Good morning, and welcome to Lazard's Third Quarter and First Nine Months of 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 touch tone phone. At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.
Thank you and good morning. Welcome to Lazard's Earnings Call for the Third Quarter and First Nine Months of 2022. I'm Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, we have posted our earnings release in 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.
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 measure is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer, and Mary Ann Betsch, Lazard's new Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results. Ken will provide his perspective on the outlook for our business. After that, Ken and Mary Ann will be joined by Peter Orszag, Chief Financial Officer of Financial Advisory, and Evan Russo, Chief Executive Officer of Asset Management, as they will open the call for questions. I'll now turn the call over to Mary Ann.
Thank you, Ally. Good morning. Let me begin by saying how happy I am to be here at Lazard. I'm looking forward to meeting many of you on the call today as I settle into my new role. Let's get started with a review of our financials. Today, we reported record third quarter operating revenue of $724 million, a 3% increase from revenue of $702 million in the third quarter of 2021. Operating revenue for the first nine months of 2022 was $2.1 billion, 3% lower than in the first nine months of 2021. In Financial Advisory, we reported record third quarter revenue of $454 million, up 19% from last year's third quarter.
For the first nine months of the year, operating revenue was also at a record level of $1.2 billion, 7% higher than the same period in 2021. As demonstrated by the record quarter, M&A has been active, particularly in Europe, where we advise on several high-profile transactions. In restructuring, although activity is still relatively low, our discussions with clients are increasing as a result of current market conditions and demand for liability management. In addition, our restructuring practice is ranked number one globally on announced transactions year to date. Our sovereign advisory team is also working on a number of complex assignments. In Asset Management, third quarter operating revenue was $263 million, 15% lower than third quarter 2021 revenue of $311 million. Management fees of $241 million decreased 20% year-over-year.
Incentive fees in the third quarter were $22 million, compared to $7 million for the third quarter of 2021. For the first nine months of 2022, Asset Management revenue was $840 million, a decline of 14% compared to the first nine months of 2021, reflecting lower average assets under management. As of September 30, we reported AUM of $198 billion, a decrease of 27% compared to September 30, 2021, and 9% lower on a sequential basis from June 30, 2022. The sequential decrease was driven by market depreciation of $10.3 billion, foreign currency depreciation of $6.6 billion, and net outflows of $2 billion. Average AUM for the third quarter was $212 billion, decreasing 24% from a year ago and 8% on a sequential basis.
This reflected global markets continuing to weaken in both equities and fixed income during the third quarter. In addition, the strengthening U.S. dollar has been a headwind thus far in 2022. As of October 21, our AUM was approximately $200 billion, driven by market appreciation of $3.4 billion, negative foreign currency impact of $0.6 billion, and net outflows of approximately $0.7 billion. Now, turning to expenses. We accrued compensation expense at a 60% adjusted compensation ratio in the third quarter, compared to 58.5% in the second quarter of 2022. For the first nine months of 2022, we accrued at a 59% ratio. This is our best estimate for the full year, but is subject to performance during the remainder of 2022.
Compensation levels reflect our significant investment for growth in both businesses and our focus on investing in and preserving intellectual capital through the cycle. Our adjusted non-compensation expense for the third quarter was $128 million, 10% higher than the prior year, primarily reflecting the impact of increased travel and investments in technology. Our effective tax rate for the third quarter, as adjusted, was 25.1%, which is unchanged from the prior year quarter. For the first nine months of the year, our adjusted tax rate was 25.6% versus 26.2% in 2021. We expect this year's annual effective tax rate to be in the mid-20% range. We have generated strong cash flow year-to-date.
In the third quarter, we returned $286 million to shareholders, including $46 million in dividends and $237 million in share repurchases. Additionally, yesterday, we declared a quarterly dividend of $0.50 per share. During the third quarter, we bought back 6.7 million shares of stock at an average price of $35.63 per share. During the first nine months of 2022, we repurchased a record 17.2 million shares at an average price of $35.49 per share. Our weighted average share count at quarter end was 102 million shares, a decrease of 11% from 114 million shares in the prior year quarter. Our unweighted share count as of September 30, was less than 100 million shares. Our total outstanding share repurchase authorization as of September 30, was $382 million. Ken will now share his perspective on our performance and outlook.
Thank you, Mary Ann. Let me take this opportunity to again welcome you to Lazard. The global macroeconomic environment continues to reflect significant levels of uncertainty. Global inflation remains at multi-decade highs. To fight this, central banks have engineered sharp interest rate increases around the world, and further rate hikes are likely. Until there is more clarity on interest rates, inflation in the economy, we can expect ongoing turbulence in the capital markets. Amid these challenging conditions, Lazard continues to perform well, and our record third quarter results underscore the strength, stability, and discipline of our model across both our businesses. In Financial Advisory, we delivered record operating revenue for the quarter year-to-date and over the last 12 months. These results were driven by record performance in Europe, despite a slowdown in M&A activity around the world.
While the market is softening, we are seeing an increase in client conversations pertaining to restructuring and liability management. The energy transition continues to drive deal activity in sectors that are less influenced by the business cycle, such as healthcare. Reshoring and infrastructure investment are propelling a range of substantial transactions globally. We are making investments to further diversify our offering for clients in Financial Advisory, including expanding our efforts in infrastructure, broadening our coverage in private credit, and launching a new geopolitical advisory group. In Asset Management, the strength of the U.S. dollar resulted in continued foreign currency headwinds in the quarter, as approximately two-thirds of our AUM are invested in non-U.S. dollar assets. As markets remain under pressure, we are focused on working with our clients as they navigate today's complex global investing environment.
Our research-driven fundamental investment style continues to perform well, especially in our value, relative value, and quality portfolios. Additionally, we continue to innovate around thematic strategies, such as our recent launch of a Lazard Thematic Inflation Opportunities strategy, as well as building upon recent successes in sustainable agriculture and digital health. For Lazard as a whole, we are making investments in people and technology to position us for success through the economic cycle while being disciplined on cost and managing our business for the long term. We remain focused on serving clients while maintaining profitable growth and shareholder value. Now, let's open the call to questions. Thank you.
Thank you. At this time, if you have a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press the pound key. We ask that you please pick up your handset to allow for optimal sound quality. We'll take our first question from Richard Ramsden from Goldman Sachs.
Hey, good morning. Ken, maybe I can start off with a bigger picture question, which is where do you think we've got to in terms of both private equity firms and strategics are adjusting to much higher borrowing costs and less leverage? I mean, I guess, look, the specific question is, it looks as if both short rates and long rates are gonna be structurally much higher than what we've seen over the last couple of decades. What do you think that means for the longer-term growth trajectory of the advisory business?
Look, I think you have to separate out financial sponsors from strategics. Let's talk about the strategics first. I think generally, when you're talking about strategics, you're looking at investment-grade credits that drive the market. Generally speaking, they have strong balance sheets and they tend to be opportunistic during periods of uncertainty, and I think we'll see that. It takes some time for that to happen because you need an adjustment between buyer and seller expectations. I think we're starting to see that, and I think we'll see opportunistic activity across a range of sectors by strategics. It's not gonna be at the levels of, you know, a boom cycle, but I think we'll see more of that.
As people become more comfortable with their ability to predict the future, that is more confidence in their predictions, then I think you'll see activity pick up again on a more sustained basis, but we're not quite there yet. There will be industries, strategic industries, where I think there'll be activity through the cycle. These will be industries which are less affected by the business cycle itself. Good examples of this are ones that have catalysts that will push activity. The best is the energy transition. I think you're gonna continue to see a lot of activity there. I think you're gonna see activity in sectors, again, that are not too influenced by the business cycle like healthcare, perhaps some of the telecom area and such. Moving to sponsors for a minute.
You're much more subject to the non-investment-grade credit environment, and you've seen, obviously, the high yield markets, the public high yield markets have been closed for quite some time. The private credit markets pulled back in the summer. I think until, again, we have more certainty about the future, those markets are gonna be tough. Traditional type of high-leverage sponsor transactions are not gonna be that plentiful. That said, the sponsor universe is an incredibly creative group of participants, and you're starting to see people adapting to the environment. One area is equity-heavy investments. That is, investments where you're finding a financial asset that can be moved and then taking a minority investment in that asset. That's one area where we've seen some activity. You're seeing it in continuation funds.
That's an area that's been pretty active for us. I think in areas where infrastructure is the primary investor, not relying on a lot of debt financing, you continue to see activity that's in the telecom infrastructure space. We're seeing that clearly in the renewable space, and I think you'll see it in some of the moves around onshoring. That's kind of a pick on the landscape. I think candidly, until you see more certainty about the environment, that is people being more comfortable with their predictions about the future with regard to interest rates, inflation, importantly the depth of the recession in Europe and whether and if there'll be a recession in the U.S. and the depth of that recession, I think the financing markets are gonna be pretty volatile.
That's pretty helpful. Thank you.
Our next question comes from Brennan Hawken from UBS.
Hey, Brennan.
Good morning, Ken. Hope you're doing well. Mary Ann, welcome and congrats on the new role. Would love to start off actually by dovetailing on that last question from Richard. You know, we've seen over the past decade what's been described as a secular shift in the share of M&A activity to sponsors or that sponsors are involved with. Certainly some of that's secular, but you know, maybe with the remarkably low rates and buoyant period that we've seen here in the last couple years, you know, maybe some of that was also a bit cyclical. Do you have a view on how much of the shift was secular versus cyclical? You know, how are you thinking about the shift that you've been making towards sponsors, you know, given the potential for some of that to reverse?
Yeah. There's clearly been a mix of both. Secular in the sense that just the sheer magnitude of money that is being managed now by the sponsor universe compared to where it was even 5, certainly 10 years ago, is vastly different, and that's gonna continue. There's just been a tremendous demand for alternative investments, and we'll see some pullback on funding because of the pullback in assets under management by the end owners, but I think the allocation still will remain pretty high.
Therefore this funding, this secular move towards alternative investments, particularly private equity, is gonna continue for a while, and that money has to be put to work. That's the secular part of it. Clearly, there have been some cyclical elements to it. That is the turnover portfolio perhaps being pushed to a degree by the ability of very low-cost financing that is sponsor-to-sponsor deals are probably more manageable in a very low financing environment. There's alternatives for a lot of these companies, which at the right pricing the public markets and alternatively to strategic. I think it's gonna be a strong environment from a secular standpoint, some pullback in cycle.
Actually that mix that kind of environment is almost tailor-made for the kind of positioning we have with regard to our mix between strategics and sponsors. We were way underweighted a few years ago. We're more balanced today, but we never have gone nearly as far as some of our competitors with regard to commitment to sponsor activity.
Fair. Sure. Okay, it sounds like you think it's the cyclical piece was more of a supporting role than the starting one.
Yeah.
Okay. That's helpful. Shifting gears to the comp ratio. We saw it increase by about 150 basis points this quarter versus where you had been running year to date. What drove that increase, and how should we be thinking about the comp ratio for the full year?
As you know, comp ratio is at this point in time always our best estimate of what it will be for year-end. Of course, this is a business where what happens in the fourth quarter, that's when we pay people, that's when we get to see what's going on in the outside environment and so on and so forth. You don't really know your final decisions till you get through year-end. That said, you have to remember, we're a little bit different from some of our peers in that we have two businesses, the Advisory business and the Asset Management business. As you know, the Asset Management business operates on a different set of characteristics than the Advisory business, particularly with regard to comp ratio.
You can see what's happened in terms of the contribution of revenues from the Asset Management business to the overall revenues of Lazard. If you do the math, you can see what the impact could be on compensation.
Okay, thanks very much.
Our next question comes from Devin Ryan from JMP Securities.
Oh, hey, this is Devin Ryan. Good morning, everyone, and welcome Mary Ann as well. I guess first question just on the environment. You know, Ken, you talked about M&A activity, I think industry-wide has been slowing, but, you know, Lazard is a very, you know, diverse business, and businesses like restructuring and debt advisory and activist and defense are accelerating in this backdrop. Love to just maybe put it all together and think about, you know, what client engagement overall, when you think about all those pieces of your business, it looks like today, relative to maybe a year ago when M&A was hotter, but some of these other businesses were less active.
Yeah. Look, in our business, you always prefer an active M&A environment than any other environment because it obviously is what provides the best outcomes, I think, with regard to fees and revenues and everything else. It's just that is a buoyant atmosphere. That said, you know, as you pointed out, we're constructed to be able to take advantage of a lot of different environments. I think the breadth of our business, both geographically and across a range of industries and capabilities, helps offset or buffers some of the drop in the M&A activity. It never fully offsets it, as we all know. What we're seeing is, in fact, what happens in these environments is dialogue tends to go up as things get worse, but that doesn't mean there's as many transactions.
At the same time, we're seeing a lot more dialog around liability management than we did a few months ago. As you'd expect, when you have the, you know, drop in earnings combined with increase in interest rates, companies that need to go to the market are gonna be constrained and, you know, they have to start thinking about alternatives. We're seeing a real uptake in everything around the energy transition. That just is an area of a lot of activity, both in the U.S. and in Europe. I think some of the areas that I pointed out before that are less subject to the business cycle are gonna continue to do well here. This is an environment where you're spending a lot of time with clients and you're trying to solve problems oftentimes that aren't necessarily built around M&A, and that's something which we do from cycle to cycle.
Okay. Thanks, Ken. Great color. Shifting gears, just want to talk about capital return and the buyback. Clearly, there's been, I think, a shift internally at Lazard around just the appetite for buybacks and, you know, 17 million shares year to date and almost 7 million in the third quarter. You know, just the pace is continuing here. Love to just think about, like, how you guys are internally thinking about capacity for buybacks and maybe appetite from here. I know you have $1 billion of cash, but you have to earmark some of that for compensation. Just how we should think about capacity, and also ability to continue at maybe a similar pace, just given that, you know, it is starting to move the needle on, you know, I think shareholder value, in my opinion.
Yeah, we agree with you on that, hopefully. Obviously, at the levels that the stock is at, it's been attractive to buy back shares. We will, with the resources we have, continue to take advantage of that. Again, this is a very cash-generative business through the cycle. As you know, we allocate a certain amount of that cash to dividends and the remainder to buyback. That's how I think you can expect it to unfold over the course of the next period of time. We have a very large share authorization outstanding, and at these levels, we think there's value in buying back shares, and I think our goal is to continue to do that.
Terrific. Thanks so much.
Our next question comes from Manan Gosalia from Morgan Stanley.
Hi, good morning, and welcome, Mary Ann. I had a question on the Asset Management fee rate. You know, that's been steadily climbing. I know part of the reason is that the outflows earlier this year were from some of the lower fee mandates. Is the same thing happening this quarter as well? I guess question is, how much more room does that have to run where you might see a few more outflows here or a little bit more mix shift, but you should see the fee rate climb? Thanks.
Hey, Manan, it's Evan. I'll take that one. Yeah, look, as you mentioned, last couple of quarters, we've seen the sort of stabilization actually increase in the average basis points, average fee rate for the bulk of our business. As you correctly pointed out, and we talked about this last quarter as well, some of the outflows that we've seen in the past two quarters were from lower fee platforms, lower fee products, couple larger mandates, so that had an impact. Generally, as you point out, look, at the end of the day, the average fee rate is driven by the mix of assets that we have, and a little bit on the vehicle mix as well, and that sort of shifted a little bit more into our favor.
We've also had some strong flows and performance this year in many of our equity products that we've had, some of our listed infrastructure, global equity, global franchise and other areas. We've also seen some less pressure from some of the outflows that we've seen in the past from EMs. That's all sort of contributed to the sort of creating a more stabilized average fee rate over time. Look, I expect it to still be lumpy, and it's gonna be dependent upon the business mix and the mix of assets going forward.
Got it. Thanks. Just a quick question on the FX side. I was wondering, has there been any material impact from the stronger dollar on your pretax margins? I mean, I know there's a headwind to revenues on the translation and the benefit to expenses, but is there any mix between regions that we should be thinking about between expenses and revenues that might have already had an impact on your pretax margins year to date? Thanks.
Yeah. Look, I think on the FX component, as you mentioned, look, the biggest part of the FX impact is that you're gonna see it in the AUM that we see, because obviously, as we pointed out, we have about two-thirds of our AUM is in non-U.S. dollar assets. You're gonna see it in the translation to that component. But as you correctly point out, Manan, look, at the end of the day, as we get closer towards year-end, you're also gonna see some impacts on the expense side because many of our non-U.S. dollar assets can also be the expense part of those assets that we manage sometimes are in different areas around the world, which could have different currency impacts, and that could have an impact on margin, specifically in the asset management business.
Overall, I'd say, you know, if you wanna comment about the general business, I'd say, look, you know, FX plays a role. We're a large company that has a significant portion of our overall business in foreign currency and non-U.S. dollar denominated. That does have an impact on the expense line as well. Yep.
Got it. Thanks, Evan.
Our next question comes from Steven Chubak from Wolfe Research.
Hey, Steven.
Good morning, guys. This is Brendan filling in for Steven. To start, I wanted to follow up on Devin's question on capital return. I appreciate that you will continue to use the excess cash to repurchase shares, but wanna get a sense as to how we should be thinking about the cadence of the buyback from here in light of the elevated levels of macro uncertainty and your ongoing, you know, commitment to invest in the business.
The issue on investing in the business is, usually, you know, so far the investments we've made in the business are organic in nature, and they run through the comp line. That's the, you know, kind of the beauty and the curse of being in a people business. To the extent that we continue to do that, it doesn't really have much of an impact on the capital return policy other than the fact that if you overdo it, you end up driving down earnings, obviously. To the extent that we're producing earnings, our goal is to return as much of that cash as possible to shareholders and the balance between dividend and share buyback.
There's a lot of room between the amount that's left over from dividend and share buyback at the levels we're operating at today. To the extent that we have that cash and we see value in our stock, and I say see value in our stock, we'll continue to buy it back.
Great. Thanks for the color. I guess I wanted to dig in a bit more on Europe. You obviously had record results in the region, but we've seen in the public data that new business activity has steadily slowed as the years progress. Wanna get a sense as to how the velocity of new deals has changed over the past three months and what your outlook for activity in the region is going forward relative to the U.S. as it feels like headwinds there are a bit more acute, given, you know, the reliance on, Russian natural gas exports, the volatility in Britain that we've seen recently and the like?
Yeah. Look, I would say our performance for the first nine months of this year were against a terrible backdrop in completed transactions in the market. There was a big drop in Europe for the first part of the year in announced deals, I mean, in completed deals for the first nine months. You know, we way outperformed. I think that everybody is being impacted across the globe by this downturn in activity. It is both in Europe and in the U.S. What has stood out for us in Europe, I think, is a combination of things for the first nine months, which was a really excellent franchise that's been focused on the areas that have been active. To the extent that activity levels fall across the board, that's gonna impact us as well.
My guess is, you know, the real challenge for everyone right now is building backlog into the first part of next year and later into the year. That doesn't only apply to Europe, it applies to the United States. I think that's the challenge at the moment that we're all facing.
Great. Thanks for taking my questions.
Sure.
That was our last question. This now concludes the Lazard conference call.
Thank you.