Lazard LTD.

Good morning and welcome to the Lazard's first quarter 2023 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 zero on your telephone keypad. At this time, I'll turn the call over to Alexandria Degnan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.

Alexandria Degnan Thank you, Brittany. Good morning, and welcome to Lazard's earnings call for the first quarter of 2023. I'm Alexandra Degnan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we have 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 statement, 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. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer, and Marianne Betch, Lazard's Chief Financial Officer. Marianne 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 Marianne will be joined by Peter Orczak, Chief Executive Officer of Financial Advisory, and Evan Russo, Chief Executive Officer of Asset Management, as they open the call for questions. I'll now turn the call over to Marianne. Thanks, Sally, and good morning, everyone. Today we reported first quarter 2023 operating revenue of $527 million, a 25% decrease from the first quarter of 2022, and a net loss of $23 million on an adjusted basis. In financial advisory, we reported first quarter operating revenue of $274 million, down 29% from last year's first quarter. The ongoing slowdown in M&A activity globally continues to present a significant headwind for financial advisory. However, we remain actively engaged with clients in both Europe and the U.S. In restructuring, activity picked up throughout the quarter and we are working on a number of complex assignments. In asset management, first quarter operating revenue was $265 million, an increase of 2% compared to the fourth quarter of 2022, and 15% lower than in the first quarter of 2022. Management fees and other revenue was $259 million for the first quarter, a 6% increase from the fourth quarter of 2022, and 10% lower than the prior year period. For the first quarter, incentive fees were $5 million, as compared to $25 million in the prior year quarter, reflecting weaker fixed income markets. As of March 31, 2023, we reported AUM of $232 billion, up 7% from December 31, 2022. This increase was driven by market appreciation of $11.6 billion, foreign currency appreciation of $1.4 billion, and net inflows of $3 billion. Average AUM for the first quarter was $227 billion, 7% higher than in the fourth quarter of 2022, and a decrease of 12% from the prior year period. As of April 21st, our AUM was approximately $236 billion, driven by market appreciation of $2.6 billion, foreign currency appreciation of $500 million, and net inflows of $400 million. In corporate, operating losses of $11 million included corporate revenues of $10 million, which were more than offset by a charge of $18 million associated with the liquidation of the firm's special purpose acquisition company in February. Now turning to expenses. For the first quarter, adjusted compensation expense was $399 million, 2% lower than the prior year quarter. This equates to a 75.7% adjusted ratio during the first quarter, compared to 58.5% in the first quarter of 2022. The higher compensation ratio is due to a combination of lower operating revenue, the liquidation of our SPAC, and higher fixed costs from amortization of prior year grants, as well as an increase in our workforce and inflationary impacts. Our non-compensation expense was $142 million in the first quarter, 21% higher than the prior year quarter, primarily reflecting higher travel and professional services expenses, as well as continued investments in technology and the ongoing impact of inflation. In light of the current environment, Lazard is conducting cost-saving initiatives. These initiatives are expected to result in the reduction of approximately 10% of our workforce globally over the course of 2023, which, combined with non-compensation initiatives, we believe will result in a reduction of approximately 10% in our run rate cost base compared to 2022. This should better position us in a normalized revenue environment to achieve our historical profitability ranges in 2024 and to continue to strategically invest in the business and return capital to shareholders. As a result of these cost-saving initiatives and assuming the challenging environment continues, we expect to achieve an awarded compensation ratio for the full year in the mid-60% range. Taking these actions resulted in a charge of $21 million in the first quarter, and we expect an additional charge of approximately $95 million over the course of the year, which will be excluded from our adjusted results. Our operating loss for the first quarter of 2023 generated a tax benefit of $11 million on an adjusted basis. We expect our annual effective tax rate for the full year 2023 to be in the mid 20% range, reflecting discrete items which typically occur in the fourth quarter. Turning to capital allocation, in the first quarter of 2023, we returned $187 million to shareholders. including 43 million in dividends, 99 million in share repurchases, and 45 million in satisfaction of employee tax obligations upon vesting of equity grants. Our diluted average share count is 87.6 million shares, which equates to the basic share count due to the anti-dilutive impact of losses. During the first quarter, we bought back 2.7 million shares at an average price of $36.75 per share. These repurchases largely offset dilution from our 2022 year-end equity compensation grants. Our total outstanding share repurchase authorization as of March 31st was $203 million. Lazard's financial position remains strong, and on Wednesday we declared a quarterly dividend of 50 cents per share. Ken will now provide his perspective on our performance and outlook.

Thank you, Marianne. Obviously, it was a tough quarter. During Q1, M&A activity fell back to levels last seen in 2012. Announcements and completions for the industry were down approximately 50% year-on-year and down approximately 30% compared to the fourth quarter of 2022. Our financial advisory results reflect these market conditions. That said, we are seeing some improvement in client dialogues and deal activity indicators, such as conflict clearances, new projects, and engagements. Our European advisory business continued its strong performance in the first quarter, and restructuring activity is increasing, especially in the U.S. We recently added two new managing directors in restructuring, further bolstering a business that is already ranked number one globally in industry league tables. We also appointed Ray McGuire as president during the quarter. With almost 40 years of experience in investment banking and M&A, Ray will play a key role in strengthening Lazard's senior relationships and an originating new business for financial advisory and across the wider firm. We are also seeing momentum in Lazard's asset management business with rising AUM driven by higher asset levels and continued strong performance by many of our strategies. In fact, More than 80% of our strategies based on AUM are outperforming relative benchmarks on a one-year basis, reflecting a market that is moving more towards fundamentals. While growth stocks outperformed in the first quarter, quality was the second best factor, benefiting from resilience in uncertain periods. As an active manager, we see significant opportunity to deliver outperformance as volatility and uncertainty continue to create a unique set of economic and market conditions. The recent stress in the banking sector, in particular, reinforces our conviction in our fundamental approach, which we believe will continue to translate into long-term alpha generation. In the first quarter, asset management also expanded its capabilities in providing strategic advice and wealth management to families with the establishment of Lazard Family Office Partners. While Lazard's business continued to perform solidly, we cannot ignore the environment in which we are operating. The recent news flow is unlikely to improve confidence among decision makers near term or make them any less reticent about committing capital. As such, the slowdown in M&A is likely to extend beyond the first quarter. Similarly, for asset management, the market outlook is likely to remain volatile so long as there is a lack of conviction about the evolution of the macroeconomic environment. Given this backdrop and the significant inflation in costs across our industry over the past several years, we made the decision to enact cost-saving initiatives. As Marian outlined, we are targeting a 10% reduction in our cost base as compared to 2022. We expect to achieve that on a run rate basis by the end of 2023. We believe we can accomplish this without impacting the productive capacity of the firm. We are reducing headcounts in areas where there are fewer opportunities for revenue generation and resizing support functions. These initiatives will result in significant additional cash flow that will enable us to continue to invest in our business at a time when those investments are more attractively priced, while continuing to return capital to our shareholders. In closing, I would like to acknowledge the dedication and commitment of our impacted employees, many of whom have contributed to the firm's success for many years. Now let's open the call to questions. Thank you.