Lazard Inc (LAZ) 2014 Q2 法說會逐字稿

Good morning and welcome to the Lazard second-quarter and half-year 2014 earnings conference call. This call is being recorded.

(Operator Instructions)

At this time I will turn the call over to Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead.

Good morning, and thank you for joining our conference call to review Lazard results for the second quarter and first half of 2014.

Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer and Matthieu Bucaille, Chief Financial Officer. A replay of the call will be available on our website 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 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 achievement to differ materially from those expressed or implied by the forward-looking statement. These factors include, but are not limited to, those discussed in Lazard's filings with the SEC, 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 for predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the day in 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 on our press release issued this morning and in our investor presentation of supplemental information, both which are posted on our website at 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 achieved another strong quarter and a solid first half. We generated record operating revenue across our businesses globally.

As a financial advisory, we are in an excellent position as a strategic M&A cycle appears to be taking shape. Companies are seeking trusted device with global capabilities and Lazard is best equipped to help them succeed.

With unrivaled global network relationships with key decision-makers in business, government and investing institutions, the highest concentration of senior-level bankers and deep local roots around the world overlay with global industry expertise. Year to date, we are advising on one-third of global announced M&A transactions valued over $10 million. We are active in numerous, strategic, complex and cross-border transactions often as sole or lead adviser.

To name just a few AT&T's acquisition of DirecTV, one of largest the largest transactions announced this year. General Electrics acquisition of Alstom's Thermals, Renewables and Grid businesses. GlaxoSmithKline's three-part transaction with Novartis in consumer oncology and vaccines. And Reynolds American's three-part transaction with Lorillard Imperial Tobacco and British American Tobacco.

Our advisory businesses is the most active it has been since before the financial crisis. The US market continues to be healthy, and now we are seeing a pickup in European M&A, where Lazard has powerful franchise.

In addition, our Sovereign and Capital Advisory services remain active globally. Advising governments and corporations on balance sheet matters, capital raising and privatizations. Lazard's Middle-Market has gained momentum and is successfully leveraging the Firm's global platform.

In asset management, investors around the world increasingly look to us for solutions to complex investment needs. They are drawn to our performance, global perspective and deep insight into local markets. We achieved net inflows of $4.7 billion in the second quarter, broadly diversified across equity and fixed-income strategies in all of our platforms from clients globally.

AUM surpassed the $200 billion mark and management fees reached an all-time high. Our RSP pipeline remains healthy, reflecting demand from institutions and retail investors globally. We continue to launch new strategies and investment growth. We recently expanded our capabilities in liquid alternatives, Multi-Asset solutions, and Small Cap equities.

In the first half of the year, we have opened three new Asset Management offices in the Middle East, Europe and the US. Asset Management continues have solid fundamentals with leadership in growing asset classes across equities and fixed income, a strong pattern of long-term performance and platforms with significant capacity for organic growth.

For both our businesses, we don't read too much of the quarterly results because advisory revenues and markets fluctuate but the trends are encouraging. They reflect clients growing demand for trusted advice in investment solutions with global expertise, a unique breadth and depth of the Lazard franchise, the investments we've made in our businesses and the work we've done to drive efficiencies and enhance operating leverage. As a global macroeconomic environment recovers, we are in excellent position for continuing profitable growth.

Matthieu will now provide color in our financial results and Capital Management.

Thank you, Ken.

Operating revenue increased 12% for the second quarter, and 20% for the first six months of 2014, compared to the 2013 periods. Adjusted net income increased 43% and 72%, respectively. Reflecting the substantial operating leverage in our business model.

Revenue growth reflected springs across our businesses. In Financial Advisory, operating revenue increased 7% for the second quarter and 29% for the first half, compared to the 2013 periods. The increases we're driven by M&A and other advisory, particularly in Europe.

In Asset Management, record quarterly operating revenue was driven by an 18% year-over-year increase in management fees, in line with average AUM. On a sequential basis, management fees grew 8%, also in line with average AUM. At quarter end, our AUM was $205 billion, 25% higher than one year ago and an 8% increase of $15.1 billion from March 31, 2014. The $15.1 billion increase included $10.4 billion of market appreciation and $4.7 billion of net influence.

Turning to expenses, in the second quarter, we continued to accrue compensation at a 58.8% adjusted compensation ratio, down from a 60% accrual ratio in the same period last year, but consistent with the full-year 2013 ratio. Our adjusted non-compensation ratio for the second quarter was 19.5%, compared to 20.5% of the second quarter of 2013. Non-compensation expense increased 6% in the second quarter, as operating revenue grew 12%.

For the first six months, non-compensation expenses increased 5% as operating revenue grew 20%. The increases in non-compensation expense primarily reflect greater levels of business activity and investment in our businesses.

Our tax rate was 21% for the second quarter, similar to the first quarter and broadly in line with our expected rate for the year. However, our tax rate varies with changes in the mix, profitability and geography of our revenue. Looking ahead to the next year, assuming increased profitability and all else being the same, we would expect our tax rate to be in the mid-to-high 20s.

Finally, regarding Capital Management, year to date as of June 30, we have returned $349 million to shareholders, primarily through dividends and share repurchases. We have more than offset the potential dilution from the 2013 year-end equity brand. We remain focused on our 2014 financial targets as we continue to invest in our business and maintain discipline and expenses,

Ken will now conclude our marks.

Thank you Matthieu. I will summarize the highlights.

Strong quarterly and first-half growth across our businesses. A substantial increase in strategic complex advisory assignments with signs of an M&A recovery in Europe. Net inflows and asset management broadly diversified by strategy, platform and clients.

Solid earnings growth reflecting increased productivity and operating leverage. High quality earnings. Significant cash generation and continued return of capital to shareholders.

Both our businesses have substantial capacity to increase activity in organic growth. We remain focused on serving clients well as we build long-term value for shareholders.

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

(Operator Instructions)

We will hear first from Devin Ryan from JMP Securities.

Good morning. Thank you for taking my questions.

With respect to business right now obviously revenues are trending well above the 2012 levels, and we will see where the year ends up. But the targets as they sit today I know are at the 25% operating margin target is based on the 2012-like revenue. So now that we're here halfway through the year, the outlook is improving, revenues are higher level.

Can we think about or is it reasonable to think that there could be upside to that operating margin? Targeted just based on all dynamics of where you have leverage points? Any update there would be helpful because I know now were in a different type of environment than we were couple of years ago.

Okay Devin look, as we've said for some time our focus for 2014 is achieving a 25% margin target. We continue to be highly focused on that.

Obviously to the extent that our business improves and there is additional revenues we have the choice of continuing to invest in our business or adding to margin. And if we are in that fortunate position as we get closer to year-end we will give people more thoughts on that.

Okay. Fair enough. And then maybe with respect to that investment. Are you guys adding MDs right now? And what areas are you adding and where would you like to add as you're thinking about the next few quarters and into next year?

I think as we pointed out last year we were caring a little bit more of our investment this year towards the Asset Management side of the Business. And I think you can see from some of the recent announcements that we've been quite active there.

We have added a Media Team in the Middle East, we added at team in Singapore and in the last couple of days we made a few additional announcements about some capabilities that we brought in on the Asset Management side. We continue to selectively hire on the Advisory side. But we have a wonderful fully built-up platform on the Advisory side so we remain selective.

Okay great. And then just lastly with respect to the M&A backdrop. Appreciate the commentary around Europe and your leverage to a recovery there.

Is there anyway to put any context around where you think we are in the US in terms of what inning we're in in the recovery versus maybe where Europe is in their recovery? Just to have some perspective of the Europe versus the US just from your view.

Sure. In our view, the cycle probably kicked in the US sometime last summer, last fall. In Europe probably six to nine months later probably the beginning of this year it's beginning to pick up in Europe, at least for us. And again it's a function really of the three things that from our experience drive an M&A cycle; it's financing, valuation and sentiment-or confidence. And the first two, valuation and financing have pretty much been in place since the crisis in the US.

In Europe, financing has improved over the last couple of years and valuations remain pretty reasonable. What has improved in the US earlier than in Europe was the confidence in the macroeconomic environment. And the improvements in macroeconomic environments. What was thought that was until the macroeconomic environment was stable and people believed it was improving that you would really have a shift in sentiment.

That probably happened sometime last summer and into the early fall in the US I think the stability in Europe, today we probably see more stability in the macro environment in Europe than we've seen since the crisis. And that is contributing to the improvements in sentiment in Europe right now. So that's why were feeling a little bit better about European M&A environment that we did sort of a year ago.

Next we will hear from Alex Blostein from Goldman Sachs.

I wanted to spend a minute on the competitive dynamics in the M&A space today. It looks like you guys have picked up considerable market share in the US relative to where you were in the prior cycle. Part of that may be just because of the issues with the banks, part of that may be from a longer-term (inaudible) for the independent advisors.

But I'm curious to how you think the competitive dynamic will evolve in Europe and whether or not we could see similar type of market share gains for you guys. Especially given the fact that it still seems like European banks are still under little bit more pressure.

It is still early in the cycle in Europe so it's kind of hard to know how this going to play out. But I think what distinguishes us at the moment and hopefully for some time and it's probably the mode around our Financial Advisory Business is this mix of concentration of senior expertise which matches the best of the large firms, and distinguishes us from virtually all of our independent competitors.

Second is a global franchise that has strong local roots wherever we compete, which is really critical to being successful in the advisory business. And then a range of capabilities across industry groups and also different areas of the advisory practice. So not only M&A but capital structure, balance sheet, shareholder relations.

And all of this being able to be applied on a coordinated basis is really I think what allows us to do a better job covering some of the larger companies and to really participate in some of these very complex transactions in a leadership role. And I think it is that combination: the senior expertise, the global local that is the deep roots locally and the global franchise with this breadth of capabilities across industry that is the mode in our Business right now.

And then shifting gears to the Asset Management Business. You alluded that there are few pipelines that are still fairly healthy,

I was wondering if you could spend a minute discussing which products are getting most traction in the pipeline? And as a follow-up to that, I was hoping you could give us an update on where we stand with Global Thematic and the outflows there, are we seeing kind of the tail end of that?

Sure let me just touch on Global Thematics quickly. The outflows for the second quarter were down a bit from the first quarter. And you know the performance in the Business at least on the short term basis improved a bit. It is still challenging on a three-to-five-year basis. And we expect, we're cautious about the business for the latter part of this year still.

Turning to the rest of the products. Look, we've been very fortunate. We have strong performance across a range of products, virtually all of our products right now. And we've got a breadth of products that really are in-demand right now for the clients that we cover, and that we work closely with.

And that's everything from our Broad Emerging Markets Platform both on the Equity and the Debt side, our international products that perform quite well, and some of our local products are really kicking in. So we're pretty happy with the mix of performance and the breadth of the products right now and I think we are seeing that in the demand for RFPs.

Thank you and then just last one on Capital Management. Seems like you guys been a little bit more opportunistic recently with respect to buying back your own stock, clearly the cash flow generation has gotten stronger with the environment maybe some updated thoughts on the use of excess cash?

Sure we're going to do what we've done in the past which is we produce a lot of cash in this business it's in excess of net income. And we've been pretty consistent about returning that in one form or another to shareholders over the course of the year. And you know it's been a mix of debt paydown which we've done a little bit of in the past.

Importantly, we've done it through dividends, we've done it through share repurchase and we've done it through special dividends at the end of the year when we have a better sense of the outcome of the year, and I think we're going to continue that of the course of the second half of this year. It's balance between share repurchase and importantly capital return through dividend or special dividend.

Our next question will come from Brennan Hawken from UBS.

So I'm following up on Alex's question on Asset Management. Can you guys-the flows were really great, good to see this quarter, can you give us some color on which products drove that strength?

Pretty much across the board. We are seeing it in the Emerging Platform, the International Platform and importantly Fixed Income, the Emerging Market Debt Platform. It has just been a good breadth of influence this quarter.

Okay. Great. It would be really helpful on a go-forward basis if you would consider maybe breaking out the net phone number by product. It's helpful that you've got the AUM by product but it would be a great enhancement if you would consider breaking that out just as an ask there.

How far do you think you are from scale on the Fixed Income side? Do you feel like you already are there or do you feel like there's a particular AUM level that you need to get to when you can start having that be a meaningful margin contributor.

I think on Emerging Market Debt side, it's already a meaningful contributor. There is obviously more we could do on the Fixed Income side we are selective about the areas where we apply our resources and want to make sure is something where we have some competitive advantage. But I think the steps we have taken on the Fixed Income side recently, particularly in Emerging Market Debt have been pretty successful so far.

Terrific. And then shifting over to the Advisory side. You guys have really been doing a lot better this year than some of the M&A-focused investment banks that you compete against, as a growth in the sort of dollar volumes have shifted to large deals. What do you attribute that outperformance? Is it based on a mature global platform as a competitive advantage? Or is this something else do you think?

Look I think covering big companies in being involved in complex transaction requires a level of expertise and coordination which we think we do a pretty good job at. Most of these big clients require global coverage that is coverage from multiple geographies. They require expertise that stand multiple industry groups, and they require expertise that expands multiple capabilities.

So you're not only talking about M&A but often time you're talking about balance sheets and such. I think what is unique to the Lazard platform is to be global, to have deep expertise locally which is critical in the advisory business, to have a very high concentration of senior people. And to be able to do this across industry groups and capabilities.

And you know I think it is you can compete selectively by a client or selectively by a country, or selectively by an industry with individuals. But it's kind of hard to do it across a broad range of companies across a broad range of geographies without a network like the one we have.

Terrific, that's helpful color. And then the last one for me sort of following up on Devin's question on margin. So when you think about your two separate Businesses and the margins and how you benchmark them across competitors.

How do you adjust for the fact that the comps you're looking at have corporate expenses already embedded in their results? And then how do you think about your corporate line and maybe how to slim down some of those structures and allocations?

I think we have done a lot on the cost side that built-in operating leverage as the business grows. So we are pretty comfortable with the target margins for the two Businesses and the overall target margin for the Business at large.

I point out that on the Asset Management side with or without the corporate margins I think we're operating pretty close to best in class margins for an institutional manager. And you know you could probably always find examples of people that are better. But I think overall we're pretty comfortable with the margins on the Asset Management side.

And if you think of what the Advisory side of the Business has been through over the last five years in terms of what's happened to the marketplace from its peaks in 2007. We are in an obvious recovery right now but we've done and enormous amount to get our cost structure under control and we think there's a lot of operating leverage built in to the Business now.

And again I think when you start looking at us versus competitors. You know these models are very different. They tend to be domestic models built around one country or couple of industry groups. And I think as they scale, their margins are probably going to change a little bit.

We're pretty comfortable with the target margins for both Businesses right now. I think there's always room for improvement on corporate costs and cost that are allocated for the business, and we're focused on that. I think we've shown the ability to get a lot of leverage out of the business as the business grows and we hope to continue to do that.

And now moving onto Ashley Serrao from Credit Suisse.

Ken I was hoping you could comment on what you're hearing today from the sponsor community by trying to put some of these record levels (inaudible) to work and also maybe exiting some of the investments?

Sure. On the exit side I think the sponsor community has been quite effective over the course of the last 12 to 18 months in terms of taking advantage of the public markets particularly in Europe, and also selectively on the sell-side for some of the larger sponsors.

The Middle Market sponsors have been quite active both buy-side and sell-side that is putting money to work as well as realizations. I think one of the challenges for the large sponsors is competing on some of these large strategic deals. And there, I think it is a little bit harder than it probably was in the last cycle putting money to work. But people are pretty creative, I'm sure they will find ways.

I appreciate the color there. Switching onto this hot topic of tax inversion. I was wondering whether you had a view there maybe from a legislative standpoint? And also if you expect more deals to be announced in the coming future? Along this scene?

Look it's been quite an active area particularly in the healthcare environment, particularly with the Specialty Pharma and the Pharma Companies, a little bit on the device side which is somewhat predictable. These are companies which there are benefits from IP and there are benefits from the fact that there is a large amount of cash overseas. So for this industry in particular there are a lot of benefits on inversions. Particular benefits on inversions.

There's a good possibility that it starts to spread to other industries and it's a dynamic. The more inversions and the more visibility on inversions the more likelihood it is that we're going to get some kind of reaction out of Congress over the course of the next couple of years.

I mean we obviously have a legislative logjam in Washington right now, and it is difficult to get anything done. But at some point it will break and if this continues at the pace it is continued at, or if the pace quickens I think we are likely to see a legislative response to it at some point.

Thanks for taking my questions and congrats on the quarter.

And now we will move to next question that will come from Vincent Hung with Autonomous Research.

First question is one of your competitors commented on the backlog and said it was the best since 2007, I don't know if you can say how good your backlog is relative to history? Or just comment on the outlook?

We never comment in backlog on these calls. All I can say is the environment is probably the most buoyant it has been since before the crisis, that is encouraging. Our share is pretty good right now.

The challenge in any environment, with any environment like this for us on big deals is closings, when they happen is it this year, next year? Particularly with ones with complicated regulatory issues. And so we are cautiously optimistic about the cycle right now, and on our Business as a whole.

Okay. Lastly, can you give us an update on the residual gross cost savings for the rest of the year?

The residual grossed cost savings? The cost savings less left at this point?

Yes exactly.

Matthieu.

We said in previous calls, we have achieved more than two-thirds of our cost savings in 2013 and the remainder of that we will keep in 2014. And as you can see (inaudible) on our non-count expenses for the first half of the year, our revenue are growing by 20% and our non-count are growing by 5%. The 5% increase in our non-count is due to an increase in business activity and investment in our new Businesses. But it is also partly offset by some of the benefits of these cost-saving initiatives.

Moving onto the next question and that will come from Douglas Sipkin from Susquehanna.

I just wanted to drill down a couple of financial items I guess. First, with respect to the Asset Management business. I mean I know it's more institutional then retail, but obviously the retail has been a real nice driver in some pockets.

I'm just trying to think, should we thinking about the fee rates modeling them on an average basis, or an ending basis? Just because I know with the big flows and trying to gauge if you guys have some real revenue momentum moving into the next quarter. Or generally speaking is a better just to assume an average asset level to sort of think about driving revenues going forward.

I think the best way to think about it is the average asset level I mean our AUM ended the quarter at about $205 billion, and obviously it is sensitive to market conditions. But that is a good place to start the second half of the year.

Okay, that's helpful. And then shifting to compensation. I know you guys have been pretty vocal about the philosophy of accruing sort of at a set rate.

And I just wanted to make sure, was that a set rate through the first half of the year or for the first three quarters of the year with potential true up in the fourth quarter? I'm just trying to gauge will you guys now start to adjust the comp into Q3 now you have more visibility or is it more of a Q4 event?

So far we are trying to be consistent with what we have done last year which is to kind of keep the same rate through the year and until we have better visibility on the overall year, make adjustments at that particular point. Because this is a business where obviously there's a lot of volatility quarter-by-quarter. So that would be our goal for this year.

Okay great. And then sort of a question around the Advisory segment. Obviously M&A incredibly strong. Any other notable sub-segments of that that you could call out?

Obviously restructuring remains pretty depressed. How are you guys feeling about Sovereign Advisory or Middle Market? Are there any signs of a pickup in either one of those?

Yes okay that's a good question. Look the overall Strategic Business is obviously pretty strong right now for us and others. The Middle Market business has had a nice pickup this year.

Interestingly, you know when people start looking at all the statistics of the market, they comment on the fact that yield volumes have not gone up that much and it's really been an improvement in the bigger part of the market. But that's not a surprise. The bigger part of the market, the $5 million-$10 million transactions have fallen off the most in the downturn post-crisis, and so the recovery there is not surprising, it's the steepest.

The Middle Market Business didn't fall off as much. The number of transactions didn't fall off as much so we're not seeing the same pick up there as a result. But it has been a good Business for us and this year has been a strong year so far in the Middle Market.

We continue to go from strength-to-strength on the Sovereign Advisory Business. The mix of business has shifted a bit. It's moved away from Europe and back into the developing markets which is where traditionally it has been very strong for us

The capital raising business is particularly on the private funded Advisory Group, it seems to be pretty good right now. And as you said, the Restructuring Business is soft at the moment and we expect that to continue as long as the macroeconomic side goes as strong as it is at the moment.

Thank you very much and nice job, really nice quarter.

And now moving on to Michael long Morningstar Research.

Overall year-to-date, has the M&A environment in your Business in general been better or worse than you were expecting at the beginning of the year?

That's a good question. I think when we ended last year we were a little bit more optimistic about how this year was going to unfold. In part because of the improvement in the macroeconomic environment in the United States and also some of the stability we were seeing in Europe.

So I think we were cautiously optimistic that we would see some improvement in the M&A cycle this year. But you know M&A cycles are funny, they never happen gradually. They tend to happen a little bit more violently up or violently down.

And so this year I think we've seen a slew of larger transactions, which is usually associated with-- you know that kind of jump--is what is associated with the beginning of a cycle. So I think we were cautiously optimistic and it probably has been a little better than we would have guessed.

Okay and just going back to your Sovereign Advisory Business for bit. Maybe along the lines of relative contribution versus restructuring type activities versus privatization and how you see sovereign advisory playing out in a further improved economic environment? Kind of along the lines of more, you know more troubled sovereign advisory versus privatization type activity?

Our Sovereign Advisory Business is primarily dealing with troubled balance sheets of countries and governments and such. And less to do with privatizations. That is more in our Capital Advisory Business.

So I think what you have seen is somewhat of a shift from Europe where you had obviously quite a bit of issues over the course of the last five years and now a bit more stability, to the developing markets which have suffered a bit from the typing a bit of the monetary policies by the US earlier this year, and some of the slowdown in some of those economies. And that is really what is driving our Business there right now. And we expect to see continued activity for a while.

And this does conclude our question and answer session and also concludes today's Lazard conference call.

Thank you.