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Lazard Ltd (LAZ) Q3 2023 Earnings Call Transcript

Lazard Ltd (LAZ)

Q3 2023 Results Conference Call

Company Participants

Alexandra Deignan - Head of Investor Relations

Peter Orszag - CEO and Director

Mary Ann - Chief Financial Officer

Conference Call Participants

Brennan Hawken - UBS

Steven Chubak - Wolfe Research

Jim Mitchell - Seaport Global

Ryan Kenny - Morgan Stanley

James Yaro - Goldman Sachs

Devin Ryan - JMP Securities

Presentation

Operator

Good morning, and welcome to Lazard's Third Quarter and First 9 Months of 2023 Earnings Conference Call. This call is being recorded. Currently all participants are in a listen-only mode. Following their remarks we will conduct the question and answer session, instruction will be provided at that time. [Operator Instructions]

At this time, I'll turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations, Treasury and Corporate Sustainability. Please go ahead.

Alexandra Deignan

Thank you, David. Good morning, and welcome to Lazard's earnings call for the third quarter and first 9 months of 2023. I'm Alexandra Deignan, Head of Investor Relations, Treasury and Corporate Sustainability. In addition to today's audio comments, we have posted our earnings release on our website. A replay of this call will also be available on our website later today.

Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance, achievements or other events to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to, those factors discussed in the company's SEC filings, which you can access on our website. Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update these forward-looking statements.

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 measures is provided in our earnings release and investor presentation.

Hosting our call today are Peter Orszag, Lazard's Chief Executive Officer; and Mary Ann Betsch, Lazard's Chief Financial Officer. Peter will begin with some brief remarks before turning the call over to Mary Ann, who will provide an overview of our financial results. Peter will then provide his perspective on current market conditions and the outlook for our business.

After our prepared remarks, Peter and Mary Ann will be joined by Evan Russo, Chief Executive Officer of Asset Management, as they open the call for questions. I'll now turn the call over to Peter.

Peter Orszag

Thanks, Ale, and good morning, everyone. I'd like to begin my first earnings call as CEO of Lazard by expressing my thanks to my predecessor, Ken Jacobs. We are thrilled that Ken, 1 of the world's premier bankers is now our Executive Chairman and has shifted his focus to advising clients. I also want to thank our Board of Directors for entrusting me with this role. It is a privilege to work with such exceptionally talented colleagues across the firm, and I look forward to serving and supporting them, our clients and our shareholders.

Lazard is one of the world's preeminent financial advisory and asset management firms with one of the most powerful brands in the financial services industry, and I am excited about our prospects to further elevate our relevance, revenue and returns. I'll provide more on our outlook and plans for Lazard later, but now let's turn the call over to Mary Ann to discuss our third quarter and 9-month results.

Mary Ann

Thanks, Peter, and good morning, everyone. Today, we reported operating revenue of $532 million for the third quarter of 2023, a 27% decrease from the third quarter of 2022. Operating revenue for the first 9 months was $1.7 billion compared to $2.1 billion in the first 9 months of the prior year. In Financial Advisory, we reported third quarter revenue of $261 million and $879 million for the first 9 months of the year. Advisory operating revenue continues to be impacted by the ongoing slowdown in M&A and this quarter's results reflect the lagged state of M&A announcements from several quarters ago.

Looking ahead, we believe the M&A cycle is turning, and we are well positioned as the market recovers to advise on a variety of transactions, including those associated with private capital as well as large cross-border and complex transactions.

Outside of M&A, we see continued momentum in several areas of the advisory business. Private Capital Advisory, our primary and secondary capital raising group, continues to see significant demand for its services, especially in the secondaries business, building on its strong second quarter and year-to-date results.

Lazard's Global Restructuring and Liability Management Group also had a strong quarter, with operating revenue increasing both sequentially and year-over-year. The pickup in restructuring activity is accelerating, and the team is currently advising on a number of significant transactions for a wide range of debtor and creditor clients.

Our Software and Advisory business also continues to perform well and advised a number of governments during the quarter, including prominent assignments for Srilanka and Greece. Lastly, 1 year after its launch, client demand continues to increase for our geopolitical advisory services amid the growing demand from corporate leaders for advice concerning global risks.

In Asset Management, third quarter operating revenue was $262 million, flat compared to the third quarter last year, and down 2% sequentially. The management fees and other revenue for the third quarter were up 8% compared to the third quarter of 2022 and flat compared to the second quarter of 2023. For the first 9 months of the year, management fees and other revenue declined 1% compared to the same period in 2022.

Asset Management revenue was $794 million in the first 9 months of 2023, 5% lower than the prior year period, reflecting lower incentive fees.

As of September 30, we reported AUM of $228 billion, 5% lower than June 30, 2023, and 15% higher than September 30, 2022. The sequential decrease was driven by market depreciation of $5.8 billion, foreign exchange depreciation of $3.3 billion and net outflows of $2 billion.

Average AUM for the third quarter was $236 billion, increasing 11% from a year earlier, and flat on a sequential basis. Average AUM for the first 9 months of 2023 was $233 billion, level with the first 9 months of the prior year.

Now turning to expenses. For the third quarter, adjusted compensation expense was $364 million. This equates to a 68.4% adjusted ratio during the third quarter, which reflects our current best estimate for the remainder of the year. Our non-compensation expense was $137 million in the third quarter, 7% higher than the third quarter last year related to increased occupancy costs as well as higher technology and professional services expenses.

We are progressing on our cost saving initiatives announced in April to reduce our count rate by 10% by the first quarter of 2024. Our goal to reduce overall costs includes a reduction in reprioritization of long-term projects. These changes reflect our commitment to return to our target expense ratios as revenues normalize. Our effective tax rate for the third quarter as adjusted was 8.4%, which compares to 25.1% in the prior year quarter. Our current estimate for the full year tax rate is projected to be in the low to mid-teens. Our estimate, as always, is dependent on the level and location of earnings as well as the impact of discrete items in the fourth quarter.

Turning to capital allocation. In the third quarter of 2023, we returned $52 million to shareholders, primarily reflecting our quarterly dividend. During the first 9 months of the year, we returned $285 million to shareholders, including $129 million in dividends, $102 million in share repurchases and $54 million in satisfaction of employee tax obligations.

Additionally, yesterday, we declared a quarterly dividend of $0.50 per share.

I will now turn it back over to Peter for comments on the outlook.

Peter Orszag

Thank you, Mary Ann. Today's results underscore the lagged effect of the slowdown in M&A announcements from several quarters ago. However, our Asset Management business and part of our Advisory business, including restructuring and private capital secondaries fundraising, are offsetting some of the overall market weakness in M&A.

Looking forward, and as we have previously stated, we believe that the worst of the M&A slowdown is behind us. We continue to see signs that the market is bottoming out and stabilizing with the quarters ahead poised for a rebound in deal activity. We are already seeing significant M&A activity in financial institutions, health care and energy transition among other sectors. We are also seeing early signs of an increase in cross-border M&A activity, which, with our global presence and expertise, we are well positioned to capture....

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