Q2 2022 Lazard Ltd Earnings Call
Good morning, and welcome to Lazard second quarter 2022 earnings conference call. This call is being recorded currently all participants are in a listen only mode. Following their remarks, we will conduct a question and answer session and instructions will be provided at that time.
Anyone should require assistance during the call. Please place to please press the star key followed by the zero on your telephone keypad at this time I will turn the call over to Alexandra Deignan, Lazard head of Investor Relations and corporate sustainability. Please go ahead.
Thank you Roger and good morning, and welcome to Lazard to earnings call for the second quarter and first half of 2022.
Head of Investor Relations and corporate sustainability. In addition to today's audio comments, we've posted our earnings release and an investor presentation on our website a replay of this call will also be available on our website later today.
Before we begin let me remind you that we may make forward looking statements about our business performance.
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 not limited to those factors discussed in the company's SEC.
Billings.
That's on our website.
No responsibility for the accuracy or completeness of these.
No duty to update these forward looking.
It's a discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance.
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 and Chief.
Officer of asset management.
And I will start the discussion with an overview of our financial results and Ken will provide his perspective on the outlook for our business after that tenant Evan and Peter.
Chief Executive Officer will.
We'll open the call to questions.
I'll now turn the call over to you.
Good morning.
Today, we reported operating revenue was $676 million for the second quarter of 2022 compared to revenue of $821 million in the same period of 2021 amid challenging market conditions.
Operating revenue for the first half of 2022 was $1 4 billion compared.
Compared to one $5 billion in the first half of 2021.
In financial Advisory, we reported second quarter revenue of $407 million.
Compared to last year's record second quarter of $471 million.
For the first half of the year operating revenue was $795 million.
1% higher than the same period in 2021.
Our dialogue with clients continues to be robust and our M&A activity remains at high levels, including in Europe , where we had a record first half.
In addition, our global restructuring practice is working on a number of complex assignments and continues to see an increase in discussions with clients regarding liability management and other capital structure considerations.
In asset management second quarter operating revenue was $266 million compared with record second quarter revenue of $343 million in 2021.
Management fees decreased 16%, while performance fees declined 79% over the prior year quarter.
For the second quarter incentive fees were $7 million compared.
Compared to $34 million for the second quarter of 2021.
For the first half of 2022 operating revenue was $577 million compared to $671 million in the first half of 2021, reflecting lower average assets under management and significantly lower performance fees.
As of June 30, we reported at.
At 217 billion, a decrease of 22% compared to June 32021, and 14% lower on a sequential basis from March 31.
The sequential decrease was driven by market depreciation of $23 2 billion negative foreign currency impact of $8 2 billion.
And net outflows of $4 6 billion.
Average any ramp in the second quarter was 230 billion decreasing 17% from a year ago and 10% on a sequential basis.
This reflected market selling off globally in both equities and fixed income and.
In addition, with approximately two thirds of our AUM in non U S. Dollar denominated securities foreign currency has been a significant headwind thus far in 2022.
Amid significantly lower market valuations are rising interest rate environment. We believe investors are placing a higher priority on fundamental active investment strategies and looking to diversify from what has been a predominantly growth focus.
Most of Lazard core and relative value strategies are outperforming in the current market. In addition, ESG integration is an increasingly important consideration for clients.
Clients are also seeking more customized solutions and thematic strategies to augment their portfolios.
All of these present opportunities for Lazard platform.
As of July 22nd our AUM was approximately $220 billion.
Driven by market appreciation of $5 5 billion.
Negative foreign currency impact of $1 4 billion and net outflows of <unk> 5 billion.
Now turning to expenses.
We continued to accrue compensation expense at a 58, 5% adjusted compensation ratio in the second quarter.
Our adjusted non compensation expense for the second quarter was $131 million, 10% higher than the prior year, primarily reflecting the impact of inflationary pressures higher travel costs and investments in technology.
Our effective tax rate for the second quarter as adjusted was 26, 4%, which compares to 25, 2% in the prior year quarter.
For the first half of the year, our adjusted tax rate was 25, 9% versus 26, 7% in 2021.
We currently expect this year's annual effective tax rate to be in the mid 20% range.
We continue to generate strong cash flow, which supports return of capital to our shareholders.
In the second quarter, we returned $246 million to shareholders, including $46 million in dividends and $199 million and share repurchases.
During the second quarter, we bought back $5 9 million shares of stock at an average price of $33 90 per share.
During the first half of 2022, we've repurchased 10 6 million shares at an average price of $35 40 per share.
Our weighted average share count at quarter end was $105 million.
A decrease of 8% from the 114 million shares in the prior year quarter.
Going forward, we expect to continue to use excess cash flow towards share repurchases.
Yesterday, our board of directors authorized additional share repurchases.
Up to $500 million, bringing our total outstanding share repurchase authorization as of today to $559 million.
Additionally, yesterday, we declared a quarterly dividend of <unk> 50 per share, reflecting a 6% increase in our dividend from last quarter and demonstrating our continued commitment to returning cash to shareholders.
Despite significantly lower market valuations and macro uncertainty in the first half of the year our results underscore the strength stability and discipline of our model.
And the continued performance of our businesses.
Ken will now share his perspective on our performance and outlook. Thank you Evan the global macroeconomic environment remains uncertain characterized by global inflation at multi decade highs rising interest rates and turbulent capital markets.
Despite the unique set of circumstances that 2022 as presented we performed well in the second quarter and first half.
Can be challenging conditions for global M&A during the second quarter, our financial advisory business delivered strong results. We continue to be active globally and remain cautiously optimistic for the second half of the year.
We are serving our clients with a statistic with sophisticated strategic advice and M&A capital structure shareholder activism capital raising as well as in restructuring.
These capabilities were built over decades and have been tested through numerous economic cycles.
In asset management, we are serving clients with investment platforms that are diversified across asset classes styles and regions. Our research driven fundamental active investment approach has resulted in the outperformance of most of our strategies so far in 2022.
In the current environment. We believe there is renewed interest in fundamental active investment strategies in which we specialize and investors are benefiting from our research capabilities to help navigate turbulent markets.
We are also benefiting from our global orientation, which provides a broad base of opportunities for clients around the world.
Looking ahead Lazard is well positioned for the remainder of the year with a diversified business model, our global client base and unrivaled expertise in strategic advisory restructuring and asset management solutions firm wide we.
We continue to invest in people resources and technology to enhance our market capabilities geographic reach and sector specific expertise.
Our business model is highly cash generative and has proven its strength and resilience across numerous business cycles. We remain focused on serving clients, while we manage the firm for profitable growth and shareholder value.
This morning, we were pleased to announce that Marianne debt will join Lazard as our new Chief Financial Officer on October three we look forward to welcoming Marianne to Lazard.
Now, we'll open the call to questions. Thank you.
Thank you at this time if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. Please press star two.
We ask that you. Please pickup your handset to allow for optimal sound quality.
And our first question comes from Brennan Hawken from UBS.
Hi, Brendan.
Good morning. Thank you for taking my questions just curious to drill in a little bit on <unk>.
Europe the outlook that you are seeing there for advisory.
And we're hearing about restructuring outlook picking up.
Maybe if you could touch on the European restructuring backdrop, and how that's looking and whether or not that those trends are similar to what we're hearing elsewhere. Thanks.
Okay.
Sure.
Look I think I'll answer that the general first Brennan.
Usually when we evaluate the M&A environment.
Look at <unk>, we look at three factors and then Theres a bunch of catalyst behind that.
Yes.
The supplies I think generally to U S and Europe at the moment.
Valuation credit or financing and.
What I would describe as a confident CEO confidence board confidence.
On valuations clearly theres been a reset in the equity markets.
The process of.
Uh huh.
Buyer expectations seller expectations is in the process of realigning.
Credit conditions.
I think have deteriorated over the last few weeks, we saw difficulty in the high yield market early this year.
The banks were still active the private credit markets spilled a lot of the.
Vacuum that was left from the from the high yield markets, but there's been a pullback in just the last couple of weeks there.
So the credit markets are tougher and.
And then I am confidence I think we're in the middle of again, a reset moving from an environment, which was dominated by discussions around inflation to one now that is more focused on recession.
So that will I think.
<unk> in a period of time, where there's a great deal of uncertainty.
With regard to activity levels, what we're seeing across the board in our business.
Is second half looks pretty solid based on what we know about our.
Announcements to date and activity underway that feels pretty good to us and the real question for us and everyone is how.
The build.
Starts the build for next year, or so and I think well have a better idea is that as we enter the fall and we see what happens with the credit markets and that's really kind of a key with regard to Europe .
Generally speaking we've had a very strong year to date.
Record first half for us second half still looks solid in Europe based on what we know and again. The key question there is going to be built into the future.
It's kind of the outlook.
With regard to restructuring clearly.
As credit conditions tighten.
There is more pressure on companies balance sheets.
So far what we've seen is a pickup in dialogue. The next is usually liability management, we are seeing some pickup there as well.
Actual restructuring is usually take longer to unfold that said one of the biggest restructuring assignments out there at the moment is the deal that we've been engaged on in Germany, which involves senior par, which is C, where we've been working with the German government on the restructuring of the natural gas contracts.
And that's obviously, a very high profile very important transaction.
Ken Thanks that was very thorough and and really helpful.
My My second question on capital management, even buybacks were really quite good.
[laughter] yours isn't going to be the handle on the throttle for very long, but you still got it there. So how should we be thinking about capital returns from here.
To me the decent to good capital returns and buybacks and <unk>, probably reflect some of that confidence that Ken just to iterate it about the outlook.
Should we expect.
Given that the back half continues to look good that buybacks should remain robust.
Hey, Brendan Yes, I think that's I think you've described it well I think Q2, we bought back $5 9 million shares year to date was $10 6 million shares.
<unk> bought back more shares than we needed to offset dilution from year end compensation and as he said look we've been aggressively utilizing cash and all the cash we've been producing on the balance sheet to take advantage of the low share prices, where we see the markets today as youre, saying, it's a vote of confidence I think we look at it and we've been very opportunistic.
Over the past year are two.
To reduce the share count very significantly as you mentioned, we reduced the weighted average share count down to under 105 million shares to $104 eight from as I called out a $114. One so really down over 9 million shares in the course of the year and as you say look we expect to continue to reduce the share count for the remainder.
For of the year with excess cash flow continue to buy back shares aggressively at these levels and I think it does.
We continue to generate additional excess cash flow, we're going to be.
And what we've been doing all year year to date and buying back shares aggressively at these prices.
Great Thanks for that color.
Yeah.
Our next question comes from Richard Ramsden from Goldman Sachs.
Good morning. Good morning, So can we just talk a little bit about financial sponsors and the engagement with that part of your client base is obviously, a very important segment.
The M&A market last year, I mean, how would you characterize the dialogue with those and then perhaps you can just talk a little bit about financing conditions for that client base, where we are in terms of resetting in terms of availability of financing and whether you think seller expectations have shifted enough. So that we can actually start to see transactions.
Closing them up out of the market.
So excellent question and.
I think we're in a pause I think the month of August is going to be a pretty quiet month for a financial sponsor transactions. The credit markets are effectively shut for those deals right now.
And the real question is and what's happening is a combination of factors I mean number one theres.
There is a reset going on both by our equity owners and creditors and investors about.
About how they see.
The economic environment unfolding over the next couple of years, we've done as I said earlier, just a few minutes ago from an environment, where people were which was quite robust a year ago to one where people are.
Laser focused on inflation to one now where people are laser focused on recession and so this adjustment. This change in expectations is going to take a little bit a little while to play through both for creditors in for.
Investors. So that's part one part two is that when it does play through there'll be a reset.
The terms of credit will change there'll be probably higher interest rates covenants will tighten up.
On the equity is there maybe one or two turns less of that in deals and there may be more equity in deals in the Irr's, we'll adjust accordingly.
<unk> in the market at that point, we will reopen the question is just how quickly that plays through.
The good news I think in terms of environment is very different promotion, a week, where the financial sector was under tremendous stress.
Here are the banks go into this recession or this period of time, if there is a recession with pretty strong balance sheets, and the ability to adjust and that kind of environment. It gives them much more ability to adjust and that kind of environment. So there's a pause.
And I think it's going to be important to see how.
How this all unfolds in Nepal.
Just as a quick follow up I mean, how much of an opportunity.
Is this more difficult environment for financing for your capital Advisory business.
I think it's a great opportunity and one of the areas, where we've been investing is in our capability to a range.
<unk> financing with the private credit markets and I think youll see some some movement on our part into the fall there.
It's just.
The credit markets have really shifted.
The banks being the primary lender with the public.
Public markets.
Complementing that to private credit providers being a very substantial now player in the market competing and complementing banks and competing and complementing the public market. So it's a it's a market where there's an enormous opportunity for a franchise like ours.
Okay. Thank you that's very helpful.
Our next question comes from Devin Ryan from JMP Securities.
Hi, Devin.
Great.
Good morning, everyone. Thanks for taking the question.
Just wanted to start back on some of the outlook commentary we've been on a number of calls over the last few days and I would characterize your tone at least for the foreseeable future is a bit more constructive than most and I.
I think we also see that in the pipeline data for Lazard on a relative basis, but just want to drill down into that a little bit I'm not sure. If you have any kind of thoughts on whether you maybe youre just seeing more momentum because of the investments you've made in head count over the past couple of years <unk> been on the higher end of the spectrum.
Group or.
Is it geographic mix.
Obviously with more tilt towards Europe , or we're just kind of where your focus is kind of your M&A efforts.
If you have any thoughts on why that is we can unpack a little bit.
Sure Peter you want to take that sure.
I guess a couple of comments first.
We have seen at least year to date.
Activity that was pretty diversified not just geographically U S and Europe , but also.
Across sectors that are health care industrials fig.
Energy transition telecom and media all areas of strength and with significant momentum.
And I think that may be.
Part of what you're seeing in the in the published pipeline data.
Is that kind of broadly diversified.
Activity that we've been experiencing.
Okay got it.
If possible to drill down a little bit more into Europe .
Whats driving the activity in Europe , whether it's sectors or themes like what is supporting.
Relatively healthy level of activity kind of despite some of the other challenges that we all know about there.
Yes, so first off when we sort of think about the first half a lot of that is is activity that well.
Was either started or are underway in the second half of last year and the first part of this year. So we have to differentiate between whats happened.
What's happening and what's going to happen in the future I think thats really important factor here so for the first half.
It just reflected.
Really strong performance across the board in Europe , and the areas that we're active so private equity second half of last year, we had a very strong performance in France, we have very strong performance in the U K and across many of them.
Other markets in Europe , and so it was pretty diversified as Peter said I think looking forward, we like everyone else I think are going up.
The future pipeline are the future Bill just going to depend a lot on how the credit markets and seller and buyer expectations.
Over the next couple of months or so but for us. The first half of the year is really driven by the fact that there was really a broad level of activity across a whole bunch of different countries in Europe .
Okay, great. Thanks, so much.
Hi, everyone. This is Alexandra I understand maybe some of my opening remarks, we're not able to be heard so I just want to provide a reminder, that we may make forward looking statements 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 Lazard.
Lazard assumes no responsibility for the accuracy or completeness of these forward looking statements and assumes no duty to update these forward looking statements.
Thank you. So you can take our next question. Please.
Our next question comes from Manny Garcia from Morgan Stanley .
Hi, good morning.
I had a question on the asset management side.
What do you said clients looking to diversify strategies away from growth and your fundamental strategy is doing better than the market is there more room to do lift outs in this environment and are you looking to lean in just given the market dislocation or do you think you need to take a step back and wait to see how things shape out.
Yes, so I think thats.
Markets are constantly evolving I think right now I think the what we're describing is just really good for our business right. The fundamental active investment strategies that we have and certainly leaning more towards the <unk> away from growth I would say, we have from growth at any price into relative value core and just.
General value strategies, it's one of the largest moves we've seen year to date and so I think it just plays well to the strength that we have currently in the existing platforms that we have in sort of our expertise across many of our strategies. So I think this is just a great environment for us.
Are there are opportunities for us look I think it's been on the table. We continuously look at additional teams in other areas to expand into but I think our existing platform really covers the market well for the areas that are doing really well year to date and so again, if that continues I think it bodes well for our business.
Got it and I guess, how should we think about the comp ratio and pretax margins going into the back half of the or.
Given your comments it sounds like there is.
Momentum on the topline on both the asset management side on the advisory side, but just wanted to get your thoughts on how you're thinking about that and particularly given the investments that you're making in both businesses.
Alright, so the comp ratio.
Accrued at 58, 5%.
Same rate, we accrued in Q1 of this year.
It's early but on I think at the end of the day. This is it's an early part of the year and that's our best estimate at the time from a comp perspective.
Comp this year as you know, we will always be driven by the strength of revenues in the back half of this year offset by investments and business mix and so we'll see it's early we're going to have a better view as we get into the second half of this year, we'll see how the year turns out from a continuation of the investments we're going to want to continue to make in the dislocation. We are seeing in markets may create some.
The opportunities for us So we'll see how the year turns out in the market for talent and I think we'll just have more visibility as we get to the back half of the year generally for margins looking at the end of the day a lot of it's driven by by revenues.
And sort of the strength of the business going forward and I guess, Bob to just wait and see how that plays out we certainly have a lot of volatility in markets.
<unk>, our asset management business and.
As we get into Q3, we'll certainly have better views as to how the year is turning out.
Great. Thanks, very much Kevin.
Our next question comes from Steven <unk> from Wolfe Research.
O'brien filling in for Steven.
So I'm talking about the asset management business the resilient in your Brazilian senior fee rate. These past few quarters has been quite impressive given the sell off in proxy.
Proxies, which is typically at a higher fee products I was hoping that you could unpack the drivers of that greater resumes Brazilians to year to date and your expectations for the trajectory of that fee rate over the next year.
Sure.
Great.
As you call out I mean, this year its actually been flattish the last couple of quarters actually up a tad bit this quarter versus last quarter and the year.
Well, so we're starting to see that level out look at the end of the day.
The rain is an output for us due to the business mix what I'd call out is just I think as we mentioned on previous calls some of the outflows that we've seen from some of our institutional clients as we called out some reallocations that were going on.
That was in lower fee products, and lower fleet fee platforms and somehow on the fixed income side. So our outflows were sort of more driven with lower fee type products in some of the inflows that we've been seeing in our thematic and alternative strategies in other areas that we've been calling out were in higher fee strategies see sort of put those two together and.
It's sort of been creating a nice balance against the AUM did you call out I think the M has been declining to a lesser extent.
Flows and certainly has seen some some fall off but I think all in.
We've gotten to that point, where I think some of the inflows and outflows are creating more of a balance and therefore the fee rate has been around steady for the last couple of quarters.
That's great color. Thank you for that.
As Max on the non comps you guys have seen a pretty substantial pickup so far.
This quarter and given travel.
It is expected to continue to normalize just wanted to get a sense as to how we should be thinking about the trajectory of that launch.
Those expenses as we continue to ramp up and inflationary pressures continue to play through your expense base.
That's exactly right I think look at the inflationary pressure pressures you're seeing in non comp.
And then a lot of that is the increase that we're seeing specifically in Q2. This year up higher travel. So I mean, if you think about marketing and business development.
If you look at that line items, specifically, it's up significantly more than $10 million travel by itself was up $10 million just in the second quarter versus the previous year and so youre starting to see what we would expect which we think is a really great sign for the business, which is just more people getting on the road seeing clients as clients are willing to meet in person.
Things happening for the first time in many years in person on the asset management side, our research analysts and portfolio managers getting out meeting with companies in person for the first time and again as I said it for a couple of years. So it's an exciting time and we are encouraging we think it's great to get out there and see folks.
We're going to expect to see that continue to grow through the back half of the year as we get more towards.
A more normalized levels, but we're also seeing some inflationary pressures. So I think this quarter is probably a good baseline from which to build but youre, probably going to see a little bit more travel costs into Q3, and Q4 again, assuming the world stays open for travel as it has been and I think it's it's a it's a good sign positive sign for the activity levels in the business.
Great well, thanks for taking my questions.
Our last question comes from Jeff Harte from Piper Sandler.
Hi, Jeff.
Jeff are you on mute.
Yes, operator error I was muted sorry.
We continue to hear about historically unusually strong levels of strategic dialogue in the face of things like plummeted and kind of confidence that recession expectations kind of two questions on that one.
Are you still seeing strong levels of strategic dialogue with clients or has that changed recently and secondly, I'm, especially interested in Europe , where <unk> has been raising I just have trouble shaking this feeling that it's a matter of when not if the next cyclical shoe drops and we kind of see that strategic dialogue shut off.
Yeah.
Look.
First I think the strategic dialogue shifted a lot over the last several over the last couple of years.
The period, 16% to 20 was really dominated by the or 19 I should say was really dominated by these very big.
Strategic deals the climate after <unk>.
<unk> post pandemic has actually been.
Strategics doing bolt ons.
Not sort of bet the company kind of deals and also.
They were not doing things that were as challenging as perhaps were done in previous years.
Around antitrust because the environment is a little bit more challenging from that standpoint.
So there's been a lot of strategic activity, but it hasnt been characterized by these mega deals that I think we saw more up between 16 and 2019 I think that's going to continue.
You know theres been a lot of things with strategics, which was priced that priced away for them because of the.
The public markets the value of public market valuations.
And frankly competition in many instances from private equity.
That environment has shifted.
Strategics are.
Generally speaking well capitalized strong balance sheets.
And I think when you have the kind of shifting geopolitical conditions, you are probably going to use M&A to shift your business with them.
Either by herself.
Our assets and I think we will see it.
What are the challenges is just going to be and this is as I alluded to earlier is just there is a reset going on in People's expectations about what's going to happen in the economy and I think we've got to let that play through before we see a real pick up in activity.
Is that still kind of I guess as far as just the dialogues there still be attained in Europe , as well or just kind of keep waiting for war to really kind of sick. So you said the activity levels there.
So the thing.
Keep in mind about Europe is most of the multinational companies in Europe for exactly that multinational companies. I mean, do you think of a German company. Most of its business is outside of Germany, you think of a Swiss company.
90% of most of this waste companies businesses outside of Switzerland, and not in Europe , but in the United States or in emerging markets and the same can be said of the global companies that are listed on the FTSE or the global companies listed on the CAC 40. So these are global businesses with businesses spread about the whole world.
And so the conditions in Europe itself, we're not the only thing that goes through the minds of a CEO . Their mindset is very similar and the board's mindset is very similar to the mindset of a multinational based in the United States or multinational based in Canada and I think that's one of the thing that's lost in this this idea that there.
Challenging conditions Europe , absolutely there are challenging conditions in Europe , but these are multinational companies that look at it on a global basis.
Interesting. Thank you.
Yeah.
Thank you for joining US today. This now concludes <unk> second quarter 2022 earnings call have a good day.
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