Sculptor Capital Management Inc (SCU) 2011 Q1 法說會逐字稿

Good morning, everyone, and welcome to Och-Ziff Capital Management Group 2011 first-quarter earnings conference call. My name is Carissa and I will be your coordinator for today.

At this time all participants are in a listen-only mode. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

I would now like to turn the call over to Tina Madden, Head of Investor Relations at Och-Ziff. Please proceed.

Good morning, everyone, and welcome. With me today are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer.

I would like to remind you that today's call may include forward-looking statements. These statements reflect the current views of management about, among other things, assumptions with respect to levels of assets under management, future events, certain expense levels, and financial performance, many of which, by their nature, are inherently uncertain and outside of our control.

Och-Ziff's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of the risks that could affect our results, please see the risk factors described in our 2010 annual report. The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.

During today's call we will be referring to economic income, distributable earnings, and other financial measures which are not prepared in accordance with US Generally Accepted Accounting Principles. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on the Class A shareholders page of our website. Furthermore, no statements made during this call should be construed as an offer to purchase shares of the Company or an interest in any Och-Ziff funds.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group LLC. Telephonic and webcast replays will be made available later today. You can find the details for both on our website at www.ozcap.com.

With that let me now turn the call over to Dan.

Thanks, Tina. Good morning, everyone, and thank you for joining our call today. This morning I will review our year-to-date investment performance through April 30 and assets under management as of May 1. I will update you on the environment for capital flows and also discuss the investment opportunities we are seeing.

Our year-to-date performance has been strong and we believe it demonstrates the value of our investment process to our fund investors. This was particularly evident during March and early April as uncertainty increased and market conditions became more difficult. We continue to generate positive, non-correlated, risk-adjusted returns and to protect investor capital in declining and volatile markets.

As always, the quality of our investment returns is a function of the discipline with which we invest to manage risk. Our performance also demonstrates the flexibility that both our multi-strategy approach and international capabilities provide. These attributes allow us to quickly respond to changes in the economic environment and to capitalize on investment opportunities globally, even when market conditions are unsettled.

While we can't predict future performance, these attributes have been integral to the consistency of our returns over time. We have a long history of generating strong returns for our fund investors because our diversified model enables us to capitalize on a broad range of opportunities across global markets without excessive exposure in any one asset class or geography.

Institutional investors are increasingly seeking to mitigate risk and enhance investment performance through investment strategies that generate risk-adjusted returns which are not correlated with the markets. We believe this is reflected in accelerating inflows into the hedge fund industry relative to the second half of 2010. Absolute return managers who can demonstrate their ability to consistently generate non-correlated returns are particularly well-positioned to benefit from this dynamic.

We believe that our active risk management process, our limited use of leverage, and our emphasis on portfolio diversification have been key elements to the consistency of our investment performance and they position us to continue generating strong non-correlated returns going forward. We are confident that these attributes have increased our institutional differentiation, which we expect will enable us to attract a significant share of future industry inflows.

Now let me turn to our business results. As we announced this morning, our assets under management as of May 1 totaled $29.4 billion, increasing $1.4 billion or 5% from $27.9 billion on December 31 due to $1.1 billion of performance-related appreciation and $400 million of net inflows. These amounts included $200 million of performance-related appreciation for the month of April and $200 million of net inflows on May 1.

Our dialogue with both current and prospective fund investors remains very active and we continue to see strong interest from a diverse mix of investors globally. However, I want to re-emphasize that the criteria for manager selection continue to evolve and become more rigorous, resulting in longer approval processes as investors seek to make careful decisions about who they will invest with for the long-term.

In addition to focusing on attracting assets to our main platforms, we continue to look for new ways to expand our product offerings to meet the requirements of current and potential fund investors. These offerings, in turn, broaden our ability to grow assets under management.

For example, in April we launched the European UCITS platform. This platform gives investors in certain geographic regions the ability to access components of our European multi-strategy product. While we anticipate that the growth of this platform will take time, it provides us with an additional opportunity to increase and diversify both our investor base and our assets under management.

Additionally, we have recently closed our second real estate fund bringing total real estate-related assets to approximately $1.1 billion. We continue to believe that there are a broad range of attractive investment opportunities in this sector, which also benefits our main fund by providing access to idea flow relating to distressed assets.

Now a quick update on our funds investment performance. Year-to-date through April 30 our Master Fund was up 4.1% net, our Europe Master Fund was up 4% net, our Asia Master fund was up 2.4% net, and our Global Special Investments Master Fund was up 5.5% net. These returns were generated with a fraction of the volatility of the S&P 500 Index.

Our year-to-date performance was primarily driven by our credit-related strategies and equity long short as we saw a diverse range of high-quality investment opportunities worldwide. We continue to be optimistic about the current environment which plays to the strengths of our investment capabilities. As I mentioned on our last call, we see increasing opportunities in merger-driven investment due to the ongoing restructuring of business globally.

We also believe that there are attractive opportunities to invest in distressed and dislocated assets as institutions seek to improve their balance sheet through the sale of a variety of assets. Additionally, we continue to believe that our international capabilities are becoming more and more important given the lack of synchronization between leading global economies. A well-established international presence is an essential component to identification and execution of high-quality investment opportunities.

Our business outside the US is substantial and we have had a long-standing presence in London and Hong Kong. These attributes are important to our fund investors and we believe they are creating an increasing competitive advantage for us within the hedge fund industry.

To sum up, we believe that our history of generating strong, consistent, non-correlated investment returns, the flexibility of our multi-strategy approach, and the strength of our international capabilities are distinct advantages to our business model and position us to attract a meaningful share of new industry inflows over time.

With that let me now turn the call over to Joel.

Thanks, Dan. Today I will review our 2011 first-quarter results and discuss how we are thinking about expenses for the second quarter. For the 2011 first quarter we reported a GAAP net loss of $95 million or $0.99 per basic and diluted Class A share. As always, a discussion of our GAAP results is contained in our press release for your reference.

Now let's turn to the details behind our 2011 first-quarter economic income beginning with revenue. Management fees totaled $118 million, of which $114 million was attributable to the Fund segment and $4 million to Other Operations, a 5% increase from the 2010 fourth quarter. The increase was primarily attributable to approximately $1.3 billion of growth in assets under management from October 1 to January 1.

From January 1 to April 1 our asset under management grew an additional $1.4 billion to approximately $29 billion due to approximately $950 million of performance-related appreciation and $450 million of net inflow.

Our average management fee remains at approximately 1.7%. This is a blended rate that includes the effective of our non-fee-paying assets. Incentive income totaled $7 million during the first quarter and was all attributable to the Fund segment. The majority of this total resulted from amounts taken to cover tax liabilities related to incentive income on assets under management subject to longer-term measurement periods.

Now let me turn to the 2011 first-quarter expenses. Comp and benefits totaled $23 million during the first quarter with $22 million attributable to the Fund segment and approximately $1 million to Other Operations. Of the total, salaries and benefits were $18 million, which was essentially all attributable to the Fund segment. This amount reflects a decline of 4% from the 2010 fourth quarter.

First-quarter comp and benefits also included $6 million of guaranteed bonuses, which is essentially all attributable to the Fund segment.

Salaries and benefits were 15% of management fees in the first quarter. We expect this ratio to be approximately 15% to 17% of management fees for the second quarter of this year.

Now turning to non-compensation expenses. Non-comp expenses totaled $21 million in the first quarter, remaining essentially unchanged from the 2010 fourth quarter with approximately $20 million attributable to the Fund segment and $1 million to Other Operations. Non-comp expenses totaled 18% of management fees in the 2011 first quarter. We expect this ratio to be approximately 18% to 20% for the second quarter of this year.

Our 2011 first-quarter effective tax rate was 19%, unchanged from the 2010 fourth quarter. Second quarter we estimate that our effective tax rate will be in the range of 19% to 22%. Our 2011 full-year effective tax rate is subject to variables that we can't determine until the fourth quarter of this year. As a reminder, these include the amount of incentive income we earn, the resulting flow of revenue expenses through our legal entity structure, and the effect that changes in our stock price may have in the deduction from vesting RSUs.

As a result of these factors, our full-year tax rate can vary by a substantial amount from our estimate. Our 2011 first-quarter distributable earnings was $65 million or $0.16 per adjusted Class A share. As you saw in our press release this morning, our dividend for the 2011 first quarter is $0.13 per Class A share.

As is typical, we use cash to fund items related to the operation of our business. The most significant of these were withholding taxes to be paid upon the vesting of RSUs and principal repayments on our variable rate borrowings.

In closing, I would like to again emphasize the relationship between growth in our assets under management and the earnings power of our business. Growth in our assets under management results from both investment performance and new capital inflows. Equally important is our ability to protect investors' capital in periods when markets are declining or volatile.

Preservation of capital is not only important to our fund investors, but is also essential to sustaining our future earnings power which benefits from an asset base that has suffered from little performance-related degradation. Growth in assets under management drives growth in our management fees and incentive income as we continue to generate consistent, positive returns on our larger base of assets.

The scalability of our business complements this dynamic, which has been evident in our results over the last six quarters. We expect that growth in our total revenues will continue to more than offset any increase in our operating expenses over time and the resulting margin expansion flows straight through to our distributable earnings and dividends.

With that we will be happy to take your questions.

(Operator Instructions) Dan Fannon, Jefferies.

Good morning, this is actually [Jerry O'Hara] sitting in for Dan today. Can you just speak briefly to the demand you are seeing in the longer-term three-year lockup product? Is it sort of being -- are the flows directed more to the traditional share classes? And then was this as a temporary reaction to the financial crisis or something along those lines?

The inflows aren't weighted in any significant way towards the three-year tranche. So there is certainly interest in it from some of the larger longer-term investors, but we are not seeing -- the flows are not significantly weighted towards that tranche.

Okay, thank you. Just one additional question. Can you also, shifting gears, speak to the breakdown of the Master Fund portfolio by investment strategy as it currently stands?

Sure, let me do that. Long short equity special situation is 40%, convertible arbitrage 17%, structured credit 17%, general credit 12%, private investment 7%, and merger arbitrage 7%.

All right. Thank you very much.

Cynthia Mayer, Bank of America Merrill Lynch.

Good morning. Just wondering, the new usage format, does that in any way compete with separate accounts for the same clients?

No. First of all, the usage platform is -- the product itself is a component of our European multi-strategy, so it is not the same as the European multi-strategy. And it is specifically designed for a different class of investor, a class of investor who is primarily focused on usage itself.

So while we think it's going to take time to grow and develop our capabilities in that area, we believe it represents a new avenue of potential AUM.

Okay. And how is the strategy different exactly?

The strategy only contains certain components of the European multi-strategy product. As a general matter, it is skewed towards the more liquid strategies.

Got it, got it.

Now that is designed, number one, to suit what the UCITS investor is looking for; number two, specifically not to just offer another alternative for an investor to switch from one fund to the other.

Right. You mentioned that the approval process is a bit slower. I am just wondering if you can flesh that out a bit in terms of how much slower and are things taking an extra three months or longer. And what particularly is being added in terms of due diligence and that sort of thing?

And you are referring, in this question, to the general institutional process? Not --

Yes, yes. Not UCITS, I am sorry.

Sure. Look, the type of investor, be it pension fund, sovereign wealth entity, as a general matter, number one, larger dollars are available. Number two, what we think it's a good thing to focus on --manager selection is more important than ever.

It's not just about returns and risk-adjusted returns. It's operational due diligence. It's longevity of the team. It's understanding our processes. Look, it's things that we absolutely welcome and things that play right to our competitive advantage.

We talked about our international capabilities. To the extent that a client wants to take the time to go to London or Hong Kong and see what we and others have available, we welcome that. We think that absolutely highlights some of the differentiation at Och-Ziff, but obviously that takes more time.

To the extent they want to do real operational due diligence we absolutely welcome that. So we feel very, very good about the process taking place. But having said that they can take longer than some of the processes that existed four or five years ago.

Okay. And then just maybe a quick question on strategies. In convertible, I am just curious if you are finding that the universe of converts available is at all constraining in terms of the amount of money you can put to work there. Because it hasn't really grown over the last few years, right, and in some cases has shrunk?

Look, we invest in convertible arbitrage generally for two reasons. Number one, to the extent that we see profit and alpha opportunity in convertible arbitrage. Number two, given the fact that certain attributes of the convertible arbitrage strategy hedge the rest of the portfolio.

But you are correct that as a general matter opportunities in convertible arbitrage -- as credit spreads have tightened -- as credit spreads have tightened globally, convertible spreads have tightened along with them. And I think it's fair to say that a large component of our convertible arbitrage allocation these days is protection for the rest of the portfolio as opposed to a pure alpha opportunity.

And I will add that is just the beauty of being multi-strat and multi-geography. It gives you other opportunities to place money in other areas that might be more attractive.

And as I think we said, Joel, on the call, but the areas that we are particularly excited about today, number one, the event driven area. The world is in an event-driven cycle and that clearly plays to our strengths.

Number two, buying distressed and dislocated assets, particularly in the structured credit area, both in the US and Europe. And you have seen that in the allocation and the profitability. Number three, as we keep harping on, the international differentiation. We have got roughly 50% of our assets invested internationally, and those are the areas that we are most excited about right now from an investment performance point of view.

Okay. Maybe I could just ask one last modeling question. I think you had incentive income that was a little bit higher than I expected since it's not 4Q. Is that a function of clients exiting or is it a function of just different timing for some clients?

No, the distribution relates to incentive income accumulating in the longer-termed asset classes, which are taxable even if they are not crystallized. So we are allowed to take distributions to cover those tax liabilities.

Now, Cynthia, also you should note that typically -- we can't predict performance, we can't predict returns. We don't know what the incentive is going to look like in those tranches, but typically you will see distributions like this end of year to the first quarter of the following year.

Okay. All right, thanks.

Roger Freeman, Barclays Capital.

Good morning in here. It's Steven Truong here for Roger. Can you give more color around the flow picture? It seems like industry trends are a little bit more robust, and why do you think that is? Thank you.

Well, industry trends are certainly a little bit more robust. We actually -- we are confident that industry trends are gone to become more robust.

We will speak mainly to the case of what we see here at Och-Ziff as opposed to the industry, but to the extent institutional investors and, quite frankly, all investors globally are looking for steady, consistent, positive returns. They are looking for non-correlated returns.

They are looking for firms with long track record. They are looking for firms with real business models. They are looking for firms where they can understand where the excess return is generated and have confidence that it will be generated going forward.

And we believe that that will lead to accelerating inflows, not just into the industry but in particular into the managers that participants believe can deliver that.

Okay. And in terms of client types, can you give the break down and perhaps give some color as to what you are seeing in terms of trends? How that may look a year from now, say, in terms of that mix?

Sure, let me give the breakdown. Pension 24%, fund to fund is about 21%, foundation and endowments 15%, corporate and institutional about 12%, private bank 11%, affiliated is 9%, and family office individuals 8%.

And can you give underlying trends in terms of how you see this mix shift perhaps going forward?

Sure. Look, trends are difficult to predict but based on where the liquidity is and where the interest is -- pension funds, sovereign wealth entities, private banks -- we also believe that corporate pension funds are -- represent a significant opportunity, given how many dollars are there, the attractiveness of the strategy, and the current penetration.

At the margin, endowment to the foundations have less liquidity than they have had traditionally and already have significant investments in alternatives.

Okay, thanks. In terms of the UCITS, can you talk about the opportunity? Are you looking to launch additional funds there? How big can that fund potentially get to?

At this point we have no further plans to expand our UCITS alternatives or UCITS platforms. Many of the things that we have done, whether it's the work we did years ago with pension funds, the work we did several years ago with private banks, start off small and have the potential to be larger.

But we tend to be slow and methodical. We really focus on doing things that we think benefit our current investors. We really think that that is important and that is why we have designed the UCITS product in this way.

Okay. And then last question just in terms of modeling, it looks like the bonus line came in at you said $8 million. That is a little bit higher than the run rate for the first three quarters last year. I just wanted to see what is going on there.

Basically in that number is a one-time payment. You will probably go back to normal levels over the next quarter.

Okay, thank you.

Kenneth Worthington, JPMorgan.

Good morning. I wanted to go kind of dig into the sales figure a little bit for the quarter.

Performance remains solid, consistent, I don't know, very good. You didn't gain -- you got a great brand name. It seems like you have got all the pieces to be the asset gatherer of choice in your field. The sales reported, just to make it apples-to-apples, $151 million. A year ago you did $1 billion, second quarter $1 billion, and it has kind of slowed since then.

Can you tell us a little bit possibly more about what is going on beneath the surface there? It kind of feels like you are extremely well set up and the last three quarters have had organic growth, which has been positive but maybe uninspiring given how well you seem positioned.

Sure. First of all, I do want to be clear, our goal is not to be the asset gatherer. Our goal is to be the manager of choice based on what we deliver. It's the results that will drive the growth in assets.

I think your arithmetic is accurate. The first quarter was a slower number than what our run rate had been. Clearly, you have seen -- as we told you then, month to month is not something to focus on. Obviously the last two months have been better in terms of trend, but we want to -- will repeat, month to month shouldn't be focused on whatever direction things are moving in.

We remain very confident, and I think you laid out the case very well. But we remain very confident that there is significant demand for what we can provide. That manager selection is crucial and that flows into the industry are going to accelerate and that we will benefit from that.

Okay. Maybe just expanding on that a little bit is it possible to talk about the sales pipeline? I am not sure that that is really all that relevant, but just in the context of the conversation how do you think -- you mentioned, I guess, earlier in the call that you thought later in the year things would continue to get better.

Does the sales pipeline -- does your specific sales pipeline feel good? Do you think 1Q -- we will see acceleration in Q2 given the pipeline? Again, flavor would be great.

Sure. We don't have a pipeline. It's not the nature of the business in terms of things lined up with expectations in certain months. But in terms of the conversations we are having, the types of indications we have received, how the processes are evolving, what we are hearing from consultants about where institutions are and what they are looking to, put that all together we feel very good and we are very confident.

I can't predict what month or what quarter that kicks in. But if you ask how do we feel based on that about the future, we feel very good and very confident.

Great, thank you very much.

Marc Irizarry, Goldman Sachs.

Great, thanks. Dan, can you talk a little bit about the -- just getting back to the net flows for a second -- the redemptions that -- the gross redemptions versus the gross subscriptions? When you are seeing redemptions from the -- on a quarterly basis or annual business what is sort of driving it, and is capacity becoming any more or less of an issue than you have seen in the past?

First of all, capacity is not becoming an issue at all. I think people are recognizing, if anything, that we are getting bigger, stronger, more capable. They look not only at total AUM, but AUM in each strategy, AUM in each geography. When investors drill down and see the resources that we have relative to the assets invested, if anything, I think they see more capacity and more capability.

In terms of the flows, most of the -- to the extent they are redemptions they tend to be the two things. Number one, some legacy from the crisis investors who had gotten hurt during the crisis and haven't fully rebounded. As a general matter, though, we think the trend in redemptions, both at Och-Ziff and for the industry, are returning to more normalized pre-crisis levels.

Okay. Then if we could just go back to the UCITS platform. There seems to be a little sense of convergence between the institutional world and the retail world. What do the fees look like on the product there?

I know you were a little hesitant to mention what the sort of capacity could be for UCITS as a vehicle for gathering assets, but any help you can give in terms of how you plan to move ahead strategically in UCITS would be helpful.

Look, the fee structure is similar to the fee structure for other funds. I am not -- we are not so much being hesitant in terms of what we are saying as much as it's something that is hard to predict. We think that the UCITS structure overall is at the early stages of its development. So if you look at other firms that have issued UCITS products, we believe with our brand name and our capability there is no reason that what we do shouldn't move to the forefront of those levels.

Having said that, we also think that the UCITS platform overall has the ability to move to greater levels over time. There are a large number of institutional investors around Europe who, for various regulatory and reporting reasons, are looking to invest substantial sums through UCITS platforms that couldn't go directly into funds.

So as I said, if you look at the numbers that have been achieved, we see no reason that over time we shouldn't move to the forefront of those levels. And everything we have seen has indicated that should be the case. Then we think there is more potential over time.

Okay, great. Joel, just a couple of questions for you. Could you just talk about the balance sheet and sort of how we should think about your -- the use of capital? It looks like the share count is drifting up a little bit. And then also can you just sort of address the debt going forward?

Yes, look, we are focused on the debt. We are constantly talking about it and we will develop a plan over time to deal with the debt.

In terms of the share count, obviously there is growth related to compensation. You know that our MD structure, their portion of the compensation, is paid in stock, so I think you have a sense of that and you can see what the growth has been. So I think it's going to be normalized based on that, but it does vary with those compensation levels.

And has there been any change in the way you are thinking about compensation relative to stock versus cash on an annual basis? And then, Joel, maybe you could just tell us headcount at the end of the period and sort of projections for this year?

In compensation, nothing has changed in our compensation model in the way we think about it. And in terms of headcount, we are at about 409 people total as of the end of the quarter.

Great, thanks.

That concludes the question-and-answer session today. I will now turn the call over to Ms. Madon.

Thank you, everyone, for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to contact me at 212-719-7381. Media inquiries should be directed to George Sard or Jonathan Gasthalter at 212-687-8080.

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