Lazard Inc (LAZ) 2013 Q3 法說會逐字稿

Good morning, and welcome to Lazard's third-quarter 2013 earnings conference call. This conference 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 would like to 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 2013. Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer, and Matthieu Bucaille, Chief Financial Officer. A replay of this call will be available on our website, www.lazard.com beginning today after 10.00 AM eastern time.

Today's call may contain forward-looking statements, these statements are based on our current expectations for 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 filing with the Securities and Exchange Commission, including our annual report on form 10-K, quarterly report 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 include certain non-GAAP financial measures. A description of these non-GAAP financial measures and the reconciliation to the comparable GAAP measures are contained in our earnings release which is 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 listed on our website at www.lazard.com. Following their remarks, Ken and Matthieu 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 third quarter. Operating revenue rose 10% on a broad mix of business and adjusted net income rose 75%, reflecting the operating leverage in our business model. In financial advisory, the breadth and depth of our global franchise was evident as we continued to increase our share of the advisory fee pool, despite a challenging M&A market. We're advising clients in some of the most significant and complex transactions around the world. In M&A, we're advising on 7 of the 20 largest global transactions announced this year. Recent announcements include Amgen on its acquisition of Onyx Pharmaceuticals, Health Management Associate sale to Community Health Systems and Vivendi on its exclusive talks with Emirates Telecommunications to sell its interest in Maroc Telecom.

In restructuring, we're winning significant mandates despite the generally low level of corporate restructuring activity. In the third quarter, Lazard was selected to advise the Brazilian petroleum company OGX on its capital structure and Detroit's Committee of Retirees on their chapter 9 proceeding. In capital advisory and sovereign advisory we continue to be active advising corporations and governments respectively on balance sheet matters, capital raising and privatizations.

In asset management, we're benefiting from a global franchise that's diversified by investment strategy, region, and client type. The business set records for third-quarter and 9-month operating revenue. It has net inflows of $1.7 billion for the quarter. Quarter-end AUM hit a record high of $176 billion. And management fees were the highest they have been for any quarter.

Despite high volatility in emerging stock and bond markets, we had net in-flows in both our emerging market equity and emerging market fixed-income platforms. While this was only one quarter, it illustrates our solid position in this area. We have a long track record, a pattern of strong performance, and an institutional investor base that is increasing its allocation to these asset classes.

In equities overall, we continue to see demand for international, emerging markets, and local equity strategies. In fixed income, we're seeing demand for our emerging market debt and global fixed-income strategies. We continue to expand our investment platforms and our global distribution network. We recently opened a new Lazard asset management office in Singapore with investment managers and marketing staff adding to our local presence in Asia.

Our results for the quarter and for the nine months reflect the breadth and depth of the Lazard franchise in both the financial advisory and asset management businesses. Despite challenging conditions, Lazard's operating revenue after three quarters is near a record level. Our net income is up 40% for the first nine months. We continue to generate strong cash flow for enhancing our profitability and increasing our operating leverage. And we continue to invest for growth. Matthieu will provide further details on our financial results.

Thank you, Ken. Lazard's 10% operating revenue gain in the third quarter reflects a 6% increase in financial advisory and a 13% increase in asset management over the same period last year. Quarterly M&A and other advisory operating revenue increased 3% from a year ago despite a generally weak market for M&A demonstrating the global breadth of our advisory business, including sovereign and capital advisory. This quarter, we had a number of M&A closings in Europe showing the benefit of our strong presence in the region, even in a difficult environment.

Restructuring operating revenue increased 23% from a year ago primarily reflecting the closings of several large assignments, including Eastman Kodak. Lazard maintains its leadership position in global announced restructurings.

In asset management, record third-quarter operating revenue increased 13% from a year ago, driven by a 9% increase in average AUM and a slight change in a mix of our AUM. On a sequential basis, management fees were up 5% from the second quarter on a 2% increase in average AUM. The $13 billion sequential increase in our AUM was primarily a result of market appreciation as well as $1.7 billion of net in-flow in the quarter. As Ken mentioned, the net in-flows were driven by emerging market equity and emerging markets fixed-income as well as our multiregional equity platform. These in-flows were partially offset by moderate net out-flows in our global equity platform.

Turning to expenses. We are seeing the results of our cost-saving initiatives. In the third quarter, adjusted GAAP compensation expense increased 5% from a year ago, even as operating revenue increased 10%. And for the first nine months, adjusted GAAP compensation expense decreased 3% from the 2012 period, even as operating revenue increased 1%. On an adjusted GAAP compensation, our adjusted GAAP compensation ratio remained at 60% in the third quarter. This compared to 62.7% a year ago and 61.8% for the full year 2012. The third-quarter adjusted GAAP compensation ratio assumes based on third-quarter 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 increased just 1% despite the 10% increase in operating revenue. This reflects cost-saving offset in part by expenses from increased business activity. Finally, regarding capital management, year-to-date, we have returned $294 million of capital to shareholders primarily through dividends and share repurchases. As of September 30, we have reached our annual objective of offsetting potential dilution from our 2012 year-end equity grants. We continue to believe we're on track toward a 2013 operating margin of approximately 21% or 22%, creating a path forward achieving our 25% operating margin target in 2014 all at 2012 activity levels.

Thank you, Matthieu. We continue to be cautiously optimistic about the environment and confident in our model. We're starting to sense some optimism regarding the global economy from boardrooms and business leaders, ultimately an encouraging sign for M&A activity. Global equity markets have been recovering, causing a surge in IPOs and privatizations. Corporations and governments are seeking independent advice on capital structure and capital raising and Lazard is positioned to serve all of them.

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, and we have significant capacity for organic growth. Both our businesses are well-positioned for revenue growth as the real economy recovers. In financial advisory with a leading global independent advisor with multiple sources of revenue, we have a world-class asset management business with strong performance and growth. Our discipline on cost is creating operating leverage as demonstrated by our results this quarter, we continue to return capital to shareholders, more than $1.2 billion since the start of 2011. And we're creating value for our clients, our shareholders and employees.

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

Thank you.

(Operator Instructions)

Our first question comes from Alex Blostein With Goldman Sachs.

Thank you. Good morning everybody. To just start off, the obligatory question on the environment. You suggested that the outlook is getting a little bit better, but I was hoping you could focus specifically in Europe given how important that region is for you guys. Clearly the macro-picture there is starting to get better, but I was hoping you could say anything more specific on the deal-making environment and if you're seeing any early signs of hope in Europe.

Okay. Look, Europe is, the drivers of activity in Europe are really not much different than they are in the United States or for that matter anywhere else in the world. The M&A environment tends to be driven by three factors, valuation, financing, and confidence. In Europe, the financing conditions have improved, you see an very active IPO market and you see a very active financing market, certainly for the larger credits. The valuations, they've gotten a little richer. Still, if you start to believe that the environment's going to be stable or you can see some growth, you're probably still okay.

And the key thing is the global, is the macroeconomic environment. In there, there are two probably positive developments, one is the fact that the tail risk in Europe is much diminished, at least the markets have really moved on with regard to tail risk. And in terms of the macroeconomic environment itself, you're starting to see stabilization in the southern part of Europe you're even starting to see some growth creep back in. It's not significant enough to say it's sustainable, but it has, it is a better environment than it was a year ago and for the first six, nine months of the year for the most part, this growth beat people's expectations during that period of time. So if that's the case and you start to see a sustained stabilization of the macroeconomic environment with some improvement in trading conditions, confidence should start to improve. And as confidence starts to improve, you are going to likely see more activity.

Got you. That's very helpful. And then on the asset management business, I'm not sure if Ashish is on the line as well, but clearly a big improvement in flows for you guys this quarter. I was wondering if you could speak to the pipeline and then specifically, so the Global Thematic still seems to be such a big overhang, is it possible to identify, a certain amount of assets that you guys still think might be at risk to help us dissect what the more natural organic growth is versus some of the riskier products?

Okay, quite a few questions built into that. Let me start with the pipeline. RFP activity for the first nine months has been strong, continues to be strong for us. Gross flows for the quarter, for the year so far have also been quite strong. Net flows for the quarter were positive in the emerging market franchise. We saw both positive net in-flows and we also saw AUM growth as a result of markets improvements.

In the thematics business, we had some outflow still but reduced from the first half of the year, offset by improvements in the overall AUM from market performance in that business. And then, as far as the thematics business going forward, a lot of the decision-making around this strategy is going to probably happen in the end of the fourth quarter and the first part of next year. And while this is a strategy which is based on long-term performance and in the five-year and ten-year numbers are still pretty good we've obviously had some difficulties in the shorter-term so we're keeping an eye on it.

Got you. Very helpful. Thanks guys.

Okay. Thank you.

Our next question comes from Howard Chen with Credit Suisse.

Hi, good morning everyone. Thank you for taking the questions.

Hi, Howard.

Ken, I was wondering if you could comment to what extent the US government shutdown potential default and this continued movement in benchmark interest rates has impacted new business formation and potentially delay or change the completion of deals if at all? Thanks.

Okay, on the asset side, it probably doesn't have all that much of an impact. The markets were pretty strong during this whole period of time. There were a couple of days where they fell off but generally speaking the rally post-shutdown got us back to where we were probably plus some in some places. So overall on asset, there probably is not much of an impact.

On the advisory side of the business, it didn't impact the third-quarter results because most of everything there is pretty much baked before the shutdown happened. The question is, is whether or not those three or four weeks of distraction either delayed things or put things on the shelf, or whatever and we won't really feel that until the, until subsequent quarters. In reality, yes this is a little bit of a setback for confidence. A lot of it depends on how people view what's going to happen in January and February, our current consensus is we're not likely to go through the same events we went through last month.

Great, thanks Ken. And Matthieu, you touched a bit on this in your prepared remarks, but can you elaborate on what drove the revenue yield pick-up in asset management and how sustainable do you think that is?

Right. This is probably two things. One is in our institutional business when we described our in-flows and out-flows. You remember that we've said that in in-flows, we've been strong in emerging market and multi-regional platforms, which tend to have high yields. On the out-flows, you remember that what we've pointed out is the Global Thematic and also the local equities and the local equities have lower yield. So net, net on the institutional business, the reason for the pickup is the change in the shift, the change in the mix of our AUM as a result of those flows. There is also a little bit of an impact created from our wealth management business in Europe.

Okay. Thanks. And then, my final question, Ken, you and the team have laid out the near and long-term goals of what you hope to achieve in terms of the operating margin and compensation, both on a GAAP an awarded basis. But I was hoping you could comment heading into compensation season over the next few months, just what's different or not different about this year for the firm and the competitive landscape versus what you are and how are you approaching that potentially differently than years past. Thanks.

We're laser-focused on achieving our targets and we're going to go into year-end with that in mind.

Okay. Thanks.

Our next question comes from Brennan Hawkin with UBS.

Good morning, thanks for taking a question. A follow up on the asset management questions there, emerging market debt AUM was up really, really nicely. Can you give some color on how much that was due to flows versus market tailwinds?

It's principally flows.

Terrific, thank you for that. And then when we think about the drop in non-comp, clearly there was a component of that, that was due to seasonality and maybe lower activity levels, but just when we're trying to deconstruct that versus the impact from the cost-cutting program, can you give us some color on that front?

So if you're talking sequentially, yes. There is in the third quarter, a seasonal low versus the second quarter, which drives the decrease in, the third quarter versus the second quarter. If you look at the third quarter this year versus third quarter of last year, so two same quarter, then you see that it went up only 1% whereas revenue went up 10%. This is really the result of, number one, some impact of our cost-saving initiatives, but there is also, in particular in our asset management, increased business activity which has led to increased non-compensation costs in the line from outsourcing and other expenses associated with that requirement, which has offset some of those benefits.

That's helpful. Thank you. And then last one from me, you know, we haven't really seen the price of the high-cost debt that you guys have that's maturing in 2015 come down. I understand that you may not want to signal here too quickly, but is there a level that you guys are watching for, in order to consider biting the bullet and maybe restructuring some of that debt?

This is always on our mind. We're constantly evaluating the different paths we have to deal with this and the challenge is, is making sure that we see real economic value created by whatever move we take here and, you know, we're examining it all the time and obviously, it becomes more real as we get closer to the 2015's maturing.

Okay. Thanks for the color.

Our next question comes from Devin Ryan with JMP Securities.

Good morning guys, how are you?

Hi, Devin.

Given some of the positive commentary on the restructuring business or at least what we interpreted as positive commentary, particularly relative to what's been a really slow backdrop. I'm just trying to put some context around that. Is that activity actually been improving for you guys in that business? Or are we kind of just at a more stable place in the cycle for that business where, you know, we'd expect activity to be around where it's been over the past year?

Our view is probably activity levels are probably where you'd -- where they've been for the past year is a good indicator. Liquidity conditions are so strong right now, that the restructuring environment is probably pretty stable at the moment and not likely to improve that much. The one area where there's probably some opportunity is in some of the developing markets, as an example, we just took on a large assignment in Brazil, which is a result of perhaps some of the outgrowth of the change in markets over the last few months for the developing world.

Okay. Got it. And then, with respect to recruiting, can you speak a bit to your view of the recruiting environment today and maybe some areas that you may be more focused on, whether by geography or sector where you see the potential of adding some people in the coming year?

This year, we've been pretty active on the asset management side, particularly on the sales and marketing functions, that's been an area where we've invested some money this year. And on the advisory side, a couple of places where we saw some opportunities to strengthen our business one in particular was Germany and then we've filled in a couple of other places. What we're really doing right now is taking a careful eye on the cost-savings plan that we had. We've always said we're going to re-invest some of that but we're going to modulate it so that we can make sure that we hit our results and also to make sure that we're in line with the environment we're in.

The environment itself for hiring is still pretty good. Compensation is not out of control on wall street at all at the moment relative to previous periods of time. And so there remain good opportunities there but we also have a good franchise that is pretty well-built out. We have a lot of operating leverage in Europe at the moment and also to a little lesser extent in the US because the market's a little bit better in the US. But still there's a lot of operating leverage in both parts -- in both of our key markets and we have a good presence in the emerging market that has been developed over a long period of time. And part of what we've done in this restructuring is concentrate our efforts on the places where we think the fee pool is most attractive.

Got it, thanks. Appreciate the color.

Thank you.

Our next question comes from Jim Mitchell with Buckingham Research.

Good morning, just a followup question on your debt coming due in 2015, is there any reason why you wouldn't want to pay that down with cash? Right now, cash levels are a little bit lower than what the total amount outstanding is. I guess, I'm just trying to get a sense of would you, is it fair to assume that the interaction between capital return and building cash to pay that down, it seems to me that versus issuing more debt to pay it down or refinance. It would make more sense to raise cash. Is that fair or what kind of dynamics are you thinking through?

We have, half our debt roughly speaking is due in 2015, half our debt is roughly speaking due in 2017. If we were to take all our cash flow to pay down debt, we're not going to pay down both traunches. We're probably going to have debt at some point even after 2017. And so one of the questions is, is which is the better traunch to pay down and which is the better traunch to start to work off or keep it extant?

And some of that comes back to how attractive the financing environment is today versus how attractive the financing environment might be in two or three years from now. I think we all have to keep in mind we have historically low rates today and spreads are pretty tight. And so it's a relatively attractive environment to refinance. But for us, it's a balance between the attractiveness of the refinancing, our view on rates, the world's view on rates and what kind of premium we have to pay to refinance the debt or pay it down.

Fair enough.

Okay.

Yes sure. And than maybe just on sovereign advisory, that's been pretty strong obviously of late. How do we think about that going forward? Is it more of a restructuring cycle where as this global economy improves, the fiscal shape of governments get better that that would wane, or do you feel that that's, you're not punching above the weight here and that that can continue to grow, how do we think about that?

This is interesting. We started off as a business associated with the developing world and the over the cycle in 2010 and 2011 as a result of the turmoil in Europe it moved a bit towards Europe. As Europe stabilizes, you know, there's going to be other parts of the world that are going to be a little less stable and I think we continue to see activity there. It's a business with a lot of runway still, in our view.

Okay, is it fair to assume it was a reasonably good driver this quarter? How do we size that? If you can give us any kind of color, that would be great.

It's kind of hard to break it out, but I'd say it's consistent with where it's been for some time and, again, this business it has multi-facets. On one hand, you advise a government and then it turns into advising on a financial system or banks and it could turn into corporate assignments. It's turning into a life cycle business for us. Many, many years ago, it simply advising on a debt restructuring for a troubled country or countries. Today, it has a broader application to our emerging market platform.

Great, that's helpful. Thanks.

Our next question comes from Mike Needham with KBW.

Good morning, guys. I have a question on the buyback. Just curious, are you being more opportunistic just where the share price has been trading this year? Or is it more really a function of, buying back stock to offset dilution from comp?

It's a little of both. I mean we clearly have offset dilution associated with comp and then we're going to be opportunistic about the remaining buying. Obviously the share price has moved up pretty significantly this year, so we have to be thoughtful as to what's the best application in terms of cash flow here.

Okay. Thanks for that and I guess from where we're sitting, the number of announced deals globally and volumes really don't look all that strong for M&A, but it seems like at least this quarter the industry is really beating expectations. Do you think sentiment has gotten a bit too negative on volumes more generally kind of based on the opportunities you guys are seeing in your pipeline?

The M&A environment is really, as I said before, it's really going to be driven by the real factors that drive M&A. So it's going to be valuation, it's going to be financing, availability of financing and confidence which is really a function of the real macroeconomic environment and that's been sort of the missing element here. Our view is the macroeconomic and if people really start to have confidence in the improvement in the macroeconomic environment then confidence overall will improve and that should be a driver of the M&A cycle, and that's been the piece that's been missing since the crisis.

Got it. Okay, thanks for answering my questions.

Thank you.

(Operator Instructions)

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

Good morning guys, my first question is on the Lazard Capital Markets. Obviously that was spun off from your entity several years ago but there's still I think some very modest business relationship between the two of you. With them apparently struggling and looking for strategic options, can you talk about the financial and/or the brand risk that you are facing from that?

Okay, on the financial side of things, it should have minimal impact on us. The lion share of our activities on the capital side is in the advisory business globally which really has very little do with LCM. On the brand, look, Lazard's been around for a long time. It's a durable brand LCM is not a part of Lazard, it's noise right now, and we expect we'll be past this at some point soon.

All right. Appreciate that and then last one for me real quickly on your share count, your diluted share count was up quarter of a quarter by about I think 1.5%, can you talk about what played a role there, cause given you had share repurchases I would expect it to be down sequentially.

It's the wonders of treasury method accounting. Matthieu --

Right, right, all of it is the increasing average share price between the second and the third quarter led to an increase in our weighted number of shares for EPS calculation and that's really just the impact on the treasury share method. I think we've discussed this in the past.

Very good. Thank you very much.

Thank you.

And it appears we have no further questions in the queue at this time. This now concludes the Lazard conference call.

Thank you.