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 Deignan, 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 Deignan, 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. 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 in 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 Mary Ann Betsch, Lazard's 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. 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, Ally. 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 US, 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 $0.50 per share. Ken will now share his perspective on our performance and outlook.
Thank you, Mary Ann. 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. 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. We believe the M&A market is stabilizing and that conditions may be in place for the beginning of a rebound. It's important to be realistic about the likely pace of such a recovery. Most M&A cycles, you see deal activity recover in fits and starts.
Just as M&A completions reflect market conditions when deals were announced 6-9 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 US dollar has 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 7 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 Lazard into the next chapter in its storied 175-year history. Let's open the call to questions.
Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. Others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Ryan Kenny with Morgan Stanley.
Hi, good morning. Thanks for taking my question.
Hi, Ryan.
Wondering if you could just give us some more color on the comp ratio? The adjusted comp ratio came down substantially quarter-over-quarter. How are you thinking through the trajectory of that for the back half of this year and into next year? What activity level outlook is embedded into your comp reserving? Thanks.
Sure. I'll take that one, Ryan. As I said, the $68.4 that we accrued this quarter is our estimate for the remaining quarters of the year, and that takes into account our estimation of the headcount reductions that we've done year-to-date, the attrition that we expect through the remainder of the year, and the hiring plans that we have through the rest of the year. That's sort of our best estimate, fully loaded with everything that we're planning. What you see driving year-over-year, the sort of elevated comp ratio is that we do have a fixed component, as you know, from the deferrals that we had last year, that's driving the adjusted GAAP ratio.
You will see the headcount reduction savings coming through in the awarded ratio, which reflects what we pay our people in the current year.
Yeah, just in terms of revenue outlook for the year, we expect that the second half of the year will be better than the first half, but it will be more weighted towards the fourth quarter, is our expectation, which obviously has some risk associated with that. That's on financial advisory. I'm sorry.
On the comments around conditions being set for a rebound, is there any more color you can give us on how much the pipeline has increased and how foundational versus fragile it feels?
I would say it's fragile. I think it's early. I think it's bottomed at this point, the market. We've seen for the industry, you know, a 50%-60% decline in completions over the last couple of years. We feel like that is bottoming out at this point. For all the reasons I pointed out in the script, it feels like there's a little bit, there's more dialogue, there's more discussion. Feels like there's more activity, but this has to translate into announcements. Then announcements have to translate into completions. It's early, but it's improving.
Great. Thank you.
Thank you. Our next question will come from Steven Chubak with Wolfe Research.
Good morning. This is Brendan O'Brien, filling in for Steven. To start, I just want to discuss Europe a bit. You know, commentary on the outlook was encouraging, but it feels like central banks in Europe are running behind the Fed a bit in terms of where they are in the rate hike cycle. We've seen how the uncertainty on the path of rates has impacted activity in the U.S. so far. Given you guys are close to the market, it would be great to get your perspective on the dynamics at play in the region and how activity and conversations compare to the U.S.
I think our experience in Europe is a little bit divorced from the market. We've had a reasonably strong year relative or a strong year relative to market conditions in Europe, overall, on the advisory side. I think you're right that the central banks are a little behind the U.S. We expect that conditions are going to remain tougher for longer. On the flip side of that, you've seen this, you know, obviously very strong rebound in equity markets in Europe, which actually matched the broad indexes in the U.S. which is the first time we've seen that in a long time. I think it's a little behind, but at the same time, there are a lot of factors, like there are in the U.S., that give us confidence that it's beginning to stabilize.
That's great color. Thank you, Ken. Then I'm just turning back to the comp ratio. I know it's early days here, but I want to get some more color on how you're feeling about the progress on your cost-cutting initiatives. Based on the slide deck, it seems as if you're already taking down your head and headcount in advisory pretty meaningfully. It feels like you're running a bit ahead of schedule. Also just given your commentary on the lag between announcements and completions in M&A. If you could speak to your ability to get the comp ratio back to the targeted range in 2024, or if we should be thinking about it being more of a 2025 type story at this point?
Look, the GAAP comp ratio is a function of past compensation practices, and pay, and current revenue environment. 2024 is going to be really a function of our discipline around costs and compensation in people, which we embarked on in the first quarter, largely completed, although it doesn't show up in the head count until, you know, until you get to the end of the year fully. Just given the pace of the departures and such in different jurisdictions. With regard to 2024 and 2025, what I would say is that it depends a lot on the revenue picture.
I think on an awarded basis, we have more confidence that we're going to get back to our margin targets than necessarily on the GAAP, because we don't really control the deferral in a given year. A lot will depend on the environment. The whole goal of this exercise, this initiative in the beginning of the year, was to put us in a position for an environment that we thought was going to be tougher for longer. We do not expect that there will be a rebound in 2024 like we saw in 2021.
As a result of that, we wanted to take the initiative to prepare ourselves for a more difficult environment, and also at the same time, free up dollars on a disciplined basis to invest in markets where we think there is more attractive fee pool than in some markets where we historically have had investments in the past. I think you can see that in our moves in the first quarter, and I think we're on track to accomplish this right now. We are on track to accomplish this.
Great. Thank you so much for taking my questions.
Thank you. Our next question will come from Devin Ryan with JMP Securities.
Great. Good morning, everyone.
Hey, Devin.
Hey, I just wanted to stay on this point, around investments and I guess recruiting. Clearly, some of your peers are really aggressively in the market right now. We're talking about just how good conditions are to bring in talent and, you know, arguably less focused on kind of intermediate-term margins or kind of reversion to the mean in margins than you guys have been. So, philosophically, you know, some differences. You know, you're right sizing in certain areas, as you mentioned, Ken, then there's maybe opportunities in other areas. I'm just trying to kind of put together if we are seeing some green shoots in the market, and maybe on the margin, the revenue outlook for 2024 is brightening a bit.
You know, does that embolden you guys to maybe get more aggressive on leaning in on investments into the areas where you want to grow? Just, you know, love to kind of just put that all together and think about, you know, the ability to recruit here and whether you guys are kind of going the other direction of peers, or maybe it's just the way you guys are framing relative to some others. I think I'll let Peter take this question, because it's about the future.
Sure. The short answer is we are actively in discussions about recruiting high productivity managing directors. There are a variety of sectors where we see plenty of opportunity for expansion. I wouldn't tie this directly to, you know, exactly when the M&A cycle turns, because when you're making a decision about hiring a senior banker, that's a medium to long-term investment, not a year-to-year investment. That part of your question, I would just say that's not really how we think about it, but we're definitely very actively in the marketplace, looking for the right fit, and we're gonna be selective about the people that we bring onto the platform. Looking for those areas of high productivity that we can add in a profitable way.
Back to Ken's point, one of the motivations for the cost saving initiatives that we announced earlier on was to make sure that we had the room to make these investments, even in a tougher year overall for the market.
Okay, that's very clear. Thank you so much. A follow-up, maybe for Evan, if I can, on Asset Management. If you just go back and look at AUM over the past, you know, roughly decade, it's kind of ranged around $200 billion, up to, you know, $250 billion range. You know, I just want to think about whether, especially as that business has evolved over the past decade, you guys feel like the business is at the scale required to operate kind of an optimized business model there. You are performing well, but just how you think about that business relative to an optimized level. Is there maybe an idea to look to scale that quite a bit more?
I know there's an active pipeline of new products, and those will all contribute, but they seem like, you know, kind of more singles than triples or home runs. Just how you guys feel about maybe the view that that business should be quite a bit bigger within Lazard. Thanks.
Evan.
Sure. Hey, Devin. Yeah, look, historically, I think the way we've always thought about the business is not about the absolute size of AUM. It's really about making sure you've got scale in the platforms that you're operating in, so scale in the products that you're in. Making sure that you can be relevant in the markets, and be a player in the markets that you're in. It's gonna go up and down based on markets and based on allocations, where clients want to put money at any point in the cycle. I don't think that we focus on the absolute number across the business as much as we think about are we scale across the different platforms. There certainly are opportunities.
We've done a lot of different types of organic growth over the years and sort of setting the stage with different types of new products that we've been developing. As you know, products take, you know, new areas can take 5+ years to kind of continue to grow. Some of our largest platforms today were built by us over the past decade, that grow into $10 billion, $20 billion, $30 billion platforms over time. We have to stay focused on continuing to build out, think smart, think ahead of where we're going. I think over time, we're certainly continuing to think about where the world is going and where those opportunities should be for our clients, where the clients want us to be.
You know, we're gonna continue to invest into the platforms that we have, to continue to grow those over time, organically, as we have, and continue, as we've said publicly, to look for inorganic opportunities across areas where clients have, you know, significant interest that we don't play today.
All right, thanks very much.
Thank you. Our next question will come from Jim Mitchell with Seaport Global.
Hey, Jim.
Good morning. Hey, maybe just jumping back to sort of the pretax margin targets and the cost saves. I think you had talked about, you know, getting back to a normal type of revenue environment, say, 2018, 2019, that can get you back to sort of those historical margins, potentially next year. Is that more of an awarded comment? Is that still possible if we can get to sort of 18, 19 revenue, revenues, 18, 19 revenue levels in 2024? I just want to make sure I understood the comment.
I think that's a pretty good direction. We get to a normalized revenue environment, we should get back to our margin targets on an awarded basis.
Okay. Maybe just following up on your announcement on the capital solutions group. Seems like Lazard has been doing providing those services. Just want to make sure I understand the strategic importance of putting them all together under one roof. I think you mentioned it's still separate from restructuring, but complementary. Wouldn't it make sense to put them all together, even restructuring? Just trying to get a sense of how you feel like that's going to help drive growth from here.
Okay. What this is really addressing is the rise, the significant and very substantial rise in the private credit markets and accessing that source of capital. It's a very flexible, very creative source of capital that now competes, if not equally, even ahead of what traditional financing banks, public markets do for our corporate client base and our restructuring client base. Coordinating that dialogue, having those dialogues with those sources of capital, I think is a unique proposition at this moment. We're kind of making sure that we're running that like you would run a debt, a capital markets desk.
Really making sure we're talking to all the sources of capital on a daily basis, and making sure that we have knowledge of where those sources of capital are, and making that available to our corporate and restructuring clients.
Yeah, okay. That's clear. Thanks.
Thank you. Our next question comes from James Yaro with Goldman Sachs.
Good morning, and thanks for taking my questions. Good morning. Peter, maybe we can start with you. I know you've yet to take over as CEO, but you've obviously talked a little bit about the future so far this morning. Maybe just any thoughts, any early thoughts on your plans and outlook for the future of the business?
Peter, go ahead.
Well, look, obviously, we'll have a lot more to say in October. I'm going to hold the bulk of it for that moment, which seems more appropriate. At the broadest level, we start from a position with fantastic people and a really remarkable brand. A lot to build on. On both sides of the business, see significant room for expansion, both in advisory and in asset management. I think, maybe with regard to, you know, anything more detailed, it would be better for us to wait for October.
Fair enough. Okay, just... We've seen a number of mixed signs as it relates to antitrust. On the one hand, you know, certain challenge deals in the US appear likely to close, at the same time-
Yeah
We've just received new proposed antitrust guidelines. How are you thinking about the risks of enhanced global antitrust scrutiny and the impact on large cap M&A? I guess it'd be interesting to get your views on both the U.S. but globally as well.
I guess I'll take that. It's Peter again. Listen, I do think it's a little bit different between the U.S., the U.K., and the EU in particular. To start with the U.S., I mean, the very interesting dynamic is, while you're right, that there are new proposed guidelines, there's also new HSR filing requirements that have been put forward. I think the big news over the past couple of months have been the court decisions, especially, you know, the most recent one. The question becomes whether what's going to happen here is if the courts continue to rule against the FTC and the DOJ in the United States, whether deals will proceed, but just with additional time duration to build in the need to litigate and additional expenses for lawyers.
It's a very interesting moment. As you may know, Lina Khan did speak about this earlier in the week and said that she was still kind of proceeding as she has been. I think with 2 more court decisions that go against the government, the phenomenon that I just mentioned, in which deals will proceed but build in additional time and cost to litigate, because there's ultimate confidence that in court, the deal will be approved, is the thing to watch over the next year or so. U.K. and EU, different situation, obviously different environment. I think what you should be looking for there is how much they diverge from the initial inclination of the U.S.
We've had some recent cases in which, I mean, I think there's a perception that it's all fully coordinated, but there have been some prominent cases recently where there have been divergences, and that's the thing to watch, for the EU and for the UK authorities.
Okay, that makes a lot of sense. Just one other quick one that I feel obligated to ask, which is just, you know, there were a few press reports a few months ago about a potential sale of Lazard. I just wanted to see if there were any comments that you could make on this.
No. No comments beyond what we didn't make in the first place.
Okay, fair enough. Thanks a lot.
Thank you. Our last question will come from Brennan Hawken with UBS.
Hey, good morning. Snuck under the wire. Thanks for taking my question. Peter, welcome and congratulations on the new role. Looking forward to working with you.
Thank you.
Peter, I totally appreciate, Peter, the idea to not get in ahead of yourself, that's very, very sensible. One question I would like to ask, though, is just philosophically, when you consider Lazard stock, the performance of Lazard stock over the past, uh, many, many years, and pathways and avenues to create value, you know, could you maybe is everything on the table? In the past, investors have asked about certain potential avenues which were previously sort of not really, uh, considered or viewed as potentially attractive. One question I regularly get from investors is whether or not a fresh perspective might open up all potential avenues and, at least for reconsideration or a fresh perspective.
Is that a philosophical question, at least a fair one to consider at this stage?
Sure. Look, as I said, we'll have a lot more to say in October. It is fair to say we're taking a fresh look at everything. That doesn't mean that the answers are going to change, but it does mean that we're taking a fresh look at everything in the, in the run-up to October.
Right. Okay. Thank you. Appreciate that. Just a couple ticky tackes. I don't think you guys provided AUM, which you normally provide, a sort of quarter to date. Any maybe update on AUM and flows? Could you give a sense, the advisory was quite strong? We're hearing restructuring picking up from some of the competitors. You know, was that a strong contributor here? How is the outlook for restructuring for the rest of 2023 and into 2024?
Two parts to the question. Why don't I let Mary Ann take the AUM question, and then I'll answer the restructuring question.
Sure. We've decided, Brennan, going forward, that because we give the AUM and the composition of the change every month, that we're not going to be doing that mid-month anymore because it can change a lot throughout the course of the month, and you'll have it as of the end of the most recent month at any point in time. We won't be doing that going forward.
Got it.
On restructuring, no, it wasn't a particularly big part of the quarter. It was a contributor, but not a standout.
Got it. The outlook?
Outlook is, as I said, I think that, the outlook for restructuring is improving. There's more activity. We expect with the significant maturities coming up, next year after year after that you're going to see, more restructuring activity. Credit conditions are going to probably be a little more challenging when that debt was originally financed, and more importantly, interest costs are going to be much higher. I think the stress on companies is greater, and that's why I alluded to the fact that we may be in one of those moments where you get a improvement in the restructuring activity, at the same time, you have more M&A activity.
Yeah. Okay. Thanks, Ken. I know how much you love my multiparters.
I love your multiparters. They're great.
All right. Thank you. We have no further questions in the queue. I would now like to conclude Lazard's second quarter 2023 earnings conference call. You may disconnect at any time.