Lazard Inc (LAZ) 2017 Q1 法說會逐字稿

Good morning, and welcome to Lazard's First Quarter 2017 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.

Thank you. Good morning, and thank you for joining our conference call to review Lazard's results for the first quarter of 2017. 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 10:00 a.m. Eastern Daylight 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 SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements 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 these non-GAAP financial measures and the 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. We started the year with strong results for clients and shareholders. Lazard achieved record first quarter operating revenue of $624 million, with record first quarters in Financial Advisory and Asset Management. These results underscore the power of our business model, the breadth and depth of our global franchise and the value we create for clients.

In Financial Advisory, operating revenue reflected solid performance across the business. In M&A, we continue to advise on large, complex and cross-border strategic transactions, including 3 of the 10 largest announcements in the first quarter. We've increased our market share in M&A globally with especially high levels of activity in Europe.

Restructuring had a strong first quarter with the completion of some large assignments. We won significant new mandates as well and we're ranked as #1 adviser globally in restructuring announcements for the quarter. Restructuring activity continued to be centered around the energy and commodity sectors, although we are seeing increased activity in other sectors as well. Our corporate preparedness in shareholder advisory business continues to grow and we advise on significant assignments relating to corporate activism and shareholder engagement. And our Sovereign and Capital Advisory services remain active, advising governments and corporations across a range of geographies on financing strategies and capital raising.

In Asset Management, our record first quarter operating revenue reflected the strength and quality of our global franchise. We achieved a high level of growth inflows across our platforms with net inflows of $3.3 billion for the quarter. Inflows, which are driven primarily by strategies in global and multiregional equity, including significant growth in our quantitative strategy despite industry headwinds from passive investment. Our emerging markets platform also had net inflows in both equity and fixed income. We finished the quarter with AUM of $215 billion, which is $25 billion higher than 1 year ago. We continue to build our Asset Management franchise through the development and scaling up a new strategy, including the first quarter launch of the Real Assets Fund. We see investor demand across many of our Asset Management platforms with significant capacity for organic growth.

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

Thank you, Ken. Lazard's first quarter 2017 operating revenue increased 23% on a reported basis and 25% on a constant-currency basis. First quarter 2017 diluted net income per share on an adjusted basis increased 66% to $0.83, which is a first quarter record for Lazard. Operating revenue for Financial Advisory increased 26%, reflecting a higher level of completion in M&A and strategic advisory as well as in Restructuring. Operating revenue for Asset Management increased 16%, reflecting a 12% increase in our average AUM as well as higher incentive fees. During the first quarter of 2017, AUM increased by $17 billion from December 31 to $215 billion. This increase was driven by market and foreign exchange appreciation of $14 billion and net inflows of $3.3 billion. As of April 24, 2017, AUM was approximately $219 billion, driven by market and foreign exchange appreciation of about $4 billion and net inflow of $24 million.

Turning to expenses. For accruing compensation at a 56.5% adjusted compensation ratio, consistent with our full year 2016 ratio and compared to 58.9% in the first quarter of last year. Adjusted compensation and benefit expense increased 18%, a slower rate than our 23% operating revenue growth. Our adjusted non-compensation ratio for the first quarter was 17.2% compared to 20.1% in the first quarter of last year. Our effective tax rate in the first quarter as adjusted was 26.6%. We continue to expect a seasonally higher tax rate in the first half of the year with a full year tax rate in the mid- to high 20s range for 2017.

Finally, regarding capital management. In the first quarter, we returned $360 million to shareholders primarily through dividends and share repurchases. As of today, we have spent $119 million this year repurchasing approximately 2.7 million shares. Lazard continues to generate substantial cash and we're increasing our quarterly dividend by 8% to $0.41 per share.

Ken will now conclude our remarks.

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

The first half of 2017 continues to look strong relative to last year. Our Financial Advisory practices are active around the world and Asset Management is building from a record level of AUM. The M&A market has been uneven this year, as corporate decision makers cope with uncertainty regarding U.S. policy under the new administration, as well as elections in Europe. Overall, however, the global macroeconomic outlook for the near to midterm remains positive. The U.S. economy is healthy and Europe continues to recover. Emerging markets have improved. The long-term trends for our business remain favorable and Lazard is in an excellent competitive position.

In conclusion, a few takeaways from the quarter. Both of our businesses achieved record first quarter of operating revenue. We continue to expect a strong first half of the year. Lazard's cash flow remains strong. Our dividend increase and ongoing share repurchase reflect our commitment to returning capital to shareholders. We remain focused on serving our clients well while we manage the firm for profitable growth and shareholder value over the long run.

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

(Operator Instructions) Our first question comes from Brennan Hawken with UBS.

So impressive strength in the Asset Management business and helpful to see the gross sales. I know you gave a couple of comments in your prepared remarks, but maybe could you give a little more specificity around some of that strength? What you think drove it? And any comments you can make on risk appetite in your institutional investor base.

Okay. Look, I think we're fortunate to have a range of products which are well positioned in the marketplace today. We're also fortunate to have an institutional client base, which tends to take a longer-term decision. And I think the product mix is pretty broad. It is well positioned against the passive tax evasion of the marketplace, particularly in United States. And I think that's really the positioning for us. In terms of risk appetite for the market, look, I think that post-election, there was probably a little bit of a pause in terms of people trying to decide their allocations or reallocate for the environment they're expecting in the future. I think we're seeing the benefits of that now, and I think we're just, again, fortunate to have a mix of strategies that kind of take advantage of the position of the market today.

And when you saw the strength in gross flows, was EM a big driver of that? Was -- were there any particular products that really stood out? Or was it pretty balanced?

It's pretty balanced. I mean, we've had flows into EM, we headed into multi-regional equities and we've had a fair amount of success in our quantitative products.

Terrific. And there's been increased focus on method too, and the potential impact. I know that Europe is an important market for Lazard in your Asset Management business, but could you give us -- or share your views on maybe how you think that's going to impact Lazard and the market broadly? And how is your positioning for that?

Look, we've spent, as I'm sure everyone in our industry has a lot of time looking at this, and just given the mix of our businesses and the way we're organized, we think that's going to have a small impact on us.

Okay. And last one. If you said it, Matthieu, I apologize, I didn't hear it. Was there an impact in your tax rate from the deferred comp? And if so, could you maybe quantify that, the deferred comp accounting change?

Right. There was, from that change in the accounting, a little bit of an impact. The impact on the rate was a little less than 5 points.

5 percentage points?

5 percentage points. Exactly.

Our next question comes from Mike Needham with Bank of America Merrill Lynch.

I think, just first on the Restructuring business. Wondering, I guess, how much is left to do in the energy sector? And how big of an opportunity might these other sectors be versus energy? It sounded like in the prepared remarks, you're still gaining mandates, but I'm just wondering how much is done with energy?

Look, we've had a good run in the Restructuring sector now for quite some time. And the energy sector continues to have issues, not as much perhaps as last year. And we've seen new activity in other sectors, particularly in the retail sector. And we expect that to probably expand a bit into a couple of other sectors, perhaps around some of the real estate areas that are related to that.

Okay. And then on the Asset Management business, clearly strong net inflows for the quarter. I was wondering if you could give us an update on the unfunded pipeline? And what strategies you think the clients are in most demand for? And then, if you have an update on Global Thematic assets.

Look, our pipeline looks pretty good. There's variability from quarter-to-quarter on RFPs, probably down a little bit, but I think the mandates that are -- they were down a little bit in the first quarter relative to last year at this time. But frankly, it's more -- we're more focused on the quality of those RFPs. And also the fact that most of our money comes from existing clients anyway, and you don't have an RFP on those particular clients. So we feel pretty good about the pipeline right now. And in terms of the flows, it's really across the board. I mean, we've seen nice flows into emerging markets. We've seen nice flows in the emerging markets platform, and into the multiregional platform. And as I said, we've had a lot of success with our comp platform in recent months.

And also, we continue to see Thematics going down. And it's down to about $4 billion now.

Our next question comes from Conor Fitzgerald with Goldman Sachs.

So appreciate the proposal is still obviously coming to focus, but it looks like the administration's going to propose a very competitive cash repatriation rate. Just wondering if that successfully goes through, if you have a sense of what that could be on an impact perspective on the M&A market? Even if it’s just anecdotal in talking to clients, like is there cash overseas that you think your clients would like to bring back and do something with the United States?

So look, I think that, obviously, repatriation, lowering of corporate tax rates are all going to be a positive, I think, for the -- we think, for the M&A environment. That said, this is early days in tax reform. This is the opening proposal. There's going to be -- my guess is, like any tax reform, it doesn't look anything like the opening proposal, but the good news is there's a lot of momentum towards there being tax reform this year, so I think the time to really pay attention to the details of this will be the second half of this year and probably the second half of the second half of this year. But I think generally speaking, for the most part, I think the market's going to continue to be optimistic about this and should, over the course of the year, help activity.

That's helpful. So you kind of answered my long-term question on what tax reform could mean with your comments around the positive impact. Just on the near term, just kind of trying to pair that with some of your comments around an uneven M&A market, given some of the policy uncertainty, just want to understand if you have -- if you thought there was any of risk that we see kind of a gap in M&A activity as potential buyers move -- buyers and sellers move to the sidelines until we get more certainty around this back -- your back half of 2017?

Yes. No, it's a good question. And the first quarter was kind of an unusual quarter because you had spurts of activity in January and March and a quiet market in February. But when you looked at the actual activity levels, they weren't that different from 2016. In fact, I think on announcement it was a little bit up from 2016. But when you looked at the market itself, it was more -- things were -- the activity levels were up and the things which were not set the company to [some of the] transactions, small transactions but sort of midsized stuff, I think where you saw a little bit of hesitation was on the very, very big things that probably you had to make very long-term decisions around tax on. So I wouldn't be surprised if the market continues like that for this year. And I think as we get closer to having more certainty around the outlines of reform, I think there's going to be more comfort around this. What does appear to be the case though is, it does look like the border adjustment tax as less likely to have happening and that was a concern for people in the first quarter. If that doesn't happen, that may lift a little of the concern as well.

(Operator Instructions) Our next question comes from Devin Ryan with JMP Securities.

Maybe one here just on European M&A. I've seen the market breathe the sigh of relief after the French elections. I'm just curious if you're seeing any chill come off in Europe? Some of the economic data has been a little bit better. And so just trying to think about what people are waiting for or looking for in Europe to maybe see activity start to improve there?

Look, we have (inaudible) first quarter in Europe on announcements. And it felt like the market in Europe was -- had improved a bit in the first quarter. There have been -- now been 2 elections that have gone towards the center. The first in Holland, the second, the first round of the French elections. If the polls are right and -- then we're likely to see a centrist candidate in the second round as well. That, overall, is good for the economic climate in Europe. It's an improving economic climate. It's probably the best on the continent that it’s been since the crisis. There's still some risk in a couple of countries around election still. I don't think Germany's much of a risk. But there's some uncertainty around Italy. But generally speaking, if we're sort of through June and the elections go as the polls have predicted, I think, Europe is in pretty decent shape and you should start to see some pickup in activity with the pickup in confidence around that.

Okay. Terrific. And then with respect to just the senior banker footprint, how are you feeling about this year? And where are you thinking about growth from here? Do you think this could be a big year of recruiting for the firm?

Well, look, I mean, 2016, we really filled out our footprint in the Americas, as you know, from what we did in Latin America and Canada and some additional hiring in the U.S. We're very focused on organic growth. We have a terrific ability to grow our own people at Lazard. That's been one of the great competitive strengths of the firm. I think it's over 60% of RMDs are homegrown and it's starting from analyst associate. So we will always be on the lookout for talents on the outside where it fits and can be added profitably to the platform. But we're not dependent on it for growth. And we'll just keep an eye on the market and trends and opportunities.

Okay. Great. And last quick one here. Just on the backlogs, I mean, the over focus maybe from some of us sometimes can be a little bit misleading, but when we look on the outside, I think there's a little bit of a perception that backlogs for the industry, for adviser activities have been shrinking a bit year-over-year. So I'm just curious, does that sound like an accurate read? Or is it maybe more just timing? You had a pretty active quarter of closings, and so sometimes it takes a little bit of time to replenish that.

Probably both. The reality is, remember, closings can be 12 to 18 months, particularly for the larger deals or even longer in some cases. So you got to remember that '15 was a record year for most people on announcements and so some of this stuff is playing through as a result of that. On the other hand, activity levels in 2016 were still pretty good. We feel very comfortable with the first half on the advisory side of the business. We never know what's going to happen in the second half until sort of midway through the year, or even later, in fact. And that will continue to be the case. It's always a little bit of a very dependent on how things get announced, timing of closings, things like that. The good news about our business this year is we have a very, very solid platform in Asset Management. We’re at record AUM at the moment, $30 billion up from last year. And if markets hold, that all goes well for the business as a whole.

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

This is actually Sharon Leung filling in for Steven this morning. My first question is just on some of the non-comp ratios. In the release, you highlighted some of the investments in your businesses as one of the contributors to higher non-comp, can you give us an outlook there? And just where you see those expenses projecting over the next couple of quarters?

Sure. Matthieu?

Right. So the increase in our non-comp is really related to 2 items. One is a little bit of the higher activity level, which you're seeing in the line, fund administration and outsourced services because of higher AUM. The effective explanation is around investment, and investment is really twofold. One of it -- one part of it is relates to IT. We're investing in a number of new systems and upgrading our technology in the firm, so that contributes to some of the increase. And then second, we have also invested in our people, increased our teams and that leads also to higher non-comp expenses.

Okay. Great. And then just on your capital management priorities, can you talk a little bit about if there are any interesting inorganic growth pursuits that you might be looking at?

Look, we're -- we, like everyone, are laser-focused on what's happening in the Asset Management world. The continued consolidation that seems to be taking place amongst some of the active managers. We think a great advantage of our business is our size. In fact, it allows us to be nimble and it also allows us to react to market conditions. And I think we've had good success at being able to shift priorities in relatively short periods of time. So we think we can start from a very healthy base. We're not at all relaxed about the environment, I should say. We're not taking it lightly but at the same time, we kind of like the competitive position we have in our business and we have to measure that against any of the opportunities that are out there.

This concludes today's conference. Thank you for your participation. You may now disconnect.