Lazard Inc (LAZ) 2013 Q2 法說會逐字稿

Good morning, and welcome to the Lazard second quarter and half year 2013 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 over to Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead.

Thank you. Good morning and thank you for joining our conference call to review Lazard's results for the second quarter of 2013. Shortly on 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 on our website at lazard.com beginning today after 10.00 AM.

Today's call may contain forward-looking statements. These statements are based on our current expectations about future events that 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 with Lazard's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on form 8-K. Lazard accepts no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements for prediction 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 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. 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.

Good morning. Lazard performed well in the second quarter. Our strong results underscored the breadth and depth of our global franchise in both financial advisory and asset management.

In advisory, the second quarter operating revenue reflected a wide variety of assignments, including M&A, sovereign, capital structure, and capital raising advice. With multiple revenue streams, we are continuing to increase our share of the advisory fee pool.

In M&A we've been advising on four of the ten largest transactions announced in the first half of the year. Our US-announced transactions are up substantially for the same period last year. In capital structure advisory, we are advising more large clients on balance sheet matters and raising and capital raising. A few examples -- Bertelsmann offering of shares in RTL Group the largest fully marketed equity offering in Europe this year, Siemens, on its Osram spinoff, the largest ever in Germany, and the UK government on its proposed privatization of the Royal Mail.

This is an advantage of our advisory business model. We are benefiting from strength in equity markets without putting capital at risk.

Our sovereign advisory business also continues to be active throughout the world with assignments that include restructuring of national banking systems, advising on privatizations, and other high-level strategic advice.

In asset management we are benefiting from a global franchise that's diversified by investment strategy, region, and client type.

We had a record second quarter and first half operating revenue. Our average AUM was up 11% from a year ago. In equities we are seeing demand for our international, emerging markets, and local strategies. In the first half of the year, RFP flow remained strong.

In fixed income, we are seeing demand for our emerging market debt and global fixed income strategies. Emerging market debt is an evolving asset class in which many institutional investors are substantially underinvested. We continue to broaden our platforms by launching new investment vehicles.

On the cost side, we have done what we said we would do -- and more. In the fourth quarter of last year, we began our cost-saving initiatives with the goal of achieving approximately $125 million in annual savings from our cost base. We exceeded our goal. We expect minimal impact on revenue growth.

From the start, we said that a key objective of the cost-saving initiatives was to create greater flexibility to retain and attract the best people. We are following through on this. In the past four months we made high level additions to the firm in the US, UK, Germany, and Australia.

Now Matthieu will provide further detail on our financial results.

Thank you, Ken. Lazard's operating revenue was a record second quarter, reflecting a 9% increase in financial advisory, and an 18% increase in asset management over the same period last year. Quarterly M&A and other advisory operating revenue increased 12% from a year ago. We performed well both in the US and Europe.

Operating revenue from capital raising advice increased 26%. These increases were partially offset by a 23% decrease in restructuring operating revenue reflecting industry-wide low level of corporate restructuring activity. We continue to be the global leader in announced restructuring.

In asset management, record second quarter operating revenue increased 18% from a year ago, driven by an 11% increase in average AUM and higher incentive fees. On a sequential basis, asset management operating revenue was up 1% in the first quarter, reflecting a 2% decrease in average AUM. The sequential decrease in AUM was driven primarily by market depreciation and $4 billion of net outflow in the quarter which were largely related to one strategy in global equities and the last of sub-advised mandate in local equities. As of July 22, our AUM has increased to an estimated $170 billion. This reflects $6 billion of market appreciation since June 30 and an estimated $0.7 billion of net inflow in the month of July.

Turning to expenses, in the second quarter adjusted GAAP compensation and benefit expenses increased 8% from a year ago, a slower pace than the 12% increase in operating revenue. From the first half of this year, adjusted GAAP compensation and benefits expense decreased 7% from the 2012 period compared to a 3% decrease in operating revenue. Our adjusted GAAP compensation ratio remained at 60% in the second quarter. This compared to 62.7% a year ago and 61.8% for the full year 2012.

The second quarter GAAP compensation ratio assumes, based on current market conditions, a full year awarded compensation ratio of 58.5% down from 59.4% for the full year of 2012. Adjusted non-compensation expense declined slightly despite the 12% increase in operating revenue. This reflects the earlier results of our cost saving initiative offset in part by deal- related third-party fees and expenses from increased business activity.

Finally, regarding capital management, we returned $54 million to shareholders in the quarter primarily through a dividend and share repurchases. This brings total return of capital to $230 million in the first half of this year. As of June 30, our share repurchases have directly offset about 75% of the potential dilution from our 2012 year-end year-end grants.

Alex will now provide more details on our cost-savings initiatives.

Thank you, Matthieu. When we announced our cost saving initiatives in October 2012, we expected they would result in approximately $125 million in annual savings from Lazard's cost base. In the first and second quarter of this year we identified additional savings, and now we expect total annual savings will be approximately $160 million, partially offset by continued investments in our business.

Of the total expected savings, approximately $120 million relates to compensation expense associated with the firm's headcount, and approximately 40 million to non-compensation expense. We anticipate that more than two-thirds of these savings will be realized in 2013, with a full impact of all the savings reflected in our 2014 results.

Although we continue to implement the cost savings initiatives, associated expenses are complete and have been reflected in our financial results. Second quarter's charge of $38 million brings the total expenses associated with the cost saving initiatives to approximately $167 million. As we anticipated, approximately 75% of these expenses are expected to be paid in cash. The additional savings we identified were primarily compensation related. Upon completion of the cost saving initiatives, we will have produced the firm's head count by approximately 250 people, although this number will be somewhat offset by hiring in growth areas of our business.

We are confident that our cost saving initiatives will provide Lazard with greater operating leverage and increased flexibility. We continue to believe our initiatives put us on track for achieving operating margin of approximately 21% or 22% in 2013 assuming 2012 activity levels. This should help create a path toward achieving our target of 25% operating margin in 2014, also at 2012 activity levels.

Ken will now conclude our remarks.

Thank you, Alex. We're cautiously optimistic about the environment, and we're confident in our model. The global economic environment is uneven, but there are pockets of activity and improving trends. The US market is leading the world economic recovery. The rest of the Western Hemisphere has promising growth prospects. Europe still has issues but a fear of a tail-risk event is receded. Some developing markets are experiencing growing pains but they continue to grow. They're increasingly involved in cross-border M&A activities.

Globally, all the factors continue to be in place for an upturn in M&A. Corporation, sovereign wealth funds, private equity sponsors are flush with cash. Confidence is improving and while valuations are rising primarily in the US, they are still reasonable.

In asset management, the long term trends that make this a great business are intact, our clients continue to look for investment solutions on a global basis. Despite recent volatility in the emerging markets, we've had net inflows in our emerging market platforms and continue to see demand. With Lazard's global scale and the breadth and depth of our services, we are better positioned than ever to serve our clients well. We are building from strength, and we are creating value for our clients, our shareholders, and our employees.

Let's open the call for questions. Thank you.

(Operator Instructions). We'll go first to Howard Chen with Credit Suisse.

Hi. Good morning, everyone.

Good morning.

Hi, Howard.

Ken, just picking up where you left off in your commentary -- we can certainly feel the contributions from businesses such as capital and sovereign advisory which you built over the last few years and expanded. But we're hoping to get a little bit more thoughts from you when you speak to boards and managements on what we need to see to kind of get back in a more traditional M&A upswing.

I'm sort of a broken record on this. There's three things we tend to look at -- valuation, financing, confidence -- when we assess the M&A markets. And let me kind of go through those three.

Valuations, they're a little richer than they've been. But relative to organic growth opportunities, they're still pretty favorable. Financing, again, rates have moved up a little bit, but probably for good reasons, that is the economy, the macroeconomic environment is improving and they're still at or around historic lows.

And then with regard to confidence, a couple of observations. First, in Europe, it feels to us like there's been a lessening of any tail risk. It doesn't mean it's gone away completely but it seems less. And it feels like we bottomed out in most places. And the little signs of activity here and there. I wouldn't bank too much on it but it feels better certainly than it did a year ago or two years ago at this time.

Second, with regard to the US, clearly the macroeconomic environment is improving and with an improvement to the real economy, you get real confidence. So while we're not seeing a bursting of activity of big deals in the US, there's been some. I think we have done our fair share of those. There seems to be a steady level of activity and assuming this macroeconomic environment continues to improve and the recovery stays intact, I think you're going see confidence levels follow that. And that's been the big issue around M&A for some time.

Two sweeps of the business I didn't hear you comment on as much were sort of the middle markets business and restructuring. I was hoping you could give a bit of update on your outlooks there.

Okay. I think I said in the last conference call we had, in the fourth quarter call, we had a very strong performance in the middle markets last year, particularly in the fourth quarter. A lot of it driven by not only our position in the market but also by what was happening on the tax front. And first quarter was weak, I think, in part because people want to get a lot of things done in the fourth quarter. And we've seen a nice pickup in business in that -- nice pickup in activity in that business over the course of the last few months or so both in terms of new assignments as well as announcements. So we feel pretty good about it. I don't think we'll get to the levels we were at last year but it feels like it's a pretty healthy environment for the middle market business.

And then with regard to restructuring, I think we're bouncing along -- we've been bouncing along in the bottom now just in terms of announcements and new activity for a while here. I think the increase in rates -- increase in rates isn't as relevant as increase in spread, and that may have a little bit of an impact. I wouldn't expect too much in the US because macroeconomic environment in US is improving and will probably offset that. But probably a little bit in Europe in part because of the spread and also because I think some of the banks in Europe are starting to get a little bit more forward-thinking about the left side of their balance sheet, which is actually probably going to lead to a few more restructuring assignments here and there.

Great. Thanks. And then finally for me, on asset management, I heard you loud and clear about the longer term trends being intact and the mind-set of the largely institutional client base, but given the choppier environment for interest rates and emerging markets, can you just speak to how complex performance, whether that bumpiness, and specific to the two things you called out, the global equities, outflows and the loss of the subadvisory mandate in local equities, any near-term expectations in the back half on things that we should be watching?

That's quite a question. Okay. Let me take it in pieces.

First, on the emerging markets, look, generally speaking, obviously, it was not an easy quarter for the emerging markets although there's been quite a bit of improvement over the last few weeks or so this those markets. For us, we've actually, in our emerging markets platforms, had net inflows in this period of time. RFP activity remains healthy, and our performance has also been -- has been strong during this period of time in our emerging markets platform. So we feel pretty good about it.

The long term trends in the emerging markets still are very good. Kind of double the growth rate of the developed world. ROEs for these companies tend to be higher than in the developed world. And balance sheets are strong, most of the policy -- policies of these -- of the countries are actually pretty reasonable, good balance sheets, healthy approaches towards monetary policy and the like. So we feel pretty good about that.

On the institutional side, generally the allocations have been increased towards global investing in emerging markets, again, two areas we're quite strong in, and people are underallocated to their new allocations, so we expect over time that that will take place. The entry point today in the emerging markets is, obviously, more attractive than it's been in a while. So overall, this continues, we think, to be an area of interest in growth.

On the global platform, we continue to have outflows in the thematics business, and we lost one subadvisory mandate. The two together account for the bulk of any of the net outflows that we've had. And I think generally speaking, when you look at our platform, it's sort of the right place, right time, with right product and fortunately pretty good performance.

Okay. Thanks for taking the question.

And our next question comes from Patrick O'Shaughnessy with Raymond James.

Hey, good morning. First question, if I could. Could you talk about the gross inflows that you had in the asset management business in the second quarter. I know it was actually pretty strong in the first quarter and I suspect it's still elevated in the second quarter but just offset by the outflows, but are you able to provide that information?

We don't break it out by strategy. But I think generally your assessment is right. It was pretty good in the first quarter, pretty good in the second quarter. Importantly, in the emerging market platform where there was a lot of noise in the May, early June period of time, it's remained healthy.

All right. And if I heard you correctly, you said net inflows are positive to start the third quarter; is that correct?

Yes.

Thank you for that. A question on the cost save. So you kind of increased what you think your achieved cost savings are from your cost reduction plan. I don't think there was a correspondent increase to -- or change near your margin guidance. So if I understand correctly, is that basically because you're reinvesting some of the extra saves in growth initiatives? And if so, can you talk about what some of those growth areas are?

I think you're spot on. Look, we've, obviously, done better than we set out to do on the cost savings and I think as Alex pointed out, it gives us more -- gives us additional operating leverage in the business over time. It gives us more levers in the event that we have shortfalls in different parts of the business, to hit our targets over time and the third thing, it gives us more ammunition for investment in the business both on the asset, as well as on the advisory side of the business.

And on the advisory side, I think it's kind of -- number one is wherever we see the ability to get someone that could really be additive to the Lazard platform and make a difference on this platform, it's something that we consider very carefully and we made a few additions like that, we have made several additions like that already this year.

Second, United States is going to be a growth market, it has been a growth market for us for some time, so we continue to look at opportunities here both in our core large cap M&A business as well as in the middle market business. We, obviously, have seen a lot of success on the capital structure advisory area, and we continue to build into that. Our presence for instance in the sovereign advisory business has been quite strong now for quite some time. And also, in the capital raising advisory business, we've had a really nice run for the first part of this year in Europe, as an example. So those would be some of the areas we're focused on the advisory side.

On asset management, it really comes down to putting in place the teams and the marketing resources to really roll out and take advantage of the performance we have several of our new products, and that's going to be one of the key focuses of the firm over the next couple of years.

All right. Great. That's very helpful. Thank you.

And our next question comes from Brennan Hawken with UBS.

Good morning.

Good morning.

So just to follow up on that last question and you can let me know whether I'm coming to the right conclusions here, but it seems as though you at this stage are sort of hesitant to indicate how much of this incremental cost savings are going to fall in the bottom line because you want to embed some flexibility based on how things develop -- is that right or am I reading too much into that?

I think what you should focus on we put some targets out for 2014 and 2013 and we're focused on achieving those targets, and we're also focused on continuing to invest in and grow the business. And we're going to use these cost savings to achieve our targets and use these cost savings to continue to grow and invest in our business and we're going to balance between the two.

Okay. And then on the cost saves, I think you guys -- does the two-thirds that you've realized here in 2013 or intend to realize, does that apply both on the compensation side of the equation as well as the noncomp expenses?

This is Alex. That's in aggregate. What you'll find is that the noncomp will be a little bit more backend-loaded just because those initiatives take a little bit longer to implement.

Okay. Okay, that's helpful. And then shifting over to revenue, on the -- thinking about the quarter and certainly the revenue is impressive, better than what I was hoping for, was there some pull-forward from deals that you had previously expected to close from 3Q? Or were there certain dynamics that we should be aware of when we're thinking about the outlook? And also if you could add maybe how you feel about your outlook for the back half of the year at this stage.

Okay. So, you know, as I said after the first quarter and the fourth quarter and I think every quarter that we've ever had that I've reported, you can't read too much into any one quarter as good as they get or as bad as they get. And advisory is kind of a lumpy business, there are always surprises to the upside or to the downside, so I think you wants to look at trends, number one. This was a good quarter. That's a good thing.

Two is that there's a lot of things in Lazard's advisory business which are not apparent from M&A. In other words, the capital structure advisory business, the sovereign advisory business, the fact that we have a global platform where statistics aren't as evident or readily available as they may be for instance in the US And so that helps us because of the breadth of the franchise.

Third is I think on the call after the first quarter, I said that we expected that as a result of the first quarter and the advisory side, it would be a little soft for the first half and it is on a half year basis. We made up some ground in the second quarter clearly. and generally speaking the second half of the year on a seasonal basis is better than the first half of the year. So that's basically, I think, where we are.

Okay. Well, when we look at -- and as you highlight, it's not a terrific measure. But when we look at the announced but not yet closed deals for you as sort of a proxy for revenue outlook, it's been sort of steadily declining here. Can you help us get some comfort that -- in the revenue outlook and the fact that we might be missing some things there, or can you -- can you help add some color to that that's additional? Because you guys have a decent comp -- a reasonably high comp to overcome as far as a hurdle back half 2012 versus the back half of the coming year here.

Look, I can only repeat what I've said, which is that on a seasonal basis, second half is usually better than first half. Second of all, you know, our share of the advisory market is -- has improved over the course of time. Third, there's a lot of breadth in our business. But it is a lumpy business and we'll see how the year evolves. A lot of it depends on markets. If they're good and strong, then you tend to get a lot of good things happening and they certainly turn negative if the opposite happens. But right now the environment feels okay, not terrible.

Okay. All right. Thanks for the color.

And our next question comes from Steven Chubak with Autonomous.

Hi. Good morning. Hello?

Good morning.

I want to do make sure you could hear me.

I can hear you. Thank you, Steven.

All right. Perfect. So one of the things I did see in the quarter is that the incentive fees actually rose in asset management and I was curious what contributed to that step up in the quarter.

It was one particular fund where we had great performance built up over time. I think we've tried to give a little bit of guidance around incentive fees, it's hard. It can be unexpected, it can be lumpy and things like that. And generally, what we've been telling people is to sort of think about it on a historical basis look back a couple years and kind of average it out and that's probably as good a measure as you're going to find on those fees.

Okay. Thanks. That's helpful. And I suppose I guess more of a follow-up as relates to the question that Howard had asked earlier, but on the restructuring side, you certainly provided some helpful guidance as relates to the same slowdown that we've seen in that business. But that particular quarter was the weakest quarter I think that we've seen since the first quarter of 2007 and I didn't know -- I know that some of the -- I guess the outlook items that you provided were a bit more constructive just given the move we've seen in rates and maybe some of the credit volatility, but should we be thinking about a potential pickup or I guess gradual improvement activity off the current base which I guess is a bit lower than what we have seen in past quarters, or should we be thinking more in the context of the $35 million to $50 million run rate we've been seeing over the last eight.

I think this is a particularly low quarter. I'm not sure that I'd use this quarter as your base. But I think generally the restructuring markets, particularly in the US, are not likely to pick up all that much even though there's been -- as I said before, there's been some increase in spread, and with some increases, spreads have widened out and rates have increased a bit but you have a better macroeconomic environment.

Europe could get a little bit better because of the activity in the banks to recognize some of the issues on their balance sheet sooner now and also the spreads have widened. So net-net, I think this is a particularly low quarter. And there might be a little improvement as a result of what's going on in Europe but I wouldn't expect we're going to see a booming restructuring market while the macroeconomic environment is improving.

Okay. That's it for me. Thanks for answering my questions.

And our next question comes from Ken Leon from S&P Capital.

Thank you. So Ken, we talked about the drivers for the corporate market for M&A and I don't recall over the last several calls whether we've ever addressed private equity and whether Lazard has any toehold in that market for transactions.

Well, we play it kind of three or four ways. Obviously, the private equity universe is sn important client base to us. We do quite a bit of large cap M&A either directly for private equity firms or alternatively on the other side of private equity activity, taking a company private or such is a core part of the M&A franchise.

The middle market business actually is primarily -- their primary client base is medium-sized sponsors. So that's a direct play on private equity there and very important client base to us and that's where the focus of the business is. And then, of course, we have the one of the leading platforms of fundraising for private equity groups so this is a very important client base for us, Ken.

And restructuring, obviously, has kind of a ho hum outlook. But I recall, as well, that how much flexibility you have with your talent movement or relationship anchors to other areas. Is that true and does that in some way inhibit or limits you for your desire for new hires at the senior managing directing level?

No the magic of our restructuring business is the ability to mix senior bankers whether industry industrialist or country bankers with restructuring expertise, and then taking talent from different parts of the firm to really focus on those transactions. When the restructuring markets are active, we're utilizing usually the M&A where the bank -- the general banking people to assist on those transactions because usually they're countercyclical and the reverse. And I think that's been one of the great benefits of having the kind of firm that we have.

I just wonder why is it separately reported because sometimes it feels as a drag to growth and other times it seems peculiar as something that's a windfall, but I wonder why it's broken out separately while other investment banks don't.

Because everybody wanted it when we went public.

Okay. That's --

We've been doing it ever since and I think everybody else just kind of threw it all together and that was the reason.

That's fair. And then just one mechanical question. You know, any help on guidance for tax rates?

Tax rates. I think we've been talking about 25% tax rate for a while on the -- for this year, guiding people towards that. That's it.

Okay. Thank you very much.

Okay.

(Operator Instructions). We'll take our next question from Howard Chen with Credit Suisse.

Thanks for taking the follow-up. Ken, I just wanted to revisit the ability to achieve 21% to 22% operating margin target for 2013. Realizing this business is lumpy, I'm trying to get some color. To what extent do you need to see new M&A deal formation or new asset management winds in the back half to achieve that target Alex reiterated. Thanks.

We've been very clear about this. We premised the targets on the 2012 activity levels which, generally speaking, I've been pretty direct about this, usually mean revenue. To the extent that we achieve those revenue targets, then I think -- those revenue levels, then I think we'll hit our targets. To the extent we fall short, if you're operating margin target is easier to achieve because that's comp this year and we control comp this year. The GAAP one -- as long as we maintain -- as long as we are disciplined about deferrals or stay disciplined about deferrals in a declining revenue environment because a lot of the compensation is reflective of past periods, then GAAP becomes more challenging. But I've been consistent about that from the beginning when we announced the targets.

Great. Thanks for clarifying.

We have no further questions at this time. This concludes our Lazard call for today. Thank you for your participation.

Great. Thank you.