Lazard Inc (LAZ) 2016 Q3 法說會逐字稿

Good morning and welcome to Lazard's third-quarter 2016 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's results for the third-quarter and first nine months of 2016. 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 the Lazard website beginning today by 10 AM EST.

Today's call may contain forward-looking statements. These statement 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 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 also include certain non-GAAP financial measures. A description of these non-GAAP financial measures and the reconciliation to the comparable GAAP measures are continued 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 Eexecutive Officer, Ken Jacobs

Thank you, Judi. Good morning. Lazard achieved record operating revenue in the third-quarter, with strong performance across our businesses. Financial advisory revenue reflected a higher level transaction closings compared to the first and second quarters, as we have expected. And asset management reached a record level of assets under management, with net inflows of approximately $3 billion.

Our ongoing advisory work continues to include large, strategic, and complex assignments for our clients around the world. For the first nine months of 2016, our number of announced transactions, valued at over $500 million, has increased 5% even as the market decreased 9%. We continue to have a high market share of the largest announced transactions, those valued over $10 billion.

Lazard's leadership in large, transformational deals highlights our competitive advantage: a truly global platform with strong local advisory teams around the world and a deep understanding of shareholder dynamics, and cross-border regulatory issues.

We continue to be active across our advisory practices, and we are investing in the business. In the past two months, we have announced a strategic expansion for the financial advisory business in the Americas. We acquired an independent firm in Canada, as well as the remaining 50% of MBA Lazard, which fully integrates our Latin American operation.

We see significant potential for long-term economic growth across the Americas, and we are in the strongest position of any advisory firm as it develops. Lazard now has the largest network of dedicated financial advisory officers in the Americas.

Asset management achieved excellent results in the third-quarter. We continue to achieve a high level of gross inflows across our platforms. The net inflows were driven primarily by strategies in our emerging market debt, local equity, and multi-regional equity platforms.

In a challenging environment for active managers, we have differentiated strategies in asset classes where active management can make a difference. We continue to successfully build out our investment platforms. Some strategies that have been bearing fruit include our quantitative and multi-asset solutions businesses.

Matthieu will now provide color on our financial results and capital management. Then I will comment on our outlook.

Thank you, Ken. Lazard's record third-quarter operating revenue of $611 million was 3% higher than the record third quarter of last year. Operating revenue for the first nine months was 7% lower than the record first nine months of last year.

On a constant currency basis, operating revenue results were substantially the same for the quarter and for the first nine months. Third-quarter 2016 diluted net income per share was $0.85, both on an adjusted and US GAAP basis. This compares to $0.93 per share for last year's third quarter on an adjusted basis and $2.99 on a GAAP basis. Last year's GAAP number included a significant benefit from the partial extinguishment of our tax receivable agreement obligation.

Financial advisory operating revenue was 4% higher than the third quarter of last year and 20% higher on a sequential basis from the second quarter of this year, driven by a 38% sequential increase in M&A and other advisory. This reflected a higher level of transaction closing.

Asset management operating revenue was 1% higher than the third quarter of last year and 6% higher on a sequential basis, driven by higher average AUM including net inflows of $2.8 billion in the quarter. Average AUM was $201 billion in the quarter.

As of October 24, 2016, AUM was approximately $203 billion, a $2.8 billion decrease from the end of the third quarter. The decrease was driven by foreign exchange movement of $2.8 billion with $600 million of market appreciation upset by $600 million of net outflows.

Turning to expenses, for the third quarter, we continue to accrue compensation on a 56.5% adjusted compensation ratio. This is approximately one point higher than the full-year 2015 ratio of 55.4%. As we have said before, this year's compensation ratio reflects higher expected deferred compensation amortization.

Regarding non-compensation, the third-quarter adjusted expense was $105 million, 2% higher than the same period last year, primarily reflecting higher asset management activity. For the first nine months of this year, non-compensation expense was flat with last year.

Turning to taxes, our tax rate for the third quarter was 24.4%, and for the first nine months of the year, it was 27%. For the full-year 2016, we now expect our annual tax rate to be in the mid- to high-20%s.

Regarding capital management, we continue to monitor our cash flow and capital allocations. As of yesterday, we have spent $255 million this year purchasing approximately 7.4 million shares well above a minimum target of offsetting potential dilution from the 2015 year-end equity grants.

Ken will now conclude our remarks.

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

Our third-quarter results support our expectations of a higher level of M&A closings in the second half of 2016 compared to the first half. Regarding the M&A market overall, we remain cautiously optimistic. Announcements pulled back earlier in 2016, as macro economic and geopolitical uncertainty dampened boardroom confidence.

That said, European activity appeared to pick up after the Brexit vote, and in recent weeks activity has picked up in the US as well. The factors we have talked about in the past for sustained M&A cycle are still in place. Persistently low, and negative interest rates through most of the developed world imply that the global disinflationary environment may persist for some time.

Companies continue to be hard-pressed for organic growth, and M&A is an important tool to grow and to rationalize their businesses. As we've noted before, the characteristics of this M&A cycle continue to play to Lazard's strength: large, strategically-driven transactions, often cross-border, that require broad and deep expertise across industries, practices, and regions.

In asset management, we are well-positioned for continued growth. We have a solid pattern of performance across our platforms. We have a broadly diversified set of strategies across these platforms, and our quantitative strategies are competing effectively in the passive ETF marketplace.

Our institutional client base continues to be a long-term strategic allocator of capital. Despite market volatility for most of 2016, our clients were net buyers.

To conclude, we achieved strong performance across our businesses in the third quarter, and as we anticipated, advisory revenue remains back-end loaded this year. Our asset management business has momentum and a world-class team of investment professionals.

We are maintaining our cost discipline, and cash flow remains strong. We expect to continue deploying cash towards share repurchases and dividend. We remain focused on serving our clients well while we manage the firm for profitable growth and shareholder value over the long-term.

Let's open the call to questions.

Thank you.

(Operator instructions)

Conor Fitzgerald, Goldman Sachs.

Good morning.

Hello, Conor.

First question is from the $600 million in outflows, I think you said it quarter-to-date. It's just a pretty big swing from what we saw in Q2. So any color you can give just on what changed in October?

It's just lumpy to start with, Conor. I think the general trend has been pretty good for us this year. We expect it to continue to be. RFPs are good, performance remains good across a range of platforms, and I think we're feeling okay about flows right now.

That's helpful. And then, if I take a look at just what your backlog implies for Q4, it should be a very strong cash flow quarter. Potentially enough to even cover your special and regular dividend. Just given where you ended the quarter from a cash perspective, how should we be thinking about your propensity to do buybacks in Q4 and maybe Q1 of next year?

I think we have been aggressive at deploying cash to buybacks this year, and I think we're going to continue to do that.

And then maybe just one more, if I could. There's been a pickup in M&A in some of the asset management stage, potentially ahead of the DOL rule. Just wondering if you have any appetite there to maybe gain additional scale, and, more of a bigger-term question, but how important do you view scale in the asset management business, especially opposed to DOL?

I think -- look, strategically for us, it has to fit, it has to make sense, and it has to add something to our business. So we have a reasonably high bar when assessing opportunities. I think we'll continue to have that high bar. But the landscape is changing, and I think it's something we have to pay attention to.

Thanks for taking my questions.

Ashley Serrao, Credit Suisse.

Good morning. Ken, opposed to all these acquisitions, I was just curious where this financial advisory and MD count stand, and where else do you see opportunities to invest given the size of your franchise today?

I'm sorry, what was the first part of the question?

Just how large is the franchise today, and how many MDs that you have?

Okay. We're, on the MD count --

144 for the -- potential advisory as of September 30. (multiple speakers)

As of September 30. Look, I think where we see a lot of opportunity is in the Americas to start. I mean, that's part of the reason for the expansion into Canada and the consolidation of our activities in Latin America.

The people in the United States continues to be quite attractive, and we see a lot of potential for continued growth in our backyard in that regard. Europe is stable at the moment and continues to be a good market for us. And I think we're having increasing amount of success in China at the moment.

Okay. And just hoping you could just -- I know you have had a lot of inflows this year, but just comment on the competitive landscape. What are you seeing that's differentiating the franchise, and perhaps thoughts on potential hires on the asset management side, as well, and developing new strategies?

Look, I think that for a long time now we've focused on developing products for our clients that are differentiated and solid, unique problems which the client has in terms of allocating capital. And I think where we have succeeded over the recent period of time signifies some of the success we're having with that.

A lot of our products are difficult to replicate, not impossible, but difficult to replicate with many of the passive investments that are particularly successful in the marketplace today. And we continue to try to drive to drive new product growth in areas which compete well against those products and also solve problems for our clients. And that's really been where the focus has been.

The areas recently which has got a lot more attention is our value-oriented quantitative business and our multi-asset business, and we continue to look at strategies to complement our more successful strategies that already exist.

Thanks for taking my questions.

Brennan Hawken, UBS.

Hello, good morning. Thanks for taking the question. Just a quick follow-up on Conor's question about the quarter-to-date. Other asset managers have highlighted October as a big reallocation month. Did that come into play for you guys? Is it a big reallocation month for you, too?

Not particularly. I think our backlog is as strong as it's been in a long time, and it just hasn't been the case for us so far.

Okay. Terrific. Thanks for clarifying that. And then sticking with asset management, could you just remind us the percentage of your AUM that's in retail accounts or exposed to retail market in the US?

Roughly 15% or so.

Terrific. So --

And, just to amplify on the point I just made -- just to put in some perspective, our unfunded business one right now is probably at an all-time high.

As in -- I guess that's a comment back to the $600 million quoted today?

Exactly.

Great. Is there a frame of reference that you could point us to when it was -- you know, an all-time high, so not really -- there isn't a neighborhood. But is there a time when the unfunded pipe was looking particularly that robust, and then in the recent history, so we can use that as a gauge to take a look at flows in any particular quarter?

I think that's hard to point to. But I think what I would say, is this has been a particularly good time for us in terms of wins, in terms of finding opportunities in the marketplace. And it comes in a particularly tough environment for a lot of others.

Sure. That's very fair.

And using that point and your position of strength, and building on the comments, Ken, that I think you made here a few minutes ago about how so many of your products are very differentiated and hard to replicate with beta -- many believe that in the retail market, as we shift into fiduciary rule, such strategies will be the parts and places in which active will continue to find a sustained place. And given some of the pressures we're seeing on some of the more retail-oriented platforms in the US, have you considered the idea that you might be able to get a retail distribution platform quite cheap in order to then position your well-placed products into retail wrappers, and now you can buy discounted distribution and even enhance your platform and expose yourselves to more growth opportunities?

We should take this off-line at some point. But I think the environment for asset management is going through a lot of change at the moment. And you know, you can imagine, we're pretty strategically focused as a firm when it comes time to advising our clients. And you can imagine we're doing the same thing ourselves at the moment.

Yes. Of course I didn't want to get into something that you can't speak to publicly but--

Point taken, though.

Okay, cool. Great. I just think it's a very cool opportunity.

And last one from me. Is there a way or can you help us think about growth in the restructuring business? And it certainly seems as though comments broadly that we hear are mandates are increasing. We are seeing some growth start to pick up for you all. How should we think about this business next year, given the environment that we're in, assuming we don't see any significant change?

So I focused on -- the US part of it is very much focused -- is very much concentrated around what's going on in the national resources sector. So the best way to judge activity in that sector is going to be follow the oil price. So if you see a significant strengthening in the oil price, I suspect the restructuring business will start to tail off. And if you see continued weakness or additional weakness in the oil price, I think you could see continued activity in that arena.

In Europe, there hasn't been much activity because of the just sheer amount of quantitative easing that's been going on and the availability of capital. But I think the thing to watch out for in Europe is just what happens in the banking sector over the next several months or so. That could actually lead to some pickup in activity in the financial services sector, as an example.

That's interesting color. Thanks a lot, Ken

Steven Chubak, Nomura.

Good morning, guys. This is Julian filling in for Stephen.

Hello Julian.

To start off, looking at your performance this year, it appears that M&A and also firm-wide revenues are expected to be flattish for the full year. Do you believe that you can grow earnings in an environment where the status quo holds, like where industry volumes are resilient but still declining off of 2015 peak levels? How should we think about the EPS growth trajectory if the current backdrop persists?

Remember, there are two factors to our business: there's the asset management business and the advisory business. The advisory business can be pretty lumpy, as you can tell from even our performance in the first couple of quarters compared to the third quarter. So I think 2015 was a spectacular year for M&A. 2014 was good 2016 is good. I think you can see this being pretty lumpy.

I think that we are very disciplined around costs, and we can continue perhaps to grow to top line even in a lumpy environment by gaining share but also by expanding our franchise in areas where we are underpenetrated. And for us, we're very disciplined about adding people because we like to make sure we're adding people that can really be successful, and we also want to be doing it on a basis where you can make money on the additions of those people.

I'd say 2016 was a good year for investment for us. I think we have been more aggressive on the hiring front, which is ultimately a driver of top line growth, and therefore earnings growth, than we have been in a while in part because we've seen more opportunity this year than other years.

And obviously asset management, I think again, is somewhat determined by how the market does but also by your relative performance compared to the market and to other managers. And I think we've compared favorably in that regard.

And I think realistically, in a business like this, as long as revenue's growing it's pretty easy to get efficiencies. At least we've demonstrated our ability to get efficiencies on the cost line and to drive EPS growth. In a flattish environment, if it persists for a while, I think we will figure out ways to do that, as well.

Okay, cool. And actually, just following up on efficiencies. You mentioned that -- I saw that your adjusted comp ratio was 56.5% for the quarter, which implies that we should expect maybe a small dip in the fourth quarter. Is that still the expectation, or how should we be thinking about that?

I think that's math, and so I think you've done the math well.

Okay, cool. And lastly just touching on the tax rate. Your tax rate was 27% on the year-to-date, it's at the low-end of your guidance. Are you still committed to managing, as you said, to the high-20%s to 30%s -- high-20%s to low-30%s going forward, and can you manage it towards the lower end, and does that reduce the likelihood or the incentive to consider changing your corporate tax structure?

Well, I'm going to let Matthieu touch on the first point, which is the tax rate, and then I'll talk to you on the structure point second.

Yes, so the tax rate for the year -- I said in my opening remarks that the outlook for the year is around now mid-20%s to high-20%s versus which was previous guidance of high-20%s to low-30%s. So we've come down a little bit. And the reason we have done this is because we have refined our assumptions and also achieved a few savings and certain (inaudible).

Okay. And on the structure, look, this is an ongoing area of review for us. Needless to say, our current structure has served us very well from a cash flow perspective, and for the foreseeable future, will serve us well from a cash flow perspective as well. There is a significant advantage in our current structure in terms of our statutory rate as well as our cash tax rate. So that is the first point I'd make.

That said, there are obviously changes going on in the world, which could impact that structure and could make it either -- could make it less attractive over time. And alternatively, there are changes going on both in Europe and in -- and there are potentially changes going on in the US, as well, that could change the relative attractiveness as those jurisdictions as places where we could consider domiciling from a tax standpoint in the future.

The problem is, it's really in flux right now everywhere. And so it's really difficult to commit to any permanent decision at this time. So it's something we're reviewing carefully. In the meantime, we obviously get a great benefit out of the current structure.

Okay, thank you guys.

(Operator instructions)

Patrick O'Shaughnessy, Raymond James.

Hello, good morning. I was hoping you could just kind of remind investors about the strategic merits of having an advisory business combined with an asset management business. What's the strategic upside for Lazard, and then what's the financial benefit of putting those two businesses together?

As I've said many times before, there are limited financial cost efficiencies between the businesses. They're run separately. The benefit is very straightforward.

In financial services, brand matters. The Lazard brand is one of the most powerful brands in financial services. Both businesses benefit enormously from that brand at different points in time and in different parts of the world. Each contributes differentially to the building of that brand. And to date, we see great benefit in keeping it together, and frankly speaking, it's tough to envision how you would separate them.

All right, got it. And then a follow-up tax question for Matthieu. As I'm looking at slide 32 in your presentation, it talks about you currently expect a 25% to 30% tax rate for the foreseeable future. So just to kind of follow-up on what you said earlier, not just -- I have you made some adjustments that can lower your tax rate this year, but as we think about our models, that 25% to 30% number, or range, is what we should be using going forward, correct?

That's exactly right.

All right, great. Thank you.

Devin Ryan, JMP Securities.

Thanks, good morning. Maybe just one on banker productivity right now. When you look at the productivity across the platform, what does that tell you about how good the backdrop is right now? I'm just trying to think about are there areas that are maybe operating above what you think is the normal trend and areas that you think I may be below that trend? And that's kind of part one.

And then part two is just -- it looks like you are still finding some opportunities to grow. You have a couple tuck-in acquisitions. When you think about market share from here, is that expanding the existing banker productivity, if you will, or is it just doing more expansion in areas that maybe you're smaller in, like these acquisitions or things like that?

Okay. So first on banker productivity, we tend to focus on productivity for employee. That's really -- professional employee really is the measure. We actually have another metric, which is average -- what we call -- associate equivalent on the advisory side. And, what that really -- what we're really shooting for is to do something close to $1 million on that, which I think is pretty much industry-leading in that regard.

And we've been very good at managing towards that over a long period of time, and it feels like we're very close or exceeding that on the advisory business right now. And frankly it doesn't vary that much between geographies for us. Some of the startup geographies might be a little lower than that in the beginning, and the goal is to get it to that kind of range over a period of time.

There is probably room -- there's always room for additional productivity in a business like ours, just doing think smarter, better, better discipline around assignments you take on, the mix between buy side/sell side, how disciplined you are on fee discussions. Those are things which -- you just get better and better at managing the business, and your communications and your teamwork gets better and all of those things tend to improve. And that's something we're highly focused on, and I think we've had great success, and there's still room for improvement there as there probably always will be.

In terms of growing the business, it's really quite simple. You identify fee pool, and that's where you want to put bankers. And there are still very significant pockets of fee pool where we are not as represented as we should be or could be over time and the question really is finding the right bankers to place and that fee pool. You just can't put anybody there and expect success. You really need, at least on our franchise, high quality people to succeed.

So growth is going to come from some additional productivity, which I think we're pretty good at, although I think we are operating at quite an attractive level right now. And it's going to come from identifying -- which we know where they are -- fee pools where there's significant opportunity to place additional people. And then the key thing is finding the right people.

Very helpful. And I guess just thinking about that, you have done some acquisitions over time when you look at those fee pools, without getting maybe into the specific areas, do you think more acquisitions are likely here over the next several years just based on where you see the opportunities, or is it easier to start a team with a small group and then build it out organically?

I think it's really a mix of three things. One is where first of all, we've got a really -- one of the great strengths of Lazard, and I think there are only a couple franchises in the world that can say this, is our ability to grow our own people. I think at Lazard it must be close to over 60% of our partner universe are people that started here very early in their careers as analysts or associates. And that's something that is key to the success of a franchise like this long-term.

Second is hiring from the outside. And there, I think just to succeed you've got to be very disciplined. You can't do it in all markets, and you have to be very differentiated in terms of the types of people you hire, and then you have to find the right place to put them to make sure that there's incremental upside. And I think we've done a pretty good job around that. And we're very disciplined around that.

And the third tool, as you point out, is acquisitions. And I think there again, there are lots of things to look at -- there are things to look at in different places, and from time to time they make sense. But it's going to be all three.

Got it. That's great. And when you think about uses of cash, just coming back to that, obviously you do have a couple announced acquisitions this year, so just trying to think through how that will impact what you are looking at year-end. And you obviously had a couple of special dividends which have been efficient ways to return cash. I'm just curious how those couple of acquisitions maybe factor in as well, not --

(multiple speakers)

The acquisitions are structured in such a way that there is minimal cash outlays, so I think that doesn't have much impact on our cash balances and won't have much impact on our cash balances for this year at all.

We're going to generate a lot of cash the second half of this year. We have been on record saying, just reinforce it, that we are going to be aggressively repurchasing shares, certainly at the levels they have been at. We will continue to do so, and then we'll make up our minds at year-end as to what to do with the rest of the cash at the time.

Got it. Okay. Very helpful. And then last one here, I understand we still have a couple of months left in the year, but any early visibility in the performance on some of the alternative funds? I'm just trying to think into fourth-quarter incentive fee potential, if things were covered a bit where if you kind of marked it today, you could see something there.

It's hard to tell. I mean, I think our guidance over the course of the year on this has just been, think about it as flat with last year, and then we will see where we are at the end of the fourth quarter. I mean these things can move around pretty dramatically in short periods of time.

Okay. Thank you very much guys.

Okay.

This concludes the Lazard conference call. We thank you for your participation.