Sculptor Capital Management Inc (SCU) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group's 2011 third quarter earnings conference call. My name is Kim, and I'll be your coordinator for today. (Operator Instructions) I would now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

Great. Thanks, Kim. Good morning, everyone, and welcome. With me today are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer and Senior Chief Operating Officer. I'd 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 fund. 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 welcome to our call today. This morning I will review our estimated year-to-date investment performance through October 31 and assets under management as of November 1. I'll also spend some time on the current investment landscape, the types of opportunities we are seeing, and our recent allocations of capital. Lastly, I'll share our perspectives on the environment for capital flows.

As you're all aware, the third quarter was marked by sharply lower equity markets globally and a significant increase in volatility. Rising concerns about the European debt crisis coupled with the potential for recession in the US and Europe and slowing growth in China eroded investor confidence and contributed to a general risk aversion across assets classes. While equity markets have rebounded from their September lows, unsettled conditions and high volatility persisted in October. Against this backdrop, the value we provide to our fund investors was again clearly evident. We continue to protect investor capital through our consistent and disciplined investment and risk management processes.

While the broader environment shapes our investment decisions, we managed portfolio exposures among our strategies in a systematic and thoughtful way. We maintained flexibility and nimbleness in how we allocated capital within our portfolios, taking advantage of investment opportunities while concurrently reducing exposure in areas where potential returns did not offset the increased risk. We are confident that the stability of our business and the diversification which results from our multi-strategy approach position us to successfully weather current tough market conditions. These attributes also position us to further capitalize on the investment opportunities that will arise from this environment. We believe that the secular growth drivers for our business remain intact over the long run.

Institutional investors continue to demonstrate a high level of interest in alternative strategies, although the timing of their capital allocation decisions is affected by both market conditions and longer internal processes. However, we are of the view that now more than ever these investors will actively seek access to absolute return strategies and investment managers that have consistently protected capital. We believe that we are well positioned to benefit from this dynamic and further increase our market share of future flows to the hedge fund industry.

Now let me briefly review our assets under management. As we announced this morning, our estimated assets under management as of November 1 totaled $28.9 billion, reflecting year-to-date growth of 4%, or $1 billion, from December 31. Of this amount, $1.1 billion was attributable to capital net inflows, partially offset by $100 million in performance-related depreciation. These amounts included $200 million of net inflows on November 1 and performance-related depreciation of $200 million the month of October. Furthering the trend we have seen over the last several quarters, our dialog with both current and prospective fund investors remains active. Our year-to-date net inflows have come from a mix of existing and new investors that is diversified both in terms of geography and type, and we are still seeing specific interest from pension funds and private bank platforms.

Now let me give you a quick update on our funds' investment performance. Year to date through October 31, our Master Fund was up 0.1% net, our Europe Master Fund was down 3.3% net, our Asia Master Fund was down 1.4% net, and our Global Special Investments Fund was up 3.1% net. These estimated returns were generated with, on average, one quarter of the volatility of the S&P 500 index. On a year-to-date basis, positive performance in our credit-related and convertible arbitrage strategies globally as well as long/short equities in the US was offset by negative performance in our other strategies. Since earlier this year we have gradually and systematically adjusted exposures in response to increasing concerns about the macroeconomic environment, the corresponding effects on markets globally and what we perceive to be changing risk profiles. We adjusted the allocations among all our strategies, increased cash in the Master Fund throughout the third quarter in response to the increasingly challenging market conditions.

The flexibility of our multi-strategy model allows us to rapidly adjust exposures, which is integral to our ability not only to protect investor capital but also to react quickly as new investment opportunities arise in a number of different asset classes. We continued to find interesting ideas in equities and credit and deploy cash in these areas during October. Equity markets globally have experienced significant dislocation, driven by macro factors rather than stock-specific fundamentals. We also believe that there will be additional opportunities that arise globally as increased capital requirements and continued deleveraging result in further asset sales.

Looking forward, we remain cautious about the economic outlook and the related timing of improved market conditions. However, we are encouraged by the global investment landscape, because we believe the dislocations created by the market turbulence in the past months have presented new investment opportunities. Additionally, higher ongoing levels of market volatility may also provide attractive opportunities to invest.

To sum up, we believe that our preparedness in this environment combined with the flexibility of our investment process enabled us to protect investor capital and leave us in a very liquid position to take advantage of new opportunities as they arise. The current market environment further serves to reinforce the attractiveness of absolute return strategies and the importance of manager selection. We continue to believe that our performance track record during this period and the stability of our business model will further increase our competitive positioning and therefore our market share over time. With that, let me now turn the call over to Joel.

Thanks, Dan. Today I will review our 2011 third quarter results and how we are thinking about expenses for the fourth quarter. I will also spend a little time reviewing our tax rate. We reported a GAAP net loss for the 2011 third quarter of $93 million, or $0.93 per basic and $0.96 per diluted Class A share. For your reference, a discussion of our GAAP results is contained in our press release.

Now let's turn to our 2011 third quarter economic income (audio skip). (Audio skip) totaled $124 million, of which $121 million was attributable to the funds segment and $3 million to other operations, remaining essentially unchanged from the 2011 second quarter as assets under management from to April 1 to July 1 remained flat. From July 1 through October 1, our assets under management decreased by approximately $800 million, as net inflows of about $400 million were more than offset by performance-related depreciation of about $1.2 billion.

Our average management fee for this period remained at 1.7%. Incentive income totaled $8 million during the third quarter and was all attributable to redemptions in the funds segment. Comp and benefits totaled $24 million, of which $23 million was attributable to the funds segment and $1 million to other operations, increasing 4% from the 2011 second quarter. Of the total, salaries and benefits were $19 million, with $18 million attributable to the funds segment and $1 million to other operations. This amount was essentially unchanged from the 2011 second quarter.

Third quarter comp and benefits also included $6 million of bonus expense, primarily related to bonus guarantees, which is essentially all attributable to the funds segment. During the third quarter the ratio of salaries and benefits to management fees remained at 15%. We continue to expect this ratio to remain at approximately 15% to 17% for the fourth quarter of this year.

Now turning to non-compensation expenses, non-comp expenses totaled $22 million in the third quarter, down slightly from the second quarter of this year. Approximately $21 million of this amount was attributable to the funds segment and $1 million to other operations. During the third quarter the ratio of non-comp expenses to management fees remained at 18%, and we continue to expect this ratio to remain at approximately 18% to 20% for the fourth quarter of this year.

Our third quarter effective tax rate was 42%. As a reminder, the tax rate in the first three quarters of each year is based on our estimate full year financial results and the related estimated full year effective tax rate. These estimates are subject to many variables which are not finalized until the end of the fourth quarter. The most significant of these are the amounts of incentive income we earn, the resulting flow of the revenue and expenses through our legal entity structure, and the effect that changes in our stock prices have on the deduction we take for vesting RSUs. During the third quarter, challenging market conditions had a significant effect on these variables. This resulted in a reduction of our estimates in relation to the overall economics of the business and therefore impacted the estimates of the third quarter and the full year effective tax rate. We anticipate that our full-year effective tax rate will be 28% to 31%. However, as always, this range could vary substantially should our actual economic results vary from our current estimates.

Our 2011 third quarter economic income was $87 million, and distributable earnings were $50 million, or $0.12 per adjusted Class A share. As we noted in our press release this morning, our dividend for the 2011 third quarter was $0.09. As in prior quarters, we used cash to fund withholding taxes that will be paid upon the vesting of RSUs and principal payments on our variable-rate borrowings.

In closing, I'd like to reemphasize our ability to protect fund investor capital in a volatile and declining market, which limits the amount of performance-related degradation to our assets under management. For example, the S&P index was down nearly 14% in the 2011 third quarter, while we were down substantially less than that. We believe that this is extremely valuable to our fund investors and therefore should enable us to further increase our market share of new inflows to the industry as global markets stabilize. The stability of our asset base in the short term and its growth potential in the long term combined with our long track record of generating risk-adjusted investment returns positions us to deliver strong future earnings growth. We accomplish this not only by generating management fees and incentive income on an increasing base of assets over time but also through the operating leverage that is inherent in our business. These two factors in turn will drive growth in our dividend.

With that, we will be happy to take your questions.

(Operator Instructions)

And your first question comes from the line of Roger Freeman, with Barclays Capital. Please proceed.

Oh, hi, good morning. It's Steven Truong here for Roger. Could you talk about the Master Fund and how the cash position, you mentioned that it has increased intraquarter and where it ended the quarter and where you see investment opportunities going forward, please? Thanks.

So, let me give you the whole allocation amongst the Master Fund amongst the strategies. So, long/short equity of 22%, convertibles are 13%, structured credit 18%, credit 12%, private investment 7%, merger arb 3%, and cash is 25%. And obviously that's at the end of the quarter, but, as you know, as we see opportunities, obviously, we're very nimble and those allocations can change and cash can go down.

And in terms of investment opportunity, what we did during the year and what we made clear to our investors was the following. Beginning in the spring, in response to deteriorating economic conditions in the US and our concerns about what was going on in Europe, we gradually and consistently reduced exposures and increased cash. Clearly, one of the things we were doing was protecting against some very significant risks in the world, and that's one of the most important things we do for our investors' capital. Joel did give you the numbers at the end of the quarter, at the end of September.

Looking forward in terms of opportunities, we see opportunities in many areas, but the two that we're focused on right now, and, as we mentioned, where we deployed cash in October, number one is certain credit and structure credit markets where dislocations presented opportunities, and number two is certain sectors of equity long/short where macroeconomic factors drove stock prices more than individual company fundamentals and created opportunities.

Okay, thanks. And then my follow-up question has to do with the investor appetite. You mentioned that discussions are taking time and that there's a bit of risk aversion. Maybe you can talk about how intraquarter how things have changed and how are things looking going into the fourth quarter here. Thank you.

Well, look, the timing of inflows is, as always, difficult to predict. We feel very good about both where we are and the dialog that we're having and, once again, how our performance, not just the risk management and the actual numerical performance, but how we got there, and the systematic nature of what we've done. And this is another -- we're not through yet, but this is another -- as of today this is another difficult market period and difficult economic period where our firm and our funds have preserved investors' capital.

We continue to see increased interest in absolute return strategies. The quality of the investor inflows as well as the conversations we're having continues to be very high. And we believe investors are very receptive and endorsing of Och-Ziff as a manager of choice.

Okay, thank you.

Your next question comes from the line of Marc Irizarry, with Goldman Sachs. Please proceed.

Great, thanks. Joel, can you just run through the guidance again on comp for the fourth quarter, and does that include cash bonuses? And then maybe just give us some perspective on how you guys are approaching comp this year. Thanks.

As I said before, 15% to 18% for salaries. I didn't give any guidance on bonuses because, as you know, bonuses are based on the overall economics of the firm, and we won't know that 'til the end of the fourth quarter, and at that time we'll determine what bonuses are going to be.

And then on the tax guidance, was that for -- you gave some guidance on the tax rate for the full year this year, so what sort of assumptions are you making in that tax rate in terms of the mix?

Well, as I said, 28% to 31%, you're right, as an annual rate. And, as I said earlier, what we do is we'll estimate economics for the firm for the full year and work that back into the quarterly rate. And obviously after the second quarter the world changed dramatically and so obviously our estimates changed in terms of overall economics for the firm.

Okay. And, Dan, can you just give some perspective on I guess there's the 45-day redemption notices that are happening industry-wide, you mentioned that -- and I think it's sort of proven out that you're gaining some share of the flows out there? What do you think is going to happen to the landscape of hedge fund flows when we sort of get past November 15 and some of the redemptions that are happening industry-wide? Where do you -- what sort of changes do you expect either in terms of the way people are allocating or maybe flows as they sort of will come your way?

We don't have that data yet, and I don't really -- it's hard for me to comment on expectations industry-wide. I don't think managers really know at this time, and we're going to have wait and see. I mean, we've seen some recent articles with some data. I don't get the data from other managers, so I accept that as accurate, but I can comment a lot about Och-Ziff and what we're seeing, but it's hard for me to comment on the industry looking forward.

Okay, so what are you seeing? I mean, are discussions that you're having with your clients telling you that you guys are in a position to take up some share here near term?

That's not the nature of the conversation, right? They don't really discuss in terms of share. I think that our clients are extremely comfortable with what we've done, what we're doing. I think that the organizational strength, I think that some of the recent articles you've seen in the paper have reminded clients that some of the things we do on the operational side in terms of portfolio finance and other aspects are also very important in protecting capital. And we're confident our clients feel very good about what Och-Ziff is doing. How macroeconomic events, how performance in other parts of their portfolio, how what other fund managers do impacts decisions they make in the short term we just don't know.

Okay. And then can you just talk a little bit about the regional or geographic exposures in Master Fund, in particular Asia within Master Fund? How are you thinking about sort of the investment landscape there near term?

Just to give you an idea of the geographic exposures at the end of September, US was 53%, Europe was 34%, Asia was 13%.

And in terms of how we're looking at Asia, I mean, look, each geographic region has its own nuances. Asia clearly is susceptible to and being impacted by events in the US and Europe. Another very important factor going on in Asia these days is the monetary tightening in China and some views as to whether that's going to continue or whether it's closer to its end. We commented on finding opportunities in equity markets where there have been substantial dislocations based on macroeconomic factors more than fundamentals. You've seen the indices in Asia and what they've done year to date. And suffice to say that we are finding opportunities within Asia, both on the credit and equity side.

Okay, great. Thanks.

Thank you.

Your next question comes from the line of Cynthia Mayer, with Bank of America-Merrill Lynch. Please proceed.

Hi, good morning, thanks a lot. Maybe just to follow up on the question of cash bonuses, back in '08 you were able to provide some cash bonuses despite horrible market environment that year, and I'm just wondering what your thoughts are around if you were to finish the year flat, if the markets remained really volatile through the end of the year, you remained highly in cash and the performance was basically flat, what would your thinking about bonuses be?

Well, Cynthia, you know we value our employees, and of course the stability of the infrastructure and the firm, but, as I always tell you, we have to wait and see where the economics of the firm will end up. We don't predict performance, and therefore we'll have to figure that out. But, and, again, keep in mind that we do pay compensation and bonuses both in cash and stock, as well, so that's something to keep in mind.

Okay, great. And then, Dan, you alluded to opportunities from further asset sales, and I'm just wondering, were you thinking of investment opportunities or acquisition opportunities? I wasn't quite sure what you were alluding to.

Investment opportunities. Financial institutions globally have large amounts of assets that they are looking to sell and are likely to continue to look to sell. So, as an example, while the situation in Europe is not resolved, part of the proposed resolution is increasing capital requirements for European banks. One of the ways that banks can increase their Tier 1 capital ratios is to sell assets. And so it's something we've been doing a lot of in certain regions of the globe. We have worked very hard to build our capabilities in each geographic region to suit the sourcing opportunities and analytical needs in each of those regions. As a general matter, more of those assets the past two years have been coming for sale in the US. Our expectation is that the flow from Europe will pick up in the future, and we're very well prepared for that.

Okay. And then maybe you could just talk a little bit about demand by geography, because you guys sell worldwide. Are you finding that Europeans are interested in more absolute return or simply more frozen in terms of putting money into anything, and also just on the Europe Fund itself, what is demand like there? And, yes, I guess, just what's demand for that fund like?

We haven't seen any significant changes in investor appetite in the different geographic regions versus where it was at different points during the year.

And the Europe Fund?

The demand, and Joel can give you the numbers as to where things are, we have not -- the demand primarily has been for the global multi-strategy fund, as has been the case for the past couple of years. We have not seen significant demand for either of the regional funds. And I think that's because investors look at the environment, look how quickly things change and prefer that we make those regional allocation decisions.

And the breakout of AUM by region, just to give you an idea, 71% is from North America, 18% from Europe and then the rest is a mix of Asia, the Middle East and other. But that's not significantly different from what you've seen in prior quarters.

Great. Thanks a lot.

Thank you.

Your next question comes from the line of Robert Lee, with KBW. Please proceed.

Thanks. Good morning, guys. Going back to the tax rate, Joel, would it be possible to get a little bit more color on kind of what changed between August 2 when you gave some guidance to what ends up being the tax rate? I mean, was it mainly the 25% decline in the stock price? Is there any one or two things you could point to specifically that drove that big change in the tax rate?

Well, there are many factors, but the two most significant, as I mentioned before, would be the amount of revenue and expense, how it flows through the model, and, of course, the RSU deduction, which is based on the tax rate. And, as you know, the -- based, rather, on the share price, and as you know the share price declined over the quarter. So I think that those are important factors. And, again, I think those are critical in determining how we're going to get to our annual economics and how that affects the tax rate and how we push it back. However, again, obviously it's -- the guidance I gave you for the year is actually, I think, pretty solid guidance, and also we're very comfortable with that.

The other thing to look at, Rob, which might be helpful, is if you look at 2009 and 2010 and you look at the quarterly tax rates and the annual tax rates, that'll give you a flavor of how the quarters changed based on how the year ended up. So I think that's a good thing to look at to give you a better sense. But in general I think both those things should be helpful.

Okay. And second, another question, if I may, on kind of capital management and the distribution. If memory serves me, I think you have about another year or so, maybe a year and a half or so, left on your term debt. I mean, how, if at all, do you think with that starting to come up as you get into 2012, how might that affect your distribution, if at all? Is it going to make you more prone to wanting to build some cash, incremental cash over the next year or so ahead of having to refinance that or maybe pay it down? Kind of how are you thinking about that?

Look, we are constantly talking about it and thinking about it, but it will not affect the distributions at all. We will distribute the majority of our distributable earnings. That's the plan. That's always been the model. We'll continue to do that. But obviously we continue to discuss and focus on what we'll do with the debt and how we'll deal with it.

All right. Great. Thanks for taking my questions.

Your next question comes from the line of Bill Katz, with Citi. Please proceed.

Hi, good morning. This is Neil Stratton filling in for Bill. A question for Joel around the non-comp and salary guidance that you gave. As we look ahead over the next six to 12 months do you see any pressures on these ratios going forward beyond 4Q?

No. No, not at all. I think the one thing to keep in mind, and especially on comp, the business will hire people as necessary, as we need them, and as it requires. However, as assets grow management fees grow, and so that -- we're very comfortable with those ratios, and we don't see material changes.

Okay, thank you.

Thank you.

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

Thanks, Kim.

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.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect, and have a great day.