Lazard LTD.

Good morning and welcome to Lazard's second quarter 2022 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. If anyone should require assistance during the call, please press the star key followed by the zero on your telephone keypad. At this time, I will turn the call over to Alexandra Degnan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.

Thanks, Gretchen. Good morning. Welcome to Lazard's earnings call for the second quarter of the first half of 2022. I'm Alexandra Degnan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we've posted our earnings release and 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 can 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 statement, including those factors discussed in the company's application file, which you can access on our website. We've already taken no responsibility for the accuracy or completeness of these statements, so do these updates, please. Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. Reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in our financial lead and investor presentation. Hosting our call today are Kenneth Jacobs, who is our Chairman and Chief Executive Officer, Evan Rizzo, Chief Financial Officer, and Chief Executive Officer of Athens. Good morning. Today we reported operating revenue of $676 million for the second quarter of 2022, compared to revenue of $821 million in the same period of 2021.

amid challenging market conditions. Operating revenue for the first half of 2022 was $1.4 billion, compared to $1.5 billion in the first half of 2021. In financial advisory, we reported second quarter revenue of $407 million, compared to last year's record second quarter of $471 million. For the first half of the year, operating revenue was $795 million, 1% higher than the same period in 2021. Our dialogue with clients continues to be robust, and our M&A activity remains at high levels, including in Europe, where we had a record first half. In addition, our global restructuring practice is working on a number of complex assignments and continues to see an increase in discussions with clients regarding liability management and other capital structure considerations. In asset management, second quarter operating revenue was $266 million, compared with record second quarter revenue of $343 million in 2021. Management fees decreased 16%, while performance fees declined 79% over the prior year quarter. For the second quarter, incentive fees were $7 million, compared to $34 million for the second quarter of 2021. For the first half of 2022, operating revenue was $577 million compared to $671 million in the first half of 2021, reflecting lower average assets under management and significantly lower performance fees. As of June 30th, we reported AUM at $217 billion, a decrease of 22% compared to June 30th, 2021, and 14% lower on a sequential basis from March 31st. The sequential decrease was driven by market depreciation of $23.2 billion, negative foreign currency impact of $8.2 billion, and net outflows of $4.6 billion. Average AUM for the second quarter was $230 billion, decreasing 17% from a year ago and 10% on a sequential basis. This reflected markets selling off globally in both equities and fixed income. In addition, with approximately two-thirds of our AUM in non-U.S. dollar-denominated securities, foreign currency has been a significant headwind thus far in 2022. Amid significantly lower market valuations and a rising interest rate environment, we believe investors are placing a higher priority on fundamental active investment strategies and looking to diversify from what has been a predominantly growth focus. Most of Lazard's core and relative value strategies are outperforming in the current market. In addition, ESG integration is an increasingly important consideration for clients. Clients are also seeking more customized solutions and thematic strategies to augment their portfolios. All of these present opportunities for the Lazard platform. As of July 22nd, our AUM was approximately $220 billion, driven by market appreciation of $5.5 billion, negative foreign currency impact of $1.4 billion, and net outflows of $.5 billion. Now turning to expenses. We continue to accrue compensation expense at a 58.5% adjusted compensation ratio in the second quarter. Our adjusted non-compensation expense for the second quarter was $131 million, 10% higher than the prior year, primarily reflecting the impact of inflationary pressures, higher travel costs, and investments in technology. Our effective tax rate for the second quarter, as adjusted, was 26.4%, which compares to 25.2% in the prior year quarter. For the first half of the year, our adjusted tax rate was 25.9% versus 26.7% in 2021. We currently expect this year's annual effective tax rate to be in the mid-20% range. We continue to generate strong cash flow, which supports return of capital to our shareholders. In the second quarter, we returned $246 million to shareholders, including $46 million in dividends and $199 million in share repurchases. During the second quarter, we bought back 5.9 million shares of stock at an average price of $33.90 per share. During the first half of 2022, we repurchased 10.6 million shares at an average price of $35.40 per share. Our weighted average share count at quarter end was 105 million, a decrease of 8% from the 114 million shares in the prior year quarter. Going forward, we expect to continue to use excess cash flow toward share repurchases. Yesterday, our board of directors authorized additional share repurchases of up to $500 million, bringing our total outstanding share repurchase authorization as of today to $559 million. Additionally, yesterday we declared a quarterly dividend of 50 cents per share reflecting a 6% increase in our dividend from last quarter and demonstrating our continued commitment to returning cash to shareholders. Despite significantly lower market valuations and macro uncertainty in the first half of the year, our results underscore the strength, stability, and discipline of our model and the continued performance of our businesses. Ken will now share his perspective on our performance and outlook.

Thank you, Evan. The global macroeconomic environment remains uncertain, characterized by global inflation at multi-decade highs, rising interest rates, and turbulent capital markets. Despite the unique set of circumstances that 2022 has presented, we performed well in the second quarter and first half. Amid challenging conditions for global M&A during the second quarter, our financial advisory business delivered strong results. We continue to be active globally and remain cautiously optimistic for the second half of the year. We are serving our clients with sophisticated strategic advice in M&A, capital structure, shareholder activism, capital raising, as well as in restructuring. These capabilities were built over decades and have been tested through numerous economic cycles. In asset management, we are serving clients with investment platforms that are diversified across asset classes, styles, and regions. Our research-driven, fundamental active investment approach has resulted in the outperformance of most of our strategies so far in 2022. In the current environment, we believe there is renewed interest in fundamental active investment strategies in which we specialize, and investors are benefiting from our research capabilities to help navigate turbulent markets. We are also benefiting from our global orientation, which provides a broad base of opportunities for clients around the world. Looking ahead, Lazard is well positioned for the remainder of the year with a diversified business model, a global client base, and unrivaled expertise in strategic advisory, restructuring, and asset management solutions. Firm-wide, we continue to invest in people, resources, and technology to enhance our market capabilities, geographic reach, and sector-specific expertise. Our business model is highly cash generative and has proven its strength and resilience across numerous business cycles. We remain focused on serving clients while we manage the firm for profitable growth and shareholder value. This morning, we were pleased to announce that Mary Ann Betch will join Lazard as our new Chief Financial Officer on October 3rd. We look forward to welcoming Mary Ann to Lazard. Now we'll open the call to questions.

Thank you.

Thank you. At this time, if you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 2. We ask that you please pick up your handset to allow for optimal sound quality. And our first question comes from Brennan Hawkin from UBS.

Hi, Brennan.

Hey, good morning. Thank you for taking my questions. Just curious to drill in a little bit on Europe, the outlook that you're seeing there for advisory. And we're hearing about restructuring outlook picking up. You know, maybe if you could touch on the European restructuring backdrop and how that's looking and whether or not those trends are similar to what we're hearing elsewhere. Thanks.

Okay. Look, I think I'll answer the general first, Brennan. Usually when we evaluate the M&A environment, we look at three factors, and then there's a bunch of catalysts behind that. This applies, I think, generally to US and Europe at the moment. Valuation, credit, or financing, and what I would describe as confidence, CEO confidence, board confidence. On valuations, clearly there's been a reset in the equity markets, and the process of buyer expectations, seller expectations is in the process of realigning. Credit conditions, I think, have deteriorated over the last few weeks. We saw difficulty in the high-yield market early this year. The banks were still active. The private credit markets filled a lot of the gaps vacuum that was left from the high-yield markets, but there's been a pullback in just the last couple of weeks there. So the credit markets are tougher. And then on confidence, I think we're in the middle of, again, a reset moving from an environment which was dominated by discussions around inflation to one now that's more focused on recession. So that all, I think, results in a period of time where there's a great deal of uncertainty. With regard to activity levels, what we're seeing across the board in our business is second half looks pretty solid based on what we know about our announcements to date and activity underway. That feels pretty good to us. And the real question for us and everyone is how the build starts, the build for next year evolves. And I think we'll all have a better idea as we enter the fall and we see what happens with the credit markets. And that's really kind of the key. With regard to Europe, generally speaking, we've had a very strong year there to date. Record first half for us. Second half still looks solid in Europe based on what we know. And again, the key question there is going to be built into the future. So that's kind of the outlook. With regard to restructuring, clearly, as credit conditions tighten, there is more pressure on companies' balance sheets. So far, what we've seen is a pickup in dialogue. The next is usually liability management. We're seeing some pickup there as well. Actual restructurings usually take longer to unfold. That said, one of the biggest restructuring assignments out there at the moment is is a deal that we've been engaged on in Germany, which involves Unipar, which is where we've been working with the German government on the restructuring of the natural gas contracts. And that's obviously a very high profile, very important transaction.

Ken, thanks. That was very thorough and really helpful. My second question on capital management, Evan, buybacks were really quite good. Yours isn't going to be the hand on the throttle for very long, but you still got it there. So how should we be thinking about capital returns from here? To me, the good capital returns and buybacks in 2Q probably reflect some of that confidence that Ken just iterated about the outlook. Should we expect, given that the back half continues to look good, that buybacks should remain robust?

Hey, Brennan. Yeah, I think you described it well. I think Q2, we bought back 5.9 million shares. Year-to-date, 10.6 million shares. We've bought back more shares than we needed to offset dilution from year-end compensation. And as you said, we've been aggressively utilizing cash and all the cash we've been producing on the balance sheet to take advantage of low share prices. We see the markets today. As you're saying, it's go to confidence. I think we look at it and been very opportunistic over the past year to reduce the share count very significantly. As you mentioned, I mean, we reduced the weighted average share count down to under 105 million shares to 104.8 from, as I call that, 114.1. So really down over 9 million shares in the course of the year. And as you say, look, we expect to continue to reduce the share count for the remainder of the year with excess cash flow, continue to buy back shares aggressively at these levels. And I think, yeah, it does, as we generate additional excess cash flow, we're going to be doing what we've been doing all year, year to date, buying back shares aggressively at these prices.

Great. Thanks for that, Keller.

Our next question comes from Richard Ramson from Goldman Sachs.

Good morning. Good morning. So can we just talk a little bit about financial sponsors and the engagement with that part of your client base? It's obviously a very important segment of the M&A market last year. I mean, how would you characterize the dialogue with those? And perhaps you can just talk a little bit about financing conditions for that client base, where we are in terms of resetting, in terms of availability of financing and and whether you think seller expectations have shifted enough so that we can actually start to see transactions closing in that part of the market.

Thanks. Excellent question. I think we're in a pause. I think the month of August is going to be a pretty quiet month for financial sponsor transactions. The credit markets are effectively shut for those deals right now. The real question is, and what's happening is a combination of factors. Number one, There's a reset going on both by equity owners and creditors and investors about how they see the economic environment unfolding over the next couple of years. We've gone, as I said earlier, just a few minutes ago from an environment where people were, which was quite robust a year ago, to one where people were laser-focused on inflation to one now where people are laser-focused on recession. And so this adjustment, this change in expectations is going to take a little while to play through, both for creditors and for investors. So that's part one. Part two is that when it does play through, there'll be a reset. And the terms of credit will change. There'll be probably higher interest rates. Covenants will tighten up. The equity, there may be one or two turns less of debt in deals, and there may be more equity in deals, and the IRRs will adjust accordingly. and such, and the market at that point will reopen. The question is just how quickly that plays through. The good news, I think, in terms of environment is this is very different from 07-08, where the financial sector was under tremendous stress. Here, the banks go into this recession or this period of time, if there is a recession, with pretty strong balance sheets, and the ability to adjust in that kind of environment is it gives them much more ability to adjust in that kind of environment. So, you know, there's a pause, and I think it's going to be important to see how this all unfolds in the fall.

Just as a quick follow-up, I mean, how much of an opportunity is this more difficult environment for financing for your capital advisory business?

I think it's a great opportunity. And one of the areas where we've been investing is in capability investments. to arrange financing with the private credit markets, and I think you'll see some movement on our part into the fall there. It's just, you know, the credit markets have really shifted from the banks being the primary lender with the public markets complementing that to private credit providers being a very substantial now player in the markets, competing and complementing banks and competing and complementing the public market. So it's a market where there's an enormous opportunity for a franchise like ours.

Okay, thank you. That's very helpful.

Our next question comes from Delvin Ryan from JMP Securities.

Hi, Devin.

Great. Hey, good morning, everyone. Thanks for taking the question. I guess I want to start back on some of the Outlook commentary. We've been on a number of calls over the last few days, and I would characterize your tone, at least for the foreseeable future, as a bit more constructive than most. I think we also see that in the pipeline data for Lazard on a relative basis, but just want to drill down into that a little bit. I'm not sure if you have any thoughts on whether Maybe you're just seeing a little more momentum because of the investments you've made in headcount over the past couple of years. I know I've been on the higher end of the spectrum of the peer group. Or, you know, is it geographic mix, you know, obviously more tilt towards Europe or just kind of where you focus kind of your M&A efforts? I'd just love to, if you have any thoughts on why that is, we can unpack it a little bit.

Sure. Peter, you want to take that? Sure. Sure. I guess a couple comments. First, we have seen at least year-to-date activity that was pretty diversified, so not just geographically, U.S. and Europe, but also across sectors, so healthcare, industrials, FIG, energy transition, telecom and media, all areas of strength and with significant momentum. And I think that may be part of what you're seeing in the published pipeline data, just that kind of broadly diversified activity that we've been experiencing.

Okay, got it. And then, if possible, to drill down a little bit more into Europe, what's driving the activity in Europe, whether it's sectors or themes, like what is supporting a relatively healthy level of activity kind of despite some of the other challenges that we all know about there?

Yeah, so first off, when we sort of think about the first half, a lot of that is activity that was either started or underway in the second half of last year and the first part of this year. So we have to differentiate between what's happened what's happening and what's going to happen in the future. I think that's really an important factor here. So for the first half, I think it just reflected, you know, really strong performance across the board in Europe in the areas that were active. So private equity, second half of last year. We had a very strong performance in France. We have very strong performance in the UK and across many of the other markets in Europe. And so it was pretty diversified, as Peter said. I think looking forward, we, like everyone else, I think are going to, you know, the future pipeline or the future build is going to depend a lot on how the credit markets and seller and buyer expectations evolve over the next couple of months or so. But for us, the first half of the year is really driven by the fact that there was really a broad level of activity across a whole bunch of different countries in Europe.

Okay, great. Thanks so much.

Hi, everyone. This is Alexandra. I understand that maybe some of my opening remarks were not able to be heard, so I just want to provide a reminder 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. Lizard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update these forward-looking statements. Thank you. So, Gretchen, you can take our next question, please.

Our next question comes from Manon Gosselia from Morgan Stanley.

Hi. Good morning. I had a question, you know, on the asset management side. Given what you said on clients looking to diversify strategies away from growth and your fundamental strategy is doing better than the market, is there more room to do lift-outs in this environment? And are you looking to lean in, just given the market dislocation, or do you think you need to take a step back and wait to see how things shape up?

Yeah, so I think that's, you know, the markets are constantly evolving. I think right now, I think what we were describing is just really good for our business, right? The fundamental active investment strategies that we have and certainly leaning more towards the away from growth, I would say, away from growth at any price into relative value core and sort of general value strategies. It's one of the largest moves we've seen year to date. And so I think it just plays well to the strength that we have currently in the existing platforms that we have and sort of our expertise there. across many of our strategies. So I think this is just a great environment for us. You know, are there opportunities for us? Look, I think it's been on the table. We continuously look at additional teams and other areas to expand into, but I think our existing platform really covers the market well for the areas that are doing really well year to date. And so, again, if that continues, I think it bodes well for our business.

Got it. And I guess how should we think about the comp ratio and the pre-tax margins going into the back half of the year? Given your comment, it sounds like there's momentum on the top line on both the asset management side and the advisory side. But just wanted to get your thoughts on how you're thinking about that and particularly given the investments that you're making in both businesses.

Sure. So the comp ratio, we accrued at 58.5%. which is the same rate we accrued in Q1 of this year. It's early. I think at the end of the day, this is, you know, it's an early part of the year. This is our best estimate at the time from a comp perspective. Comp this year, as you know, will always be driven by the strength of revenues in the back half of this year, offset by investments and business mix. And so we'll see, you know, it's early. We're going to have a better view as we get into the second half of this year. We'll see how the year turns out from a continuation of the investments we're going to want to continue to make and The dislocation we're seeing in markets may create some opportunities for us. So we'll see how the year turns out in the market for talent, and I think we'll just have more visibility as we get to the back half of the year. Generally, for margins, look, at the end of the day, a lot of it's driven by revenues and sort of the strength of the business going forward, and I guess we'll have to just wait and see how that plays out. We certainly have a lot of volatility in markets impacting our asset management business, and I think as we get into Q3, we'll certainly have better views as to how the year is turning out.

Great. Thanks so much, Evan.

Our next question comes from Steven Chubach from Wolf Research.

Brian filling in for Steven.

So I want to talk about the asset management business. The resiliency in your fee rate these past few quarters has been quite impressive given the sell-off and EM proxies, which is typically a higher fee product. I was hoping that you could unpack the drivers of that greater resiliency year-to-date and your expectations for the trajectory of that fee rate over the next year.

Sure. So, look, the fee rate, as you call it, I mean, this year it's actually been flat-ish the last couple of quarters, actually up a tad bit this quarter versus last quarter and the year before as well. So we're starting to see that level out. Look, at the end of the day, The fee rate is an output for us due to the business mix. What I'd call out is just, I think as we mentioned on previous calls, some of the outflows that we had seen from some of our institutional clients, as we called out some reallocations that were going on, a lot of that was in lower fee products and lower fee platforms and some on the fixed income side. So our outflows were sort of more driven with lower fee type products. And some of the inflows that we've been seeing In our thematics and alternative strategies and other areas that we've been calling out, we're in higher fee strategies. So you sort of put those two together, and it's sort of been creating a nice balance against the AUM. As you call out, I think the EM has been declining to a lesser extent, you know, the outflows, and certainly has seen some fall off. But I think all in, we've gotten to that point where I think some of the inflows and outflows are creating more of a balance, and therefore the fee rate has been around steady for the last couple of quarters.

That's great, Collier. Thank you for that.

Next, on the non-comps, you guys have seen a pretty substantial pickup so far this quarter, and given travel is expected to continue to normalize, just want to get a sense as to how we should be thinking about the trajectory of those expenses as we continue to ramp up and inflationary pressures continue to play through your expense base.

I think that's exactly right. I think, look, it's inflationary pressures you're seeing in non-comp, and then a lot of that is the increase that we're seeing specifically in Q2 this year of higher travel. So, I mean, if you think about marketing and business development, if you look at that line item specifically, it's up significantly more than $10 million. Travel by itself was up $10 million just in the second quarter versus the previous year. And so you're starting to see what we would expect, which we think is a really great sign for the business, which is just more people getting on the road, seeing clients as clients are willing to meet in person, meetings happening for the first time in many years in person. On the asset management side, research analysts and portfolio managers getting out and meeting with companies in person for the first time, again, as I said, for a couple of years. So it's an exciting time, and we're encouraging. We think it's great to get out there and see folks. I think we're going to expect to see that continue to grow through the back half of the year as we get more towards – more normalized levels, but we're also seeing some inflationary pressures. So I think this quarter is probably a good baseline from which to build, but you're probably going to see a little bit more travel costs into Q3 and Q4, again, assuming the world stays open for travel as it has been. And I think it's a good sign, positive sign for the activity levels in the business.

Great. Well, thanks for taking my questions. Our last question comes from Jeff Hart from Piper Sandler. Hi, Jeff. Jeff, are you on mute? Yep. Operator error.

I was muted. Sorry. We continue to hear about historically unusually strong levels of strategic dialogue in the face of things like plummeting confidence and recession expectations. Kind of two questions on that. One, are you still seeing... strong levels of strategic dialogue with clients or has that changed recently? And secondly, I'm especially interested in Europe where war has been raging. I just have trouble shaking the feeling that it's a matter of when, not if, the next cyclical shoe drops and we kind of see that strategic dialogue shut off.

Look, first, I think the strategic dialogue shifted a lot over the last couple of years. you know, the period 16 to 20 was really dominated by, or 19 I should say, was really dominated by these very big strategic deals. The climate after 20 post-pandemic has actually been strategics doing bolt-ons, were not sort of bet-the-company kind of deals, and also they were not doing things that were as challenging as perhaps were done in previous years around antitrust because the environment is a little bit more challenging from that standpoint. So there's been a lot of strategic activity, but it hasn't been characterized by these mega deals that I think we saw more of between 16 and 19. I think that's going to continue. You know, there's been a lot of things which strategics were just priced, that priced away for them because of the public markets, the public market valuations and and frankly competition in many instances from private equity. That environment has shifted. Strategics are, generally speaking, well-capitalized, strong balance sheets. And I think when you have the kind of shift in geopolitical conditions, you are probably going to use M&A to shift your business with them, either to buy or sell assets. And I think we'll see it. You know, one of the challenges is just going to be, and this is, you know, as I alluded to earlier, is just there's a reset going on in people's expectations about what's going to happen in the economy.

And I think we've got to let that play through before we see a real pickup in activity.

And that's still kind of...

I guess as far as just the dialogues there, it's still maintained in Europe as well. I just kind of keep waiting for war to really kind of deepen the activity levels there.

So the thing to keep in mind about Europe is most of the multinational companies in Europe are exactly that, multinational companies. I mean, you think of a German company, most of its business is outside of Germany. You think of a Swiss company, you know, 90% of most of the Swiss companies' business is outside of Switzerland and not in Europe, but in the United States or in emerging markets. And the same can be said of the global companies that are listed on the FTSE or the global companies listed on the CAC 40. So these are global businesses with businesses spread about the whole world. And so the conditions in Europe itself are not the only thing that goes through the minds of a CEO there. Their mindset is very similar and the board's mindset is very similar to the mindset of of a multinational based in the United States or a multinational based in Canada. And I think that's one of the things that's lost in this idea that there's challenging conditions in Europe. Absolutely, there are challenging conditions in Europe, but these are multinational companies that look at it on a global basis.

Interesting. Thank you.

Thank you for joining us today. This now concludes Lazard's second quarter 2022 earnings call. Have a good day.