Q3 2021 Lazard Ltd Earnings Call
Yeah.
Good morning, and welcome to the Lazard third quarter and nine months 2021 earnings Conference call. This call is being recorded currently all participants are in a listen only mode. Following their remarks, we will.
Will conduct a question and answer session and instructions will be provided at that time.
If anyone should require assistance during the call. Please press the Darcie followed by the zero on your Touchtone phone.
At this time I would like to turn the call over to Alexandra Deignan.
Lazard head of Investor Relations and corporate sustainability. Please go ahead.
Thank you and good morning, welcome to Lazard to earnings.
First nine months of 2021, and Alexandra Deignan, the company's head of Investor Relations and corporate sustainability. In addition to today's audio comments, we've posted our earnings release and Investor presentation, which you can access on our website. A replay of this call will also be available on our web site. Later today before we begin let me remind you that we may make forward looking statement.
It's about our business and performance.
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, including but not limited to those factors discussed in the company's SEC filings, which you can access on our website. There's art assumes no responsibility for the accuracy or completeness of forward looking statements.
There was no duty to update.
Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and Investor presentation.
Hosting our call today are Kenneth Jacobs, <unk>, Chairman, and Chief Executive Officer, and Evan Russo Chief Financial Officer, Adam will start the discussion with an overview of our financial results and Kent will provide his perspective on the outlook for our business. After that we will open the call to questions.
Now I'll turn the call over to Evan.
Good morning today, we reported record operating revenue for the third quarter and first nine months of 2021, reflecting strong results across the firm.
Third quarter revenue was a record $702 million up 23% from a year ago.
Revenue for the first nine months was a record $2 2 billion up 30% year over year.
In financial Advisory record third quarter revenue was $381 million increased 24% from last year's period, reflecting broad based activity across sectors market cap and regions.
Advisory revenue was driven primarily by M&A completion in the Americas and in Europe are.
A high percentage of these were in the $1 billion to $10 billion range.
Private equity related activity is increasing.
Year to date, our advisory revenue from transactions involving financial sponsors has more than doubled.
Our private capital Advisory franchise continues to show strength as we advised financial sponsors globally on fund raising and innovative secondary market solutions.
As we've noted on previous calls restructuring activity has been relatively subdued reflecting the high level of liquidity across markets.
Our sovereign and capital markets advisory businesses remain active advising governments and corporations on financing capital structure and shareholder strategy.
Overall, our advisory activity is at an all time high and we currently expect record fourth quarter revenue for financial advisory with strong momentum going into 2022.
Asset management third quarter operating revenue of $311 million increased 19% from last year's period, reflecting a larger base of assets under management.
Average num reached a record high of $278 billion for the third quarter, 23% higher than a year ago, and 1% higher on a sequential basis.
As of September 30, we reported AUM at quarter end of $273 billion, 20% higher than last year's period, and 2% lower on a sequential basis.
The decrease was primarily driven by negative foreign exchange movement of $3 3 billion and net outflows of $2 3 billion, partly offset by market appreciation of $8 billion.
The quarters net outflows were primarily from equities, partly offset by net inflows in fixed income and alternatives.
Inflows continued to be healthy across our platforms.
As of October 22nd AUM increased to approximately $279 billion, driven primarily by market appreciation of $6 $6 billion and positive foreign exchange movement of point $9 billion.
Partly offset by net outflows of $1 $1 billion.
Our pattern of investment performance has been good this year.
Proximately two thirds of our composite strategies are outperforming their benchmarks on a one year basis, our recent investments in thematic fixed income and alternative platforms as well as their performance position them well for growth.
We see significant opportunities for growth in both of our businesses and asset management, we continue to invest in people technology and our distribution effort as well as the development of new and existing funds and the scaling up of our platforms.
These include the recent addition of a long short equity team focused on the technology media and telecom sector.
Launch of a global investment grade convertible bond fund.
And a new quantitative small cap fund.
In addition, we have recently made senior hires and global marketing and ESG and sustainability and to support the expansion of U S and European distribution.
We continue to see substantial opportunities to recruit talented investment teams, adding strategies that are complementary to our existing platforms.
In financial Advisory, we are executing on our growth strategy with an elevated pace of strategic recruiting.
Especially in high growth sectors, such as Biopharma, Fintech alternative energy and private capital.
While we continue to focus on internal promotes year to date, we have made more than 20 senior hires including Mds and senior advisors.
Now turning to expenses.
Even as we invest for growth, we remain focused on cost discipline or.
Our adjusted non compensation ratio for the third quarter was 16, 6% compared to 18, 1% in last year's third quarter.
Non compensation expenses were 13% higher than the same period last year on year, reflecting increased business activity and technology investments.
We continued to accrue compensation expense at a 59.5% adjusted compensation ratio in the third quarter.
Regarding taxes, our adjusted effective tax rate in the third quarter was 25, 1%.
For the first nine months of the year. It was 26, 2%.
We continue to expect this year's annual effective tax rate to be in the mid 20% range.
So as art continues to generate strong cash flow, which supports return of capital to shareholders.
In the third quarter, we returned $103 million, which included $52 million in share repurchases.
During the quarter, we bought back one 1 million shares of our common stock at an average price of $46.01 per share.
As of September 30th our total outstanding share repurchase authorization was $314 million.
And we'll now provide perspective on our outlook. Thank you Evan market conditions remain excellent for both of our businesses in the U S. Economic growth is generally robust and a strong recovery appears likely to continue into next year and Europe recovery remains on track as business conditions normalize the strength of economic demand combined with pandemic related labor shortages.
Leading to supply chain disruptions and growing concerns about inflation and these developments are driving a new set of discussions with Ceos boards and institutional investors as travel restrictions ease we are having more in person meetings and reinforcing the personal engagement so important to both sides of our business the.
The M&A environment continues to be as good as we've seen and we use and we are as active as we've ever been the forces driving global strategic activity remain in place technology, driven disruption continues to be a catalyst for M&A across industries, the global drive to reduce carbon emissions as an emerging catalyst and an abundance of private capital along.
Strategic capital continues to drive activity.
On the investor side demand for risk assets with a growing focus on sustainability continues to create opportunities for active management to drive alpha.
Our asset management franchise is providing clients with a growing and innovative array of investment strategies and customized solutions.
Estimates, we've been making in both of our businesses position us well for further growth we continue to invest in people resources and technology to enhance our market capabilities geographic reach and sector specific expertise remain focused on serving our clients well, while managing the firm for profitable growth and shareholder value over the long run now lets open the call up to <unk>.
<unk>.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again, Please press star one to ask a question, we'll pause for just a moment to allow everyone the opportunity to signal for questions.
Thank you our first question will come from Richard Ramsden with Goldman Sachs.
Good morning, guys. So Ken I know you talked about a recovery in M&A in Europe.
Last time, you spoke can you just update us on whether that is accelerated into the third quarter and then could you just expand a little bit on your comments around concerns around inflation and supply chain disruptions.
Driving discussions with clients is that likely to impact M&A restructuring or both in your view. Thanks a lot.
Sure. So first on Europe, we could I think the recovery in Europe are by and large it's underestimated in the U S. By my most observers both from an economic standpoint, as well as in terms of activity levels, we're seeing a record level of activity at least for our business across Europe, right now which is very encouraging.
As far as inflation is concerned look there are two camps here one which.
<unk> is essentially a.
We're this is a transitory inflations transitory weaker economic growth.
Growth is going to alleviate some of the pressures of supply chain issues or diminish and deferred will be able to control. It largely speaking the bond market until recently was more or less in that camp I think the other camp is their supply chain is here to supply chain disruptions are going to last longer.
Tumor demand just driving up prices deferred is behind the eight ball on this and that we're in for a longer period of inflation frankly, I think the debate is wide open at the moment and and we're going to have a better feel for that as we enter into early next year.
And you know the second quarter weakness, perhaps some weakness in China you could argue on one hand is going to keep it in check on the other hand, clearly the supply chain disruptions as we heard last night from Amazon and Apple or are concerned.
Okay, alright, thanks, a lot.
Yeah.
Thank you. Our next question comes from Manan <unk> with Morgan Stanley.
Hi, good morning.
Can you could you expand on your comments that advisory activity is at an all time high and our focus should be a record.
Yeah. So this quarter was a record third quarter revenues. It was light compared to peers, but then again you had a very strong second quarter and I think you had a similar dynamic going from the first to the second quarter. So I just wanted to SaaS you know how much of this is timing more than anything else.
Sure Evan let me start there look I think at the end of the day, what we're saying is we're as Ken pointed out we've got a high level of activity across the firm there's lots of business activity. As you mentioned, we had a great second quarter coming in it's a record third quarter for us lots of positives coming out and we just see a terrific outlook.
For us on the business side, and what is shaping up as you can see from the visible pipeline that you guys see out there you can certainly see that things are very very busy here and we're expecting to have a you know at this point in time, but currently expect there to be a record for Q4 for financial advisory for US and then strength into 2022 as well and so I think.
This is a this is just a.
<unk> of what we've seen across the last couple of quarters certainly the significant strength, we had in Q2.
It was terrific and then you know Q3 again, a record quarter, we always get a little bit of some slowdown in Q3, just in terms of closings, but the pipeline, we have and you know sort of the opportunity set that we see ahead of us across the continents as Ken just mentioned in Europe, as well as well as the the Americas, but really on a global basis, but just staying at very high levels of activity.
If I can just follow up on that in terms of cross border M&A with more economies are opening up are you seeing that starting to accelerate or do you think that's you have to pick up.
We need to see supply chain issues said before things really.
Accelerate on that front.
I'd say cross Atlantic not as much as.
As we've seen in the past within Europe for sure a lot of that is.
Our supply chain, it's private equity of course.
And importantly, it is a I think the beginnings of energy transition I think we're going to see a lot more within Europe are eventually probably more across the Atlantic, but I'm not sure that we're going to see as much as we've seen in the past for a little while.
Got it thank you.
Thank you. Our next question comes from Brennan Hawken with UBS.
Hi, Brennan.
Good morning, Ken and Kevin Thanks for taking my questions.
Ken you've spoken in the past about an effort to hire more empties in certain sectors in advisory and a bit of a bias to the U S. Geographically and then referenced 20 senior hires in his prepared remarks, but you know.
Maybe could you give us a.
A little bit more specifics on how that's proceeding I believe your advisory MD head count ended last year at 171, so given.
The folks of the hires you've made pipelines any that you might expect could be joining here. It's a little late in the year, but maybe there's a few where do you think you'll end the year end and where are you adding is that in the places that you've identified can you maybe just give a little bit on that for sure.
So so this has been a very.
Aggressive here for us in terms of our growth outside hires I think actually were close to two dozen outside hires now not quite there, but almost in senior hires between partners and or Mds and senior advisors.
The focus for US has been on I think the areas we've outlined in the past I mean, clearly the growth in private equity opens the aperture for us of people that we will succeed on the Lazard platform.
It also opens the aperture for many of our younger part Christian Directors, I think which others have talked about as well because of the ability to pursue that business for them. So that's been a real positive for us and as you've seen we've done hires obviously this accelerated group of hires plus the promotions had gains last year really impact will impact.
The MD head count.
In terms of other areas clearly biopharma is important technology is important and anything around the energy transition is important as you can see we made a recent hired just in the last week in London around that so.
So this this has been a very good year for recruiting for US I think it will slow down a little bit in the fourth quarter as it always does but we have I think a good pipeline for for next year ahead of us.
Great.
Thank you for that.
There's also was a comment I believe you made it about sponsor activity doubling.
And can you know.
That's clearly an area, where you're looking to grow.
Do you have an estimate for how much of your advisory revenue.
Either today or has it been involved.
Involved or touching a sponsor in one way or another.
And do you have a sense for where that stands and where you're interested in driving that as you're as you continue to build out that business and make hires in places that you think can move the needle there do you have any sure.
You know parameters.
Sure. So we've doubled it this year I think we're close to we're getting close to 40% for the first nine months, we were in the low twenties last year.
About 20% many of our competitors are indexing up around 60% to 80%. So there's a lot of white space ahead of us and frankly speaking if you look at that it's been historically more skewed towards Europe for us. So there's a lot of white space for us in the United States on sponsors that's an area, where we think there's a lot of growth right.
Now.
And if they go to just eliminate that gap to the 60 to 80, and therefore basically potentially double it again from the 40.
I think there's room.
For a lot more growth in that business. It's you know look there's ups and downs in the markets and obviously you have to manage modulate between where the activities on the strategic and private side and a lot of it is growing out the sleeves in private equity, but yeah, theres a lot of room for growth for us here.
Great. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Devin Ryan with JMP Securities.
Hi, Thanks. This is Brian Mckenna for Devin so within asset management. It was another quarter of modest net outflows, but how should we be thinking about flows moving forward.
I know it takes some time for mandates to come through in outflows to abate, but do you have any sense of when we'll start to see an inflection here.
Sure let me start with that look on the flow side as we have been called out before.
Gross flows have been strong in that that's the key for us in our business. We continue to see strong gross inflows and so many of our products. As you mentioned look we had some slight net outflows in the quarter.
But you know as we've talked about in previous quarters, we're starting to see that be more balanced and that's sort of as we expected we're starting to see a little bit more balance in the outflows versus the inflows you're starting to see months, where we have positive net inflows.
But yet it's still a little bit lumpy right, it's still a little bit choppy, we'd still expect it to remain a little bit lumpy for the next the next few months ahead and that's just because you know make some reallocations of a lot of our corporate clients as markets have traded off as pension plans become more fulsome, there's different risk reductions coming on to some of the institutional client basis and a little bit also.
No change in investment philosophy, just as the markets change and as the environment changes you know out of the pandemic and so we'd normally expect to see some lumpy and choppy movements in the institutional space and that's what we're seeing but gross flows remained strong and we continue to build a great pipeline of new products that we keep talking about I think as those come on certainly in the next year or two that's going to be also helpful from a blow.
[noise] perspective, but as you know gross flows is what we focus on those continue to remain strong and I think as we continue to play out the rest of this year and get into next year with the new products, we should be in a better position, but you know we were just going to continue to focus on great performance in our business. We're starting to see some they will turn around as we called out you know two thirds of our.
Posit strategies had on a performance basis that also plays in overtime to driving even more strong strength in gross inflows in the coming quarters ahead.
Got it helpful and then non compensation costs declined about 2% sequentially in the quarter. So how should we think about the trajectory of these expenses into the fourth quarter and that next year and then within that do you have any expectations around how quickly or to what magnitude teeny will recover.
Sure look I think we did $117 million of non comp in Q3, you're saying it's down a couple of million dollars from Q2, but I think we're getting to sort of that sort of newest newish level. The ratio as we said are coming in about 16, 6% through the nine months were at the low end of our normal non comp a range I'd make a couple of comments.
Non comp you know I think the first part as you mentioned T. N E. We're starting to see a little bit of an uptick in travel in the in the third quarter of this year. Most specifically in September and of course as you get into October so as people are coming back to the offices as our clients are coming back to their offices as clients are demanding more not demanding but asking for.
More meetings in person as we're getting out more on the road to develop new client relationships, we're starting to see more travel pick up of course, we're starting from a very very low level, but we're starting to see that come up a little bit and I think it's gonna still take it's going to accelerate over the next couple of quarters, but its going to take a little bit of time until you get back to a more normalized environment.
I don't think you're ever going to get back to sort of the pre pandemic levels, you're probably going to get back to a 70% to 75% maybe and that depends on our business activity and the strength of the movement of people around the globe, but at this point in time look at starting to accelerate but off of a very low base. The other thing we're seeing in non comp over the last couple of.
And we expect that for next quarter as well as the increase in recruiting costs as Ken mentioned, we've got a huge pipeline of senior hires in both businesses, both asset management as well as in financial Advisory and that's everything from mid level to senior hires were in a pretty good expansion phase here in both of our businesses, we're seeing lots of opportunity to acquire great talent.
And so that the recruiting costs associated with that comes under professional fees in our non comp and you're starting to see that tick higher as well. That's that's terrific for us great investment for the future and finally, you know it's a technology I mean, we continue to invest in technology, we continue to find great opportunities to deploy more into technology.
Which we believe is a competitive advantage and certainly a significant comparative advantage for us versus our peers and as we've talked about in previous quarters, we're investing in everything from infrastructure to creating a better environment for all of our employees more efficiency to create a better workplace.
Just get better efficiencies out of everything we do on a day to day basis as well as client insights using data analytics and data science and all the things you can use once you have strong technology tools to truly deliver better advice to clients in both asset management as well as in financial advisory. So those are sort of the key sort of three key topics that are sort of in.
<unk> non comp I'd say look going forward as you question I think you're going to continue to grow it from here as we said if we can continue to find ways to invest into the business at this point when we have and we are at the lower part of our non comp ratio was a great opportunity for us to deploy some of that into areas that are going to create benefits for us for years to.
Come.
Great. Thanks, Kevin.
Thank you as a final reminder, please press star one now if he would like to ask a question again, we're pausing for questions. Please press star one to join the queue.
Thank you at this time I'm showing no further questions. This now concludes Lazard conference call. Thank you for joining have a good day.
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