Lazard Inc (LAZ) 2016 Q4 法說會逐字稿

Good morning, and welcome to Lazard's fourth quarter and full year 2016 earnings conference call. This call is being recorded.

(Operator Instructions)

At this time I will turn the call over to Judy 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 2016. Hosting the call today our Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer, and Matthieu Bacaille, Chief Financial Officer. A replay of this call will be available on the Lazard website beginning today by 10.00 AM, Eastern 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 10K, quarter reports on form 10Q and current reports on form 8K.

Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not reply 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 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 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 questions. I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Good morning. Today Lazard reported strong operating results for the fourth quarter and full year 2016. We achieved record quarterly operating revenue, financial advisory had a record quarter and a record year. Asset management's fourth quarter revenue increased 6% and despite all the markets, finished the year with a 6% increase in a AUN.

Financial advisory's performance in this year in political surprises and market volatility underscores the strength, resilience, and breadth of our franchise. Our core practices remain highly active across industry sectors around the world.

As we anticipated, financial advisory revenue was backend loaded in the second half of the year based on a higher level of M&A closings. Lazard advised on five of the top 10 completed global transactions in 2016, including our lead advisory role in the largest completed transaction of the year.

We maintain the strong pace of new M&A assignments in 2016. Lazard's number of announced transactions, valued over $500 million, increased in North America, in Europe and on a global basis, even as market activity in those regions decreased. We continue to win an outside share of the largest advisory assignments, those valued over $10 billion.

Lazard advised on or continues to advise on one quarter of the largest transactions announced in 2016, including three of the 10 largest announced in Europe post-Brexit. Our capitol advisory practice also advised clients on three of the continents five largest IPOs in 2016. And we've been active in the first month of 2017, advising on some of the largest M&A transactions in both North America and Europe.

As distressed debt and restructuring activity increased, our restructuring groups operating revenue almost doubled. We continue to be highly active in energy and commodity related sectors in addition to other high profile global assignments.

During the year, we capitalized on opportunities to invest in our business. We fully integrated our Latin American operations. We acquired an independent advisory firm in Canada, and we accelerated our senior-level recruiting around the world.

Our asset management business performed well in a challenging environment for active managers. We continue to have strong gross inflows and a broad range of strategies across our platforms, despite market volatility and foreign exchange headwinds we achieved modest net inflows for the year which included strong net inflows in our equity mutual fund platform.

Flows in the fourth quarter were negatively affected by market and currency volatility following the US presidential election. We also had some delays in the funding of new mandates. But our level of new mandates remains healthy and 2017 is off to a strong start. As of Friday, January 27th, AUM stood at $205 billion with net inflows of $1.2 billion since the start of the year.

Our long-term pattern of performance remains solid in a broad range of strategies across our platforms, and we continue to see interest in our global emerging and quantitative market strategies. We continue to build our asset management franchise through the development and scaling up of new and existing platforms. In 2016 we further developed our quantitative and multi- asset capabilities and launched several new funds.

We are creating investment solutions for the needs of sophisticated institutional clients. For example we are now providing an asset allocation advisory service that leverages the expertise and resources for multi-asset management teams. In addition we are expanding our asset management distribution capabilities to large financial institutions in Europe.

Matthew will now provide color on our financial results and capital management, and then I'll comment on our outlook.

Thank you, Ken. Lazard's record quarterly operating revenue of $685 million was 15% higher than Q4 of 2015.

Operating revenue for the full year was $2.3 billion, slightly below the record achieved in 2015. On a constant currency basis operating revenue results were substantially the same for the quarter and the full year. Diluted net income per share on an adjusted basis was $1.13 for the fourth quarter, a 23% increase in last year.

For the full-year 2016 it was $3.09 compared to $3.60 in 2015. The annual decline primarily reflected our higher effective tax rate. On the US GAAP basis diluted net income per share was $0.96 for the fourth quarter and $2.92 for the full year 2016.

Financial advisory had record quarterly and annual operating revenue of 22% and 2% respectively from 2015. In asset management fourth quarter 2016 operating revenue increased 6% from 2015, primarily driven by an increase in average AUM.

Annual revenue decreased 5% from 2015, a strong year, and also included a gain from the sale of our Australian private equity business. Management fees were down slightly for the year. For the quarter management fees were up 4% from 4th quarter 2015 and roughly flat with the third quarter of this year.

Assets under management as of December 31st, 2016 were $198 billion, down $7.5 billion from September 30, reflecting negative foreign exchange movement of $7 billion, net outflows of $2.7 billion, partially offset by market appreciation of $2.2 billion. In 2016, we had broad-based gross inflows of $39 billion, and at the end of the year our net inflows were $0.2 billion.

As of January 27, 2017, AUM was approximately $205 billion, reflecting market appreciation of $4.2 billion, positive foreign exchange movements of $1.7 billion and net inflows of $1.2 billion through December 31st.

Turning to expenses, our 2016 adjusted GAAP compensation ratio was 56.5% compared to 55.4% in 2015. The increase primarily reflected our previously discussed higher amortization expense.

Awarded compensation expense for 2016 decreased 2%. The corresponding awarded compensation ratio was 55.8%, unchanged from 2015 and at the low end of our targeted range of 55% to 59% over the cycle. Adjusted non-compensation expense for the quarter and for the full-year were essentially flat compared to 2015, reflecting our continued cost discipline.

In 2016 our operating margin was 25% on an adjusted basis and 25.6% on an awarded basis. The awarded margin was roughly flat to last year. Our 2016 annual effective tax rate was 23.7% at the low end of the range we previously communicated and compared to the historically low rate of 16.7% in 2015.

Looking ahead, assuming a similar environment, we estimate our annual tax rate will remain in the mid-to-high 20% range for 2017 and our cash taxes to be in the mid-to-high teens. As always the quarterly rate may fluctuate.

Regarding capital management during 2016 we returned $692 million of cash to shareholders, an increase of $108 million from 2015 primarily reflecting increased share repurchases. Consistent with work we've done in the past few years, we are also returning cash to shareholders in the form of a year-end special dividend. Yesterday in addition to a quarterly dividend of $0.38 per share, was declared a special dividend of $1.20 per share, the same as last year. Ken will now conclude our remarks.

Thank you, Mathieu. I'll provide some perspective on our outlook and then we'll open the call to questions. The first half of 2017 looked strong relative to last year for both our businesses. Our financial advisory practices are active around the world and asset management is building from a base of AUM that is roughly $26 billion higher than at this time last year.

Overall the global macroeconomic outlook for the near to midterm is positive. While there are a number of geopolitical trade a policy factors in play this year, the US economy remains healthy and Europe continues to recover. In the US, the prospect of regulatory and tax reform would bode well for a continued high level of M&A activity and the fundamentals of a strong M&A environment remain in place globally.

Financing is still widely available at historically cheap rates for investment-grade credits, valuations have climbed but potentially supported by expected growth in developed economies and lower tax rates, and sentiment while volatile continues to be constructive among CEOs in boardrooms around the world. In asset management we have a world-class franchise that has outperformed other asset managers in a challenging period. This reflects the strength of our model.

We have a differentiated product mix in international, global and emerging markets investing, which are difficult for passive strategies to replicate. Our primarily institutional client base tends to allocate capital strategically on a long-term basis and we are benefiting from the investments we've made in our quantitative and multi-asset capabilities, which allow us to compete effectively in the fee sensitive space.

To conclude, Lazard achieved strong results in a volatile year with a record second half and a record fourth-quarter. We have strong momentum going into 2017. We are serving clients with broadly diversified advisory practices and investment platforms, both with capacity for increased activity and organic growth.

We are investing in our businesses for continued growth. We are maintaining our cost discipline. Our model continues to generate significant free cash, and we are returning substantial cash to our shareholders. We remain focused on building value for clients and our shareholders.

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

Operator, do we have questions?

(Operator Instructions)

We will go first to Conor Fitzgerald with Goldman Sachs.

Good morning. Firstly, a bigger-picture about the potential for corporate tax reform. When you think about everything that could come as a part of that, everything from lower corporate tax rates to tax repatriation, or sorry, to cash repatriation, to cross-border taxes or the elimination of interest deductibility, what makes you most optimistic about the outlook for M&A, and what makes you the most cautious?

Okay, simplistically, we put it into two buckets. The first bucket is the repatriation, the potential excise tax on repatriation, and potentially a lower statutory rate. There are very few losers in that discussion, from a corporate standpoint. Relatively speaking, it's uncontroversial and such.

And I think from an M&A standpoint, net-net, that is a positive. The movement of money back into the US that is abroad probably either will help -- companies will allocate that either in the form of business investment into plant, property, and equipment, capital investment, potentially some M&A activity obviously, perhaps some return of capital to shareholders depending on how it's all structured. Lower statutory rate is probably a net positive for valuations. The excise tax perhaps if there's enough left over helps infrastructure investments and, generally speaking, would probably be good for the economy as a whole.

The second bucket is more complicated to analyze; that is the border adjustment tax, that's probably all the deductions which are being discussed, at least on the corporate side, a 100% ability to do business, expense capital investment, the reduction or elimination of the interest deduction. There are going to be winners and losers there in companies, and I think it's more difficult to predict how that's going to come out. Net-net, policy reforms generally that provide better incentives for investment are going to be good for valuations, but I think the second bucket is going to be more difficult to predict.

That's helpful, thanks. You have gotten off to a pretty strong start to start the year in terms of deal announcements. Based on what you're seeing in your conversation with management teams, do you expect that momentum to be sustained?

I think I signaled in my remarks, I think the first half of the year looks strong for us relative to last year, and the second half will really be driven by what happens in the markets, which are going to be a function of what comes out of Washington in terms of actual policy, and then also some of the discussion around trade and geopolitics. I think we all have to take a deep breath and keep an eye on what is going on. I think, generally speaking, since the election, market participants have been generally pretty optimistic about the potential for policy initiatives that are going to be good for the economy.

That's helpful; thanks for taking my questions.

We will go next to Brennan Hawken with UBS.

Good morning, thanks for taking the question. Thanks for all the color on outlook. I think the one question I had as a follow-up there on the tax side would be: Some of these potential changes to, whether it be border adjustment or interest deductibility or what have you, do you think that there might be a chance for restructuring activity to pick up on the back of this if we see some significant adjustments, at least from your business perspective?

That's a good question. I think it's too early to make predictions around that, first, because I don't think we know enough about yet how the border adjustment tax would take place, over what period of time, and then also whether the interest deduction applies retroactively forward, at what level.

And then, of course, as I said earlier, I think the second bucket, the border tax adjustment, the interest deductibility, that all falls in the bucket of there are winners and losers here, and it is just to me strikes me that there is less certainty around how that plays out because of that than the first bucket. So I think the short answer is, I don't think we know enough to know yet how that plays, and what it does for M&A and what it does for restructuring, what it does for the market overall.

That's really fair, but helpful to hear that perspective. On asset management, a couple questions, number one, I know Global Thematic continues to be a little bit of a drag, but it seems like the size of it and the scale is shrinking. Can you remind us roughly how much AUM is left in that strategy?

Yes, it's $4.9 billion as of December 31.

I think you've hit it on the head, relative contribution and scale is less of a concern today than it was two years ago.

Outstanding, thank you. Last one for me: We have seen a lot of valuation compression in the asset management space over the last couple years. Has that led you to consider more significantly pursuing non-organic options to add either capabilities, broaden your product lineup, or open up new distribution channels?

I think that's a great question. Look, the environment for active managers and asset managers generally has changed pretty significantly over the last couple of years. And you have also seen a change in the climate for investment managers that are owned by banks. And there has also been a lot of rule changes around asset management, DOL rules and such, in the US, and you have rule changes in Europe as well. I think you are going to see a lot of discussion around activity, inorganic activity in the asset management world, over the next couple of years.

I think from our standpoint, the bar is high in terms of anything we consider doing. We consider ourselves to have a very good Business today; obviously, the world presents challenges. I think we have reacted pretty well to them so far.

Any inorganic investment is going to have to overcome a high bar for us. It's going to have to have attractive return characteristics to the employment of any capital we deploy here. It would also have to do things that we can't do today ourselves, and have to be sustainable into the future. We are going to look, like others, but we are going to be extraordinarily disciplined about it.

That's helpful, thanks very much for all the color and the answers.

Thank you.

We'll go next to Steven Chubak with Nomura Instinet.

Good morning. I wanted to kick things off with a question on the corporate structure, and really appreciate some of the detailed disclosure you guys provided in this slide deck regarding tax and corporate structure considerations. And it clearly outlines how you guys are thinking about it in the current regime. But what I'm wondering is, if we do in fact see any change to US tax legislation, a substantial reduction in the corporate rate, how might that inform your thinking as to whether you would consider converting to a C Corp?

Well, one thing's for sure, Steven, you are consistent on the calls on this topic. I want to thank you for that.

I think our deck makes it pretty clear that this is something that we are carefully looking at, carefully considering, and have carefully evaluated. And we are very focused on what's going to happen on tax reform, what's going to happen on rates, and how it fits us. And we have a very open mind about this, as I've said before on these calls, and that continues to be the case. There is obviously -- the right kinds of changes in tax reform in the US can be very attractive to us.

Is there a break-even rate or some guidance you can give in terms of, if the US corporate rate shakes out at this level, then we would strongly consider it?

I wish I could do that; that would make my life simple. I think there is too many things in the tax code that affect this that I think you really have to look at it holistically. There could be a rate, but then there could be other things in the provision that completely undoes that because of some crazy place where we do business, and I think it's too soon to know that.

But I will say, as I said, this is top of mind for us. You can see by our disclosure in the deck that this is something we are carefully evaluating, and we are just looking forward to seeing what happens.

Thanks, Ken; that is extremely helpful color. Switching gears to the expense side, I just want to dig into the comp ratio for a bit. The discipline has certainly been quite impressive.

I'm wondering, as we look ahead to 2017, if we do in fact experience, call it, a flat to slightly up revenue backdrop, given you are already at the low end of your guidance, should we expect to see any meaningful comp leverage from here? And then what is the delta we should expect in a flattish revenue backdrop between the GAAP and awarded?

On the first point, we've been, as you said, rigorously disciplined about compensation. This year, in fact, I think you saw that the mix changed pretty significantly with regard to asset management, the advisory business. The advisory business, as you know, is the higher compensation margin part of the Business, and yet we were able to maintain a flat awarded ratio. That is something we are very focused on. At the same time, we also are cautious about making sure we have enough resource to grow the Business, and enough resource to compete in the business, but it's something we are good at, I think.

Going forward, it's a little difficult to give you a sharing between growth and compensation without knowing mix. I think you can probably dig into our materials going back. We've given you almost perfect disclosure on this so that you can see what we have done in different environments. And I think that would probably, at least over the last four or five years, give you a pretty good picture of how we think about things. But it's a little difficult to give you a simple formula because I'm not sure what the mix is going to be and exactly where the environment is going.

With regard to the between GAAP and awarded, we will put out and I think it is in our deck the awarded -- the GAAP or deferred number we expect for 2017, so you can easily plug that into any model you have with regard to what you can -- then you can determine what the GAAP comp ratio will be from that. And on the awarded, I think we give some guidance around, generally speaking, saying where we end is where we begin, and that's pretty much how we have approached this for the last several years.

Got it. Just one final one for me: Ken, appreciated all the detail regarding the ingredients for M&A and the outlook. The one comment that surprised me a bit, and it's not something I've heard yet, concerned valuation and the fact that while valuations do look frothy, that a lot of corporates are willing to contemplate or consider some of the tailwinds, whether it be regulatory relief or a reduction in tax rate. And I'm wondering whether that's going to result in a possible delay, but then maybe some reacceleration activity as we get better clarity on some of the sources of uncertainty, or whether they are willing to just give credit for some of those animal spirits today?

I think what happened post election is -- I mean, there is a couple different narratives you can have as to what goes on in the market. One narrative post election was that, by and large, market participants believed that through a mix of tax reform, deregulation, and some policy changes around infrastructure investment, that you would see some incremental growth in GDP in the future in the US, a increase in business investment, long overdue. And then with the tax reductions in particular, also you might see some benefits around corporate earnings.

The key on this is, do they all come through? I think the market is, under that narrative, the market was expecting these policy changes from the new administration and the new Congress. I think the devil is obviously in the detail and in the timing, and the clearer this becomes I think the more it can sustain the market, maybe improve it. If it becomes more questionable or cloudy, uncertain, I think that has implications as well.

Very helpful, Ken. Thanks for taking my questions.

We will go next to Devin Ryan with JMP Securities.

Good morning, guys. Maybe coming back to another side of Brennan's question about asset management, there's an argument for maybe why there could be more consolidation in this space in the US and Europe, and your asset management platform arguably has some scarcity value, and performance has been quite strong there. And so when we think about that relative to where Lazard's valuation is today, it's on the lower end from a multiple range of where it has been in some time. And this has come up over the past 10 years I've covered the stock.

But how would you think about unlocking value through separating the two Businesses? Because it would seem that there is quite a bit of value in the asset management business that maybe isn't getting credit today within the overall Franchise.

I think you could reverse that and say the advisory business, too, couldn't you?

Absolutely, but, yes, curious on the asset management side.

We are long-term shareholders of this Business. There has been real benefits to having these two Businesses together because they share one of the most powerful, valuable brands in the world of finance. It gets complex to separate it. Obviously, it's not impossible, and I think we are, in the long run, trying to be good stewards of shareholder value. And we are conscious of discounts, we are conscious of opportunities, and will remain that way.

Okay, that's helpful. I figured I would try there.

With respect to recruiting, there has been a lot of press releases in recent months just around hires and obviously the smalltalk in acquisitions, so just trying to think about the trajectory there because I think there is some notion that Lazard's a pretty mature firm in the industry and obviously a leader in terms of revenues. But you are still adding folks at a pretty good clip here, so how should we think about the trajectory of senior banker headcount from here? And then as you think about whitespace over the next year or two, what are some of the biggest areas you are interested in?

One of the real treasures of Lazard and I think competitive advantages of the Firm is our ability to grow our own partners, both on the asset and the advisory side of the Business. Well over half, and my guess is well over 60%, close to 70% of our partnership is homegrown, meaning they started here as analysts, associates, in some cases early VPs. But that is truly, my view, one of the marks of a great firm is being able to do that because you can sustain yourself in terms of the quality of people over many cycles and I think that is something we've proven.

You look at the leadership of Lazard, on all sides of the Business, you have people that are driving our key industry practices, a lot of them grew up here as analysts and associates, they spent their career here. That is something very, very few firms in the world can do today, and I think it gives us an exceptional advantage in the marketplace.

The reason why I think that is more the case today than it's ever been is because there aren't that many firms today -- large firms today -- which have been the source of most of the talent for the boutiques that are really capable of growing the next generation and the generation after of advisory talent, and I think increasing the even asset management talent. And so, therefore, having this capability is really important.

That said, we are in a competitive world. And when we see opportunity to hire really good people who are going to really move our Franchise -- we have a high bar for that -- we'll do it. And 2016 was a particularly successful year for adding people for us on the advisory franchise.

We also doubled down on our bet on the Western Hemisphere. We improved our position substantially in Canada with a small acquisition there in the fall. And we consolidated our Business in Latin America, which we think in the long run has a lot of opportunity and is very well positioned to capitalize on that.

I think in the United States in particular, we see, have seen, and continue to see opportunity for growth in some of the regions of the country where traditionally investment banking hasn't had as much of a penetration as -- at least the advisory business -- broadly speaking hasn't had as much penetration as the opportunity suggests. So I think we're feeling pretty good about where we are in terms of people right now, and we're going to remain opportunistic and focused on the areas that are going to really drive people.

Okay, that's great color. Last quick one here, asset management, I appreciate the color on where your AUMs stand and the flows to date. With the mandates that you cited, where are those coming from?

And I apologize if I missed this, but just emerging markets obviously gets a lot of attention. How is momentum in terms of flows feel in that business?

Simplistically, the emerging market platform has some outflows in the fourth quarter which have been largely -- not completely yet -- but largely offset by inflows so far year to date in the first quarter. So I think we're feeling pretty comfortable with where we are broadly speaking on our platforms, and in particular on the emerging market platforms right now.

Terrific, thank you, guys.

(Operator Instructions)

We will go next to Mike Needham with Bank of America.

Good morning, thanks for taking the questions. I was hoping you could drill down a little bit more on the asset management business just for Q4. What was the client activity that drove the outflows in emerging markets and global equity, along with -- I think you mentioned delays in commitments. And then on the pipeline, if you want to highlight a few of the strategies where you think you have some momentum to drive some inflows for 2017?

Okay, I think I covered it in the statement. It was kind of emerging market equity, some of the international and some delayed mandates that resulted in the outflows in the fourth quarter. And as I just said, I think on the emerging markets platforms, we haven't completely offset those outflows but we are getting close, year to date.

In terms of activity, I would say RFP activity is decent. I think we are seeing increased activity around some of our Quant products right now, and on emerging market and international. And, generally speaking, I think we are having a good level of interest and activity in the first quarter of this year at this point.

Okay, thanks. I guess just one follow-up: You've historically advised on some of the biggest deals in the advisory business. Over the last two years there's been a nice pickup in the number of really large deals. How do you characterize the regulatory environment for big company combinations today, and do you think that changes at all with the new administration in the US? Thanks.

Actually 2016 was a down year for big deals compared to 2015, but still at a pretty high pace historically. 2017 is off to a pretty good start in that regard.

The regulatory environment, it's kind of early and hard to know right now. I think the expectation by most market participants is that the overall antitrust regime may be a little bit more relaxed in the US relative to what it has been for the last eight years. I think we have to wait and see. The proof is in the pudding on that. There are going to be different things that different administrations focus on and care about.

In the EU, things haven't really changed much at all. It's a tough regime but so far probably a pretty fair one, so I think it's a little bit wait and see on that.

Frankly, I don't think it has been terrible. I think the deals are much more challenging from a regulatory standpoint because they are down the center of the fairway. They make a lot of sense strategically, and as a result, those kind of deals are going to create overlaps and they're going to create regulatory hurdles, and I think people work through them for the most part and get them right. Occasionally, they are difficult.

Okay, thank you.

Ladies and gentlemen, this now concludes the Lazard conference call. You may now disconnect.