Lazard Inc (LAZ) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Lazard's first-half, second-quarter 2015 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 second quarter and first half of 2015. Hosting the call today, are Ken Jacobs, Lazard's Chairman, 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 daylight time.

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 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 on forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made.

Today's discussion may also include certain non-GAAP financial measures. 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 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 Matthew 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 a strong quarter in the first half. Both Financial Advisory and Asset Management surpassed last year's record levels of operating revenue. Top line growth was broad-based reflecting the global breadth and mix of our businesses. Our adjusted results show the significant operating leverage in our model. Operating revenue up 6% for the quarter, earnings from operations up 29%, pretax income up 37% and net income up 53%.

In Financial Advisory, our momentum continues. On an LTM basis, we've achieved nine consecutive quarters of operating revenue growth. M&A activity remains strong. We are serving clients around the world with a distinctive focus, global scale and local insight and breadth and depth of expertise. Year-to-date, we're advising on three of the 10 largest global announcements. We have significant market share in the most active sectors for M&A. We are advising iconic companies across all sectors on transformative, strategic transactions. And our expertise and equity capital markets advisory and corporate preparedness is a competitive strength as we advise on takeover defenses and assignments relating to corporate activism.

Our restructuring practice has been gaining energy related assignments. We are the global leader in announced restructurings year to date. And our Sovereign and Capital Advisory services have been highly active globally advising governments and corporations on balance sheet matters, financing, strategy and capital raising.

In Asset Management, our record operating revenue for the quarter and first half reflects the strength and diversity of our investment platforms. We generated record management fees in both periods despite market and foreign exchange volatility. We achieved net asset inflows of $1.6 billion driven by a broad range of equity and fixed income strategies. For the first half of the year, our net inflows were $2.6 billion. We see steady investor demand across our Asset Management platforms with significant capacity for organic growth. And we continue to expand our investment solutions for clients. In the second quarter, we launched several new equity mutual funds that seek stable returns with managed risk and we announced plans for our new European long, short strategy. Matthieu will now provide color on our financial results and capital management.

Thank you, Ken. Operating revenue increased 6% for the second quarter and 7% for the first six months of 2015, compared to the 2014 period. Revenue growth reflected strength across our businesses. Financial Advisory achieved record second quarter and first half operating revenue, increasing 13% and 11% respectively. The increases were driven primarily by M&A and Other Advisory, which rose 17% for the second quarter and 13% for the first half. Restructuring operating revenue also grew in the second quarter, but was slightly down for the first half of the year.

Asset management achieved record second quarter and first half operating revenue. On a sequential basis, management fees increased 3% from the first quarter of 2015. Incentive fees are down from last year and given market volatility, could remain muted. Average AUM for the second quarter was a record $203 billion, 2% higher than average AUM in the first quarter of 2015, driven by $1.6 billion in net inflows across our platform and by foreign exchange movements. As of July 17, our AUM was $205 billion, a $2 billion increase since June 30. The increase was driven by net inflows of $0.4 billion, market appreciation of $3.8 billion, partially offset by $2.3 billion of foreign exchange movements.

Turning to expenses. We continued to accrue compensation at a 55.6% adjusted compensation ratio, consistent with the first quarter of 2015 and our full-year 2014 ratio. Our adjusted non-compensation ratio for the second quarter was 18.1%, compared to 19.5% in the second quarter of last year. Non-compensation expense decreased 2% as operating revenue grew 6%, reflecting our continued cost discipline.

Turning to taxes. In the second quarter, we released a valuation allowance of our US deferred tax assets. This resulted in an increase of approximately $1.2 billion in our net deferred tax assets and the recognition of a liability of approximately $962 million related to our tax receivable agreements. Impact is a net benefit of approximately $237 million which we have excluded from our adjusted financials. As a result of those changes, our adjusted tax rate for the quarter was 11.6% and we now expect our full-year 2015 adjusted tax rate to be in the mid-teens.

As we said in the past, our adjusted tax rate is likely to increase in the year following the release of the valuation allowance. In 2016, assuming similar business conditions as in 2015, our adjusted tax rate could be in the range of high 20s to low 30s. However, we expect our cash taxes to remain in the high teens. In July, we also agreed to repurchase a portion of our tax receivable agreement obligation. This will have the effect of increasing our third quarter net income but we'll exclude this impact from our adjusted results. Finally, regarding capital management, yesterday, as of June 30, we have returned $423 million of capital to shareholders, primarily through dividends and share repurchases. Ken will now conclude our remarks.

Thank you, Matthieu. To summarize our second quarter highlights, record operating revenue across our businesses for the quarter and the half, continued strong activity in M&A globally, another quarter of net inflows in Asset Management broadly diversified by strategy, platform and clients, solid earnings growth, significant cash generation and continued return on capital to shareholders. Regarding our outlook for the second half of this year, we continue to be cautiously optimistic. The US recovery is proceeding and the global M&A cycle has been gathering strength. But macroeconomic environment in Europe and in developing markets remains challenging and capital markets may continue to be volatile.

However, long-term trends remain favorable for both our businesses and we are in an excellent position going forward. Our Advisory Business is building strength, serving clients globally on their most important strategic and financial matters. Asset management is a world class franchise with broadly diversified strategies and a global primarily institutional client base. Both our businesses have high productivity and operating leverage. We have significant capacity for increased activity and organic growth. And we are maintaining our cost discipline. We continue to focus on having value for our clients and shareholders.

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

(Operator Instructions)

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

Good morning.

Good morning.

On the tax rate, just want to clarify. Thanks for all the color on that, Matthieu. Does that mean that Lazard is going to be running, starting next year, at an equivalent tax rate that you would be accruing for if you were a C Corp?

We will -- the answer to your question is that our tax rate next year is going to be the same for GAAP and for on an adjusted basis. But there is no change in our corporate structure.

No, I'm sorry. Let me reword the question to make it more clear. Sorry if that was confusing. Would this mean that all of the tax benefits or many of the tax benefits that have been tied to the partnership structure would largely have worked through at this point?

No, they're still there. But we have it now in our balance sheet and that's the difference from what was there in the past. In the past, we had a valuation allowance against our deferred tax assets and we didn't have a liability regarding the tax receivable agreement and now we have that on the balance sheet. This is the only change versus the previous quarters.

Okay. Thanks for that. On the M&A side, could you give us an update on the outlook for M&A in Europe? Whether we saw a little bit of a flare up with the drama in Greece this quarter. Did you see that impact sentiment or activity on the continent? We've heard some of your competitors indicate that there's still some robust opportunities in Europe. So would love to hear your view there.

Sure. Overall confidence levels, market conditions are better in Europe now than probably any time since the crisis. That said, second quarter was pretty volatile because of the concerns around Greece and to a degree, some of the emerging markets. You always -- in M&A, you find these periods of -- you find small air pockets or off pockets when you have these periods of volatility. I wouldn't be surprised if we saw little bit of that in the first and second quarter, particularly in the second quarter. You saw it a little bit in deal announcements for the market as a whole in Europe. But generally speaking, the environment is better than it's been since the crisis. So overall, we would expect activities to continue.

Terrific. And then, given the size of your restructuring business and with interest rates in the United States finally poised it looks like to start increasing this year, do you have any impact on what that might do to your restructuring revenues?

So far, the pick-up -- we've seen a little bit of pick-you up in activity in the restructuring business primarily associated with the energy sector. I think as long as the macroeconomic environment stays robust, I think our expectation is restructuring activities are going to remain at their -- around their current levels. May go up a little bit. The real question around restructuring is if you see discontinuity in the financing markets. If for some reason, you'd see a real backup or inability to finance high yield debt, then you will start to see some pick-up in restructuring activity. But so far, we haven't seen any signs of that.

Thanks for that. Then just a couple quick ones on asset management. Was there an FX impact on AUM this quarter? Could you size that?

Yes, it was $2.2 billion.

Terrific. And that was a tailwind?

It was what? It was positive, yes. It was a positive impact.

Okay. Great.

Our AUM increased by approximately $4 billion, $1.6 billion of net inflows, $2.2 billion of foreign exchange and $0.2 billion of market impact.

Helpful. Thank you. And then last one. You mentioned I believe seeding some mutual fund products in your asset management business. Is that an indication that you'd like to grow the retail side of the business there?

I think generally speaking, you're seeing more activity on our part in mutual funds. It reflects a couple of things. One is demand of -- overall demand from clients and movement towards the DC space going forward and preparing for that.

Okay. Thanks for the color.

And we'll take our next question from Ian Gorman with Goldman Sachs.

Hi, good morning, guys. Obviously emerging market volatility isn't all that helpful for the market component of your AUM. But curious to get your thoughts on your experience on the flow side of the business. Obviously, it looks like it hung in well this quarter. But just wondering if there's historically a pain thresholds for institutional investors when emerging markets start getting a little bit more sloppy?

So far, we've seen net inflows across our emerging market, debt and equity platforms. Net inflows for the first and second quarter which is good. The base is primarily institutional base, so they tend to be more long-term in terms of their overall vision of the market. And third, is that they still remain relatively under allocated to the emerging markets, the big institutions to find benefit plans. And so consequently, the flows probably will be okay for a while. Should be okay for a while.

That last point, just as a followup, do you see opportunity to grow the fixed income product offering, especially with what we're seeing with Sovereign debt yields around the globe at record low levels?

Yes. In fact, we expect that some of the volatility comes out of the emerging markets, that should be pretty attractive.

All right. Thanks for taking my questions.

Thank you.

We'll take our next question from Ashley Serrao with Credit Suisse.

Good morning.

Good morning.

I just wanted to clarify that you said that there would be no change to your cash tax rate.

That's right. We said the cash tax rates are going to remain in the high teens.

Okay. Thank you for that. And then curious what are you hearing from the sponsor community and with particularly the respect to obtaining financing, given the tension that the OCC has placed on levered lending?

There's obviously more scrutiny on overall leverage in sponsor led deals. That probably has had more impact on larger public deals than it has had on the sort of what I call middle market activity. Activity in the middle market remains pretty robust for sponsors. It's probably quiet, it's certainly quieter than it was in the last cycle among larger deals.

Okay. And then I was just curious what are you hearing from your global CEOs with respect to looking at European companies as a potential target?

I think that generally speaking, when you look at these -- I would step back from the question and answer it by saying, when you think about European companies, it's a domicile, not a mix of business. Most European companies are as global or more global than their counterparts in the US are, especially in industries like industrials and consumer and places like that. And so consequently, I think when you are -- it's difficult to generalize and say how does an American company view a European company. The real question is how they view the mix of assets and where those assets are? It just happens where the domicile is. Obviously, there's a lot of activity around the UK and Ireland for tax reasons last year. That's quieted down a little bit. Generally speaking, assets are viewed as assets globally today.

Then just finally, just a quick question. You've done a lot of investment this year and could you just give us an update on the recruitment environment and your ambitions on the Financial Advisory side.

For us, our platform is scaled, built out. We have a lot of success promoting from within. When we find individuals who really can make a difference on our platform in areas that are important to us, we'll do some outside recruiting. It continues to be a way to fill in some gaps or take advantage of some opportunities, but we're pretty thoughtful and cautious about it. It has to really make sense.

Okay. Thanks for taking my questions.

We'll take our next question from Devin Ryan with JMP Securities.

Hey, thanks. Good morning.

Good morning.

I guess just trying to analyze what we can see from the outside. Your backlog looks like we're close to, if not a record year. And so maybe with that as a starting point, just love to get some thoughts around the M&A cycle in your view. Are we in the mid to later innings if your backlog is that strong or should we just think that that's more market share driven?

Well, let's -- we don't generally comment. We don't comment on backlog, so let me move away from that. Activity levels are strong right now in the United States. A little less strong in Europe, but okay. And globally, okay. It doesn't feel like to us this is late in the cycle. This cycle took a while to get started. Generally, the M&A cycle moves in tandem with the equity markets. The equity markets move for three or four years without the M&A markets moving at all. There's some catch-up going on here. When you go back and you look historically, which is I think in our investor deck, there's some data in there, you see that the cycles oftentimes can last anywhere from four to eight years. Four being kind of the shortest and eight years or so or nine years being longer. This one still feels like it's got a ways to go.

Got it. Helpful perspective. And then maybe coming back to the comments on Europe. It seems that there's maybe two different dynamic there. You have the UK that's reasonably healthy or improving. Continental Europe still seems to be lagging. So I guess, one, do you think that's the case? And then two, what is your expectation for a recovery in Continental Europe or what's going to drive that?

Well, look, Continental Europe recovery, again, you can't generalize across all the continent. You have to sort of separate it into north and south and to increasingly even in the middle of Europe. In the north, you've seen pretty good performance for the last couple of years. Obviously, the Southern part of Europe suffered really the most post crisis. But there's a pretty decent recovery under way in Spain and there's some improvement in Italy and some of the other Southern countries.

And part of the issue in Europe is it's just got -- still has a lot of debt that hasn't been reduced, big overhang, and that kind of mutes the recovery. That said, the conditions in Europe today are better than they've been since the crisis. And with that, you've seen an improvement in the stock market. You've seen an improvement in the financing markets. And with the change in exchange rates, you're probably also getting some benefit from that. And with the drop in oil prices and gas prices, consumers getting a benefit from that. All those things should over time contribute to some improved macroeconomic environment.

Got it. Okay. Thank you. And then just lastly here on the alternative funds that tend to impact incentive income in the fourth quarter, can you guys give any color on just how those have been performing thus far this year?

Alternative funds right now we're about on high water marks but it's a little early to say. So I think we said that in the current volatile environment some of our incentive fees may be a little bit muted as respect the current incentive fees. It's really something we should discuss a little bit later on during the year.

Got it. Okay. Great. Thanks for taking my questions and congrats on the strong quarter.

Thank you.

(Operator Instructions)

We'll take our next question from (inaudible) with Autonomous.

Good morning.

Good morning.

Just one question. It's on the other fees in asset management and that was quite strong this quarter compared with others. Can you just give me a bit of color what's going on there?

Yes. Well, this is linked to accelerated carried interest in our private equity business in Australia because we've just sold it. So as a result of the debt consolidation of the business, we accelerated the recognition of some of these revenues.

Okay. Thank you.

This now concludes the Lazard conference call.

Okay. Thank you.