Earnings Call Transcript
Lazard, Inc. (LAZ)
Earnings Call Transcript - LAZ Q2 2022
Operator, Operator
Good morning, and welcome to Lazard's Second Quarter 2022 Earnings Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session. At this time I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.
Alexandra Deignan, Head of Investor Relations and Corporate Sustainability
Thanks everyone. Good morning and welcome to Lazard's Earnings Call for the Second Quarter and First Half of 2022. I am Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we posted our earnings release and an investor presentation on our website. A replay of this call will also be available on our website 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 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 statements. This discussion also includes certain non-GAAP financial measures that we will discuss regarding the company's performance. Reconciliation of these non-GAAP financial measures to comparable GAAP measures is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; Evan Russo, Chief Financial Officer. Evan will start the discussion with an overview of our financial results, then Ken will provide an outlook for the company. I'll now turn the call over to Evan Russo.
Evan Russo, Chief Financial Officer
Good morning. Today we reported operating revenue of $676 million for the second quarter of 2022 compared to revenue of $821 million in the same period of 2021 amidst challenging market conditions. Operating revenue for the first half of 2022 was $1.4 billion compared to $1.5 billion in the first half of 2021. In Financial Advisory, we reported second quarter revenue of $407 million compared to last year's record second quarter of $471 million. For the first half of the year, operating revenue was $795 million, 1% higher than the same period in 2021. Our dialogue with clients continues to be robust and our M&A activity remains at high levels, including in Europe, where we had a record first half. In addition, our global restructuring practice is working on a number of complex assignments and continues to see an increase in discussions with clients regarding liability management and other capital structure considerations. In Asset Management, second quarter operating revenue was $266 million, compared with record second quarter revenue of $343 million in 2021. Management fees decreased 16%, while performance fees declined 79% over the prior year quarter. In the second quarter, incentive fees were $7 million compared to $34 million for the second quarter of 2021. For the first half of 2022, operating revenue was $577 million compared to $671 million in the first half of 2021, reflecting lower average assets under management and significantly lower performance fees. As of June 30, we reported AUM at $217 billion, a decrease of 22% compared to June 30, 2021, and 14% lower on a sequential basis from March 31. The sequential decrease was driven by market depreciation of $23.2 billion, negative foreign currency impact of $8.2 billion, and net outflows of $4.6 billion. Average AUM for the second quarter was $230 billion, decreasing 17% from a year ago and 10% on a sequential basis. This reflected market selling off globally in both equities and fixed income. In addition, with approximately two-thirds of our AUM in non-U.S. dollar denominated securities, foreign currency has been a significant headwind thus far in 2022. Amidst significantly lower market valuations and a rising interest rate environment, we believe investors are prioritizing fundamental active investment strategies and looking to diversify from what has been a predominantly growth focus. Most of Lazard's core and relative value strategies are outperforming in the current market. In addition, ESG integration is an increasingly important consideration for clients. Clients are also seeking more customized solutions and thematic strategies to augment their portfolios. All of these present opportunities for the Lazard platform. As of July 22, our AUM was approximately $220 billion, driven by market appreciation of $5.5 billion, negative foreign currency impact of $1.4 billion, and net outflows of $0.5 billion. Now turning to expenses, we continue to accrue compensation expense at a 58.5% adjusted compensation ratio in the second quarter. Our adjusted non-compensation expense for the second quarter was $131 million, 10% higher than the prior year, primarily reflecting the impact of inflationary pressures, higher travel costs, and investments in technology. Our effective tax rate for the second quarter, as adjusted was 26.4%, compared to 25.2% in the prior year quarter. For the first half of the year, our adjusted tax rate was 25.9% versus 26.7% in 2021. We currently expect this year's annual effective tax rate to be in the mid 20% range. We continue to generate strong cash flow, which supports returning capital to our shareholders. In the second quarter, we returned $246 million to shareholders, including $46 million in dividends and $199 million in share repurchases. During the second quarter, we bought back 5.9 million shares of stock, at an average price of $33.90 per share. During the first half of 2022, we repurchased 10.6 million shares at an average price of $35.40 per share. Our weighted average share count at quarter end was $105 million, a decrease of 8% from the 114 million shares in the prior year quarter. Going forward, we expect to continue to use excess cash flow towards share repurchases. Yesterday, our Board of Directors authorized additional share repurchases of up to $500 million, bringing our total outstanding share repurchase authorization, as of today, to $559 million. Additionally, yesterday, we declared a quarterly dividend of $0.50 per share, reflecting a 6% increase in our dividend from last quarter and demonstrating our continued commitment to returning cash to shareholders. Despite significantly lower market valuations and macro uncertainty in the first half of the year, our results underscore the strength, stability, and discipline of our model and the continued performance of our businesses. Ken will now share his perspective on our performance and outlook.
Kenneth Jacobs, Chairman and Chief Executive Officer
Thank you, Evan. The global macroeconomic environment remains uncertain, characterized by global inflation at multi-decade highs, rising interest rates, and turbulent capital markets. Despite the unique set of circumstances that 2022 has presented, we performed well in the second quarter and the first half. Amid challenging conditions for global M&A during the second quarter, our Financial Advisory business delivered strong results. We continue to be active globally and remain cautiously optimistic about the second half of the year. We are serving our clients with sophisticated strategic advice in M&A, capital structure, shareholder activism, capital raising, as well as in restructuring. These capabilities were built over a decade and have been tested through numerous economic cycles. In Asset Management, we are serving clients with investment platforms that are diversified across asset classes, styles, and regions. Our research-driven fundamental active investment approach has resulted in the outperformance of most of our strategies so far in 2022. In the current environment, we believe there is renewed interest in fundamental active investment strategies in which we specialize, and investors are benefiting from our research capabilities to help navigate turbulent markets. We are also benefiting from our global orientation, which provides a broad base of opportunities for clients around the world. Looking ahead, Lazard is well-positioned for the remainder of the year with a diversified business model, a global client base, and unrivaled expertise in strategic advisory, restructuring, and asset management solutions. Firm-wide, we continue to invest in people, resources, and technology to enhance our market capabilities, geographic reach, and sector-specific expertise. Our business model is highly cash-generative and has proven its strength and resilience through numerous business cycles. We remain focused on serving clients while we manage the firm for profitable growth and shareholder value. This morning we were pleased to announce that Mary Ann Betsch will join Lazard as our new Chief Financial Officer on October 3rd. We look forward to welcoming Mary Ann to Lazard. Now, we'll open the call to questions. Thank you.
Operator, Operator
Thank you. Our first question comes from Brennan Hawken from UBS.
Kenneth Jacobs, Chairman and Chief Executive Officer
Hi, Brennan.
Brennan Hawken, Analyst
Hey, good morning. Thank you for taking my questions. Just curious to drill in a little bit on Europe and the outlook that you're seeing there for advisory. We're hearing about restructuring outlook picking up. Maybe if you could touch on the European restructuring backdrop and how that's looking and whether or not those trends are similar to what we're hearing? Thanks.
Kenneth Jacobs, Chairman and Chief Executive Officer
Okay. Look I think I'll answer the general first, Brennan. Usually when we evaluate the M&A environment, I look at three factors, and then there's a bunch of catalysts behind that. This applies I think generally to the US and Europe at the moment: valuation, credit or financing, and what I would describe as confidence—CEO confidence and board confidence. On valuations, clearly there's been a reset in the equity markets, and the process of buyer expectations and seller expectations is in the process of realigning. Credit conditions, I think, have deteriorated over the last few weeks. We saw difficulty in the high-yield market early this year. The banks were still active. The private credit markets filled a lot of the vacuum left from the high-yield markets, but there's been a pullback in just the last couple of weeks there. So, the credit markets are tougher. And then on confidence, I think we're in the middle of, again, a reset moving from an environment dominated by discussions around inflation to one now that's focused more on recession. So, that all results in a period of time where there's a great deal of uncertainty. With regard to activity levels, what we're seeing across the board in our business is that the second half looks pretty solid based on what we know about our announcements to date and activity underway. That feels pretty good to us. The real question for us and everyone is how the pipeline for next year evolves, and I think we'll all have a better idea as we enter the fall and we see what happens with the credit markets. That's really kind of the key. With regard to Europe, generally speaking, we had a very strong year there to date—a record first half for us. The second half still looks solid in Europe, based on what we know. And again, the key question there is going to be built into the future. So that's kind of the outlook. With regard to restructuring, clearly as credit conditions tighten, there is more pressure on companies' balance sheets. So far what we've seen is a pickup in dialogue. The next step is usually liability management; we're seeing some pickup there as well. Actual restructurings usually take longer to unfold. That said, one of the biggest restructuring assignments out there at the moment is a deal that we've been engaged in in Germany, which involves Uniper, where we've been working with the German government on the restructuring of the natural gas contracts. That's obviously a very high-profile, very important transaction.
Brennan Hawken, Analyst
Ken, thanks. That was very thorough and really helpful. My second question on capital management. Evan, buybacks were really quite good. Yours isn't going to be the hand on the throttle for very long, but you still got it there. So, how should we be thinking about capital returns from here? To me, the decent capital returns and buybacks in Q2 probably reflect some of that confidence that Ken just iterated about the outlook. Should we expect, given that the back half continues to look good, that that buyback should remain robust?
Evan Russo, Chief Financial Officer
Thanks, Brennan. Yes, I think that's—you described it well. I think, in Q2, we bought back 5.9 million shares, year-to-date, 10.6 million shares. We've bought back more shares than we needed to offset dilution from year-end compensation, and as you said, look, we've been aggressively utilizing cash and all the cash we've been producing on the balance sheet to take advantage of low share prices as we see the markets today, and as you're saying, it's got a confidence, I think, and we've been very opportunistic over the past year to reduce the share count significantly. As you mentioned, we reduced the weighted average share count down to under 105 million shares, from 114.1 million, so really down over 9 million shares in the course of the year. As you said, we expect to continue to reduce the share count for the remainder of the year, with excess cash flow continuing to buy back shares aggressively at these levels. Yes, it does, as we continue to generate additional excess cash flow, we'll be thinking what we've been doing all year—year-to-date—of buying back shares aggressively at these prices.
Brennan Hawken, Analyst
Great. Thanks for that color.
Operator, Operator
Our next question comes from Richard Ramsden from Goldman Sachs.
Richard Ramsden, Analyst
Hi. Good morning. So, Ken, can we just talk a little bit about financial sponsors and the engagement with that part of your client base? Obviously, a very important segment of the M&A market last year. How would you characterize the dialogue with those? And perhaps you can talk a little bit about financing conditions for that client base, where we are in terms of resetting the availability of financing? And whether you think seller expectations have shifted enough so that we can actually start to see transactions closing in that part of the market? Thanks.
Kenneth Jacobs, Chairman and Chief Executive Officer
Yes. No. So, excellent question. I think we're in a pause. The month of August is going to be a pretty quiet month for financial sponsor transactions. The credit markets are effectively shut for those deals right now. The real question is—and what's happening is a combination of factors. Number one, there's a reset going on both by equity owners and creditors and investors about how they see the economic environment unfolding over the next couple of years. We've gone, as I said earlier, from an environment that was quite robust a year ago to one where people are laser-focused on inflation to one now where people are laser-focused on recession. This adjustment—this change in expectations is going to take a little while to play through, both for creditors and for investors. So that's part one. Part two is that when it does play through, there'll be a reset. The terms of credit will change. There will likely be higher interest rates, covenants will tighten, there might be one or two turns less of debt in deals, and there may be more equity in deals. The internal rates of return will adjust accordingly, and the market will reopen. The question is just how quickly that plays through. The good news in terms of conditions is that this is very different from 2007, 2008, where the financial sector was under tremendous stress. Here, the banks go into this recession or this period of time, if there is a recession, with pretty strong balance sheets and the ability to adjust in that kind of environment. So there's a pause, and I think it’s going to be important to see how this all unfolds in the fall.
Richard Ramsden, Analyst
Just as a quick follow-up. I mean, how much of an opportunity is this more difficult environment for financing for your capital advisory business?
Kenneth Jacobs, Chairman and Chief Executive Officer
I think it's a great opportunity. One of the areas where we've been investing is in capability to arrange financing with the private credit markets. You'll see some movement on our part into the fall there. The credit markets have really shifted from the banks being the primary lender, with the public markets complementing that, to private credit providers now being a substantial player in the market, competing and complementing the banks. It's a market with enormous opportunities for a franchise like ours.
Richard Ramsden, Analyst
Okay. Thank you. That's very helpful.
Operator, Operator
Our next question comes from Devin Ryan from JMP Securities.
Kenneth Jacobs, Chairman and Chief Executive Officer
Hi, Devin.
Devin Ryan, Analyst
Great. Hey, good morning everyone. Thanks for taking my question. I guess, I want to start back on some of the outlook commentary. We've been on a number of calls over the last few days, and I would characterize your tone, at least for the foreseeable future, as a bit more constructive than most. I think we also see that in the pipeline data for Lazard on a relative basis. But I just want to drill down into that a little bit. I'm not sure if you have any thoughts on whether maybe you're just seeing a little more momentum because of the investments you've made in headcount over the past couple of years. I know you've been on the higher end of the spectrum of the care group, or is it geographic mix? Obviously, more towards Europe or just kind of where you focus your M&A efforts. I'd love to hear your thoughts on why that is so we can unpack it a little bit.
Kenneth Jacobs, Chairman and Chief Executive Officer
Sure. Peter, do you want to take that?
Peter Orszag, Analyst
Sure. I have a couple of comments. First, we have seen at least year-to-date activity that was pretty diversified. So, not just geographically in the US and Europe, but also across sectors. So, healthcare, industrials, FIG, energy transition, telecom, and media are all areas of strength and with significant momentum. I think that may be part of what you're seeing in the published pipeline data—just that broadly diversified activity.
Devin Ryan, Analyst
Okay. Got it. Then if possible to drill down a little bit more into Europe, what's driving the activity in Europe, whether it's sectors or themes? What is supporting a relatively healthy level of activity despite some of the other challenges that we all know about there?
Kenneth Jacobs, Chairman and Chief Executive Officer
Yes. So first off, when we sort of think about the first half, a lot of that is activity that was either started or underway in the second half of last year and the first part of this year. We have to differentiate between what's happened, what's happening, and what's going to happen in the future. That’s really an important factor here. So for the first half, I think it just reflected a really strong performance across the board in Europe in the areas that were active. So private equity in the second half of last year—we had a strong performance in France, the UK, and across many other markets in Europe. It's pretty diversified, as Peter said. Looking forward, like everyone else, we're going to— the future pipeline depends a lot on how the credit markets and seller and buyer expectations evolve over the next couple of months. But for us, the first half of the year was driven by a broad level of activity across a variety of different countries in Europe.
Devin Ryan, Analyst
Okay. Great. Thanks so much.
Alexandra Deignan, Head of Investor Relations and Corporate Sustainability
Hi, everyone. This is Alexandra. I understand that maybe some of my opening remarks were not able to be heard. I just want to provide a reminder 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. Thank you. So, operator, you could take our next question please?
Operator, Operator
Our next question comes from Manan Gosalia from Morgan Stanley.
Manan Gosalia, Analyst
Hi, good morning. I had a question on the asset management side. Given what you said about clients looking to diversify strategies away from growth, and your fundamental strategy is doing better than the market, is there more room to do lift-outs in this environment? Are you looking to lean in just given the market dislocation, or do you think you need to take a step back and wait to see how things shape up?
Kenneth Jacobs, Chairman and Chief Executive Officer
Evan?
Evan Russo, Chief Financial Officer
Yes. So Manan, I think that's—the markets are constantly evolving. Right now, I think the—what we were describing is just really good for our business. The fundamental active investment strategies that we have are certainly leaning more towards moving away from growth at any price into relative value core and general value strategies. This is one of the largest moves we've seen year-to-date. I think it just plays well to the strength that we have currently in existing platforms we have and our expertise across many of our strategies. This environment is great for us. Are there opportunities for us? Look, that is continuously on the table. We are constantly looking at additional teams and areas to expand into. But I think our existing platform really covers the market well for the areas that are doing really well year-to-date. Again, if that continues, I think it bodes well for our business.
Manan Gosalia, Analyst
Got it. And I guess how should we think about the comp ratio and the pretax margins going into the back half of the year? Given your comments, it sounds like there's momentum on the top line on both the asset management side and the advisory side. But I just wanted to get your thoughts on how you're thinking about that, and particularly given the investments that you're making in both businesses?
Evan Russo, Chief Financial Officer
Sure. The comp ratio we accrued at 58.5%, which is the same rate we accrued in Q1 of this year. It's early, Manan. At the end of the day, this is our best estimate at the time from a comp perspective. Comp this year will always be driven by the strength of revenues in the back half of the year, offset by investments in business mix. We'll see—it's early and we'll have a better view as we get into the second half of this year. We'll see how the year turns out with the continuation of the investments we want to continue to make. The market dislocation may create opportunities for us. We will have more visibility as we get to the back half of the year. Generally, for margins, a lot is driven by revenues and the strength of the business going forward. I'll have to wait and see how that plays out. We certainly have a lot of volatility in markets impacting our asset management business. As we get into Q3, we'll have better views of how the year is turning out.
Manan Gosalia, Analyst
Great. Thanks a lot, gentlemen.
Operator, Operator
Our next question comes from Steven Chubak from Wolfe Research.
Unidentified Analyst, Analyst
Brian, filling in for Steven. I'm talking about the asset management business. The resiliency in our fee rate these past few quarters has been quite impressive, given the sell-off in EM proxies which is typically a higher fee product. I was hoping that you could unpack the drivers of that greater resilience year-to-date and your expectations for the trajectory of that fee rate over the next year?
Evan Russo, Chief Financial Officer
Sure. Look, the fee rate as you call out, has actually been flattish this year. The last couple of quarters, it’s actually up a tad bit this quarter versus last quarter and last year as well. We're starting to see that level out. At the end of the day, the fee rate is an output for us due to the business mix. I think, as we've mentioned on previous calls, some of the outflows that we had seen from some of our institutional clients were reallocations that were going on. A lot of that was in lower-fee products and lower-fee platforms, and some on the fixed income side. Our outflows were sort of more driven by lower-fee types of products, while some of the inflows we have been seeing in our thematics and alternative strategies and other areas that have been called out were in higher-fee strategies. You put those two together, and it's been creating a nice balance against the AUM. As you call out, the EM has been declining to a lesser extent than outflows and certainly, we have seen some fall off. But I think, all in, we’ve gotten to the point where some of the inflows and outflows are creating more of a balance and, therefore, the fee rate has remained steady for the last couple of quarters.
Unidentified Analyst, Analyst
That's great color. Thank you for that. Next on the non-comps. You guys have seen a substantial pickup so far this quarter, and given travel is expected to continue to normalize, I just want to get a sense as to how we should be thinking about the trajectory of those expenses. As you know, we continue to ramp up, and inflationary pressures continue to play through your expense base.
Evan Russo, Chief Financial Officer
I think that's exactly right. Look, it's inflationary pressures you're seeing in non-comp— and a lot of that is the increase that we're seeing specifically in Q2 this year from higher travel. If you think about marketing and business development, that line item specifically is up significantly—more than $10 million. Travel alone was up $10 million just in the second quarter versus the previous year. You’re starting to see what we would expect, which we think is a great sign for the business—more people are getting on the road seeing clients as clients are willing to meet in person, meetings happening for the first time in years on the asset management side, with research analysts and portfolio managers getting out to meet with companies in person. As I said, for a couple of years, it’s an exciting time and we are encouraged. We think it’s great to get out there and see folks. We expect that to continue to grow through the back half of the year as we get towards more normalized levels. However, we are also seeing some inflationary pressures. This quarter is probably a good baseline from which to build, but you're likely to see a little more travel costs in Q3 and Q4, assuming the world stays open for travel as it has been. I think it’s a positive sign for the activity levels in the business.
Unidentified Analyst, Analyst
Clear. Thanks for taking my questions.
Operator, Operator
Our last question comes from Jeff Harte from Piper Sandler.
Kenneth Jacobs, Chairman and Chief Executive Officer
Hi, Jeff. Jeff, are you on mute?
Jeff Harte, Analyst
Yeah. Operator, I was muted, sorry. We continue to hear about historically strong levels of strategic dialogue in the face of things like plummeting confidence and recession expectations. I have kind of two questions on that. One, are you still seeing strong levels of strategic dialogue with clients or has that changed recently? And secondly, I'm especially interested in Europe, where war has been raging. I just have trouble shaking the feeling that it's a matter of when, not if, the next cyclical shoe drops, and we see that strategic dialogue shut off.
Kenneth Jacobs, Chairman and Chief Executive Officer
Look, first, I think the strategic dialogue shifted a lot over the past several years. The period from 2016 to 2019 was dominated by these very big strategic deals. The climate after 2020, towards the pandemic, has actually seen strategic focus shift to bolt-ons rather than overarching company deals. They are also not doing as challenging things, possibly, as were done in previous years around antitrust, because the environment has become more challenging from that standpoint. So, there has been a lot of strategic activity, but it hasn't been characterized by mega deals like we saw more between 2016 and 2019. I believe that will continue. There are many strategic transactions that are priced away due to public market valuations and private equity competition. Strategics generally are well-capitalized, with strong balance sheets. When you have a shift in geopolitical conditions, you're likely to use M&A to shift your business by either buying or selling assets. I think we’ll see that. One of the challenges is the reset happening in people's expectations about the economy. We need to let that play through before we see a real pickup in activity.
Jeff Harte, Analyst
And that's still kind of I guess as far as just the dialogues there, still maintained in Europe as well? I can't shake the feeling that it's a matter of time until the next cyclical shoe drops and we see that shut off.
Kenneth Jacobs, Chairman and Chief Executive Officer
The thing to keep in mind about Europe is that most multinational companies in Europe are just that—multinational companies. If you think of a German company, most of its business is outside of Germany. For a Swiss company, 90% of most of its business falls outside of Switzerland; it’s often in the United States or emerging markets. The same can be said for global companies listed on the FTSE or CAC 40. These are global businesses with their operations spread across the globe, so conditions in Europe aren't the only thing that goes through the minds of their CEOs. Their mindset is very similar to that of a multinational based in the United States or Canada. That’s often lost in this idea that conditions in Europe are challenging. Absolutely there are challenges, but these companies view it from a global perspective.
Jeff Harte, Analyst
Interesting. Thank you.
Operator, Operator
Thank you for joining us today. This now concludes Lazard's second quarter 2022 earnings call. Have a good day.