Good morning and welcome to Lazard's First Quarter 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead.

Thank you, Britney. Good morning, and welcome to Lazard's earnings call for the first quarter of 2023. I'm Alexandra Deignan, Head of Investor Relations 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 when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measure is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Mary Ann Betsch, Lazard's Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results, then Ken will provide his perspective on the outlook for our business. After that, 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 will open the call to questions. I'll now turn the call over to Mary Ann.

Thanks, Ale, and good morning, everyone. Today, we reported first quarter 2023 operating revenue of $527 million, a 25% decrease from the first quarter of 2022 and a net loss of $23 million on an adjusted basis. In Financial Advisory, we reported first quarter operating revenue of $274 million, down 29% from last year's first quarter. The ongoing slowdown in M&A activity globally continues to present a significant headwind for financial advisory. However, we remain actively engaged with clients in both Europe and the U.S. In restructuring, activity picked up throughout the quarter, and we are working on a number of complex assignments. In Asset Management, first quarter operating revenue was $265 million, an increase of 2% compared to the fourth quarter of 2022 and 15% lower than in the first quarter of 2022. Management fees and other revenue was $259 million for the first quarter, a 6% increase from the fourth quarter of 2022 and 10% lower than the prior year period. For the first quarter, incentive fees were $5 million as compared to $25 million in the prior year quarter, reflecting weaker fixed income markets. As of March 31, 2023, we reported AUM of $232 billion, up 7% from December 31, 2022. This increase was driven by market appreciation of $11.6 billion, foreign currency appreciation of $1.4 billion and net inflows of $3 billion. Average AUM for the first quarter was $227 billion, 7% higher than in the fourth quarter of 2022, and a decrease of 12% from the prior year period. As of April 21, our AUM was approximately $236 billion, driven by market appreciation of $2.6 billion foreign currency appreciation of $500 million and net inflows of $400 million. In corporate, operating losses of $11 million included corporate revenues of $10 million, which were more than…

Thank you, Mary Ann. Obviously, it was a tough quarter. During Q1, M&A activity fell back to levels last seen in 2012. Announcements and completions for the industry were down approximately 50% year-on-year and down approximately 30% compared to the fourth quarter of 2022. Our financial advisory results reflect these market conditions. That said, we are seeing some improvement in client dialogues and deal activity indicators such as complex clearances, new projects and engagements. Our European Advisory business continued its strong performance in the first quarter and restructuring activity is increasing, especially in the U.S. We recently added 2 new managing directors and restructuring, further bolstering a business that is already ranked number one globally in industry league tables. We also appointed Ray McGuire as President during the quarter with almost 40 years of experience in investment banking and M&A. Ray will play a key role in strengthening Lazard's senior relationships and originating new business for financial advisory and across the wider firm. We are also seeing momentum in Lazard's Asset Management business with rising AUM driven by higher asset levels and continued strong performance by many of our strategies. In fact, more than 80% of our strategies based on AUM are outperforming relative benchmarks on a 1-year basis, reflecting a market that is moving more towards fundamentals. While growth stocks outperformed in the first quarter, quality was the second best factor benefiting from resilience and uncertain periods. As an active manager, we see significant opportunity to deliver outperformance as volatility uncertainty continue to create a unique set of economic and market conditions. The recent stress in the banking sector, in particular, reinforces our conviction in our fundamental approach, which we believe will continue to translate into long-term alpha generation. In the first quarter, asset management also expanded its capabilities…

[Operator Instructions] We will take our first question from Brennan Hawken with UBS. Your line is now open.

Hi Brennan.

Hey, how you doing, Ken? Good morning. Thank you for taking my questions. I'd like to start on the plans for the workforce reduction. You guys provided an expectation for the awarded comp ratio for the year. But how should we expect that to translate into an actual reported adjusted comp ratio? And also, Ken, when you touched on -- you gave a little color around the expected expense reduction, but could you maybe provide a bit more specificity around how you would manage these cuts without impacting revenue and where they'll be focused?

Sure. Okay. Let me take a minute and just give a little bit of context for why now in terms of the headcount -- in terms of the cost restructuring and the cost initiatives and then get to your question on the awarded versus GAAP and then touch on finally, the productive capacity point. Let's start. December, Goldman Conference, Earnings, February 2. I think in both cases, I was asked how do you think about the environment? And how are you thinking about cost initiatives? And in both context, what I said was, look, things appear to be a little bit better today than we would have expected six months before. And so consequently, what we're going to do is kind of take a look and see things -- how things unfold and into midyear. Candidly, things have really deteriorated, I think, overall in the external environment relative to where we were in December and again in February. And so consequently, we just felt it was time to take some action. We didn't want to keep our head in the sand about this and always time to move on this. So that's the background to this. When we look at our business, a couple of things stuck out. The first is, as you know, on the advisory side, in particular, we have a more global footprint than many of our competitors do. And a lot of this was designed for a geopolitical environment in the mid-teens, which is, in fact, very different from today. So to your point on productive capacity, some of this is just reorienting headcount from places where we think there's less opportunity than there was at that time. Second, when we look at the business today, and we look back on the fact that coming out…

Sure. Great. Sorry go ahead. No, no, please. I didn't mean to interrupt you.

I think you had one more question.

It was around how you execute year and avoid impacting the revenue?

Yes. I think I touched on that. I think it's a combination of two things. One is where we think we have less opportunity and people and then where the investments are going to go in the future. I think that really is it.

Got it. Okay. That was very thorough. Ken. I appreciate it. And then the follow-up, it does seem, based upon some analysis around the fixed comp expense that you have. It does seem as though there was some incentive accrual since you're going through and doing some workforce reduction. Obviously, that will play through -- where that gets executed will play through on that adjusted reported comp, as you discussed. But how should we be thinking about the potential for some of these incentives that may be you booked to be adjusted as you get through the year, would you think that there would be the capacity for that as the revenue picture becomes more clear based on the outlook?

So I think I'm following the question, so let me kind of answer what I think is the question. Look, in the first quarter, generally speaking, there's some accrual for incentive comp, but it's usually pretty small. Each of the first quarters. That's just historically the case. And then I think the second is there room as a result of some of these restructurings to have more flexibility at year-end, the short answer is yes, but all of this doesn't really kick in until we get to 2024.

Okay. All right. Appreciate it.

We'll take our next question from James Yaro with Goldman Sachs. Your line is open.

Good morning, and thanks for taking my question. I just wanted to first touch on your outlook for M&A in Europe versus the U.S. given clearly as a somewhat healthier banking system today, and appears to have a somewhat stronger near term economic trajectory as well.

It's a good question. So kind of surprising, our first quarter performance in Europe, which, of course, is dependent a bit on what was announced 6, 12 months before. It was actually quite strong. And when we look at the business in Europe right now, look, there has clearly been a slowdown in announcements over the last 4 or 5 quarters in Europe as well. But when we look at the individual businesses in Europe at the moment, they're pretty robust. And I'm not sure that plays into revenue in a quarter by quarter, but I feel pretty good about where our franchise is in Europe right now and the activity levels, while clearly less than they were in 2021 or not, at least for the businesses where the business we're doing and the countries we're in, it's not terrible at the moment.

Okay. That's very helpful. And then if we just turn to restructuring, maybe you could just talk about the type of assignments and geographies in which you're seeing the biggest pickup in that business? When should we expect the pace of the restructuring to actually hit your revenue? And then what's your view on the length of this restructuring cycle at this point?

Okay. Great question. So first of all, this M&A cycle and restructuring cycle seems to be very different from '01, '02, '06, '09 or '14, '13, whatever it was, even the short restructuring cycle before the pandemic. Generally speaking, our experience has been -- not even general, but our experience historically has been that when M&A turns down, usually some period of time prior to the M&A turn down, restructuring assignments start to pick up and the restructuring cycle offset some of the decline in M&A. That's been our experience in the past. What's unusual about this restructuring cycle is it's been delayed, muted and delayed. That said, we're finally seeing a real pickup in activity. And that probably starts to translate into revenue towards the end of this year into the beginning of next year. And to that end, actually, we've just added 2 new restructuring partners, one focused on creditor assignments, which is an area that we've been trying to build. So I think that should help us a bit just in terms of the market share gains there. But generally speaking, this has been muted so far. Do I think it's going to last longer? I think part of that is going to be dependent on what happens in the banking sector. If we get a real credit crunch there, then this could be quite a long cycle. If we get a more muted credit crunch, it probably is going to be a good cycle. Good in the sense that there'll be activity because there's a lot of maturities coming due in a higher interest rate environment, and that's going to, I think, make for some stress overall. But the actual breadth in the market will, in part, be dependent on what happens with the credit crunch.

That's very clear. Thanks for taking the time.

And as far as sectors, I think you're going to see a lot of activity in real estate, which is a strong area for us. Retail, as you can see, continues to be an area which has been difficult. And then I think it was more or less going to be focused on companies that have overlevered capital structures with near-term maturities. That's where the pressure is, and that are affected by downturn in the economy.

Okay, thank you so much. Appreciate that.

We will take our next question from Devin Ryan with JMP Securities. Your line is now open.

Hi Devin.

Hey, good morning. I just want to come back to the conversation on the expense reduction. So the 10%, is that equal across segments? Or is that more weighted towards advisory is kind of the first point. And then it sounds like some aspect of this is just a little bit of kind of -- you've been dragging your feet on areas where maybe the fee pools aren't as compelling today as they were in the past. And so now it's kind of the time to do that plus some incremental trimming where the environment today is challenged, right? So I just want to kind of clarify within that. And then the other part of the question is, so then what does this mean for investing in 2 parts of the business where maybe the fee pool is becoming more compelling in advisory where you guys have been pretty active recruiting externally over the past couple of years?

Okay. So let's start with the last question, but I think it was the last question first. Part of the objective here in terms of taking this action now is to get ahead of the environment. For two reasons. One is that the M&A business is a cyclical business. It's when the -- there's summer fall, followed by winter and then there's spring/summer again. This is cycles. That's the business we're in. And we're in a down cycle right now. Experience tells us that in a cycle like this, you probably want to do this early for 2 reasons. One is you get it out of the way. So people are focused and ready for the recovery. And what you're doing with clients now determines how well you do as the recovery takes place. So that's kind of part one. Part 2 is, this is the environment where if you can create enough room in the cost structure to allow for future investment, which is what we're trying to do here, it's an environment where you can pick up really incrementally good talent. And that's what we're focused on is senior talent -- productive talent in the places that matter to us, which I think here is going to be in the U.S. and in Europe. So that's the goal here, is one to get ahead of it so that when the recovery does, we're not distracted by a restructuring that took place at the end of it, and then number 2 is just to make sure we have the fuel to continue to invest in our business at a time when those investments are priced much more attractively. So that's kind of part one. As far as the places where productivity is, look, I'm not so sure we were behind the curve on this. I just think this is a changing environment, a changing cycle. And unfortunately, these are the times where you have to do these things, and these are tough decisions. And you're always making bets in this business as to where the cycle is going to -- where the activity is going to be in the next cycle and we're making those bets now in terms of what we're doing here. As far as where the headcounts are coming from, look, the advisory business has more people than the asset management business has. So obviously, it's going to be more impacted than the asset management businesses. The office closings are all on the advisory side. And with regard to corporate, I think there's a fair amount of reengineering that's taking place there and the -- it's going to be impacted as well.

Okay, thanks for the thorough answer Ken. I believe Evan is on the call.

Yes.

Okay. I believe Evan is on the call. So I want to ask what just -- okay, great. So Evan, obviously, you've now been in the seat for nearly a year on the asset management side. So just walk to maybe dig in around kind of your thoughts in that seat kind of strategic priorities and maybe areas that may get more investment or less investment? Or how are you thinking about just the overall growth profile and strategy of that business now that you've been in the seat for a year?

Sure. Devin, happy to share some thoughts on that. I mean it's been several -- obviously several quarters now, a couple of quarters of direct involvement here in the asset management business, but obviously I've been in the asset management -- focused on asset management for the last 5 years as CFO as well. So continuation of our strategy is what we set up at the beginning. We've been focused on 3 specific areas for us, which is really; first is foremost is performance and focusing on the performance of all of our funds. And as Ken mentioned earlier, 80% of our funds outperforming their benchmarks on a one-year basis. So I think we've had some good success there. Obviously, the market movement more towards fundamental investing that we've seen over the past 6 to 9 months has been playing towards the areas of our strength, which are relative value, quality and sort of factor quant, which is the area of focus for our business, both across fixed income and equities. And so I think performance is an area we're going to continue to focus on. We're spending a lot of time thinking about what kind of tools and resources, research and insights, how do you generate the best insights across the platform we have. We have tremendous amounts of intellectual capital on a global basis. We're lucky to have such great teams in all emerging markets and global international and in local areas around the world and I think bringing together those insights allow us to truly have an advantage on a performance basis in so many of our funds, especially in fundamental areas of the markets and certainly markets to become more fundamentally driven. The other area that we've spent a little bit of time focusing on, I…

Terrific. Thanks for the thorough answer. Appreciate it guys. I will hop back in the queue.

Great.

We'll take our next question from Steven Chubak with Wolfe Research. Your line is open.

Hi Steven.

Hi, good morning Ken. So I did want to ask about some of the comp ratio comments. You noted you're still committed to getting back to the 55% to 59% target comp ratio. It sounds like you're hoping to get back to that range possibly as early as 2024 assuming a more normalized revenue environment. And just wanted to confirm first, whether that's the right interpretation? And second, what level of normalized revenue will be required to deliver such an outcome on this pro forma lower expense base.

Great question. So -- and that is the thought process that actually went into what we're doing. First, again, to repeat, one of the things that really compelled us to take action now is when we thought about the inflation in expenses in our business, partly to do -- partly to do some of the headcount increases and the likely revenue trajectory of our business, particularly the advisory business over the next couple of years or so, this was a necessary thing to do because if we had gone back to 2020 or 2022 revenues, and we had the 2022 cost base going into 2023 with that kind of inflation, we would not be within our targets. And so the goal here is if you think about revenue somewhere in the 2020 or 2022 range for the advisory side, then you start to see how we can get back to our targeted ranges on comp and non-comp and what ultimately ends up this margin. And then, of course, it's the mix between the businesses, between advisory and asset. What's interesting about this is this could turn out to be a little like the period '09 to '13, where asset kind of leads the recovery because the markets and that flows through to P&L quicker than the announcements going up and then the completions do on advisory. So I would kind of keep that in mind as we go through this, and that's how we're thinking about it. What is normalized revenue environment? I guess I would say it's not 2021. I don't think we're going to be repeating 2021 as an industry for a while. I think individually as firms, we could, but I think that's not something that the industry should count on as a whole. My guess is it looks probably more like '18, '19, '20 maybe '22 as being more normalized kind of years. But this is the conundrum of the advisory business. It's a very difficult business to predict in any given year. You know what happens over the long run with regard to the advisory market, it's kind of a 4% GDP plus growth business. But you don't know any given year, it can move as we see 30%, 40%. And so the cycles are pretty big.

Thanks for all that color Ken. And just for my follow-up, the tone on the environment, admittedly that you just conveyed, it's much less sanguined than what we've heard from some of your bulge bracket tiers, which are arguably better comps for Lazard, have a similarly global footprint. Want to understand whether there are any idiosyncratic factors that would result in weaker performance at Lazard relative to some of the bulges? And what are some of the macro factors or indicators that could potentially support inflection sooner than what you can be?

Okay. So a couple of points on that. One is when I look at the actual advisory revenues of our -- what I'd say, money center peers, so Goldman, Morgan Stanley, JPM, Citi, BofA and then I look at the independents. Candidly, most people -- there are exceptions in there, but -- most people have acted within a few points of the market one direction or the other. Some a little worse, some a little better, but it's been kind of market performance there. So I'm not sure you can make those distinctions right now, number one. Number two is, I think the piece of the business that could turn for us sooner than the market turns is restructuring. As I said earlier, what's unusual about this cycle is usually when we see this kind of downturn in M&A, it's offset or muted by an upturn in restructuring, almost simultaneous or even proceeding. Here, it's been delayed. So I think what we could -- what could happen towards the end of this year is we start to see restructuring revenues coming through before the market recovers and such. So that should help a little bit for those that have restructuring practices. And then what could change? Look, I think the biggest issue out there right now is just the inability to kind of predict the future that is people don't really have a lot of conviction and confidence about their ability to convict -- to predict the future. Now what's funny about that is they were totally wrong in 2021 when they were so bullish and were -- had real conviction. But that's where we are. And it's difficult for people to allocate significant capital in that kind of environment, whether you're a company or you're a fund manager. And…

Helpful perspective Ken. Thanks so much for taking my questions.

Sure.

We will take our next question from Matt Moon with KBW. Your line is open.

Good morning. Just wanted to drill down on the environment and maybe what you're seeing between the strategic and sponsor community in more detail. On the one hand, it seems that sponsors are seeing a slightly higher level of degradation versus strategics. But as you note, they should be quicker to return to market. So just curious on your updated thoughts here. Yes, would just love to…

So let's start with strategics. One complicating factor in the strategic market is the really big deals that have a lot of overlap are in a pretty difficult and I trust environment. We just saw the activation deal -- the problems with the activation deal in the U.K. And so that kind of -- and that's been the case now for several years. So this isn't a new factor, but there is some -- there's obviously going to be reticence on pulling the trigger on really big deals where there's a significant antitrust component. That said, within sectors, you're still seeing some strategic activity amongst bigger deals. We're involved in as an example, in the Newmont Mining situation. There was a big water deal that we did recently and such. So there's some activity there. And I think for strategics that have strong balance sheets, as we've seen in every cycle where there's a downturn, they remain active. They're not as active as when you're in a period of massive optimism, but they remain active. The area where there's continued strategic activity, I'd say, is in the kind of $1 billion to $5 billion deal segment where you're not sort of betting the company and in industries where M&A is kind of R&D and growth. And so you're seeing that in the pharma sector with biotech, you continue to see that in the renewable sector. We see some in tech, although that's complicated at the moment because of antitrust. And we're seeing an enormous amount of activity in the big sector just because of the strength of our FIG practice -- the strength of our FIG practice. So those have been good areas for us. And then what's interesting about the consumer sector every now and then there's a big…

Great. And then just shifting gears for my follow-up to the asset management side. You guys obviously executed a smaller kind of modest-sized acquisition in March of Truvvo while also simultaneously combining the existing private client offering you guys had to create the Lazard family office partners. I know it's a smaller part of AUM base, but just curious if you're seeing any recurring and ongoing opportunities for the private client side of the business specifically? I'm just kind of thinking in the wake of the banking crisis that affiliated bank model for private clients, if there's anything there or if that's more outside the area of focus for you guys?

Evan, do you want to kind of size that and..

Yes. As you mentioned, we formed Lazard family office partners with the acquisition of Truvvo earlier in the first quarter and we put that alongside our existing private client business. We've always had a very strong private client business in the high net worth space here, the direct business here. And the combined business now in the U.S., approximately $8 billion of AUM. We're very excited to bring on the new team and to really form this new entity to chase the -- and sort of building a much broader practice across the wealth management space. Look, it's really augmenting what we've always done. I think when you think about the movement around what's going on in the financial space today, there certainly is a lot of movement, and that's partly why we thought about thinking about this channel as one that we should continue to grow. Obviously, we've had a large wealth management practice across Europe for a while now. And this was just a good opportunity for us to create a base to, to look at all the changes that are going to go on. We do expect there to be a lot of movement in the wealth management space over the coming couple of years, and this will give us another growth vector in that space over the coming years as well.

Great, thanks, guys.

Yes.

We will take our next question from Ryan Kenny with Morgan Stanley. Your line is now open.

Hi, good morning. I wanted to follow up on the comment around wider spreads impacting deal financing. Can you give us some more color on how much wider spreads and credit conditions are playing a role in deal completion? Is it a bigger headwind than higher rate? And I'm asking to just try to get a sense of what's a better macro outcome, higher rates with no recession or a rate cut that come with a recession but also -- and also better credit conditions?

Well, look, I mean, I think the problem here is you've got a lot of cross currents. And so you sort of -- and navigating those cross currents is the challenge of this environment for anybody that's looking for financing. If we end up in a more difficult economic -- macroeconomic environment, one where there's a recession, my guess is spreads start to widen a bit. On the flip side, if we go in a recession, that probably is an expectation that the Fed is going to start to pull back on rate increases. So you have a rate environment that starts to improve a little bit. On the -- another current is if you think about what's happening in the regional and the community banking sector with regard to deposit outflows and what that does to the ability to lend particularly into the commercial real estate sector in the SME sector, where the regional banks and the community banks are very important players that probably creates a bit of a credit crunch for people. On the other side of that, you have a huge amount of money in the private credit funds right now that start to become more active. So you have all these cross currents. But the key here is just that risk capital is just a lot more expensive today than it was in 2021. And as a result of that, valuations are going to be depressed or what people could afford to pay for businesses is going to go down.

Thank you.

Thank you. This now concludes the Lazard conference call.