Lazard Inc (LAZ) 2018 Q2 法說會逐字稿

Good morning, and welcome to Lazard's Second Quarter and First Half 2018 Earnings Conference Call. This call is being recorded. (Operator Instructions) At this time, I'd like to turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our conference call to review Lazard's results for the second quarter and first half of 2018. Hosting the call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Evan Russo, Chief Financial Officer. A replay of this call will be available on the Lazard website beginning today by 10 a.m. Eastern.

Today's call may contain forward-looking statements. These statements are based on our current expectations about future events and are subject to known and unknown risks, uncertainties and assumptions. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

These factors include, but are not limited to, those discussed in Lazard's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely 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 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 Evan 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. Today, we reported the highest operating revenue for any quarter in our history and a record first half, surpassing last year's record levels. Revenue for the last 12 months was a record $2.77 billion. These achievements reflect the scale and diversity of our model, the breadth and depth of our global franchise and the investments we are making to generate growth.

In Financial Advisory, our results reflect broad-based activity by practice and by geography. The robust global M&A market for large strategic transactions played to Lazard's strengths. We were an adviser on 4 of the 10 largest global transactions announced in the first half of the year as well as the 4 of the 10 largest completed.

We are seeing healthy M&A activity across the Americas, Europe and Asia. Cross-border activity remained strong. In the second quarter, almost 60% of our announced transaction volume was cross-border.

All of our Financial Advisory practices are active globally. Restructuring activity is steady. Our Shareholder Advisory practice continues to win assignments in the U.S. and Europe. And our Sovereign Advisory and Capital Advisory businesses continue to advise governments and corporations on financing strategy and capital raising.

The first half of the year has been a period of expansion for our Financial Advisory business as we continue to see growth opportunities. We have made a number of senior-level hires in Europe and the U.S. to complement internal promotions. We are also investing in technology to enhance and differentiate our client advice, especially in the Shareholder Advisory area.

In Asset Management, we achieved record second quarter revenue and a record first half revenue, reflecting the strength and quality of our global franchise.

Average AUM in the second quarter declined slightly from the first quarter of 2018 but is near historically high levels.

We continue to invest in organic growth in Asset Management through the incubation, development and scaling up of strategies. We recently announced new funds in global commodities and hedge convertible strategies and we plan to launch additional funds in the near future.

We are also investing in technology to support the development of existing and new strategies, including in our quantitative and multi-asset businesses. We continue to evaluate key lift-outs and similar inorganic growth opportunities in Asset Management.

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

Thank you, Ken.

Our second quarter and first half results reflect continued high performance across the firm.

Quarterly operating revenue of $741 million was an all-time record, 3% higher than last year's record level.

First-half operating revenue of $1.47 billion was also a record, 9% higher than last year's record level.

Our second quarter diluted net income per share on an adjusted basis was $1.10 per share, up 12% over last year's quarter. And for the first half, it was $2.35, up 30% over last year's first half.

In Asset Management, operating revenue for the second quarter was 7% higher than last year. Management fees and other revenue was 9% higher but declined 2% in the first quarter of this year, reflecting lower average AUM. Operating revenue for the first half was a record, up 13% over last year.

AUM as of June 30 was $238 billion, 5% higher than a year ago but 6% lower from the end of the first quarter this year. The sequential decrease of $14 billion reflected negative foreign exchange movement of $8.1 billion, market depreciation of $1.8 billion and net outflows of $3.8 billion.

The foreign exchange impact and market depreciation primarily stemmed from our emerging market platform, where the strengthening U.S. dollar had the greatest impact. However, our emerging market strategy experienced minimal net outflows in the quarter.

As of July 20, AUM was approximately $241 billion. This increase reflected market appreciation of $3.1 billion, net inflows of more than $500 million and negative foreign exchange movement of about $150 million.

Regarding Financial Advisory. On our prior earnings call, we said we expected challenging comparisons to last year's record second quarter. While the comparison was indeed challenging, we achieved a slight increase in revenue. This reflected accelerating momentum through the quarter and a few transactions that closed more quickly than anticipated.

For the first half of the year, Financial Advisory revenue increased 8% over last year's record first half.

Looking ahead across our franchise. Asset Management is navigating volatile markets. Average AUM is starting from a lower base compared to the first half of 2018. But in the first 3 weeks of July, we have seen a positive trend. In Financial Advisory, we see positive momentum across our practices and regions.

Turning to expenses, we are maintaining our comp discipline even as we invest for growth. In the second quarter, we continue to improve compensation at a 55.8% adjusted compensation ratio. For the first half of 2018, our 55.8% ratio compares to 56.5% last year.

Our adjusted non-compensation ratio for the second quarter was 16% compared to 16.1% in the second quarter of last year. While our non-comp ratio is currently at the low end of our target range over the cycle, we expect quarterly variability of non-comp expenses as we continue to ramp up our investments for growth.

Turning to taxes: Our effective tax rate for the second quarter as adjusted was 26.9%. For the first half of the year, the tax rate was 20.4%. We continue to expect an annual effective tax rate for this year in the low 20s. In the coming years, we continue to expect an effective tax rate in the mid-20s.

In regards to capital allocation, we continue to generate strong cash flow, which supports our share repurchases and dividends. In the second quarter, we returned $139 million to shareholders, which included $78 million in share repurchases. For the first half, we returned $588 million to shareholders, which included $224 million in share repurchases.

Ken will now conclude our remarks.

Thank you, Evan.

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

Overall, the global macroeconomic environment remains positive for the near- to mid-term despite significant volatility in global markets during the second quarter. The U.S. economy is robust with strong growth and generally high levels of CEO confidence. The environment in Europe has improved, emerging markets have been pressured by strengthening of the U.S. dollar in 2018. But earnings growth in those markets and profitability are expected to be relatively strong this year.

The overall environment remains healthy for M&A. Confidence is generally high among business leaders, financing is available, valuation has generally remained reasonable. Technological disruption is spreading across industries and driving strategic activity. And shareholder activism campaigns are at an all-time high as activist investors expand globally.

Both of our businesses are well positioned in this environment.

In Financial Advisory, we have an unrivaled global platform and deep resources to advise clients on their most important strategic decisions. We are serving them with proven expertise and innovative analytical tools across industries and geographies.

In Asset Management, we are serving a global, primarily institutional, client base with a diversified set of investment strategies and solutions. And we continue to extend our platforms through the seeding of new strategies, lift-outs and fund launches.

Our record performance in the quarter, the first half of the year and over the last 12 months underscores the strength and stability of our franchise.

We see opportunities for growth across our firm. And we are investing accordingly. Since the start of the year, in addition to our internal promotions, we recruited 12 managing directors and 4 senior advisers in Financial Advisory, in Europe and the U.S. We have recruited portfolio management teams in international value and alternative strategies. We've expanded our global distribution network for Asset Management in Asia Pacific and Europe. And we have increased our investment in technology across both our businesses to support existing and new investment strategies in Asset Management and to refine new tools in Financial Advisory.

We remain focused on serving our clients well, while we manage the firm for profitable growth and shareholder value over the long run.

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

(Operator Instructions) We'll first go to Mike Needham of Bank of America.

I have a couple of questions on your growth opportunity. You touched on them a bit in the prepared remarks. First, on the advisory business, it seems like that business is already pretty big, like a fairly comprehensive advice network. You have added a significant number of people over the last 2 years. Can you just talk about where you're seeing the most opportunity to pick up share?

Sure. If you look at just this year, the first part of the year, we made a bunch of hires in Continental Europe. Some of that was to reinforce already a strong position there and to also build out capability in a couple of the industry groups and also our Shareholder Advisory practice in Europe. And then the balance of the hires has been in the U.S. this year. And those hires really reflect what we perceive to be just a significant opportunity for us in still our best -- one of our best markets to continue to build out here. We just see a lot of opportunity in the U.S. untapped (inaudible).

Okay, great. And then a similar question for Asset Management. You touched on, I think, global commodities and the hedge fund space. If you kind of step back and think about like the biggest opportunity to grow that business, I'm sure it depends on how some of the strategies pan out in terms of performance. But in addition to those areas, maybe just try to size the hedge fund opportunity in terms of the platform you want to grow. And then if you could also touch on quant investing and fixed income. Fixed income used to be a pretty big growth driver for the firm.

Okay. So let me start with quant. That's probably been our most significant success over the last few years in terms of launching of new platforms. And we see really significant opportunity in that area, both in terms of the capabilities that we have today, the capabilities that we're developing today in-house, and also adding to them through lift-outs of specific teams, either -- that are hedge funds or long-only strategies that complement that business. So that's an area where we see a lot of potential for growth. And that product is both a domestic product as well as an international product. And it also has the facility to be able -- we're able to adapt it to specific strategies, a little like what we've done with a robotics fund in Japan, which is now, I think, a $10 billion platform for us. And then in terms of other areas, I think the whole area of smaller hedge funds, that's been a very difficult place for people to develop their businesses. And we see a lot of opportunity there to lift out teams and then put them on the Lazard platform, get the benefit of our marketing groups and our research and our other capabilities. And we've done quite a bit of that in the last several months or so. I think we've now brought in about 3 platforms over the last 6 months or so in that regard.

Okay, got it. And if you have any comments on fixed income, you guys had attracted quite a few assets a few years ago.

Yes, I think on fixed income, the area where we've had the greatest success is in the emerging markets, debt and currencies, that's turned into quite a franchise for us. And we're always -- and we have a very strong but small and very well-performing traditional fixed income business. And the question for us is really where we see an entry point to grow that business.

We'll next move to Brennan Hawken of UBS.

I'd like to maybe start really broadly here. Today's results really underscore how your -- the fundamentals of your business have decoupled with Lazard shares here recently with the stock coming under a decent amount of pressure, it's leading to a lot of frustration for shareholders. So have -- and I'm sure it's a frustration with you as well. Can you maybe share some thoughts on what you guys think you can do about this disconnect, and the fact that Lazard shares, the discount to peers is increasing and where you think there might be a lack of understanding?

Sure. Look, this isn't the first time that we have decoupled from peers. I mean, this has happened -- there have been air pockets in terms of valuation at other times. They tend to be associated with periods where there's volatility in currencies or in markets outside of the U.S. And the second quarter was a particularly volatile period, both in terms of currencies in developed markets. I think there were movements of more than 5%, which is, I think, a couple of standard deviations away from the norm in that regard. And obviously, there's been a lot of turmoil in terms of the emerging markets over the last quarter or so.

And so what -- historically, if you look at the performance of Lazard shares, when you see events like that, oftentimes you see a decoupling of our share price from our peers. As frustrating as that is, it just sort of seems to happen when you get that mix of factors.

And then second is, look, the reality is we are a mix of Asset Management and advisory. The advisory firms that our peers tend to be starting from a smaller base, higher growth rates in some cases but not necessarily in all cases compared to us over the last several years as a result of that. And then second, are very domestic in terms of their revenue mix, so are kind of pure plays in the U.S. economy at the moment. And if you look at us, we're a more diversified platform. And then on the Asset Management side, if you look at our -- the people that are our Asset Management peers either in the U.S. or Europe, actually the performance of their stock prices, either on an absolute basis or on a TSR basis, are worse than ours, significantly worse than ours. And when you look at the 2 together, I mean, I think we're trading at a discount right now, significant. But I think a lot of it maybe -- and some of it maybe associated with this mix of factors in the quarter. Hopefully, we'll see us revert to the mean or beyond that. I think that Lazard deserves a premium valuation. We have the 2, I think, best franchises out there in the advisory side and on the Asset Management side. I think over time, hopefully a short period of time, people will recognize that because of the strength of the earnings and of the cash flows and the durability of the franchise and the fact that over long periods of time, the volatility of our revenues are much lower than the volatility of the revenues of our peers on both sides of the business.

Yes, that's really helpful, Ken. One of the things that you touched upon was the recent volatility in the dollar, which it's been my experience, a lot of this has led to some concern around the Asset Management business. Have you considered that sometimes -- given these periods of volatility and the decoupling and the concerns around Asset Management, have you considered maybe disclosing monthly AUM the way some of your other Asset Management peers do, which might improve visibility, given that you have a more institutional band, and therefore visibility in the AUM isn't as strong, given some of the typical public data that's available?

I must say I think that having been through this a couple of times now, I think your point is well taken. It's something that we really have to reflect on. I think that in the past, we've seen this, it's come up. I think this time around, we should go back and really reflect on that. Thank you for the thought.

Sure, glad to. One more, there's been something else that's happened this quarter that's been pretty topical, which is that some of the alternative asset managers have announced that they're going to convert over from partnerships into C corps. Have you been paying close attention to those developments? Is that something that you all are -- the positive reaction in those shares, it might be informing or playing into how you guys think about your own legal structure? And has it led you to maybe consider that decision that you made on the C corp last quarter as a more fluid thought process?

So I think there have been 2 conversions so far. One, if I'm not mistaken, was Ares and the second is KKR. I think on Ares, that's hard to read anything into that in terms of the impact of the C corp. On KKR, I think there's been a positive impact so far. A little -- I think obviously, overall, alternatives have done well and KKR has done better obviously than some of their peers since the announcement. So look, as I said, when we came to our conclusion last quarter, we felt at this time, given the impact of tax on our business, very significant impact of tax on our business, that this wasn't, we felt, an attractive decision at that time. But obviously, we will carefully follow the market events. KKR hadn't done the conversion at that point. We will watch carefully how it's evaluated by the market over the next period of time to see if the impact is sustained. And then we also have to keep looking at our business and evaluating it versus the cost of making the conversion. And also keep in mind, a lot of the benefit here comes from the lowering of the U.S. tax rate, corporate tax rate. And the durability and sustainability of that decrease in the U.S. corporate tax rate is what is substantively behind the advantage of converting to a C corp. And that's something we'll also going to have to keep an eye on, given the political winds.

We'll next move to Ann Dai with KBW.

This is actually Matthew Gruseke on for Ann. Overall, just kind of looking at the deal environment as a whole, how have you been viewing talks with management, given trade tariffs and everything going on in the kind of political sphere? Has that been affecting certain segments of the market more or sectors of larger, mid-sized deals? Any commentary on that?

Sure. So look, just a backdrop, the macroeconomic environment is still very strong, particularly in the United States. It's improved in Europe. And the rest of the world, a little more mixed but generally speaking, strong and probably the best it's been in quite some time. I think in terms of the other factors that drive M&A, as a result of that, confidence levels are high. Interest rates remain quite low relative certainly to where we are in the cycle, macroeconomic cycle. And valuations while a little rich, I think, because of the strength of the economy, the expectation is people are going to grow into these valuations. And then as a backdrop, the catalyst, which is a big driver of activity right now, is technological disruption. And you can kind of see that or signs of it in almost every single deal. Trade tensions are a new phenomena. They are -- right now, if you look at the substance of it, it's mostly rhetorical. The impact from a macroeconomic standpoint is still pretty small. Where it potentially has an impact is, as you saw this morning on the NXP transaction, deals that have complicated regulatory paths in China will probably -- there will be some impact, potentially some impact. Deals from China into the United States, which is pretty small volume historically, will be affected by this. And it's just another consideration that goes into thinking about how you evaluate a deal if you're a Board of Directors or a CEO or a management team. It's something which probably wasn't on the table 6 or 9 months ago or a couple of years ago. It's something that has to be built into one's thinking when thinking about a deal. For now though, most of this is rhetorical. And I think the impact of it, if there is an impact of it, will be felt as it -- if it becomes real. And I don't think we'll have a real sense for that over the next 6 months -- 6 to 9 months for now. So it's a long way of saying that to date, it really hasn't had much impact. I think going forward, it's another consideration. But given the strength of the environment in the U.S. and the fundamentals around M&A, it shouldn't have much of an impact. And where it will have a substantive impact is going to be on the odd deal or the deal which has a complicated regulatory path in China is my guess.

Just one more follow-up question on kind of emerging markets and kind of the view of in that space. Client sentiment around EM as a whole on the Asset Management segment, has there been real decline in interest there? Because you said earlier, net flows were down this quarter but wasn't contributed by emerging markets. So just wondering maybe where -- any color on where those outflows might come from.

Sure. A couple of comments on that. The first is on sentiment around emerging markets. This isn't the first time there has been a selloff in emerging markets, or there has been dislocations in currency markets. I mean, this phenomena has happened multiple times over a few decades and is not a new phenomena. I think sentiment around emerging markets is something, which for long-term investors in the emerging markets is something that people kind of build into their thinking about being an investor in these markets. And you have to look at it on an overall long-term period of time. And institutions are still relatively underallocated to emerging markets globally. And on top of that, when you look at the valuations in emerging markets today, they're pretty compelling compared to most other periods of time. So I think that's first. Second is when you look at the Lazard business, the flows for the quarter, we had net outflows, but they were relatively speaking pretty small. And when you look across the breadth of the outflows, they were dribs and drabs across a bunch of different strategies really not associated particularly with any particular theme or particular performance. It just seemed to be a quarter where we had small outflows across a number of different strategies. Nothing was particularly concentrated in one strategy and wasn't particularly concentrated in a particular strategy which was under our outperforming indices. And most of the deterioration in the AUM for the quarter, virtually -- large portion -- very large portion of the deterioration of the AUM for the quarter was foreign exchange, which was simply the underperformance of the developed world currencies and emerging world currencies versus the dollar this quarter.

We'll next hear from Devin Ryan of JMP Securities.

I just have a few follow-ups here. So I guess, first, I'd love to dig in a little bit more to some of the comments on Europe and the tone there and really into when you look at your kind of leading franchise, does it feel like Europe is steady, just at a better kind of base than maybe it had been at? Or does it actually feel like it's still gaining steam? And really what I'm trying to get at here is what your sense is of kind of maybe where we are in Europe and maybe this part of the cycle relative to some other cycles that we've seen where Europe has been more robust and how that compares to kind of where we are in the U.S., where obviously you flagged how strong things are.

Yes. So M&A markets are kind of funny. They don't have a steady up or a steady down. They tend to do these things in step functions. And it doesn't always happen on a straight line. And there's a little bit of inconsistency between it. I think overall in Europe, it's a much better atmosphere than it was a year ago or 2 or 3 or 4 years ago at this time macroeconomically. And we've seen a pretty -- a strong improvement in activity. And I think we expect to see that continue. There's been -- on a local basis in France, we have a very, very strong position right now. On the continent, a very good position. U.K. remains pretty active even in spite of the tensions around Brexit. So overall, it feels good in Europe. And we've seen a significant pickup in activity over the course of the last 12 to 18 months or so. But like everything, we can see spurts up in the next quarter or the quarter after. It's hard to predict. We could see some falloffs. But generally speaking, the backdrop around M&A in Europe is pretty good right now.

Okay, great. And then with respect to advisory, I kind of heard the comment that the second quarter included maybe a little bit of timing, where some deals closed that you hadn't thought would as of kind of the comments from last quarter's earnings call. Because I know last quarter, you had suggested that the bar was quite high from the second quarter of last year for advisory. And obviously, you guys even exceeded that, so kind of a huge blow-out quarter here. How does that change the expectation on the full year? I think as of last quarter, kind of the view was the back half of the year should even kind of gain steam. So I'm just curious if kind the timing of some deals closing changes that at all. Or is there still kind of a positive expectation for the back half?

Look, when we ended the year last year, we said that we thought the comps for the first half were going to be very difficult and the second half, easier. Actually, the comps for the first half turned out to be beatable. And I think we did very well. And I think Evan alluded to the fact that there were probably a couple of things that closed a little earlier. But I think the overall strength of the quarter really was from the fact that a lot of things happened that we didn't anticipate happening just because the market was good and our market position is strong. So I think that's a positive sign. We don't -- I think the point that we made in the last year about the second half still feels pretty good to us. I mean, it's a -- the comps are a little bit easier and the second half of the year still looks pretty good. And obviously, like everything else, it depends how the year unfolds -- July. June, July, August are important times to build backlog. And then you kind of get lucky in September and October. But the tenor of the market in the fall has a lot to do with how the year ends. And we're not there yet. But it feels pretty good.

Okay, great. And then just last kind of quick one here on kind of clean-up modeling. If you gave it, I missed it on just where kind of the AUM is quarter-to-date. And then also just on the tax rate, what drove that higher than kind of the full year guide this quarter?

Sure. So AUM, we said, as of July 20 was approximately $241 billion, so an increase of a little over $3.5 billion since the end of the second quarter. With regards to the tax rate, so tax rate over the first half of the year blended came in about 20.5%, which is in line with our expectations for the year -- full year. We said it was going to come in low 20s. First quarter, as you remember, we report a low tax rate as we announced because of the accounting for stock-based compensation, which provides the discrete tax benefit that we get in Q1. So we're averaging back out in the low 20s. And we expect that as our current estimate for the rest of the year as well.

Thank you. We have no further questions in queue at this time. This now concludes the Lazard conference call.