Commission, including our annual report on form 10K, quarterly reports on Form 10-Q, and current reports on form 8K. 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. Description of these non-GAAP financial measures and their reconciliation to the comparable GAAP measures are contained in our earnings release which has been issues 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 at lazard.com. Following the 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.

Thank you, Judi. Good morning. Thank you for joining our call. We are pleased to report strong results for the full year and fourth quarter 2012.

Some highlights. Annual operating revenue rose 5% over last year, approaching record levels. Adjusted GAAP earnings per share increased 10%. M&A and Other Advisory revenue was up 13% for the year, even as global M&A completions were down 14%. Lazard continues to gain significant share of the advisory fee pool. In the fourth quarter, M&A and Other Advisory revenue increased 40%, and asset management revenue increased 20% compared to the prior period. For the year, Asset Management operating revenue matched the record level of 2011. Assets under management at year-end 2012 reached a record high of $167 billion, up 18% over the prior year.

Behind the numbers is the story of Lazard's continuing evolution. In the last several years, we have diversified our sources of revenue in both of our businesses, Financial Advisory and Asset Management. We're adapting to clients' changing needs and an integrated global marketplace. We've made great strides in driving shareholder value. The strategic decisions we've made and our execution of them have positioned Lazard for continued growth and profitability.

Today, Lazard is the only independent advisory firm with a fully-built-out global infrastructure and global industry teams. We have a network of relationships with key decision-makers in business, government, and investing institutions around the world. The power of our network allows us to deliver better solutions to our clients, and it becomes more powerful as the world becomes more integrated. For example, in Financial Advisory, more than half of our M&A volume was cross border, including our largest and most complex transactions. Our participation in emerging markets M&A reached its highest level ever, almost 20% of announced deals.

In Asset Management, we are equally globally diversified, meeting the needs of a primarily institutional client base around the world. Nearly half of our Asset Management revenue comes from clients base outside of North America. Our investment strategies in global, local, and emerging markets in both equities and fixed income led AUM growth in 2012. Our investment platforms continued their strong pattern of performance. Lazard's global network is a competitive strength and a platform for revenue growth as our services evolve to meet clients' needs.

A significant portion of our 2012 revenue came from income streams that either did not exist at Lazard 10 years ago or that we've grown substantially. Lazard Middle Market, which we acquired five years ago, had its best year ever. Our Sovereign Advisory business was active on some of the world's most prominent assignments. These included work in Europe, Latin America, Africa and the US. Our Advisory work on capital structure, balance sheets, and capital raising continues to grow, complementing our traditional M&A business. For example, capital structure advice was key to Lazard's role as an advisor to Deutsche Telekom on the T-Mobile MetroPCS transaction as well as our recent representation of Microsoft on the Dell buyout.

In Asset Management, our investment platforms continue to expand. On the equity side, we've experienced significant growth in our international global emerging markets and multi-asset strategies. On the fixed-income side, emerging market debt and global fixed income have shown healthy growth. We continue to invest in the extension of all of our global platforms in both equities and fixed income.

Even as Lazard grows, we have become more efficient and effective in the way we manage our business and more disciplined on costs. We've communicated our financial goals regarding margin targets in Capital Management and our plans to reach them. Since the beginning of 2009, we've reduced our awarded compensation ratio by 12 percentage points as operating revenue has increased by 22%. Since the beginning of 2010, our quarterly dividends has increased 60%, and we've returned more $1 billion in capital to shareholders. In last year's fourth quarter, we implemented cost-saving initiatives that provide a further path to reaching our financial goals both in composition and non-compensation. We are in track with these initiatives.

Matthieu will now provide some color on our financial results in Capital Management followed by Alex who will update you on our cost-saving initiatives.

Thank you, Ken. 2012 was a solid year of performance for revenue growth, cost discipline, and returning capital to shareholders. Lazard's operating revenue grew 5% over the year and 22% in the fourth quarter despite a challenging macro-economic environment and volatile global market during most of the year. Financial Advisory operating revenue was driven primarily by M&A and Other Advisory, which was up 13% for the year and 40% for the fourth quarter, reflecting a wide range of assignments. Researching operating revenue was down 8% for year, which was generally in line with industry-wide activity. It was down 36% for the quarter. This comparison was skewed by the strong fourth quarter of 2011.

Asset Management operating revenue for the full year 2012 was effectively unchanged from its record level of 2011. This was achieved despite the downturn in global equity market in the first half of the year followed by a recovery in the second half. In the fourth quarter, Asset Management operating revenue was up 20% from last year and up 11% sequentially from the third quarter of 2012. Assets under management reached a record level of $167 billion at year end, and average AUM for the year was 2% higher than the prior-year period. Management fees for the full year were 11 with 2011 (sic - see press release "1% lower than 2011"), reflecting the 2% increase in our average AUM, a change in the mix, and foreign exchange fluctuations. In the fourth quarter, management fees were up 10% from last year and up 3% sequentially from the third quarter of 2012. Incentive fees rebounded in 2012, up 66% for the year, primarily reflecting the performance at year end of certain alternative strategies.

Turning to expenses. Our 2012 awarded compensation ratio was 59.4% compared to the prior-year awarded ratio of 62%. While our operating revenue increased 5% in 2012, we held awarded opposition expense flat, even as it reflected our investment in 2012, including the cost of our Brazilian acquisition. Our adjusted GAAP composition ratio for 2012 was 61.8% down slightly from 62% in 2011. As we said before, approximately 2 points that 61.8% reflects the 2008 deferred compensation awards which have a four-year vesting period. Absent the 2008 awards, our adjusted GAAP compensation ratio in 2012 is in line with our awarded compensation ratio, which demonstrates the high-quality of our earnings. Non-compensation expense grew 5% in 2012. This reflected higher occupancy cost and transaction-related third-party fees, partially offset by lower professional fees. While we've seen the initial benefits of our cost-saving initiatives, we expect more a meaningful impact in 2013.

Regarding capital management, 2012 was a strong year for returning capital to shareholders through dividends and share repurchase as we returned $540 million to shareholders. This included the achievement of our goal to return $200 million in surplus cash one year ahead of schedule. In 2012, we also paid a special dividend and accelerated the payment of a year-end quarterly dividend. Going forward, we intend to continue offsetting potential share dilution from equity-related compensation, and we plan to continue to deploy future excess cash toward dividends, additional share repurchase, or debt repurchase.

Alex will now provide an update on our cost initiatives.

Thank you, Matthieu. Our previous earnings call, we announced initiatives to reduce our existing expense base by approximately $125 million, of which $85 million would come from compensation expenses associated with reducing staffing and approximately $40 million from non-compensation costs. These initiatives are focused on realigning the firm's investments to create greater operating leverage with increased flexibility to continue retaining and attracting the best people. We continue to believe that these initiatives will improve margins while maintaining the firm's long-term growth potential. As we announced last quarter, implementation of these initiatives is centered on support functions, Financial Advisory, and non-core businesses.

Our efforts remain focused on first, reorganizing support functions to leverage efficiencies across businesses and geographies, second, devoting more resources to areas with long-term potential as we reduce investments in staff in areas with low productivity, and third, renegotiation's or exiting certain third-party contracts. We have made significant progress towards achieving our objectives. We've completed the majority of the cost-saving initiatives, though, as we previously discussed, a number of activities will continue through the first half of the year. To date, as a result of these initiatives, approximately 200 employees globally are leaving the firm. In support functions, reductions are across the board, including finance, IT, and other general services. In Financial Advisory, reductions are concentrated in regions with low growth potential in the near to medium term and in areas of low productivity. We have also consolidated our US and Spain Wealth Management units into our Asset Management business, continuing to serve the high-net-worth clients through our Lazard Asset Management and Lazard Freres Gestion franchises.

With respect to non-compensation expense, we have achieved significant cost reductions with outside providers primarily by reducing the number of vendors and renegotiation's our exiting contracts in data services, technology, real estate, and other outsourced services. We continue to expect at least two-thirds of savings will be realized in 2013 with the full impact realized in 2014. We estimate implementation charges associated with these initiatives will total between $110 million and $130 million. In the fourth quarter, we took a $103-million charge, approximately of 75% of which was in cash. The remainder of the implementation expenses will be incurred in the first half of 2013. We believe our initiatives put us on track to achieving an operating margin of approximately 21% or 22% in 2013 on both an adjusted GAAP and awarded basis, creating a path toward achieving our target of a 25% operating margin in 2014, all at 2012 activity levels.

Ken will now conclude our remarks.

Thanks, Alex. I'll give you some perspective on our outlook, and then we'll open the call to questions. We're encouraged by the level of M&A activity in the fourth quarter of 2012. It indicates that CEO confidence is improving. This has been the missing element for an upturn in the M&A cycle as financing remains cheap and valuations are reasonable. As the global macro-economic environment improves, we are cautiously optimistic about 2013. We're well positioned globally, even this slow recovery.

For example, in Europe last year, our Advisory revenue was flat while the market was down 32%. Our US Advisory revenue ex-restructuring was up 17% while the market was up only 2%. For the rest of the world, our Advisory revenue was close to its all-time peak in 2007. In Asset Management, our year-end record AUM gives us a solid foundation entering 2013. We have traction across most of our investment platforms given our strong performance. Almost 85% of our strategies are equity related. We are a market leader in the growth and asset classes across equities and fixed income, and our platforms have significant capacity for organic growth.

In conclusion, we're confident that with the breadth and depth of our platform, the strength of our network, and our financial discipline, Lazard is better positioned than ever. Let's open the call to questions.

(Operator Instructions)

We'll take our first question from Joel Jeffrey with KBW Brokerage.

Good morning guys. I apologize; I joined on the call just a little bit late. But in terms of your Advisory revenues during the quarter, just thinking about the sustainability of that going forward, was there a lot of activity potentially tied to Middle Market's activity or maybe some Sovereign assignments that were factored in that that may or may not be repeating?

Okay. Look, I think generally speaking, across the board, we had outperformance on the Advisory side of the business in 2012. Obviously, the fourth quarter was a strong quarter, and this is a difficult business to measure quarter by quarter. That said, I think when you look at the components you mentioned, in particular on that middle-market side, I think on that business, there were clearly some tailwinds at the end of '12 driven by some of the anticipated tax savings that helped that business. On the other hand -- and that may not be there for 2013. Yet on the other hand, if we're seeing an improving M&A environment, that could offset that a bit. On the Sovereign side, we continue to see a good flow of business.

Okay, great. And then the corporate line was particularly strong this quarter. Can you just talk a little bit about what was going on there?

Look, rising margins generally means rising valuations for some of the investments on our balance sheet, and it really reflects that.

Okay, great. And then just lastly for me, the comment about achieving the 21% to 22% operating margin during the year, is that based any assumption for revenue growth, or is that on a flat revenue assumption?

I think what we said consistently is that we're shooting for the 21%, 22% in '13 and 25% in '14, and the assumption on the environment is the one we live in today, not we anticipate for the future. So we're saying in the event we have an environment that looks like 2012, performance like 2012 on the revenue line, we're confident we'll get to the 21% and 25% in '13 and '14.

Great. Thanks for taking my questions.

We'll take our next question from Brennan Hawken with UBS.

Good morning guys. Couple quick questions in Asset Management. Performance in this quarter was really, really solid. The market performance looks really good. What were the -- where there any regions are strategies that were standouts there?

Sure. Look, what I'd say on the Asset Management business, I think we're really comfortable where we are in the business right now. We've got a lot of tailwinds in the business at the moment. One, obviously, a, we start the year with $167 billion of AUM compared to $141 billion last year, so that helps us. Sentiment, generally, in the equity markets is improving. Compared, certainly, to 2011, it's probably better than any time that it's been since the crash. And you kind of see that in the first month of January retail flows, which we'll see some benefit of, but as you know, we're institutional business. The vast majority of our investment strategies are performing, delivering superior returns on both a short and long-term basis. We've seen strong RP activity at the end of last year into this year, beginning of this year.

We've seen really strong flows into our global international emerging markets businesses, the new platforms we've established around the emerging markets business and emerging market debt business, and we had some good performance inflows into the fixed-income businesses as well. In terms of headwinds, one -- we got a couple, one around the mid-cap business where we've seen some outflows which were probably performance related. And in the thematics business, one of the senior members of our Team is retiring because of an illness, and so we're going to monitor that pretty closely. But that's been a closed strategy for a while. So overall, we're feeling pretty good about the environment in Asset right now.

Cool. I did notice, though, that core IA fees ticked down a bit in 4Q. Was that driven by a one-time type of a thing, or is that just the new mix so we should count on that run rate? What's the deal there?

Look, performance fees -- the average fee in any given quarter is subject to a bunch of different factors. One is the mix of the business, where we're getting inflows. There's a little bit of foreign exchange built into this. So I wouldn't read in too much into one quarter in terms of the average fee.

Okay. Cool. And then last one for me, on the Advisory side, aside from the AmBev deal, can you -- is it possible to quantify how much of the pipeline might be facing any kind of antitrust concern or anything like that? Is that something you guys can quantify for us?

I wouldn't know where to begin on something like that. What I'd say about the -- look, we don't give you backlog or pipeline numbers, and it's a little tough sometimes on some the deals which are not traditional M&A deals or such that pick up in lead cables. But what I'd say is the following. We obviously had a strong fourth-quarter. This can be sometimes a little bit of a lumpy business quarter to quarter, but I think the trends over time are pretty consistent. And I think going into 2013, we tend to look at three factors around the Advisory environment, which you all are probably pretty familiar with from previous calls, valuation, financing, sentiment. And generally speaking, valuations are still pretty reasonable. They're up a little bit from last year. Financing is probably as good as it's been in our professional careers, certainly in the United States and probably even Europe for the larger companies. There's still some difficulty around financing the small, mid-size companies.

And with regard to sentiment, that's improved. That's clearly better than it was at this time last year, probably any time in the last few years. Part of that is attributable to the anticipated global recovery, which seems to be -- while fragile, seems to be taking bulk, particularly in the United States. The second is, around some of the tail risk diminishing in Europe. And then all of that, and then the third is probably around some of the resolution around election and getting through the first stage fiscal cliff crisis. And I think all of that improves sentiment, and that probably means more some reasonable markets for M&A over the next year or two.

Great. Thanks for the color guys. And the results look really good. Congrats.

Thank you.

We'll take our next question from Howard Chen with Credit Suisse.

Hi. Good morning, everyone. With respect to the compensation and the accrual, Matthieu, you reiterated a 200 basis points related to the 2008 awards falling out. So as we think about a starting point for comp accrual this year and your revenue outlook, is something closer to a 60% a good starting point? Or should we think about maybe something different as you fold in the benefits and payoff from the overall program that we're focused on?

I think probably the end-of-year GAAP number less the '08 accruals is a good reflection of the beginning of this year before you build in what we are going to do in terms of the restructuring plan for -- because most of that kicks in -- two-thirds of that kicks in '13 and the rest in '14.

Great. Thanks Ken. And then, can the comment you made regarding a significant portion of your revenues and growth were in businesses that were either incubating or the Firm wasn't involved in a decade ago. I was hoping, could you help us frame in any way, maybe the relative growth or contribution of some of these businesses such as Middle Market, AM, and Sovereign, as we see it all lumped together into Financial Advisory revenue line? Thanks.

Yes, look, I think we've been reluctant to break a lot of this stuff out for competitive reasons, obviously, so I'm not going to start to do it on this call. What I'd say is the following. If you go back 10, 12 years ago, Lazard was primarily a large-cap -- it was basically core M&A business. And over the last decade or so, we've really diversified the revenue stream. Obviously, we -- the first was the restructuring business, which is now the global leader. The second investment was around the private fund advisory effort, which is capital raising for private equity funds, and now increasingly also involved in a lot of the secondary sales of units. A third was the investment in the middle-market business and some of the geographic expansion into Australia and some the other emerging markets. And then lastly, we've taken some businesses which have always had a presence at Lazard, the Sovereign Advisory business and the Capital Structure business, and those have really -- with leadership and excellent people, have really grown pretty dramatically over the last few years or so. And we just hope to continue that.

Okay, thanks. And then finally for me, I just wanted to revisit LAM. As noted before, the overall performance has been a great. I realize one quarter's flows are lumpy, but is a slowdown that we saw in the back half more a function of some of the factors you noted regarding the mid cap the thematics products and the Management Team there? Or is there something else timing related driving a bit more of a subdued flows picture?

No. I think, generally speaking, we're pretty comfortable with where we're positioned. RFPs are up. Market sentiment's better. We have great performance across a lot of a asset classes, and importantly, we have a lot of capacity right now, quarter-to-quarter stuff that's held. But the one thing I note about the quarter is AUM jumped pretty dramatically, and for the year, we had net inflows against some of the issues that you noted. And look, in 2012, particularly on the institutional side, industry-wide flows were very, very slow. I think our gross flows last year were close to -- almost $27 billion, which was probably one of our best years if not our best year in that regard.

Great. Thanks for taking the questions.

Okay.

We'll hear next from Devin Ryan with Sandler O'Neill.

Good morning. How are you guys?

Good.

Just want to come back to the Sovereign Advisory business one more time here. Obviously, a solid quarter, and appreciate the comments. But for us, it's obviously very hard from the outside to track that business, probably more than some others. So just want to get some color on this quarter and just the improvement in that business? Is there more situational for you guys? And then, do you feel like that business is trending one way or another? Just want to get some color since, again, it's a little bit hard for us to really follow that from the outside.

That's understandable, and I get that. Look, all of our businesses are lumpy from quarter to quarter, but if you look at a trend, you can get a good feel for it. And obviously, the trend on the Sovereign Advisory business has been pretty strong for the last three years or so. It's a business which historically Lazard has had a presence in. And it's been historically associated with some of the more difficult emerging market stories. And I think one of the things we've managed to do over the last several years is to not only expand the breadth of the business. It's done business on almost every continent in the world and continues to. That's clearly the market leader in the business. And obviously, we've evolved in some of the most -- things going in Europe over the last couple of years or so. We see a lot of opportunity in that business going forward. And in addition to that, we've also invested pretty -- we've also some invested in some capability that's important to success in this business with some deeper understanding of some of the more esoteric financial products. And I think we are unique in that capacity from an advisory side, and that really has helped the business.

Okay, great. Just moving on to the Asset Management business, I understand that the incentive fees are generally more elevated in the fourth quarter driven by primarily the alternatives business. Is a possible to put in some perspective or just give us any sense of the performance in the alternatives business in 2012? I'm just trying to get some perspective around performance fees at the end of the year here and then relative to maybe how well that business did this year?

Look, it was kind of across the board. The performance fees don't only relate to the alternative business for us. We have some built into some of the many of the loan-only funds as well. So it's not as black and white as you present it, and it's unlike I think a lot of the other people that you perhaps follow. That's number one. And number two, I just think it reflects the strong performance over a wide class of assets where we happen to have performance fees.

Okay. I just -- I understand there's other incentive fees within there, but just the delta, the upside delta I thought was generally more driven by the alternatives. But that is fair enough if that's not the case this quarter.

Yes, and look. This was not a banner year for performance fees. It was a good year; it wasn't a great year. And again, as I'd say, obviously, alternatives matter, but we also have some performance fees built into some of our loan-only classes as well -- funds as well.

Right. Got you. And then just lastly for me, clearly some headcount reductions with the cost initiatives, but just want to get your perspective on appetite for actually hiring and bringing in some new, talented senior bankers and what the environment looks like for you guys right now?

Sure. I mean look, built into our numbers are our efforts for margin targets in 2013 and 2014 and into our cost initiatives is a -- we carved out room for investment consistent with historical levels. So we are going to -- in places where we see talent and we see opportunity, we will invest. And I think the environment is still positive for that right now because of what's going on at some of our larger competitors. But we'll be disciplined about it. And I think it applies to both sides of the business equally. In other words, if anything, there's really some opportunities in Asset Management right now that are exciting, and we're going to look at those pretty carefully as well as on the Advisory side.

Great. Thanks for taking my questions.

You're welcome.

(Operator Instructions)

We'll hear next from David Trone with JMP Securities

Hi. Good morning. My question was already asked and answered, but I just want to double check. Sorry to ask again on this comp ratio. So the adjusted GAAP and that awarded probably converge for good, say, second quarter?

I laugh at the second quarter because in fact, comp is only done at year-end, so everything else is kind of an estimate for what's going to happen during the year.

Sure.

But I think the substance of the answer -- of my answer would be the following. I think if you take out once and for all the '08 grants, we've got a balance now which should exist -- which should continue between the awarded and the GAAP. Of course, depending on what happens with revenue, the GAAP will always reflect more of the past compensation than the recorded will, but the key thing is that we have kept our deferral policy consistent now for three years. Our vesting, by the way, is three years, one-third in year two, two-thirds in year three, which means that we -- it fully reflects now what we've done over the last couple of years, and so I find that it should stay pretty balanced going forward. There may be some fluctuations by 1 point or so in '13 or even in '14, but it's going to stay pretty close.

Okay, great. And then shifting abruptly here to like a 10,000-foot view. I get questions all the time about you guys taking market share from the bulge bracket firms and the reasons behind that. And I know we had -- post WorldCom and Enron, we had a shift of Board focusing towards unconflicted advice, and that's been about 10 years now. Do you think as a driver of market share, that has run its course, or do you think that's still something that's an important factor, not in terms of maintaining market share, but in the context of expanding it?

Look, I think there are whole bunch of things going on here, and I can only speak from our experiences opposed from others. The first is, I think what we do is -- and our platform is unique. It's global, it's integrated, it cuts across all the different industry groups, and it has a very strong capability in M&A, but it's complemented by a really deep understanding of balance sheets and markets and increasingly of many of the esoteric financial products that are out there. And that complete approach, that is, being able to have a local view, a strong local view, which is critical to the Advisory business. In fact, I think it is the single most important success factor in the Advisory business. Starting with that strong local presence and being able to layer on top of that a global view, add a deep industry knowledge, and then being able to help think through very carefully the implications for balance sheets and stocks and stock and capital raising is what separates us from both our large competitors and our small competitors because I really think we're really the only ones who can do this globally. That's number one.

Number two is, obviously, there are some things that have gone on the market, particularly in the United States, that encourage the use of independent advisors. I think that's been helpful, but it's not the only thing that matters. And then third, obviously, there's a transition in the business models going on at the larger firms which has not settled out yet, so I think for now and for the foreseeable future, I think we have a model which should do well in these markets. There'll be ups and downs, and some will people will get their act together and do a little bit better. But I think, generally speaking, the trend is pretty positive for us.

Okay. Great. Thank you very much.

Thanks.

At this time, there are no further questions. This will conclude the Lazard conference call.

Great. Thank you.