Q3 2022 Lazard Ltd Earnings Call
If you need any understanding today's program.
[music].
Good morning, and welcome to Lazard third quarter and first nine months of 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, if anyone should require assistance during the call. Please press the star key followed by the zero and you touched on phones 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 and good morning, welcome to <unk> earnings call for the third quarter and first nine months of 2022, I'm Alexandra Deignan head of Investor Relations and corporate sustainability. In addition to today's audio comments, we have 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.
We begin let me remind you that we may make forward looking statements about our business and 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 but not limited to those factors discussed in the company's SEC filings, which you can access on our website Lazard assumes no responsibility for the accuracy or completeness of these forward looking statements and assumes no.
You need to update these forward looking statements today's audio 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 comparable GAAP measure is provided in our earnings release and Investor presentation.
Hosting our call today are Kenneth Jacobs, <unk>, Chairman, and Chief Executive Officer, and Mariana Dash, and our new Chief Financial Officer, Maryanne 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 Ken and Marianne will be joined by Peter <unk>, Chief Financial Officer of financial adviser.
Evan Russo Chief Executive Officer of asset management assay, well open the call for questions.
I'll now turn the call over to Marianne.
Thank you Allie and good morning, let me begin by saying, how happy I am to be here at Lazard.
Looking forward to meeting many of you on the call today as I settle into my new role.
Let's get started with a review of our financials.
Today, we reported record third quarter operating revenue of $724 million, a 3% increase from revenue of 702 million in the third quarter of 2021.
Operating revenue for the first nine months of 2022 was $2 1 billion three first time lower than in the first nine months of 2020 one.
In financial Advisory, we reported record third quarter revenue of $454 million up nine.
19% from last year's third quarter.
For the first nine months of the year operating revenue was also at a record level of $1 2 billion, 7% higher than the same period in 2021.
As demonstrated by the record quarter M&A has been active particularly.
Particularly in Europe , where we advised on several high profile transactions.
And restructuring although activity is still relatively low our discussions with clients are increasing as a result of current market conditions and demand for liability management.
In addition, our restructuring practice is ranked number one globally on announced transactions year to date.
Our sovereign advisory team is also working on a number of complex assignments.
In asset management third quarter operating revenue was $263 million, 15% lower than third quarter 2021 revenue of $311 million.
Management fees of $241 million decreased 20% year over year.
Incentive fees in the third quarter were $22 million compared to 7 million for the third quarter of 2021.
For the first nine months of 2022 asset management revenue was $840 million a decline of 14% compared to the first nine months of 2021, reflecting lower average assets under management.
As of September 30, we reported.
Of the 198 billion a decrease of 27% compared to September 30th 2021, and 9% lower on a sequential basis from June 30th 2022.
The sequential decrease was driven by market depreciation of $10 3 billion.
Foreign currency depreciation of $6 6 billion and net outflows of $2 billion.
Average AUM for the third quarter was $212 billion decreasing 24% from a year ago and 8% on a sequential basis.
This reflected global markets continuing to weaken in both equities and fixed income during the third quarter.
In addition, the strengthening U S dollar has been a headwind thus far in 2022.
As of October 21st our AUM was approximately 200 billion.
Driven by market appreciation of $3 4 billion.
Negative foreign currency impact of <unk> 6 billion and net outflows of approximately <unk> 7 billion.
Now turning to expenses.
We accrued compensation expense at a 60% adjusted compensation ratio in the third quarter.
Compared to 58, 5% in the second quarter of 2022.
For the first nine months of 2022, we accrued at a 59% ratio.
This is our best estimate for the full year, but it is subject to performance during the remainder of 2022.
[noise] compensation levels reflect our significant investment for growth in both businesses and our focus on investing in and preserving intellectual capital through the cycle.
Our adjusted non compensation expense for the third quarter was $128 million, 10% higher than the prior year, primarily reflecting the impact of increased travel and investments in technology.
Our effective tax rate for the third quarter as adjusted was 25, 1%, which is unchanged from the prior year quarter.
For the first nine months of the year, our adjusted tax rate was 25, 6% versus 26, 2% in 2021.
We expect this year's annual effective tax rate to be in the mid 20% range.
Okay.
We have generated strong cash flow year to date.
In the third quarter, we returned $286 million to shareholders, including $46 million in dividends and $237 million and share repurchases. Additionally.
Additionally, yesterday, we declared a quarterly dividend of <unk> 50 per share.
During the third quarter, we bought back six 7 million shares of stock at an average price of $35 63 per share.
During the first nine months of 2022, we repurchased a record 17.2 million shares at an average price of $35.49 per share.
Our weighted average share count at quarter end was 102 million shares a decrease of 11% from 114 million shares in the prior year quarter.
Our unweighted share count as of September 30th was less than 100 million shares.
Our total outstanding share repurchase authorization as of September 30th was $382 million.
Ken will now share his perspective on our performance and outlook. Thank you Mary Anne Let me take this opportunity to again welcome you to Lazard.
The global macro macroeconomic environment continues to reflect significant levels of uncertainty global inflation remains at multi decade highs to fight the central banks have engineered sharp interest rate increases around the world and further rate hikes are likely until there is more clarity on interest rates inflation in the economy, we can expect.
Going turbulence in the capital markets.
In these challenging conditions Lazard continues to perform well and our record third quarter results underscore the strength stability and discipline of our model across both our businesses.
In financial Advisory, we delivered record operating revenue for the quarter year to date and over the last 12 months. These.
These results were driven by record performance in Europe .
Spike a slowdown in M&A activity around the world.
While the market is softening, we're seeing an increase in client conversations pertaining to restructuring and liability management the.
The energy transition continues to drive deal activity in this in sectors that are less influenced by the business cycle, such as health care and re shoring and infrastructure investment are propelling our range of substantial transactions globally. We.
We are making investments to further diversify our offering for clients in financial advisory, including including expanding our efforts in infrastructure broadening our coverage in private credit and launching a new geopolitical advisory group.
Asset management, the strength of the U S. Dollar resulted in continued foreign currency headwinds in the quarter as approximately two thirds of our AUM are invested in non U S dollar assets.
If markets remain under pressure, we are focused on working with our clients as they navigate today's complex global investing environment.
Our research driven fundamental fundamental investment style continues to perform well, especially in our value relative value and quality portfolios. Additionally, we continue to innovate around <unk> strategies.
She is our recent launch of a lazard nomadic inflation opportunities strategy as well as building upon recent successes and sustainable agriculture and digital health.
But those arent as a whole we are making investments in people and technology to position us for success through the economic cycle, while being disciplined on cost and managing our business for the long term, we remain focused on serving clients, while maintaining profitable growth and shareholder value now lets open the call to questions. Thank you.
Okay.
Yeah.
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 the pound key.
I ask that you. Please pickup your handset to allow for optimal sound quality, we'll take our first question from Richard Ramsden from Goldman Sachs.
Hey, good morning, so so Ken maybe I can start off with a bigger picture question, which is where do you think we've got to in terms of both private equity firms and strategic adjusting to much higher borrowing costs with less leverage.
Look the specific question is it looks as if both short rates and long rates are going to be structurally much higher than what we've seen over the last couple of decades. So what do you think that means for longer term growth trajectory of the advisory business.
Look I think you have to separate out financial sponsors from strategic so let's talk about the strategic first.
I think generally when you're talking about strategics.
Youre looking at investment grade credits.
That drive that market.
Generally speaking they have strong balance sheets.
And they tend to be opportunistic during periods of uncertainty and I think we'll see that it takes some time for that to happen because you need an adjustment to <unk> buyer and seller expectations, but I think we're starting to see to see that and I think we'll see opportunistic activity across a range of sectors by strategic.
It's not going to be at the levels of <unk>.
Boom cycle, but I think we will see more of that and then as people become more comfortable with their ability to predict the future.
That is more confidence in their predictions then I think youll see activity pick up again on a more sustained basis, but we're not quite there yet there will be industry strategic industries, where I think there'll be activity through the cycle.
These are the industries, which are less affected by the business cycle itself. Good examples of this are ones that have catalyst.
That will push activity. The best is the energy trends in energy transition I think youre going to continue to see a lot of activity there.
I think youre going to see activity in sectors again, Doug too influenced by the business cycle like health care and perhaps some of the telecom area and such.
Moving to sponsors for a minute there youre much more subject to the non investment grade credit environment, and you've seen obviously the high yield markets. The public high yield market has been closed for quite some time.
Private credit markets pulled back in the summer.
And I think until again, we have more certainty about the future of those markets are going to be tough and traditional type of high leveraged sponsored transactions are not going to be that plentiful that said the sponsor universe is an incredibly creative group of.
All participants and Youre starting to see people adapting to the environment one area is.
Equity heavy equity.
Investments that is <unk>.
Investments, where you're finding a financial asset that can be moved and then taking.
Taking a minority investment in that asset that's one area, where we've seen some activity youre seeing in continuation funds. That's an area that's been pretty active for us and I think in areas, where infrastructure is the primary industrial not relying a lot of on a lot of debt financing youre continuing to see activity. That's in the telecom infrastructure space, we're seeing that clearly in the renewable.
Space and I think youll see it in some of the moves around onshore. It. So that's kind of a uptick on the landscape, but I think candidly until you see more certainty about the environment that is people being more comfortable with their predictions about the future with regard to interest rates inflation.
Ordinarily the.
The depth of the recession in Europe , and whether and if there'll be a recession in the U S and the depth of that recession, I think the financing markets are going to be pretty volatile.
Okay. That's really helpful. Thank you.
Our next question comes from Brennan Hawken from UBS.
Hey, Brandon.
Good morning, Ken.
Hope you're doing well maryann are welcome and congrats on the new role.
Would love to start off actually by by Dovetailing on that last question from Richard.
We've seen over the past decade, what's been described as a secular shift in the share of M&A activity to sponsors or that sponsors are involved with.
And certainly some of that secular but maybe with the remarkably low rates.
And buoyant period that we've seen here and nobody asked couple of years you know maybe some of that was also a bit cyclical.
Do you have a view on how much of the shift was secular versus cyclical.
And how are you thinking about the shift that you've been making towards sponsors.
Given the potential for some of that to reverse.
So there's clearly been a mix of both.
In the sense that the.
Just the sheer magnitude of money that is being managed out by the sponsor universe compared to where it was.
Even five certainly 10 years ago is vastly different and thats going to continue Theres just been a tremendous demand.
For alternative investments and.
We will see some pull back on funding because of the pullback in AST.
Assets under management by the end owners, but I think the allocation still will remain pretty high and therefore this funding the secular move towards alternative investments private equity is going to continue to for a while and that money has to be put to work. So that's the secular part of it clearly there have been some cyclical elements to it that is the <unk>.
Over a portfolio perhaps suite.
Being pushed to a degree by the ability of voluntary low cost financing that is sponsor to sponsor deals are probably more manageable and a very low financing environment, but there is alternatives for a lot of these companies, which at the right pricing in the public markets and alternatively to to a strategic so I think it's going to be a strong environment from.
A secular standpoint, some pullback in cycle and actually that mix that makes that kind of environment is almost tailor.
Tailor made for the kind of positioning we have with regard to our mix between strategics and sponsors we were way under weighted a few week three years ago, we're more balanced today, but we never had gone nearly as far as some of.
Some of our competitors with regard to our commitment to sponsor activity.
For sure.
Okay. So it sounds like you think it's the cyclical piece was more of a supporting role.
Hello, everyone.
Okay. That's that's helpful and then shifting gears to the comp ratio.
So we saw it increase by about 150 basis points this quarter versus versus where you had been running year to date, what drove that increase and how should we be thinking about the comp ratio for the full year.
Well as you know our comp ratio is at this point in time is always our best estimate of what it will be.
For year end, but of course this is a business where what happens in the fourth quarter. That's when we pay people. That's when we get to see what's going on in the outside environment and so on and so forth. So you don't really know your final decisions until you get through year end that said.
You have to remember, we're a little bit different from some of our peers in that we have two businesses the advisory business and the asset management business. As you know the asset management business operates on a different set of characteristics in the advisory distant business, particularly with regard to comp ratio and you can see what's happened in terms of the contribution of revenues.
From the asset management business to the overall revenues of Lazard and if you do the math you can see what the impact could be on compensation.
Okay. Thanks very much.
Our next question comes from.
Brian Devlin from J M P Securities.
Okay.
Hey, this is Devin Ryan good morning, everyone.
Welcome Maryann as well.
I guess first question just on.
The environment. So can you talk about your M&A activity industry wide has been slowing but lazard has a very diverse business in businesses like restructuring debt advisory and activism defense.
Are accelerating in this backdrop and so what means maybe put it all together and think about what client engagement overall when you think about all of those pieces of your business that looks like today.
Relative to maybe a year ago, when M&A was hotter, but some of these other businesses were less active.
Yes, so look at it.
In our business you always prefer an active M&A environment than any other environment because it obviously is.
What provides the best outcomes I think.
With regard to fees and revenues and everything else. It's just that that is a buoyant atmosphere that said as you as you pointed out were constructed to be able to take advantage of a lot of different environments.
I think the breadth of our business, both geographically and across a range of industries and capabilities.
Helps offset or buffer some of the drop in the M&A activity is never fully offsets as we all know.
What we're seeing is in fact, what happens in these environments is dialogue tends to go up as things get worse.
That doesn't mean, there's as many transactions, but at the same time.
We're seeing a lot more dialogue around liability management that we did a few months ago.
As you would expect when you have the drop in earnings combined with <unk>.
Increase in interest rates companies that need to go to the market are going to be constrained and they have to start thinking about alternatives.
We're seeing a real uptake in.
Everything around the energy transition that just is an area of a lot of activity both in the U S and in Europe .
And I think some of the areas that I pointed out before that are less subject to the business cycle are going to continue to do well here, but this is an environment, where youre spending a lot of time with clients.
And you're trying to solve problems, so oftentimes that arent necessarily around built around M&A, and that's something which we do from cycle to cycle.
Okay. Thanks, Ken Great color.
Shifting gears just want to talk about capital return and the buyback you clearly theres been a shift internally at Lazard around just the appetite for buybacks and 17 million shares.
Year to date, almost $7 million in the third quarter.
The pace is continuing here.
Love to just think about it.
How you guys are internally thinking about capacity for buybacks and maybe appetite from here I know you have $1 billion of cash, but you have to.
Earmark some of that for compensation and so just how we should think about capacity and also ability to continue maybe at a similar pace just given that it is starting to move the needle on.
I think shareholder value in my opinion.
Yes, we agree with you on that hopefully.
Obviously at the levels that the stock is out it's been attractive to buy back shares.
And we will with the resources, we have continued to take advantage of that.
Again this is a very cash generative business through the cycle.
And as you know, we allocate a certain amount of that cash to dividends and the remainder so buyback and that's how I think you can expect that to unfold over the course of the next period of time, we have a very large share authorization outstanding.
At these levels, we think there's value in buying back shares and I think our goal is to continue to do that.
Perfect. Thanks, so much.
And our next question comes from Manny Garcia from Morgan Stanley .
Hi, good morning, and welcome Maryann.
Had a question on the asset management fee Red that's been steadily climbing.
And I know part of the reason is that the outflows earlier this year were from some of the lower fee mandates.
Is the same thing happening this quarter as well and I guess question is how much more room does that have to Ron nowhere.
You might see a few more outflows you are a little bit more mix shift, but you should see the fee rate climb.
Hey, Manav, it's Evan I'll take that one yes as.
As you mentioned last couple of quarters, we've seen that sort of stabilization and actually increase in the average basis points average fee rate for the bulk of our business as you correctly pointed out and we've talked about this last quarter as well some of the outflows that we've seen in the past two quarters or from lower fee platform lower fee products couple of larger mandates so that had an impact.
But generally as you pointed out look at the end of the day. The average fee rate is driven by the mix of assets that we had a little bit on the vehicle mix as well and that sort of shifted a little bit more into our favor. We've also had some strong flows and performance this year and many of our equity part of our business. The equity products that we've had some of our listed infrastructure global equity global.
Franchise and other areas and we've also seen some less pressure from some of the outflows that we've seen in the past from <unk>. So that's all sort of contributed to the.
Sort of creating a more stabilized average fee rate over time, and I expect it to still be lumpy and it's going to be dependent upon the business mix and the mix of assets going forward.
Got it thanks, and then just.
A quick question on the FX side.
I'm wondering has there been any material impact from the stronger dollar on your pretax margins.
I know there is a headwind to revenues on the translation.
And the benefit to expenses, but are there any.
Is there any mix between regions that we should be thinking about between expenses and revenue as that might have already had an impact on your pretax margins year to date. Thanks.
Yes, so look I think on the <unk>.
The FX component as you mentioned the biggest part of the FX impact is that youre going to see it in the.
That we see because obviously as we pointed out we've got two thirds of our AUM is in non U S. Dollar assets, so you're going to see it in the translation to that component, but as you correctly pointed out but look at the end of the day as we get closer towards yearend, you're also going to see some impact on the expense side because many of our non U S. Dollar assets can also be.
The expense part of those assets that we manage sometimes are in different areas around the world, which could have different currency impacts and that could have an impact margin specifically in the asset management business, but overall I would say if you want to comment about the general business I'd say look FX plays a role very we're a large company that has significant.
<unk> of our overall business.
In foreign currency and non U S. Dollar denominated that does have an impact on the expense line as well.
Got it thanks Evan.
Our next question comes from Steven <unk> from Wolfe Research.
Hey, Steven.
Hi, Good morning, guys. This is brendan filling in for Steven.
So to start I wanted to follow up on Devins question on capital return I. Appreciate that you will continue to use the excess cash to repurchase shares but wanted to get a sense as to how we should be thinking about the cadence of the buyback from here in light of the elevated levels of macro uncertainty.
Your ongoing commitment to invest in the business.
Look.
The issue on investing in the businesses.
So far the investments we've made in the business are organic in nature and they run through the comp line.
That's the key.
The beauty and the curse of the.
In a people business.
And to the extent that we continue to do that it doesn't really have much of an impact on the capital return policy other than the fact that if you overdo. It you end up driving down earnings obviously, but to the extent that we are producing earnings. Our goal is to return as much of that cash as possible to the shareholders and the balances between dividend and share buyback.
And there's a lot of room between the amount that's leftover from dividend and share buyback at the levels. We're operating at today. So to the extent that we have that cash and we see value in our stock and I say see value in our stock will continue to buyback.
Alright, thanks for the color and then I also wanted to dig in a bit more on Europe .
You've obviously had record results in the region, but we have seen in the public data that new business activity.
Steadily slowed as the years progress wanted to get a sense as to how the velocity of new deals has changed over the past three months and what your outlook for activity in the region.
Going forward relative to the U S. As it feels like headwinds there are a bit more acute.
Given.
Reliance on Russia National natural gas exports.
The volatility in Britain that we've seen recently and the like.
Yeah, So look.
I would say our performance for the first nine months of this year were against a terrible drop backdrop and completed transactions in the market there was a big drop.
In Europe for the first part of the year in announced deals.
<unk> completed deals for the first nine months and we way outperformed.
I think that everybody is being impacted across the globe by this downturn in activity.
It is both in Europe and in the U S.
It stood out for us in Europe , I think is a combination of things for the first nine months, which was a really excellent franchise thats been focused on the areas that have been activity, but to the extent that activity levels fall across the board that's going to impact us as well and my guess is the real challenge for everyone right now.
Is building backlog into the first part of next year and later into the year and that doesn't only apply to Europe applies to the United States and I think that's the challenge at the moment that we're all facing.
Great. Thanks for taking my questions.
Sure.
Yeah.
That was our last question. This now concludes Lazard conference call.
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