Good morning, and welcome to Lazard's Third Quarter and First 9 Months of 2022 Earnings Conference Call. This call is being recorded. At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.

Thank you, and good morning. Welcome to Lazard's earnings call for the third quarter and first 9 months of 2022. I'm Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we have posted our earnings release and an investor presentation on our website. A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements about our business and performance. 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, 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. Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measure is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Mary Betsch, Lazard's new Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results, then Ken will provide his perspective on the outlook for our business. After that, Ken and Mary Ann will be joined by Peter Orszag, Chief Financial Officer of Financial Advisory; and Evan Russo, Chief Executive Officer of Asset Management as they will open the call to questions. I'll now turn the call over to Mary Ann.

Thank you, Ale. Good morning. Let me begin by saying how happy I am to be here at Lazard. I'm looking forward to meeting many of you on the call today as I settle into my new role. Let's get started with a review of our financials. Today, we reported record third quarter operating revenue of $724 million, a 3% increase from revenue of $702 million in the third quarter of 2021. Operating revenue for the first 9 months of 2022 was $2.1 billion, 3% lower than in the first 9 months of 2021. In Financial Advisory, we recorded third quarter revenue of $454 million, up 19% from last year's third quarter. For the first 9 months of the year, operating revenue was also at a record level of $1.2 billion, 7% higher than the same period in 2021. As demonstrated by the record quarter, M&A has been active, particularly in Europe, where we advised on several high-profile transactions. In restructuring, although activity is still relatively low, our discussions with clients are increasing as a result of current market conditions and demand for liability management. In addition, our restructuring practice is ranked #1 globally on announced transactions year-to-date. Our sovereign advisory team is also working on a number of complex assignments. In Asset Management, third quarter operating revenue was $263 million, 15% lower than third quarter 2021 revenue of $311 million. Management fees of $241 million decreased 20% year-over-year. Incentive fees in the third quarter were $22 million compared to $7 million for the third quarter of 2021. For the first 9 months of 2022, Asset Management revenue was $840 million, a decline of 14% compared to the first 9 months of 2021, reflecting lower average assets under management. As of September 30, we reported AUM of $198 billion, a decrease of 27% compared to September 30, 2021, and 9% lower on a sequential basis from June 30, 2022. The sequential decrease was driven by market depreciation of $10.3 billion, foreign currency depreciation of $6.6 billion and net outflows of $2 billion. Average AUM for the third quarter was $212 billion, decreasing 24% from a year ago and 8% on a sequential basis. This reflected global markets continuing to weaken in both equities and fixed income during the third quarter. In addition, the strengthening U.S. dollar has been a headwind thus far in 2022. As of October 21, our AUM was approximately $200 billion, driven by market appreciation of $3.4 billion, negative foreign currency impact of $0.6 billion and net outflows of approximately $0.7 billion. Now turning to expenses. We accrued compensation expense at a 60% adjusted compensation ratio in the third quarter compared to 58.5% in the second quarter of 2022. For the first 9 months of 2022, we accrued at a 59% ratio. This is our best estimate for the full year but is subject to performance during the remainder of 2022. Compensation levels reflect our significant investment for growth in both businesses and our focus on investing in and preserving intellectual capital through the cycle. Our adjusted noncompensation expense for the third quarter was $128 million, 10% higher than the prior year, primarily reflecting the impact of increased travel and investments in technology. Our effective tax rate for the third quarter as adjusted was 25.1%, which is unchanged from the prior year quarter. For the first 9 months of the year, our adjusted tax rate was 25.6% versus 26.2% in 2021. We expect this year's annual effective tax rate to be in the mid-20% range. We have generated strong cash flow year-to-date. In the third quarter, we returned $286 million to shareholders, including $46 million in dividends and $237 million in share repurchases. Additionally, yesterday, we declared a quarterly dividend of $0.50 per share. During the third quarter, we bought back 6.7 million shares of stock at an average price of $35.63 per share. During the first 9 months of 2022, we repurchased a record 17.2 million shares at an average price of $35.49 per share. Our weighted average share count at quarter end was 102 million shares, a decrease of 11% from 114 million shares in the prior year quarter. Our unweighted share count as of September 30 was less than 100 million shares. Our total outstanding share repurchase authorization as of September 30 was $382 million. Ken will now share his perspective on our performance and outlook.

Thank you, Mary Ann. Let me take this opportunity to again welcome you to Lazard. The global macroeconomic environment continues to reflect significant levels of uncertainty. Global inflation remains at multi-decade highs. To fight these, central banks have engineered sharp interest rate increases around the world, and further rate hikes are likely. Until there is more clarity on interest rates and inflation in the economy, we can expect ongoing turbulence in the capital markets. Amid these challenging conditions, Lazard continues to perform well, and our record third quarter results underscore the strength, stability, and discipline of our model across both our businesses. In Financial Advisory, we delivered record operating revenue for the quarter, year-to-date, and over the last 12 months. These results were driven by record performance in Europe, despite a slowdown in M&A activity around the world. While the market is softening, we are seeing an increase in client conversations regarding restructuring and liability management. The energy transition continues to drive deal activity in sectors that are less influenced by the business cycle, such as healthcare, reshoring, and infrastructure investment, which are propelling a range of substantial transactions globally. We are making investments to further diversify our offering for clients in financial advisory, including expanding our efforts in infrastructure, broadening our coverage in private credit, and launching a new geopolitical advisory group. In Asset Management, the strength of the U.S. dollar resulted in continued foreign currency headwinds in the quarter as approximately two-thirds of our AUM are invested in non-U.S. dollar assets. As markets remain under pressure, we are focused on working with our clients as they navigate today's complex global investing environment. Our research-driven fundamental investment style continues to perform well, especially in our relative value and quality portfolios. Additionally, we continue to innovate around thematic strategies, such as our recent launch of a Lazard Thematic Inflation Opportunities strategy, as well as building upon recent successes in sustainable agriculture and digital health. For Lazard as a whole, we are making investments in people and technology to position us for success through the economic cycle while being disciplined on cost and managing our business for the long term. We remain focused on serving clients while maintaining profitable growth and shareholder value. Now let's open the call to questions. Thank you.

We'll take our first question from Richard Ramsden from Goldman Sachs.

So Ken, maybe I can start off with a bigger picture question, which is where do you think we've got to in terms of both private equity firms and strategics adjusting to much higher borrowing costs and less leverage? I mean, I guess, look, the specific question is, it looks as if both short rates and long rates are going to be structurally much higher than what we've seen over the last couple of decades. So what do you think that means for the longer-term growth trajectory of the advisory business?

I think it's important to differentiate between financial sponsors and strategic buyers. Focusing on strategic buyers first, they typically involve investment-grade credits that have a significant impact on the market. These entities generally possess strong balance sheets and are opportunistic during uncertain times. While it may take some time for buyers and sellers to align their expectations, we are beginning to observe this change, which will lead to more opportunistic activity across various sectors. Although this won't match the levels seen during boom cycles, I expect to see an increase in these activities. As confidence in future predictions grows, we should witness a more consistent uptick in activity, although we are not there yet. Certain industries will likely continue to see activity regardless of the economic cycle, specifically those with specific catalysts, especially in the energy transition sector. I anticipate continued activity in sectors like healthcare and perhaps some areas of telecom, which are less influenced by the overall business cycle. Shifting to sponsors, they face a more challenging environment due to the non-investment-grade credit market. The public high-yield markets have been closed for an extended period, and the private credit markets saw a pullback in the summer. Until there is more clarity about factors such as interest rates, inflation, and the recession's magnitude in Europe, these markets will remain difficult. Traditional high-leverage sponsor transactions will not be common. However, the sponsor community is highly creative, and adaptations are starting to emerge, particularly in the form of equity-heavy investments and minority stakes in financial assets. We have also seen activity in continuation funds and infrastructure investments, especially in telecom and renewables. Overall, until we gain more certainty regarding interest rates, inflation, and the potential depths of recessions in both Europe and the U.S., the financing markets will experience volatility.

Our next question comes from Brennan Hawken from UBS.

Mary Ann welcome, and congrats on the new role. Would love to start off actually by dovetailing on that last question from Richard. We've seen over the past decade what's been described as a secular shift in the share of M&A activity to sponsors. Certainly, some of that is secular, but maybe with the remarkably low rates and buoyant period that we've seen over the last couple of years, maybe some of that was also a bit cyclical. Do you have a view on how much of the shift was secular versus cyclical? And how are you thinking about the shift that you've been making towards sponsors given the potential for some of that to reverse?

Yes. So there's clearly been a mix of both. Secular in the sense that the sheer magnitude of money managed now by the sponsor universe compared to where it was even five, certainly ten years ago, is vastly different and that's going to continue. There is tremendous demand for alternative investments. We'll see some pullback on funding because of the decline in assets under management by the end owners, but I think the allocation will still remain pretty high. Therefore, the secular move towards alternative investments, particularly private equity, is going to continue for a while, and that money has to be put to work. That's the secular part of it. Clearly, there have been some cyclical elements to it; the turnover portfolio is being pushed to a degree by the ability of very low-cost financing that allows for sponsor-to-sponsor deals, which are probably more manageable in a very low financing environment. But these companies now have alternatives at the right pricing in public markets and strategically. So I think it's going to be a strong environment from a secular standpoint, with some pullback on the cyclical side. That mix is kind of tailor-made for the positioning we have with regard to the mix between strategics and sponsors. We were underweighted a few years ago but are more balanced today, though we never went nearly as far as some of our competitors in commitment to sponsor activity.

Fair. Sure. Okay. So it sounds like you think it was more of a supporting role than the starting one.

Yes.

Okay. That's helpful. And then shifting gears to the comp ratio. So we saw an increase by about 150 basis points this quarter versus where you had been running year-to-date. What drove that increase? And how should we be thinking about the comp ratio for the full year?

Well, as you know, the comp ratio at this point in time is always our best estimate of what it will be for year-end. But of course, this is a business where what happens in the fourth quarter is critical. That's when we pay people and see what's happening in the outside environment, so we don't really know final numbers until we get through year-end. That said, our structure differs from some peers as we have two businesses: the advisory business and the asset management business. The asset management business operates on a different set of characteristics compared to the advisory business, particularly concerning the comp ratio. You can see the impact of the contributions from the asset management business on Lazard's overall revenues. If you do the math, you will see what the impact could be on compensation.

Next question comes from Devin Ryan from JMP Securities.

This is Devin Ryan. And welcome, Mary Ann, as well. I guess, first question, just on the environment. Ken, you talked about M&A activity, which has been slowing, but Lazard is a very diverse business and businesses like restructuring and debt advisory are accelerating in this backdrop. I would love to just put it all together and think about client engagement overall, considering all those pieces of your business relative to a year ago when M&A was hotter but some of these other businesses were less active.

Yes. In our business, you always prefer an active M&A environment, as it provides the best outcomes regarding fees, revenues, and overall success. That is a buoyant atmosphere. That said, as you pointed out, we're constructed to take advantage of many different environments. The breadth of our business, both geographically and across a range of industries and capabilities helps offset or buffer some of the drop in M&A activity. It never fully offsets it, as we all know. What we're seeing is that dialogue tends to increase as conditions worsen. This doesn't mean there are as many transactions. However, we are seeing a lot more discussions around liability management than we did a few months ago. As you'd expect, when earnings drop combined with rising interest rates, companies that need to enter the market will face constraints and must consider alternatives. We're witnessing a significant uptick in activity around the energy transition, which remains robust both in the U.S. and Europe. Furthermore, areas less subject to the business cycle will continue to do well. In this environment, you're spending a lot of time with clients, trying to solve problems that aren't necessarily based around M&A, which we do from cycle to cycle.

Okay. Great color. Shifting gears, just want to talk about capital return and the buyback. Clearly, there's been a noticeable shift internally at Lazard regarding the appetite for buybacks, with 17 million shares repurchased year-to-date and significant activity in the third quarter. I'd love to understand your internal thinking about the capacity for buybacks and appetite moving forward. I know you have $1 billion in cash, but you have to earmark some of that for compensation. How should we view capacity and ability to sustain a similar pace, given it's starting to impact shareholder value, in my opinion?

Yes. We agree with you on that—hopefully. At the levels that our stock is at, it's been attractive to buy back shares. We will, with the resources we have, continue to take advantage of that. Again, this is a very cash-generative business through the cycle. As you know, we allocate some of that cash to dividends and the remainder to buybacks—that's how we expect it to unfold over the next period. We have a large share authorization outstanding, and at these levels, we think there's value in buying back shares, and our goal is to continue doing just that.

And our next question comes from Manan Gosalia from Morgan Stanley.

Welcome, Mary Ann. I had a question on the asset management fee rate. That's been steadily climbing. I know part of the reason is that the outflows earlier this year were from some of the lower-fee mandates. Is the same thing happening this quarter as well? How much more room does that have to run where you might see a few more outflows here or a little bit more mix shift, but you should see the fee rate climb?

Manan, it's Evan, and I'll take that one. Yes, look, as you mentioned, the last couple of quarters, we've seen stabilization and actually an increase in the average basis points, average fee rate of the bulk of our business. As you pointed out, some of the outflows that we experienced in the past two quarters were from lower-fee platforms, lower-fee products, a couple of larger mandates, which had an impact. Generally speaking, our average fee rate is driven by our asset mix and vehicle mix, which shifted somewhat in our favor. We also had strong flows and performance this year in several of our equity products, including our listed infrastructure, global equity, global franchise, and other areas. We've also seen less pressure from some outflows than we saw previously from emerging markets. So all of this contributed to a more stabilized average fee rate over time. I expect it to still be lumpy and dependent upon our business and asset mix going forward.

Got it. And then just a quick question on the FX side. I was wondering, has there been any material impact from the stronger dollar on your pretax margins? I know there is a headwind to revenues on translation and a benefit to expenses. But are there any regional mix impacts on expenses and revenues that might have already impacted your pretax margins year-to-date?

Yes. On the FX component, as you mentioned, the most significant FX impact is seen in the AUM, as two-thirds of it consists of non-U.S. dollar assets. You'll observe this in the translation of that component. As we approach year-end, some impact on expenses will arise as many of our non-U.S. dollar assets often have expenses in different regions worldwide, which can have varying currency impacts that could influence our margins, particularly in the asset management business. Overall, FX plays a role; as a large company with a substantial portion of our business in foreign currencies and non-U.S. dollar denominations, it affects both revenue and expenses.

Our next question comes from Steven Chubak from Wolfe Research.

This is Brendan filling in for Steven. To start, I wanted to follow up on Devin's question on capital return. I appreciate that you will continue to use the excess cash to repurchase shares. But I wanted to understand how we should think about the cadence of the buyback from here given the elevated levels of macro uncertainty and your ongoing commitment to invest in the business.

Look, the issue of investing in the business is usually organic in nature, and they run through the compensation line. That's the beauty and the curse of being in a people business. The investments we've made in the business haven't significantly impacted our capital return policy; however, if overdone, it can drive down earnings. To the extent we're producing earnings, our goal is to return as much cash as possible to shareholders while balancing dividends and share buybacks. We have a considerable gap between the cash leftover from dividends and buybacks at our current operating levels, so as long as we have that cash and see value in our stock, we'll continue to buy it back.

Great. I wanted to dig a bit more into Europe. You had record results in the region, but the public data shows that new business activity has steadily slowed as the year progressed. Wanted to get a sense of how the velocity of new deals has changed over the past three months and your outlook for activity in the region compared to the U.S., considering the acute headwinds from reliance on Russian natural gas exports and the recent volatility in Britain.

Yes. I would say our performance for the first nine months of this year came against a really difficult backdrop and a significant drop in completed transactions in the market. There was indeed a big drop in Europe for the first part of the year concerning announced deals. We outperformed in that regard. Everyone is being impacted by this downturn in activity, both in Europe and the U.S. I think what stood out for us in Europe is the combination of a really excellent franchise focused on areas of activity. To the extent that activity levels fall across the board, that's going to impact us as well. The real challenge for everyone right now is building backlog into the first part of next year and later in the year, and that applies to both Europe and the United States. That's the challenge we are currently facing.

That was our last question. This now concludes the Lazard conference call.

Thank you.