Lazard LTD.

Good morning and welcome to Lazard's second 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 will turn the call over to Alexandra Degman, Lazard's Head of Investor Relations, Treasury and Corporate Sustainability. Please go ahead.

Good morning and welcome to Lazard's earnings call for the second quarter and first half of 2023. I'm Alexandra Degman, Head of Investor Relations, Treasury 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 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. 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 relief and investor presentation. Hosting our call today are Kenneth Jacobs, Lizard's Chairman and Chief Executive Officer, and Mary Ann Vetsch, Lizard's Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results. Then Ken will provide his perspective on the outlook for our business. After that, Ken and Mary Ann will be joined by Peter Orszag, Chief 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 Mary Ann. Thanks, Sally, and good morning, everyone. Today we reported operating revenue of $620 million for the second quarter of 2023, an 8% decrease from the second quarter of 2022. Operating revenue for the first half was $1.1 billion compared to $1.4 billion in the first half of the prior year. In financial advisory, we reported second quarter revenue of $344 million compared to $407 million in the second quarter of 2022. On a sequential basis, financial advisory revenue increased 26%. For the first half of the year, operating revenue was $618 million, 22% lower than the same period in the prior year, relative to an overall market decline of approximately 50% in M&A completions globally. Despite these challenges, we remain actively engaged with clients in both Europe and the U.S., and Private Capital Advisory, our primary and secondary capital raising group, delivered a strong first half. In asset management, second quarter operating revenue was $267 million, up 1% compared to the second quarter of 2022 and sequentially. Management fees were up 1% compared to both the second quarter of 2022 and the first quarter of 2023. For the first half of the year, management fees declined 5% compared to the prior year period. For the second quarter, incentive fees were $6 million compared to $7 million for the second quarter of the prior year. For the first half of 2023, asset management operating revenue was $532 million compared to $577 million in the first half of 2022, reflecting lower management fees and incentive fees. As of June 30th, we reported AUM of $239 billion, an increase of 11% year-to-date and 3% higher from March 31st of this year. The sequential increase was driven by market appreciation of $8.8 billion, offset by foreign currency depreciation of $600 million and net outflows of $1 billion. Average AUM for the second quarter was $235 billion, increasing 2% from a year ago and 4% on a sequential basis. Now turning to expenses. For the second quarter, adjusted compensation expense was $424 million. This equates to a 68.4% adjusted ratio during the second quarter, which reflects our current best estimate for the remainder of the year. Our non-compensation expense was $144 million in the second quarter, 10% higher than the prior year, primarily reflecting increased occupancy costs, higher travel and professional services expenses. As we reported last quarter, we have conducted cost-saving initiatives, which we believe will result in a reduction of approximately 10% in our run rate cost base by 2024. Taking these actions resulted in an expense of $147 million in the second quarter and $167 million year-to-date, which are excluded from adjusted results. Our effective tax rate for the second quarter as adjusted was 31.2%, which compares to 26.4% in the prior year. We currently expect this year's annual effective tax rate to be in the mid-20% range. Turning to capital allocation, in the second quarter of 2023, we returned $47 million to shareholders, including $43 million in dividends. During the first half of 2023, we returned $234 million to shareholders, including $86 million in dividends, $99 million in share repurchases, and $49 million in satisfaction of employee tax obligations. Additionally, yesterday we declared a quarterly dividend of 50 cents per share. Ken will now share his perspective on our performance and outlooks.

Thank you, Marianne. The global macroeconomic outlook is improving. As inflation continues to fall, expectations are mounting that we are close to the end of the current tightening cycle. In addition, there is growing anticipation that central banks will successfully achieve a soft landing. This sense of macroeconomic optimism is yet to filter through to M&A completions, which have remained low since transaction volume began to slow in the first quarter of 2022. However, we believe the M&A market is stabilizing and that conditions may be in place for the beginning of a rebound. But it's important to be realistic about the likely pace of such a recovery. Most M&A cycles see deal activity recover in fits and starts. Just as M&A completions reflect market conditions when deals were announced six to nine months ago, we expect that newly announced transactions will complete at a similar pace. In the meantime, we are seeing increasing board and investor confidence. The gap between buyer and seller expectations is narrowing, and signs are emerging that financing, while more expensive, is becoming more accessible. We are also seeing a pickup in cross-border activity, particularly among European clients looking to engage in transactions in the U.S., while the Middle East continues to be a growing hub for capital and deal activity. Although restructuring had a slow start to the year, activity is picking up and should increase ahead of significant amounts of debt maturing in a more challenging credit environment and facing higher financing costs. In light of this evolving landscape, this week we announced the launch of Lazard's new Capital Solutions Group, a global team focused on advising, coordinating, and executing the firm's capital raising and debt advisory solutions for clients, which will complement our world-class restructuring business. Given these market factors, we believe the years ahead could deliver circumstances in which a surge in both M&A and restructuring activity coincide at the same point in the economic cycle. The environment for asset management is improving. AUM is up 11% year-to-date, and significantly FX headwinds are abating as the U.S. dollar is weakened throughout 2023. We are seeing momentum across the business, including growth in Europe and significant flows in global equities and emerging markets, led by our quantitative equities platform and several global equity strategies. As we outlined last quarter, we believe the current market conditions create an environment which is more favorable for our fundamentally driven investment approach, with many of our strategies outperforming on a one- and three-year basis. While there remains a level of uncertainty in the markets, our asset management business continues to see an active new business pipeline. We are also continuing to expand our relationships with financial institutions across the globe with increasing traction in Asia and continued success in the U.S. Turning to the upcoming leadership changes, in May, we announced that Peter Orszag, currently CEO of Financial Advisory, will become CEO of Lazard on October 1. On the same day, I will transition to the new role of Executive Chairman, in which I will principally advise clients. Having worked closely with Peter for the past seven years at Lazard, I can attest to his leadership qualities and his clear and exciting vision for the firm and its future. In recent years, we have placed new leaders in virtually every business, country, and industry group across the firm, all of whom will play an important role in supporting Peter as he leads Ozard into the next chapter in its storied 175-year history. Now let's open the call to questions.