Lazard Inc (LAZ) 2014 Q4 法說會逐字稿

Good morning and welcome to Lazard's full-year and fourth-quarter 2014 earnings conference call. This call is being recorded.

(Operator Instructions)

At this time, I'll 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's results for the full year and fourth quarter of 2014. Hosting the call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer, and Matthieu Bucaille, Chief Financial Officer. A replay of this call will be available on the Lazard website beginning today by 10 AM Eastern time.

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 in 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 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 those non-GAAP financial measures and their reconciliation to the comparable GAAP measures are contained in our earnings release, which has been issued this morning.

For today's call we will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and in our investor presentation, both of which are posted on our website.

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's 2014 results reflect continued strong performance across both our businesses. Operating revenue reached a record level, up 15% over last year. We generated record earnings with 59% increase in earnings per share. We achieved our financial goals including an operating margin of 25%.

In the three years since we announced our financial goals, we have delivered strong revenue growth, we have strengthened Lazard's market position, we have enhanced profitability, even as we continue to invest in the business, and we have continued to return capital to shareholders. These accomplishments underscore the power of our business model, the strength of Lazard's global franchise and the value we are creating for clients and shareholders.

Both our businesses have been building momentum. In financial advisory, we continued to gain market share in 2014 and reinforced our status as the preeminent independent advisory firm in the world.

M&A and other advisory achieved record annual operating revenue of more than $1 billion. Notably, M&A and other advisory revenue has surpassed its prior peak year of 2007, even as the global M&A market remains 22% lower. This outperformance reflects the breadth and depth of our global advisory business and our distinct competitive advantage.

Lazard is a leader in the large, strategic, complex and cross-border transactions that characterize the current M&A cycle. In 2014, our number of global announced transactions valued at over $500 million increased 38% compared to 11% for the market. Lazard advised on more than one-third of all globally announced transactions valued at $10 billion and over. Approximately half of our announced transactions were cross-border.

Our M&A revenue growth was especially strong in the US and in Europe. We gained substantial market share in Europe as strategic activity increased during the year. Our sovereign and capital advisory services continue to be in high demand globally, advising governments and corporations on balance sheet matters, capital raising and privatization. And Lazard's middle market achieved excellent results in 2014 as it continues to successfully lever the Lazard franchise and our global network of relationships.

In asset management, we achieved another year of record annual operating revenue. Our investment platforms had strong gross and net in-flows in every quarter of 2014, with $3 billion of net inflows for the fourth quarter and $11 billion for the year. These flows reflected mandates from large institutional investors around the world and were diversified across investment platforms in equity and fixed income.

We have nearly doubled our fixed income assets under management in the last three years. This growth has been driven primarily by flows into our emerging market debt strategies, as well as our local and global debt strategies. The global markets remain volatile but our asset management business has solid fundamentals with leadership in growing asset classes across equities and fixed income, a strong pattern of long-term performance, broadly diversified strategies with significant capacity for organic growth, and an ability to provide solutions to our clients for their evolving investment needs.

We continue to launch new strategies to meet ongoing client demand. In 2014, we expanded our capabilities in global equities, multi-regional equities, liquid alternatives and multi-asset strategies. We also continued to expand our investment coverage and distribution in selected regions, including the Middle East, Europe, and the US.

Matthieu will now provide color on our financial results and capital management.

Thank you, Ken. Lazard's 2014 net income and diluted net income per share on an adjusted basis increased 59% over 2013. Operating revenue increased 15% for the year on both a reported and constant currency basis.

In the fourth quarter, operating revenue increased 4% on a reported basis and 7% on a constant currency basis. Quarterly operating revenue increased sequentially throughout the year.

Financial advisory operating revenue increased 23% for the year and 14% for the fourth quarter, driven primarily by M&A and other advisory operating revenue, which increased 31% for the year and 17% over last year's strong fourth quarter. In asset management, operating revenue increased 9% for the year to a new record level, driven by record management fees which were up 13% for the year.

Asset management fourth-quarter operating revenue was 3% less than last year's record fourth quarter, primarily due to lower performance fees in our alternative investment strategy. Management fees for the quarter were 9% higher than last year.

AUM ended the year at $197 million. Average AUM for 2014 was a record $196 billion. As of January 30, 2015, AUM was approximately $193 billion, reflecting $2.9 billion of market and foreign exchange depreciation and $0.8 billion of net outflows on December 31.

Fourth-quarter net inflows of $3.1 billion were primarily driven by new mandates in our multi-regional and fixed income platforms. Annual net inflows were $11.3 billion, reflecting broadly diversified inflows across our major platforms.

Turning to expenses. Our 2014 awarded compensation ratio was 55.8%, down from 58.3% for 2013. Corresponding adjusted GAAP compensation ratio was 55.6%, down from 58.8% for 2013. Both ratios were at the lower end of our targeted range of 55% to 59% over the cycle.

Awarded compensation expense for 2014 increased 10% even as operating revenue grew 15%, in line with our goal of growing awarded compensation expense at a slower rate than operating revenue growth. We continue to be disciplined with deferred compensation, maintaining a consistent rate of deferrals each year and consistent [best in case]. This highlights the quality of our earnings.

Adjusted non-compensation expense for 2014 increased 8% compared to the 15% increase in operating revenue, and was primarily driven by increased activity in investment in our business. As Ken said, we achieved our financial targets for 2014 with annual operating margin of 25.5% on an adjusted GAAP basis, and 25.4% on an awarded basis.

Our annual tax rate in 2014 was 20%, down from 22% last year, due to changes in the mix, profitability, and geography of our revenue. As we have said before, in 2015, assuming a continued high level of profitability and all else being the same, we would expect our tax rate to be in the mid to high 20%s.

Regarding capital management, during 2014 we returned $425 million to shareholders, primarily through dividends and share repurchases. With increased profitability, we are generating substantial cash flow and this benefits shareholders. Yesterday, in addition to our quarterly dividend of $0.30 per share, we declared a special dividend of $1 per share.

Ken will now conclude our remarks.

Thank you, Matthieu. I'll provide some perspective on our outlook, then we'll open the call to questions.

Regarding outlook, we remain cautiously optimistic. The US macroeconomic environment has improved but Europe and many of the developing markets remain unsettled, and the capital markets have been volatile recently. However, longer-term trends remain favorable for both our businesses.

In financial advisory, the fundamentals are in place for continued growth of a strategic M&A cycle that plays to Lazard's strengths. Companies are looking across borders to grow through acquisitions. Demand is strong for expert strategic advice that can be levered across geographies and industry groups.

There are high barriers to entry for competitors on a global scale. And few, if any, firms have Lazard's breadth and depth of senior bankers focused exclusively on strategic advice.

In asset management, we are well positioned as institutions around the world continue to expand their investments beyond local markets. Demand grows for sophisticated multi-asset investment solutions, and defined contribution plans increasingly seek institutional quality investment managers such as Lazard.

To conclude, Lazard is in an excellent position. We have a business model that has proven its strength and resilience through cycles, one of the premier brands in financial services which adds value to both our businesses, increased market share in growing markets, momentum in revenue and earnings growth even as we invest in the business and return capital to shareholders, substantial capacity for increased activity in organic growth, operating leverage in both our businesses, and a proven ability to create shareholder value.

Before we go to questions, I want to take this opportunity to thank all my partners and colleagues at Lazard for their hard work and tremendous effort over the past three years in achieving our financial targets. All, while continuing to provide world-class service to our clients.

Now let's open the call to questions. Thank you.

(Operator Instructions)

Our first question comes from Ashley Serrao with Credit Suisse.

Good morning, guys. Ken, I heard your concluding remarks but I just wanted to drill down. As we think about the future margin trajectory of Lazard, what message do you want to leave us with? More specifically, I was just curious about how you're thinking about balancing investment in the franchise and just letting revenue growth drop to the bottom line.

I think at this point our playbook is as follows -- Intense focus on clients, which will drive revenue growth; continued investment in the business, as we've done over the last several years; an intense focus on our ability to create operating leverage because we're able to grow our revenues at a faster rate, or I should say we're able to control comp and non-comp expenses, that is grow them at a slower rate than revenues. That will drive operating margin, that will drive operating results, and that will drive hopefully shareholder value.

Okay. And as we sit here and think about the dollar getting stronger as the day goes by, how should we think about the impact on your franchise?

We're, Ashley, a very global business. More than, I think, 57% of our revenue are booked in the US so we have some international exposure to foreign exchange. But remember, we have also a very large cost base, also in local currencies. So we have a natural hedge. The impact is relatively limited.

If you look at the euro exposure, about 20% of our revenues are booked in euros. So even a 5% to 10% drop in the euro would only impact operating income by 1% to 2%.

Okay. Thank you for taking my questions and congratulations on hitting your targets.

Our next question comes from Alex Blostein with Goldman Sachs.

Great. Good morning, guys. Congrats. Question came up for you as far as you guys are thinking about capital management and just the strategy of the advisory business and the asset management business. When you take a step back in your 2012 letter, I think you guys talked about the value that Lazard is trading at relative to a number of your peers, whether it's the advisory firms or the asset management firms. And today, clearly, when you look at where the stock's trading, the multiple probably still doesn't even get to where either one of those subsectors trade. As you guys are sitting here today, anything you're contemplating that's different when it comes to capital returns with maybe bigger buyback or any other strategic options that could potentially unlock shareholder value?

From our standpoint, the first thing we're focused on is driving results and over time we expect the market will value them appropriately. We've been a consistent generator of capital and I think we've been aggressively returning it to shareholders. I think we returned more or less half our market cap over the last three years or so. And we continue to be aggressive about finding ways to return capital to shareholders.

Thanks. And then a specific question on the asset management business. Very nice gross flows, continues to be pretty solid progress you guys continue to make there. When we think about the headwinds that you're still facing from some of the legacy products that have been outflowing, any sense to give us a sense of how much more in terms of outflows there's left to get us a better sense of what the net picture of flows could look like over the next 12 months?

Overall we've been pretty pleased with the gross flows and the net flows over the course of the last year, the last quarter. We had net inflows across a range of products, including the [M] products. Thematics, as you know, has been a challenge in terms of flows for the last year or so. Performance in the short-term has improved. It's a long-term strategy and we continue to be optimistic about the range of strategies right now.

Got it. Great. Thanks for taking the questions. Congrats again.

Our next question comes from Brennan Hawken with UBS.

Good morning, guys. And congrats on hitting the targets. Starting out in asset management -- and I apologize if you guys disclosed this and I missed it -- how much did FX impact AUM? And generally how does the largely institutional client base view currency risk?

In the fourth quarter the market in foreign exchange depreciation was $3.6 billion. $5.6mbillion of this was foreign exchange depreciation. That's to answer your first question. On your second question, we have about 70% of our assets denominated in foreign currency.

Okay. And then flows remained pretty solid. RFP activity, has that continued to be robust too, even in some of the recent volatile quarters?

I'd say a little falloff in the fourth quarter. And we're at levels probably a year and a half ago, not a year ago, but generally speaking still okay.

Okay. Great. That's helpful. Thanks. And then as we think about the target, the margin target, I get it that you guys want to focus on operating leverage, which makes a lot of sense given the nature of the business and the cyclical component. When you think about, though, the margin headwind from the corporate segment at Lazard, which is a little bit uniquely higher than some of your competitors, how should we think about grinding that lower over time? Does that remain a priority for you guys?

A couple of comments. First, on margin expansion, as revenue grows, there are really two fundamental sources. The first is we continue to believe that on the margin we're able to grow our comp expenses at a lower rate than revenues. So, that's one source of likely margin improvement in the future.

And then the second comes from the fact that with regard to the non-comp expenses, about one-third are variable and two-thirds are fixed. So, assuming a lower inflation rate, which I think is the world we live in, we should continue to see margin improvement coming from non-comp expenses.

With regard to corporate, I think we said from the outset this is a long-term opportunity for us. Some of it comes just from scaling the business and some of it comes from redesign of processes and operations and we remain intensely focused on that.

Okay. Great. And then the last one from me -- have you guys given any thought or is there any potential to shift around the legal structure? You guys are currently a PTP. You kick off K-1. That does present an issue and does somewhat limit the investor base a bit. Do you think that that might impact and put a discount on your valuation? And as we've seen the delta between your basic and adjusted diluted share count narrow here over the last several years, is this something that's more feasible now than before?

It's something that requires a lot of thought and I don't think we're ready to talk about that on a conference call.

Okay. I get it. Thanks.

Our next question comes from Devin Ryan with JMP Securities.

Hi, good morning. Congratulations on the really strong results. Appreciate the detail on the operating margins. Just a couple quick follow-ups here. Just with respect to the compensation element, you're already moving close to that mid to bottom end of the range that you guys have put out there, the mid-50%. Does it get to be a point where the incremental returns or incremental margins decline, especially if advisory revenues were continuing to grow on the current infrastructure? I'm just trying to get a sense of, could you actually move below that mid-50% range if advisory revenues are expanding without big investments into the Company?

There's always a balance between investment and what that does in terms of growing the business and margin improvements. And I think we've done a pretty good job of modulating that over the last few years or so.

I think by just sheer math, at some point your benefits get diminished. It was obviously a lot easier to do five years ago than it is today. But we still see opportunity that as revenues grow, we will continue to be able to grow the compensation expenses at a slower rate. There may be some day where that's not possible. And obviously that, to some extent, gets offset by the investment we do in the business.

We also continue to see opportunity on the non-comp side. But, look, for us, the key thing is being able to serve clients and we do that by making sure we have the best people here, retaining, attracting them, by continuing to invest in the business. But at the same time, I think as we've demonstrated over the last few years, we're also intensely focused on making sure that we execute well on behalf of our shareholders. And we're going to continue to do that.

Okay. Thanks. And then just with respect to Europe, with the rally in the dollar, are you guys seeing any signs yet of maybe a pick-up in cross-border activity into Europe? And then, also in Europe, you've been named on some pretty high-profile restructuring alignments recently. I know those are specific issues but it would be great to get your outlook on that business in Europe and then maybe more broadly, as well.

Sure. Generally speaking, last year was a pretty active year for the big, complicated, cross-border stuff, both inside and outside of Europe and within Europe, at least for us. And we would expect that -- there was some volatility in the markets, obviously, in the fourth quarter, but we expect to see that activity to continue this year and into next year. And I think that overall this environment hopefully plays to our strengths, continue to play to our strengths in that regard.

Got it. And with respect to restructuring?

The sovereign advisory business speaks for itself at the moment. And on the restructuring side, I think that there, assuming a continued improvement in the macro environment, that probably remains quiet. The one exception to that perhaps is the oil industry. But that depends in part on what happens with the oil price. If it stays at the lower levels that we've seen over the last several weeks or so, then that's likely to drive some restructuring activity in that industry.

Okay. Great. And then just lastly, apologize if I missed this, but can you give any detail on where AUM currently stands? I know we get that in the Q. How much of the negative marks on FX, or have there been negative FX marks this quarter, and if there have been can you give that detail?

I said that the AUM as of January was approximately $194 billion. The foreign exchange impact in the crop was $3.6 billion.

Great. Thank you.

Our next question comes from Joel Jeffrey with Keefe, Bruyette, Woods.

Good morning, guys. Just thinking a bit more about your capital return strategies and the timing of the special dividend, I know in the past you've done them in December. Just wondering if there was anything behind the issuance in the first quarter? And then how we should be thinking about the timing of buybacks in 2015.

Sure. First, I think the last one was somewhat impacted by changes in tax laws. So, this seemed to be a natural time to do it. We see our results. Obviously this can be a cyclical business, and the fourth quarter's important, so you tend to want to see your results.

Once you have them, then it allows us to have a much better view on cash and obviously profitability and cash flow. And, therefore, this seemed to be an appropriate time to consider it.

With regard to repurchase, we're as committed as always to offsetting any dilution associated with deferred stock awards. We'll continue to do that. And then, depending on the opportunity for share buybacks, we'll be opportunistic based on share price, and so on, as we've been in the past.

Okay. Great. And then just lastly from me, when you think about European M&A, and we saw some modest improvements last year coming off of a relatively small base, is there anything in the macro environment there that gives you a lot of concern that you could actually see a pullback in there if things worsen?

First, I think last year, while the environment wasn't outstanding, I think that in fact on deals over $500 million, the market in Europe was down. The completion's probably about 2%. I think we were up about 21% and we were particularly strong in the larger deals. So, for us, I think we saw pretty important improvement in the market place last year.

There's been three stimulus effects in Europe in the last couple of months. The first is the sharp drop in the currencies over the summer, into the fall, which obviously impacts the euro but also makes the euro exports much more competitive, which is probably good macro-economically for Europe. The second, the drop in the oil price obviously helps the consumer in Europe and many industries. And then third, there's been an enormous stimulus on the monetary side through the quantitative easing announced by the ECB recently.

So, all three of those things probably, assuming they flow their way into the economy, should be pretty good for the environment over the medium or long term. And that generally drives people's -- CEO confidence and that generally drives activity. So, I think these things are more likely to be positive effects on activity than negative, but then there's the politics and you have to see how that plays out.

Great. Thanks for taking my questions.

Our next question comes from Steven Chubak with Nomura.

Hi, good morning. Just a quick question on asset management. In digging into some of the numbers, it looks like the revenue yield has remained quite resilient and pretty steady actually over the last few years, in fact, despite, at least in the most recent quarter, seeing a decline in the higher fee emerging market channel. I was just wondering whether you could shed any light as to how that fee rate might evolve given where you're seeing the strongest product demand.

I think we continue to see pretty level fees for ourselves. You're right, you noticed it's improved over the last few years. It's pretty steady right now. And as I think I said, in the fourth quarter we continue to see inflows across the board in asset management, and particularly in the EM product where net inflows were positive for the quarter and for the year.

Okay. And then just one more follow-up on the operating margin commentary. And I appreciate, Ken, all the detail that you provided. But just thinking about the advisory revenue trajectory, is it fair to assume, if we see revenue growth in this coming year, all else equal, that, given the embedded operating leverage in the model, that the margin should expand?

I would expect so. I think that what we've seen over time is, number one, as revenue grows we've been able to grow comp at a lower rate than revenue. We expect that should be able to continue for a while more.

Number two is we continue to have leverage on our non-comp expenses, just given the fact that a large portion of them are fixed. That is especially the case on the advisory side of the business, a little less on the asset side of the business. So, I think we should continue to see margin improvement in that business as revenue grows.

Needless to say, we continue to see opportunities for investment. We've done that in the past. And we're going to modulate between the two because, again, for our business, the key is serving clients. When we do that well, we get growth. When we get growth, we get all the other good things that happen from that.

It's going to be this balance between the investment and margin growth. But that said, I think we're still pretty confident there's improvements in margin ahead of us, if we get revenue growth.

Excellent. That's it from me. Thank you for taking my questions.

Our next question comes from Jim Mitchell with Buckingham Research.

Hi, good morning. Maybe we could just talk a little about the bigger picture around M&A. We've seen a little bit of a slowdown over the last three to four months with the volatility. How are you sensing, is this just a little bit of a pause as your clients think about the volatility or is there a bigger concern here? What's your sense of conversations and how you're looking at the next 12 months in terms of activity levels?

Sure. Generally speaking we remain constructive. We think that a big part of the M&A cycle is driven by people's views in the macro environment. The US, obviously the macro environment is improved. The US economy is the largest economy in the world. It's now the biggest contributor to world growth.

You can probably argue that a lot of the volatility in the markets over the latter part of last year is really a function of the world adjusting to the US economy growing, the movement in the dollar, the drop in the oil price, reflecting the huge amount of production coming online in the US, the ECB able to ease once the US reduced its easing. All these things seem to us to be a part of a function of the US growth kicking in.

Now, whether or not the markets can calm down is important. All this has to be factored in. And if they do calm down, that should aid confidence even more.

We continue to see financing costs low. Depending on your view of the macro environment, you can be constructive about valuations. As always, it's a function of the three. When you have CEO confidence, or improving confidence, you have reasonable views on valuation, and you have available financing, then you probably have the factors that continue to support an M&A cycle.

And conversation levels remain active?

They seem reasonable at the moment.

Okay. Maybe a question on the special dividend. How do you guys think about that versus a buyback? Your net share count hasn't really moved much. You opted for a special dividend with the incremental cash. What would change your mind to go more with a more aggressive buyback versus a special dividend?

Look, this is all a balance. Special dividend is a very efficient way for us to get cash back to shareholders in a very short period of time, especially when we're in or around blackout periods and things like that. And it also tends to reward long-term holders of the stock well, and that's something we're very focused on because those are the people that ultimately are shareholders. And, also, our employees happen to be long-term shareholders, as well. So it's a pretty efficient way to get capital back.

That said, as you know, we've been an aggressive purchaser of shares at different points in time. We're always in the market, repurchasing any of the deferred compensation. We will continue to do that. And we'll continue to be opportunistic between the two.

But we're a cyclical business. We don't know our results oftentimes until the fourth quarter and the results of the fourth quarter. And when we do a little better in the fourth quarter then sometimes this becomes a very efficient way to deliver value back to shareholders.

Fair enough. Maybe one last question, maybe for Matthieu, on the tax rate. You guys have been talking about a high 20%s tax rate for a while. I think the tax rate went down in 2014. What makes it jump? You had a pretty big jump in profitability in 2014 and the tax rate went down. What triggers the 25% to 30% tax rate going forward? Is it a gradual ramp or should we be thinking that this happens as early as 1Q?

In 2014, our tax rate decreased primarily because of the geographic mix of our earnings, and the year ended up at 20%. We had said low 20%s. This is pretty much in line with what we had said.

With respect to 2015, we said that, as we become more profitable, our tax rate should go up. In my introductory comments I said that our tax rate for 2015 should be mid to high 20%s. This is primarily linked to, assuming same profitability, this is primarily linked to a reduction of our NOLs. And, yes, this should impact our tax rate as soon as the first quarter.

So a lot less NOLs in 2015.

Yes.

Okay. Great. Thanks.

(Operator Instructions)

Our next question comes from Vincent Hung with Autonomous.

Good morning. You mentioned at the beginning that you saw $0.8 billion of outflows in January. Can you give us a bit more detail about that?

It's very early days to really try to derive any trends for the net outflows. I said, yes, we're $0.8 billion from December 31 to January 30.

Okay. And thank you for the granularity on compensation that you give us every year. When I look at the base salary and benefits line, how should I think about the growth of that going forward?

Salaries and benefits line -- it's a good question. Salaries are reflective of market conditions and also just numbers of people and things like that.

Benefits, we've seen pressure on benefits over the last few years, as you can tell from that line. Part of that is just the social costs of employment in Europe, some of the higher taxes in Europe primarily. Some of that gets alleviated this year. You'll see a little bit of it go off because of the drop in the 75% rate in France. But the trend, unfortunately, is, at least outside of the United States, for those benefit costs to go up. It's been quite a few years now.

Okay. That's it. Thank you very much.

And we have a follow-up question from Devin Ryan with JMP Securities.

Thanks. A quick follow-up on the comp ratio and modeling that going forward. I know that historically it's been based off of the prior year full level in terms of how you start the year and then you do the fourth quarter true-up. So, how should we think about that heading into 2015? Is that still reasonable or should we think about it in a different way?

I think that's pretty reasonable.

Okay. Thank you.

Thank you. This now concludes the Lazard conference call.