Lazard Ltd (NYSE:LAZ) Q4 2022 Earnings Call Transcript

Lazard Ltd (NYSE:LAZ) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good morning and welcome to Lazard’s Full Year and Fourth Quarter 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.

Alexandra Deignan: Thank you, good morning and welcome to Lazard’s earnings call for the fourth quarter and full-year 2022. I’m Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today’s audio comments, we’ve 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 Ann Betsch, Lazard’s 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. If you are currently on the call, please make sure your line is one mute. I’ll now turn the call over to Mary Ann.

Mary Ann Betsch: Thanks, Ale and good morning everyone. Today, we reported fourth quarter 2022 operating revenue of $671 million, a 31% decrease from record revenue of 968 million in the fourth quarter of 2021. Operating revenue for full-year 2022 was $2.8 billion, 12% lower than full-year 2021. For context, this represents the second highest annual operating revenue in Lazard’s history, following the firm’s record operating revenue in 2021. In Financial Advisory, we’ve reported fourth quarter revenue of $404 million, down 34% from last year’s fourth quarter. For the full-year, operating revenue was $1.7 billion, 7% lower than record revenue in 2021. Despite the challenging market conditions of 2022, robust strategic M&A activity drove financial advisory to a record first nine months with activity slowing during the final months of the year.

While the pace of announcements and completions moderated amid rising macroeconomic uncertainty, our client engagement remains active across geographies. In restructuring, our discussions with clients are increasing as a result of rising interest rates and demand for liability management and we are currently engaged on a number of assignments in both the U.S. and Europe. In Asset Management, fourth quarter operating revenue was $259 million, 25% lower than the fourth quarter of 2021. Annual operating revenue was $1.1 billion, 17% lower than 2021, primarily reflecting lower average assets under management and lower incentive fees. Management fees and other revenue was 245 million for the fourth quarter, 18% lower than the prior year period, reflecting a 21% decrease in assets under management year-over-year, partly offset by a slight increase in the average fee rate.

Management fees and other revenue was $1 billion for full-year 2022, a 15% decrease from the prior year. 2022 was a year of significant market volatility, geopolitical tensions, and quantitative tightening, which manifested in lower valuations across asset classes globally. Although markets showed signs of improvement in the fourth quarter, investors reallocated portfolios at year-end to de-risk assets and increased liquidity. The strength of the U.S. dollar was also a sustained headwind for our asset management business as approximately two-thirds of our AUM is held in non-U.S. dollar denominated assets. As of December 31, 2022, we reported AUM of $216 billion, up 9% from September 30. This increase was driven by market appreciation of $14.4 billion, foreign currency appreciation of 7.7 billion and net outflows of 3.7 billion.

Photo by Adeniji Abdullahi A on Unsplash

Net outflows in the fourth quarter moderated significantly from the 6.7 billion in net outflows during the fourth quarter of 2021. Average AUM for the fourth quarter was $211 billion, a decrease of 23% from a year earlier. On a sequential basis, average AUM was essentially flat, compared to the third quarter of 2022, reflecting stabilizing market conditions and the weaker U.S. dollars. As of January 27, our AUM was approximately $230 billion, driven by market appreciation of 11 billion, foreign currency appreciation of 2 billion, and net inflows of $200 million. Now, turning to expenses. We accrued compensation and benefits expense and a 59.8% full-year adjusted ratio in 2022, compared to 58.5% in 2021. The 2022 ratio primarily reflects lower than anticipated advisory revenues in the fourth quarter, along with investments to expand our businesses and to ensure we are well-positioned to capitalize on market conditions when they improve.

Our adjusted non-compensation expense for 2022 was $518 million, 10% higher than the prior year, reflecting the impact of increased travel and investments in technology. Our effective tax rate for full-year 2022 as adjusted was 25.7% versus 23.9% in 2021. The year-over-year increase was primarily due to the geographic mix of our earnings. We expect our annual effective tax rate in 2023 to be in the mid-20%. We generated strong cash flow in 2022 returning a record $936 million to shareholders, including 182 million in dividends and 692 million in share repurchases. Additionally, yesterday we declared a quarterly dividend of $0.50 per share. During the fourth quarter, we bought back 2.4 million shares at an average price of $32.91 per share. During the full-year 2022, we repurchased a record 19.7 million shares at an average price of $35.17 per share.

Our weighted average share count as of the fourth quarter was 97 million shares, a reduction of 14% from the prior year quarter. Our total outstanding share repurchase authorization as of December 31 was $302 million. Ken will now provide his perspective on our performance and outlook.

Kenneth Jacobs: Thank you, Mary Ann. While the global macroeconomic environment remains uncertain conditions are generally better today than many were anticipating six months ago. Lazard enters 2023 having a navigated the volatility of the past year. The diversity and breadth of our business allowed us to weather the worst of these conditions and achieve the second best annual operating revenue in our history. However, the global slowdown in M&A activity in this €“ and announcements in the second half of 2022 caught up with us in the fourth quarter and is likely to continue to impact our financial advisory performance through the first half of 2023. Although the near term outlook remains uncertain, we were cautiously optimistic regarding an improvement in the macroeconomic environment going into the second half of this year based on several factors.

While global inflation remains elevated, recent data indicate that price increases are beginning to moderate. Central banks are slowing the pace of rate hikes, which may mean a shortening of the current tightening cycle. Equity markets have rallied, spreads have tightened, and volatility has receded, unemployment is generally holding steady around the world and most developed economies are maintaining GDP growth. And since the beginning of the year, we’ve noted an increase in M&A dialogue, while market sentiment seems to be improving. We also took advantage of last year’s downturn to make strategic investments in our Financial Advisory business. These investments included adding senior financial advisory hires in the U.S., Europe, and the Middle East, broadening our private credit and infrastructure advisory capabilities, launching our new geopolitical advisory group, and expanding our venture and growth banking group into the U.S. Because of these in-depth investments and others taken over the past year.

As the M&A environment picks up, we are well-positioned to capitalize on the recovery and gain market share. Turning to our asset management business. There has been a notable improvement in the overall climate for asset management since the end of the third quarter. Assets under management are up approximately 16% since Q3 2022, positively impacting both revenue and the businesses operating leverage going forward. Looking at performance, approximately two-thirds of our composite strategies with benchmarks are outperforming on a one-year and three-year basis. The weakening of the U.S. dollar is also providing a benefit as long standing headwind for our business is abating. Amid this improving outlook, we remain focused on our asset management clients, many of whom are reallocating portfolios in the wake of last year’s repricing of risk.

Investors sentiment also continues its shift towards research driven fundamental investment style in which Lazard has global breadth and expertise. Our asset management business has momentum behind it and is well-positioned for 2023 with a diverse array of innovative strategies and custom solutions to meet the investing needs of a sophisticated client base. Finally, 2023 marks the 175th anniversary of Lazard’s founding. For the better part of two centuries, our firm is thrived by staying focused on our core businesses and guiding principles, striving for excellence, empowering our people, and engaging with clients. Lazard continues to strategically invest in people and technology, maintain discipline around expenses, deliver profitable growth and shareholder value, and remain focused on serving our clients.

Let’s open the call to questions. Thank you.

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Q&A Session

Operator: We’ll take our first question from Manan Gosalia from Morgan Stanley.

Manan Gosalia: Hey good morning.

Kenneth Jacobs: Good morning.

Manan Gosalia: I wanted to focus on the asset management side, it looks like another strong quarter on the fee rate here. And I know you noted earlier that part of this was from a mix shift. So, is this the right rate to assume going forward or are there any other puts and takes there?

Evan Russo: Hi Manan, its Evan, I’ll kick that off. Yes, look, we’ve seen €“ as you’ve seen over the last couple of quarters, the fee rate is starting to tick back up. As we’ve said in the past, the bulk of that is driven by the asset mix. A little bit more on the vehicle side this time as well, we saw some vehicle mix have a positive impact for us. We saw more coming into funds a little bit less from some of the sub advised and some of the SMAs that we have in our business. Also, as we pointed out over the last couple of quarters, some of the larger outflows that we had were in lower fee mandate. So that would as you point out, sort of lead us to a starting run rate that’s probably a little bit higher than it was a year ago.

So, I think in general, yes, it seems to be the outlook, seems to be more stable than certainly the past few years where we’re seeing it more contracting on a more steady pace and now it seems to have leveled off a little bit. I think it’ll be a little bit bumpy still. I mean there’s going to be quarter-to-quarter movement because all these flows sort of do play into it. The mix has a huge impact of it. And so as markets move around, you’re going to continue to see that jump around a bit. But generally, it feels a lot better than it’s been over less several years.

Manan Gosalia: Great. Thanks, Evan. And maybe just a big picture question on the strategy in the asset management space. What is the environment like for lift-outs? What is your capacity and willingness to do them? And any general updates in your strategy as we look ahead to 2023?

Evan Russo: Yes, sure. So, when you think about the market last year, certainly the volatility has played a huge role in the way a lot of the teams certainly smaller firms have been thinking about their own strategies. And whether or not they can go at it alone. They shift more towards larger institutional clients thinking about having less managers in their portfolio all that plays into the idea that there’s a lot of these smaller firms and certainly smaller teams from smaller firms that are looking for homes on bigger platforms and certainly they’re focused on ones that have global distribution, which is a significant benefit for us given the breadth and depth of our distribution capabilities, the breadth and depth of our research.

So, we are certainly sought after by many of these teams. We are constantly reviewing what’s out there from both a strategic acquisition and a lift-out scenario, sort of bringing teams onto the platform. We’ve done that selectively over the last couple of years. I would say from the market environment, you’re asking how it feels today relative to the last couple of years. I would say the pace given the volatility of markets over the last year has certainly picked up in terms of the number of conversations, the number of firms that are looking to join larger platforms. And so, I would expect that to continue over the course of the year.