Q2 2023 Lazard Ltd Earnings Call
Okay.
Good morning, and welcome to Lazard second quarter 2023 earnings Conference call.
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Following their remarks, we will conduct a question and answer session.
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At this time I will turn the call over to Alexandra Deignan, Lazard head of Investor Relations Treasury and corporate sustainability. Please go ahead.
Good morning, and welcome to <unk> earnings call for the second quarter, and first half 2023, and Alexandra Deignan head of Investor Relations Treasury and.
Billy.
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 begin let me remind you that we may make forward looking statements about our future.
Yeah.
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.
<unk> assumes no responsibility to the accuracy completeness of these forward looking statements and assumes no duty to update. These forward looking statements. Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating.
A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our earnings release and Investor presentation.
Our call today Kenneth Jacobs.
Chairman and Chief Executive Officer, and Maryann batch with Archer Chief Financial Officer.
Maryann 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 or that Chief Executive Officer of financial Advisory and Evan Russo Chief Executive Officer of asset management as they open the call for questions I'll now turn the call over to Marianne.
Thanks, Sally and good morning, everyone.
Today, we reported operating revenue of $620 million for the second quarter of 2023, an 8% decrease from the second quarter of 2022.
Operating revenue for the first half was $1 1 billion compared to $1 4 billion in the first half of the prior year.
In financial Advisory, we reported second quarter revenue of $344 million compared to 407 million in the second quarter of 2022.
On a sequential basis financial advisory revenue increased 26%.
For the first half of the year operating revenue was $618 million, 22% lower than the same period in the prior year relative to an overall market decline of approximately 50% and M&A completions globally.
Despite these challenges we remain actively engaged with clients in both Europe and the U S and private capital Advisory are primary and secondary capital raising group delivered a strong first half.
In asset management second quarter operating revenue was $267 million up 1% compared to the second quarter of 2022 and sequentially.
Management fees were up 1% compared to both the second quarter of 2022, and the first quarter of 2023.
The first half of the year management fees declined 5% compared to the prior year period.
For the second quarter incentive fees were $6 million compared to $7 million for the second quarter of the prior year.
For the first half of 2023 asset management operating revenue was $532 million compared to 577 million in the first half of 2022, reflecting lower management fees and incentive fees.
As of June 30, we reported AUM of $239 billion, an increase of 11% year to date and 3% higher from March 31 of this year.
The sequential increase was driven by market appreciation of $8 8 billion offset by foreign currency depreciation of $600 million and net outflows of 1 billion.
Average AUM for the second quarter was 235 billion, increasing 2% from a year ago and 4% on a sequential basis.
Now turning to expenses for the second quarter adjusted compensation expense was $424 million.
This equates to a 68, 4% adjusted ratio during the second quarter, which reflects our current best estimate for the remainder of the year.
Our non compensation expense was 144 million in the second quarter, 10% higher than the prior year, primarily reflecting increased occupancy cost higher travel and professional services expenses.
As we reported last quarter, we have conducted cost saving initiatives, which we believe will result in a reduction of approximately 10% and our run rate cost base by 2024.
Taking these actions resulted in an expense of $147 million in the second quarter and $167 million year to date, which are excluded from adjusted results.
Our effective tax rate for the second quarter as adjusted was 31, 2%, which compares to 26, 4% in the prior year.
Currently expect this year's annual effective tax rate to be in the mid 20% range.
Turning to capital allocation in the second quarter of 2023, we returned $47 million to shareholders, including $43 million in dividends.
During the first half of 2023, we've returned $234 million to shareholders, including 86 million in dividends $99 million in share repurchases and $49 million in satisfaction of employee tax obligations.
Additionally, yesterday, we declared a quarterly dividend of <unk> 50 per share.
Ken will now share his perspective on our performance and outlook.
Thank you Mary Anne.
Global macro macroeconomic outlook is improving as inflation continues to fall expectations from balancing that we are close to the end of the current tightening cycle. In addition, there is growing anticipation that central banks will successfully achieve a soft landing.
Central macroeconomic optimism has yet to filter through to the M&A to M&A completions, which is remained low since transaction volume began to slow in the first quarter of 2022. However.
However, we believe the M&A market is stabilizing and that conditions may be in place at the beginning of a rebuild.
It is important to be realistic about the likely pace of such a recovery. Most M&A cycle you see deal activity recovery in fits and starts Joseph M&A completions reflect market conditions when deals were announced six to nine months ago, we expect that newly announced transactions will complete at a similar pace in.
In the meantime, we are seeing increasing board and investor confidence the gap between buyer and seller expectations is narrowing and signs are emerging that financing while more expensive is becoming more accessible.
We're also seeing a pickup in cross border activity, particularly among European clients looking to engage in transactions in the U S. While the middle East continues to be a growing hub for capital and deal activity.
Restructuring had a slow start to the year activity is picking up and should increase ahead of significant amounts of debt maturing in a more challenging credit environment and facing higher financing costs and.
In light of this evolving landscape. This week, we announced the launch of <unk>, New capital Solutions Group, a global team focused on advising coordinating and executing the firm's capital raising and debt advisory solutions for clients, which will complement our world class restructuring business.
Given these market factors, we believe the years ahead could deliver circumstances in which a surge in both M&A and restructuring activity coincide at the same point in the economic cycle.
The environment for asset management is improving AUM is up 11% year to date and significantly FX headwinds are abating as the US dollar has weakened throughout 2023, we're seeing momentum across the business, including growth in Europe and significant flows in global equities and emerging markets led.
By our quantitative equities platform and several global equity strategies as we outlined last quarter. We believe the current market conditions create an environment, which is more favorable for our fundamentally driven investment approach approach with many of our strategies outperforming on a one and three year basis, while there remains a level of uncertainty.
The market so our asset management business continues to see an active new business pipeline. We are also continuing to expand our relationships with financial institutions across the globe with increasing traction in Asia and continued success in the U S.
Turning to the upcoming leadership changes in May we announced that Peter Orszag currently CEO of financial adviser Advisory will become CEO of Lazard on October one on the same day I will transition to the new role of executive Chairman and which I will principally advised clients have.
We work closely with Peter for the past seven years of Lazard I can attest to his leadership qualities and its clear and exciting vision for the firm and its future in recent years, we have placed new leaders in virtually every business country and industry group across the firm all of whom will play an important role in supporting Peter as he leads those hard into the next chapter in its.
Storied 175 year history, now lets open the call to questions.
Thank you.
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We will take our first question from Ryan Kenny with Morgan Stanley .
Hi, Good morning, Thanks for taking my question Hi.
Hi, Ryan.
Wondering if you could.
Just give us some more color on the comp ratio at the adjusted comp ratio came down substantially quarter over quarter. How are you thinking through the trajectory of that for the back half of this year and into next year and what activity level outlook is embedded into your conference Irving. Thanks.
Sure I'll take that one Ryan.
So as I said the $68 four that we accrued this quarter is our estimate for the remaining quarters of the year and that takes into account our estimation of the head count reductions that we've done year to date, the attrition that we expect for the remainder of the year and the hiring plans that we have through the rest of the year. So that's sort of our best ever.
<unk> fully loaded with everything that we're planning.
What you see driving year over here are the sort of elevated comp ratio is that we do have a fixed component as you know from the deferrals that we had last year and so that's driving the adjusted GAAP ratio, but you will see the head count reduction savings coming through in the awarded ratio, which reflects what we pay our people in the current year.
Yes, just in terms of revenue outlook for the year.
We expect that the second half of the year will be better than the first half.
But it will be more weighted towards the fourth quarter is our expectation, which obviously has some risk associated with that.
And that's on financial Advisory I'm sorry.
And on the comments around conditions being set for a rebound is.
Is there any more color you can give us on how much the pipeline has increased in our foundational versus fragile it feels.
I would say it's fragile.
I think it's early.
I think it's bottomed at this point the market we've seen.
For the industry.
A 50% 60% decline in completions over the last couple of years.
Where we feel like that is bottoming out at this point and for all the reasons I pointed out in the.
In the script it feels like there is a little bit there's more dialogue. There is more there is more discussion goes like this more activity, but this has to translate into announcements and then announcements have to translate into completions.
It's early but it's improving.
Great. Thank you.
Thank you.
Our next question will come from Steven <unk> with Wolfe Research.
Good morning, This is Brendan O'brien filling in for Steven.
To start I, just wanted to discuss Europe with that commentary on the outlook was encouraging but it feels like central banks in Europe are running behind the fed a bit in terms of where they are in the rate hike cycle and we've seen how the uncertainty on the path of rates has impacted activity in the U S. So far.
You guys are close to the market would be great to get your perspective on the dynamics at play in the region and how activity conversations compare to the U S.
I think our experience in Europe is a little bit divorced from the market.
We've had a pretty reasonably strong year relative for a strong year relative to market conditions in Europe .
Overall on the advisory side.
You're right that the central banks are a little behind the U S.
And we expect that conditions remain tougher for longer but on the flip side of that you've seen this obviously very strong rebound in equity markets in Europe .
Which actually match the broad indexes in the U S, which is the first time, we've seen that in a long time.
So I think it's a little behind but at the same time there are a lot of factors like there are in the U S that gives us confidence that it is beginning to stabilize.
That's great color. Thank you again, and then just turning back to the comp ratio I know, it's early days here, but I wanted to get some more color on how youre feeling about the progress on your cost cutting initiatives.
Based on the slide deck it seems as if you're already taking down your MD count and advisory pretty meaningfully.
So it feels like you are running a bit ahead of schedule.
And also just given your commentary on the lag between announcements and completions and M&A. So hoping you could speak to your ability to get the comp ratio back to the targeted range in 2020 for Eric we should be thinking about it being more of a 2025 type story at this point.
Look.
GAAP comp ratio is a function of.
Past.
Compensation.
Practices.
And pay.
And current revenue environment. So 2024 is going to be really a function of our discipline around <unk>.
Costs and compensation and people.
Which we embarked on in the first quarter largely completed although it doesn't show up in the head counted until you get to begin to the year fully.
Just given that the pace of the departures and such in different jurisdictions.
With regard to 'twenty four 'twenty five what I would say is that it depends a lot on the revenue picture.
I think on an awarded basis, we have more confidence that we're going to get back to our margin targets than necessarily on the gap because we don't really control.
The deferral in a given year.
And a lot will depend on the environment, but right, but the whole goal of this exercise.
Exercise. So this initiative in the beginning of the year was to put us in a position for an environment that we thought was going to be tougher for longer we did not we do not expect that there will be a rebound in 24 like we saw in 'twenty, one and as a result of that we wanted to.
Okay environment.
And also at the same time free up dollars.
On a disciplined basis to invest in markets, where we think there is more attractive fee pool than in some markets, where we historically have had.
Investments in the past and I think you can see that in our moves in the first quarter and I think we are on track to accomplish this right now we are on track to accomplish this.
Great. Thank you so much for taking my questions.
Thank you.
Our next question will come from Devin Ryan with JMP Securities.
Yeah.
Great Good morning, everyone.
Hey, Devin.
Hey, I just wanted to stay on this point.
Around investments in.
Recruiting clearly some.
Take this question is it's about the future sure. So short answer as we are actively in discussions about recruiting high productivity managing directors. There are a variety of Ah sectors, where we see plenty of opportunity for expansion I'd I wouldn't Titus directly to you know exactly when that.
Mana cycled turns because when you're making a decision about hiring a senior banker that's a medium to long term investment not a year to year investment and so that part of your question I <unk> I would just say <unk>, that's not really how we think about it but we're definitely very actively.
In the marketplace looking for the right fit and we're gonna be selective about the people that we bring onto the platform looking for those areas of high productivity that we can add in a profitable way and back to Ken's 0.1 of the one of the motivations for the.
Cost saving initiatives that we announced earlier on was to make sure that we had the room to make these investments, even and and a tougher year overall for the market.
Okay.
Thank you so much follow up maybe for rabbit, if I can on asset management. If you just go back and look at a over the past roughly a decade. It's kinda ranged around 200 billion up to 250 billion dollar range and you know I, just Wanna think about whether especially is that businesses evolved over the past decade.
You guys feel like the businesses at the scale required operate come and optimize business model. There you are.
Performing well, but just how you pick about that business relative to optimize level and is there may be an idea to to to look the scale that I'm quite a bit more I know, there's a active pipeline of new products and those wall contribute but they seem like you know kind of more singles than triples, or home runs and so just how you guys feel about.
Maybe the the view that.
That business should be quite a bit bigger within <unk>. Thanks.
Sure. He Devon, so yeah look historically I think the way we we've always thought about the business is not about the absolute size at a O M. It's really about making sure you've got scale in the platforms that you're operating in so scale and the products that you're in making sure that you can be relevant in the market N B a player.
In the markets that you're in and so it's gonna go up and down based on markets and based on allocations, where clients want to put money at any point in the cycle, but I don't think that we focus on the absolute number across the business as much as we think about army scale across the different platforms. There certainly are opportunities we've done a lot of different types of organic growth over.
The years and sort of setting the stage with different types of new products that we've been developing as you know products take you know new areas can take five five plus years to kind of continue to grow some of our largest platforms today were built by us over the past decade that grow into 10, 20 30 billion dollar platforms over time.
And so we have to stay focused on continuing to build out things smart thinking ahead of where we're going I think over time, we're certainly can <unk> continuing to think about where where the world is going and where those opportunities should be for our clients, where the clients want us today and we're going to continue to invest into the platforms that we have to continue to grow those over time or <unk>.
Exactly as we have and continue as we said publicly to look for inorganic opportunities across areas, where clients have significant interest that we don't play today.
Alright, thanks very much.
Thank you.
Our next question will come from Janet muscle when he quit global.
Good morning, Hey, maybe just jumping back to sort of the the the pretax margin targets and the cost saves.
I think you had talked about you know getting back to a normal type of revenue environment 2018, 2019 that can get you back to sort of those historical margins potentially next year is that more of an awarded comments is that is that still does that still possible. If we can get to sort of.
18, 19 revenue revenues <unk> 18.
<unk> 19 revenue levels in 24, <unk> I, just want to make sure I understood the comments.
I think I think that's I think that's a pretty good direction I think we get to a normalised revenue environment, we should get back to our emergent targets an unordered basis.
Okay, and maybe just following up on your announcement on the capital solutions group.
It seems like Lazard has been doing providing those services. So I just wanted to make sure I understand that's the strategic importance of putting them all together under one roof and I think you mentioned it's still.
Still separate from restructuring, but complimentary as well.
Wouldn't it made sense to put them all together, even restructuring just trying to get a sense of how you feel like that's gonna help drive growth from Ya. Okay. What what this is really addressing is the rise significant and very substantial rise in the private credit markets <unk>.
And accessing that source of capital, it's a very flexible very creative source of capital that now compete if not equally even ahead of what traditional financing banks public markets do for our corporate client base and a restructuring client base and.
Coordinating that dialogue, having those dialogues with those sources of capital I think is a unique proposition at this moment <unk>.
And we're kind of making sure that we're running that like you would run Ah Ah Ah Ah capital markets desk really making sure we're talking to all the sources of capital on a daily basis, and making sure that we have knowledge of where those sources of capital R and making that available to our our corporate and restructuring clients.
Yeah, Okay. That's that's clear thanks.
Thank you.
Our next question comes from that same Kiara with Goldman Sachs.
Good morning, and thanks for taking my questions, maybe I should just starting with your good morning, Peter maybe it to start with you I know you you you had to take over C. A.
But you've obviously talked a little bit about the future. So far this morning. So maybe just any any thoughts any early thoughts on your plans and outlook for the future of the business.
Go ahead, yeah, well if luck, obviously will have a lot more to say in October so I'm gonna hold the bulk of all of it for for that moment, which seems more appropriate but at the broadest level. We start from a physician with fantastic people in a really remarkable brand a lot to build on and on both sides of the business C. <unk>.
<unk> room for expansion those same advisory and an asset management I think.
Maybe with regard to anything more detailed it would be better for us to wait for October .
Fair enough. Okay, and then just we've seen a number of mixed signs that really as it relates to antitrust on the one hand.
Certain challenges in the U S appear likely to close but at the same time just received new proposed antitrust guidelines. How are you thinking about the risks of enhance global antitrust scrutiny and the impact on large cap ebony and and I guess it'd be interesting to get your views on both the U S, but globally as well.
I guess I'll take that it's Peter again, so listen I do think it's a little bit different between the U S. The U K and you in particular to start with the U S. I mean very interesting dynamic is while you're right that there are new proposed guidelines.
A new agents are filing requirements.
Put forward.
I think the the big news over the past couple of months had been the court decisions, especially the most recent one and the question becomes whether.
What's going to happen here is if the courts continue to rule against the F. T C and the D O J and the United States, whether deals will proceed but just with additional time duration to build in the need to litigate an additional expenses for lawyers.
So it's it's a very interesting moment and as you May know Lina Con did speak about this earlier in the week and said that she was still kind of proceeding as.
As she has been.
I think with a couple more court decisions that go against the government.
The.
And on that I, just mentioned in which deals will proceed but build in additional time and cost to litigate them because.
Because there's ultimate confidence that in court the deal will be approved.
Is the thing to watch over the next year or so U K in any U a different situation, obviously, a different different environment and I think what you should be looking for there is how much today.
Diverged from the initial inclination of the U S until we've had some recent cases in which there's been I mean, I think there's a perception that it's also like ordinate, but there have been some prominent cases recently, where there had been divergences and that's the thing to watch for the U N for the.
For the UK authorities.
Okay that makes a lotta sense and then just one other quick one that I feel obligated to ask which is just there were a few press reports a few months ago about a potential sale of Lazard I just wanted to see if there were any comments that you could make on this.
No no comments beyond what we didn't make it in the first place.
Okay fair enough.
Thanks, a lot.
Thank you.
Our last question what comes from Brennan Hawkins with B S.
Hey, good morning, snuck in under the wire. Thanks for taking my question [laughter].
[laughter] and and Peter welcome and congratulations on the new role looking for it.
If you.
Peter <unk>.
<unk> I totally appreciate Peter the [noise].
The idea to not get ahead of yourself and that's very very sensible when one question I would like to ask though.
Philosophically.
When you consider Lazard was art stock performance it was art stock over the past.
Many many years and pathways and avenues to create value.
Could you may be is everything on the table because in the past investors have asked about certain potential avenues, which were previously sort of not really considered or viewed as as potentially attractive and.
One question I regularly get from investors is whether or not.
A fresh perspective might open up all potential avenues and at least for for reconsideration or a fresh perspective.
Is that a philosophical question or at least a fair one to consider at this stage.
Sure luck as I said, we'll have a lot more to say in October . It is fair to say, we're taking a fresh look at everything that doesn't mean that the answers are gonna change, but it does mean that we're taking a fresh look at everything in the in the run up to October .
Right. Okay. Thank you I appreciate that and then just a couple of picky tax I didn't think I don't think you guys provided a U M, which you normally provide sort of quarter to date, so any maybe update on a U M and flows and.
Could you give a sense that the advisory was quite strong we're hearing restructuring picking up from.
From some of the competitors you know <unk>.
Was that a strong contributor here and how's the outlook for restructuring for the rest of the twenty-three and into 24 too.
Two parts to the question why don't I, let Marianne take the AUN question, and then I'll answer the restructuring question.
Sure. So we've decided brown I'm going forward that because we give the <unk> and the composition of the change every month that we're not going to be doing that mid month anymore. Because can change a lot throughout the course of the month and you'll have it as of the end of the most recent month at any point in time, so it won't be doing that going forward.
And Okay, and then on restructuring no it wasn't a particularly big part of the quarter. It was.
A contributor but not a standout.
And the outlook outlook.
I'll look as as I said I think that the outlook for restructuring is improving there's more activity. We expect with the significant maturity is coming up next year year. After year after that that you're gonna see more restructuring activity credit conditions are gonna, probably it would be a little more challenging when that than those.
Then that's it that was originally financed and more importantly interest costs are going to be much higher. So I think the stress on companies grader and that's why I alluded to the fact that we may be in one of those moments, where you get a improvements in the restructuring.
Activity at the same time, you have more M&A activity.
Yeah. Okay. Thanks can I know how much you love My multi partners. So there's my I Love your multi partners.
[laughter].
Alright, thank you.
We have no further questions in the queue. So I'd like I'd like to conclude Mistyped second quarter of 2023 earnings conference call.
Disconnect at anytime thank.
Thank you.
Okay.
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