Lazard Ltd (LAZ) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Lazard's Third Quarter 2012 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I'll turn the conference over to Judi Frost Mackey, Lazard's Director of Global Communications. Please go ahead.

Good morning, and thank you for joining our conference call to review Lazard's results for the third quarter and first 9 months of 2012. Hosting the call today are Ken Jacobs, Lazard's Chairman and Chief Executive Officer; Matthieu Bucaille, Chief Financial Officer; and Alex Stern, Chief Operating Officer. A replay of this call will be available on our website, lazard.com, beginning today after 11 a.m. Eastern Daylight Time. Today's call may contain forward-looking statements. These statements are based on our current expectations about future events and are subject to known and unknown risks, uncertainties and assumptions. 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. These factors include, but are not limited to, those discussed in Lazard's filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Today's discussion may also include certain non-GAAP financial measures. A description of these non-GAAP financial measures and their reconciliations to the comparable GAAP measures are contained in our earnings release, which has been issued this morning. For today's call, we will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and in our investor presentation of supplemental information, both of which are posted on our website at lazard.com. Following their remarks, Ken, Matthieu and Alex will be happy to answer your questions. I will now turn the call over to our Chairman and Chief Executive Officer, Ken Jacobs.

Good morning. Thank you for joining our call. Entering the fourth quarter, Lazard's 9-month operating revenue is near peak levels. While the macroeconomic environment remains challenging, our performance year-to-date underscores the strength of our independent, advice-driven model. Our M&A and Strategic Advisory business is up 5% for the year, despite a drop in third quarter and even as the global M&A market of completed transactions declined 26%. Currently, we are advising on 4 of the top 10 M&A transactions announced this year. All 4 are cross-border, demonstrating Lazard's global breadth. In Asset Management, our global business is at peak levels. AUM, as of September 30, is at $160 billion, near its record high. Operating revenue is up 7% over the second quarter. Our investment platforms around the world continue to perform well. We have higher demand for our products across asset categories and geographies, from new and existing clients. Trends in global Financial Services continued to favor Lazard. First, as universal banks and integrated investment banks undergo secular changes to their business models, we are gaining market share as measured by advisory fees. Before the financial crisis, the difference in fee market share between Lazard and the market share leader was approximately 4:1. The difference today is roughly 2:1. Second, as more than 1/3 of global M&A transactions become cross-border, we are the only independent advisory firm with truly global scale to serve clients. Smaller firms need to invest heavily to gain similar scale, and which still do not have the tightly-knit network that Lazard has developed over decades. Third, as investors demand diversified investment solutions, our Asset Management business is well positioned to win mandates with innovative offerings and strong investment returns across our platforms. Fourth, as investment markets evolve in the developing countries, our Asset Management business should be -- should benefit from its global footprint, broad array of solutions and respected brand. But we're not relying on these positive trends alone. We are driving efficiencies and enhancing operating leverage by reducing our expense base, and we are orienting the firm's growth toward areas where we see the greatest potential return. Growth initiatives include organic expansion, hiring, opportunistic hiring and deepening relationships across both businesses. In Financial Advisory, we continue to develop our range of advisory capabilities. We are expanding on relationships in client board rooms by providing advice in areas such as capital structure and corporate preparedness. These services dovetail with our general M&A practice and solidify our role as our clients' most trusted financial advisor. We are also growing with our advisory clients in developing markets. In the third quarter, we integrated our Brazilian operations based in São Paulo. We created Lazard Africa to leverage our sovereign and corporate expertise in this rapidly growing region for our clients in both developed and developing countries. In Asset Management, we are encouraged by the continued strong demand from clients around the world. In our emerging markets platform, we continue to gain traction in our developing markets multi-asset and a small-cap strategies. Our multi-regional platform has produced strong patterns of performance resulting in several mandates. In local equities, we have won mandates in U.K. equity, U.S. equity and Australian equity strategies. And in fixed income, we have seen robust demand for emerging market debt and global fixed income offerings. Lazard Asset Management is extending its global footprint with new offices, one that recently opened in Zurich and a planned opening in Singapore. In sum, we are aligning Lazard so that we are in the right places, with the right people to help our clients capitalize on opportunities anywhere in the world. We are building value for our shareholders by allocating our resources to areas with the highest growth potential. We are taking steps to run more efficiently in a challenging market environment, and we have significant operating leverage to outperform as the global economy improves. Matthieu will now provide some color on our third quarter results and capital management, followed by Alex who will talk about our cost-saving initiatives.

Thank you, Ken. Our 9-month operating revenue is near the peak level, which was set last year. Third quarter operating revenue was down 5% compared to the prior year. In Financial Advisory, the third quarter decline in M&A and Strategic Advisory reflected lower market activity although we outperformed the market. Restructuring was also down 10% from last year's third quarter, reflecting the general decline in corporate restructuring activity. On a 9-month basis, Financial Advisory revenue is up 1% from the prior year, driven primarily by M&A and Strategic Advisory. Asset Management revenue increased in the quarter on higher management and incentive fees. Management fees are up 4% sequentially and 1% over the prior year third quarter. AUM increased 8% sequentially to $160 billion and was up 18% over the previous -- over the prior year third quarter. In the third quarter, average AUM was $157 billion. This bodes well for management fees in the future. Now we'll turn to expenses starting with non-compensation expense. We had an improvement this quarter, reflecting in part the early stages of our cost-saving initiatives. Non-compensation costs in the third quarter declined 4% from the prior year and 10% sequentially from the second quarter. This reduction was primarily due to lower professional fees and business development expenses. However, we expect to see most of the benefits from our cost-saving initiatives in our non-compensation expenses in 2013. Although we may see some seasonality and volatility in the next few quarters, we anticipate the trend line to be favorable. Regarding compensation expense, we focused on awarded compensation in managing our business. Awarded compensation reflects the cost of all pay, including deferrals, for the year with respect to which it is awarded to the employee. And bonuses which are the bulk of compensation are not set until year end. Our goal is to achieve a compensation ratio over the cycle in the mid- to high-50s percentage range on both an awarded and GAAP basis. The cost-saving initiatives announced in our press release are significant steps toward achieving this goal. For the third quarter of 2012, our adjusted GAAP compensation ratio was 62.7% compared to 62.0% for the full year 2011 and compared to 59.3% for the third quarter of 2011. Our third quarter adjusted GAAP compensation ratio also continues to reflect deferred compensation awards from 2008, which had a 4-year vesting period. Our awards since 2009 have a 3-year vesting period. As previously stated, we expect our amortization expense to revert to a lower level in 2013. Regarding capital management, one of our stated financial goals was to return $200 million in surplus cash to shareholders in 2013. As of today, we've achieved this goal 1 year ahead of schedule through share repurchases above and beyond the move made to offset potential dilution from year-end stock unit grants. Year-to-date, we have returned $432 million to shareholders through dividends and share repurchases, including the $200 million in surplus cash. Alex will now provide more detail on our cost initiatives.

Thank you, Matthieu. In our April shareholder letter, the firm set financial targets, including an operating margin based on GAAP and awarded compensation of at least 25% in 2014 even at current activity levels. We stated that to achieve this goal, we will take measures to reduce the firm's expense base and that these measures would result in implementation costs. A great deal of planning has gone into developing our cost initiatives. We are confident they will result in increased profitability with minimal impact on Lazard's revenue growth. We're focused on several areas. One, reorganizing support functions to leverage efficiencies across business segments and geographies. We've identified significant opportunities for streamlining legacy operations. Two, reducing investments and staff in areas of low return so we can devote more resources to areas with greater long-term growth potential. Three, renegotiating or exiting certain third-party contracts such as data services and real estate. Deflationary trends in the Financial Services industry are a tailwind as we drive down costs from third parties. These initiatives will primarily impact our support functions and Financial Advisory business and will not affect our core Asset Management businesses. Once these initiatives are completed, we anticipate approximately $125 million in annual savings from our existing expense base, of which approximately $85 million is expected to come from compensation and $40 million from non-compensation expense. The majority of initiatives are expected to be completed during the fourth quarter of this year. As a result, we anticipate 2/3 of these savings will be realized in 2013 with the full impact realized in 2014. We estimate implementation expenses associated with these initiatives will be between approximately $110 million and $130 million, the significant majority of which will be incurred in the fourth quarter of 2012 and the remainder in the first half of 2013. Approximately 75% of the implementation expenses are expected to be in cash. The noncash expense will primarily reflect the acceleration of certain restricted stock unit grants. We expect these initiatives will have a limited impact on our 2012 expense base. However, we anticipate our 2012 awarded compensation ratio will be somewhat less than 60%. In addition, we expect to reach an operating margin of approximately 21% or 22% in 2013 on both the GAAP and awarded basis, creating a clear path toward achieving our target of a 25% operating margin in 2014, all at current activity levels. Ken will now conclude our remarks.

Thanks, Alex. In the shareholder letter last April, we focused on 3 objectives to drive shareholder value: Revenue growth, cost discipline and efficient use of capital. Our announcements today position us to achieve all 3. For revenue growth, the steps we've taken put us in a better position than ever. The breadth and depth of our global network remain unrivaled. We are reallocating resources to areas where we see the highest potential for return. We see substantial growth opportunities, and we have the financial flexibility now to capture them. In terms of cost discipline, we are already seeing results. We are confident our initiatives will improve profitability with minimal impact to revenue growth. We are making progress toward achieving our target operating margin of 25% in 2014, even in the event that we remain at current activity levels. Regarding capital, we beat our target of returning $200 million in surplus cash to shareholders in 2013. We continue to returning capital in share repurchases and dividends, $432 million, year-to-date. As we achieve our objectives, we're creating value for shareholders of whom Lazard employees are the single largest group. We are confident the actions we are taking will significantly benefit our firm, our clients and will create shareholder value. In short, we are managing the firm to the same standard of excellence as the advice and solutions we have always provided to our clients. We're happy to take questions.

[Operator Instructions] We'll take our first question from Joel Jeffrey with KBW. Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: I apologize if I missed it earlier. Did you give -- can you just repeat if you gave the guidance for awarded comp in 2013?

We're not -- in 2013, what I said or what Alex pointed to was the operating margin target of 21% or 22%. Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: Apologize for that. Okay. And then I got a question, in terms of the Asset Management business, incentive fees were certainly a bit stronger than what we were looking for. Can you talk a little bit about what was going on there in sort of the sustainability of those at these levels?

Incentive fees were stronger in the third quarter than they were in the second quarter because of the anniversary date on a few contract that we have and led to have higher incentive fees on a few strategies. With respect to generally the incentive fees for the fourth quarter, it's really very much too early to tell anything. I think we'll have to see where the market goes. Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And then, in terms of the cost savings on the noncomp side, is the additional $40 million inclusive of the declines we saw in the current quarter? Or is that something on top of what we saw this quarter?

This is Alex. It's on top. It's going to be spread across several areas from technology and IT to professional fees and occupancy. And what we're really seeing -- we're seeing deflationary trends in the Financial Services industry that are a tailwind as we drive down cost from some of these third parties.

Yes, but Joel, just to your question, it's on top of what we saw in the third quarter. Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. Okay. And then just lastly, do you have any comment on the announcement about some of the board departures this morning?

Sorry, can you repeat the question? Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division: I'm sorry. In terms of the -- it looks like Gary Parr and Vernon Jordan are resigning from the board. Can you give any comments on that?

Sure. Yes, first of all, they're not departing the firm. Both Gary and Vernon are highly engaged in client activities and are very much involved in everything that goes on in terms of the firm strategy as well, particularly Gary with his deep understanding of the Financial Services sector. Look, what we're addressing here is the following: One, we added a new director today, Andy Alper, that I think we targeted in our shareholder letter. We said, we'd add 2 new directors this year. He's the second director. The first was Dick Parsons. And in the case of Vernon and Gary, I think, we're just trying to reflect the governance environment we live in, which is to have more outside directors. Both of them will provide ongoing advice to the board as advisory directors. And I don't think we're going to miss a beat.

We'll go next to Howard Chen with Crédit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Ken, on the advisory environment, you're always helpful in framing where you think we stand on market optimism, valuation and financing. So I was hoping to get an update there? And just can you compare and contrast what you and the team are hearing from buyer versus seller and maybe across the different regions of the advisory business?

Sure. Happy to. Look, I kind of use the same framework -- you've heard us use the same framework for the last few years. Valuation, financing, confidence. Valuation, generally, still pretty reasonable even in the -- even as a result of the market. The stock market picked up over the last several months or so. When you compare valuations to organic growth opportunities, it's still pretty favorable. On financing, aside from the small mid-sized market in Europe, generally speaking, financing is pretty favorable as well across geographies. Where the issue exists, which has been the case for the better part of the last 4 or 5 years since the advent of the crisis, is around confidence. And here, it's really a function of a couple of things. One is there's still uncertainty about the macroeconomic performance and overall globally. Second, I think, the impact of the fiscal cliff in the U.S. has probably tamed activity. Whatever happens in the presidential election is going to result in a lot of attention being addressed to this issue. And if it gets behind us, that's going to have a pretty positive impact we believe on CEO confidence, especially given the fact that the macroeconomic environment in the U.S. seems to be improving. With regard to Europe, what I think is happening is on one side, there's been some positives, which is the actions of the ECB and the overall policy approaches over the summer were, in part, what's behind some of the market recovery, the stock market recovery. I wouldn't say confidence has improved dramatically in Europe, but at least it sets the ground for things stabilizing a bit. But the macroeconomic environment in Europe remains very difficult. And then with regard to, broadly speaking, the emerging markets, bottom line is if the U.S. gets a pickup in activity, it really will lift a lot of these markets as well, which is something we haven't seen for quite some time. So overall, it all comes back to confidence right now. Howard Chen - Crédit Suisse AG, Research Division: Okay. And then shifting gears, Alex, just to clarify the $125 million savings targets and that 21% to 22% operating margin target in a similar revenue environment, that implies to me that you're dropping the $125 million to the bottom line rather than reinvesting a part of that back in the business. Is that fair to say?

Yes, don't forget in our base compensation level, we have reinvestments in there. We have recruiting in our base compensation level. So that is true. Howard Chen - Crédit Suisse AG, Research Division: Okay, great. So just to confirm it, that $125 million is a net figure?

Correct. Howard Chen - Crédit Suisse AG, Research Division: Okay. And then, Matthieu, you noted the $200 million target being achieved on capital return a little earlier. Now that you've gotten there, how do you think about the next set of goals on capital management, capital return? How should we be thinking about that?

Good, yes. Our business model, as you know, generates a lot of cash. So we've continued to -- we intend to continue to pursue active capital management policies. But we will continue also to have a balanced approach to our capital management policies. We have a strong rating in our financial services company, and we want to keep these attributes. We had set ourselves 3 objectives: One was to buy back $200 million -- to distribute $200 million of surplus cash to shareholders. We've done this 1 year ahead of time. Two other objective, one is to buy back shares to neutralize the year-end rent. We will continue to do that and we will continue to deploy our excess cash towards the -- return to shareholders and debt reductions.

We'll go next to Devin Ryan with Sandler O'Neill. Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division: Just a question on the counter cyclicality of the restructuring in M&A businesses. Restructuring revenues have been trending around $30 million the last couple of quarters. And clearly understand that results are still going to be lumpy going forward. But just want to think about it, as the M&A environment does improve, do you see restructuring activity and revenues potentially declining even further from these levels structurally? Or do you feel like we're starting to get to a point where we're leveling off in terms of activity and potentially revenues as well?

Sure. First, it is a difficult environment to predict what's going to happen because you've kind of got a lot of different forces at work. On one hand, if we get a -- if we get past some of these confidence issues and the macroeconomic environment improves, that will obviously drive M&A activities. On the restructuring side, a lot depends on different markets. As an example, we may see macroeconomic improvements in the U.S. We may see macroeconomic -- we may see more confidence about multinationals globally, but you still may have a fair amount of restructuring opportunity with small and medium-sized firms, particularly in Europe. And so it's a little difficult to predict right now. I think generally speaking, this feels like, I wouldn't say bottom because you never know, but it feels like we're stabilized at the restructuring point and the leverage probably is probably more in the M&A side going forward than the latter -- than the former. Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division: Okay, great. And also, appreciate all of the additional color on the expense initiatives. Just to be clear, I just want to make sure I fully understand. The expense save targets are exclusive of any benefit of kind of the lower RSU amortization expense essentially rolling off this year?

That's correct.

We'll go next to the Alex Blostein with Goldman Sachs.

Just a follow-up on Howard's question on capital management. Matthieu, can you maybe just get a little bit more explicit in terms of how you guys are thinking on a forward basis? Clearly, you've returned more than you expected this year. But when you're looking out at the 2013, maybe you can give us a sense of the amount you're looking to return on an annual basis given the fact that you guys are generating a lot of cash flow. What would be the mix for buybacks versus dividends? And I guess, just as a follow-up to that, I wonder if earlier amortization of some of the RSUs, given that you're letting some people go, would that result in a step-up in the share count and would you guys be also kind of willing to offset that with a buyback to keep the share count flat?

Okay. So that's a mouthful. Let's just kind of start -- this is Ken. Let me just start with the big picture. We're generating more cash than our net income because our cash tax rate tends to be lower than our stated tax rate. That probably continues. And so therefore, I think you have to start with how much cash generation there is in the business, which is pretty -- potentially not only has been substantial but is the result of what we're doing, if -- even where we are now, it should continue to be substantial and obviously improves in the environment as that improves. With regard to return on shareholders, I think if you go back and look at our record over the last few years, we have been very focused on returning capital to shareholders. We've done that through share repurchase. We've done that through an increase in dividend. And we've done it through this reduction of surplus cash. Our expectation is, is that as we continue to generate cash, we're going to share as much of it as we can with shareholders. And the real question is, is the balance between trying to maintain a stable rating and a strong balance sheet. We are a financial services firm. But I think you kind of see that we've been very active on this. With regard to any of the share issuance, we're going to offset that with share buybacks. If we have the opportunity to do more than that, we will. And the choice between dividend and share repurchase is a function a little bit of the environment that is where share price is, where tax policy is, and just the favorability from perspective of different shareholders. And so we're just very attuned to this right now.

Okay. And sorry, and then, the preference for buyback versus dividend kind of the similar mix on a forward basis, or is there a preference for...

I think the best we can do is say what exists now is a good reflection of the future. But that said, we're very cognizant of the tax efficiency of dividends versus share repurchases. There's a lot of changes that are -- potential changes that expected going forward. So we're going to take a careful look at that before we change policies.

Got it, helpful. Ken, I wanted to follow up on just the M&A discussion. It feels like there's clearly a couple of important catalysts over the next 3 to 4 months between the elections and the fiscal cliff, et cetera. Do you see resolution, whatever it may be, as a natural catalyst here, at least, with the U.S. election on people kind of pulling the trigger and making decisions just because they'll know who would be in the White House? Or do you think this is more of a confidence issue and the resolution around fiscal cliff would be more important?

Well, first, I think, what's interesting is to see how there is sort of a divergence between the performance of the stock market, which of course, could change any day, which we can't predict, but the performance of the stock market and the M&A cycle. Usually, they're pretty tightly aligned. Here, we've seen some divergence. We think it's primarily driven by the confidence issue about pulling trigger on big deals, confidence in board rooms. My own view is that it's just more about resolution of the cliff than it is about candidate, but that -- different people have different views.

Got you. And sorry, just one more from you guys. Solid flows this quarter, I was hoping you guys could give a little bit more color on where -- what strategies you're getting traction in? Two good quarters in a row of good organic growth. So maybe you can spend a minute on what type of strategies, asset classes and geographies?

Matthieu?

So the answer is the solid flows in the quarter. You're right, they're really across the platform. They're in emerging markets. We had some inflows in developing markets in multi-strategy, in small-cap emerging markets. In international equities, we had also some good successes because of the strong performance of our business. Local strategies also, we had some inflows, U.S., U.K., Australia. And then also in fixed income, we have some good inflows from fixed income, from global fixed income. And also as we've mentioned in past calls, a lot of good successes in emerging market debt.

We'll go next to the Brennan Hawken with UBS.

A quick one on Asset Management, sort of following up on that last question, I guess. If you could add some color on what trends you're seeing in RFPs? And maybe how you would characterize institutional risk appetite, institutional investor risk appetite and how that's changed since the Central Bank actions that we saw in the third quarter, that'd be great.

Okay. Let me start with the second question first, which is post the Central Bank actions. Generally speaking, the tolerance for risk -- in other words, risk is improved since the Central Bank actions. It's obviously introduced more liquidity into the market and given people some confidence that we're -- I mean, it's not over, but that we're past the point in time where we're likely to have another Lehman-like event, which helps a lot in terms of allowing people to start thinking about investing in the future, which obviously has direct impact on equities, which has been favorable for us. And with regard to your second question about the types of strategies and such, I think we feel like we're in the right place at the right time. RFPs are up significantly since the earlier part of this year. And with regard to strategies, we seem to be where the flows are going, which is global, emerging markets, equities and those are both very strong areas for us.

Great. And I'm sorry if I missed this before. But on the advisory side, I know we don't get to see all of the pipeline. So can you comment on how the pipeline looks from your end and maybe give us some color on that?

Yes, sure. Well, first, we never really directly talked to backlog and pipeline. But let me just kind of give you some feel for our business today. We're -- today on the large deals, we're involved in 4 of the 10 largest deals globally that are pending. Our market position, we feel, has improved pretty dramatically over the last few years. If you go back to 2007, I think we were -- compared to the largest fee -- advisory fee market share entity, we were 4:1. Today, we're about 2:1. So that's a pretty significant improvement over that period of time. And when you look at the breadth of the things we work on, you have to keep in mind that while M&A is obviously very important, large cap M&A is very important, we have a thriving middle-market practice, particularly in the U.S., and we have a breadth of activities across the capital structure from sovereign debt advisory, which is obviously in great demand at the moment, restructuring and balance sheet advice to companies. And so we benefit from an improvement in the M&A cycle, particularly large cap M&A. That's very lucrative. But we also have a whole bunch of other areas where we get to develop advisory fees.

And then just tucking in on some of these cost savings here announced. So if we back out, and you guys kind of walked through the math on the $125 million and how that get you to sort of the low 20s, what -- does that mean -- does that imply that there's some revenue growth assumptions for you guys hitting the 25% that gets you the rest of the way there? Or is it that -- you'll just assess where we are in the revenue outlook in a year and then if you need to cut more to get to your target?

No. Let me be very direct about it. $125 million, 2/3 of it will hit -- or benefit us in 2013, which we believe gets us to this 21% or 22% operating margin target. Even if we're still at activity levels that exist today and the full impact of these cost savings in 2014, plus this continuing cost discipline we have in the business today, we're confident will get us to 25%, again, even if, not projecting it and hoping it's not the case, but even if we're all stuck at these macroeconomic activity levels that exist today. And so again, to hammer it home, we're not going to be relying on revenue growth, and we think the actions we've taken should get us there.

Okay. Of the $30 million roughly, using the midpoint of your $110 million to $130 million costs you'll incur in the fourth quarter, the $30 million that is noncash, is that -- should we just assume that's all RSU amortization? And how much of that comes out of the roughly $195 million that you weighed out is amortized, and we have visibility advertising in 2013?

It's Alex. It is primarily acceleration of RSUs. We're not breaking down the acceleration piece right now.

Okay. Is it probably reasonable to assume that a good deal of that would come out of the 2013 schedule?

Yes, we need to have 2/3 -- we're saying 2/3 of the benefits next year.

Got it. Okay, you use that same math. Okay, that makes sense. And then I guess, and last one for me. Can you give us some more color on how making cuts like this, cutting $85 million from comp and $40 million from noncomp and having like business development expenses drop this quarter, how can that not impact your revenue growth outlook? And maybe color on what markets you're pulling back from, and what you continue to view as attractive markets?

Okay, it's Alex. I think if you look at the areas that we're focused on, there were -- we're overstaffed relative to the foreseeable market opportunity. There's certain businesses or groups with lower return prospects, and there are resources that we can better share infrastructure, support resources that we can better share across some of our businesses and geographies. We have an organizational structure that reflects the firm's long history of separate operating entities, and they're quite a bit of efficiencies to be gained there. What we said is these initiatives are going to be primarily focused on support functions and Financial Advisory. Don't forget, half of our business is Asset Management.

Sure. But you also said that most of the Asset Management business wouldn't be impacted by this, right?

That's right. That's the -- I think the point Alex making is that roughly half our business today is Asset Management, half our revenues roughly is Asset Management. And then, the core Asset Management business is largely unaffected by this exercise. The other half of the business is going to be the Financial Advisory business, and the cuts there -- the cuts are focused on Financial Advisory and support. Support, we don't believe has any impact on revenue. And with regard to the advisory businesses, it's just really a focus on things which we don't think are going to really impact revenue. We've been very careful about thinking about that, and it also frees up some resources and reallocates them to areas where we think there's potential for more growth.

Okay. So I guess, following up on that then, of the $85 million or so that's in comp, how much is coming from producer roles versus support? Can you guys break that down?

Yes. So this is obviously a people service business, people business. We've got -- this is all just underway. I think you'll find it becomes more evident as we get through the fourth quarter.

We'll go next to Douglas Sipkin with Susquehanna.

So just to follow up a little bit more on the prior question. I mean, obviously, appreciate the color on the cost-cutting initiative, but it does by and large feel like it's related to comp. I think the numbers you provided, it's about 70%. So I mean, when you guys are going to provide a little bit more detail in terms of, I don't know, what type of reduction on the MD headcount we'll find? And then secondly, and I hate to sound brass, but I mean, how can we get confidence that this is sort of the last so-called restructuring? I just sort of go back to 2009, and granted that was a tough environment, but I count maybe 3 or 4 quarters where we have one of these so-called impact events. I'm just wondering how does an investor or an analyst get confident that this fourth quarter, $120 million -- $110 million to $120 million impact is, in fact, the absolute last one that we're going to see, and we're moving to smoother sort of consistent results going forward.

Look, good question, fair question. We've put out a shareholder letter in April, which detailed the fact that we were going to take a very capital look at our cost structure. We also made it clear in that letter that to accomplish that, given the nature of our business and the fact that there's a lot of amortization of past awards that, that was likely going to result in a charge. So there should be no surprises here that if we're going to take cost out, that there's going to be a charge associated with it. As to whether this is the last one or not, everybody has to reach their own judgment. Our view is straightforward on this, which is that we are trying to take the initiatives necessary to reduce the cost base in a way that we achieve the objectives we set out in the shareholder letter, which is a 25% operating margin on a GAAP and awarded basis in 2014, even if we're still at the existing -- even though if we're still at the current activity levels we have today. We're not anticipating that, but even if we're stuck there, that's what we're hoping -- that's what we're going to achieve. This, if you do the math on these cost initiatives, I think, you'll find that we get to 21%, 22% next year with about 2/3 of it coming in and between the rest of the initiatives heading in 2014 and cost discipline around this place that now exists, we are comfortable we're going to get to our margin targets in 2014. And we think the kind of things we've done will have a minimal impact on revenues. And as Alex and I pointed out in the last question, half our business, Asset Management, the core Asset Management activities are unaffected. The other half on Financial Advisory, we think we've really taken a careful look at where we think revenue is likely to come from over the next couple of years. And we really feel like we've kind of focused on the kinds of things, which won't impact that.

And then just a follow-up. I mean, why not -- I guess, if you're sort of trying to clean it all up in the fourth quarter, why not pay the prepayment penalty or sort of the premium on your debt and throw that into the mix. And this way, you could sort of -- I mean, I'm just saying from the standpoint of sort of cleaning the decks clear, why not do that then too in the fourth quarter. This way...

You know what? That's a great question. And as you can imagine, we're pretty good at corporate finance here, hopefully. And that's one of the things we kind of pride ourselves on. And if we could do this in a way, which was NTD, neutral to positive, we would have done it. But when you cut through it all, it was very expensive.

No, I appreciate that. I mean, obviously, economically, it never made that much sense, and that's why you guys didn't do it because the rates are low. But I guess, just given the nature of what's transpiring with your operating model, maybe it sort of did make sense. But I appreciate that. And then just finally...

It's math. And you know what? Unfortunately, in the end, it's math. And we're into the substance, not the form on this. And this is just something which we've studied endlessly for the last few years. Why would a business like ours have 7% debt outstanding when we didn't need it? And now this is just something which we're going to have to deal with in the next couple of years, but we want to do it in a favorable way where we're generating benefits for shareholders.

Great. And then just a final one more on sort of the overall M&A business. Obviously, you guys continue to put up pretty good numbers on the Financial Advisory side, in a tough tape. It does kind of feel like -- I mean, just looking, reading the papers, it does feel like it is a tougher regulatory environment for structuring and getting big deals done. Do you think that's just sort of specific to the transactions that are actually getting announced? Or is there sort of a bias that exists now with governments around the world, maybe towards shutting down or preventing or stymieing bigger type of transactions, because it just feels like there's more deals that I've noticed that did shut down?

I think that's kind of anecdotal more than it is a trend. And what I mean by that is, I think, our experience is, so far, that the larger impact on M&A activity comes from confidence about the macroeconomic environment and some government policy issues, but not necessarily antitrust. The antitrust environment in the U.S., even though, there's some deals that shut down, it's pretty predictable. There hasn't been any wholesale change in the way deals are looked at. I think people, in a couple instances earlier this year, late last year, pushed the envelope on one deal in particular. But generally speaking, the big deals that are out there seem to be getting done. Yes, maybe, there's a little more complexity at times, but I think that kind of reflects more the macroeconomic environment than it does the regulatory environment. But that's one person's view.

We'll go next to Jim Mitchell with Buckingham Research.

I just want to follow up on just on the math that you talked about on the cost saving initiatives. I know it's been beaten to death. But I think the disconnect that's been talked about at the edges is if you take the $125 million versus current revenues, you get to probably 22%. Is the difference between 22% and 25% the expectation that amortization expense goes down from here? I just want to make sure that that's the clear difference there.

25% in 2014, you mean?

Yes, I mean, like I said, if you say -- you say that revenues don't have to go up from here to get 25%. If you take $125 million out, you don't get to 25%. So I'm assuming that 300 basis point difference or so, that I calculate anyway, is amortization expense declining from current levels as well?

Okay. So again, there are 2 different places you start from, one is on the awarded operating income, which I think, we're trending around 18% on an LTM basis and then you have the GAAP numbers. The simplest is awarded and then we can work backwards to GAAP, okay? On the awarded, the $125 million, you can take 2/3 of it, you get to the numbers we're talking about for -- the 21% or 22% for 2013. And I think if you finish the math and take the other 1/3 in, you get pretty much to the numbers we're talking about for 2014. On the GAAP piece, you get this year as a result of the steps we are taking, you'll get to the -- again, the same range for 2013 and again, probably the same range for 2014. Obviously, GAAP is a little bit more sensitive to revenue environment, but not much at this point. And obviously, on the GAAP side, we're getting some benefit from the fact that we've been much more disciplined about deferrals, they've been consistent over the last 3 years. And you can take a look at the investor decks that we've had out and they show a pretty steady decline in the amortization expense because we no longer have the 4-year in there and the fact that we've been disciplined about deferrals over the last 3 years. And so I think that should get you to the same place.

No, that's fair. It's just that you had a $50 million increase this year in amortization. We don't really have your projections for next year. So I was just hoping you can give us some kind of expectation on the GAAP basis.

Well, look, the simplest way to think about it is you've got the '08s, which were $54 million in '11 and they were $40 million in '12, then they're going to be probably around $5 million in 2013. So that's a big piece of it. And then another piece of it is obviously, as a result of these actions, the amortization expense associated with the people that will be leaving will be eliminated as well.

Yes, okay, fair enough. I can run through these numbers. Just one other question...

I think for now, we'll work in, obviously, offline. Matthieu and Katherine can help you work through them.

Yes, sure. One last question on the share count. You have been stepping up the buybacks, but you're still seeing the share count down 1% to 2%. Is there ever an ability to get that down at a more rapid pace?

Well, look, the share count is a function of how many new shares we issue, and we're absolutely committed to offsetting that dilution. The other part of the share count is the esoteric nature of accounting for RFUs and treasury stock. And I mean, you know -- I assume you know how that works, which is...

Well, certainly if your stock price goes up, that's a good thing, but your stock...

It is, but except it tends to increase more shares. And so the fact that we've got a lot of capital and got an aggressive buyback program, hopefully, we can address some of that. But some of it is just a function of share price.

Right, but the share price has been reasonably flat for the last year so. So I would hope it would go down a little bit more, but I get your point.

[Operator Instructions] We'll go next to Ken Leon with S&P Capital IQ. Kenneth M. Leon - S&P Equity Research: A couple of questions. First, on looking at areas for cost savings. Before -- on previous calls, Ken, there's always talking about how flexible resources are between businesses restructuring and advisory. But significantly, as Europe -- you have a large position there. The outlook may not be improving for some time. So is that really the thrust of looking at your statements of moving to areas other than maybe Europe for new growth areas?

Look, we're not going to detail where we're doing the cost cutting office by office or activity by activity. Again, a lot of that become evident when we're finished with this, and you deserve an answer then. The second part of it is look, we're gearing efforts around where there's growth is important. I mean, as an example, some of it happens naturally at Lazard. Some of it is a focus of our efforts. But the business evolves. We were primarily an M&A business, 10, 12 years ago, focused just on large cap, heavily focused in just the U.S. and in Europe. Today, a breadth -- we have a breadth of activity that spans across the capital structure, capital advisory for healthy companies, restructuring for unhealthy companies, sovereign debt advisory for countries. It's a big part of our business today. Look, it's a breadth of activities between large cap and other areas of the M&A market. Today, we have a thriving mid-market business in the United States. If you look at the flows across the M&A market, historically, they've been -- if you go back 10, 15 years ago, they may have been concentrated within geographies. In fact, in Europe, it was a lot about the deal activity cross-border in Europe, not so much outside of Europe. Today, it's remarkable the flows that occur across geographies. And so one of the things we're doing here is really realigning our opportunity set with where the activity is. And some of that is really a focus on the markets that are going to be most active and how to gear efforts in markets to complement that. I mean, in fact, what's happened over the last few years for us is Europe has become a hub for emerging market activity probably more so than it's ever been and more so than probably any firm in the world is for us, and that just reflects a change in markets. Kenneth M. Leon - S&P Equity Research: So when we think about producers putting aside geography, shall we be thinking about the flexibility you have between advisory and restructuring and not worry so much in terms of what the line item is for restructuring when you report?

I think you can think about it in terms -- that probably is one way of looking at it, another way is across the spectrum of M&A activity, whether it's mid cap, large and also, broadly speaking, across geographies. And one of the things we've introduced into the system in the last 3 years is hell of a lot more flexibility. And as a result of that, we think we have the ability to really streamline a lot of our activity and just execute a lot better, a lot more effectively and a lot more productivity -- with a lot more productivity, and that's what this is about. Kenneth M. Leon - S&P Equity Research: Two other questions. First, Matthieu, on tax rate, was there any guidance on tax rate?

The tax rate is slightly up versus last quarter. But it's mainly just an adjustments to our full year view on the tax rate, some changes in geographical mix and then a few discrete items that's created a little bit of lumpiness from one quarter to another. Kenneth M. Leon - S&P Equity Research: And my last question for Ken is a lot of attention in June or summer with Nelson Peltz. Has there been ongoing conversations like any other shareholders? Or any take in terms of their position?

We've got a handful of very large shareholders in the business today. We have spent a lot of time since year end last year speaking with all of our shareholders and really spending time understanding how they think about the business, what they want us to do in the business, and we're listening very carefully to all of them.

At this time, I'd like to turn the conference back over to Mr. Ken Jacobs.

Well, look, I just want to thank everybody today for the conference call. And if you have questions, obviously, our team is available.

Thank you.

And ladies and gentlemen, thank you for participation. This does conclude today's conference call.