Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Lazard Ltd. (NYSE:LAZ)

Q4 2011 Earnings Results Conference

February 6, 2012 8:00 am ET

Executives

Kenneth M. Jacobs - Chairman and CEO

Matthieu Bucaille – Chief Financial Officer

Judi Frost Mackey - Director, Global Communications

Analysts

Guy Moszkowski - Bank of America Merrill Lynch

Howard Chen - Credit Suisse

Christopher Kotowski - Oppenheimer & Co. Inc

Devin Ryan - Sandler O'Neill & Partners

Daniel Harris - Goldman Sachs

Joel Jeffrey - Keefe, Bruyette & Woods, Inc

James Mitchell - Buckingham Research Group, Inc

Steven Gavios - Jennison Associates, LLC

Operator

Good morning and welcome to Lazard’s Fourth Quarter and Full Year 2011 Earnings Conference Call. This call is being recorded. At this time, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions)

At this time, I’d like to turn the call over to Judi Frost Mackey, Lazard’s Director of Global Communications. Please go ahead.

Judi Frost Mackey

Good morning and thank you for joining our conference call to review Lazard’s results for the fourth quarter and full year of 2011. Hosting the call today are Lazard’s Chairman and Chief Executive Officer, Ken Jacobs, and Chief Financial Officer, Matthieu Bucaille. A replay of this call will be available on our website at www.lazard.com beginning today shortly after the call.

Today’s call may contain forward-looking statements. These statements are based on our current expectations about future events that are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements.

These factors include, but are not limited to, those discussed in Lazard’s filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements.

Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Today's discussion may also include certain non-GAAP financial measures. A description of these non-GAAP financial measures and a reconciliation to the comparable GAAP measures are contained in our earning release, which has been filed with the SEC in our current report on Form 8-K.

For today's call, we will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and in our investor presentation of supplemental information, both of which are posted on our website at www.lazard.com. Ken and Matthieu will be happy to answer your questions following their remarks.

I’ll now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Kenneth M. Jacobs

Good morning. Thank you for joining our call. The financial markets were difficult in 2011 and Lazard had a challenging fourth quarter. Yet, our franchise is better positioned today than ever before with significant operating leverage in both our businesses, Financial Advisory and Asset Management, as macroeconomic conditions improve.

We entered 2011 with a broad and deep platform, with the best people and an unrivaled network of relationships with corporations, governments and investing institutions around the world. We achieved record revenues through the third quarter. In the fourth quarter we experienced a revenue decline in Financial Advisory and a slow down in Asset Management. Both were primarily caused by the market turmoil centered in Europe, which began in summer and continue to year-end. The fourth quarter revenue decline combined with our discipline on compensation deferrals, led to a drop in fourth quarter earnings.

In Financial Advisory, full-year operating revenue decreased 11% from 2010. Fourth quarter revenue increased 3% from the third quarter, but declined 26% from the strong fourth quarter of 2010. The Financial Advisory, each quarter in 2011, was better than the previous one from a revenue perspective.

Asset Management achieved record operating revenue for the year, up 6% from 2010 driven by a 14% increase in management fees, offset by lower performance fees. Fourth quarter revenue declined 20% from year-ago levels primarily driven by lower performance fees in our alternatives business.

I’d like to cover three topics in my remarks. First, our macro outlook. Second, our compensation approach and goals, and third some perspective on Lazard today.

Let’s start with the outlook. Across developed and developing markets, confidence is improving. We believe the U.S is enjoying a slow, but steady recovery. The developing markets have stabilized and their long-term growth story appears intact. In Europe, business conditions were likely remained difficult for some time.

A recovery in M&A appears increasingly likely. In the developed world, multinational corporations have limited opportunities for organic growth, if they have strong balance sheet and record amounts of cash and financing is available. Developing market champions are also looking for opportunities in the developed world, as a result we expect to see more cross-border activity.

Our Strategic Advisory business is in a strong position to benefit from these trends. We are the leading independent advisor globally with deep roots in every major developed market and most developing markets throughout the world. We have strong operating leverage from an M&A recovery in Europe and the U.S. We’re increasingly well positioned in Asia, Latin America and the Middle East.

On the restructuring front, we expect to see an increase in European activity this year as financial sector pressure tightens credit. This should affect midsized, highly leveraged and privately owned companies. In the U.S., we expect less activity as the economy recovers and financing is available.

Our Capital Structure Advisory business is a powerful complement to our M&A and strategic advisory work. We expect it to grow especially in Europe as the de-leveraging of developed economies continues. Equity markets are off to a good start this year. In our Asset Management business the outlook is excellent. Despite the volatile markets in 2011, we’re building from a position of strength.

We now have more than 20 strategies with over $1.5 billion in assets under management. Relative performance has been strong in all our major platforms and we’re extending our franchise across our key investment platforms and geographies. As investor confidence builds and global markets recover our Asset Management business model is well positioned. Half our clients are non-U.S. and our global export-import local model thrives on cross-border flows.

We see considerable pent-up demand among institutions. Investors are sitting on cash they want to put to work. The growth of global pension systems and sovereign wealth funds is an area where we see great potential to leverage Lazard’s global footprint. In developing markets, in particular, we see opportunities to leverage our banking relationships to open doors for Asset Management and vice versa.

Now I’d like to review our approach to compensation since 2009. As we said before we believe the best way to manage our business is to focus on current year awarded compensation and maintain control over deferrals. The concept of awarded compensation simply considers the cost of all pay, including deferrals in the year it is awarded to the employee, it’s the way that any of us thinks about our compensation in a given year.

An awarded compensation for us includes all of our investments in new hires. We think this is the best way to manage and track compensation cost. Under GAAP, reported period compensation reflects current salaries, benefits and cash compensation and deferral amounts from prior years. Current year deferrals are not included in current year GAAP compensation making it difficult to assess current year awarded compensation cost.

We understand that most of you will continue to model our business and compare us to competitors through a GAAP lens, but disclosing awarded compensation should help you to judge the compensation trends in our business, assess the quality of our earnings, and more accurately model our GAAP compensation cost going forward.

Now let’s turn to our compensation goals. First; we’re committed to growing awarded compensation at a slower rate than revenue growth. We accomplished this in 2009 and 2010. In 2011, revenues declined and we reduced compensation inline with a decrease in revenue including our investment in new hires during the year. Matthieu, will discuss this in more detail.

Second; we will remain disciplined regarding deferral rates as we’ve been since 2009. Our firm wide deferral rate was approximately 23% in 2011 and in 2010. And in 2009 it was about 22%. Third; we’re committed to achieving, a compensation to revenue ratio over the cycle in the mid-to-high 50’s percentage range on both a GAAP and awarded compensation basis while maintaining control of deferrals.

It will be challenging to meet this goal in 2012 because of the burden of differed grants made in 2008, and our commitment to stay disciplined on deferrals. But the goal is achievable for 2013 on both a GAAP and awarded basis while maintaining control of deferrals.

Lazard is in excellent financial health. We continue to generate significant cash flow. Our model requires minimal capital to operate and there is a high conversion of stated earnings to cash flow. In April of 2012, we plan to increase the quarterly dividend on our outstanding common stock by 25% to $0.20 per share. This follows the 28% increase in our quarterly dividend in April 2011.

We’re following through on our goal of returning cash to shareholders. In the last two years, we bought back shares of our stock to more than offset potential dilution of year-end equity grants. We’re committed to doing so in 2012 as well.

I’ll conclude with the perspective on Lazard today. The year is off to a promising start. Our Financial Advisory business is more active than at this time last year. Our competitive position continues to strengthen. We’re engaged in some of the largest and most high-profile transactions around the world.

Last year, we were involved in three of the ten largest M&A transactions as well as groundbreaking spin-offs and asset sales. We remain active in highly complex cross-border transactions and some of the largest restructuring assignments.

Asset Management has a strong tailwind of good performance, investor demand, and rebounding markets. Most of our hedge fund assets are already above their high order marks. Our assets under management are near their average level of last year. Our financial strength has allowed us to keep investing in our business.

In Financial Advisory, we’ve complemented our already deep ranks of senior bankers in a range of practice areas and geographies. In Asset Management, we’ve hired senior investment professionals and extended our platform by launching new strategies in emerging markets, equities, and fixed income.

Entering 2012 as the leading global independent advisory firm, we see substantial growth opportunities ahead. Lazard had significant operating leverage in both our businesses as the macroeconomic environment improves.

My colleagues and I are the largest and longest term shareholders in Lazard. We believe the steps we’ve taken are the right steps to build value for our shareholders over the long-term. We look forward to answering your questions today and in the months to come.

Matthieu, will now provide more detail on our results and will highlight some of our work for clients. Thank you.

Matthieu Bucaille

Thank you, and good morning. I’ll now provide more color on four areas, net income and revenue, business activity in Financial Advisory and Asset Management, operating expense and capital management.

This morning, we reported adjusted diluted net income per share of $1.31 for the year and $0.01 for the fourth quarter. These results were primarily due to the decline in our revenues in the fourth quarter and to our discipline regarding compensation deferrals. Also contributing to the decline was the impact of compensation obligations from 2008 and 2007.

Annual operating revenue of $1.884 billion for 2011 was down 5% from 2010. Fourth quarter operating revenue was $469 million, a 23% decline from a historically strong 2010 fourth quarter.

Financial Advisory revenue was down 11% in 2011 from 2010. This decline primarily reflected a 33% decrease in restructuring revenue as activities slowed throughout the year. While fourth quarter revenue declined, our Strategic Advisory business was and continues to be active.

As Ken mentioned, we advised on three of the ten largest M&A transactions announced in 2011. These included Medco’s Health Solutions $29 billion merger with Express Scripts, Progress Energy’s $26 billion merger with Duke Energy, and Google’s $12.5 billion acquisition of Motorola Mobility. We played an active role in some of the most notable corporate [demergers] and spin-offs such as the ITT and Tyco transactions.

On Sovereign Advisory business, our Sovereign Advisory business continues to be involved in the most important and high-profile global assignments, including advising the Government of Greece in it’s ongoing debt negotiations and the U.S. Treasury with respect to General Motors and many others. Award leading restructuring group has been retained for some of the largest and most complex assignments including Kodak, the creditors of Hostess, and the Allied Pilots Association regarding American Airlines’ Chapter 11 proceedings.

In Asset Management, our firm achieved record operating revenues and management fees. Operating revenue was $883 million for 2011, 6% higher than 2010. This reflected record management fees of $818 million. Management fees were 14% higher than 2010, principally because of a higher level of average assets under management and a better business mix.

Global stock market volatility in the second part of the year depressed AUM an incentive fees, in particularly, in alternatives, which are typically earned in the fourth quarter. This led to a fourth quarter decline in operating revenue to $204 million, 6% lower than the third quarter of 2011 and 20% lower than the fourth quarter of 2010.

We had net outflows of $1 billion for the year and $294 million in the fourth quarter. These relatively limited net outflows were primarily due to clients delayed investment decisions and delayed funding of new mandates in the third and fourth quarters.

Asset Under Management ended 2011 at $141 billion versus $152 billion on average during the year. However, as of the end of January our AUM has already reached approximately $150 billion, a level near our 2011 average and our pipeline of new mandates continue to grow.

Turning now to operating expense, and first of all through compensation. The 2011 adjusted GAAP compensation and benefits expense was $1.168 billion, roughly even with 2010. The ratio of adjusted GAAP compensation to operating revenue was 62% compared to 59% in 2010.

Three key factors contributed to the increase of our GAAP ratio. First, the 5% decline in operating revenue versus 2010. Second, the 20% increase of amortization of prior year’s deferrals from $241 million in 2010 to $289 million in 2011. Third, in order to avoid a further increase of deferrals in future years we maintain 2011 deferrals at 23% of compensation, the same level as in 2010. More deferrals now will just mean more expense in the future or in other words current income at the expense of future income.

In order to better assess our compensation costs, let us look at awarded compensation. Our awarded compensation ratio was 61.7% in 2011, roughly even with the 2010 ratio of 61.5%. Overall, awarded compensation was down from $1.217 billion in 2010 to $1.163 billion in 2011 inline with the 5% decline in operating revenue. But firm wide, discretionary bonuses declined by approximately 20%.

Over the course of the year we made significant investments in both of our businesses. These investments are included in our awarded compensation expense. So our 2011 awarded compensation not only reflects the impact of our revenue decline, but also the investments made over the course of the year. During the first quarter of 2012, we expect to incur expenses of approximately $25 million to $30 million associated with the year-end profit.

Non-compensation. We had $400 million in expenses for 2011, 9% higher than in 2010. Our non-compensation expense ratio for the full-year 2011 was 21% versus 19% in 2010. As discussed in the past, the increase was attributable primarily to cost associated with investments in our business, which we initiated in the first half of 2011, higher activity levels, primarily in Asset Management and the weakening of the U.S. dollar versus foreign currency on average during the year. The impact of some of these investments will continue to be felt in 2012, but we have launched initiatives to partially offset this cost. These include optimization and centralization of our purchasing, acceleration of our back office integration, and technology investments for greater efficiency.

Finally, in 2011 we accelerated our active capital management policies with a goal of reducing risks and increasing return to shareholders. As Ken mentioned, in April 2012 our Board of Directors plan to increase the quarterly dividends on our outstanding common stock by 25% to $0.20 per share. This follows the 28% increase in our quarterly dividends in April 2011. In July we reduced leverage by repurchasing $150 million of subordinated debt at a discount. Going forward, we will continue to consider opportunistic ways to reduce or extend our debt.

Our balance sheet is strong and liquid. We also increased return to shareholders with accelerated stock repurchases. During the year we repurchased 6.2 million shares at attractive prices enough to more than offset new RSU grants, reducing our fully diluted number of shares outstanding. As of the end of 2011 we still had $212 million available for additional share repurchase.

Going forward, we remain focused on quality, revenue, and earnings growth, operational leverage, and active capital management. This concludes our remarks. We are now happy to take your questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) And we will take our first question from Guy Moszkowski with Bank of America Merrill Lynch.

Guy Moszkowski - Bank of America Merrill Lynch

Good morning. Just, I’m going to focus in a little bit on the compensation although obviously you gave a fairly detailed discussion. First of all the negative operating leverage issues that you were talking about, do you feel that they equally impacted the Asset Management and the Financial Advisory businesses or was that issue more pronounced in one than the other?

Kenneth M. Jacobs

Hi. Guy, I’m not sure I follow your question exactly. Can you give me a little more background or give me a little detail to it on the operating leverage?

Guy Moszkowski - Bank of America Merrill Lynch

So I guess the question is to the extent that fixed comp issues either because of hiring or because of deferred comp charges hit your businesses heavily given that revenue was down. Was that impact more severe in Financial Advisory, in Asset Management or was it pretty much equal across both businesses?

Kenneth M. Jacobs

Okay. So let me break the question into two parts. One is the fixed costs associated with our business on the comp side. I’d say that when you look at GAAP you’ve got three components, obviously, you got salaries, benefits – you have salaries and benefits and the – then you have the cash bonuses and then you have the amortization of cost from prior years. What we did in terms of the salary -- the cash bonuses is really the discretionary part of GAAP compensation. And there I think as you can see from the press release we were very aggressive, we took it down, discretionary bonuses by approximately 20%.

In terms of how that hits the business go down, I’d say the following. The Advisory Business was really the business that was off this year. So the disproportionate impact of the decline in bonuses was felt by the advisory side of the business. The Asset Management business was essentially up this year, and so the impact was much less on the Asset Management side than it was on the advisory side. I hope that goes to your question?

Guy Moszkowski - Bank of America Merrill Lynch

Yeah, no that helps. I mean the implication is that maybe more of the discretionary hiring that led to that $50 million increase in base salary and benefits was more of that in Financial Advisory as well?

Kenneth M. Jacobs

Probably a little bit more in Financial Advisory than the Asset Management side. But on the other hand on the Advisory side we are also more aggressive over the course of the entire year of managing in and managing out. On the Asset Management side, I’d say, it’s net we were adding.

Guy Moszkowski - Bank of America Merrill Lynch

And was most of the $50 million increase in the base salary and benefits due to additional headcount or did you have meaningful base salary increases?

Kenneth M. Jacobs

I’d say it’s a mix. And some part of it is due to the salary increases at the end of last year. You just -- you think about the base of the number of employees we have and our cost of living type of increase, then you can see the impact that would have. And then some of it obviously is associated with the hiring.

Guy Moszkowski - Bank of America Merrill Lynch

And given what happened over the course of the year in terms of just the business flow and obviously a lot of that is cyclical and, I guess, to some extent politics and therefore a decline in confidence. But overall are you still comfortable that you’ve hired appropriately or in retrospect do you feel like you may have over hired and I guess the corollary to that is, do you feel like in anyway you might be top-heavy?

Kenneth M. Jacobs

Okay, good question. Look we were actually pretty careful about hiring in 2010 and we became a little bit more aggressive in 2011 and we are probably a little bit more aggressive right now. Our view on hiring has always been “you do it when people aren’t". In a sense cyclically you have to be counter cyclical about hiring. When things get expensive you want to sit on the side lines, when things start to become a little bit looser and more reasonable is the time to hire.

And frankly speaking 2010, ’09 comp, 2010 was probably a pretty difficult year to hire. 2011 we saw more opportunities, so we became a little bit more aggressive. But -- and I think in 2012 we are going to also see some more opportunities. Most of this has been what I would say fill out of places where we -- we needed to fill out China, a little bit in the Middle East, a little bit in Latin America. And then also I’d say in the developed markets it’s really been pretty much complementing and building on strengths that we already have. And I think we are pretty comfortable with the hires we’ve made.

Guy Moszkowski - Bank of America Merrill Lynch

Okay. And then the final question is going to just be on Asset Management and you referred to some of the strategies that you think are, have gained traction and I guess, look attractive for marketing purposes, and I was wondering if you could give us a little bit more of a sense for what those are?

Kenneth M. Jacobs

Okay. Matthieu, you want to take a shot at that?

Matthieu Bucaille

Yeah. Well, in some of the most -- some of the strategies where we have most tractions include emerging market debt, global equities and fixed income. As you know, we've also made a number of investments across all of our platform during the year and we also expanded in real-estate, so that’s, I think the key highlight.

Guy Moszkowski - Bank of America Merrill Lynch

Okay. That’s great. Thanks very much.

Kenneth M. Jacobs

Sure.

Operator

We’ll go next to Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Hi, good morning, Matthieu. Good morning, Ken.

Kenneth M. Jacobs

Good morning.

Matthieu Bucaille

Good morning.

Howard Chen - Credit Suisse

Ken, following-up on your operating leverage remarks in the prepared commentary, just any thoughts on framing the size or timing of that operating leverage and could you highlight some of your initiatives that you all are doing outside of comp to control expenses maybe as the top-line environment remains soft or that gives you some cushion as things improve?

Kenneth M. Jacobs

Okay. First, look from a macroeconomic outlook standpoint, two markets or obviously two businesses, the Advisory and the Asset Management business; on the Advisory side needless to say if there is a recovery in the M&A markets that’s going to have a positive impact on us. And with regard to that I’ve said this before, there are three factors we kind of look at, confidence, financing, valuation.

I think generally speaking our sense is since the low point of kind of November, December confidence has improved in, pretty much everywhere, say for some parts of Europe, and even there, I think even in the recent weeks since the actions of ECB over December it’s probably improved a bit as well.

On the financing front clearly in the U.S. and the developing world markets are open. In Europe for the large companies there is still quite a bit of accessibility to capital. I think for the mid-tier companies and the more highly leveraged companies there’s some credit crunch going on there. So but, generally speaking the financing environment is okay, and obviously the improvement in the equity markets in recent weeks helps that as well.

On the valuation front things are still reasonable, and then the real challenge for companies is organic growth and so if you got a challenge around organic growth then we think it’s inevitable that there’s going to be more M&A activity. And so, we’re keeping in a careful eye on that, the tone is a little bit, its clearly a little bit better now than it was in the fall.

On the Asset Management side, obviously the recovery of the equity market really helps us. I think the products that we have and the performance we had in those products all positioned us very well for any kind of recovery. We see a lot of pent-up demand amongst institutions globally, especially for the kinds of things we do. So actually, I think we’re really pretty well positioned to really take advantage of the operating leverage we have in the business, if there’s any kind of recovery.

Now to your question on the expense side; in our business we really have three expenses. We have comp, we have non-comp, and we have interest expenses. On the interest expense side unfortunately we’re kind of locked into debt that comes due in 2015 and every time I say, we’d like to do something about it, the debt trades up in price. So we keep a careful eye on it, but I am not sure there’s that much we can do on that in the near-term.

With regard to comp; I think as you look through our disclosures and you have further conversations with us, I think you’ll see we’ve been quite aggressive, we have not only taken down comp on a discretionary basis by 20%, but we’ve managed also to offset in real terms any of the hires we’ve made over the course of the year and have actual comp decline inline with revenue. So, I think we’ve done a pretty good job on the comp side this year, and appropriately so, a decline in revenues in the business, there should be a sharing of the downside clearly with the employees and the people in the business, just as there is on the upside.

On the non-comp side, that falls into two categories; a portion that’s fixed, a portion that’s somewhat variable. The fixed portion is things like, rents and the like there. We probably have a kick-up in 2012 just by virtue of having to renew some leases that were 20 years old, for instance in New York. But on the other hand we think we think we found – we’ll find enough savings in the business over the course of next year to probably offset that. With regard to the other half of comp which is more variable, there if revenues go up, probably those go up, but probably not quite as quickly as revenues. And if revenues go down they’ll probably go down, but again you don’t quite go down quite as quickly as revenues. So that’s probably a good summary of the non-comp picture.

Howard Chen - Credit Suisse

Very [comprehensive].

Kenneth M. Jacobs

And needless to say, on the macroeconomic environment, we’re going to be as thoughtful about it as anyone and to the extent that the recovery doesn’t come, then we’ll continue to tighten things up.

Howard Chen - Credit Suisse

Very helpful. Thanks Ken. And then, just maybe a follow-up on that, if we look at the profitability of the firm over the past few years, the mix between financial advisory to Asset Management changed pretty dramatically, I mean, given Asset Management businesses historically have a lower comp ratio. Why doesn’t that help you maybe even more?

Kenneth M. Jacobs

It does. And actually, I think if you look back over the disclosure we have on, I think its page 13, you’ll see that the overall awarded comp ratio which is really the best measure of what we pay in any given year in terms of compensation has trended down pretty substantially since 2006, ’07, ’08 and such; and so, I think that’s first.

The second is; there are two different businesses managed differently with very different cost structures. And to just give you a little perspective on it, to help you sort of think this through. In 2011, when we got finished with the year, the Financial Advisory business in a down year was operating on an awarded compensation basis at a ratio of about 63%. We’re confident to that, if revenue rebounds to historic levels, we can manage this business to about 60% or lower over time. In 2010, as an example, when revenues were about $1.12 billion this business was at 60%.

Our Asset Management business today had an awarded comp at the end of the year of about 43% and corporate and support or really support functions were about 8% of the firm revenue. This will decrease as revenues grow, that is the support functions will not grow anywhere near as quickly as revenues will. So to help you kind of think about this, well we've no idea really what 2013 revenues will be. At this point, with the similar mix of business though, and assuming a growth environment that’s consistent with the forecast for 2013 that you guys have out there right now. We believe that we can achieve the compensation ratio I discussed above on both the GAAP and awarded compensation basis and we think we can do that while keeping control of the deferrals.

Howard Chen - Credit Suisse

Great. That’s helpful. Thank Ken, and then just …

Kenneth M. Jacobs

Just a word of qualification on that, just for you guys to know I mean a lot of this is premised on – a part of this is premised on the environment we’re in today. We think there’s a nice tailwind coming from the second – the changes going on in the financial services sector, so we’re counting in part on that, but I think that’s a pretty reasonable assumption. And also, I don’t want to mislead anyone; this environment could create a lot of attractive investment or acquisition opportunities that could change the mix of our business in either direction. And so that’s just one thing to think about as we go forward. Okay?

Howard Chen - Credit Suisse

Great. Thanks Ken. And then final one from me; the Asset Management flow picture is fairly tepid for the industry and you’re certainly feeling a little bit as well, the flow has got a bit weaker in a sense of the 10-Q, but I know there’s a lot of noise within that. Could you speak to on your current thoughts on the back log for new mandates and just what [seasonal] are seeing in that business? Thanks.

Kenneth M. Jacobs

Yeah, sure. I think, look, the month of January felt pretty good to us on new mandates and interests. I think, right now we’re really starting to see the pipeline on the Asset Management side, mandates start to build and we’re feeling pretty good about it. I mean that combined with the fact that the AUM is back to the average level of last year and that we’re above high watermark on virtually all our performance fee related funds, gives us some comfort.

Howard Chen - Credit Suisse

Okay.

Kenneth M. Jacobs

And as you know just to add to that, one of the things we’ve working in our favor is 2011 investment performance has been good across virtually the whole platform.

Howard Chen - Credit Suisse

Great, thanks.

Kenneth M. Jacobs

Okay.

Operator

And we’ll take our next question from Chris Kotowski with Oppenheimer & Co.

Christopher Kotowski - Oppenheimer & Co. Inc

Yeah, I wonder the investments and people that you made this year, one is, are you for 2012, is that contractually locked-in or is there room on the – and flexibility on the discretionary bonus side for that …

Kenneth M. Jacobs

Oh, sure. Good question.

Christopher Kotowski - Oppenheimer & Co. Inc

… in 2012?

Kenneth M. Jacobs

Right. Good question. The answer is that for the most part, the hiring we do does not come with any long contractual obligations at all. I mean, that’s one of the nice things about this particular environment is that the contractual obligations fall off pretty quickly in terms of guarantees and things like that.

What we do incur, which we -- again, on page 13, you’ll see is we incur, often times you’ve to pick up deferrals or past stock grants or things like that when you hire somebody, but those don’t carryover into the future if we’re expensing them right now on the awarded compensation, which is the way we do it.

Christopher Kotowski - Oppenheimer & Co. Inc

Okay.

Kenneth M. Jacobs

So, we got a lot of flexibility as time goes on.

Christopher Kotowski - Oppenheimer & Co. Inc

And then kind of a business outlook question, just the economic turmoil in Europe, has this really put European M&A, the European M&A cycle unhold indefinitely in your opinion?

Kenneth M. Jacobs

No, I don’t think so, and this is a very kind of a subtle point. Europe has been pretty muted for M&A activity for the last two years or so, 2010 was a little bit better, and I’m not sure with the lead table statistics and all that show, but from a tenor standpoint, ’10 was a better year than ’11, ’11 was a tough year from an M&A perspective.

We think that in the short-term, we think that assuming there is not a shock in Europe, in the short-term, medium-term there should actually be quite a pick-up on the part of cross-border activity for the larger multinationals. There is a real pent-up demand here amongst the large multinationals in Europe as a result of the last couple of years of shocks and uncertainty.

These companies are fundamentally not a lot different from the multi-nationals in the U.S. and some of the emerging market champions. Their businesses are highly diversified, highly global. And so, I’d expect assuming their confidence settles down a little bit or improves a little bit in Europe and there is a some – and you get some stability in the market there, that we’re going to probably start to see quite a bit of pick-up on the part of the multi-nationals in Europe in terms of M&A. That’s our sense.

Christopher Kotowski - Oppenheimer & Co. Inc

Okay, all right, that’s it from me. Thank you.

Kenneth M. Jacobs

Okay.

Operator

We’ll go next to Devin Ryan with Sandler O'Neill.

Devin Ryan - Sandler O'Neill & Partners

Hey, good morning.

Matthieu Bucaille

Hi, good morning.

Devin Ryan - Sandler O'Neill & Partners

I understand and agree with the view to keep deferrals related to 2011 comp under control, but I just wanted to get maybe some comments if you could speak a little bit to the timing of how you accrued comp throughout the year and maybe why it wasn’t little bit better incorporated into results in the first three quarters, was it a function of just timing of the hiring throughout the year or did something changed in your revenue view late in the year or was there something else there?

Kenneth M. Jacobs

Okay, good question. Look, in the end when the comp decisions were made in the fourth quarter, every year, as a result of how the firm does and how the different businesses perform and also some view on what’s going on in the marketplace.

So, in a way, and we’ve been very -- and I’ve said this many times in investor meetings is that you don’t really know comp until the fourth quarter, each year. And the accrual is kind of a guess, but it’s based on the current conditions at that particular time, it really -- you’re not paying people quarter-by-quarter.

So, that’s number one. Number two is, look, we were operating at record revenue levels through the third quarter. And while there was turmoil in the markets beginning some time over the summer and into the fall, it really wasn’t evident to us where we were going to end up on revenues until the fourth quarter.

And as a result of that, we also didn’t know where we’re going to end up on compensation either. And as you can probably tell, a small revenue change has a high degree of impact on GAAP compensation because so much of GAAP reflects the past so really it’s a decision around deferrals. And we made that when we saw everything.

Devin Ryan - Sandler O'Neill & Partners

Okay. Great, thanks. And then just, one on the non-comps, can you remind me what the jump is intangible amortization was related to in the fourth quarter? And then, from a timing perspective, at what point in 2012 would or should we expect to see the impact of some of the initiatives that you guys discussed, can you expand on that?

Matthieu Bucaille

I’m sorry, your first question was about the increase of the amortization?

Devin Ryan - Sandler O'Neill & Partners

Intangible?

Matthieu Bucaille

Oh, intangibles, okay. The increase in intangibles this year was mainly due to the fact that at Edgewater, our private equity business, it was some carried interests being paid on some of their investments, and we therefore have to accelerate the amortization of the intangibles that we’ve recorded at the time of the acquisition corresponding to this potential capital gains in some of their investment. So, that’s the explanation on the increase in the amortization of intangibles.

Devin Ryan - Sandler O'Neill & Partners

That’s essentially a one-time item then, correct?

Matthieu Bucaille

Yeah, yeah.

Devin Ryan - Sandler O'Neill & Partners

Okay.

Matthieu Bucaille

Yeah. Then with respect to the impact of the investments, yes, the investments will impact mainly two lines. One is, as Ken mentioned, occupancy. We’ve an increase in the new lease of the Rockefeller Plaza that will impact the full-year of 2012. We also have some impact of new IT investments, which will also impact the 2012 numbers, maybe the first part little bit more than the second part.

And also referring to the cost initiative that Ken discussed; a number of them we’ve initiated in the second part of 2011 and they will ramp up as time goes by. So, we should see probably more of the impact of this cost savings in the second part of the year rather than the first part of the year.

Devin Ryan - Sandler O'Neill & Partners

Okay, great. Thanks for that color. And then just lastly, one on the restructuring side, you guys obviously have probably better view than anyone into what’s currently going on in the restructuring market, I just love to get your view of whether activities improving, declining, remaining stable? And then just any view of kind of maybe what the base restructuring level maybe from a revenue perspective would look like in this cycle relative to maybe what was experienced at similar points in prior cycles, that would be helpful.

Kenneth M. Jacobs

Okay. So first I think you really have to separate the U.S. market from the European market on restructuring for 2012. We are likely to see a pickup in the restructuring levels in Europe in 2012. There is a credit crunch underway for medium sized, small, privately held or highly leveraged companies. They are primarily finance – primary financing in Europe is by the banks, not by the capital markets, particularly for that group. And obviously the banks are under a lot of pressure in Europe and so consequently credits tight, and so I think we are going to see a pickup activity – pickup of activity there next year. In the U.S., I think activity levels are going to probably be a little bit less because the macroeconomic environments improving, and financing is generally speaking available. So you probably see a little bit of decline or some decline in the U.S. that maybe offset -- maybe little bit more than offset, but offset by what’s going on in Europe.

Devin Ryan - Sandler O'Neill & Partners

Okay. So there is two things together kind of looking at maybe this cycle relative to maybe where we were in the early 2000 to the end of the prior cycle and kind of the trail off, I mean, this just – it seems like we are at a higher run rate. Is that fair to say?

Kenneth M. Jacobs

I think it’s a higher run rate in part because it’s a more global business for us than it was at that point in time. So that’s probably a good assumption.

Devin Ryan - Sandler O'Neill & Partners

Okay, great. Okay, thanks for taking my questions.

Kenneth M. Jacobs

Sure.

Operator

And before we go to our next question I just would like to ask everyone that in the interest of time if you would limit yourself to one question. We will go next to Daniel Harris with Goldman Sachs.

Kenneth M. Jacobs

Okay. People who want to follow-up, they can have a follow-up.

Daniel Harris - Goldman Sachs

Thanks Ken. Hi, good morning. Over the last few years revolver and to look you guys on an annual basis versus any one period in time, which can tend to be choppy. And so thinking about 2011 versus 2010 and the industry more broadly most of your peers reported an advisory number that was up in the high single low to double-digit numbers and your more independent peers were up noticeably higher. So what do you attribute the weakness to this year in your results versus the industry more broadly?

Kenneth M. Jacobs

Yeah. Actually I kind of look at – we tried to look at this from cycle to cycle. So in fact if you look from ’09 to ’11 on the strategic advisory business, I think the numbers compare pretty favorably to just about anybody. Number one, we had a very strong fourth quarter in 2010. I think it was -- it’s not a record, next to our record fourth quarter in 2010. So we probably got a little lucky on some closings in 2010, that could have easily have slipped into 2011 as an example. So that’s one issue or one point.

The second point is, look geographically when you compare us to the boutiques, I think you will find that we have a little bit -- obviously more exposure to Europe. So some of the pickup in the overall advisory revenues have been muted by the activity levels in Europe. The flipside of it is, we’ve done, I think on any basis very well in the United States and if you were to compare us apples-to-apples in the United States, is an example to some of the boutiques that are based here, I think you’d see our performance is at least as good, if not outstrips them.

Daniel Harris - Goldman Sachs

Okay. Thank you.

Operator

And we’ll take our next question from Joel Jeffrey with KBW.

Joel Jeffrey - Keefe, Bruyette & Woods, Inc

Good morning guys.

Kenneth M. Jacobs

Good morning.

Matthieu Bucaille

Good morning.

Joel Jeffrey - Keefe, Bruyette & Woods, Inc

Just a quick follow-up on Devin’s question, given how you accrued for comp last year? Do you think you’ll be a little bit more aggressive in the early part of 2012?

Kenneth M. Jacobs

When you say aggressive, you mean?

Joel Jeffrey - Keefe, Bruyette & Woods, Inc

Well, accrue at a higher rate, than you had it in 2011?

Kenneth M. Jacobs

I would expect so.

Joel Jeffrey - Keefe, Bruyette & Woods, Inc

Okay, great. And just one quick follow-up; in terms of the $25 million to $30 million comp expense you’re thinking about for 1Q, that’s solely a 1Q issue or that’ll also be an impact into later quarters?

Kenneth M. Jacobs

Look, that’s based on where we are right now in terms of year-end process in the environment we’re in. As I said before; we think the environment is improving, and so consequently we’re pretty comfortable with the operating leverage we have in the business, in this environment, in the environment that looks like is unfolding. But as I’ve said repeatedly since ’09, we’re going to be very disciplined about our business.

Joel Jeffrey - Keefe, Bruyette & Woods, Inc

Okay. Thanks.

Operator

We’ll go next to James Mitchell with Buckingham Research.

James Mitchell - Buckingham Research Group, Inc

Hi, good morning. Just as you mentioned it’s difficult to buyback 100% debt in this kind of environment. Why not in a tough environment perhaps go into a bit of a net-debt position versus neutral today for your shareholders to buyback more stock aggressively build cash over the next couple of years when the debt comes due. Why not accelerate to buyback even more aggressively?

Kenneth M. Jacobs

That’s good question. So number one is; we did raise the dividend, because we think that’s a very efficient way to get back cash to shareholders who’re holding our stock for the long-term, including obviously the employee base, which are the longest term shareholders of the company.

The second and very importantly is; we have this balance, which I’ve talked about before between wanting to maintain investment grade, which we do. And at the same time being able to aggressively manage our balance sheet, and so in a very difficult macroeconomic climate you probably have to be a little bit more sensitive to that, and as the climate starts to improve, I think you’ll probably have more flexibility. So needless to say we’re going to take a very careful look at that as the next year or so unfolds. I think our record over the course of the last couple of years has been to really improve the capital management and again over the last couple of years or so its been a pretty choppy macroeconomic environment with these shocks, and so consequently we haven’t wanted to kind of test fate on this issue. But if things – as things start to improve, we have more flexibility and you can be sure, we’re going to be looking at this very closely.

James Mitchell - Buckingham Research Group, Inc

Okay, thanks.

Operator

And we’ll take our last question from Steven Gavios with Jennison.

Steven Gavios - Jennison Associates, LLC

Good morning, everybody. So, on the compensation issue, I know you talked in your remarks about the financial – that there is an impact from hiring and other growth decision that you’ve made. Can you give us sort of some color on what sort of financial impact that had on the comp?

Kenneth M. Jacobs

Sure. Now, let’s separate out the issues, there is GAAP comp and there is what we call, awarded comp, awarded comp is what we pay people in a given year, okay? All right, so let me focus my remarks first on the awarded comp because that’s the actual comp and that’s what you really -- that’s how you can really assess what’s going on.

There we probably made net about, call it, 50 million of hires this year and we offset a large part of that with exits over the course of the year. And on top of that we took down discretionary compensation by roughly $100 million. I think that would give you some flavor as to how it worked?

Steven Gavios - Jennison Associates, LLC

Okay.

Kenneth M. Jacobs

All right.

Steven Gavios - Jennison Associates, LLC

And -- go ahead, I’m sorry, Ken.

Kenneth M. Jacobs

Okay. I mean, there are a couple of small offsets in there. We’ve foreign exchange, which worked in the wrong direction on some of the comp stuff for us this year, which is unfortunate. And then also needless to say, as you increase salaries, you also – particularly in Europe get an increase in benefits and so that had some impact as well. So, the numbers don’t quite round exactly. Okay?

Steven Gavios - Jennison Associates, LLC

Okay.

Kenneth M. Jacobs

And let me touch on the GAAP side for a moment because I just think it’s worth noting this. On the GAAP compensation cost, particularly on the amortization, I think you’re going to find that -- you’ll find that in 2012 we’ll be at a run rate reflective of the compensation policies that we instituted in 2009. However, there is about, I’d guess it’s close to 50 …

Matthieu Bucaille

43.

Kenneth M. Jacobs

… $43 million worth of compensation cost in GAAP in 2012 that are associated with the 2008 grants. So, I think you will find that those costs are going to trend a little bit higher than they were – those costs in 2012 will be a little bit higher than they would be on a normal run rate based on the policies we put in place in ’09.

Steven Gavios - Jennison Associates, LLC

[Right]. Which I imagine was – what was behind your earlier comment about 2012 being a tough year to reach your compensation goal targets, right?

Kenneth M. Jacobs

On GAAP, that’s correct.

Steven Gavios - Jennison Associates, LLC

Okay.

Kenneth M. Jacobs

All right. But again the decision on the deferrals was, we just want to get off this treadmill. I mean, to keep deferring would just have made this harder and harder each year and eventually I just don’t think this is the right way to manage the business.

Steven Gavios - Jennison Associates, LLC

Okay. Thank you.

Kenneth M. Jacobs

Okay.

Operator

And this does conclude today’s question-and-answer session.

Matthieu Bucaille

Okay.

Kenneth M. Jacobs

Okay.

Matthieu Bucaille

Thank you.

Kenneth M. Jacobs

Thank you.

Operator

Thank you, and this now concludes the Lazard conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Lazard's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts