Lazard Inc (LAZ) 2017 Q2 法說會逐字稿

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

Thank you. Good morning, and thank you for joining our conference call to review Lazard's results for the second quarter and first half 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 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 also 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'll 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 at lazard.com. 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.

Thank you, Judy. Good morning. In the second quarter, Lazard achieved the highest quarterly operating revenue in its history. The strong quarter contributed to a record first half and a record 12-month period.

Over the last 4 quarters, we have achieved more than $2.6 billion in operating revenue. Both the Financial Advisory and Asset Management businesses achieved record revenue for the second quarter and first half. Our M&A and strategic advisory revenue increased 50% in the quarter, even as the markets volume of M&A completions decreased 7%. We were especially active in Europe, advising clients on some of the most prominent transactions in the quarter.

Lazard's leadership in advising on large, complex and cross-border matters highlights our competitive advantage, a fully global platform with strong local advisory teams and a deep understanding of shareholder dynamics and regulatory issues.

While the pace of M&A announcements has been relatively flat in 2017 compared to last year, there have been pockets of growth, notably in Europe, while Lazard's volume of announcements was up significantly in the first half compared to the same period last year.

Our industry leading global restructuring team had another strong quarter with the completion of some large assignments. We have won significant new mandates as well, including increased activity in the retail sector.

Our shareholder advisory business continues to grow as we advise on significant assignments relating to corporate activism and shareholder engagement globally. And our Sovereign and Capital Advisory services remain active, advising governments and corporations across a range of geographies on financing strategy and capital raising.

In Asset Management, all-time record operating revenue reflected the strength and quality of our global franchise. We finished the quarter with assets under management of $226 billion, a record level that is $34 billion higher than 1 year ago as of June 30. We achieved record management fees in the quarter and the first half. Incentive fees continue to increase on the strength of our investment performance.

Growth inflows have remained strong across our investment platform. Net flows were essentially flat in the second quarter. And for the first half of the year, we have achieved net inflows of 2.6 -- $2.9 billion. We continue to build our Asset Management franchise through the development and scaling up of new strategies. We see investor demand across many of our platforms with significant capacity for organic growth.

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

Thank you, Ken. Lazard's second quarter 2017 operating revenue increased 33% on a reported basis and 35% on a constant currency basis.

Second quarter 2017 diluted net income per share on an adjusted basis increased 61% to $0.98. Quarterly operating revenue for Financial Advisory increased 43% to a record level of $411 million. This reflected an elevated number of completions in M&A and strategic advisory as well as some large completions in restructuring.

M&A revenue increased 50% in the quarter. Quarterly operating revenue for Asset Management increased 22% to a record level of $307 million. This reflected increases in both our management fees and incentive fees. Management fees increased 16%, in line with increase in our AUM. During the second quarter of 2017, AUM increased by $11 billion from March 31 to $226 billion. This increase was driven almost entirely by markets and foreign exchange appreciation. The quarter ended with muted net outflows, which were primarily driven by fixed income strategies and one global equity strategy, which we have discussed in the past.

As of July 25, AUM was approximately $231 billion, driven by market and foreign exchange appreciation of about $6 billion, offset by net outflows of about $650 million.

Looking ahead for both of our businesses, Asset Management topped the second half of the year in a strong position with AUM about $34 billion higher than 1 year ago.

In Financial Advisory, last year's back-end loaded second half could make comparison a bit more challenging. However, we see healthy activity around the world, especially in Europe, which is benefiting from positive macro trends.

Turning to expenses. In compensation, we continue to accrue compensation at a 56.5% adjusted compensation ratio consistent with our full year 2016 ratio. For the first half of 2017, a 56.5% ratio compared to 57.6% last year.

Our adjusted noncompensation ratio for the second quarter was 16.1% compared to 20.7% in the second quarter of last year. Please note, that our adjusted noncompensation expense includes certain charges, primarily reflecting the implementation of a new global enterprise resource planning system. We expect the total cost of the project to be approximately $25 million, most of which will take place in 2017 with the remainder in the first half of 2018 upon completion of the project.

Our effective tax rate in the second quarter as adjusted was 29.6%. We continue to expect a full year tax rate in the mid- to high 20s range for 2017.

Regarding capital management, we returned $493 million to shareholders in the first half of 2017, primarily through dividends and share repurchasing. Year-to-date, we have spent $185 million buying back shares. We have already exceeded our objective of offsetting potential dilutions from the 2016 year-end equity grant. We continue to generate strong cash flow and expect to continue deploying future excess cash towards share repurchases and dividends.

Ken will now conclude our remarks.

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

Overall, the global macroeconomic outlook for the near to midterm remains positive. U.S. economy is healthy and Europe's recovery is gaining momentum. Emerging markets continue to improve. Global M&A activity has declined steadily compared to the past few years and partly because of some uncertainty regarding U.S. policy, but the environment remains favorable. Sentiment continues to be constructive among CEOs and board rooms around the world. Financing is widely available at historically cheap rates for investment-grade credits. And while valuations are high, they are potentially supported by continued macroeconomic growth.

Our advisory business is in an excellent competitive position to maintain a significant share of the market. In Asset Management, we are well positioned for continued growth. We are building from a record base to the AUM. We have a broadly diversified set of investment strategy serving a global primarily institutional client base. And our quantitative strategies are competing effectively against demand for lower fee products.

To conclude, some takeaways from the quarter. We achieved our highest ever quarterly operating revenue based on strong performance in both our businesses. On a 12-month basis, operating revenue was at a record level. Asset Management achieved record fees and AUM with net inflows for the year.

Financial Advisory continues to be active across our practices globally with significant increase in European transactions. We are maintaining our cost discipline and cash flow remains strong. We expect to continue deploying cash towards share repurchases and dividends. We remain focused on serving our clients well while we manage the firm for profitable growth and shareholder value over the long term.

Before we go to questions, yesterday, we announced senior level appointments, including a new Chief Financial Officer effective October 1, Evan Russo, who is sitting in with us today and will transition into that role and be active on our next earnings call.

I also want to take this opportunity to thank Matthieu Bucaille for his service as CFO. Matthieu Bucaille and I have been in the trenches together at Lazard now for almost 30 years. We say that Lazard is in our blood is an understatement. Matthieu stepped into the CFO role almost 7 years ago at a time of tremendous turmoil, change and opportunity for the firm. He has more than fulfilled all of our expectations. He is a great friend, a great colleague and a true professional. And I look forward to working with him in his new and significant role at the firm and in Paris.

Now let's open the call to questions.

(Operator Instructions) And we'll go first to Brennan Hawken with UBS.

This is Brent Dilts on for Brennan actually. Wondering first, if you could just touch on a little bit more color on Europe. You said you're seeing a pretty good pick up. I know you don't like to give outlook, but just anything you could provide there, what you're seeing, little more specifics?

Okay. So big picture. Obviously, there has been some favorable political changes on the continent over the last several months. The elections in Holland followed by the elections in France and the expectation of a stable outcome in Germany has, I think, resulted in a much more stable climate for the continent, at least. Brexit continues to be a challenge, the uncertainty around Brexit. But overall, the macroeconomic environment, particularly, again, on the continent has improved pretty significantly over the last several months or so. And as a result of that, we're seeing a real pickup in [CO] confidence and that seems to be translating at least into activity for us. In addition, there has been a lot of discussion and actual activity around the area of corporate activism -- or shareholder activism in Europe and that's also led to a pickup in activity for us, helping corporates and many of our clients prepare and deal with that.

Okay, great. And then on restructuring. You mentioned energy is flowing down and we see that just across the industry. So wondering if you could give us a little bit of color just around the retail? You've had a couple of big wins there. It looks like that you're on -- just kind of what you think could play out there and just maybe how we should think -- again, I know you don't like to give outlook, but just -- if asked for the retail, there's nothing else that we should expect like maybe more trough levels or if it's just too hard to tell at this point?

Yes, I think -- look, Brent, we spent a lot of time thinking about what's happening here. Obviously, the backdrop is a pretty good macroeconomic environment with very low rates and, obviously, tremendous financing availability. So you think to yourself that, that's not a particularly right climate for restructuring. But I think what we witnessed, at least in oil and gas and now in retail, is enormous disruption coming from technological change. In the case of oil and gas, it was really the introduction of these revolutionary technologies around drilling, which had led to these significant discoveries in shale gas and shale oil and then, obviously, the disruption that caused in terms of pricing of the oil and gas markets and the effect on that industry. And I think we're witnessing effectively the same kind of disruptive effective technology on retail right now. You're seeing, obviously, the tipping point perhaps in retail driven by the growth of Amazon and the resurgence of Walmart through its e-commerce activities. And that's had a real impact on the -- that's having a real impact on the retail sector. And I think there'll be some knock-on effect, perhaps, in the real estate sector as a result of that. But I think that theme here is really disruption caused by technological change. And we used to think of technology as something limited to technology, but what we're witnessing now is the enablement of technology in different industries and that has the potential to be disruptive. And in certain cases, it really forces restructuring of those industries, and I think that's what's happened in oil and gas and in retail.

Okay, great. And congratulations to Matthieu and Evan.

Thank you.

Thank you.

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

I guess, first one here. Just maybe come back to that last point on restructuring and trying to take that question a little bit further. It sounds like the backdrop has been a little better than may be budget is coming into the year, but you had a couple of really great quarters of closings and so that's reflected in results. So just trying to think about how that base of retainers has been trending. So just kind of taking out the lumpiness of the closings and try to parse through that how the retainer level is right now?

It's okay. I mean, I think I would say that -- look, we're shifting from a very high level of activity in oil and gas to an increasing level of activity in the retail sector. And if I said, I think we're a little surprised by the continued activity -- the level of restructuring activity over the last 12 or 18 months, given the strength in the economy, but we see some large trends at play that probably will propel it for the foreseeable future now. Will it propel it at the levels we've seen in the first half. I mean, I'm not predicting the future, but we have, obviously, one of the leading franchises in the world, if not the leading franchise. And I think we're pretty quick to react to what's going on in the marketplace as you can see with some of our recent assignments. So we feel pretty good about it.

Got it. Okay. That's great. And then, obviously, some really nice results within Asset Management. It seems like that momentum has continued here. Just with respect to flows, outside of the Global Thematics fund, which we all kind of understand the dynamic there, can you just speak to what you're seeing? And then maybe within emerging markets specifically, how much more capacity you have in the equities and debt strategies? And then the last part of that is just where the Global Thematics AUM stands now, but it sounds like there is some more outflow?

Matt, you want to comment on the Global Thematics?

Yes. So Global Thematics as of the end of the quarter was at $3.2 billion AUM, and we've experienced again this quarter some outflows -- net outflows of about a $1 billion in Global Thematics. But overall, I'd say the following. First is that with regard to flows for the first half, they were positive. With regard to -- and essentially flattish for the quarter -- this quarter, which I think is pretty good given the backdrop of the mass of money going into index funds. In terms of capacity, I think we're fine across the range of strategies, including the ones you mentioned. And in terms of outlook, we look at the unfunded commitments, and we feel pretty good right now. And I think it's always challenging when markets hit peak levels, institutions, in particular, are thoughtful about when and timing around commitments -- when they're going to fund commitments. But overall, the pipeline feels okay..

Okay. All right. Terrific. And then just last quick one here on expenses. The $25 million expense item. Can you just -- I kind of missed some of the detail there. What that was? And just thinking about how that should be reflected? Is it a -- just kind of pro rata over the quarters, or just how to kind of think about modeling that through?

So the comments there is twofold. Number one, with respect to the quarter, you've seen the earnings release and the footnote. We have excluded a charge of approximately $8.9 million associated with the cost of the implementation of this new financial systems, in particular, a new ERP system, okay? So that's for the quarter. What I said in my remarks is that the overall cost of implementation of that new system is approximately $25 million, though 9 of which we've expensed already in the first part of the year, the rest is going to come for the remainder of the year and maybe a little bit in 2018 as we're planning to be done with implementation in the first half of 2018.

Got it. Okay. And those expenses are going to run through the operating line, or they get adjusted out?

Yes. So on the -- exactly. It's been expensed every quarter on a U.S. GAAP basis. And in our adjusted numbers, the noncompensation is going to be excluding this charge every quarter as we're incurring the expense.

And we'll go next to Steven Chubak with Nomura.

Ken, I was hoping to dig into some of the commentary that you had given in terms of the restructuring outlook. It's certainly been a topic that's garnered a lot of attention from investors and even the press more broadly in terms of the challenges impacting the retail space. I suppose that my understanding was that relative to energy that those restructurings were much less involved and certainly less complex. And even though there certainly feels like there is a secular trend that could persist that the fee opportunity would ultimately be less. And didn't know if you could at least clarify whether, obviously, that take is mistaken? Or how you're thinking about the longer tail for the potential restructuring opportunity within retail?

Yes. Well, look, I would say that every restructuring needs to be generous. Each one is like an independent exercise. It depends enormously on the state of the company, the state of the capital structure, the state of the alternatives and state of the outside environment. So I'm not sure you can generalize that restructuring in the retail sector as simpler or less of an opportunity or the opportunity plus or minus then you could in any other sector, at least that's not our experience historically, every one of these is unique. And then the second question on the size of the opportunity. Look, part of it is just a function of how impacted companies are by shifting consumer sentiment -- consumer taste changes and also what's happening in terms of disruption from technology. I think we're seeing a massive amount of disruption to the retail sector right now. You've seen it in the department store space, you're increasingly seeing it in the supermarket space and then you're also seeing it in some of the specialty stores, as some of the traffic in the malls decline. So the sector as a whole is really facing challenges it's never had to deal with before. Number one. And then number two is, there is an obvious knock-on effect in retail that goes to real estate, which, I think, we're all keeping a careful eye on because that's -- some of the fortunes of the retail stores change so do some of the underlying value of the real state and, therefore, what happens to some of the real estate operators. So we're keeping a careful eye on that as well. But I think the theme is really one of disruption from technology and it really -- which of the sectors are getting hit. We saw that in oil and gas, we see it in retail, and I think over time we're likely to see it elsewhere.

And then just switching gears to the advisory side. Certainly, the backdrop, it remains fairly favorable. Ken, you cited your -- the ingredients, again, that support relatively favorable M&A backdrop from here. At the same time, you did note that you have pretty tough second half compares. And I'm just wondering how we should think about the revenue outlook for the second half. And more specifically, should we expect to see typical back half seasonality, which has historically been a very powerful thing within the M&A space?

Well, first, we really comment on pipeline and outlook. I don't think we've ever really commented on pipeline and outlook. What I would say is -- yes, you noted it. We as -- just mathematical, we had a very strong second half last year, which by definition means that whatever we're compare against is harder than what we were comparing against last year compared to the year before. So that just math. I think in terms of the environment, what happens in the third and fourth quarter is usually a function of what happened in the market, the 6 to 18 months before as well as the momentum in the market at that particular point in time. We feel pretty good about our market position. But this is a business, which has its ups and downs from quarter-to-quarter. But overall, I think our competitive position has never been stronger. We've sort of been hitting on all cylinders in -- at the firm, the advisory, restructuring, within advisory, the shareholder activism business or what we call Shareholder Advisory business, and then obviously, Asset Management. And so we feel pretty good about the franchise, and I think I'd leave it at that.

(Operator Instructions) And we will go next to Patrick O'Shaughnessy with Raymond James.

So despite your capital returns to date, your cash position is up about $300 million versus where it was a year ago. Would you guys contemplate any change to your capital return strategy, may be an ASR, maybe boosting your share repurchases to reflect that strong cash position?

Look, we've been very disciplined about making sure that at year-end when we see our full year results, we are very clear about returning cash to shareholders. We've been a disciplined, but aggressive buyer of our shares for the first half of this year. I think we continue to be disciplined about it in the second half of this year. And then obviously, when we get to year-end and we see full year results, we clear the cash and give it back to shareholders. If we haven't done it through buybacks, then we'll continue with our special dividend. It's been a good policy for us. It makes it very simple.

This now concludes the Lazard's conference call. We thank you for your participation. You may now disconnect.