Lazard Ltd (NYSE:LAZ) Q4 2023 Earnings Call Transcript

Lazard Ltd (NYSE:LAZ) Q4 2023 Earnings Call Transcript February 1, 2024

Lazard Ltd beats earnings expectations. Reported EPS is $0.66, expectations were $0.35. 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Alexandra Deignan, Lazard’s Head of Investor Relations, Treasury and Corporate Sustainability. Please go ahead.

Alexandra Deignan: Thank you, Todd. Good morning, and welcome to Lazard’s earnings call for the fourth quarter and full year 2023. I’m Alexandra Deignan, Head of Investor Relations, Treasury and Corporate Sustainability. In addition to today’s audio comments, we 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 include 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 to 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: Thank you, Ale, and good morning everyone. Our fourth quarter results represent a solid first step, as we execute our long-term growth plans. Activity during the fourth quarter also reinforces our confidence that the M&A cycle has turned a corner as we indicated on last quarter’s call. We remain focused on providing sophisticated and differentiated advice and investment solutions for our clients, and we are well positioned for a stronger year ahead. In addition to existing mandates, the quantity and quality of our dialogues suggest a productive 2024. At the same time, there is a high degree of geopolitical uncertainty that could affect business activity. I’ll share more on our outlook shortly. But before I turn to Mary Ann to discuss our fourth quarter and full year results, I’d like to extend a very warm welcome to the new members of our Board of Directors announced earlier this week.

Dan Schulman, who most recently served as CEO of PayPal; and Steve Howe, former US Chairman and Managing Partner of the Americas for Ernst & Young. Dan and Steve bring broad experience as executives and directors of numerous public companies. We are excited for their leadership as we refresh and reinforce the strength of our Board and pursue our ambitions for Lazard. Now, let me turn the call over to Mary Ann.

Mary Ann Betsch: Thanks, Peter. Today we reported firm-wide operating revenue of $761 million for the fourth quarter of 2023, up 13% from the fourth quarter of 2022. Operating revenue for the full year 2023 was $2.4 billion compared to $2.8 billion for the full year 2022. Global M&A announcements in 2023 fell to their lowest level in a decade and completions were down 32% year-over-year. Our business was affected by the slowdown. The Financial Advisory operating revenue totaling $1.4 billion for the full year 2023 compared to $1.7 billion for the prior year. Fourth quarter results however, reflects the continued positive trend of more constructive client conversations, resulting in an increased number of announced deals. We reported Financial Advisory operating revenue of $477 million for the fourth quarter, up 18% compared to the fourth quarter of 2022.

Examples illustrating this trend, includes, several large strategic transactions announced during the fourth quarter and in January, including Iliad’s proposed merger with Vodafone, Western Digital Corporation’s separation of HDD and Flash businesses; Energy Exemplar’s acquisition by Blackstone and Vista Equity Partners; AbbVie’s acquisition of ImmunoGen; and Sanofi’s acquisition of Inhibrx. Our Advisory business in Europe had a particularly strong quarter and year. Our UK office had its highest quarterly revenue ever in the fourth quarter and in France, Lazard was ranked number one in market share for 2023. Our co-heads of Europe’s Financial Advisory businesses are focused on integration and collaboration to capture cross-border opportunities and are demonstrating strong results.

Our Private Capital Advisory Group has continued to deliver meaningful growth in client mandates and fee income especially in our secondaries business as investors in private equity look for sources of liquidity amidst volatile M&A and public markets. In addition we see increasing client demand in our global restructuring and liability management group. Client activity picked up significantly during the second half of 2023 in both the US and Europe and we see continued strong demand for our services in part because we expect interest rates to remain higher for longer. We also continue to invest in our leading Sovereign Advisory business and our team is well positioned to serve clients as they navigate this prolonged higher rate environment.

Finally heightened interest from our clients in the geopolitical landscape remains and demand for our geopolitical advisory group services continues to increase as a result. Turning to Asset Management. Fourth quarter operating revenue was $274 million, up 6% compared to the fourth quarter one year ago and up 4% from the prior quarter. Management fees for the fourth quarter were up 5% compared to the fourth quarter one year ago and down 1% from the prior quarter. For the full year 2023 management fees increased 1% compared to the full year 2022. Asset Management operating revenue was $1.1 billion for the full year, 3% lower than the prior year, reflecting incentive fees compared to 2022. As of December 31st, we reported AUM of $247 billion 8% higher than September 30th, 2023 and 14% higher than December 31st, 2022.

The sequential increase from September 30th was due to market appreciation of $16.9 billion and foreign exchange appreciation of $5 billion, offset by net outflows of $3.6 billion. Average AUM for the fourth quarter was $234 billion, an increase of 11% from the fourth quarter of 2022 and 1% lower on a sequential basis. Average AUM for the full year was $233 billion, 2% higher than 2022. During 2023, we saw positive net inflows across our global and European fundamental equity strategies, our quantitative platform, and our US and European fixed income strategies. In addition our European and Asia-Pacific distribution teams won significant new business including mandates from a public pension scheme in France, UOB Asset Management in Asia, and Mid Wynd Investment Trust in the UK.

Now, turning to expenses. Our adjusted compensation expense was $516 million for the fourth quarter and $1.7 billion for the full year 2023. Our adjusted compensation ratio was 69.8% for the full year 2023 compared to 59.8% the year prior. Our awarded compensation ratio for 2023 was in the low 70s. Going forward, we will no longer disclose this measure as we understand it was not considered useful by investors. Importantly, we remain disciplined in setting compensation each year, balancing market dynamics, business performance, and continued investment in talent. Our adjusted non-compensation expense was $148 million in the fourth quarter, 4% higher than the fourth quarter last year. Our adjusted non-compensation expense was $572 million for the full year 2023 10% higher than the prior year.

The year-over-year increase was primarily driven by increased occupancy and professional services expenses including one-time costs such as our C Corp conversion. Travel and entertainment expenses were also a factor, reflecting increased client and business development activity. We are on track to reach our target headcount reduction which was previously announced last April and is due to be completed by the first quarter of this year. At the same time, we continue to invest in talent in key areas. Cost savings related to our headcount reduction will lag actual departure dates and as revenues normalize we aim to return to our target expense ratios overtime. Shifting to taxes, our effective tax rate for the fourth quarter as adjusted was 16%, compared to 26.3% for the fourth quarter of 2022.

Our effective tax rate for the full year 2023 was 14.5%, compared to 25.7% for the full year 2022. Turning to capital allocation, in the fourth quarter of 2023, we returned $44 million to shareholders, primarily through our quarterly dividend. For the full year 2023, we returned $330 million to shareholders including $173 million in dividends, $102 million in share repurchases and $55 million in satisfaction of employee tax obligations. Additionally, yesterday we declared a quarterly dividend of $0.50 per share. I’ll now turn the call back to, Peter.

Peter Orszag: Thank you, Mary Ann. On our last call, I said that the third quarter was a turning point both for Lazard and for the M&A market. Our fourth quarter results are consistent with that observation, as we increasingly build momentum and execute against our longer-term ambitions for Lazard. Looking at Financial Advisory, interplay between headwinds and tailwinds, continues to create favorable conditions for M&A activity. Tailwinds remain strong, as business leaders look for opportunities to capture technological innovation, address global supply chain shifts and drive revolutions in Life Sciences and The Energy Sector. At the same time, the headwinds are increasingly subdued. While it is increasingly clear that interest rates may be higher for longer, the debate has shifted away from if rates will go up to when they will go down.

And now that higher rates have been in place for a longer period of time, we are seeing buyers and sellers better align on valuations. In addition, financing markets are opening up, private equity is becoming active again and more Boards and C-suites are willing to pursue transactions in the wake of some favorable antitrust decisions by court. As a result, we are engaged in an expanded number of client conversations. We see stronger M&A activity across the US and Europe and in a broad array of sectors including Technology, Industrials, Financial Institutions, Healthcare and Energy all of which are sectors where Lazard has deeply embedded networks and teams. We also see significant further revenue opportunities beyond M&A, in our capital solutions, restructuring and liability management businesses.

As leaders in markets expect higher interest rates for longer and ways of debt maturities approach, clients increasingly explore solutions across the various options our teams provide. To support this growth and further build our leadership in this space, over the past two months we announced three new managing directors in our restructuring group two in New York and one in London. In Asset Management, we began 2024 with $247 billion in assets under management approximately 14% higher than at the start of 2023. Positive market sentiment and a widening dispersion of returns across asset classes, is leading to increased activity and interest across our range of actively managed investment products. In addition, Evan’s strategic plan is focused on stabilizing and optimizing the business which has helped produce improved results throughout the year.

Our investment teams continue to perform well in this market environment. And we’ve seen significant outperformance across our emerging markets, global quant and select local strategies. We’re also continuing to add talent to the business, with senior hires to our small cap equity platform in the fourth quarter and a recently announced new head of our Japanese business. During the fourth quarter we provided specific goals for our long-term plan to double revenue by 2030 and deliver an average annual total shareholder return of 10% to 15% through 2030. In Financial Advisory, we are focused on high-productivity growth. We are targeting an increase in average revenue per MD to $8.5 million by 2025 and $10 million by 2028 and a net addition of 10 MDs each year, through internal promotions and lateral hires.

In addition to four new MDs recently hired, which underscores our ability to attract world-class professionals to Lazard, in January we also promoted 10 new managing directors from within the firm, reflecting our long-standing strength in developing internal talent. In Asset Management, we are focused on strengthening our traditional business while adding capabilities in less liquid products, primarily through inorganic opportunities. We are targeting approximately 30% of asset management revenue from alternatives or private markets and wealth management by 2030. We will evaluate and pursue acquisitions in a programmatic disciplined manner with a focus on creating value for our shareholders. Let me now turn to the outlook for the year ahead.

As we’ve shared previously, we expect 2024 to be better than 2023. We see continued signs of a healthy and strong economy and the tailwinds for M&A activity strengthening while headwinds abate. We also could experience an unusual environment in 2024 with increased M&A occurring alongside greater restructuring activity as rates remain high and debt maturities approach. We do note, however, that alongside these macroeconomic conditions, geopolitical uncertainty is increasingly top of mind for decision makers. I remain very focused on building a commercial and collegial culture to execute our ambitions, pursuing a strategic path to achieving our Lazard 2030 goals and creating value for our shareholders. To that end, we are pleased to have completed our conversion to a C-Corporation on January 1st.

As we embark on the year ahead and our next chapter, our complementary businesses, premier brands, established global leadership and extraordinary talent provide a strong foundation. Now let’s open the call to questions.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Ryan Kenny with Morgan Stanley. Please go ahead.

Ryan Kenny: Hey, good morning. Thanks for taking my question. I have a big picture question for Peter on the Lazard 2030 strategy. And slide 10 is really helpful in understanding the building blocks there. One of the drivers listed and you’ve talked about this before is increasing relevance. Can you help walk us through what specific changes culturally you’re making to make sure that Lazard is top of mind for CEOs and Boards?

Peter Orszag: Sure. And relevance is important not just for its own sake but because it then reinforces the brand and converts into revenue. So I want to make that clear. But there are lots of things that we are doing from increased presence externally. So getting our top bankers and thinkers out in the media at conferences and so on to project the force of Lazard’s insights and make it even more apparent to the world the differentiated talent and insight that we have. We are doing a lot more convening events that bring together top CEOs and thought leaders into a place that — into select places so that there are conversations that can occur that again are more than what one can get out of the newspapers today. And then we’re building out new capabilities that increase our relevance, a great example of that is the geopolitical team.

Clearly as I said before you can’t make a business decision today without geopolitical considerations being taken into account and we have a top-notch team that is helping our clients evaluate those questions.

Ryan Kenny: Okay. Great. And as I just think through wallet share, you’re clearly focused on increasing productivity of MDs over time. You’ve also taken some actions to manage headcount. So when we put those two together is the goal to keep your wallet share but get more efficient or to grow wallet share?

Peter Orszag: Our goal is to increase our wallet share. We believe that’s what will occur as we execute our Lazard 2030 goals, but to do so in a way that is not just buying wallet share but doing so in a high productivity manner. And the reason that I just want to pause on is really important, which is as we raise our productivity for MD, the operating leverage that we get especially on the non-MD comp ratio is what allows us to then invest in new talent. So it’s a self-reinforcing cycle that as we raise productivity, we free up room in our comp ratio to make new investments in managing directors. That leads to additional wallet share gains, additional relevance as we just discussed but doing so in a manner that still fits within our comp and margin targets.

Ryan Kenny: Great. Thanks.

Operator: Thank you. Our next question will come from Devin Ryan with JMP Securities. Please go ahead.

Peter Orszag: Hi, Devin.

Q – Devin Ryan: Hi. Thanks. Good morning. First question, just on those head count reductions and the projected reduction of 10% in the run rate cost base, by I guess the end of 2023. Can you guys just give us an update on where we are on all those savings? How much of that was reinvested or will be reinvested back in the business, just because there’s a lot of moving parts on expenses and then also appreciate that 2024 might be a little bit of a transition year, in kind of a revenue recovery. So just trying to think through some of the moving pieces and kind of what that could mean for maybe non-comp expenses in the absolute and maybe comp ratios, on a relative basis. Thanks.

Peter Orszag: Sure. So I’ll start and then maybe Mary Ann coming in. Look, let’s cut through all the complexity because, I think this is pretty simple. We are committed to our tradition, our long-term margin targets both on comp and on non-comp. So on comp, you should again, just keep in mind, that our goal is to return to those traditional targets of being in the mid- to high 50s, on the comp ratio as revenue normalizes. So, all the other pieces are contributors to that. We are on target for the head count reduction that we articulated early last year, which is a 10% reduction from the first quarter of 2023 to the end of the first quarter of 2024. That is tracking. But again, it’s not done for the sake of doing it, but rather to help us on our transition back to those traditional margin targets.

And that’s, what I think you should be tracking. You’re right, also to point out, that 2024 might be a transition year. It depends obviously, on how strong the revenue environment is, but we are committed to getting back to those traditional targets over time. I don’t know, Mary Ann, if you want to add.

Mary Ann Betsch: Yes. So, the one thing Devin, you mentioned non-comp as well. So I would just say, that we’ve done a lot of work. We are continuing to look constantly for cost savings opportunities, we’re sort of turning over every stone. And so, if you look sort of at what to expect for 2024 versus 2023, we expect to continue to see inflationary pressure and increased travel for example, occupancy costs tend to go up over time. But we really are working hard to keep expenses this year flat to maybe down a bit. So that’s what I would expect there, in dollar terms, right which will get in the back

Peter Orszag: And the ratio will come down…

Mary Ann Betsch: Exactly.