Lazard Ltd (LAZ) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to Lazard's Third Quarter 2018 Earnings Conference Call. This call is being recorded. At this time, 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. At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations. Please go ahead.

Good morning, and welcome to Lazard's earnings call for the third quarter and first nine months of 2018. I'm Alexandra Deignan, the company's Director of Investor Relations. In addition to today's audio comments, we have posted our earnings release and an investor presentation which you can access on our website at www.lazard.com. 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 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 Evan Russo, Chief Financial Officer. They will provide some opening remarks, and then we'll open the call for questions. I would now turn the call over to Ken.

Hi, good morning. Lazard continues to achieve strong operating performance. While our third quarter was relatively flat compared to last year, nine-month operating revenue for both our businesses reached a record level. Our results reflected the breadth and depth of our global franchise, the stability of our diversified model, and the benefits of our ongoing investments for growth. In Financial Advisory, we remain active across businesses, sectors, and regions. Our M&A revenue increased significantly in the third quarter, offset by a decline in restructuring, and we achieved record level M&A revenue for the first nine months of the year. We gained market share of announced transactions globally with strong increases in both North America and Europe, and we have advised on 5 of the 10 largest transactions announced this year. The diversity of our advisory services has reported revenue growth with high levels of activity in our Shareholder Advisory practice, Capital Advisory, Capital Raising, and Sovereign Advisory. Our Asset Management business has been resilient in challenging global markets. For the third quarter, AUM increased year-over-year and sequentially. Gross inflows continue to be strong across our platforms despite the volatility in Emerging Markets. We had modest net outflows in the third quarter, primarily driven by Emerging Markets, but these were offset by strong inflows in our global strategies, reflecting the diversity of our platforms. During October, which has been a month of enormous volatility, we achieved net inflows in our Emerging Markets franchise. We continue to benefit from a primarily institutional client base, which is focused on the long-term strategic allocation of capital, and we are benefiting from investments we've made in the business including our quantitative strategies, which continue to gain traction. Evan will now provide color on our financial results and capital management, then I will comment on our outlook.

Thank you, Ken. Our third quarter and nine month results reflect the stability of our business model, and our ability to manage the business in volatile markets. Adjusted net income per share increased 1% for the third quarter and 21% for the first nine months of 2018. Third quarter operating revenue was 3% lower than last year's record level, while nine-month operating revenue reached a new record of $2.07 billion, up 5% over last year. Financial Advisory revenue for the third quarter was essentially flat, and reflected higher M&A revenue offset by lower restructuring revenue. The decline in restructuring reflected the lumpiness of closings in a relatively subdued market, although we continue to win significant large assignments. Asset Management revenue for the third quarter declined 4% year-over-year, with management fees also down 4%. The year-over-year decline reflected a change in the mix of our average AUM, primarily caused by the market depreciation of Emerging Markets and their currencies. On a sequential basis, management fees declined 5% from the second quarter of 2018. This reflected a decline in average AUM as well as the change in product mix, as flows trended towards lower fee strategies. We finished the third quarter with AUM at $240 billion, 1% higher than the year-ago period, and 1% higher on a sequential basis. Net outflows in the third quarter were moderate at $288 million. This reflected outflows across a range of our Emerging Markets Equity and debt strategies, offset by inflows in our global strategies and in local and multi-regional fixed income strategies. Since the end of the third quarter, we had net inflows in our Emerging Markets platform. As of October 19, AUM was approximately $230 billion. The decrease since quarter end primarily reflected market depreciation of $9.7 billion as well as negative foreign exchange movement of $600 million; net flows were essentially flat. Looking ahead across our franchise; Asset Management continues to navigate challenging markets. Volatility in Emerging Markets ticked up significantly in the first half of October; and lower AUM will lead to tougher comparisons with last year's fourth quarter. In Financial Advisory, our current level of activity is strong and is running at about the same level as this time last year. We are still on track for Advisory revenue in the second half of 2018 to be ahead of last year's second half. Turning to expenses, we are maintaining our cost discipline even as we invest for growth. In the third quarter, we continued to accrue compensation at a 55.8% adjusted compensation ratio. Adjusted non-comp expense for the third quarter was $109 million, down slightly from a year ago. The non-comp ratio moved up to 18.1%, reflecting lower revenue in the quarter. Turning to taxes, our effective tax rate in the third quarter as adjusted was 23%. For the first nine months of the year, it was 21.2%. We expect an annual effective tax rate for this year in the low-20s. In the coming years, we continue to expect an effective tax rate in the mid-20s. In regards to capital allocation, strong cash flow supports our share repurchases and dividends. In the first nine months of 2018, we returned $724 million to shareholders, which is greater than the total amount returned in 2017. Through October 19, we have repurchased 6.2 million shares of common stock, which is ahead of last year's pace and significantly offsets the number of shares we issued during the year associated with deferred compensation awards. In the third quarter, we took advantage of attractive credit markets to issue $500 million of senior notes in early September, using half of the proceeds to repurchase $250 million of near-term maturity debt. We plan to use the remaining proceeds for general corporate purposes, including additional share repurchases. Based on the feedback we've received in discussions with our shareholders, we expect to increase our capital allocation towards share repurchases. Our total outstanding share repurchase authorization is now $524 million, following yesterday's additional authorization by our board of directors. Ken will now conclude our remarks.

Thanks, Evan. I will provide some perspective on our outlook, and then, we'll open up the call to questions. Overall, the global macroeconomic environment has softened over the last quarter. The U.S. economy remains robust; the European economy's growth rate has slowed, but is still growing; and Emerging Markets as a group continue to have strong fundamentals, but have experienced significant capital markets volatility. Market volatility has been a headwind for our Asset Management business. Pressure on fees is likely to continue, but we are serving clients with a world-class franchise and an increasingly diverse set of investment strategies and solutions to help offset this trend. While our level of M&A activity remains strong, the current M&A environment remains constructive, financing is widely available and valuations are getting more reasonable by the day. We are keeping an eye out for signs of an inflection point in this environment. Global M&A announcements for the industry slowed in the third quarter, interest rates spiked recently, the IMF has lowered global GDP estimates, and political and policy risks are testing CEO confidence. Now, more than ever, our diversified business model has proven its strength and stability in prior cycles, and we believe Lazard is in the best position of any of the independent firms across cycles. We've been steadily broadening and deepening our range of client services. And when the next downturn inevitably occurs, we believe that firms like ours with the broadest and deepest services will fare best. We continue to invest for growth in both our businesses. In Financial Advisory, our opportunistic hiring reinforces the breadth and depth of our teams by adding complementary capabilities. In Asset Management, we continue to extend our platform through the seeding of new strategies, lift-outs and fund launches. We have also been enhancing our marketing and distribution across Europe, leveraging the breadth of our platforms. We continue to make significant investments in technology across the firm to support existing and new investment strategies in Asset Management and to create proprietary insights and new tools in Financial Advisory. We remain focused on serving our clients well, while we manage the firm for profitable growth and shareholder value over the long-term. Now, let's open the call to questions.

Thank you. We can now take our first question from Brennan Hawken from UBS. Please go ahead.

Hey, good morning. Thanks for taking the question. My first one's on capital. Evan, you made a comment that you would be more interested in engaging in share repurchase, based on feedback from investors, which makes a lot of sense, given the valuation of the stock for sure. Just thinking back to the recent cadence of capital returns, there's been a fairly semi-regular special dividend in recent years. Given your comments, given the valuation of the stock, how are you thinking about the allocation of capital to that special versus repurchase, given the extraordinary market environments?

Sure. Hey, Brennan. Of course, so look, we're keeping our balanced approach to capital management. I mean, the consistency, the way we think about returning capital to shareholders is really remaining the same. So we think about our dividends, we think about consistently raising the common dividend, always offsetting compensation dilution as we called out in the call today as well, thinking about what cash we need in the business, and then returning all excess cash to shareholders, as you said, either in the form of special dividends or share repurchases. With regards to the special dividend decision, look, we look at that at year-end when we have the best visibility into our business, and what we consider really excess cash. In the past, as you've said, we've utilized the tool of special dividends as we believed it's the most efficient form to quickly distribute cash back to our shareholders. But as we said, we've had lots of discussions with some shareholders and the shareholders' is mixed – the shareholder reaction has been mixed, but we've heard more leaning towards them expressing their preference that might be more towards share repurchases. So we're going to take that into account as we look at that at the balance of the year. And in addition to that, as we called out, I mean, we've raised some additional cash in the form of raising that $500 million of additional notes this year. And for that, we'll have excess cash to utilize for share repurchases over the coming months as well.

Okay. And is there any timeframe that we should think about? You had mentioned over the coming months, as far as the other debt issuance, how should we think about the timing, just for modeling purposes, as far as that allocation of capital and cash to the repurchase program?

I mean, look, it's always going to depend on share price as well, and in the case of how fast we can deliver the shares – we can buy back the shares in the market depending on market tone. But look, we expect to be utilizing share repurchases over the next three to six months in a big way, and probably some of the excess cash we have towards buying back some of the compensation dilution may slip into the middle of next year.

And to be clear, it's a lot more attractive to be buying stock back at these levels than it was six months ago.

Without a doubt. Yeah. Without a doubt. So, unfortunately... (14:23)

Yes. I got you, I got you. Very clear. Thank you. And then, you guys also commented on headwinds in the quarter to date, for sure, we've all watched that. But when we think about some of those headwinds, both in FX and markets, came into play on your fee rate and impacting the mix, so how should we think about the fee rate from here if we were to take the quarter-to-date market dynamics that you highlighted, and think about trying to triangulate that into fee rate? Should we assume some continued pressure, would it be a similar sort of magnitude as you saw 2Q into 3Q, or would it be at a lesser pace? How can we frame that analysis?

Yeah. So, the fee rate, Brennan, fee rate has changed this quarter primarily due as you called out to the product mix shift that we've had. And as you think about what's happened in volatility in markets in October, I mean, it's been a wide volatility, really globally, so all asset classes have been hit certainly in the last few days, the volatility we've seen. But if you think about the volatility hitting all of our spaces and specifically in the Emerging Markets space, you again continue to think about the fact that you're probably having some of the basis point margins from some of the higher products and strategies that we run moving more tilted toward some of the lower strategies, the fixed incomes, which don't move as much because of the volatility.

Yeah, I know. That's all fair. Okay. So, I guess paraphrasing that, you think that we should – assuming we continue to see this, we should continue to see some key pressures sustain at least to some degree maybe not to the magnitude that we saw?

Yeah. Look, Brennan, this is a mix question more than anything else, right? So, to the extent that we see AUM go down in areas where we have higher fees, then obviously, the pressure on the overall fee rate is going to be greater. To the extent we see stability at those levels, then the fee level will moderate. The fee pressure for us is really a mix question on what's happening with AUM from what's happening in market. It really isn't all that much impacted by the flows in or out right now.

100% which is why I was asking about the quarter day trends that were highlighted. So, that's helpful.

Yeah.

Thanks for that.

Okay.

Last one from me, there has been some highlighting of pull forward from some of the other M&A firms that could reach a level of as much as 10% of Advisory revenues. You guys didn't call that out, so I'd assume it didn't reach your thresholds of materiality, but is that fair and how should we think about pull-forward impact on the quarter?

Sure. Brennan, so you're referring to is the revenue recognition standard, which caused us to evaluate revenue as contingencies go away in potential fees that we're going to earn from transaction contingencies and transactions go away in fees that we're going to earn on transactions closings. And when there is a high probability that a transaction will actually close, so we have to recognize that revenue in a quarter that may not be the same as when the transaction actually closes, just to make sure everybody understands what that is. So it's got to move around some revenues quarter-to-quarter. Last quarter, we called out, and we pulled forward a few transactions to use that terminology of pull forward. We pulled forward a few transactions into the second quarter from the third quarter. This quarter, as you said, we had a few transactions that met that standard. We had to pull forward that into the Q3, probably a little bit more this quarter than last quarter. But all-in-all, not material relative to the revenue of the company.

Thanks for all the color.

We can now take our next question from Devin Ryan from JMP Securities. Please go ahead.

Thanks. Good morning, everyone. First question here, just following up on Brennan's question on the repurchase, good to see that here, especially with where the stock is. Just to be clear, as we're kind of just running through some of the math. I hear the comments on kind of maintaining still some balance between repurchases and specials. But when we contemplate the incremental debt issue wins, do you still have effectively the same capacity for special dividends or is this shifting some money out of a potential, I guess, that bucket towards repurchases? I'm just trying to think about the balance between the two, and then kind of where cash balances are with the incremental debt?

Sure. So the incremental debt we have is for additional share repurchases. And on top of that, I mean, if we decided to tilt away from some form of special dividend, which again we won't decide that until the end of the year, and we'll see where markets are. We'll see where share prices are, and we'll see what excess cash we have to make a decision on what amount there is. But there's plenty of cash in the system currently, and there's plenty of cash because of the excess proceeds we raised during our last financing, which we completed in September.

And obviously, we're having a strong financial year so far. So that means additional cash flow as well.

Exactly. Okay, great. Thank you, just wanted to clarify. And then, a follow up just on the Asset Management business, we obviously all see kind of the recent announced sale of an asset manager in the market, OppenheimerFunds, which I know you guys know well. But similarly sized as your platforms, some similar attributes, the purchase price is nearly $6 billion, which is well-above Lazard's entire market cap today. So the question that I'd be getting, I guess since then is, obviously that deal stood out to people to kind of frame the potential value that the people think exists within your Asset Management business. And so just trying to think about whether there's ways to, I guess, help the market more with the value of your asset manager if you would agree with the comment of similar attributes, and that $6 billion value and whether there's ways to help the market I guess better appreciate that value or other things that you guys are thinking about with Asset Management, just given that it doesn't seem like the market's giving you a lot of credit based on the recent announcement?

Or for our Advisory business. So look...

Good point.

Hardly a surprising question. And the simplest answer is, is it just suggests Lazard is undervalued at this point. But we're in a market where I think there's probably a lot of misvaluations. And I think it's going to take some time for things to settle down and for people to get some confidence again to make some bets. But let me provide some color first. These two businesses have been together a long period of time, and through multiple market cycles. And I say multiple market cycles, generating a lot of benefits for both businesses and frankly speaking for the firm as a whole, and we think shareholders over a long period of time, which we today believe will continue to be the case in the future. As you mentioned, Devin, and as probably most people on this call know, we were the sole advisor to MassMutual on its recent sale of Oppenheimer to Invesco. As a result of that, we know the competitive landscape, the factors driving the transaction intimately. On the face of it, there are lot of similarities between Oppenheimer and Lazard Asset Management, such as size of assets under management and product mix. But there are also important differences. In terms of distribution, OppenheimerFunds is primarily a U.S. centric and retail-focused business, whereas Lazard Asset Management is primarily a global and institutional business. And as you would expect, merging two retail businesses creates a lot of cost synergies for any large retail manager. Needless to say, we're guardians of shareholder value. A bunch of us are very large shareholders ourselves. And if there were interest at similar valuation levels, we of course would take it seriously. So hopefully, this is a very clear answer to that question.

Yeah. Okay. Thank you. Appreciate that. And $6 billion is a big number still. Follow up here...

We did pretty well for our client.

And then the last one here just a little bit of maybe just market perspective here. So you've been hearing a little bit of the large cross-border deals have seemed to maybe take a pause, at least in August and September. And not sure if that uncertainty from what's going on with trade tensions. But would love to just get your perspective, because you guys are obviously leaders, kind of on the cross-border transactions. And whether there is any real kind of effect that you're seeing from some of the trade tensions or – that has come through yet or people just maybe looking at a couple months and kind of over-extrapolating that where there really hasn't been a big shift in the environment?

Okay. Look, there's a lot packed into that question, so I'm going to take a few minutes to answer it. First, I tend to use the same three or four factors to kind of talk about the M&A market and the health of the M&A market. And I'll do that here. And then I'll provide a little color beyond that. We tend to look at financing, equity valuations, CEO confidence. And then you try to see if there's a certain theme or catalyst that's driving activity. With regard to financing, obviously, rates spiked in – over the course of the last month, moved roughly 30 basis points or 40 basis points on the long end. And there was some widening of spreads, particularly on the lower end of the credit spectrum. But we haven't really yet seen financing dry up or really a real move in credit spreads. And frankly, if you start to see a real move in credit spreads, then you have to be a little bit more concerned about activity levels. So that's number one. Number two is, equity valuations are improving by the day. And so that kind of cuts both ways in terms of M&A activity. On one hand, clearly valuations are lower. But on the other hand, people's stocks, if they're using stock, is going to be less attractive perhaps. And also there is obviously some hesitancy about the future when you see this kind of turmoil in markets. And so people tend to freeze for a period of time. As regard CEO confidence, ultimately, it's very much driven by the macroeconomic environment. And I think as I said earlier, there's some softening, but overall, the U.S. remains robust. Europe is still pretty good, better than last year, a little softer than it was earlier this year. China clearly slowing down. So while the macro environment remains pretty constructive, it's probably a little bit weaker than it was earlier this year at least in terms of prospects and how people feel. Confidence here is also going to be driven in part by geopolitical tensions, trade. And there, I think there are some impacts. I mean, the first is, it's a little difficult to plan when you're not sure what's going to happen to your supply chains. In some respects, things have gotten better because of NAFTA being renegotiated and there being an agreement with Mexico and Canada. In some respects, things are worse because of what's going on with China. I think, the first round of tariffs, 10% probably have been largely offset by currency moves. But I think the larger impact is really around supply chains and predictability of being able to anticipate where your product is coming from, your ability to access markets. And I think that's going to have, over time, a dampening effect on confidence levels. The other aspect of this environment is just the certainty of getting approvals abroad. I think that there is increasing concern that there is a risk that if you have a big complicated deal, and it requires approvals China, that there is a risk that the Chinese may be using the antitrust process in China much like the Americans have been using CFIUS. And I think there's some risk to – ability to close deals as a result of that. So all-in-all, at least when we look at our business today, it still feels strong right now. I mean, I think our activity levels remain robust. When we think about how the business feels today for next year versus how it felt last time – last year at this time for the coming year, it feels about the same, but I think you really have to pay attention to what's going on in the markets right now, and determine whether or not this is going to be something that, suggest word and inflection point. And I think that's something we'll know better over the course of the next couple of months or so.

Yeah. I agree. Thanks a lot, Ken. I appreciate the comprehensive answer.

We can now take our next question from Steven Chubak from Wolfe Research. Please go ahead.

Hi, good morning. So, Ken, I really appreciate your remarks on the Oppenheimer transaction. I thought you've framed some of the considerations there quite well. I would tend to agree there; certainly appear to be some valuation anomalies at least in the near-term context in light of some of the recent volatility. We're just taking a step back, over the past five years, your stock is essentially trading flat against the backdrop where financial market proxies have all meaningfully outperformed. And as you start to think about opportunities to create shareholder value, why not get more aggressive in taking advantage of some of those disconnects where you can maybe look to create shareholder value. You've said that multiple times on this call about the efforts to build shareholder value. I understand the buyback is an attractive use of capital, but why not consider strategic alternatives at least with some of your other businesses where you can maybe create additional value for shareholders over a sustained period, clearly there is a disconnect in terms of the value of your stock, and the fact that there has been this lagging share of performance.

Point taken.

That's it? Okay. Look, I appreciate you guys... (29:29)

Devin asked a very pointed question about our Asset Management business. I think I gave a pretty comprehensive and clear answer about that. You've asked the same question about it; there's no different answer about the Asset Management business I want to give you. With regard to the other alternatives, you're really talking about sale of the Advisory business. I don't think that's very practical. Spinning the businesses which when you look at this environment with declining share prices and compressed valuations, and really what that would mean in terms of separation, I mean, that's something which we're pretty expert at evaluating and considering. And with regard to capital allocation, I think, to-date, we've been pretty good about that. And I think we see tremendous opportunity in where the share price is today, relative to where it was. And I think we're going to obviously be a lot smarter if we're buying shares in the 30s and low-40s than we would have been buying it in the 50s. So, I think that's something that we're very focused on. If the question is consolidation, I mean, that's something which I think everybody is looking at on the Asset Management side of the business. And I think that it's going to be something that we will have to consider as well.

All right. That's it from me. Thanks very much for your comprehensive answer, Ken. I appreciate it.

Next question comes from Chris Walsh from Buckingham Research Group. Please go ahead.

Hey. Good morning, guys, and thanks for taking the question. Just wanted to peel back the onion a little bit on advisory fees in the quarter; you mentioned debt restructuring was down while M&A was up. Restructuring for Lazard has typically been around 15% to 20% of revenues or advisory fees. And with that dragging down total advisory fees in the quarter, I mean, would it be fair to assume there's been kind of a meaningful drop-off in restructuring activity, and kind of what's your outlook for restructuring in this current environment?

Yeah. Again, remember, the fees that we report for a quarter reflect activity levels that occurred probably somewhere between 6 and 18 months ago. So it's always a little difficult to read what you announce for your results in a quarter as representing activity levels in those quarters. So that's just – I want to be cautious about that. That said, restructuring fell precipitously in this quarter, which is not surprising, because the last 12, 18 months has been a very buoyant time for the economy, markets, financing. So you'd expect restructuring fees to fall. And the M&A environment for us at least in this quarter was strong. I mean, we had a very strong quarter for M&A fees. I think the outlook going forward is really – it's a great question right now, because you're not likely to see restructuring activity start to pick up again unless you see one of a couple of factors. I mean, the first is obviously a widening of credit spreads, because that is probably the strongest indicator of a slowdown in M&A activity, number one. But also number two, the likelihood that restructurings pick up. So we keep a careful eye on that. The second is, whether or not there's some big dislocation in the sector. I mean, we obviously saw a lot of dislocation frankly from technology in the oil and gas sector, shale gas, that technology applied to shale gas, shale oil, and the oversupply situation of kind of 2014-2015, and that led to an enormous amount of restructuring activity. We've benefited a lot from the disruption in the retail sector on the restructuring side, and that's created activity for us, but obviously at a diminishing level until just this week, in fact. And I think that disruption, you should pay attention to, in terms of what it does to other sectors as well. I mean, my guess is, we will start to see a pickup in restructuring activity over the course of the next kind of 12 to 18 months. That would be my guess.

Got it. That's very helpful. And then just one other question on the Financial Advisory business, Lazard, unlike some of its U.S. boutique peers, has a dedicated and middle market advisory practice. And can you just kind of run us through the strategy there, your plans for the business, and perhaps its relative contribution to overall Financial Advisory fees?

Sure. I mean, that business is focused on – is dedicated and focused to sell-side M&A activities. It's almost exclusively a sell-side business for non-public transactions. I mean, there's an exception every now and then, but essentially non-public transactions, which means its primary client base is Private Equity. And as you can imagine, that's been a pretty buoyant area for activity. And so that business has done pretty well in this cycle. And the challenge there is just, we're always looking for ways to grow that business. And it tends to grow better during market downturns than market upturns, because the type of people that get attracted to doing that business become more available as the cycle starts to shift, as opposed to when the cycle is very strong. So that business has kind of grown in spurts for us. It was probably a quarter the size it was when we acquired it back at the tail-end of the last cycle. And my guess is, we're going to see some opportunities to grow it pretty significantly over the coming years. And the other thing we've done is, we've extended that franchise now to Europe. It's not quite as integrated in Europe as it is in the U.S. But my guess is, as we see the opportunity, we'll build it out in the same way there. And it's a very significant business, the Private Equity business in Europe as well for everyone.

Got it. Well, thanks for answering my questions.

We can now take our next question from Mike Needham from Bank of America Merrill Lynch. Please go ahead.

Hey, good morning. First question I have is on Europe and the deal environment. After some optimism earlier this year, it does look like things have started to slow down a bit. For your business, do you think the rate of change in the U.S. segment of your business versus Europe – I think the view was that Europe, because it's starting off of lower base, the rate of change potential could be much higher versus the U.S. Has that dynamic changed?

Yeah. Look, I think on global terms, I would agree with you that Europe is a little slower than I think everybody anticipated it would be this year. But actually, our business kind of belies that. We're having a very strong year in a couple of our core markets in Europe right now, against a backdrop that is actually weaker volume wise. And I think that just reflects the strength of the franchise and the market share gains we've made there. And we're actually seeing quite a bit of activity. That said, I think again, like I said with regard to my overall comments, I mean, I think, one just has to be a little cautious looking forward about what's happening in the environment, and whether that's going to shift activity levels. But I think in terms of our own performance in Europe, I think we're significantly outperforming the market activity right now.

Okay. Thanks. And a follow up on expenses. You've seen some nice margin expansion over the last couple of years. It kind of happened in coordination with market appreciation in the Asset Management business, particularly in EM. If marks continue to be negative in that business, how much expense flex do you have? It sounded like over the last couple quarters, you're making investments into the business. My assumption is a lot of that's in the Asset Management business. So just if you could talk about expense flex, if the environment's a little bit more negative than expected? Thanks.

Yeah. Look, remember, everything we do effectively gets expensed through the comp line. Because if we're hiring people, you can't capitalize that or at least we don't capitalize that. And there's obviously some additional expense that goes through the non-comp line when you're adding capabilities and services. But I think we've done a pretty good job of managing and balancing that investment with obviously the ongoing need to retain people and attract people. Second is, I think we learned a lot running this business over the last 10 years through some pretty difficult periods of time about expense management and what it takes to manage through the cycle. So that's something we're pretty conscious of, and especially conscious of now. I wouldn't overplay the impact of any one strategy or any one area of the firm is contributing to the margin improvement or the ability or pressure on margins. I mean, in fact, when you look at the contribution of the Advisory business and the growth of the Advisory revenues over the course of the cycle, you could probably make the argument that the largest contribution to margin has come from that business because of the leverage we got off of that increase in revenues coming primarily from productivity gains in that business. And I think, we've been highly disciplined on the Asset Management side in terms of balancing investment in the business. But you're right, we have made quite a few – we created quite a few initiatives around the technology side, which frankly in the end, for the things we're doing for our business, I'll put aside ERP for a second, is not terribly expensive. It's really very focused, and I think highly – again, focused on things that will really drive, creating an edge for investment, and creating an edge in terms of insight on the advisory side of the business. And that stuff doesn't necessarily mean you're spending lots of money. It means you're focusing your money really on the things that make an important difference to our clients.

Okay. Thank you.

We can now take our next question from Jeff Harte from Sandler O'Neill. Please go ahead. Jeffery J. Harte - Sandler O'Neill & Partners LP: Hey. Good morning, guys. So only one more question left for me, and I want to follow up on expenses. You commented on the ability to manage down expenses in a more difficult environment. Can you talk a little bit about pre-tax margin expansion potential if the environment doesn't slow down? I mean, 28% is historically high for you guys, but I'm wondering if there is room for it to continue going higher?

Yeah. Hey, Jeff. Yeah, I mean, we think about margin expansion as you said, we've done a great job of getting the margins to where we are. I think, we've really taken a hard look at the non-comp expenses. And as Ken mentioned, managed to invest for growth that we do through the comp line and the non-comp line in a very thoughtful manner to achieve both margin expansion as well as investment over the last couple of years. I mean, going forward as you say, as we think about it, where can the next margin come from. And look, in the non-comp line, if revenues continue to grow, if we get continued revenue growth as we've called out our non-comp as essentially one-third to one-half variable. The other half is kind of fixed. And so that fixed portion which grows with inflation, if we get more significant revenue growth, we'll see some additional benefits to the margin line through non-comp. Compensation again, it depends also. If we're getting significant revenue growth depending on where it is and how significant it is, there may be some opportunities there as well.

Yeah. And I think, through this cycle, we've done a pretty good job of getting some leverage off of revenue growth and in compensation. I think, when you look at peer asset managers, I don't think anybody has done it except for us to any significant extent. And on the Advisory side, it's something that we've been focused on now for about a decade. But eventually there are limits on that, but that's something I think we've been pretty good at. Jeffery J. Harte - Sandler O'Neill & Partners LP: Okay. Thank you.

Thanks, Jeff.

That's the last question. So I would now like to conclude the call, the Lazard's conference call. You may disconnect. Thank you.