Lazard Ltd (NYSE:LAZ) Q1 2024 Earnings Call Transcript

Lazard Ltd (NYSE:LAZ) Q1 2024 Earnings Call Transcript April 25, 2024

Lazard Ltd beats earnings expectations. Reported EPS is $0.66, expectations were $0.58. LAZ isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Lazard’s First Quarter 2024 Earnings Conference Call. This call is being recorded. Currently all participants are in a listen-only mode. following the remarks, we’ll conduct a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the call over to Alexandra Deignan, Lazard’s Head Of Investor Relations, Treasury, and Corporate Sustainability. Please go ahead.

Alexandra Deignan: Thank you, Brittany. Good morning, everyone, and welcome to Lazard’s earnings call for the first quarter of 2024. 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 a 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 is Peter Orszag, Lazard’s chief executive officer, and Mary Ann Betsch, Lazard’s chief financial officer. 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: Thank you, Ale, and good morning to everyone. As we continue to pursue our long-term objectives, Lazard reported a record first quarter with firm-wide adjusted net revenue of $747 million, an increase of 42% year-over-year. Going into 2024, we anticipated that interest rates would stay higher for longer. During the first quarter, we saw this environment materialize with implications largely as expected. Relative to a world in which interest rates are rising, even stability in rates facilitates increased activity in M&A as buyers and sellers align on valuations and deal financing becomes more readily available. And beyond M&A, approaching debt maturities are interacting with this higher for longer landscape to produce stronger activity in restructuring, liability management, and private capital solutions.

The impact of this market backdrop, along with our focus on growth and increasing productivity, drove record first quarter revenues within our advisory business. At the same time, higher rates increased the appeal of short-term investments, such as T-bills and money market funds, which reduces new allocations into active equity strategies. This effect should dissipate as rates eventually decline and investors put more money to work. Despite the current prolonged higher rate environment, we had solid revenue growth within asset management in the first quarter, and average AUM increased 6% from year end 2023. First quarter performance also reflects continued efforts to further strengthen our platform by delivering excellence in the products we already offer, enhancing our distribution structure and team, and investing in areas of future opportunity.

Lazard’s strong first quarter results represent the ongoing execution of our long-term strategic plan and reinforce our belief that 2024 will be a better year for our business. I’ll share more on our outlook shortly, but let me first turn the call over to Mary Ann, who will provide further details on the quarter.

Mary Ann Betsch: Thank you. As Peter noted, today we reported record first quarter firm-wide adjusted net revenue of $747 million, up 42% from the year prior. Increase in firm-wide revenue was driven primarily by our financial advisory business. Financial advisory adjusted net revenue was $447 million for the first quarter, up 63% from the first quarter last year. We had strong performance across the U.S. and Europe, which included several large-cap transactions completed during the first quarter, as well as in public and private capital markets and restructuring activity. We saw the pace pick up across deal sizes and geographies, which also contributed to this quarter’s revenue growth. Lazard completed a number of marquee transactions in the first quarter, including ImmunoGen’s acquisition by AbbVie, CymaBay Therapeutics’ acquisition by Gilead, and LXi’s merger with LondonMetric.

We also advised on several capital markets listings in Europe, including Galderma’s IPO and Sodexo’s spinoff and listing of Pluxee, as well as fundraising for Wynnchurch Capital, Rubicon Founders, and McCarthy Capital. Turning to asset management, adjusted net revenue was $276 million for the first quarter, up 1% from the fourth quarter and 4% higher than the first quarter last year. Management fees for the first quarter were up 4% from the fourth quarter and up 3% compared to the first quarter last year, reflecting higher assets under management. As of March 31, we reported AUM of $250 billion, 2% higher than December 31st, 2023, and 8% higher than March 31, 2023. During the quarter, net outflows of $6.6 billion and foreign exchange depreciation of $3.6 billion were more than offset by market appreciation of $14 billion.

Average AUM for the first quarter was $247 billion, up 6% on a sequential basis, and 9% higher than the first quarter of 2023. We continue to have positive and constructive engagement with clients, and we are seeing increased client interest in strong performing strategies across our international and emerging markets platforms and quantitative products. Firm-wide revenue also included corporate revenue of $24 million in the first quarter, consisting primarily of investment gains and interest income, along with a one-time gain on the sale of a legacy investment. Now turning to expenses, for the first quarter of 2024, our adjusted compensation expense was $493 million, equating to a ratio of 66%. This compares to 75.7% for the first quarter one year ago.

For the first quarter, our adjusted Non-Compensation expense was $134 million, 6% lower than the prior year, equating to a ratio of 18% compared to 27% the year prior. The year-over-year decrease was primarily due to lower professional services fees and other expenses, partially offset by higher travel expenses. During the first quarter, we completed our target headcount reduction of 10%, which has been in progress since April of last year. We remain focused on expense management while making targeted investments in the business. Shifting to taxes, our adjusted effective tax rate for the first quarter was 32.6%, compared to 32.1% for the first quarter of 2023. We currently expect our full-year tax rate to be in the high 20% range. Turning to capital allocation, in the first quarter of 2024, we returned $121 million to shareholders, including a quarterly dividend of $44 million, share repurchases of $22 million, and $56 million in satisfaction of employee tax obligations.

Year-to-date, we have repurchased 958,000 shares, and we have remaining authorization available for $163 million. Additionally, yesterday we declared a quarterly dividend of $0.50 per share. We remain committed to balancing investments and growth with the return of capital to our shareholders. Finally, during the quarter, we refinanced a portion of our debt by issuing $400 million in seven-year senior notes at a 6% coupon. Now I’ll turn the call back to Peter.

Peter Orszag: Thank you, Mary Ann. Our outlook for a productive 2024 is reinforced by our strong first quarter results and is further supported by several factors. As we have said before, in financial advisory, the tailwinds behind transactions include powerful factors, such as innovation in technology, energy transition, the biotech revolution, and the shift of supply chains as companies de-risk. These tailwinds continue to propel M&A activity. Meanwhile, headwinds have generally diminished in force over the past few quarters. During the first quarter, market expectations became more closely aligned with the higher-for-longer rate environment, reducing a source of mispricing risk in the markets. In addition, the difficulty of finding financing when rates were rising has largely abated, and the government’s deterrence effect on regulatory matters has weakened in the wake of recent court decisions.

While many headwinds have tapered, geopolitical concerns remain top of mind, with significant focus on the potential for escalation and spillovers from the ongoing conflict in Ukraine and the Middle East. These concerns result in increased client demand for our geopolitical advisory team and, in general, are more than offset by the fading of other headwinds. Overall, the interplay between these tailwinds and headwinds remains a shift towards a more constructive market environment. This shift is occurring alongside our effort to increase revenue per MD, which is trending well. The combined effect of the market and our own efforts is ongoing momentum and fairly widespread M&A activity, including in health care, industrials, tech, and energy across both North America and Europe.

We have also significantly expanded our connectivity to private capital, which is another growing source of strength. Various efforts across sponsor coverage, capital solutions, fundraising, and structuring liability management increasingly build on one another and attract new business opportunities. In liability management specifically, conversations with clients are growing as they seek innovative ideas to address approaching debt maturities. While historically we’ve been more debtor-focused, we’ve invested over the past few years to evolve our restructuring and liability management practice, and we now cover both creditors and debtors quite effectively. Finally, attracting world-class talent to Lazard remains a top priority for financial advisory.

We are pleased to have hired four new managing directors during the first quarter and this month, with ongoing productive recruiting conversations underway. Turning to asset management, we continue to strengthen our platform and pursue excellence in our core strategies and products as we evolve into newer areas of opportunity. Clients look to us to deliver solutions that help diversify and manage risk in their portfolios, and we remain focused on enhancing performance and distribution to strengthen the core strategies, products, and areas that meet our existing client demand. Examples include recently refreshing the depth and expertise of our US. equity team and welcoming a new head of our Japan business as we expand client engagement and distribution efforts more broadly across Asia-Pacific markets.

As I mentioned earlier, the current interest rate environment means that across the investment industry, cash is accumulating on the sidelines. Investors are patient given current short-term yields and are looking to be opportunistic about returning to risk markets. This environment will eventually shift as central banks move to reduce rates, and our ongoing efforts to strengthen the current platform support our ability to capture demand when cash is put back to work and investors look to diversify. As we evolve the business into newer areas of opportunity, we completed our initial investment in a strategic partnership with Alaya Partners in Paris. The result is a new asset management client offering that provides private market solutions within the technology industry.

This partnership reflects our long-term strategic plan to meet future client opportunities by providing private market, alternative investment, and wealth management solutions, balanced with investing in the strategies we believe will be most attractive within liquid public markets in the years to come. As evidenced by our strong first quarter results, we continue to make progress towards Lazard 2030 and our long-term strategic objective to double firm-wide revenue and deliver an average annual shareholder return of between 10% and 15% through 2030. In pursuit of enhancing insights for clients and increasing overall firm efficiency over time, we are actively exploring and deploying generative AI, and we believe that 2024 will be a critical transition year to a new way of conducting business in both financial advisory and asset management.

We are excited about the prospects for serving our clients even more effectively while freeing internal resources for higher value-added activities as the technology evolves. In addition, our re-energized focus on brand and culture is resulting in increased client conversations and new business opportunities. Through insightful research and unique convening events, we are building on our highly regarded brand and further enhancing our relevance for clients. And a high degree of enthusiasm across the firm to aim higher together is reinforcing our increasingly commercial and collegial culture. Importantly, it is when risks and opportunities are most complex that business, investment leaders, and government reach out to Lazard. Our global network, intellectual capital, and long history of collective experience and knowledge continue to further our unwavering mission to provide the most sophisticated and differentiated advice and investment solutions for our clients.

Now let’s open the call to questions.

Operator: Thank you. [Operator Instructions] We’ll take our first question from Steven Chubak from Wolfe Research. Your line is open.

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Q&A Session

Brendan O’Brien: Good morning. This is Brendan O’Brien filling in for Stephen. I guess to start, I just wanted to touch on the comp ratio. Revenues were at a record level in one queue, but the comp ratio is still pretty elevated. I know that you’re still dealing with the overhang from prior year deferrals, but I wanted to get a sense as to whether this is a reflection of your view on the sustainability of this revenue level in one queue? And as we look out beyond ’24, can you speak to your confidence in your ability to get the comp ratio back to the targeted range?

Mary Ann Betsch: Sure, I’ll take that one. Hi, Brendan. So, as Brendan, in years prior to 2023, we used to start off the year using the prior year ratio as kind of a proxy for the best estimate in the current year because early in the year, it’s hard to predict where revenues are going to land, and the band of outcomes is still pretty wide. So, when we looked at that for this year, last year’s ratio was pretty high, and so we didn’t feel that was appropriate, especially as revenues, as we’ve said, are expected to be better. But there still is a lot of unpredictability in the year, and also in our recruiting efforts, we’re really excited about the trajectory there, but there’s a cost to that as well. So, we didn’t think using last year’s rate made sense, but we, as you said, moving towards our ratio was an important objective for this year, and we actually hope to be able to do better than that as the year progresses.

And then looking at 2025, we’ll get back to the target as quickly as we can.

Brendan O’Brien: That’s great color. Thank you. And I guess for my follow-up, I wanted to touch on, the asset management business. While trends in advisory look quite strong, outflows in asset management segment have continued to accelerate despite your improved performance. I understand that’s still early days in terms of execution on your growth initiatives for the business, and it sounds like demand for your products is beginning to pick up. But when thinking about value creation for the franchise, I just wanted to get a sense as to how you’re evaluating or thinking about the path forward. And would you consider strategic alternatives if the process of reinvigorating growth in this segment is taking longer than anticipated?

Peter Orszag: Sure. Let me take that, and then maybe Evan can add some additional color. First, let’s just talk about what’s happening in the business. We have a significant amount of very, very strong performance, and we can go into that in a bit. But with regard to the net outflows in the quarter, that was, I think, disproportionately driven by the phenomenon that I mentioned, which was a higher for longer environment means there’s more cash sitting on the sidelines, and so the inflows into active strategies like ours were depressed as a result. That will reverse, because we do expect that interest rates will be cut, and that will alter the flow of investment dollars. So, there is a bit of a, Sui generis or a phenomenon associated with the higher for longer environment.

In terms of this underlying strategy, I think we’re making a lot of progress on what I see as the three key areas. One is to continue to strengthen the core, and we gave you some examples of that with regard to the U.S. equity team. The second is to continue to evolve the distribution channel. We gave you an example of that with regard to Japan. And then the third is to continue to move into newer areas of opportunity for us in private markets and associated products, and the example there is Alaya Partners. So, there is progress that is occurring. I don’t know if, Evan, you wanted to add anything to that, and then I can come back to the other part of the question in a second.

Evan Russo: No, I think you summarized it well. I think at the end of the day this quarter, as you just said, the market environment, given the significantly higher yield and short duration money markets, we start to see that at the beginning of the year. I think we’d expect that to continue through the middle of the year until central banks start to get more visibility on the lowering of rates. There’s certainly a lot of money starting to sit on the sidelines. There’s about $9 trillion, I think, last estimate I saw of money sitting in money markets, a short duration instrument. And what we’re hearing from allocators and from the investor community and our clients is that they just need higher conviction before putting new money to work.

It’s not a question of if, it’s a question just of when and when the right timing is. And so we’re starting to see that, and that sort of flows through from retail to institutional. But we’re starting to see the growing interest, as Peter mentioned before, in some of our strategies of globalization. So being more global strategies, specifically areas like Japan or others, which have been under allocated asset classes in the past but are continuing to gain traction. There’s really a lot of client interest into those under allocated places, such as EM and others, as well as an uptick in the interest that we have across our quant and systematic platform. So, a lot of good things going on below the surface, but some of the macro trends I think are going to take a little bit of time to work through before we see that into flows.

Peter Orszag: And then just to round out the answer you had asked about the strategic alternative question, as I hope you get the sense, we see a lot of upside potential in this business. And we also see significant synergies that can be built further out from outstanding content across the two businesses from our brand and from convening events that share and that are centered around that outstanding content. That having been said, we are a public company, and we’re always open to value-enhancing suggestions. But, again, I’d go back to we see a significant amount of upside in both businesses, including the asset management.

Brendan O’Brien: Great. Thank you all for taking my questions.

Operator: Thank you. We’ll take our next question from Brennan Hawken from UBS. Your line is open.

Brennan Hawken: Good morning. Thanks for taking my questions. I’d like to drill into the non-comp a bit. This was a little better than expected this quarter. Is this the right building-off level for non-comp, or was there some noise that might have flattered the result this quarter? How should we be thinking about it this year?

Mary Ann Betsch: I’ll take that one. So, we, as have been working hard to identify and implement cost savings, and we’re pleased with the results of those efforts. When you’re looking, though, at kind of quarter-to-quarter seasonality, as it tends to move around a bit. And if you’re thinking about the rest of the year, I would kind of assume that the cost savings that we’ve achieved are going to be more or less offset by increases in things like occupancy costs and market data, where we’re kind of price takers, and then travel, which is increasing as client activity picks up, which is a good thing. So, there’s kind of, put some takes there. But the first quarter, we had a little bit of an excess benefit, just based on the comparison to last year, where there were some sort of one-time pops.

Brennan Hawken: Okay. Was that because the comp was high, not necessarily because the base in one? I’m just thinking about the base in one queue, not necessarily the comp.

Mary Ann Betsch: No, sorry. What I meant was that if you’re comparing non-comp year-over-year, the decline is partially reflecting the fact that last year there were some one-time items in there.

Brennan Hawken: Ah, okay, okay, great. Thanks for clarifying that. And then you spoke and you prepared remarks a bit about restructuring and the activity levels that you’re seeing. Could you speak about where restructuring revenue as a proportion of advisory has been running? This is something we all used to get disclosed, but it would just be helpful to think about how much that has contributed to your advisory business in, the past year or so, and particularly helpful given that the outlook remains pretty solid for that business?

Peter Orszag: Yeah. So, Brennan, I think I’m going to give you some color, but may not fully satisfy the desire for perfect clarity on this.

Brennan Hawken: I’m used to that. It’s okay, Peter.

Peter Orszag: Let me give you a little bit of backdrop here. So, first, I think, we say restructuring and liability management. Honestly, or frankly, it’s mostly liability management in today’s marketplace. And we did see a significant uptick relative to this time last year, which we believe will continue. relative to the market, we were lagging a little bit in the beginning of last year. I think we’ve now been catching up or caught up in our rightful place in the marketplace that’s been reestablished. And so, I mean, as an example, the increase for the first quarter relative to the first quarter of last year, this quarter’s restructuring and liability management was over two times what it was in the first quarter of last year.

We do expect that an elevated level of activity will continue as the debt maturities that are approaching interact with the hire for longer environment. And we feel like we are now very well positioned with a more diversified team that’s covering creditors and debtors and that has much more connectivity to private capital where a lot of activity is occurring to continue to be active. Frankly, even as interest rates come down, this will continue to be, because of the maturity walls, it will continue to be a significant area of activity.

Brennan Hawken: Okay, thanks for taking my questions.

Operator: Thank you. We’ll take our next question from James Yaro from Goldman Sachs. Your line is open.

James Yaro: Good morning, and thanks for taking my questions. So, we’ve seen industry M&A activity year-to-date improve substantially more in the U.S. than in Europe. I was hoping, Peter, you might be able to just provide your color on dialogues and the differences between the U.S. and Europe.

Peter Orszag: Sure. Look, we did see, including in the first quarter, there was more of a pickup in North America than in Europe, although both are up. And that’s generally the picture that we see for the year ahead, or for 2024 as a whole, which is a larger or a disproportionate uptick in North America, but still a healthy level of activity and, expanded level of activity in Europe. So, as one of the differentiated benefits, or one of the differentiators for Lazard is that we’ve got strong presence both in North America and in Europe. It provides a source of diversification, if you will, when there are different pockets of opportunity. Last year, Europe was relatively strong for us. It is still a strong year for Europe, but North America, consistent with that market. I think we may be outpacing the market a bit, but consistent with the market, we’re seeing a bit more strength in North America right now.

James Yaro: Okay. I think that makes a lot of sense. Maybe just on the corporate revenue line, which did reach a record this quarter, any chance you could size the gain in that line just so we can, model the sustainability, model sustainably that line item? And then any color on whether you do accrue comp and non-comp expenses against that line item?

Mary Ann Betsch: Yeah. So, in terms of the gain, I would describe it as fairly sizable, but not a majority of the corporate revenue for the quarter. So, if you’re, just thinking about kind of the run rate for the rest of the year, I would assume, some return on our cash, plus or minus, investment gains on seed portfolio. So, that’s how I would think about that. And then in terms of the comp ratio, we really do that for the firm as a whole, and it’s not, at this point in the year, not done on a person-by-person basis or, kind of at that level of granularity.

James Yaro: Okay. That’s very clear. Thanks so much.

Operator: Thank you. We’ll take our next question from Devin Ryan with Citizens JMP. Your line is now open.

Devin Ryan: Thanks. Good morning, Peter, Mary Ann, and Evan. Thanks for taking the question. So, I want to just come back on the comp ratio as a follow-up and appreciate the color you guys provided there. And I also know that you’re projecting revenues on a four-year basis at the beginning of the year is really tough. So, first quarter comp accrual, maybe isn’t a perfect science, but is there a level of revenue or a range of revenues we could think about that would be supportive of kind of driving that comp ratio or the overall margin profile back to the normalized range? Just trying to kind of think about that algorithm and what it looks like given that maybe the first quarter is not the best way to judge it off of.

Mary Ann Betsch: Yeah, I mean, I think, as Brendan mentioned at the top of the call, we are still sort of dealing with the aftermath of the deferrals and the impact that that has on the current year. So, that’s definitely part of the equation. and so, it’s I think a question of how quickly we can get back, into the target range. And the level of revenue certainly matters, but I don’t think I would give you a magic number where, I can foresee that we would hit 59.9%, right? I think there’s a lot of input to it, and so we’re trending towards it, but the pace is just going to depend on many factors, including how quickly the revenues recover.

Devin Ryan: Okay. All right. That’s fine. Thanks a lot. And then a follow-up here, maybe for Peter, just on kind of broader trends within the M&A market. And, we’ve been tracking more corporate activity. Really, over the past year plus versus sponsors, I think Lazard’s been well-positioned for that, given strong corporate relationships. It does seem like sponsors are gearing up to do more, and so I’d love to just kind of get some color from you around what you’re seeing in that balance between corporates versus sponsors and the degree that sponsors are picking up behind the scenes and kind of what’s maybe shifting the behavior or catalyst for them coming back to the market. Thanks.

Peter Orszag: Sure. I agree with your characterization, which is, to date, the strategics have been kind of leading the way, but I think we’re now in the stage of the cycle where sponsors are coming back on the playing field. So, I think you’ve got the market characterization correct, and that’s what we’re seeing in our own business, which is the share of our revenue that was coming from private capital had declined over the last year or two as strategics were picking up more quickly than private capital was. But we are in the early stages of seeing that, yeah, the dialogue and the activity with sponsors starting to accelerate. One thing that I would highlight is I think maybe, as I said in my remarks, perhaps unappreciated is how much Lazard has been strengthening our connectivity to private capital over the past couple of years so that we are positioned for this shift as it occurs.

And that’s not just in private equity, but it’s across the whole array of what these now large alternative asset managers are focused on. So private credit, fundraising, restructuring liability management, as I mentioned, and then, yes, private equity and sponsor coverage. We’ve been investing in all those areas, and so your historical perception of Lazard may be, may need to evolve a little bit because of the investments that we’ve been making. And I will tell you that several of the very large alternative asset managers have remarked how much our coverage has improved and how much connectivity, expanded connectivity they are seeing between Lazard and their firms.

Devin Ryan: All right. Thank you very much.

Operator: Thank you. We’ll take our next question from Ryan Kenney with Morgan Stanley. Your line is open.

Ryan Kenney: Hi, good morning. Thanks for taking my question. Wondering if you could give some color on what you’re seeing around the election and how boards and CEOs are thinking through it. Do you sense any hesitancy to wait and see what ultimately transpires and what the impact to the antitrust environment would be or no? Thanks.

Peter Orszag: So, a couple comments here. One, yes, the U.S. has an election. It’s one of more than several dozen elections across the globe. So, when I said that geopolitical forces are something that’s on clients’ minds and that they often look to a place like Lazard to help navigate, we’re seeing a lot of demand for insight into the combined geopolitical and business environment because you can’t make a business decision today without taking geopolitical forces into account. And Lazard is very well positioned to help clients on exactly those sorts of issues. With regard to the U.S. election specifically, honestly, there’s sort of typically two parts to a client meeting. The first part is the sort of the warm-up and the second part is the meet of the meeting. The U.S. election still is in the warm-up section and typically not in the meet of the meeting section of client interaction.

Ryan Kenney: Great. Thank you.

Operator: Thank you. We have no further questions at this time. This does conclude Lazard’s first quarter 2024 earnings conference call. Thank you for your participation. You may now disconnect and have a wonderful day.