Sculptor Capital Management Inc (SCU) 2015 Q2 法說會逐字稿

Good morning, everybody and welcome to the Och-Ziff Capital Management Group's 2015 Second Quarter Earnings Conference Call. My name is [Zhu], and I'll be your operator for today.

At this time, all participants are in listen-only mode. (Operator Instructions)

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

Thanks, Zhu. Good morning everyone and welcome to our call. Joining me today are Dan Och, our Chairman and CEO and Joel Frank, our CFO. As a reminder, today's call may include forward-looking statements, many of which are inherently uncertain and outside of our control. Och-Ziff's actual results may differ, possibly materially, from those indicated in these forward-looking statements. Please see our 2015 first quarter 10-Q and the press release we issued earlier today for a description of the risk factors that could affect our financial results and our business and other matters related to the forward-looking statements. The Company doesn't undertake any obligation to update publicly any forward-looking statements.

During today's call, we'll be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with US GAAP. 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 our website.

No statements made during this call should be construed as an offer to purchase shares of the Company or any interest in any Och-Ziff funds.

With that, I'll now turn the call over to Dan.

Thanks, Tina. Good morning everyone and thank you for joining us today. During the second quarter, our funds performed well capping a strong first half and we are extremely pleased with our performance across all asset classes this year. During the quarter, we further diversified our business mix and made progress with the development of new product offerings. In our experience LPs are migrating to alternative managers who have not only demonstrated consistent performance, but who can also offer products and investment expertise in a range of asset classes outside of the traditional alternative allocation. This select group of managers, of which we believe we are one, has the size, scale and brand that enable them to identify and capitalize on emerging opportunities globally.

While we have experienced net outflows year to date, we do not believe that current flow trends are reflective of the future growth potential of our business. We believe we have built a significant competitive advantage in each of our strategies which in turn has enabled us to diversify our business and build scale in these areas in a short time period as we've done with our credit business.

Additional areas of the credit market such as European CLOs and private real estate credit represent opportunities we can take advantage of due to the investment expertise we have built, the synergies between our teams and the scalability of our business. The strength of our investing capabilities is also enabling us to consider adding to existing product offerings such as [USIPs] as well as asset classes we have demonstrated a strong investment capability over a number of years such as energy.

We believe that our ability to expand our business by building on our inherent competitive strengths is attractive to LPs. This has been demonstrated by LP interest in our real estate credit and energy strategies.

In the last three years our assets from products other than a multi-strategy fund have increased more than fivefold to $15 billion as of June 30. However, we believe that we are just in the beginning stages of the growth that will result from the diversification of our business and the resulting effect we'll have in our AUM and earnings. With that, let me briefly review our products.

At the end of the second quarter the AUM in the multi-strategy funds totaled $33 billion, decreasing 3% year over year. The OZ Master Fund has performed well this year. Through June 30, it has generated a net return of 4.1%, and extended that performance last month and in July with the year-to-date return of 4.8%. The majority of this performance has been driven by our long/short equity strategy reflecting the strength of our global equities team. This positioning is not an expression of a particularly strong view on the direction of global equity markets as we believe that equities in total are generally fairly valued, rather reflects our conviction in the individual investments in our portfolio, the relatively large number of opportunities that we're seeing and our view that the current investment environment is conducive to stock picking. It also demonstrates the value of our active risk management which gives us the ability to change exposures rapidly. We believe our investment performance continues to position us as a leading manager for multi-strategy absolute return products.

Separately, we are excited by the opportunities we're seeing in Asia, particularly in China, Japan and India. We believe the ongoing expansion of regional capital markets, specifically the liberalization of the financial markets in China, will create compelling stock pick and capital market opportunities amid significant volatility in the years ahead.

Volatility in Asia is a concern for less experienced investors in the region but with a deep bench of local investment professionals at over 14 years of on-the-ground investing experience, we believe we are well positioned to take advantage of the opportunities volatility creates. Our investment performance in Asia this year reflects these competitive advantages and we believe these dynamics should result in attractive investment opportunities as well as growth in our Asian platform.

The AUM in our dedicated credit products totaled $11.7 billion at the end of second quarter, increasing 29% year over year. The assets in our opportunistic credit funds totaled $5.1 billion, increasing 2% year over year. Of this amount, the OZ Credit Opportunities Master Fund, our global opportunistic credit fund totaled $1.6 billion, increasing 59% year over year and generated a net return of 1.1% year-to-date through June 30 and an annualized net return of 15.7% since inception.

In recent months, credit market suffered due to the drop in commodities and energy prices resulting in steep losses in many high-yield and similar credit instruments. We were patient investors amidst this downturn and are pleased with the performance of our credit funds given challenging market conditions. We are beginning to see pockets of opportunity emerge in certain areas, specifically in energy and believe our patience will be rewarded with compelling opportunistic investments in the near term.

Our closed and optimistic credit funds performed well with gross IRRs of 18.6% to 24% since inception and gross MOICs of 1.4 to 2.1 times. The assets in these funds declined by $665 million year over year, resulting from distributions made during their harvest periods.

The assets of our Institutional Credit Strategies platform totaled $6.6 billion at the end of the quarter increasing 63% year over year. This growth was driven by our CLO business. In the last 12 months, we have closed four CLOs adding approximately $2.1 billion of additional fee generating capital to our asset base.

As part of our expansion of the ICS platform we introduced an open-ended loan fund during the quarter. This fund is another example of how we're taking advantage of our expertise in the credit markets.

The assets in our real estate fund totaled $2 billion at the end of the quarter increasing 9% year over year. We have begun to invest our third opportunistic real estate fund while [our second] funds are in the harvest periods having delivered significant value to the LPs invested in them. They have generated strong returns with gross IRRs of [25.1%, 36.1%] and gross MOICs of 1.7 to 2 times on total invested capital.

We continue to broaden the scope of our real estate investing activities taking advantage of synergies between our real estate and other investing teams. The real estate credit fund we introduced in the first quarter of this year is an example of that. We are also evaluating investment opportunities outside the US and our real estate team is working closely with our credit and equities teams to identify new investments.

We believe that over time this will drive growth not only in our optimistic real estate business but also enable us to introduce innovative new products with the benefit of our LPs.

With that, let me now turn the call over to Joel, who will take you through our financial results.

Thanks, Dan. For the 2015 second quarter, we reported GAAP net income of $5 million or $0.03 per basic and diluted Class A share. The press release we issued this morning contains a full discussion of our GAAP results and is available on our website. On an economic income basis our second quarter distributable earnings were $95 million or $0.18 per adjusted Class A share and our dividend was $0.14.

Now turning to the details of our economic income results, our total revenue for the 2015 second quarter were $199 million, declining 13% from the first quarter. Management fees were $167 million, a slight increase from the first quarter as our average assets under management grew. Our average management fee for the second quarter was 1.42%. Incentive income totaled $32 million resulting from crystallized incentive on longer-term AUM as well as from redemptions. The decline in incentive income compared to the first quarter of this year was primarily due to the tax distributions we took in the first quarter that were not repeated in the second quarter.

Now for a brief recap of our economic income operating expenses, our 2015 second quarter comp and benefits expense was $33 million. Of this amount salaries and benefits were $28 million, essentially unchanged compared to the first quarter of this year. The remaining $5 million was bonus expense. Salaries and benefits were 17% of management fees in the second quarter. For the third quarter, we anticipate this ratio will remain in the range of 17% to 19%.

Our 2015 second quarter non-comp expenses were $51 million, 26% higher on a sequential basis. This increase was primarily due to the higher expenses related to legal and regulatory matters. Non-comp expenses were 30% of management fees in the second quarter. In the third quarter, we expect this ratio will increase to a range of 35% to 37% due to the increased legal expenses relating to the ongoing FCPA investigation.

However, we continue to remain hopeful that this increase will normalize by the end of this year. Our effective tax rate for the 2015 second quarter was 17%. For the third quarter and full year, we estimate that our effective tax rate will be in the range of 17% to 20%.

In closing, I'd like to re-emphasize the importance of the diversification of our business and the growth in assets under management and in turn earnings. As Dan mentioned, the diversification of our business is increasing rapidly with about a third of our assets under management investment products other than on multi-strategy funds. The breadth and depth of our investment teams in each of our strategies has been essential to the success we have had to date in diversifying our business, not only in establishing our presence as a manager of dedicated credit, real estate and equity products, but in building scale as we've done in credit. Because we are a leading alternative manager, we continually see a broad range of investment ideas globally. This allows us to identify and capitalize on emerging trends and build new investment platforms around them creating value for our LPs.

As the market for alternative products grows in areas that have traditionally not been open to us such as core, fixed income or equity is driving significant incremental demand. This is a secular trend we believe will not only increase industry capital allocations but also influence which managers will be leading beneficiaries.

We believe the long-term growth potential for our business is substantial. Our business has size, scalability, global presence and investment expertise to meet the growing demand for our existing products and innovative new ones as investors' demand evolves. These attributes are sustainable competitive advantages that will continue to differentiate our business across our platforms and drive asset growth. As our assets grow and our business diversifies further, we expect that growth and consistency in our revenue and earnings will increase.

With that, we will now take your questions.

(Operator Instructions) Bill Katz, Citi.

Just wanted to sort of counterbalance your commentary of feeling good about growing the business from here versus some of the real-time trends. When I look at the Master Fund, you've had outflows now for four quarters in a row. Sort of wondering can you sort of talk through what some of the drivers of the attrition has been? Obviously, performance is pretty good year to date, but nonetheless how much of it is related to, maybe just asked differently, can you sort of talk to the breadth and depth of where the attrition is coming from?

Sure. I mean, look, we found historically flows in all our products tend to be episodic and the key is, again, you've seen over 20 years since we've been public, we generate performance and manage risk and do all the other things that we always talk about. Then we establish and maintain our position as market leaders both in individual products and with institutions and other investors overall, and we're very confident that that is going to continue.

The performance in the Master Fund continues to be strong. We think it's providing what clients are looking for. They're getting a deeper and deeper knowledge of what we do and how we do things. If you look our credit products -- our credit and other products have gone fivefold over the past several years. We think we've got a lot of room there as well. So we think that if we continue to maintain performance and other capabilities that our multi-strategy products will maintain the market-leading positions while we grow other products. And exactly how that growth ebbs and flow is hard to predict.

Okay. Just a follow-up question, you mentioned China, India and a few other areas as sort of big areas of growth. China seems to be some controls being put in place by the government there. How much exposure do you have to Mainland China? I think one of your peers recently was sort of shut, at least temporarily, and is that having an effect on your ability to drive performance in that region?

Look, you've seen the performance both in -- July was the difficult time period in China. You can see the performance in the multi-strategy fund was positive, you can see the Asia Fund did get back some part of its profits, but we think risk was actively managed very well there.

We've been in Asia for 15 years now and we've seen number of different cycles. We've seen a lot of firms come, go, come and go again and come and go again during our 15 years. We've got over 40 people on the ground. We think we have the market-leading presence and capability. We think that these are very large countries with very large economies with a lot of growth and change in front of them and being on the cusp of that is we think is going to work well for our clients.

Robert Lee, KBW.

I guess maybe first question, just kind of curious on the kind of distribution payout ratio. I mean historically you've run kind of 90% plus in terms of your distribution versus the DE. This quarter I think it's around 75%, 76%. I mean, was there -- can you maybe talk about that a little bit and should we expect that maybe in subsequent quarters you have to go back to kind of the historic payout ratio or is there something going on that may keep it at a little lower level for a while?

No, look I think, Rob, it's generally the same reasons we've had before, whether it's RSU settlements, CapEx, taxes. Again, I think you'll see it range -- the range will vary as we go across quarters, but I think this range to a little bit higher range is what you should expect across the board.

Okay. And then I'm just kind of curious in terms of from a fund raising perspective, and I know you can't comment on specific accounts, but I guess it's been public. State of New Jersey has committed more money, but I think it's also public knowledge that they get somewhat of a fee holiday, I guess, for a period of time and some new capital, I guess. I guess my question is if you have committed capital that hasn't yet started earning fees I assume that's on your AUM, is it possible to kind of quantify that kind of dry powder so to speak that has already been committed to you guys but hasn't yet shown up in the asset levels?

No, look we're not going to talk about specific investors and specific flows. I mean, you did see that there is a commitment and whenever we could obviously, we would, but we're not going to talk about specifics.

Okay. Let's see, what else. I guess, a follow-up question is over the last several years business has kind of seen some shift in your client base towards, I think, more pensions, more institutions. I don't have [the various figures right] in front of me. And I'm just kind of curious, I mean, how has that impacted the sales process to the extend, maybe consultants get more involved in the process and maybe -- and I don't know to what extent maybe that because of some of the ongoing investigations that's kind of slowed the new sales process, but I'm just kind of curious how maybe the dynamics have changed as the client base has shifted and if actually the consultants are kind of more involved because of that?

Well every client base has its unique features. At the end of the day our goal is to have the best products and capabilities, figure out where the opportunities are going to be, design the process to get those clients. So you are correct, over the past several years our focus has been on private banks and on pension funds, primarily because we thought that was where the best opportunity was. And you've seen large increases in both areas because we have the products and capabilities and we executed the sales process properly.

Going forward in addition to those areas, we think there are some new areas and channels that will exist for us and we're taking the same approach, have the best products, have the capabilities, think about how the channel works or how the clients work and accommodate that. So our growth with private banks and pension funds has not only been the multi-strategy fund, but it's also been with our other products and so we think that having all the teams work together, the products, the sales force, the other parts of the organization is what clients are looking for and it works well.

I appreciate your patience with my questions. Just one more quick one. You had mentioned -- I guess you had launched an open-end fund. And I think I missed the last part of it, was that a pay loan fund, bank loan fund and can you maybe just update us what channels that's being distributed through?

It's an institutional credit fund and it's through our -- we distribute it through our normal channels, nothing unusual.

Gerald O'Hara, Jefferies.

First, it's clear that product diversification strategy is well underway, but it also appears then the multi-strategy outflows are edging out newer product inflows. Can you maybe give us a sense at how mainly discussions are progressing with some of the quote-unquote early inning products? I mean, which you are seeing the most traction with or which kind of have the most opportunistic outlook for?

Well, we have a number of different things going on and it's sometimes hard to [give] exactly how they're going to play out. You saw that there was an announcement made several months ago by the BBC that we're going to be sub advising on. We talked about real estate credit and some of the other things that we may do there. We talked about energy. In addition, some of the more established new products such as the institutional credit side, we have a lot to do there. So CLOs clearly have been growing very well. Joel has mentioned the loan fund which is something relatively new.

So while it's hard to predict, we're going to do our best to post you, number one, on what the new products and initiatives are. And then as they grow and develop -- as a general matter, as they grow and develop and the assets become more relevant, we will post you accordingly.

Okay, that's helpful.

I think the key is more irons in the fire, more opportunities for growth, more areas where we think we can demonstrate that we excel. And you saw that at the beginning of this year, on the fourth quarter earnings call when we released the credit and real estate returns historically. I think that's -- for those who hadn't been exposed to them on a consistent basis, it was very clear that the performance was very, very strong, very consistent to a lot of different cycles. And our view is that we can continue to show that in different areas we're going to continue to do well in terms of the new product growth.

And I'll add even on a new product front and all those different things that we're doing, it's not just throwing something against the wall and see what works. There is investor interest in all of them and that's one reason why we're developing them in accordance with what expertise we have. Hope that's helpful.

Yes, absolutely. Thank you. And then just as a follow-up, as it relates to the ongoing legal investigation, I understand you probably can't give much details here if anything at all really, but is there any color at this point, probably a question for Joel, with respect to any potential future non-comp legal accruals and actually just sort of a tie-on here, I suppose, is this a topic that's been coming up in client discussions for potential mandates? Thank you.

Well, first in terms of the investigation there are different progression points. So that's going to affect expenses. But we're hopeful that the effect to non-comp will moderate by the end of the year and we're hopeful the investigation is over by the end of the year, but it's something that I can't predict. In terms of conversation with investors, yes, of course there is going to be something I would discuss, but it's not a major focal point.

Craig Siegenthaler, Credit Suisse.

First, just coming back to net flows, were there any large redemptions in the negative $1.1 billion of flows in the multi-strat funds?

I'm sorry, could you ask that again. I'm sorry, didn't hear.

Any unusually large redemptions, I wonder if you could call out maybe the one or two largest redemptions in there or was it spread across a wide base of clients?

Yes, it's spread that goes a wide base of clients.

And then third quarter performance fees always have that seasonal step-up, can you help us with what we should be expecting for the 3Q15?

I'm sorry again, I didn't hear what you said.

During the third quarter you typically have a step-up in performance fees, pretty large in last two years. I'm wondering if you could help us with your expectations for the third quarter.

Well, look, it's not necessarily third quarter. That's going to -- the first three quarters are going to vary based on what we crystallize in terms of longer-term assets and redemptions and such, but the fourth quarter is when we collect the majority of our incentive. So, I will give you guidance when I can on specific items that I know are going to come. And in terms of the third quarter at the moment, there's really not much guidance that I can give you.

Okay. If returns this year is shaping up to be similar last year and the asset base is somewhat similar, could it be pretty close to last year?

I mean, it could be, but I can't project because we don't know what performance is going to be through the end of the year and of course, we don't know the asset levels at the end of the year. So it's very hard to project and it's something I wouldn't predict. I think what you do is follow the returns that you see so far year to date, you can make some assumptions if you'd like to do that through the end of the year, but we can't predict returns.

Got it. And just one last one here on OZ Master. Equity long/short, you've seen the highlight that it's the major driver of positive performance recently. What were the major drivers against that, what were weighed on that return?

Well, you are not going to be weighed on it, we were generally positive in all investment areas, but the largest allocation was to the equity long/short and as a general matter, the best performance was in the equity long/short.

Michael Carrier, Bank of America.

Just another question, just on the outflows, I guess, overall, but focused on a multi-strat, I know you said over the years you had periods where you had these episodic times where you do have outflows. Just wanted to get a sense like when you go through those periods, what typically has been the driver and I think we've seen with some firms in the industry where they made -- really successful in bringing in money in a period of time and then you go through a period where in that region or that segment of the market you see redemptions for a period of time just because they were actually very successful and then you see some of the reallocations going on. So just wanted to get any sense of if that's part of the driver, if there's any capacity issues because it just seems -- it does seem strange given the performance versus the industry in seeing good consecutive quarters where you are seeing outflows?

Well, it could be a number of different factors. And I think what's key for us is we believe very strongly, given the performance in those products in particular that all the issues relate to the category itself, whether it's multi-strat or however the category is grouped. So what we've seen -- I believe your question was kind of what the factors are and maybe what turns it. We never know what turns it. Having said that, historically we've always seen that as long as we're performing and we're doing the right things, it has always turned and we're very confident that it will turn again.

Okay. And then just a follow-up, some of the newer areas where you're diversifying, just wanted to get an update on the outlook when you see -- when you think about the funds that are in the market, what the fund raising potential is. And then I think from a shareholder's standpoint when we think about the economics typically a lot of the growth has been coming [from like] the CLO side. Just wanted to get an outlook on that in terms of the fees and how we should be thinking about that coming down to distributable earnings. I guess my point is in some of these products are you at scale or does the increasing scale continue to benefit the overall operating leverage in the business and margin?

Well, the products themselves, both the overall category, we think there is a substantial amount of growth and the individual products we feel the same way. So on the credit side, on the real estate side and some of the areas, we mentioned during the call while we're pleased with a fivefold growth over the past several years we think that we're at the beginning stages of that expansion and that capability. As a general matter, we feel the same way.

The different products that we mentioned that we've recently announced, whether it's the loan fund, the real estate credit opportunities, some of the others, we think there is big potential there.

In terms of the economics, I mean obviously it's hard for us to predict, but I think the easiest way obviously to model is using the overall AUM and the average management fee. And our concern is not, hey, you know what, this product has a lower fee than the other product. It's just an additive to our AUM and to our investment process. That's the big positive to us because it generates revenue and the majority of our products to-date have a 20% incentive fees and gives us the opportunity to earn a considerable amount of incentive income.

Ken Worthington, J.P. Morgan.

This is Will Cuddy going in for Ken. Our questions are already asked and answered. Thank you.

Bill Katz, Citi.

Thanks for taking my follow-ups, just two of them. Joel, you mentioned that you hope that the elevated G&A might dissipate by the end of the year. Does that mean that the fourth quarter is most likely to be elevated as well or would the fourth quarter potentially be lower than the third quarter?

Well, we'll see. Again, it's a process I can't predict, and I'll give you guidance like I always do, if it's something if it's going to be lower or the same or whatever, when we get to that point, you'll know in advance.

Okay. And then just a follow-up. In terms of the change -- not change but the payout of the distribution -- dividend, how much of that relates to potentially some legal uncertainty or capital that's necessary for building up some of these newer products versus just a change in policy?

None of it relates to any legal uncertainty. Some of it -- I think the real answer focusing on this stuff is if we think there is value in retaining some of this to see some of our products, which we do. In other words, if it's retention of capital for different products, we're going to do that. We think that's the value, we're going to do that. But we're going to discuss it and you'll get a sense of it.

So, there is some investments we're making in certain products as an example. It could be CLOs, it could be other stuff we're doing, but you're going to get a sense over time whether we think it's more valuable to retain that cash to invest in products or distribute it. But in general, I think we're going to remain around this level for a while. If that's going to change obviously we'll talk about it with you.

Thank you for your questions. That concludes the question-and-session for today. I will now turn the call over to Ms. Madon.

Thanks, Zhu, and thank you everyone for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to give me a call at 212-719-7381. Media inquiries should be directed to Jonathan Gasthalter at 212-687-8080.

Thank you for your today's participation in this conference. That concludes the presentation. You may now disconnect. Have a very good day.