Q4 2023 Lazard Inc Earnings Call
Good morning, and welcome to Lazard fourth quarter and full year 2023 earnings conference call.
This call is being recorded.
All participants are in listen only mode.
Following the remarks, we will conduct a question and answer session.
Instructions will be provided at that time.
If anyone should require assistance during the call. Please press the Starkey followed by zero on your telephone keypad.
At this time I will turn the call over to Alexandra Turkmen Lazard as head of Investor Relations Treasury and corporate sustainability. Please go ahead.
Speaker Change: Thank you Todd good morning, and welcome to <unk> earnings call for the fourth quarter and full year 2023, I'm Alexandra Deignan head of Investor Relations Treasury and corporate sustainability.
Speaker Change: In addition to today's audio Com, we posted our earnings release 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.
Speaker Change: Factors that could cause our actual results level of activity performance achievements or other events to differ materially from those expressed or implied by the forward looking statements, including but not limited to those doctors discussing the company's SEC filings, which you can access on our website.
Speaker Change: Already since no responsibility for the accuracy or completeness of these forward looking statements and assumes no duty to update these forward looking statements.
Speaker Change: Today's 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 comparable GAAP measures is provided in our earnings release and Investor presentation.
Speaker Change: Hosting our call today are Peter or that Saks, Chief Executive Officer, and Maryann, That's nice Chief Financial Officer, Peter will begin with some brief remarks before turning the call over to Mary Ann who will provide an overview of our financial results. Peter will then provide his perspective on current market conditions and the outlook for our business.
Speaker Change: After our prepared remarks, Peter Marianne will be joined by Evan Russo Chief Executive Officer of asset management as they open the call for questions I'll now turn the call over to Peter.
Peter: Thank you Allie and good morning, everyone.
Peter: Our fourth quarter results represent a solid first step as we execute our long term growth plan activities.
Peter: Activity during the fourth quarter also reinforces our confidence that the M&A cycle has turned a corner as we indicated on last quarter's call.
Peter: We remain focused on providing sophisticated and differentiated advice and investment solutions for our clients and we are well positioned for a stronger year ahead.
Peter: In addition to existing mandates the quantity and quality of our dialogues, suggesting productive 2024.
Peter: At the same time, there is a high degree of geopolitical uncertainty that could affect business activity I'll share more on our outlook shortly.
Peter: But before I turn to maryann to discuss our fourth quarter and full year results I'd like to extend a very warm welcome to the new members of our board of Directors announced earlier this week.
Peter: And children, who most recently served as CEO of Paypal and Steve how former U S Chairman and managing partner of the Americans for Ernst and young <unk>.
Peter: And Steve brings broad experience as executives and directors are numerous public companies. We are excited for their leadership as we refresh and reinforce the strength of our board and pursue our ambitions for Lazard now.
Peter: Now, let me turn the call over to Mary Anne.
Mary Anne: Thanks Peter.
Mary Anne: Today, we reported firm wide operating revenue of $761 million for the fourth quarter of 2023 up 13% from the fourth quarter of 2022.
Mary Anne: Operating revenue for the full year 2023 was $2 4 billion compared to $2 8 billion for the full year 2022.
Mary Anne: Global M&A announcements in 2023 fell to their lowest level in a decade and completions were down 32% year over here.
Mary Anne: Our business was affected by the slowdown with financial advisory operating revenue totaling $1 4 billion for the full year of 2023 compared to $1 7 billion for the prior year.
Mary Anne: Fourth quarter results. However reflects the continued positive trend of more constructive client conversations, resulting in an increased number of announced deals.
Mary Anne: We reported financial advisory operating revenue of 477 million for the fourth quarter up 18% compared to the fourth quarter of 2022.
Mary Anne: Examples illustrating this trend includes several large strategic transactions announced during the fourth quarter and in January including Elliott its proposed merger with Vodafone Western Digital Corporation separation of HDD and flash businesses.
Mary Anne: Energy Exemplars acquisition by Blackstone and Vista equity partners.
Mary Anne: These acquisition of Immunogen and fantasies acquisition of inhibits.
Mary Anne: Our advisory business in Europe had a particularly strong quarter and year.
Mary Anne: Our U K office had its highest quarterly revenue ever in the fourth quarter and in France. Lazard was ranked number one in market share for 2023.
Our co heads of Europe's financial advisory businesses are focused on integration and collaboration to capture cross border opportunities and are demonstrating strong results.
Mary Anne: Our private capital Advisory group has continued to deliver meaningful growth in client mandates and fee income, especially in our secondaries business as investors in private equity you'd look for sources of liquidity amidst volatile M&A and public markets.
Mary Anne: In addition, we see increasing client demand in our global restructuring and liability management group.
Mary Anne: And activity picked up significantly during the second half of 2023 and both the U S and Europe and we see continued strong demand for our services in part because we expect interest rates to remain higher for longer.
Mary Anne: We also continue to invest in our leading sovereign advisory business and our team is well positioned to serve clients as they navigate this prolonged higher rate environment.
Finally heightened interest from our clients and the geopolitical landscape remains and demand for geopolitical advisory groups services continues to increase as a result.
Mary Anne: Turning to asset management fourth quarter operating revenue was $274 million up 6% compared to the fourth quarter, one year ago and up 4% from the prior quarter.
Mary Anne: Management fees for the fourth quarter were up 5% compared to the fourth quarter, one year ago and down 1% from the prior quarter for.
Mary Anne: For the full year 2023 management fees increased 1% compared to the full year 2022.
Mary Anne: Asset management operating revenue was $1 1 billion for the full year, 3% lower than the prior year, reflecting lower incentive fees compared to 2022.
Mary Anne: As of December 31st we reported AUM of $247 billion, 8% higher than September 30th 2023, and 14% higher than December 31, 2022.
Mary Anne: The sequential increase from September 30th was due to market appreciation of $16 9 billion and foreign exchange appreciation of 5 billion offset by net outflows of $3 6 billion.
Mary Anne: Average AUM for the fourth quarter was 234 billion, an increase of 11% from the fourth quarter of 2022, and 1% lower on a sequential basis.
Mary Anne: Average AUM for the full year was 233 billion, 2% higher than 2022.
Mary Anne: During 2023, we saw positive net inflows across our global and European fundamental equity strategies are quantitative platform and our U S and European fixed income strategies.
Mary Anne: In addition, our European and Asia Pacific distribution teams won significant new business, including mandates from public pension scheme in France.
Mary Anne: You won't be asset management in Asia, and mid wind investments investment trusts in the U K.
Mary Anne: Now turning to expenses, our adjusted compensation expense was 516 million for the fourth quarter and $1 7 billion for the full year 2023.
Mary Anne: Our adjusted compensation ratio was 69, 8% for the full year 2023, compared to 59, 8% to year prior.
Mary Anne: Our awarded compensation ratio for 2023 was in the low seventies.
Mary Anne: Going forward, we will no longer disclose this measure as we understand it was not considered useful by investors importantly, we remain disciplined in setting compensation each year balancing market dynamics business performance and continued investment in talent.
Mary Anne: Our adjusted non compensation expense was 148 million in the fourth quarter, 4% higher than the fourth quarter last year.
Mary Anne: Our adjusted non compensation expense was 572 million for the full year 2023, 10% higher than the prior year.
Mary Anne: The year over year increase was primarily driven by increased occupancy and professional services expenses, including one time costs such as our C Corp conversion.
Mary Anne: Travel and entertainment expenses were also a factor, reflecting increased client and business development activity.
Mary Anne: We are on track to reach our target headcount reduction, which was previously announced last April and is due to be completed by the first quarter of this year.
Mary Anne: At the same time, we continue to invest in talent in key areas.
Mary Anne: Cost savings related to our head count reduction will lag actual departure dates and as revenues normalize the aim to return to our target expense ratios over time.
Mary Anne: Shifting to taxes, our effective tax rate for the fourth quarter as adjusted was 16% compared to 26, 3% for the fourth quarter of 2022.
Mary Anne: Our effective tax rate for the full year 2023 was 14, 5% compared to 25, 7% for the full year of 2022.
Mary Anne: Turning to capital allocation in the fourth quarter of 2023, we returned $44 million to shareholders, primarily through our quarterly dividend.
Mary Anne: For the full year 2023, we returned $330 million to shareholders, including 173 million in dividends $102 million in share repurchases and $55 million in satisfaction of employee tax obligations.
Mary Anne: Additionally, yesterday, we declared a quarterly dividend of 50 cents per share.
Mary Anne: Now I'll turn the call back to Peter.
Peter: Thank you Mary Anne on our last call I said that the third quarter was a turning point both for Lazard and for the M&A market.
Peter: Our fourth quarter results are consistent with that observation as we increasingly build momentum and execute against our longer term ambitions for lazard.
Peter: Looking at financial advisory the interplay between headwinds and tailwind continues to create favorable conditions for M&A activity.
Peter: <unk> remained strong as business leaders look for opportunities to capture technological innovation address global supply chain shifts and drive revolutions in life Sciences, and the energy sector.
Peter: At the same time the headwinds are increasingly subdued.
Peter: Well it is increasingly clear that interest rates may be higher for longer.
Peter: The debate has shifted away from if rates will go up to when they will go down.
Peter: And now that higher rates have been in place for a longer period of time, we are seeing buyers and sellers better align and valuations in.
Peter: In addition financing markets are opening up private equity is becoming active again and more boards and C. Suites are willing to pursue transactions in the wake of some favorable antitrust decisions by court.
Peter: As a result, we are engaged in an expanded number of client conversations.
Peter: We see stronger M&A activity across the U S in Europe and in a broad array of sectors, including technology Industrials financial institutions health care and energy all of which are sectors, where lazard has deeply embedded networks and teams.
Peter: We also see significant further revenue opportunities beyond M&A, and our capital solutions restructuring and liability management businesses.
As leaders in markets expect higher interest rates for longer and waves of debt maturities approach clients increasingly explore solutions across the various options our teams provide to.
Peter: To support this growth and further build our leadership in this space over the past two months, we announced three new managing directors in our restructuring group two in New York and one in London.
Peter: In asset management, we begin 2024 with $247 billion in assets under management, approximately 14% higher than at the start of 2023.
Peter: Positive market sentiment and a widening dispersion of returns across asset classes is leading to increased activity and interest across a range of actively managed investment products.
Peter: In addition, <unk> strategic plan is focused on stabilizing and optimizing the business, which has helped produce improved results throughout the year.
Peter: Our investment teams continue to perform well in this market environment.
And we've seen significant outperformance across our emerging markets global Quant and select local strategies.
Peter: We're also continuing to add talent to the business with senior hires to our small cap equity platform in the fourth quarter.
Peter: And our recently announced new head of our Japanese business.
Peter: During the fourth quarter, we provided specific goals for our long term plan to double revenue by 2030 and deliver an average annual total shareholder return of 10% to 15% through 2030.
In financial Advisory, we are focused on high productivity growth.
Peter: We're targeting an increase in average revenue per MD to $8 5 million by 2025 and $10 million by 2028 and a net addition of 10 a M to use each year through internal promotions and lateral hires.
In addition to four new Mds recently hired which underscores our ability to attract world class professionals to Lazard in January we also provided 10, new managing directors from within the firm.
Peter: Reflecting our long stated longstanding strength in developing internal talent.
Peter: In asset management, we are focused on strengthening our traditional business, while adding capabilities in less liquid products, primarily through inorganic opportunities.
Peter: We are targeting approximately 30% of asset management revenue from alternatives or private markets and wealth management by 2030, we will evaluate and pursue acquisitions in a programmatic disciplined manner with a focus on creating value for our shareholders.
Operator: Good morning, and welcome to Lazar's fourth quarter and full year 2023 earnings conference call. This call is being recorded. Currently, all participants are in listen-only mode.
Peter: Yeah.
Peter: Let me now turn to the outlook for the year ahead as.
Peter: As we've shared previously we expect 2024 to be better than 2023, we see continued signs of a healthy and strong economy and the tailwind for M&A activity strengthening while headwinds abate.
Operator: Following the remarks, we will conduct a question and answer session. Instructions will be provided at that time. If anyone should require assistance during the call, please press the star key followed by zero on your telephone keypad.
Peter: We also could experience an unusual environment in 2024 with increased M&A occurring alongside greater restructuring activity as rates remain high and debt maturities approach.
Operator: At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations, Treasury, and Corporate Sustainability. Please go ahead. Thank you, Todd. Good morning, and welcome to Lazard's earnings call for the fourth quarter and full year 2023. I'm Alexandra Deignan, Head of Investor Relations, Treasury, and Corporate Sustainability. In addition to today's audio comments, we've posted our earnings release on our website. A replay of this call will also be available on our website later today.
Peter: We do note however that alongside these macroeconomic conditions geopolitical uncertainty is increasingly top of mind for decision makers.
Peter: I remain very focused on building, a commercial and collegial culture to execute our ambitions pursuing a strategic path to achieving our lazard 2030 goals and creating value for our shareholders.
Peter: To that end, we are pleased to have completed our conversion to a C Corp on January one.
Alexandra Deignan: Before we begin, let me remind you that there are important factors that could cause our actual results, level of activity, performance, achievements, or other events 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 duty to update these forward-looking statements.
Peter: As we embark on the year ahead, and our next chapter our complementary businesses Premier brand established global leadership in extraordinary talent provide a strong foundation.
Speaker Change: Now, let's open the call to questions.
Speaker Change: If you have a question at this time, please press star one on your telephone keypad.
Speaker Change: If your question has been answered you may remove yourself from the queue by pressing star two.
Alexandra Deignan: Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. The 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 Peter Orszag, Lizard's Chief Executive Officer, and Marianne Vetsch, Lizard's Chief Financial Officer.
Speaker Change: So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.
Speaker Change: We will take our first question from Ryan kidney with Morgan Stanley. Please go ahead.
Devin Ryan: Hey, good morning, Thanks for taking my question.
Devin Ryan: Thanks for your question for Peter on the Lazard 2030 strategy and Slide 10 is really helpful. In understanding the building blocks. There one of the drivers listed and you've talked about this before is increasing relevance can you help walk us through what specific changes culturally you are making to make sure that Lazard is top of mind for Ceos and boards.
Peter Orszag: Peter will begin with some brief remarks before turning the call over to Marianne, who will provide an overview of our financial results. Peter will then provide his perspective on current market conditions and the outlook for our business. After our prepared remarks, Peter and Marianne will be joined by Evan Russo, Chief Executive Officer of Asset Management, as they open the call for questions. I'll now turn the call over to them. Thank you, Allie, and good morning, everyone.
Speaker Change: Sure and relevance is important not just kind of for its own sake, but because it then reinforces the brand and converts into revenue.
Peter Orszag: Our fourth-quarter results represent a solid first step as we execute our long-term growth plan. Activity during the fourth quarter also reinforces our confidence that the M&A cycle has turned a corner, as we indicated on last quarter's call. We remain focused on providing sophisticated and differentiated advice and investment solutions for our clients, and we are well positioned for a stronger year ahead. In addition to existing mandates, the quantity and quality of our conversations suggest a productive 2024. At the same time, there is a high degree of geopolitical uncertainty that could affect business activity.
Speaker Change: Make that clear, but there are lots of things that we're doing from increased presence externally to getting our top bankers and thinkers out on in the media on at conferences and so on to project the fourth.
Speaker Change: Force of Lazard insights.
Speaker Change: And make it even more apparent to the world a differentiated talent and insight that we have we are doing a lot more convening events that bring together top Ceos and.
Speaker Change: Thought leaders into a place that too.
Speaker Change: <unk>.
Speaker Change: Select places so that.
Peter Orszag: I'll share more on our outlook shortly, but before I turn to Mary Ann to discuss our fourth quarter and full year results, I'd like to extend a very warm welcome to the new members of our board of directors announced earlier this week. Dan Shulman, who most recently served as CEO of PayPal, and Steve Howe, former U.S. Chairman and Managing Partner of the Americas for Ernst & Young.
There are conversations that can occur that again are more than one can get out of.
Speaker Change: The newspaper say and then we're building out new capabilities that increase our relevance as a great example of that is the geopolitical team clearly as I said before you can't make a business decision today without geopolitical considerations being taken into account and we have a top notch team that is helping our clients.
Peter Orszag: Dan and Steve bring broad experience as executives and directors of numerous public companies. We are excited for their leadership as we refresh and reinforce the strength of our board and pursue our ambitions for Lazard. Now, let me turn the call over to Mary Anne.
Speaker Change: Evaluate those questions.
Speaker Change: Okay great.
Speaker Change: Just think through wallet share.
Speaker Change: Clearly focused on increasing productivity of Mds over time, you've also taken some actions to manage head count. So when we put those two together is the goal to keep your wallet share by getting more efficient or to grow wallet share.
Marianne Vetsch: Thanks, Peter. Today, we reported firmwide operating revenue of $761 million for the fourth quarter of 2023, up 13% from the fourth quarter of 2022. Operating revenue for the full year 2023 was $2.4 billion compared to $2.8 billion for the full year 2022. Global M&A announcements in 2023 fell to their lowest level in a decade, and completions were down 32% year over year.
Speaker Change: Our goal is to increase our wallet share. We believe that's what will occur as we execute our it was our 'twenty three goals, but to do so in a way that is not just.
Speaker Change: Buying wallet share, but doing so in a high productivity manner and the reason for that I just want to pause on is really important which is as we raise our productivity per M. D. The operating leverage that we get especially on the non M. D comp ratio is what allows us to then invest in new talent. So it's a self.
Marianne Vetsch: Our business was affected by this slowdown, with financial advisory operating revenue totaling $1.4 billion for the full year 2023, compared to $1.7 billion for the prior year. Fourth quarter results, however, reflect the continued positive trend of more constructive client conversations, resulting in an increased number of announced deals. We reported financial advisory operating revenue of $477 million for the fourth quarter, an 18% increase compared to the fourth quarter of 2022.
Speaker Change: Reinforcing cycle that as we raise productivity.
Speaker Change: We free up room in our comp ratio to make new investments in managing directors that leads to additional wallet share gains additional relevance as we just discussed but doing so in a in a manner that still fits within our comp and margin targets.
Speaker Change: Great. Thanks.
Speaker Change: Thank you. Our next question will come from Devin Ryan with JMP Securities. Please go ahead.
Marianne Vetsch: Examples illustrating this trend include several large strategic transactions announced during the fourth quarter and in January, including ILLiad's proposed merger with Vodafone, Western Digital Corporation's separation of HDD and flash businesses, and Energy Exemplars Acquisition by Blackstone and Vista Equity Partners. AbbVie's acquisition of Immunogen and Sanofi's acquisition of Inhibrix. Furthermore, our advisory business in Europe had a particularly strong quarter and year. Our UK office had its highest quarterly revenue ever in the fourth quarter.
Devin Ryan: Hey, Thanks, good morning.
Devin Ryan: First question just on those head count reductions and the projected.
Devin Ryan: Reduction of 10% run rate cost base.
Devin Ryan: Bobby I guess the end of 2023 can you guys just give us an update on where we are on all of those savings how much of that was reinvested or will be reinvested back into the business just because theres a lot of moving parts on expenses and then also appreciate that your 2024 might be a little bit of a transition year.
Devin Ryan: Or a revenue recovery. So just trying to think through some pieces and kind of what that could mean for maybe non comp expenses in the absolute and maybe comp ratios.
Marianne Vetsch: And in France, Lazard was ranked number one in market share for 2023. Our co-heads of Europe's financial advisory businesses are focused on integration and collaboration to capture cross-border opportunities and are demonstrating strong results. Our Private Capital Advisory Group has continued to deliver meaningful growth in client mandates and fee income, especially in our secondaries business as investors in private equity look for sources of liquidity amidst volatile M&A and public markets. In addition, we see increasing client demand in our global restructuring and liability management group. Client activity picked up significantly during the second half of 2023 in both the U.S. and Europe, and we see continued strong demand for our services, in part because we expect interest rates to remain higher for longer.
Speaker Change: Yeah on a relative basis. Thanks sure. So I'll start and then maybe Marianne will come in at like let's cut through.
Marianne: All of the complexity because I think this is pretty simple we are committed to our.
Speaker Change: Tradition, our long term margin targets, both on comp and on non comp so on comp you should again.
Marianne: Just keep in mind that our goal is to return to those traditional targets of being in the mid to high Fifty's on the comp ratio as revenue normalizes. So all the other pieces.
Marianne: Our contributors to that we are on target for the head count reduction.
Marianne: That we articulated early last year, which is a which.
Marianne: Which is a 10% reduction from the first quarter of 2023 to the end of the first quarter of 2024 that is tracking but again, it's not done for the sake of doing it but rather to help us on our transition back to those traditional margin targets.
Marianne Vetsch: We also continue to invest in our leading sovereign advisory business, and our team is well positioned to serve clients as they navigate this prolonged higher rate environment. Finally, heightened interest from our clients in the geopolitical landscape remains, and demand for our geopolitical advisory group services continues to increase as a result. Turning to asset management, fourth-quarter operating revenue was $274 million, up 6 percent compared to the fourth quarter one year ago. Management fees for the fourth quarter were up 5% compared to the fourth quarter one year ago. For the full year 2023, management fees increased 1% compared to the full year 2022.
Marianne: And that's that's what I think you should be tracking you are right also to point out that 2024 might be a transition year. It depends obviously on how strong the revenue environment is that we are we are committed to getting back to those traditional targets over time I don't know Marianne if you wanted to add yes. So the one thing Devin you mentioned non comp as well so I would just say.
Marianne: That we've done a lot of work we are continuing to look constantly for cost savings opportunities, where you know started out are turning over every stone and so if you look sort of at what to expect for 2024 versus 2023, we expect to continue to see inflationary pressure and increased travel for example.
Marianne Vetsch: Asset management operating revenue was $1.1 billion for the full year, 3% lower than the prior year, reflecting lower incentive fees compared to 2020. As of December 31st, we reported AUM of $247 billion, 8% higher than September 30th, 2023, and 14% higher than December 31st, 2022. The sequential increase from September 30th was due to market appreciation of $16.9 billion and foreign exchange appreciation of $5 billion, offset by net outflows of $3.6 billion. Average AUM for the fourth quarter was $234 billion, an increase of 11% from the fourth quarter of 2022 and 1% lower on a sequential basis. Average AUM for the full year was $233 billion, 2% higher than in 2022.
Marianne: Occupancy costs tend to go up over time, but we really are working hard to keep expenses. This year of flat to maybe down a bit.
Marianne: So that's what I would expect that dollar terms in dollar terms right, which will get at the ratio will come down on that one.
Marianne: Yeah.
Speaker Change: Okay terrific color. Thank you.
Speaker Change: As a follow up Peter I think there has been.
Peter: A positive reaction to the C Corp conversion.
Peter: The decisive actions you guys took their so kudos and I think that's showing through in the stock I think the question that I'm still getting.
Peter: Is around kind of the strategic and maybe financial merit as well be advisor model with kind of advisory plus Amsterdam.
Peter: I appreciate that's been the model, but you know as you continue to assess do you see scenarios, where the businesses could be more valuable separated or you're still evaluating that I know you said everything was on the table. When you started so just would love to get an update on how youre thinking there and is it still TBD or.
Marianne Vetsch: During 2023, we saw positive net inflows across our global and European fundamental equity strategies, our quantitative platform, and our US and European fixed income strategies. In addition, our European and Asia-Pacific distribution teams won significant new business, including mandates from a public pension scheme in France. UOB Asset Management in Asia and Midwind Investment Trust in the UK. Now turning to expenses, our adjusted compensation expense was $516 million for the fourth quarter and $1.7 billion for the full year 2020. Our adjusted compensation ratio was 69.8% for the full year 2023 compared to 59.8% the year prior. Our awarded compensation ratio for 2023 was in the low 70s. Going forward, we will no longer disclose this measure, as we understand it was not considered useful by investors. Importantly, we remain disciplined in setting compensation each year, balancing market dynamics, business performance, and continued investment in talent. Our adjusted non-compensation expense was $148 million in the fourth quarter, 4% higher than the fourth quarter last year.
Peter: Is this really kind of where we were I guess you've made the decision on the business model being combined.
Speaker Change: Sure well, what the way I would put it is we see significant upside and both sides of the business and so we're really focused on trying to create more value by executing on those opportunities and thats. The immediate task ahead of us. So on advisory I think we've laid out the path.
Speaker Change: Involving a net addition of empties and also raising productivity on the asset management side of the business. It involves really two things one is optimizing the traditional business by.
Speaker Change: Focus on investment performance and also on upgrading our distribution team.
Speaker Change: With the goal of some degree of growth so because market appreciation at least more than offsets the pressure on from fee compression in net outflows given given the move to index funds in active management and liquid markets.
Speaker Change: Combined with so that's part one and then part two is.
Speaker Change: Pivoting and diversifying the business into less liquid parts of the marketplace, where investors are increasingly allocating there their money and we see a significant opportunity for lazard in that space.
Speaker Change: And that will be.
Speaker Change: A focus of our inorganic activity.
Marianne Vetsch: Our adjusted non-compensation expense was $572 million for the full year 2023, 10% higher than the prior year. The year-over-year increase was primarily driven by increased occupancy and professional services expenses, including one-time costs such as RC Corp conversions. Travel and entertainment expenses were also a factor, reflecting increased client and business development activity. We are on track to reach our target headcount reduction, which was previously announced last April and is due to be completed by the first quarter of this year. At the same time, we continue to invest in talent in key areas. Cost savings related to our headcount reduction will lag actual departure dates, and as revenues normalize, we aim to return to our target expense ratios over time. Shifting to taxes, our effective tax rate for the fourth quarter, as adjusted, was 16%, compared to 26.3% for the fourth quarter of 2022. Our effective tax rate for the full year 2023 was 14.5%, compared to 25.7% for the full year 2022.
Speaker Change: Going forward, which we're going to do in a disciplined manner. So coming back to your question, we see significant upside on both sides of the business. We also see opportunities for us.
Speaker Change: Fully in a fully compliant manner with all the the appropriate.
Speaker Change: Get firewalls for.
Speaker Change: Additional connectivity and synergies between the two businesses too. So we are focused on all of that and I think that's the that's the next several years of what we're what we're planning to do.
Speaker Change: Yes.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from Steven <unk> with Wolfe Research. Please go ahead.
Steven: Hey, good morning.
Steven: Good morning.
Steven: Peter Peter a question on just the restructuring comments you made you noted you're anticipating higher for longer rates, certainly bodes well for the liability management business. In particular I was hoping you could just speak to your outlook for the business relative to inactive 'twenty three and how it could be impacted if we do beat.
Steven: Good to see a steady stream of rate cuts beginning in may or June of this year.
Peter: Sure. So what I would say with regard to our businesses. We started off at least relative to the market slash some of the competition a little bit slower in 2023 and restructuring that has as we approach the end of the year activity for us picked up significantly and Thats what were seeing coming into 2024. The team is very active we're really pleased with.
Marianne Vetsch: Turning to capital allocation, in the fourth quarter of 2023, we returned $44 million to shareholders, primarily through our quarterly dividends. For the full year 2023, we returned $330 million to shareholders, including $173 million in dividends, $102 million in share repurchases, and $55 million in satisfaction of employee tax obligations. Additionally, yesterday we declared a quarterly dividend of 50 cents per share. I'll now turn the call back to Peter. Thank you, Marianne.
Peter: The new additions, which I think gives us a lot more firepower in the sector were also.
Peter: Seeing that kind of flywheel effect from the various different things that we're doing so well.
Speaker Change: Just to step back for a second we have been diversifying the team historically as you know we were very debtor.
Speaker Change: As a focused we now have a team that can very easily cover both creditors and debtors and we also have been building out our connectivity with private capital that is important because a lot more of the restructuring and liability management activity is involves <unk>.
Peter Orszag: On our last call, I said that the third quarter was a turning point both for Lazard and for the M&A market. Our fourth-quarter results are consistent with that observation as we increasingly build momentum and execute against our longer-term ambitions for Lazard. Looking at financial advisory, the interplay between headwinds and tailwinds continues to create favorable conditions for M&A activity. Tailwinds remain strong as business leaders look for opportunities to capture technological innovation, address global supply chain shifts, and drive revolutions in life sciences and the energy sector. At the same time, the headwinds are increasingly subdued.
Speaker Change: The capital and private equity and there is definitely a feedback loop from our new Lazard capital solutions team to restructuring and liability management.
Speaker Change: Also frankly, our PCA fundraising business, we've got lots of different touch points now with private capital and we're seeing that.
Speaker Change: That play through also.
Speaker Change: So.
Speaker Change: Yeah.
Speaker Change: It looks like for now we're seeing an uptick in overall activity I think that may well be partly because we've reconfigured our team to be able to cover to be where activity is.
Speaker Change: In a very constructive way with the new additions.
Speaker Change: A R R welcome and with regard to whether.
Peter Orszag: While it is increasingly clear that interest rates may be higher for longer, the debate has shifted away from whether rates will go up to when they will go down. And now that higher rates have been in place for a longer period of time, we are seeing buyers and sellers better align on valuation. In addition, financing markets are opening up, private equity is becoming active again, and more boards and C-suites are willing to pursue transactions in the wake of some favorable antitrust decisions by the courts. As a result, we are engaged in an expanded number of quiet conversations.
Speaker Change: A rate decline will change any of that in 2024.
Speaker Change: Maybe at the margin, but two things one is I think the market may well still be.
Speaker Change: Overly optimistic about when the fed is going to start cutting rates and would you perhaps go into that if you'd like but secondly, the rate reductions are going to be gradual and so I think for a lot of 2020 for the type of environment that we're seeing especially combined with the wall of maturities that are approaching.
Speaker Change: He is going to lead to a lot of restructuring activity.
Peter Orszag: We see stronger M&A activity across the U.S. and Europe and in a broad array of sectors, including technology, industrials, financial institutions, healthcare, and energy, all of which are sectors where Lazard has deeply embedded networks and... We also see significant additional revenue opportunities beyond M&A in our capital solutions, restructuring, and liability management business. As leaders and markets expect higher interest rates for longer and waves of debt maturities approach, clients increasingly explore solutions across the various options our teams provide. To support this growth and further build our leadership in the space, over the past two months, we announced three new managing directors in our restructuring group, two in New York and one in London. In asset management, we begin 2024 with $247 billion in assets under management, approximately 14% higher than at the start of 2023. Positive market sentiment and a widening dispersion of returns across asset classes are leading to increased activity and interest across our range of actively managed investment products. In addition, Evan's strategic plan is focused on stabilizing and optimizing the business, which has helped produce improved results throughout the year. Our investment teams continue to perform well in this market environment.
Speaker Change: Okay. That's really helpful. Peter and just for my follow up just a clarifying question around the revenue trajectory.
Speaker Change: Some of your peers have indicated they expect the slow build in fees and 24, just given the elongated deal and conversion timelines wanted to get a sense as given your strong backlog momentum.
Speaker Change: <unk> you cited in your prepared remarks entering 'twenty for how we should think about the revenue trajectory over the coming year and is the expectation, it's going to be a little bit more back half loaded just given some of those inaugurated timelines.
Speaker Change: Well I've spoken before about that those timelines. It does take time from a conversation to announcement to completion each of those have a variable and sometimes long lags between them.
But we're moving through that process. So again, I think where the market has definitely turned.
Speaker Change: With regard to the kind of within the year are typically for example in the first quarter is not the strongest quarter of the year and things and often the fourth quarter is the strongest quarter of the year. So if you just looked at history I think that would be a reasonable pattern to project and I guess.
Speaker Change: There's no there's nothing we're seeing that suggests that you know that typical historical pattern is not what to expect also in 2024.
Speaker Change: Helpful color Peter Thanks for taking my questions.
Speaker Change: Our next question comes from Brennan Hawken with UBS.
Brennan Hawken: Hey, Brennan good morning, Thanks, Hey, how are you Peter Thanks for taking my questions I'd love to its very helpful to hear your productivity targets.
Brennan Hawken: So I'd like to drill down on maybe how to think about MD growths.
Peter Orszag: And we've seen significant outperformance across our emerging markets, global, quant, and select local strategies. We're also continuing to add talent to the business with senior hires to our small cap equity platform in the fourth quarter and a recently announced new head of our Japanese... During the fourth quarter, we provided specific goals for our long-term plan to double revenue by 2030 and deliver an average annual total shareholder return of 10 to 15 percent through 2030. In financial advisory, we are focused on high productivity growth. We are targeting an increase in average revenue per MD to $8.5 million by 2025 and $10 million by 2028 and a net addition of 10 MDs each year through internal promotions and lateral hires. In addition to four new MDs recently hired, which underscores our ability to attract world-class professionals to Lazard, in January, we also promoted 10 new managing directors from within the firm, reflecting our longstanding strength in developing internal talent. In asset management, we are focused on strengthening our traditional business while adding capabilities in less liquid products, primarily through Inorganic Opportunity. We are targeting approximately 30% of asset management revenue from alternative or private markets and wealth management by 2030.
Brennan Hawken: So you gave some color on hiring and promotes here recently, we see the MD head count is already down.
Brennan Hawken: Decently from the <unk> level I know.
Brennan Hawken: That 10% wasn't about Mds and there's maryann you gave some color on the fact that theres still some flow through to happen for head count but.
Brennan Hawken: How should we think about that flow through on that and the head count.
Brennan Hawken: Number and then how should we think about also the go forward investing plans and any kind of like annual pace of net adds.
Brennan Hawken: Sure.
Brennan Hawken: Maybe as a starting base you should project forward once we get through the year end processes.
Brennan Hawken: And.
Brennan Hawken: And some people who will be leaving Lazard.
Speaker Change: Actually doing so you should start off.
Speaker Change: In financial Advisory at about 200, managing directors and build from there and I think with regard to them.
Speaker Change: The pace and the sort of annual plan I think you should expect obviously there will be a.
Speaker Change: Variation from year to year, but or we're planning and hoping to come in at around that 10, net add per year, it might be plus or minus a little but.
Speaker Change: Depending on this is especially on lateral hires.
Speaker Change: The matching function matters, a lot and we wanted to make sure that we're not just filling a quota on hitting.
Peter Orszag: We will evaluate and pursue acquisitions in a programmatic, disciplined manner with a focus on creating value for our shareholders. Now, let me turn to the outlook for the year ahead. As we've shared previously, we expect 2024 to be better than 2023. We see continued signs of a healthy and strong economy and the tailwinds for M&A activity strengthening while headwinds abate. We also could experience an unusual environment in 2024 with increased M&A occurring alongside greater restructuring, as rates remain high and debt maturities approach. We do note, however, that alongside these macroeconomic conditions, geopolitical uncertainty is increasingly top of mind for decision-making. I remain very focused on building a commercial and collegial culture to execute our ambitions, pursuing a strategic path to achieving our Lazard 2030 goals, and creating value for our shareholders. To that end, we are pleased to have completed our conversion to a C corporation on January 1st.
Speaker Change: Hitting and net out of 10, but rather I'm getting the right people, so sometimes it'll be more than that sometimes it'll be less than that but I don't think the variation will be that significant.
Speaker Change: Okay, great Great, Yes of course, but you know it would be around but that's that's around yet.
Speaker Change: Yeah, hopefully to get a rough idea.
Speaker Change: We'd love to drill down on expenses, because given your efficiency efforts and some of the moving pieces here this year.
Speaker Change: How should we think about the fixed expense base.
Speaker Change: Going forward, what kind of a delta versus where you were in 2023.
Speaker Change: And how much sort of most important if you really how much of these changes.
Speaker Change: Increased your level of operating leverage to a environment that seems to be improving.
Speaker Change: Yeah. So I'll start and then maybe Marianne will well will come in and let's separate them into the fixed costs into two components.
Operator: As we embark on the year ahead and our next chapter, our complementary businesses, premier brand, established global leadership, and extraordinary talent provide a strong foundation. Now, we're opening the call to questions. If you have a question at this time, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star 2, so others can hear your questions clearly.
Marianne: In the non comp.
Marianne: Category I think you should think about non comp being roughly flat in dollar terms just coming back to some of the earlier commentary.
Marianne: That's a combination of some things that will will respond to a stronger market travel and entertainment is a good example, and other things where we think we could have some reductions in 2020 for professional services is a good example in that category and then and in the car.
Devin Ryan: We ask that you pick up your handset for best sound quality. We'll take our first question from Ryan Kinney with Morgan Stanley. Please go ahead. Hey, good morning.
Marianne: <unk> you should expect that fixed costs will go down as a result of that as the head count reductions.
Peter Orszag: Thanks for taking my question. I have a big picture question for Peter on the Lazard 2030 strategy. And slide 10 is really helpful in understanding the building blocks there. One of the drivers listed, and you've talked about this before, is increasing relevance.
Marianne: Materialize and then clearly the bonuses component will.
Marianne: It will depend on how the businesses performed throughout the year and Maryann will fill in a little bit more detail, perhaps but the more the most important point is everything we're doing here is to make lazard more efficient and to put us on the path to raising productivity because that is the way to get operating leverage and we are pleased with the progress that we're making.
Peter Orszag: Can you help walk us through what specific changes culturally you're making to make sure that Lazard is top of mind for CEOs and boards? Sure. And relevance is important not just kind of for its own sake but because it then reinforces the brand and brings in revenue.
Maryann: Yeah, I'll, just add a couple of things to that.
Maryann: And really focusing on the fixed portion of compensation costs, which you've got a couple of different components in there right. So you've got salaries, which we will expect to come down sort of as you see the effects of the head count reductions come through you've got benefits, which for us are higher than most companies because of our presence in Europe.
Peter Orszag: So I want to make that clear. But there are lots of things that we are doing with increased presence externally. So getting our top bankers and thinkers out in the media, at conferences, and so on, to project the force of Lazard's insights and make it even more apparent to the world the differentiated talent and insight that we have. We are doing a lot more convening events that bring together top CEOs and thought leaders into a place that, you know, into select places so that there are conversations that can occur that, again, are more than what one can And then we're building out new capabilities that increase our relevance. A great example of that is the geopolitical team.
Our benefits and social charges, and so and those tend to vary with cash bonuses. So there's some unpredictability there, but generally tend to go up over time, and then you've got amortization of prior year Awards, which as you know high awards have gone up in the past yeah that we see the effects of.
Maryann: Those in future years, as you know and the other element that is that is sort of impacting this year in particular as we've got a couple of pretty productive people, who are becoming retirement eligible and so you recognize their entire award in the Euro the grant essentially because they've earned the whole thing and don't have to.
Peter Orszag: Clearly, as I've said before, you can't make a business decision today without geopolitical considerations being taken into account. And we have a top-notch team that is helping our clients evaluate those questions. Okay, great.
Maryann: Stay through the surface period.
Speaker Change: Got it and just sorry, just to clarify that.
Peter Orszag: And as we just think through wallet share, you're clearly focused on increasing the productivity of MDs over time; you've also taken some actions to manage headcount. So when we put those two together, is the goal to keep your wallet share but become more efficient, or to grow wallet share? Our goal is to increase our wallet share. We believe that will occur as we execute our Lizard 2030 goals, but to do so in a way that is not just buying wallet share, but doing so in a high productivity manner.
Speaker Change: The comment on the retirement eligible if those are new folks who are retirement eligible this year. So a delta versus what the impact was put in place that's right. That's right. Okay. Great. Thanks for all that color really appreciate it.
Speaker Change: Our next question comes from Jim Mitchell with Seaport Global. Please go ahead.
Jim Mitchell: Hey, good morning.
Jim Mitchell: Good morning, David.
Jim Mitchell: Good morning, just maybe on you noted Peter that Europe was particularly strong. This year can you talk about your outlook on Europe, how much of that strength was just your.
Devin Ryan: And the reason for that, I just want to pause on something really important, which is as we raise our productivity for MD, the operating leverage that we get, especially on the non-MD comp ratio, is what allows us to then invest in new talent. So it's a self-reinforcing cycle that as we raise productivity, we free up room in our comp ratio to make new investments in managing directors that lead to additional wallet share gains and additional relevance, as we just discussed, but doing so in a manner that still fits within our comp and margin targets. Great, thanks. Thank you. Our next question will come from Devin Ryan with JMP Securities. Please go ahead. Hey, thanks. Good morning.
Jim Mitchell: Push for productivity and collaboration versus the environment, and how youre thinking about that in 'twenty for.
David: Sure. So look we have a <unk>.
David: Co heads of Europe on the advisory side, which is fantastic. That's I think if you go back over Lazard history. One of the questions always was the degree to which Europe was integrated where there.
David: The coeds are off to a great start.
David: And.
David: We expect more to come from that structure as we are as we move forward through time with regard to.
David: The the market, we're still seeing significant activity in M&A and in some and in restructuring out of Europe.
Peter Orszag: First question concerns just those headcount reductions in the projected reduction of 10% in the run rate cost base. By the end of 2023, can you guys just give us an update on where we are on all those savings, how much of that was reinvested or will be reinvested back into the business, just because there's a lot of moving parts in expenses, and then also understand that 2024 might be a little bit of a transition year in kind of a revenue recovery. So just trying to think through some of the moving pieces and kind of what that could mean for maybe non-comp expenses in the absolute and maybe comp ratios, you know, on a relative basis. Thanks. Sure. So I'll start and then maybe Marianne will come in. Look, let's cut through all the complexity because I think this is pretty simple.
David: It may well be that part of the reason for that is that the.
David: The macroeconomic environment is a bit more challenging in Europe than in the U S, especially in Germany, specifically.
David: But across the continent and to some degree in the U K.
David: And so as companies see that more challenging domestic market. They are looking for top line growth through inorganic options, including in other geographies and that plays to our our strength.
David: I'd highlight again that among the independent firms, we really are the only one that has a strong presence in both North America and Europe. So to the extent that European firms are looking for a north American targets.
David: That's a natural fit with Lazard.
Speaker Change: Right makes sense and then just maybe on the margin targets.
You talked about getting our productivity per M. D up to $8 5 million by 25 is that kind of the bogey you need to get to the 20% margin and comp ratio targets or.
Speaker Change: Just trying to triangulate what normalized you would mean for those targets.
Peter Orszag: We are committed to our tradition, our long-term margin targets, both on comp and on non-comp. So on comp, you should, again, just keep in mind that our goal is to return to those traditional targets of being in the mid to high 50s on the comp ratio as revenue normalizes. So all the other pieces are contributors to that.
Speaker Change: I think there are lots of ways of hitting the normalized targets, but the plan all fits together and so we are aiming to accomplish all of the all of the things that we've set out productivity targets, obviously make it easier to hit the margin targets are.
Peter Orszag: We are on target for the headcount reduction that we articulated early last year, which is a 10% reduction from the first quarter of 2023 to the end of the first quarter of 2024. But again, it's not done for the sake of doing it, but rather to help us on our transition back to those traditional margin targets. And that's what I think you should be tracking.
Speaker Change: But.
Speaker Change: I wouldn't say, it's a it's not a necessary condition and maybe partially sufficient but it's not necessary.
Speaker Change: But we're planning on doing all of the above so hitting the expansion in the number of M. D is the increase in productivity, which then helps to finance the increase in the number of Mds.
And be very attentive to our comp and non comp expense ratios as the market normalizes.
Peter Orszag: You're right also to point out that 2024 might be a transition year. It obviously depends on how strong the revenue environment is, but we are committed to getting back to those traditional targets over time. I don't know, Marianne, if you want to add anything.
Speaker Change: Okay, great. Thanks.
Speaker Change: Our next question comes from James <unk> with Goldman Sachs. Please go ahead.
Marianne Vetsch: Yeah. So the one thing, Devin, you mentioned non-comp as well. So I would just say that we've done a lot of work. We are continuing to look constantly for cost savings opportunities where we are, you know, sort of turning over every stone. And so if you look sort of at what to expect for 2024 versus 2023, we expect to continue to see inflationary pressure and increased travel, for example. Occupancy costs tend to go up over time, but we really are working hard to keep expenses this year flat to maybe down a bit. So that's what I would expect there in dollar terms, right? Which will get us back. The ratio will come down a lot. Okay, terrific color.
James: Good morning, and thanks for taking my questions I, just wanted to touch on the asset management business and get your.
James: Patients are for flows in the fee rate in that business over 2024, and maybe into 2025.
James: I'll, let Evan take that sure Hey, James Devin.
Evan L. Russo: So yeah look I think flows as we've talked about in the previous quarters that we expected that flows were becoming more balanced overall for US net flows in 2023 were significantly better than our previous years. Despite some of the headwinds that we've all seen in the market. We expect it to be choppy continues to be choppy month to month quarter to quarter as you know based on our business.
Evan L. Russo: And certainly the first half of this year a lot of that is driven by the fact that you still have a lot of money sitting on the sidelines moved into money market and short duration type.
Evan L. Russo: Type instruments based on the higher yields that people are getting so there's a lot of money sitting on the sidelines, that's drawing capital away from risk assets and putting new money to work. So there's a little bit less conviction that we saw and I think that the markets are generally in Q4 and into the beginning of this year by putting new money to work so that starts to come off the sidelines, which we expect to happen.
Devin Ryan: Thank you. As a follow-up, Peter, I think there's been a positive reaction to the C Corp conversion and the decisive actions you guys took there. So kudos, and I think that's shown through in the stock. Yeah, I think the question that I'm still getting is around kind of the strategic and maybe financial merit as well, the model with kind of advisory plus asset management. And I appreciate that's been the model. But you know, as you continue to assess, do you see scenarios where the businesses could be more valuable separated? Are you still evaluating that? I know you said everything was on the table when you started. So just would love to get an update on how you're thinking there. And, you know, is it still TBD?
Evan L. Russo: Over the coming quarters ahead, we expect that to be a positive for us.
Evan L. Russo: We're seeing significantly.
Evan L. Russo: You called out in the script, we're seeing growing interest in many of our global strategies, the quantitative platform and selectively in fixed income I'd, probably say, it's a little bit earlier for us in the emerging markets as part of the cycle I think investors are still as we said sitting a little bit on the sidelines waiting for that opportunity.
Evan L. Russo: Waiting for the right timing to go back and reallocate into <unk> as you know last probably five or 10 years people started taking allocations down so we see that as a potential growth option and we are definitely having more conversations with clients and allocators about the right timing of that transition back into that space and that would obviously be a.
Peter Orszag: Or, you know, is this really kind of where we, I guess, you've made the decision on the kind of business model being combined? Thanks. Sure. Well, the way I would put it is that we see significant upside on both sides of the business, and so we're really focused on trying to create more value by executing on those opportunities, and that's the immediate task ahead of us. So on advisory, I think we've laid out the path involving a net addition of MDs and also raising productivity. On the asset management side of the business, it involves really two things.
Evan L. Russo: A positive for us as well, but I would expect that to be playing out probably over the next 12 months to 18 months, but overall I think that's the that's the strategy that we would see continuing to work and I think from a performance perspective, we've had a significant performance across the portfolios with significant strength in many of those areas that I called out globally.
Evan L. Russo: Yeah.
Evan L. Russo: The quantitative platform itself.
Evan L. Russo: As markets broaden out from what we saw in the past year as we all know the return performance beyond just seven stocks I think this move more towards fundamentally driven markets are certainly won't play to our strengths and we're already seeing that in the performance that we've had in the emerging markets in many of our international strategies.
Peter Orszag: One is optimizing the traditional business by focusing on investment performance and also on upgrading our distribution team, with the goal of some degree of growth because market appreciation at least more than offsets the pressure on from feed compression and net outflows given the move to index funds in active management and liquid markets combined with, so that's part one, and then part two is pivoting and diversifying the business into less liquid parts of the marketplace where investors are increasingly allocating their money, and So coming back to your question, we see significant upside on both sides of this.
Speaker Change: Okay. Thanks that was very helpful.
Speaker Change: Just one other one which is on your buyback I think the the size of the buyback was a positive surprise in the quarter. My opinion, maybe you could just speak to your updated thoughts on capital return priorities from here.
I'll I'll start and then Marianne can come in look moving forward.
Marianne: As Ive said before well first to start with we have two very cash generative businesses as markets normalize.
Marianne: And as we move forward in time, we are going to be putting an increased emphasis on using that cash flow for the inorganic opportunities that we see it in asset management.
Marianne: Obviously beyond the dividend.
Marianne: And so I.
Marianne: I would highlight for example, we have a new head of Corp, Dev who is starting in the next two or three weeks as we.
Marianne: Add additional capabilities to.
Marianne: Explore inorganic opportunities that we that we see on the on this pivot and diversification of the asset management business.
Peter Orszag: We also see opportunities for fully, in a fully compliant manner with all the appropriate firewalls for additional connectivity and synergies between the two businesses too. So we are focused on all of that, and I think that's the, you know, the next several years of what we're planning to do. Okay, thank you. Our next question comes from Steven Chubak with Wolf Research. Please go ahead.
Marianne: We're going to approach that in a very disciplined manner, and obviously way that so that use of cash and that use of capital again.
Marianne: Other potential uses including buybacks and deleveraging.
Marianne: A couple of points James just to clarify my comments on the buybacks were for the full year and we did buybacks in the first quarter, primarily but not this quarter. So just to make sure. That's clear and then on the pace of buybacks going forward as Peter just said that's one of the uses of our excess cash and we saw.
Steven Chubak: Hey Peter, on just the restructuring comments you made, you noted you're anticipating higher for longer rates, which certainly bodes well for the liability management business in particular. I was hoping you could just speak to your outlook for the business relative to an active 23 and how it could be impacted if we do begin to see a steady stream of rate cuts beginning in May or June of this year.
Marianne: Certainly plan to offset dilution from stock comp over time I was just starting to note that the pace, maybe a bit uneven based on other opportunities that we have so.
Marianne: That's not great for modeling, but yeah, I would expect to offset but not necessarily immediately.
Marianne: Alright as quickly as we Havent passed.
Peter Orszag: So what I would say with regard to our business is we started off, at least relative to the market slashing some of the competition, a little bit slower in 2023 in restructuring. But as we approach the end of the year, activity for us picked up significantly. And that's what we're seeing coming into 2024. The team is very active.
Speaker Change: Okay, that's very clear thank you very much.
Speaker Change: Thank you our last question will come from Mike Brown with K B W. Please go ahead.
Michael Brown: Hey, great good morning.
Michael Brown: Good morning, Peter Peter You mentioned.
Michael Brown: <unk>.
Michael Brown: Part of the plan for the asset management business is to pivot and diversify into private markets and understanding that this is going to be a multiyear process.
Michael Brown: But just wanted to hear a little bit more about that what could acquisitions look like there. It sounds like its early days you mentioned that you just hired someone who's got a corp Dev side of the business, but how.
Peter Orszag: We're really pleased with the new additions, which I think give us a lot more firepower in the sector. We're also seeing a kind of flywheel effect from the various different things that we're doing. So just to step back for a second, we have been diversifying the team. Historically, as you know, we were very debtor-focused. We now have a team that can very ably cover both creditors and debtors. We have also been building out our connectivity with private capital. That is important because a lot more of the restructuring and liability management activity involves private capital and private equity. And there's definitely a feedback loop from our new Lazard Capital Solutions team to restructuring and liability management. Also, frankly, our PCA fundraising business, we've got lots of different touch points now with private capital, and we're seeing that play out also. So, it looks like, for now, we're seeing an uptick in overall activity. I think that may well be partly because we've reconfigured our team to be able to cover, you know, be where the action is in a very constructive way. The new additions are welcome.
How do you think about bringing on the right assets to scale on the Lazard platform. While also paying the right price. So it can be accretive just given the valuations in the space are certainly higher than the private market side.
Speaker Change: Yeah, So here's the way I would look I would sort of phrase that.
Speaker Change: We're acting with urgency, but also discipline I'm.
Speaker Change: Focused on obviously trying to.
Speaker Change: Find the right the right fit not just making an acquisition for the sake of making one I'd highlight not just price, but cultural fit as being extremely important to making sure that the inorganic strategy and the programmatic M&A is a success over time.
Speaker Change: Or.
Speaker Change: Particularly focused on private asset managers with some degree of established track records that are still relatively early in their AUM progression, where they could benefit from our prestigious brand and our distribution network global distribution network.
Speaker Change: And we benefit from their diversification of offerings and performance.
Speaker Change: And we see a lot of opportunity to acquire firms of this size it and at this stage as they may be too small to move the needle at the very large alternative asset managers.
Peter Orszag: And with regard to whether a rate decline will change any of that in 2024, maybe at the margin, but two things. One is that I think the market may well still be overly optimistic about when the Fed is going to start cutting rates.
Speaker Change: And two large to integrate into firms are much smaller than we are so there's a sweet spot for us and we're going to again act with urgency, but also take.
Peter Orszag: And we can perhaps go into that if you'd like. But secondly, the rate reductions are going to be gradual. And so I think for most of 2024, the type of environment that we're seeing, especially combined with the wall of maturities that are approaching, is going to lead to a lot of restructuring. It's really helpful, Peter.
Speaker Change: The appropriate care to find the right match, because we are fully cognizant of the risks of you know deal has gone astray.
Speaker Change: Or integration that doesn't work. So you should expect again I use the word programmatic on purpose, we're going to do this over time and we're going to wait to make sure we get the right match, but as soon as we see the right match, we are going to act decisively.
Peter Orszag: And just for my follow-up, there's a clarifying question around the revenue trajectory. Some of your peers have indicated they expect slow build-in fees in 2024, just given elongated deal and conversion timelines. Wanted to get a sense, given your strong backlog momentum, the tailwinds you cited in your prepared remarks entering 2024, how we should think about the revenue trajectory over the coming year and whether the expectation is it's going to be a little bit more back half loaded just given some of those elongated timelines? Well, I've spoken about those timelines before.
Speaker Change: Okay, great. Thank you for that.
Speaker Change: And just maybe one one kind of a follow up on the advisory side of the business. You had mentioned in your prepared remarks that the private equity side is getting more active.
Speaker Change: What what is that starting to look like at this stage is it still more about kind of the dialogues are you starting to see things kind of falling into place and if you think about historically.
Speaker Change: What would be the final hurdles here that would need to get that cohort to become more active.
Speaker Change: Yes.
Speaker Change: Well, let me say a couple of things first outside of M&A.
Peter Orszag: It does take time from conversation to announcement to completion. Each of those has, you know, variable and sometimes long lags between them. But we're moving through that process. So, again, I think the market is definitely turned with regard to the kind of within the year. Typically, for example, the first quarter is not the strongest quarter of the year, and things and often the fourth quarter is the strongest quarter of the year.
Speaker Change: M&A, we have lots of business with private capital Slash alternative asset managers, that's our Lazard capital solutions practice in the private credit another.
Speaker Change: Fund raising our vectors in our restructuring and liability management practice in our P. C. A R fundraising business, which had a a lot of activity, especially in the secondary as component of its business last year and that continues into this year and then to the heart of your question.
Peter Orszag: So if you just looked at history, I think that would be a reasonable pattern to project. And I guess there's nothing we're seeing that suggests that, you know, that typical historical pattern is not what to expect also in, helpful caller Peter. Thanks for taking my call. Our next question comes from Brennan Hawken with UBS. Hey, Brandon.
Speaker Change: We are just seeing I think after a period of time in which private equity was trying to with a little bit on the sidelines with regard to especially sell sides.
Speaker Change: Their core business model of being transactional coming back online. So I think it's just a it was a matter of time.
Speaker Change: And.
Brennan Hawken: Good morning. Thanks. Hey, how are you?
Speaker Change: We're seeing that in our dialogues I think it's also apparent from the commentary from some of the leaders of the biggest alternative asset managers.
Peter Orszag: I'd love to, it's very helpful to hear your productivity target. So I'd like to drill down on maybe how to think about MD growth. So you gave some color on hiring and promotions here. Recently, we see that the MD headcount is already down decently from the 1Q level. That 10% wasn't about MDs, and Marianne gave some color on the fact that there's still some flow-through to happen for headcount. But how should we think about that flow-through on the MD headcount number? And then how should we think about also the go-forward investing plans and any kind of annual pace of net ads? Sure. So I think maybe as a starting base, you should project forward once we get through the year-end process of and some people who will be leaving WIZARD actually do so. You should start off in financial advisory at about 200 managing directors and build from there.
Speaker Change: That they are coming back I think I said coming back onto the playing field and that's the way I would describe it so the level of activity is not what it was yet in 2021, it's clear also that our dialogue with strategic started to get more serious earlier then.
Speaker Change: With private equity, but that is now clear.
Speaker Change: Liberating and we're seeing a lot of dialogue with private equity around M&A specifically in addition to the other.
Speaker Change: The ways in which we interact with them.
Speaker Change: Okay, great. Thank you for taking my questions.
Speaker Change: Thank you I will now turn the call back to Peter or Zhang for any closing remarks.
Peter: Look I think you'll be joining I would just say one thing in closing, which is a it's been about four months since taking over the role of CEO and I've been very actively meeting with our clients and are our own employees and our colleagues and shareholders and the results of all of that is that my conviction.
Peter Orszag: And with regard to... The pace in the annual plan, I think you should expect, obviously, there will be a variation from year to year, but we're planning and hoping to come in at around that 10 net add per year. It might be plus or minus a little, but depending on, especially lateral hires, the matching function matters a lot, and we want to make sure that we're not just filling a quota on saving a net add of 10, but rather getting the right people, so sometimes it will be more than that, sometimes it will be less than that, but I don't think the variation will be that significant for a year.
Peter: And about the path that we're on has only increased it is remarkable to interact with clients who are on.
Peter: On a unsolicited basis very complementary of the work that we do and most importantly, this organization is United in its ambition to aim higher and achiever Lazard 'twenty three goals, so more to come and thank you for joining us.
Peter: This does conclude today's lazard.
Speaker Change: For fourth quarter and full year 2023 earnings Conference call. You may disconnect. Your line at this time and have a wonderful day.
Brennan Hawken: Okay, great. Great. Yeah, of course. But you know, it'll be around.
Speaker Change: Okay.
Peter Orszag: But that's, that's yeah, around. Yeah, hopefully, I get a rough idea. Um, we'd love to drill down on expenses. Given your efficiency efforts and some of the moving pieces here this year, how should we think about, you know, the fixed expense base? Going forward. What kind of a delta will there be versus where you were in 2023? And how much, sort of, most importantly really, how much of these changes, you know, increased your level of operating leverage in that environment? Yeah, so I'll start and then maybe Marianne will come in.
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Peter Orszag: Let's separate them into the fixed cost into two components. In the non-comp category, I think you should think about non-comp being roughly flat in dollar terms, just coming back to some of the earlier commentary. That's a combination of some things that will respond to a stronger market. Travel and entertainment is a good example.
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Peter Orszag: And other things where we think we could have some reductions in 2024; professional services is a good example in that category. And then, in the comp line, you should expect that fixed costs will go down as a result of the headcount reductions materialize. And then, clearly, the bonuses component will depend on how the businesses perform throughout the year. And Marianne will fill in a little bit more detail, perhaps.
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Peter Orszag: But the most important point is that everything we're doing here is to make Lizard more efficient and to put us on the path to raising productivity because that is the way to get operating leverage. And we are pleased with the progress that we are making. Did Marianne want to add?
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Marianne Vetsch: Yeah, I'll just add a couple things to that. And really focus on the fixed portion of compensation costs, which you've got a couple different components in there, right? So you've got salaries, which we will expect to come down sort of as we see the effects of the headcount reductions come through. You've got benefits, which for us are higher than most companies because of our presence in Europe, benefits, and social charges. And so, those tend to vary with cash bonuses. So there's some unpredictability there, but they generally tend to go up over time.
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Marianne Vetsch: And then you've got amortization of prior year awards, which as, you know, high awards have gone up in the past, and we see the effects of those in future years, as you know. And the other element that is sort of impacting this year in particular is that we've got a couple of pretty productive people who are becoming retirement eligible. And so you recognize their entire award in the year of the grant, essentially because they've earned the whole thing and don't have to stay through the service period.
Marianne Vetsch: Got it. And just sorry, Marianne, just to clarify that comment on the retirement eligible folks, those are new folks who are retirement eligible this year. So a delta versus what the, That's right. That's right. Okay, great. Thanks for all that, Kyle. I really appreciate it. Hey, good morning. Good morning.
Brennan Hawken: Just maybe on, you noted, Peter, that Europe was particularly strong this year. Can you talk about your outlook for Europe? How much of that strength was, you know, just your push for productivity and collaboration versus the environment and how you're thinking about that? Sure, so look, we have new co-heads of Europe on the advisory side, which is fantastic. That's, I think, if you go back over Lazard's history, one of the questions always was the degree to which Europe was integrated.
Peter Orszag: We're there. The co-heads are off to a great start. We expect more to come from that structure as we move forward through time; the market; we're still seeing significant activity in M&A and in restructuring out of Europe. It may well be that part of the reason for that is that the macroeconomic environment is a bit more challenging in Europe than in the U.S., especially in Germany, specifically, but across the continent and to some degree in the U.K. And so as companies see that more challenging domestic market, they're looking for top-line growth through inorganic options, including in other geographies, and that plays to our strength.
Brennan Hawken: I'd highlight again that, among independent firms, we really are the only one that has a strong presence in both North America and Europe, so to the extent that European firms are looking for North American targets, that's a natural fit with Lausanne. Right, it makes sense. And then maybe on the margin targets, you talked about getting productivity per MD up to eight and a half million by 25. Is that kind of the bogeyman you need to get to the 20% margin and comp ratio targets? Or is it, you know, just trying to triangulate what normalized to you would mean?
Peter Orszag: I think there are lots of ways of hitting the normalized targets, but the plan all fits together, and so we are aiming to accomplish all of the things that we've set out. Productivity targets obviously make it easier to hit the margin targets, but I wouldn't say it's a necessary condition.
Peter Orszag: It may be partially sufficient, but it's not necessary. But we're planning on doing, you know, all of the above. So hitting the expansion in the number of MDs, the increase in productivity, which then helps to finance the increase in the number of MDs and be very attentive to our comp and noncomp expense ratios as the market. Okay, great, thanks.
James Yarrow: Our next question comes from James Yarrow with Goldman Sachs; please go ahead. Good morning and thanks for taking my question. I just wanted to touch on the asset management business and get your expectations for flows and the fee rate on that, and Ray Biondelli. Let Evan take that.
Evan L. Russo: Sure. Hey James, Devin. Um, so yeah, look, I think flows, as we talked about in the previous quarters, that, you know, we expected that flows were becoming more balanced overall for us, and net flows in 2023 would be significantly better than in previous years, despite some of the headwinds that we've all seen in the markets. We expect them to be choppy, you know, continue to be choppy month to month, quarter to quarter, as you know And certainly, in the first half of this year, a lot of that is driven by the fact that you still have a lot of money sitting on the sidelines, moved into the money market, short duration, type, uh, instruments, uh, based on the higher yields that people are getting. So there's a lot of money sitting on the sidelines that's drawing capital away from risk assets and putting new money to work. So there's a little bit less conviction than we saw.
Evan L. Russo: And I think that the market saw generally in Q4 and into the beginning of this year that by putting new money to work, as that starts to come off the sidelines, which we expect to happen, uh, over the coming quarters ahead, we expect that to be a positive movement for us. Significantly, uh, as Peter called out in the script, we're, we're, we're seeing growing interest in many of our global strategies, the quantitative platform, and selectively in fixed income. I'd probably say it's a little bit earlier for us in the emerging markets, uh, as part of the cycle. I think investors are still, as we said, sitting a little bit on the sidelines, waiting for that opportune moment, waiting for the right timing to go back and reallocate into EM. As you know, in the last, uh, probably five or 10 years, people started taking allocations down.
Evan L. Russo: So we see that as a potential growth option, and we're definitely having more conversations with clients and allocators about the right timing of that transition back into that space. Uh, and that would obviously be a positive for us as well, but I would expect that to be playing out probably over the next 12 to 18 months. But overall, I think that's the, uh, that's the strategy that we would see continuing to work in. I think from a performance perspective, we've had significant performance across the portfolios with significant strength in many of those areas that I called out globally and, um, the, uh, quantitative platform. And so as markets broaden out from what we saw in the past year, as we all know, the return performance beyond just seven stocks, I think this move more towards fundamentally driven markets will certainly play to our strengths, and we're already seeing that in the performance that we've had in the emerging markets and many of our international strategies. Okay, thanks. That was very helpful.
James Yarrow: There's one other one, which is, you know, on your buyback. I think the... The size of the buyback was a positive surprise in the quarter, in my opinion. Maybe you could just speak to your updated thoughts on capital return priorities. I'll start, and then Marianne can come in.
Peter Orszag: Look, moving forward, as I've said before, well, first to start with, we have two very cash-generating businesses as markets normalize. And as we move forward in time, we are going to be putting an increased emphasis on using that cash flow for the inorganic opportunities that we see in asset management, obviously beyond the dividend. And so I would highlight, for example, we have a new head of CorpDev who is starting in the next two or three weeks as we add additional capabilities to explore the inorganic opportunities that we see in this pivot and diversification of the asset management business. We are going to approach that in a very disciplined manner and obviously weigh that use of cash and that use of capital against other potential uses, including buybacks and de-leveraging. A couple of points. James, just to clarify, my comments on the buybacks were for the full year, and we did buybacks in the first quarter primarily, but not this quarter.
Marianne Vetsch: So just to make sure that's clear. And then on the pace of buybacks going forward, as Peter just said, that's one of the uses of our excess cash. And we certainly plan to offset dilution from stock comp over time. I would just sort of note that the pace may be a bit uneven based on other opportunities that we have. So I realize that's not great for modeling, but I would expect it to balance out, but not necessarily immediately or as quickly as we have in the past.
James Yarrow: Okay, that's right. Thank you. Our last question will come from Mike Brown with KBW. Please go ahead. Hey, great. Good morning.
Michael Brown: Morning Peter, Peter, you mentioned that part of the plan for the asset management business is to pivot and diversify into the private market, and understand that this is going to be a multi-year process. But just wanted to hear a little bit more about that.
Peter Orszag: What could acquisitions look like there? It sounds like it's early days. You mentioned that you just hired the dev side of the business, but how do you think about bringing on the right assets to scale on the Lazard platform while also paying the right price so it can be accreted, just given the valuation, which is certainly high?
Peter Orszag: Yeah, so here's the way I would sort of phrase that. We're acting with urgency, but also discipline, focused on obviously trying to find the right fit, not just making an acquisition for the sake of making one. I'd highlight not just price but cultural fit as being extremely important to making sure that the inorganic strategy and the programmatic M&A is a success over time. We're particularly focused on private asset managers with some degree of established track record that are still relatively early in their AUM progression, where they could benefit from our prestigious brand and our distribution network. And we benefit from their diversification of offerings and performance. And we see a lot of opportunity to acquire firms of this size and at this stage as they may be too small to move the needle at the very large alternative asset managers and too large to integrate into firms much smaller than we are. So there's a sweet spot for us. And we're going to, again, act with urgency, but also take the appropriate care to find the right match because we are fully cognizant of the risks. You know, deals gone astray or integration that doesn't work. So you should expect, again, I use the word programmatic on purpose.
Peter Orszag: We are going to do this over time, and we're going to wait to make sure we get the right match. But as soon as we see the right match, we are going to act decisively. Okay, great. Thank you for that. And just maybe one kind of follow up on the advisory side of things. You had mentioned in your prepared remarks that the private equity side is getting more active. What is that starting to look like? Still more about the dialogues, are you starting to see things falling into place? Think about, you know, historically.
Peter Orszag: What would be the final hurdles here that would need to get that cohort to become, you know, more active? Well, let me say a couple of things. First, outside of M&A, we have lots of business with private capital slash alternative asset managers. That's our Lazard Capital Solutions practice in the private credit and other fundraising vectors in our restructuring and liability management practice in our PCA, our fundraising business, which had a lot of activity, especially in the secondaries component of its business last year, and that continues into this year. And then to the heart of your question, we are just seeing, I think, after a period of time in which private equity was trying to, was a little bit on the sidelines with regard to especially sell sides, their core business model of being transactional coming back online. I don't, so I think it's just a matter of time.
Peter Orszag: And we're seeing that in our conversations. I think it's also apparent from the commentary from some of the leaders of the biggest alternative asset managers that they're coming back. I think I said coming back onto the playing field, and that's the way I would describe it.
Peter Orszag: So the level of activity is not yet what it was in 2021. It's also clear that our dialogue with strategics started to get more serious earlier than with private equity, but that is now re-equilibrating, and we're seeing a lot of dialogue with private equity around M&A specifically in addition to the other ways in which we interact. Okay, great. Thank you for taking my question. Thank you. I will now turn the call back to Peter Orszag for any closing remarks. Look, I thank you for joining us. I would just say one thing in closing, which is that it's been about four months since I took over the role of CEO. And I've been very actively meeting with our clients and our own employees, colleagues, and shareholders. And the result of all of that is that my conviction about the path that we're on has only increased. It is remarkable to interact with clients who are, on an unsolicited basis, very complimentary of the work that we do. And, most importantly, this organization is united in its ambition to aim higher and achieve our Lazaar 2030 goals.
Peter Orszag: So more to come. And thank you for joining us. This does conclude today's Lizard 4th quarter and 4-year 2023 earnings conference call. You may disconnect your line if it's time, and have a wonderful day.
Operator: And I don't know. I don't know. I don't know. Bye!
Operator: A. R. Billings and Dan Hance.