Lazard LTD.

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

Thank you, David. Good morning, and welcome to Lazard's earnings call for the third quarter and first nine months of 2023. I'm Alexandra Degnan, Head of Investor Relations, Treasury, and Corporate Sustainability. In addition to today's audio comments, we've 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 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 Peter Orszag, Lizard's Chief Executive Officer, and Marianne Betts, Lizard's Chief Financial Officer. Peter will begin with some brief remarks before turning the call over to Marianne, who will 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 Marianne 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.

Thanks, Allie, and good morning, everyone. I'd like to begin my first earnings call as CEO of Lazard by expressing my thanks to my predecessor, Ken Jacobs. We are thrilled that Ken, one of the world's premier bankers, is now our executive chairman and has shifted his focus to advising clients. I also want to thank our board of directors for entrusting me with this role. It is a privilege to work with such exceptionally talented colleagues across the firm, and I look forward to serving and supporting them, our clients, and our shareholders. Lazard is one of the world's preeminent financial advisory and asset management firms with one of the most powerful brands in the financial services industry, and I am excited about our prospects to further elevate our relevance, revenue, and returns. I'll provide more on our outlook and plans for Lazard later, but now let's turn the call over to Mary Ann to discuss our third quarter and nine-month results.

Thanks, Peter, and good morning, everyone. Today we reported operating revenue of $532 million for the third quarter of 2023, a 27% decrease from the third quarter of 2022. Operating revenue for the first nine months was $1.7 billion compared to $2.1 billion in the first nine months of the prior year. In financial advisory, we reported third quarter revenue of $261 million and $879 million for the first nine months of the year. Advisory operating revenue continues to be impacted by the ongoing slowdown in M&A, and this quarter's results reflect the lagged state of M&A announcements from several quarters ago. Looking ahead, we believe the M&A cycle is turning, and we are well positioned as the market recovers to advise on a variety of transactions, including those associated with private capital, as well as large cross-border and complex transactions. Outside of M&A, we see continued momentum in several areas of the advisory business. Private Capital Advisory, our primary and secondary capital raising group, continues to see significant demand for its services, especially in the secondary's business, building on its strong second quarter and year-to-date results. Lazard's Global Restructuring and Liability Management Group also had a strong quarter, with operating revenue increasing both sequentially and year-over-year. The pickup and restructuring activity is accelerating, and the team is currently advising on a number of significant transactions for a wide range of debtor and creditor clients. Our sovereign advisory business also continues to perform well and advised a number of governments during the quarter, including prominent assignments for Sri Lanka and Greece. Lastly, one year after its launch, client demand continues to increase for our geopolitical advisory services amid the growing demand from corporate leaders for advice concerning global risks. In asset management, third quarter operating revenue was $262 million, flat compared to the third quarter last year and down 2% sequentially. Management fees and other revenue for the third quarter were up 8% compared to the third quarter of 2022 and flat compared to the second quarter of 2023. For the first nine months of the year, management fees and other revenues declined 1% compared to the same period in 2022. Asset management revenue was 794 million in the first nine months of 2023, 5% lower than the prior year period, reflecting lower incentive fees. As of September 30th, we reported AUM of $228 billion, 5% lower than June 30th, 2023, and 15% higher than September 30th, 2022. The sequential decrease was driven by market depreciation of $5.8 billion, foreign exchange depreciation of $3.3 billion, and net outflows of $2 billion. Average AUM for the third quarter was $236 billion, increasing 11% from a year earlier and flat on a sequential basis. Average AUM for the first nine months of 2023 was $233 billion, level with the first nine months of the prior year. Now turning to expenses. For the third quarter, adjusted compensation expense was $364 million. This equates to a 68.4% adjusted ratio during the third quarter, which reflects our current best estimate for the remainder of the year. Our non-compensation expense was $137 million in the third quarter, 7% higher than the third quarter last year, related to increased occupancy costs as well as higher technology and professional services expenses. We are progressing on our cost-saving initiative announced in April to reduce our debt count by 10% by the first quarter of 2024. Our goal to reduce overall costs includes a reduction and reprioritization of long-term projects. These changes reflect our commitment to return to our target expense ratios as revenues normalize. Our effective tax rate for the third quarter, as adjusted, was 8.4%, which compares to 25.1% in the prior year quarter. Our current estimate for the full year tax rate is projected to be in the low to mid teens. Our estimate, as always, is dependent on the level and location of earnings, as well as the impact of discrete items in the fourth quarter. Turning to capital allocation, in the third quarter of 2023, we returned $52 million to shareholders, primarily reflecting our quarterly dividend. During the first nine months of the year, we returned $285 million to shareholders, including $129 million in dividends, $102 million in share repurchases, and $54 million in satisfaction of employee tax obligations. Additionally, yesterday we declared a quarterly dividend of $0.50 per share. I will now turn it back over to Peter for comments on the outlook. Thank you, Marianne.

Today's results underscore the lagged effects of the slowdown in M&A announcement from several quarters ago. However, our asset management business and part of our advisory business, including restructuring and private capital secondary fundraising, are offsetting some of the overall market weakness in M&A. Looking forward, and as we have previously stated, we believe that the worst of the M&A slowdown is behind us. We continue to see signs that the market is bottoming out and stabilizing, with the quarters ahead poised for a rebound in deal activity. We are already seeing significant M&A activity in financial institutions, healthcare, and the energy transition, among other sectors. We are also seeing early signs of an increase in cross-border M&A activity, which with our global presence and expertise, we are well positioned to capture. This bottoming out reflects the interplay between the catalysts of activity, including ongoing technological innovation, shifts in global supply chains, the life sciences revolution and the energy transition, and the headwinds, which include a divergence in expectations between buyers and sellers because of the impact on valuations from the sharp increase in interest rates, the uncertainty in financing markets, and regulatory concerns. As higher interest rates remain in place for a longer period, as monetary policy tightening likely nears its end, and as some companies have won court victories on regulatory matters, the headwinds have generally been easing in recent months. One of the strong indications of this changing balance between catalysts and headwinds comes from the tenor of our client discussions, which are growing more constructively. There are two important lags between such a constructive shift in client discussions and revenue, though. First, there's a lag between active discussions and an increase in announcements, which for the market as a whole have now stabilized but are not yet increasing meaningfully. After a pickup and announcement, another lag then occurs, the completions, at which time the revenue impact of the rebound in activity begins to be felt. In addition, as the M&A market begins to rebound, we are also seeing non-M&A revenue opportunities within our capital solutions and restructuring businesses, both of which are seeing client activity accelerate. In asset management, despite volatility in the market, the challenging interest rate environment, and another surge in growth, mainly attributable to a select group of technology companies, we saw strong performance across many of our investment strategies and groups, including emerging markets, thematics, and local strategies. While new money is being put to work, the appeal of short-term investments, T-bills, and money market funds remain significant. As such, investor appetite to allocate cash to equities and risk assets remains subdued. Nonetheless, institutional investors are showing interest in our global quant and thematic strategies. Let's now turn to our future outlook for Lazard. In addition to our world-class brand, Lazard today has the potential to combine high return future growth with a significant underlying degree of stability. Our growth will be built on a foundation of a resilient model that spans across businesses, products, and regions, and a structure that is more secure than one focused solely on M&A in a specific geography. Last month, I outlined our objectives between now and 2030. Our growth will come from proactively leveraging our brand into new and expanded areas through talent development, lateral hires, and inorganic additions, while concurrently managing our existing business even more efficiently. One important step on this path involves elevating our relevance through more involvement in top deals and advisory, winning important mandates in asset management, and leveraging our global insights with increased thought leadership and content-rich convening. Our Lazard 2030 vision also includes few specific and concrete goals for the firm to accomplish by the end of this decade. The first is to double revenue firm-wide by 2030, with increases split roughly evenly between asset management and financial advisory, implying double-digit revenue growth annually on average. The second goal is for Lazard's total shareholder return to average 10% to 15% per year through 2030. Let me share a few more details on some of the specific actions we will take to reach these goals. Looking first at the asset management business, we have opportunities in both the core business and in adjacencies, and we intend to pursue these opportunities aggressively through both organic and targeted inorganic growth. Private asset managers with some degree of established track record but that are still relatively early in their AUM progression are of particular interest in any programmatic M&A for us over the coming years. We believe opportunities of this kind will combine the strength of our brand and distribution with the benefits from a fund manager's established investment performance while optimizing shareholder value relative to the acquisition cost. We also see potential for asset management growth by investing in and expanding our distribution capabilities. Evan has been implementing a strategic plan to maximize the value of our global distribution platform, which includes increasing our client reach worldwide with a particular focus on financial intermediaries in the U.S. and Europe and regional expansion in Asia, as well as engaging more effectively with our clients. Additionally, we have continued to develop a group of recently launched strategies with strong investment track records that are poised for growth, and we will continue to launch new ancillary products and vehicles to build upon our current investment capabilities and offerings. Turning to financial advisory, multiple pathways will contribute to doubling our revenue over the next seven years, including an expanded private capital effort spanning our capital raising business, our new Lazard Capital Solutions practice, and more extensive M&A fees from private equity. Among our M&A clients, we see potential for growth in both the United States and Europe. One key differentiator is that Lazard has long been known for its exceptional insight into geopolitical events and our ability to combine our business advice with an awareness of the geopolitical forces that could affect outcomes. That's all the more valuable to clients today, and our capabilities in this area have been reinforced by our outstanding geopolitical advisory team. Turning to specific sectors, Opportunity for us exists across many areas in North America, with particular growth potential in technology, industrials, power and energy, and healthcare, while we continue to build on our historically strong positions in sectors such as financial institutions and real estate. We also see significant additional revenue opportunities in Europe, which would be accentuated by an expansion of U.S.-Europe M&A trade, given our uniquely strong position in both continents. We are seeing increased interest among European companies seeking to acquire US assets, and Lazard is well positioned to advise these clients. All of this will require Lazard to expand its ranks of managing directors. Some will come from internal promotions. We are unique among the independent advisory firms in having an established track record of being able to develop our own productive bankers. Part of the expansion will also come from more aggressive lateral hiring than Lazard has historically done in the past. One question may naturally be whether we can maintain our historical margin target as the market normalizes, which we expect to do, if we are also going to undertake a significant increase in our number of managing directors. The answer lies partially in our potential to raise productivity per MD. More specifically, if each of our advisory MVs generates an additional $1 million in revenue, the effect is to free up more than $50 million in total each year to invest in new lateral hires without any adverse impact on our compensation margins. We are confident that with increased intensity, targeting of market opportunities, being paid appropriately for the exceptional work we do, expanded use of cutting-edge technology, and more significant annual trimming of less productive MDs, we can substantially raise productivity over time. We also expect to benefit from the embedded growth in the disproportionately high share of our current MDs who are newly hired or newly promoted. Such a high productivity growth path is the best way to combine our traditional emphasis on excellence with our expanded revenue opportunities and ambitions. None of this will occur overnight, but with consistent effort, we are confident that we can achieve our 2030 goals. As we expand our business across asset management and financial advisory in the years ahead, I look forward to updating you on our progress over time. We will also find the right moment to provide you with more detailed plans and targets for between now and 2030 to help you measure how we are doing along the way. Over recent months, I've been traveling extensively to meet with Lazarn investors and hear their thoughts about the firm. One of the clearest messages that has come through during this listening exercise is a widespread desire to see our corporate structure simplified. For that reason, we are announcing today that Lazard intends to convert its current structure to a new status as a U.S. corporation or C-Corp. We believe conversion to a C-Corp will simplify tax reporting, may act as a catalyst for enhanced shareholder ownership, and therefore provide liquidity benefits for our stock. One significant change relative to our previous evaluations of such a conversion is that the tax benefit of our current structure is declining materially due to changes in global tax laws. Given the smaller tax impact than in the past, we believe that the benefits of conversion now outweigh those costs. We expect the conversion to take place on January 1, 2024, subject to compliance with global regulatory requirements. Lastly, as our 175th anniversary enters its final month, we are proud of our history and confident in our future. For the better part of two centuries, we have served as trusted advisors for our clients, providing an unparalleled level of expertise, insight, and global reach. We have attracted and developed extraordinary talent, and we have evolved and adapted into a stronger and more resilient institution. It is our heritage, resilience, and commitment to excellence that make the Lazard brand so extraordinary. And we now have an opportunity to combine that resilience and excellence with significant growth going forward. In the years ahead, we will leverage our brand, our global business model, the investments we are making and expect to make, and the extraordinary caliber and commitment of our people to expand our business and take Lazard to new heights. Now let's open the call to questions.

Apologies for the delay. If you have a question at this time, please press the star and 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star and 2. So others can hear your question clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Brennan Hawken with UBS. Please go ahead. Your line is open.

for taking my questions. Peter, you laid out a lot there. Hi, Brennan. Hi, good morning. I'd love to drill down on some of it. I'd say since you announced your ambition to double revenue by 2030, which is roughly seven years, I'd say the part where there's the most pushback is on the asset management side. In covering the industry, there's a lot of pressure, right? And the big example that people point to when thinking about your plans, which seem to combine both organic and inorganic opportunities, as you referenced in your comments, would be Invesco. Over the past seven years, Invesco has nearly doubled AUM. AUM's up 90%. So just about in line with your doubling ambition there. But the problem is the revenue translation hasn't been there. Revenue is only up 30% over that time frame. So how are you thinking about the ways in which you can double the revenue over that time frame despite the persistent V-rate pressure on this business?

Sure. Well, the way I would put it is we're not interested in growth for growth's sake and we're not interested in AUM accumulation for the sake of accumulating AUM. Our goals here are to grow in a high-return way and in a way that enhances shareholder value. So the objectives are exactly the ones that you put forward. That having been said, we see significant opportunity within the existing business to continue to upgrade our performance and distribution, which will be helpful in maintaining our revenue and earnings streams. A good example is we're doing this call from the U.K. where we just held our board meeting. Both on the investment teams located here and on the distribution within the U.K., we've seen changes that have been occurring under Evan's leadership that point to improved performance in both distribution and performance. So there's a lot that can be done there. And then on the inorganic side, we are interested in adjacencies where we see promise for revenue growth and for earnings growth over time. And so areas such as private credit, real estate, and infrastructure are areas that we think will continue to attract capital allocation. And because they are less liquid, continue to have a healthy degree of fee associated with them.

Okay. The valuation... Delta, though, is a bit challenging here. So if you're going to be particularly looking to acquire and add teams and capabilities within some of those private credit and more alternative structures, how are you planning to finance that? Is the idea going to be, you said in your comments, lift outs and smaller teams that don't have that have really good capabilities on the investment side but don't have the other capabilities that you can add, like distribution and scale and whatnot. So that seems clear, but is that going to be largely just cash deals that have earnouts, and so you're going to change maybe a capital return structure to be more embedded to allocating capital to growing some of these businesses, or are you going to be adding leverage? What's your plan as far as financing these lift-outs?

Sure. Well, first, I think in terms of the sweet spot of the kind of target zone, you have it basically right, which is we're looking for established track records but earlier in the AUM progression so that we can optimize shareholder value even post-apposition cost because we think that's the right part of the growth trajectory to get maximum benefit from our brand and our distribution while also benefiting from the historical track record that the target will have accumulated. With regard to the financing options, obviously that's going to depend deal by deal. What I would say is we have two, in normalized conditions, we have two very cash-generative businesses. One indicator of that is if you look at the buybacks that we've done beyond what's required, take the dividend out beyond that and then take out what's required to offset the dilution from our deferred compensation packages, we have bought back $1 billion of stock in additional buybacks over the past four years. So that's an indication of the firepower that would be available. We obviously also have equity. There are lots of options, earnouts, et cetera. So I don't want to pin down exactly how we will finance the inorganic options other than to highlight that we have two very cash-generative businesses, and we can deploy our cash flow, at least in part, towards value-enhancing inorganic growth.

Okay. Thank you for the questions. A lot more questions, but I'll hop back in the queue and stick to the two questions.

Okay.

We'll take our next question from Steven Chubak with Wolf Research. Please go ahead. Your line is open. Hi. Good morning, Peter. Good morning, Marianne.

Morning. Morning.

So I wanted to start off with a question on the C-Corp conversion. Peter, as you noted, prior management was reluctant to convert to a C-Corp, citing a significant potential increase in the tax rate. You noted some upcoming changes in the tax code would result in a more modest increase. I was hoping you could unpack what some of those changes were in the tax code that resulted in a more modest impact, how you determined that the benefits might outweigh the costs here, And what's the pro forma tax rate for the company following conversion?

Sure. I'm going to do part of this, and then Mary Ann will do another part. Stepping back here, as I laid out, there are pros and cons. We view the benefit of this is that it is something that investors and potential investors raise as something that would make the current structure being an impediment to owning Lazard and the conversion being a catalyst behind owning Lazard. So I think that's the benefit, and there may be increased liquidity in our shares to the extent that there's expanded ownership and increased interest. The cost is primarily, I mean, there's some minor legal and administrative and other changes, but the cost is primarily a change in the effective tax rate. And that cost has come down. The impact on the effective tax rate is now in the low single digits. as we move forward into a more normalized environment. And before I turn it over to Mary Ann for a little bit more detail, what I would also say in addition to our judgment that the benefits now outweigh the cost, We also hope that this shows that we are increasingly listening to our shareholders. This came up repeatedly in my discussions with them, and also acting decisively to pursue the shareholder value that we've articulated we want to achieve over time. But why don't I turn it over to Marianne for any additional comments?

Sure. So, I mean, as you can imagine, this stuff is incredibly complicated. So, try to sort of keep it high level. But generally, you know, one of the things that's changed since we put this structure in place is that the U.S. tax rate has come down. And so, if you think about sort of the incremental cost of becoming a U.S. corporation, the U.S. tax rate is one of the factors. Additionally, the sort of global alignment of tax regimes and the global minimum tax that's going to be coming online in various places over the next couple of years make that delta even smaller. And so as we looked at that and we did sort of a range of scenario analyses looking at different earnings mix and levels of pre-tax earnings over the next few years, we were able to determine that that estimated range was really in the low single digits. And as Peter said, that's where we determined that that was the time to act.

That's great. And it looks like I have a similar problem to Brennan. I have a load of questions I want to ask. I'm going to limit it to just one on the comment you made, Peter, regarding milestones or checkpoints that you're going to offer along the way, you know, ahead of the 2030 bogey or target that you had outlined. I was hoping you can give us some context in terms of what are some of the milestones that you're hoping to lay out that we can hold management accountable to.

Well, we'll find the right time to do that. We want to do that when there are some stepping stones and proof points already in hand. And so it's not just plans, but you're starting to see the beginning of action also. But I think you should expect the normal things that one would look to in terms of monitoring how the business is operating. So beyond revenue and earnings, things like how we're expanding in the growth areas that that, you know, we see on the asset management side of the business, how we're doing on improving performance within an existing business and moving into adjacencies.

Peter Piotrowski- Any numbers you can put behind it, Peter?

Peter Piotrowski- At the right moment, yes, and now is not the right moment.

Peter Piotrowski- Okay, fair enough. All right, I'll hop back in the queue. Thanks for taking my questions.

We'll take our next question from Jim Mitchell with Seaport Capital or excuse me, Seaport Global. Please go ahead. Your line is open.

Okay, thanks. Good morning. Peter, just on your comments around funding future MD headcount growth with improved productivity, can you kind of discuss kind of what your analysis was to kind of feel comfortable that, you know, whether it's a million or more in terms of per MD improvement, you feel comfortable that's achievable relative to, you know, whether it's competitor analysis or how you're thinking about it?

Sure. Let me start with, I think, a really important point, which I also briefly mentioned, which is we have a significant amount of embedded growth and also productivity enhancement that will come from the disproportionate share of managing directors today who are just ramping up the productivity curve. So in normal years historically going back, we've had about 30% or so of our managing directors being in that kind of new category, either lateral or newly promoted. Today it's 40%. That 10% differential is a very large change. The newer people are disproportionately in areas that we see as exciting opportunities going forward. Our Lazard Capital Solutions Group, a revamped effort in Germany, expanded coverage of private capital writ large, investments in biotech and energy. Our new team in the Middle East. And then also our geopolitical team, which is best in class on Wall Street and is leading, it is reinforcing Lazard's historical dominance in firms that are looking for the combination of business and geopolitical insight. And I think in today's world, that's an extremely valuable thing. So the first part is just an appreciation for the embedded growth and productivity pop, if you will, that we have as they move forward in their ramp. The second is all the various things that I mentioned. It's not going to be one thing, but many different things, from the fees that we charge to more aggressive culling of employees less productive tenured MDs. So actually just to return to the former topic, one of the reasons why we have that different mix today, part of it is the investments that I just mentioned, the new lateral hires and also newly promoted managing directors in those areas. But partly it's also we have started earlier this year, and we will continue to do this, to be – extremely rigorous about culling lower productivity managing directors each year. After a sufficient period of time, if a banker is not – I've talked about being commercial and collegial. Both of those are super important. And if we have someone who's not living up to either end of that, those aren't going to be the right place for them. So multiple different pathways, but mostly it comes back to – excited about the areas that we're investing in, some indebted growth already that may not be apparent above the surface, and then really active management and being very committed to achieving the productivity improvements that will create the flywheel of reinforcing resources that allow us to do another round of investments.

Okay, that's all helpful color. Maybe just on the follow-up on, I know it's not an easy question or one you can put a hard number on, but I think everyone's struggling with the timing of the revenue rebound, if we get it, and comp ratios. You guys are cutting 10% of your headcount. Is there a way for us to box around next year in terms of whether it's an absolute dollar amount of comp that needs to be accrued, or just how to think about the parameters for the comp ratio.

Let me give you a little bit on the outlook, and then maybe Marianne will do something on the comp ratio. As you know, you asked an impossible question, so thank you for acknowledging that. What I would say is we do expect, just based on the constructive dialogue among clients, we expect 24 to be better than 23. The question becomes how much, and that's very difficult to predict right now. I do think there are reasons that we believe Lazard has some advantages relative to the market. So one way of thinking about it is whatever your view is of the market, why could Lazard potentially perform better than that without taking a view on exactly when the market completions pick up. And I'd point to a few. One is the investments in our coverage of private capital writ large, especially our lizard capital solutions, which is getting a significant amount of demand and creating the positive flywheel effect that we were hoping for from creating that group. The second is our excellence in geopolitical. In today's world, I think it's clear that it's impossible to make a significant business decision without insight into geopolitics. Lazard is always part of our DNA to stand out along that domain and all the more so with our first-in-class geopolitical advisory team. The third is that to the extent that the Europe-US M&A trade does pick up, that's something that Lazard, given that we're strong in both continents, will naturally benefit from. And then the fourth is what I mentioned with regard to the the elevated share of newer MDs. So those are some reasons why you may see different performance from Lazard relative to the market. But with regard to the market as a whole, it's, as you pointed out, almost impossible to know. I would just go back to what I said earlier, which is there clearly is a shift in the tone of client discussions that are more constructive today than they were six or nine months ago.

I'll take the invitation out of the conversation. So, I mean, you know, you're seeing this year the effects not only of lower revenues, but also of the sort of lagged deferrals that we had in 21 and 22, 21 being a record year of revenue. So, we had sort of elevated comp that's deferred into this year, and we'll continue to see some of that in 24 as well. But I really do think it's going to come down to the revenues and that, as Peter laid out, we're hopeful, but there's uncertainty there. So the cuts that we designed earlier this year were really meant to create the room not only to invest in areas where we see growth, but also to allow us to get back to our target ranges when the revenues have normalized. And so that's you know, sort of still how we're thinking about it, and we're going to see how quickly revenues come back.

Yep. Well, thanks for taking my impossible question.

We'll take our next question from Ryan Kenney with Morgan Stanley. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking my question, and thanks for all the detail and the prepared remarks. I just wanted to follow up on that comp ratio commentary. You mentioned that a component of the revenue growth plan is to expand MD count partially from promotions, partially from lateral hires. Can you just give us an update on what the recruiting environment is like? I know earlier in the year, we've been hearing from the peer group that it was a strong recruiting environment. Does recent optimism on them and iRebound make it harder to recruit, and could that put more pressure on the comp ratio near-term?

So we're in the midst of active discussions. Well, first, I'd note we have, again, the embedded growth that I mentioned before from the MDs in key areas that are ramping up. But with regard to the new lateral hires, active discussions we've been adding, for example, in restructuring. We just had a new restructuring MD join its start in Europe, and there are others coming. The issue is that we're selective in making sure that our lateral hires are a good cultural fit and also in the areas where obviously we want to expand and then also in the areas and productive in those areas, clearly, and then also at the right expectation with regard to their compensation. So I won't comment on what other people are doing. That's their business. But with regard to ours, we're very comfortable with the tenor of the discussions we're having, the attractiveness of the Lazard platform going forward. There's a lot of interest in joining Lazard from a wide array of different bankers, and we are going to be selective in the matching function to make sure that we wind up maximizing the chances that the The state is a good one and think we can do that. in a shareholder-friendly and growth-enhancing way. Only other thing I'd finally say is I want to really emphasize the point I made about our ability to grow our own talent and to create productive bankers through internal promotion. We stand out in having a long history of being able to do that. So what you should expect going forward from us is that continued excellence in internal talent development coupled with more aggressive lateral hiring than we may have done during some historical periods.

Thanks. And just on the comment of eventually getting back to target range on the comp ratio, you know, once revenue environment normalizes, is that still mid to high 50s?

Yes, it is.

Thanks.

We'll take our next question from James Yarrow with Goldman Sachs. Please go ahead. Your line is open.

Good morning, and thank you for taking my questions. I just want to start first with the impact of the U.S. elections next year and what that could mean for both your businesses.

I'd say the U.S. election at this point is something that comes up in the first five minutes of client discussions before you turn to the actual matter that you're discussing. I expect that as we move into 2024 more fully, the time allocated to that topic will increase a bit. Again, when I said the tone of client discussions has turned more constructive, that's the dominant factor. And obviously, as we move into 2024, the U.S. election, I think, will be another thing that generates demand for our geopolitical insights. But we don't see it right now having a massive effect on the trajectory that we're looking at in either business.

Okay, that's very constructive. Maybe just turn to the asset management business again. I just wanted to touch on the financing for potential acquisitions once more. How are you thinking about your leverage levels today, and would you contemplate adding to these to fund any potential deals?

Well, we're comfortable that we have two very cash-generative businesses. The number I gave you, for example, on the amount of buybacks that we've done above the dilution offset over the past four years is indicative of that. And so that provides some perspective on the cash flow that we have available. That having been said, I don't want to rule out any options. It will depend on the particular target. If we were to hypothetically finance part of an acquisition through additional debt, obviously we would be motivated to reduce that leverage quickly over time, as one would expect in an EM&A transaction. But I think we've got lots of options available to us moving forward. Okay, thank you so much.

We'll take our next question from Devin Ryan with JMP Securities. Please go ahead. Your line is open.

Okay, thanks very much. Good morning, Peter, Mary Ann, and Evan. Hi. I just want to start kind of first big picture question. You know, Lazard founded in 1848. Most of your independent peers were founded over the past couple of decades. I think many of them would argue that they built their firms off of a blank piece of paper, and so that allows for, you know, a much more efficient cost structure just as you go. And so I just want to talk a little bit about kind of the expense structure. You know, obviously you have expense initiatives underway, and I hear you on kind of getting back to a more normalized margins. But when you think about the overall infrastructure of Lazard today, the whole global footprint, you know, or even mix of kind of where you have offices, do you see over time kind of more opportunity to get more efficient around the expense structure or even maybe more dynamic on expenses as you move forward here?

Let me say a couple of things. First, there were significant adjustments that we've made, not all of which have been fully implemented yet because it takes a while sometimes to close offices in other countries, but we did take a very careful look at places that we didn't think would meet our productivity hurdles, and we'll continue to do that. Now, I think at its core, Lazard has always been hearkening back to that. History has always been deep in Europe and the U.S., and that defines Lazard in some way, and that will continue. But we're going to be aggressive about making sure that we're only in places where we think we can expand in a high productivity way, because I think that's what leads to a you know, leads to a model that works over time on behalf of our bankers and our shareholders and, you know, allows us to serve our clients with the excellence that they have come to expect from Lazard. The only other thing I'd say about expenses is we will be laser folk. We are going to be aggressively pursuing an agenda of making sure that we're as lean as possible. Because we see that in de-layering. It's one reason why I didn't replace myself as head of advisory. We see an opportunity for not only lower cost ratios from leaner teams, but also better experiences for our people. We have extremely talented people. And we believe that with more running room for each participant on a mandate, the talent development experience is better on behalf of our clients. We are continuing to take, just to return to your question, continuing to take a careful look at each office and each geography. At its core, Lazard has always been strong in Europe and the U.S. Don't expect that to change. And we're committed to being as lean as possible moving forward.

Got it. Okay, terrific. Peter, I guess another one for you. You've been CEO here for just a few weeks now, but already some pretty marked changes around both communications, but also shareholder matters like the C-Corp structure announced today. And there's something that many of us have been talking to our clients about and writing about for years. So, you know, obviously, In a few weeks, a lot changing. From a cultural perspective, what do you want your legacy to be both kind of inside and outside of Lazard? And what, if anything, do you see changing around the brand or culture as you implement some of these changes? Clearly, you have a firm that has effectively hundreds of years of history, but at the same time, these are big changes and things that are relatively dynamic. So I just want to get a sense from you how you're thinking about kind of your legacy as well.

Appreciate the question. I would say, look, what we are trying to do here as we pursue these Lizard 2030 goals is pursue growth in an ambitious and aggressive way, but also in a way that is high return and high productivity, and to act decisively when it's clear that something is shareholder enhancing. So that's really what we hope we're starting to demonstrate, but it's obviously early days and we plan to continue to demonstrate that. With regard to internal culture, I've really emphasized the combination of being commercial and collegial. Both parts of that are super important to the pathway forward, and that means being, you know, aggressive on behalf of our clients and ambitious on behalf of our clients, but it also means acting like a team and treating one another with respect, and I think that's what I would hope the legacy will be.

Okay, terrific. Thank you. And our next questions will come from Brennan Hawkin with UBS. Please go ahead. And Brennan, your line is open.

Sorry about that. It was muted. I was just so excited to get my follow-up questions in.

All right.

All right, here we go. So how should we think about advisory MD headcount by year-end? you have announced plans to make some reductions, but so far versus year-end, you know, year-end was, I believe, the numbers we have out of the filings, 212 at year-end last year, and now, you know, in the queue for 2Q, it was 227. So maybe where do we stand on advisory MDs now? Where do you expect by year-end? And then how should we be thinking about the trajectory of that MD count given your plans for productivity enhancement?

Sure. First, let me say we are, before I turn to MDs, we are on target to hit our goal of reducing headcount by 10%, measured from the first quarter of 2021. to the first quarter of 2024 overall. That's not specific to MDs. Second, before I actually answer your question, just a little bit of framing, which is, again, really focused on, in the year-end process, having high bars on being commercial and collegial or higher bars so that following the pandemic, when for natural reasons there might have been a bit more of a generous policy with regard to remaining at Lazard, We are very focused on raising productivity and making sure that people are collaborative moving forward. And with regard to your specific question, you'll see in the queue for this quarter a number of 215. That will come down already. That includes some people who will be departing, but they are still counted in the queue. And by year end, it will be down from that. Again, consistent with our overall goal of 10% headcount adjustments.

Perfect. Thank you for that. And then part of your plans, Peter, include internal development and enhancing productivity, right? So what I'd be curious about, have you gone through the exercise of breaking down that MD count, right? The little over 200 by like strata. In other words, X percent produce, you know, eight plus million or 10 plus million, right? And then there's the middle strata and there's a lower strata. And so I guess the 10% reduction is going to be very heavily focused on that lower strata. And then also, have you looked at, of the promotes, how many are able to get into that top tier? And what can you learn about their journey in order to ensure the promotions are as effective as possible?

Excellent question. A few comments. Again, just a reminder about the 40% that are still ramping, which is an extra roughly 20 managing directors with embedded productivity ahead. You won't be surprised to know that we do exhaustive analysis of productivity at the individual level, bi-quintile, bi-quartile, et cetera, I don't think it's appropriate to share those numbers here. But like in any organization, you're going to have a skew to that distribution. And we are therefore really focused on giving people some time to become productive. And everyone from time to time will have an off year. But if over a prolonged period of time, a matter of several years, either the collegiality or the productivity is not there, we're going to part company with the managing directors. That was a core kind of filter for the adjustments that we did make earlier in the year, and it will be a core filter going forward. Then with regard to the kind of the productivity ramp, if you will, and what we can learn from cost experience on people who are promoted and also lateral hires, we have invested in a significant amount of of analysis around that question. I think we are getting better. There's always going to be some degree of uncertainty because until someone's actually in a seat, it's always a little bit hard. There's always some uncertainty around that. But we feel confident that we have some of the markers for what ups the odds or makes it less likely for someone to be productive on our platform.

All right. Well, look forward to learning more about that as the journey progresses. Thanks for taking my follow-ups.

Thanks, Brian.

Thank you. And this now concludes Lazard's third quarter 2023 earnings conference call. You may now disconnect.