Lazard Ltd. (NYSE:LAZ)
Q1 2016 Earnings Conference Call
April 21, 2016, 08:00 AM ET
Judi Frost Mackey - Managing Director, Global Communications
Kenneth Jacobs - Chairman and Chief Executive Officer
Matthieu Bucaille - Chief Financial Officer
Dan Paris - Goldman Sachs
Marcus Carney - Credit Suisse
Brent Dilts - UBS
Devin Ryan - JMP Securities
Steven Chubak - Nomura
Vincent Hung - Autonomous
Good morning, and welcome to Lazard's first quarter 2016 earnings conference call. [Operator Instructions] At this time, I will 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 first quarter of 2016. Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer; and Matthieu Bucaille, Chief Financial Officer.
A replay of this call will be available on the Lazard website beginning today by 10:00 AM Eastern Time.
Today's call may contain forward-looking statements. These statements are based on our current expectations about future events and are subject to known and unknown risks, uncertainties and assumptions. These 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 their reconciliation to the comparable GAAP measures are contained in our earnings release, which has been issued this morning.
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, both of which are posted on our website at lazard.com. Following their remarks, Ken and Matthieu will be happy to answer your questions.
I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.
Thank you, Judi. Good morning. Both of Lazard's businesses continue to achieve strong operating performance, despite a challenging first quarter. All things considered, given volatility of markets and a tough comparison with rapid first quarter of 2016, the business performed well.
We are advising clients on a record level of transactions in 2016, and our Asset Management business performed across a range of investment platforms. Our ongoing advisory board includes a substantial share of the largest, most complex and cross-border assignments globally.
We're advising on four of the 10 largest M&A transactions announced in the first quarter of 2016. We continue to advice on four of the 10 largest transactions announced last year, and about half of our announcements in the quarter were cross-border.
Lazard's market share of the largest global transactions reflect our competitive advantage, which is the breadth and depth of our business, our high concentration to the senior level advisory bankers and our unrivaled global network relationships with key decision makers in business, government and investing institutions. We continue to be active across our advisory practices.
Restructuring had a strong first quarter. The majority of restructuring activity remain centered around energy and commodity related sectors and Lazard is advising on a substantial share of these assignments.
Our corporate preparedness and shareholder advisory business is growing, as we advise on assignments relating to corporate activism and shareholder engagement. And our Sovereign and Capital Advisory services continued to advise government's incorporations across a range of geographies on financing strategy and capital raising.
In Asset Management, we performed well in a period of high market volatility. Assets under management increased 3% from the end of last year through April 14. Relative investment performance was strong in most strategies across our platforms. And we continue to have a high level of gross inflows, approximately $10 billion, in line with the first quarter of last year in a much more challenging environment this year.
This achievement underscores the quality and diversity of our investment services, and it reflects the perspective of our primarily institutional clients for long-term strategic allocators of capital. We continue to build our Asset Management franchise through the development and scaling up of new strategies. In the first quarter we expanded our fixed income and alternatives platforms with new fund launches.
Matthieu will now provide some color on our financial results and capital management. Then I'll comment on our outlook.
Thank you, Ken. Lazard's first quarter 2016 operating revenue declined 13% on a reported basis, but is in comparison to the record first quarter of 2015. On a constant currency basis, operating revenue declined 12%. First quarter 2016 diluted net income per share on an adjusted basis declined 35% to $0.50 and on a pre-tax basis 31% to $0.71.
Operating revenue for both Financial Advisory and Asset Management declined 12% in comparison to their record first quarters one year ago. The decline in Financial Advisory was driven primarily by lower level of M&A transaction closings. This was partially offset by higher restructuring revenue, which reflected the closing of several large transactions as well as the generally active market in the U.S. energy sector.
In Asset Management, the decline in first quarter 2016 operating revenue primarily reflected lower average AUM, a small change in mix of our AUM and lower incentive fees. As we said in the past, our incentive fees are running at a lower level and we continue to expect aggressively muted incentive fees for the rest of the year.
During the first quarter of 2016, AUM increased by $4.2 billion from December 31 to $191 billion. This increase was driven by positive foreign exchange movements of $3.9 billion and market appreciation of $609 million, partially offset by net outflows of $361 million. Flows continue to be impacted by one global equity strategy, which had $1 billion of net outflow in the quarter.
Average AUM in the first quarter of 2016 was $185 billion compared to $198 billion a year ago and $188 billion in the fourth quarter of 2015. As of April 14, 2016, AUM continued to increase and was approximately $193 billion, a $2 billion increase from the end of the first quarter.
Turning to expenses. The 58.9% adjusted compensation ratio for the first quarter reflected front-end loaded amortization expense associated with retirement eligible employees, who's deferred compensation is fully expensed in the quarter combined with lower level of operating revenue. However, the higher first quarter ratio does not reflect our view of the year or a change in our consultation discipline.
We continue to manage our business based on awarded compensation, and we expect that our 216 awarded compensation ratio will be in line with the 2016 ratio of 55.8%, assuming the performance of both of our businesses, hiring levels and the compensation environment is similar to 2015. For the rest of the year, we expect approximately $25 million of additional amortization expense as compared to 2016. Regarding non-compensation, the first quarter adjusted expense was $102 million, down 5% from last year, primarily reflecting the lower overall level of activity.
Finally, regarding capital management, we returned $328 million to shareholders during the quarter, primarily through dividends and share repurchases. As of April 20, we have repurchased approximately 3.4 million shares and already offset about two-third of the potential dilution from our 2015 yearend equity grant.
Yesterday, our Board of Directors authorized additional share repurchases, bringing our total repurchase authorization to $300 million. Lazard continues to generate substantial cash, and we are increasing our quarterly dividend by 9% to $0.38 per share.
Ken will now conclude our remarks.
Thank you, Matthieu. I'll provide some perspective on our outlook, and then we will open the call to questions. We remain confident in the strength of our business for 2016. We are advising on a record level of transactions and we expect M&A advisory revenue to be back-end loaded with a higher level of closings during the second half of the year.
Regarding the M&A market environment, volatility in the first quarter was contributed to a general slowdown in new transaction announcements. But we know from experience that M&A cycles never go up in a straight line. The fundamentals for continued activity remain in place. We are in excellent competitive position to maintain a significant share of the large, complex and cross-border transactions that characterize this cycle.
On the Asset Management side, we are building from a lower base of AUM than last year, but the long-term outlook remains positive. Our franchise is world-class with investment platforms that are broadly diversified across asset classes, styles and regions, a strong long-term pattern and performance, primarily institutional clients that are strategic allocators of capital and significant capacity for organic growth.
To conclude, Lazard is in a strong position for the remainder of the year. Volatility is subsided; the fundamentals of the M&A cycle remain intact; our Asset Management business is performing well across investment platforms; we continue to invest in both our businesses; our dividend increase and ongoing share repurchases underscore the high cash generation of our business model, with our commitment to return capital to shareholders; and we remain focused on serving our clients well, while we manage the firm for profitable growth and shareholder value over the long-term.
Now, let's open the call to questions.
[Operator Instructions] We go first to Dan Paris with Goldman Sachs.
Wondering if you could help us frame the potential restructuring revenue opportunity over the next few years? We obviously saw a nice uptick this quarter. It sounds like mandates are tracking up meaningfully. The revenues similar to M&A are likely a function of completion. So based on what you're seeing, the stressed energy companies doing today, what do you see is a typical lag time between being hired and completing a deal? And should we be thinking about the ultimate revenue opportunities consistent with kind of '08, '09 period or is there another period of time that this feels like that we can think about?
That's a good question, Dan, to start with. I think that to frame it, first, the cycle started -- the restructuring activity really picked up, starting to pick up last summer or last fall with the significant drop in the oil price. It tends to have kind of a soft start, because people, generally speaking, are always kind of reluctant to take the first steps around restructuring until they have a certain view of the longer-term environment. So it takes a little while to kick-in.
I think we are seeing now in the first quarter the beginnings of the revenue ramp-up from this new activity. It feels more like the dotcom bubble than it does, the '08, '09 period. The '08, '09 period spread across the entire economy, starting with financial sector, but was much broader. The cycle around dotcoms during last decade in 2001, 2002, 2003, was more concentrated in the TMT sector like this cycle is, which is likely to be heavily concentrated in the energy commodity sector. So I think I'd probably look back at that cycle.
The only difference being, that cycle was also complimented by a bunch of the big fraud cases, so that probably likely to be a little bit higher than perhaps this one will get to. But that's probably our sense.
And from a timing perspective, anything you could point to, where we're kind of all over the map in terms of that delta between kind of announced?
The restructuring business tends at least in the early middle part of the cycle. It'd be pretty lumpy, because there is a lot of uncertainty about when things get started when they close. I think it should ramp up over the course of this year, but it could be a little bit lumpy.
Maybe just to shift gears. When I include the special dividend, your shares are trading at something near 7% on yield and you definitely have been more active on the buyback this year. So wondering, if this is a bit of a change in strategy for you away from the special and into buybacks? And do you ever think about putting more of the special dividend into regular to help with yield support on the stock?
Well, we increased the dividend again 9% this quarter up to $0.38 a share. And I think our policy, I mean, I'll just reiterate it, hopefully it's been pretty clear, which is that in the first sense we will always offset the -- do the best we can to offset the incremental shares that are created on the grants. And we try to do that as early in the year as possible, so it matches the price at which we issue it at. And here I think we've done quite a bit of that already this year.
Second, we want to have a strong dividend, because we have a business which reflects a really strong cash flow. We're very comfortable with that, and that's why we've increased the dividend pretty significantly over the last several years.
And third is, you really don't know exactly how the business performs, because the business tends to be seasonal in the fourth quarter. It tends to -- you also don't pay people to the fourth quarter. So our final policy on capital return doesn't really get determined until we get to the fourth quarter.
But what we are prepared to say, we've done consistently over the last several years is basically to sweep the cash out in the most efficient way we can, which has so far been special dividend. But we've always said, when we see particular value in the stock price, we'll take advantage of it. And you know there were some periods in the first quarter, which were pretty attractive to buy the stock back, and we did.
So I think that what you can count on from us is strong dividend. I think we like the special dividend, it's a very efficient way to give cash back to shareholders. And you never really make a mistake about what price you're buying the shares at, if you do it that way. But there will be periods of time where we think the stock is undervalued, and we're going to be aggressive about buying stock back at that point in time.
We move next to Ashley Serrao of Credit Suisse.
This is Marcus Carney filling in for Ashley. I guess, first, can you talk a bit about your revenue outlook for the year and how your comp could flex, if revenues end up 5% lower?
First, I don't want to make any revenue projections. But I'll give you kind of some help into how we're thinking about it. First is, right now we're advising on a record level of announced transactions for us, that is things that are already, given the market announce, which is a good sign. In terms of compensation, generally, what we're pointing to is all things hypothetically, all things equal in terms of how we performed last year, if we had the same year, as we had last year. We're targeting an awarded compensation ratio in line with last year, which is about 55.8%.
GAAP will vary a little bit with that. We are going to have an additional GAAP charges this year, for the whole year. I think, Matthieu misspoke in the script, saying the rest of year, but for the whole year it was about $25 million or so. So all things equal, revenue and awarded comp of 55.8%, GAAP will be a little bit higher than the 55.8%. If revenues are up, GAAP will be around the same as 55.8%. And if they're down it could be a little bit higher than the 55.8%, it's just this additional charge on GAAP will drive the GAAP ratio up little bit, if all things equal, but if revenues are up, it gets offset.
I think you see a decline in revenue, we have a better chance of keeping the awarded comp ratio in line. It gets tougher on the GAAP side, just because those are historical charges. And as you know, we really manage our business around the awarded line, not the GAAP line. The GAAP is an output, not an input.
Moving to asset management, can you provide an update on RFP pipelines and maybe touch on the decrease in average fields for the quarter?
Sure. So look, the change in average fee for the quarter, it's just noise. I mean 1 basis point really is not much the move. And I think you can just look at the movement in AUM in terms of different products and see why that happened, and that could be washed away in a quarter in the other direction pretty easily just given recent moves in the markets. And with regard to FPs actually they're up at this point over the fourth quarter. We feel pretty good about the pipeline at the moment.
We move now to Brennan Hawken of UBS.
This is Brent Dilts filling in. I just have one here on M&A. Just with the treasury rule inversions recently, just curious how that impacts your outlook for M&A and then separately in M&A just --
First on the inversions not much, really the big statement on inversions were two before this one, which really slowed down the activity in the emerging markets. I mean most of the activity -- it was a high level of activity in inversions in '13 and '14 and a lot of that went away. I think these last steps probably clamped on most of the rest of the activity, but it already kind of come out of the market, so we don't see that much impact.
And then separately on just your outlook for M&A in Europe, if you're seeing any signs of further up tick there, I mean, it seems like it's been improving a bit, but just curious what you're seeing?
I feel little cautious about Europe. I think it's improved a bit. And look, for the overall environment, announcements for the first quarter were about flat with last year. I mean, for us, they were even with last year. The volumes were down pretty significantly both for the market and for us. I think in Europe, we saw a little bit of uptick in announcements, it's not terrible, but frankly it was [indiscernible], I think there's going to be a little overhang on the market until that clears.
Next we move to Devin Ryan at JMP Securities.
Just a quick one here on trends in China. Obviously, this year you had a record level of announcements, the volume at least coming out of China, I know that you guys have been involved in some of those kind of cross-brooder deals. I'm curious is this a kind of story that's getting bigger in your eyes and is it something that Lazard is going to participate in, just given that it is a meaningful part of overall volumes this year.
Yes, look, I think we have a really terrific business team in China that we've invested in over the last several years, which has really helped position us for some of this activity over the recent period of time. I think the trend is a long-term trend. I think it reflects a lot of the goals that the Chinese government sets for the economy.
If you read the five year plan you could almost predict where the activity is going to be. I think it's been a pretty good producer of activity so far. But like everything, in the M&A world there are ups and downs, never a straight line, and I think we've seen a strong curtain activity here that probably continues at a reasonable level, but it has ups and downs along the way.
And then maybe just coming back to the comp ratio and comp in the [multiple speakers]. I understand the dynamic of you're not projecting revenues on the year, you're trying to get some perspective around what the comp ratio could look like in different types of environment. But just curious why not set it more at that level to start the year just given the outlook I suspect, as you were pointing out here record number of assignments, the revenue backlog still looks pretty good. I am just curious in terms of setting it this quarter, why changed the dynamic there a little.
So I feel that we went up, but we got hit with a lot of front-end loaded charges from a GAAP perspective related to the return, some of these retirement related expenses, so that caused the tickup combined with the fact that it was a tough revenue compared to first quarter last year, so the math just drove it up on a GAAP basis for the first quarter.
Our outlook for the year, comp, I mean on all things equal with last year, as I said, if you were to assume all equal with last year, the awarded ratio we expect to be in the range of about 55.8%. We've got additional charges for the entire year of $25 million. And you could assume that the charges will be less than the next three quarters than they've been in the first quarter for GAAP. Therefore the GAAP ratio is going to -- as revenues are flat with last year, and I'm not projecting that, but if they were flat with last year, the GAAP ratio would be a little bit higher than the awarded ratio. If the revenues are up, it's probably around the same as the awarded ratio, so you can kind of do the math around that.
So I think we're pretty comfortable with the awarded ratio being a pretty good indicator, all things equal, hypothetically flat revenues for the year.
And I think you could assume that the second quarter is going to be more in line with what our projection is for the year or thoughts are for the year.
And then just one on kind of the tone in the M&A market today, I mean, obviously the extreme volatility in the first quarter I'm sure put a little bit of a chill just around dialogues. So I'm just curious if that seems to be falling now maybe a point further away from it or is there just a lag on that, and so I'm really trying to get a sense of, does it feel like the broader market things are kind of starting to settle back down to normal and activity is feeling maybe better behind the scenes or there is a lag off of that kind of extreme move in 1Q, so therefore maybe things are kind of slowing a little bit.
I think everything you said is about right, so let me kind of parse it. Volatility is never good for M&A. We saw a record or near record level of volatility in the first quarter, so needless to say that probably quelled some of the activity, if not a significant amount of activity. I think it takes a little bit of time before things get back to normal.
I think we're seeing a normalizing of sort of confidence levels right now. As I've said, first quarter '15 on announcements, it wasn't bad on volume, it wasn't nearly as good as -- first quarter '16 was decent in terms of announcements, but not as good on volume this last year. I'd be surprised if '16 turns out to be as good as '15 in terms of overall announcements for the year. '14 was a pretty good year that seems to be tracking '14 so far pretty well.
Generally as to the cycle or the environment, as you know, we tend to look at three things and then we try to identify a catalyst for the cycle. The three things are: financing, valuation, confidence. Generally speaking on valuation, things are about the same as they were last year. Financing probably improved since the first quarter. High grade has always been pretty strong, the high yield markets, spreads have narrowed a bit. Financing is a little bit more available
Confidence tracks pretty closely with people's view of the macro cycle. M&A tends to be procyclical and also tracks pretty closely with markets and the macro cycle. I think during the first quarter there were some concerns that the volatility would impact the macro environment. It doesn't look like it has in the U.S., which is a good sign. I think in Europe, you're going to have a little bit of overhang, as I said before, because [indiscernible] until that's behind us, it's going to be a little hard for people to make big bets.
And the M&A cycle doesn't ever appear to be a straight line to us. It has its pockets, air pockets. I think we hit one in the first quarter. We hit one last summer or two. And then you saw a resumption of activity in the fall, we did one the year before it. So it wouldn't surprise us if things recover a bit, but we hit another one along the way too.
But generally speaking the catalyst behind this cycle is pretty powerful, which is this disinflationary, deflationary trend. And M&A becomes a important tool for boards and companies to have in their toolbox to address difficulties or challenges around organic growth and challenges around driving earnings through additional efficiencies in the business, and that catalyst is an important factor in what's happened and what's likely to happen in the M&A markets going forward.
And just quickly on the flows in the quarter, not sure if you gave it, but can you give any additional color around some of the nuances there yet, a little bit of net outflow, I'm just curious if [multiple speakers].
We had very much net outflows of a little over $300 million. We had $1 billion or so. In one fund we had some issues with for a while, so I take that out of there. We actually had net inflows for the quarter, which even the modest outflows, which was quite an achievement given the volatility in the first quarter.
Gross flows were quite strong, as I said earlier, about $10 billion I think, which compares very favorably with the first quarter last year and some of the best quarters we had. On gross flows, performance in the business is strong across the range of platforms. And AUM right now is back to almost where we were in average basis in '15, which I think we all feel pretty good about given where things were in the first quarter.
Our next question comes from Steven Chubak with Nomura.
Maybe the first question for Matthieu, you mentioned that quarter-to-date you have seen a $2 billion increase in AUM. I was hoping you can give us a breakdown of how much of that increase had come from flows versus performance?
Right. So the $2 billion breaks as follows. We had a market appreciation of $2.6 billion roughly. It was negative market movement of $400 million. And then we had net outflows of approximately $160 million.
And maybe just a one more follow-up on the asset management business for Ken. I appreciate the comments that you've made about the fee rate being quite lumpy, and you downplayed to some extent the potential impact this had on the quarter. But I guess just taking a step back, it is the first quarter we've seen in very long time, where the revenue yield actually hit below 50 basis points.
And it's just been extraordinary [technical difficulty] over the last few quarters, running in that 50 bp to 52 bp range. And especially, given the strength in EM, which is higher fee, I would have expected that to be on an upward trajectory. So just looking ahead, how should we be thinking about how that fee rate should traject in the coming quarters. And should we expect --
Well, I think actually, you hit it on the head, which is again, which is the higher rate. But EM was at probably low point, at one point in the first quarter. And so consequently, that recovery is going to drive the recovery in the yield. So I think you can look at the first quarter, see where the AUM was for some of those products. I think on the EM, we've had quite a recovery since then and you could assume what's going to happen to yield with that.
Our final question comes from Vincent Hung with Autonomous.
So how much AUM is left in the global thematic strategy right now?
And last question. So how much are you're doing in the middle market right now? And can you provide any commentary around what you're seeing there, if it's any different than the broader M&A trend?
Good question. Middle market, right now, activity levels are, I think, near peak for us. I mean it's really been quite active. The closings, they're always a little bit all over the map for us. But the activity levels at the moment, feel very good in the middle market.
And how much of that as a percentage of revenues would you say?
I don't think we've ever really broken it out, but it kind of runs in line with sort of transaction announcements, the fee levels. If you take a look at the transaction, number of transactions, and you look at the average size, the fee levels are pretty similar to the rest of the business percentage-wise.
End of Q&A
And ladies and gentlemen, this now concludes the Lazard conference call. Please now disconnect.
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