Lazard Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 7 speakers on the call.

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 will conduct a question and answer session. Instructions will be provided at that time.

Operator

At this time, I would like to turn the call over to Alexandre Degnan, Lazard's Head of Investor Relations, Treasury and Corporate Sustainability. Please go ahead.

Speaker 1

Thank you, Britney. Good morning, everyone, and welcome to Lazard's earnings call for the Q1 of 2024. I'm Alexandra Degnan, 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.

Speaker 1

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.

Speaker 1

Hosting our call today are Peter Orazag, ZAR's Chief Executive Officer and Mary Anne Betsch, XAR's Chief Financial Officer. After our prepared remarks, Peter and Mary Anne will be joined by Evan Russo, Chief Executive Officer of Asset Management, as they open the call to questions. I'll now turn the call over to Peter. Thank you, Ali, and good morning to everyone. As we continue to pursue our long term objectives, Lazard reported a record Q1 with firm wide adjusted net revenue of $747,000,000 an increase of 42% year over year.

Speaker 1

Going into 2024, we anticipated that interest rates would stay higher for longer. During the Q1, 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 and A as buyers and sellers align on valuations and deal financing becomes more readily available. And beyond M and A, approaching debt maturities are interacting with this higher for longer landscape to produce stronger activity in restructuring, liability management and private capital solutions. Impact of this market backdrop, along with our focus on growth and increasing productivity, drove record 1st quarter revenues within our advisory business.

Speaker 1

At the same time, higher rates increased the appeal of short term investments such as T Bills and money market funds, which reduces allocations into active equity strategies. This effect should dissipate as rates eventually decline and investors put money more money to work. Despite the current prolonged higher rate environment, we had solid revenue growth within Asset Management in the Q1 and average AUM increased 6%

Speaker 2

from year

Speaker 1

end 2023. 1st 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 Anne, who will provide further details on the quarter. Thank you.

Speaker 1

As Peter noted, today we reported record 1st quarter firm wide adjusted net revenue of $747,000,000 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 $447,000,000 for the Q1, up 63% from the Q1 last year. We had strong performance across the U. S.

Speaker 1

And Europe, which included several large cap transactions completed during the Q1, 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 Q1, including ImmunoGen's acquisition by AbbVie, CymaBay Therapeutics acquisition by Gilead, and LXI's merger with London Metrics. We also advised on several capital markets listings in Europe, including Galderma's IPO and Sodexo's spin off and listing of Plexi as well as fundraising for WynnChurch Capital, Rubicon Founders and McCarthy Capital. Turning to Asset Management, adjusted net revenue was $276,000,000 for the Q1, up 1% from the 4th quarter and 4% higher than the Q1 last year.

Speaker 1

Management fees for the Q1 were up 4% from the Q4 and up 3% compared to the Q1 last year, reflecting higher assets under management. As of March 31st, we reported AUM of $250,000,000,000 2% higher than December 31, 2023, and 8% higher than March 31, 2023. During the quarter, net outflows of $6,600,000,000 and foreign exchange depreciation of 3 point $6,000,000,000 were more than offset by market appreciation of $14,000,000,000 Average AUM for the Q1 was $247,000,000,000 up 6% on a sequential basis and 9% higher than the Q1 of 2023. 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 24,000,000 dollars in the Q1, consisting primarily of investment gains and interest income along with a one time gain on the sale of a legacy investment.

Speaker 1

Now turning to expenses. For the Q1 of 2024, our adjusted compensation expense was 493,000,000 equating to a ratio of 66%. This compares to 75.7% for the Q1 1 year ago. For the Q1, our adjusted non compensation expense was $134,000,000 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 service fees and other expenses, partially offset by higher travel expenses.

Speaker 1

During the Q1, 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 Q1 was 32.6% compared to 32.1% for the Q1 of 2023. We currently expect our full year tax rate to be in the high 20% range. Turning to capital allocation.

Speaker 1

In the Q1 of 2024, we returned 121,000,000 to shareholders, including a quarterly dividend of 44,000,000, share repurchases of 22,000,000 and 56,000,000 in satisfaction of employee tax obligations. Year to date, we have repurchased 958,000 shares, and we have remaining authorization available for $163,000,000 Additionally, yesterday, we declared a quarterly dividend of 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 $400,000,000 in 7 year senior notes at a 6 percent coupon. Now I'll turn the call back to Peter.

Speaker 1

Thank you, Mary Anne. Our outlook for a productive 2024 is reinforced by our strong Q1 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 and technology, energy transition, the biotech revolution, and the shift of supply chains as companies derisk. These tailwinds continue to propel M and A activity. Meanwhile, headwinds have generally diminished in force over the past few quarters.

Speaker 1

During the Q1, 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 deterrent 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, between these tailwinds and headwinds remains a shift towards a more constructive market environment.

Speaker 1

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 in fairly widespread M and A activity, including in Healthcare, 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.

Speaker 1

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 4 new Managing Directors during the Q1 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.

Speaker 1

Examples include recently refreshing the depth and expertise of our U. S. 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.

Speaker 1

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 in wealth management solutions, balanced with investing in the strategies we will be we believe will be most attractive with in liquid public markets in the years to come. As evidenced by our strong first quarter results, we continue to make progress towards Lazard 2,030 and our long term strategic objective to double firm wide revenue and deliver an average annual shareholder return of between 10% 15% through 2,030.

Speaker 1

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 reenergized 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 collegiate culture.

Speaker 1

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 We'll take our first question from Steven Chubak with Wolfe Research. Your line is open.

Speaker 3

Good morning. This is Brendan O'Brien filling in for Steven. I guess to start, I just wanted to touch on the comp ratio.

Speaker 2

Revenues were at a record

Speaker 3

level in 1Q, but the comp ratio is still pretty elevated. A record level in 1Q, but the comp ratio is still pretty elevated. I know that you're still dealing with the overhang from prior year deferrals, but wanted

Speaker 4

to get a sense as

Speaker 3

to whether this is a reflection or of your view on the sustainability of this revenue level in 1Q? And as we look out beyond 24%, can you speak to your confidence and your ability to get the comp ratio back to the targeted range?

Speaker 1

Yes. Mary Anne, do you want to take that one? Sure. I'll take that one. Hi, Brendan.

Speaker 1

So as you know, 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, you know, moving towards our ratio was an ratio was an important objective for this year, and we actually hope to be able to do better than that as the year progresses.

Speaker 1

And then looking at 20 25, we'll get back to the target as quickly as we can.

Speaker 4

That's great color. Thank you. And I guess for

Speaker 3

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 the segment is taking longer than anticipated?

Speaker 1

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.

Speaker 1

And so the inflows into active strategies like ours were depressed as a result. That will reverse. And 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 3 key areas.

Speaker 1

1 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, give 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.

Speaker 1

And the example there is a live partner. 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

Speaker 4

the question in a second.

Speaker 2

No, look, I think you summarized it well. I think at the end of the day, this quarter, as you 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 $9,000,000,000,000 I think last estimate I saw of money sitting in money markets and short duration instruments.

Speaker 2

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 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.

Speaker 2

So global being more global strategies, specifically areas like Japan or others, which have been under allocated asset classes in the past that are continuing to gain traction, certainly a lot of client interest into those under allocated places such as the EM and others, as well as an uptick in the interest that we have across our quant 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 towards the end of the year.

Speaker 1

And then just to round up the answer you had asked about the strategic alternative question. As I hope you get the sense, we see a lot of upside And we also see significant synergy, synergies that can be built further out from, outstanding content across the 2 businesses from our brand and from convening events that are, that are that share and that are high 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.

Speaker 3

Great. Thank you all for taking my questions.

Operator

Thank you. We'll take our next question from Brendan Hawken with UBS. Your line is open.

Speaker 4

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?

Speaker 4

Or was there some noise that might have flattered the result this quarter? How should we be thinking about it this year?

Speaker 1

Mary Anne, I'll take that one. So we, as you know, 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 quarter to quarter seasonality, as you know, 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 or 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 puts and takes there.

Speaker 1

But the Q1, 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.

Speaker 4

Okay. But was that that was because the comp was high, not necessarily because the base in 1 I'm just thinking about the base in 1Q and not necessarily the comp.

Speaker 1

No, sorry. What I meant was that if you're comparing non comp year over year, the decline was partially reflecting the fact that last year there were some one time items in there.

Speaker 4

Okay, okay. Great. Thanks for clarifying that. And then you spoke in your 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.

Speaker 4

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.

Speaker 1

Yes. So Brendan, I think I'm going to give you some color, but may not fully satisfy the desire for perfect clarity on this.

Speaker 4

But let me I'm used to that. It's okay, Peter.

Speaker 1

Let me give you a little bit of backup 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.

Speaker 1

And so, I mean, as an example, the increase for the Q1 relative to the Q1 of last year was this quarter's restructuring in my building management was over 2 times what it was in the Q1 of last year. We do expect that an elevated level of activity will continue as the debt maturities that are approaching interact with the higher 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.

Speaker 4

Okay. Thanks for taking my questions.

Speaker 1

Thank you.

Operator

Thank you. We'll take our next question from James Yarrow with Goldman Sachs. Your line is open.

Speaker 4

Good morning and thanks for taking my questions. So we've seen industry M and A activity year to date improved 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.

Speaker 4

S. And Europe?

Speaker 1

Sure. Look, we did see, including in the Q1, 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 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 you know, one of the differentiated benefit 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.

Speaker 1

When there are different pockets of market a bit. But consistent with the market, we're seeing a bit more strength. Market a bit, but consistent with the market, we're seeing a bit more strength in North America right now.

Speaker 4

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?

Speaker 1

Yes. So in terms of the gain, I would describe it as fairly sizable, but not a majority of the corporate revenues 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.

Speaker 1

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.

Speaker 5

Thanks. Good morning, Peter, Mary Anne and Evan. Thanks for taking the question.

Speaker 4

Good morning.

Speaker 5

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 full year basis at the beginning of the year is really tough. So Q1 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 Q1 is not the best way to judge it off of.

Speaker 1

Yes. 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

Speaker 2

of how quickly we

Speaker 1

can get back into the target range. And give you a magic number where I can foresee that we give you a magic number where I can foresee that we would hit 59.9%, right? I think it's there's a lot of inputs 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.

Speaker 5

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 and A market.

Speaker 5

And we've been tracking more corporate activity really over the past year plus versus sponsors. I think Lazard has 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?

Speaker 1

Thanks. 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.

Speaker 1

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 2 as strategics were picking up more quickly than private capital was. But we are in the early stages of seeing that yes, the dialogues and 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.

Speaker 1

And so, your historical perception of Lazard may be, evolve they need to evolve a little bit because of the investments that we've been making. 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.

Speaker 5

All right. Thank you very much.

Operator

Thank you. We'll take our next question from Brian Kenny with Morgan Stanley. Your line is open.

Speaker 6

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.

Speaker 1

So a couple of comments here. 1, yes, the U. S. Has an election. It's one of more than several dozen elections across the globe.

Speaker 1

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, 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 regards to the U. S. Election specifically, honestly, there is sort of typically 2 parts to a client meeting.

Speaker 1

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. Great.

Speaker 1

Thank you.

Operator

Thank you. We have no further questions at this time. This does conclude Lazard's Q1 2024 earnings conference call. Thank you for your participation. You may now disconnect and have a wonderful day.

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