Lazard Ltd

NYSE:LAZ

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, and welcome to Lazard's First Quarter 2019 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 Q&A session. Instructions will be provided at that time. [Operator Instructions]

At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations. Please go ahead, ma'am.

[Alexandra Deignan, Head of Investor Relations]

Good morning, and welcome to Lazard's earnings call for the first quarter 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. These 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 Evan Russo, Chief Financial Officer. They will provide some opening remarks, and then we will open our call to questions.

I will now turn the call over to Ken.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

As expected -- good morning. As expected, our first quarter results came in lower than the comparable period last year. In our advisory business, strong activity in U.S. was offset by softness in Europe. In Asset Management, AUM grew 9% from the end of the fourth quarter, reflecting the strong performance of the markets in the first quarter.

Advisory activity levels in the U.S. continue to be strong, but while there are pockets of strength, particularly in France for us, Europe overall remains soft. We are active across all our practices and well positioned for a recovery in activity in Europe.

Our world-leading global restructuring practice continues to be an important contributor to our franchise. Year-to-date, Lazard is ranked number one for the announced -- for announced restructuring deals globally. Activity levels remain high in our shareholder and capital advisory practices.

In Asset Management, gross flows were strong across our platforms. Our investments in new strategies and platform expansions continue to bear fruit. Our quantitative strategies achieved strong net inflows in the first quarter. Our convertible and hedge fund strategies also achieved positive net flows.

We launched four new funds in the first quarter: two under alternatives platform and one each in fixed income and international equities. Earlier this month, we announced additions to Lazard senior management team. These new positions, in combination with our existing leadership team, will strengthen our ability to capitalize on opportunity we see in both our businesses. We are confident that the disruption taking place in the asset management industry will create opportunities for Lazard, both organic and inorganic, over the next several years.

In Financial Advisory, we believe the changing landscape will increasingly favor firms that have the best people with the best capabilities. And in both businesses, our investments in innovative technology are providing competitive edge today and increasingly will in the future.

Evan will now provide color on our results, then I will comment on our outlook.

[Evan Russo, Chief Financial Officer]

Thank you, Ken. Financial Advisory first quarter operating revenue of $330 million was down 15% from last year's record level. This reflected a lower level of completed activity in Europe and Asia, in contrast to the America, where first quarter revenue increased year-over-year. Asset Management operating revenue of $284 million was down 14% from last year's record level. On a sequential basis, it increased 1% from the fourth quarter of 2018.

Average AUM for the first quarter was $229 billion, down 11% from a year ago, but up 2% from the fourth quarter of 2018. We finished the fourth – the first quarter with AUM at $235 billion, 9% higher than the start of the year. The increase was primarily driven by market appreciation, slightly offset by negative foreign exchange movement.

Net flows for the quarter were neutral, reflecting net inflows in our fixed income and alternative platforms, offset by net outflows in our emerging markets, local and multiregional equity platforms. As of April 17, AUM was approximately $241 billion, driven primarily by market appreciation.

Looking ahead across our franchise. Asset Management is off to a good start in 2019. Our increase in AUM has reached the average AUM of full year 2018, which was $241 billion. We expect that Financial Advisory in the second quarter will continue to have challenging comparisons to last year's record revenue levels. We expect the second half of the year to be stronger than the first half.

Turning to expenses. In the first quarter, we accrued compensation expense at a 57.5% adjusted compensation ratio, compared to 55.8% in the first quarter of last year. Our improved compensation level reflects higher amortization associated with previous years' awards and lower revenue in this year's first quarter. Our full year comp expectations will develop through the year based on revenues, business mix and the pace of hiring.

Non-comp expenses were 1% higher than the same period last year, reflecting higher investments in technology, as well as marketing and business development costs, offset by lower fund administration fees.

Our adjusted non-compensation ratio for the first quarter was 18.7% compared to 15.8% in the first quarter of last year. The higher ratio primarily reflects the lower revenue in this year's first quarter.

Turning to taxes. Our effective tax rate in the first quarter, as adjusted, was 19.4%. We continue to expect an annual effective tax rate for this year in the mid-20% range.

Turning now to capital allocation. We continue to generate strong cash flow, which supports return of capital to our shareholders. In the first quarter, we returned $386 million including $103 million in dividend and $192 million in share repurchases.

In addition, in the first quarter, we took advantage of attractive credit markets to issue $500 million of senior notes, using part of the proceeds to redeem $250 million of near-term maturity debt to further extend our maturity profile. We plan to use the remaining proceeds for general corporate purposes, including additional share repurchases.

As a result of our repurchase program in the quarter, we have already exceeded our objective of offsetting potential dilution from the 2018 year-end equity grants. Our first quarter diluted weighted average share count declined 8% from a year ago to 121 million shares. Finally, we have increased our quarterly dividend by 7% from $0.24 to $0.47 per share.

Ken will now conclude our remarks.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Thank you, Evan. A few words on our outlook before we open the call to questions. The global macroeconomic environment has moderated in recent months, but is forecasted to pick up in the second half of 2019.

Strategic activity reflects a high degree of regional variation. The U.S. remains relatively strong. European activity is softer than a year ago primarily reflecting uncertainty around Brexit and the Germany economy, although we see pockets of strength notably in France. Lazard's strong presence in Europe positions us well for recovery in that market.

The forces driving strategic activity continue to be in place. For the next several years, we expect technology driven disruption to be a significant driver of M&A across industries and shareholder activism continues to put pressure on CEOs and Boards globally.

Our advisory business is well-positioned in this environment with the most sophisticated capability and deeply established presence in local markets globally, reinforced with expertise from global sector and specialty teams.

In Asset Management, our franchise is world class, with investment platforms that are broadly diversified across asset classes styles and regions. Our institutional clients remain strategic allocators of capital.

In both our businesses, we continue to invest in our people, capability and importantly, technology to enhance our competitive edge. We remain focused on serving our clients well, while we manage the firm for profitable growth and shareholder value over the long term.

Let's take questions.

[Operator]

Thank you. [Operator Instructions]

We'll now take our first question from Richard Ramsden from Goldman Sachs. Please go ahead. Your line is open.

[Richard Ramsden, Goldman Sachs]

Okay. Good morning, everyone. Perhaps you can talk a little bit about the restructuring business. It does seem as if that's picked up this quarter. Would you say it's picked up faster than you expected heading into the year? And perhaps you can talk a little bit about the outlook for that business for the rest of the year.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Okay. So look, restructuring tends to vary quarter-by-quarter a bit, because of the lumpiness of fees. But generally speaking, the practice is active, but we haven't yet seen a turn in credit conditions. And for this business to really pick up, one has to see a shift in credit conditions and see spreads widen. We haven't seen too much of that yet, but there are few little warning signals around that out there. And so, we expect a moderate level of activity this year. And if you start to see spreads start to widen, it should start -- it could pick up.

[Richard Ramsden, Goldman Sachs]

Okay. And then secondly, can you talk a little bit about the buyback, $192 million, I think you bought back this year. Can you just confirm the remaining authorization is $400 million?

And then secondly, can you talk a bit about the capacity to issue more debt to increase the buyback over time? What do you feel comfortable with in terms of overall debt levels?

[Evan Russo, Chief Financial Officer]

Sure. Hi, Richard. It's Evan. Let's start with -- yeah, we have approximately $400 million at the end of last quarter available on the share repurchase authorization. As you know from quarter-to-quarter we'll up that whenever it gets too low. So, we have plenty of authorization to continue buying back shares. And it's -- in this period, as we mentioned we've repurchased approximately 5.2 million shares in Q1 and that was after repurchasing about 6 million shares in Q4.

And as we mentioned we bought back enough shares to more than offset our year-end deferred stock awards. So taking down the share count significantly. We've taken the weighted average share count down approximately 11 million or 12 million shares since the beginning of 2018, so we're down to about 121 million. And we're moving closer towards the $100 million share count level. And we're going to continue to be -- 100 million share count level.

So we're going to continue to be aggressive throughout the year. Of course, that's going to be dependent upon share price and other levels of cash generation and investment. And as you pointed out, look, in March, we took advantage of the attractive credit markets to refinance and extend maturities of our remaining 2020 notes, and we raised additional proceeds, approximately $230 million of excess proceeds to again continue with our stronger and aggressive share repurchase levels that remained throughout the year.

I think in terms of the sort of capital structure, over the past nine months, we've increased our leverage for the sake of repurchasing additional shares, mostly for the sake of additional share repurchases by about $500 million. We certainly have much more capacity to issue more debt, if we wanted do.

Although, look, we are -- in our businesses, we are conservative naturally with our capital structure, and the way we look at it is long-term maturities are very important to us. Cheap cost of debt in this part of the cycle is very important to us as well. We're comfortable with the level of debt we currently have outstanding, and I think that we constantly revisit that on a year-over-year basis. We continue to look at our capital structure in the context of our business, the business cycle where we're up to and the expectations of the business for the coming years out.

[Richard Ramsden, Goldman Sachs]

Okay. Thank you very much.

[Operator]

We will now take our next question from Michael Needham from Bank of America. Please go ahead. Your line is open.

[Michael Needham, Bank of America]

Hey, hey, good morning. So the first one I have is just on the new growth team that you announced. Can you just talk about what that team is going to be focused on? My guess would be more on the Asset Management business, new strategies and organic growth. But just practically, what they are focused on practically? How they are going to implement changes at the firm? Like who has to sign off on new initiatives? And any additional capital spend or further growth.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Okay. So three parts to it. One is, a clear part of this is taking a lot of the initiatives that we have commenced around technology that are starting to have real impact on our capabilities on both the advisory and asset side and pushing that along at an accelerated pace because we see a lot of opportunity there. This isn't necessarily lots of money. It's just taking capabilities that we're developing on our own, some network bringing in from the outside and making sure that we're getting them into the businesses as quickly and as efficiently as we can. And that's been an initiative that's been underway now for the past year or so, and we're going to accelerate that because we see an enormous opportunity there in both businesses to create competitive edge.

Second is, in terms of the environment, at least on the Asset Management side, because of a lot of the trends in the industry, the disruption from passive, again, technology, we expect there's going to be a lot more opportunity to look at lift outs, which we view as organic type of growth. We've already accelerated activity around that this year on the Asset Management side of the business with several teams brought on, and we see more opportunity to do that in the future.

So having some dedicated resource really focused on that, we think we could accelerate our activity there. And then obviously, there's going to be from time-to-time, some inorganic things that will be coming up as a result of the same disruption that could be interesting to complement our business with. But we're going to be pretty disciplined about that, as we have been in the past.

But again, the environment, probably over the next, call it, 12 months, 24 months, 36 months is probably going to lend itself to more of both the lift-out opportunities that is small strategies that can scale on their own to maybe smaller firms that will do better associated with us than they will do on their own. And we can take -- they can take advantage of both our distribution or brand or bring us distribution capabilities, we don't have, as an example. Those are the kinds of things we'll be looking at.

And then on the advisory side, really the key there is implementing, again, hiring and such in a way that's really complementary to the business. I think, on the advisory side, we have the benefit of having a pretty good history of growing our own people. I think we've made 12, 14 promotes on the advisory side this year -- 11 promotes on the advisory side this year, and that's a steady progression each year. But every now and then, that needs to be and should be complemented by outside hires. And I think where we see that opportunity, we're going to take advantage of this. And again, it gives us a little bit -- more ability to focus on this than we've had in the past.

[Michael Needham, Bank of America]

Okay. All right. That's great. And then a follow-up on incentive fees. How close are your funds to the high watermarks? And how -- is it -- just given the markets recovered nicely, would you expect incentive fees to like kind of resume later this year?

[Evan Russo, Chief Financial Officer]

Yes, look, I mean, incentive fees are going to move around quarter-to-quarter. As you saw this quarter here, we've got some low incentive fees. Q4, we had lower incentive fees as well. As you're right, I mean, this quarter was a lot due to the -- we're still a way from the high watermark even though some of the markets are hitting their highs. It sort of depends on where some of the investments are made and where the investors came into the fund. And so we still have a little bit of a way to go forward to hit the high watermarks on some of the funds.

As you remember, also, it's kind of lumpy. I mean, generally, we see more of incentive fund in the Q4 is where most of them -- or some -- a little bit in Q2, but mostly in Q4, is when most of those funds pay out. So, we'll know more as we get moving through the year.

[Michael Needham, Bank of America]

Okay. Thank you.

[Operator]

We'll now take our next question from Devin Ryan from JMP Securities. Please go ahead, your line is open.

[Devin Ryan, JMP Securities]

Hey, good morning Ken, good morning Evan. The first question, just on Europe. As you've referenced, we could see the announcements are down quite a bit from last year. And I'm just curious, in your view, what changes the tone and whether there's pent-up activity, if you will. Like, for example, if we get some clarity on Brexit, does that represent a big catalyst? And so that's kind of part one.

And part two is just, bigger picture, remind us why you're still structurally bullish on the European footprint. Obviously, we haven't really had a recovery post-financial crisis. So, I think some people seem to think that it's not as good of a business, but I would argue the otherwise. So, I'm curious how you guys would frame that.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Sure. So, let's start with the kind of near, medium-term picture, which is I think your first question around the macroeconomic environment in Europe and Brexit. There's no question that Brexit weighs heavily on activity levels in the U.K., and to a degree, on the continent as well. It really comes down to a very simple issue, which is the ability to plan.

And it's reasonably difficult to do -- make big bets around M&A if you don't really know what the future is going to bring -- has in store for you with regard to a number of things associated with Brexit, which is a lot.

So, to the extent that there is a resolution to Brexit and I would argue hopefully not a hard Brexit because I think that will -- that may create more turmoil. But if you end up with something along the line of a customs using, soft Brexit or no Brexit, once that clarity comes, I think there is a pent-up level of activity, particularly in the U.K., that I think will take place.

On the continent, you have two phenomena at work; one is a bit of Brexit. Again, how do you make bets when one of the largest countries in Europe is somewhat -- is in an uncertain state?

And the second, which I guess weighed on Europe is the softness in Germany at the second half of the beginning of this year. A lot of that appears to be export-driven and tied in part to China. There were other factors, but that's a big factor.

China has shown recent strength economically and it looks like exports are starting to pick up again. And so we may see some improved performance in Germany in the second half of this year. And if you see that, then the overall macro environment for Europe becomes more benign, and you're looking probably at growth rates for the continent of close to 1.5% in the second half, at least IMF and other forecasts. And that starts to feel a little bit more stable. And as I think -- and if that starts to take place, then I think you start to see a pickup in activity.

But look, Europe is structurally a smaller M&A market today than it was at the same period of time in the last cycle than it was. From Lazard's standpoint and I think the other incumbent in Europe's standpoint, Rothschild, our headcounts are pretty similar to where they were last cycle, but -- and our benefit has been our margins are probably better than they were then.

And we picked up just a lot of share because of that. Because I think the phenomenon in Europe is you have less new independents than we've seen in the U.S. And so the shift in market share from the integrated firms to the independents in the U.S. has been mostly integrated, reducing some footprint in Europe, not all the way, but some footprint in Europe.

And Lazard and one of the other incumbents, Rothschild, is doing pretty well in keeping their footprint and keeping -- and increasing share during this period of time. And so the overall economics of the business, where it's been in the last couple of years, has been pretty good. This year, obviously, if it's a really slow year, maybe a little more challenged.

But I think overall, Europe is going to continue to be the second biggest market globally after the U.S. And you have world-class companies across Europe: U.K., France, Nordic, Netherlands, Switzerland. You see companies that are world-class, global competitors, equal to their competitors in the U.S. with demands around M&A that are going to be very similar. And I think we remain extraordinarily well-positioned to serve those companies.

[Devin Ryan, JMP Securities]

Okay, terrific. Thanks for all the perspective there. And just to follow-up, maybe talk a little bit about how big the non-M&A Advisory and Restructuring businesses, like shareholder activism or Capital Advisory footprints, how big they are today relative to a few years ago, whether it be headcount or revenues.

And I know that a lot of the Advisory capabilities are interconnected here, but I'm just trying to think about where these businesses have come from. And then the relative growth from here and whether you see more growth in kind of traditional capabilities, traditional kind of M&A Advisory or do some of these ancillary businesses maybe grow faster from a smaller base.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

I love this question. I mean you're hitting on a great strength of our Advisory business. So, as you know, we've been a pioneer in adding Advisory capabilities beyond the traditional M&A toolbox. And so we were a pioneer -- restructuring pioneer in PCA, pioneer in Shareholder Advisory and analytics. Increasingly, I think, we're going to be a pioneer in using technology as a shareholder intelligence and corporate intelligence tool. So that's something we're very focused on.

PCA, which is our capital advisory, the fundraising business for us, last year, I think was at peak levels in terms of revenues. We see an enormous amount of opportunity in that business today. We've got a whole bunch of new products that we have rolled out, that we think really open up new fee streams for us there. So we're pretty excited about that.

And the Shareholder Advisory, which is morphing into a shareholder intelligence tool is something that we're putting a lot of resource into technologically, to a degree, people as well. That in of itself, we think, could become an independent fee stream over time. But today, it's really a capability that creates edge in our ability to get hired. And I think what we're really focused on in that business is providing a really fuller set of services to our clients, a much better ability to have insight into how to predict outcomes when it comes to transactions with those tools.

And that really I think will help us cement relationships with clients; really drive the ability to garner perhaps a larger share of fees from a client. And very importantly, it shortens acquisition time of clients, because it provides a capability which is differentiated from the M&A capability. So we're really excited about these various new platforms and very focused on building them out.

[Devin Ryan, JMP Securities]

All right, great, thanks a lot Ken.

[Operator]

We'll now take our next question from Brennan Hawken from UBS. Please go ahead. Your line is open.

[Brennan Hawken, UBS]

Good morning guys. Thanks for taking the question. Curious about whether or not you guys have reconsidered or considered revisiting and look at efficiency efforts, you talked to a lot of investors, and I know you guys have echoed this sentiment too. There's some frustration that the market is not recognizing the value in Lazard shares and the multiple certainly seems to be quite low. And at least, when we look at the profit margins for you all versus a combination of publicly traded asset managers, which mixes a little different, right, so you need to adjust for that plus some of the M&A boutiques suggest that maybe there could be some work to get profit margins a bit higher. So curious about how the benchmarking efforts are going and whether or not you think there might be some room to drive the margin higher through some efficiency efforts internal. Thanks.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Look, this is always a delicate question because you're always trying to balance investment in the business against margin. And I think we have, over the last several years, found the right balance. We benchmarked our business pretty carefully several years ago, as you're probably aware, both on the advisory and the asset side of the business.

I think our advisory business global platform benchmarks really well with other global platforms. It's a little easier to be concentrated in one market as opposed to having a global platform. That may raise a question in terms of have we made the right investments in the right places at all points in time. That's something we're always looking at, we'll continue to look at and we should look at based on structural changes globally to trade patterns and investment patterns. But it's something -- but having this global platform is of great value to the firm.

And on the Asset Management side of the business, I think again, we benchmarked ourselves pretty carefully against the real -- against businesses that look very similar to Lazard, not necessarily ones that are trading publicly. And I think we feel pretty comfortable with those benchmarks. But again, look, this is partly a question of expectations about cycle as much as anything else and we're entering a period of prolonged slowdown as an example at some point. We are pretty good at preparing for that, and I think you've seen us do that before. And I just would remind everyone that this is a firm that's been through multiple cycles in both the advisory and the asset business. And it's something that we've had a lot of experience in dealing with.

[Brennan Hawken, UBS]

Thanks for that color.

[Operator]

We'll now take our next question from Steven Chubak from Wolfe Research. Please go ahead. Your line is open.

[Julian Craitar, Wolfe Research]

Good morning guys. This is actually Julian filling in for Steven. Just wanted to kick things off on your Financial Advisory business, particularly Europe. Appreciate the colors particularly on U.K. and Germany. So a two-part question. One, I was wondering if your second half outlook versus first half contemplates that potential pickup in deal activity in Germany or any Brexit resolution for that matter. And then kind of looking beyond the second half towards the longer term, I was wondering, what are you thinking about resource personnel allocation in Europe relative to the opportunity, particularly if softness does continue? I know you guys are – have been in that region for a while, so that's home base for you guys, but just wanted to get a sense as if like where – how could we be thinking about your research allocations, particularly if the revenue environment remains soft there?

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Sure. So first question, again, you have to be a little careful about announcements versus completions in thinking about performance in any given year. So, if you see a pickup in microeconomic activity in Europe, or a resolution of Brexit towards the second half of this year, obviously, it may have some impact on this year, a better environment, things close, you may get some ability to close transactions quickly. But some of that just may fall into next year as well, which is what my expectation would be for a lot of it.

That said, I think, generally in our business we think that – as we – as Evan has said before, again to last year, I'll repeat it, our first half comps are challenging because we have a such a strong first half last year. Our second half should be better than our first half, is our expectation overall for the business.

To your longer-term question, look I think I touched on this before. The European markets are not – do not recover to their peak levels of 2007, 2006-2007, in fact – or lower in terms of overall completions and volumes than they were in the last cycle. I think we have been right-sized for that, and our profit margins have been really – and our overall margins in Europe have been attractive – more attractive, actually, than they were in the last cycle, even at lower activity levels. And our position is – our goal in Europe, like it is everywhere, is to be one of the leading competitors in each of the markets that we compete in.

That said, like everywhere in the world, it's structurally and cyclically, they become challenges to the business. We are very conscious of making sure that the business maintains its cash flow and profitability, and we'll adjust accordingly. The one thing I will say is, if you just were to look at the headcount and revenue of Lazard, you will see that it has skewed more towards the U.S. over the last kind of decade or so than it was in the last cycle. So we have oriented ourselves to where there has been more growth in the market over the last several years than what was the case in the last cycle.

[Julian Craitar, Wolfe Research]

Got you. Thanks, Ken for the color. Just wanted to switch gears to a question on your PTP structure. Under the current partnership structure, your tax rate – it looks like it's going to continue to run in the mid-20s, and it looks like it's still going to be a little bit higher than many of the independent peers operating as a C corp. Was just – I mean, I appreciate the color that you guys provide in your presentation, but wanted to get your latest thoughts on potential C corp conversion. And also, how would you respond to investor claims that you might need to be more proactive in addressing a potentially suboptimal tax structure, particularly after how a few recent C corp conversions appear to have been well received by the market?

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Evan, take it.

[Evan Russo, Chief Financial Officer]

Sure. So look, let's talk about our current structure, to start of with. Our current structure is currently very beneficial, as you know. I mean, you quoted the mid-20s tax rate that we have. Of course, from a cash tax rate perspective, as we said, mid to high-teens is the current cash tax rate, and so we've got to keep our eye on that as well. So we actually have a very beneficial structure that we're currently hearing. And we've gone through that in the past quarters.

Look, we continue to analyze and review all the information that's out there in the market and what other people have done, what the impact is and as we said, look, there is some very significant differences between Lazard and the other PTP. One of the biggest benefits of a conversion to a C corp comes from index ownership. The PTPs that have done the conversion, the biggest part of their claim is always that they're going to get into some of the indexes. And they're starting from a point, where they have 0% index ownership, and they're hoping to get to a point where they get maybe 8% to 10% index ownership.

And Lazard currently, in our current structure, we currently have 15% index ownership. We were already included in Russell, CRSP and others. And with that shows the difference between Lazard's current structure and the other PTPs. So we're slightly different than them, and that allows us to already have some of the benefits of index ownership.

And on the cost side, again, some of the other PTPs, every guy have their own structure. Ultimately, some of the other PTPs that are converting are able to shield a bunch of the tax. And Lazard's structure, year-over-year, they have some tax offset. And so therefore, they're able to not have their taxes go up in the early years, although, if you look out over a longer term, they're expecting very significant increases in their tax rate because of their conversion. And so Lazard, looking out, when we review the same analysis for ourselves, we don't have those significant tax to offset in the early years. And in fact, because of our large international business, we have more international income than many of the others out there. Because of that and because of our existing NOLs and OFLs, which support our significant beneficial current structure with a very low cash tax rate, in that case, if we convert it, we would have significant additional taxation up to as we said earlier this year, to get up to about 1,000 basis points additional tax that would hit us if we convert it into a C corp.

And so because of that, we continuously look at it, but currently we're not going to do anything that we don't think is in the interest of our long-term shareholders. And we should do things that make sense or appropriate. So we're going to continue to look at it. And as our current structure changes, or -- and as we said before the NOLs in a few years start to decline, maybe there's a different analysis that can be done and maybe even closely to something that can make sense. But currently, we don't see how that analysis would make sense for our shareholders.

[Julian Craitar, Wolfe Research]

Got you. Thank you guys. I appreciate it. Just one more quick follow-up for me, but on the non-comp side. So how -- just curious to get your outlook. I know that you guys invested -- you cited higher tech investment spend, technology investment spend this quarter, but it looks like it still came a little bit lighter than expected. Going forward, I know you cited a softness in 2Q and then better second half versus first half. But just kind of like, looking over this period and also a little bit beyond, while you guys continue to invest, how should we be thinking about your non-comp trajectory? I mean currently, it's towards the higher end of your through-the-cycle target range. And just wanted to get a sense as if you guys have any thoughts as to how you're planning on managing it as you guys move forward?

[Evan Russo, Chief Financial Officer]

Sure. So look on the non-comp side, we spent -- if you look back over the last couple of years, as Ken mentioned earlier, we have a significant focus on our cost and our cost discipline as we've been investing for growth in the business. And so last year, we had significant lower non-comp rates. And as you mentioned, we started talking about how we were investing more for growth in our tech and investing in technology and technology systems, platforms across the business for the sake of infrastructure efficiency and edge in our businesses.

And so that -- it was part of why we expected non-comp to be moving higher this year relative to last year. I think the ratio this quarter, as we mentioned, reflects really lower revenue in the quarter more than it does an increase in non-comp. You saw non-comp was really only up about 1%, and a lot of that did reflect the increase that we saw in the technology spend this quarter. We expect, for the remainder of the year, to have elevated spend in technology and in some of the other investments that will flow through to the non-comp line.

That said, we still -- again, subject to revenue the ratio is -- a lot of it is subject to significant amounts of where the revenue will come out for the year. And so it's too early to tell the non-comp picture for the full year. But again, we remain focused on the discipline we had over the past few years leading to where we were, which is a lower part of the curve on the non-comp basis with additional spend this year for additional investments that we're making mostly in technology.

[Julian Craitar, Wolfe Research]

Got you. Thank you guys for the color.

[Operator]

We'll now take our next question from Michael Brown from KBW. Please go ahead. Your line is open.

[Michael Brown, KBW]

Hi, good morning guys. So most of my questions have been asked and answered. I just wanted to just clarify. Was there any impact this quarter from the revenue recognition? Was there any kind of timing-related nuances that we should be aware of this quarter?

[Evan Russo, Chief Financial Officer]

Yes, look, it's not material for us, and I think we're getting to the -- sort of the point where it sort of ins and outs in every single quarter. I mean this is -- we've been talking the -- sort of the -- what we call the pull forward every quarter. This quarter was certainly not more material than any of the quarters we've had in the past. I mean, in every quarter, we have a couple of deals that kind of fall on one side or the other that under the new revenue recognition guidelines, we have to take into this quarter. But we kind of got into that pattern now where we kind of expect that a little bit will kind of roll forward. And in the next quarter, you'll probably pull some forward next quarter, so over time, it kind of averages out.

How we're now different than historically were, where you had a different deadline at the end of the quarter and sort of either things closed or they didn't. And sometimes deals hit at the end of the quarter or they fell a day short and you kind of move it to the next quarter. So you're going to get those quarter end scenario. This quarter again, not material for us and kind of -- we're getting into that pattern where it shouldn't be that relevant on a go-forward basis.

[Michael Brown, KBW]

Okay. That's fair. And then just as you're talking about non-comp, we saw that the expenses for your ERP system, they kind of declined sequentially. Is that kind of closer to the end, the investment in your ERP system? Or is that just kind of quarterly lumpiness?

[Evan Russo, Chief Financial Officer]

Yes. No. We are ending. We went live with our new ERP system at the beginning of this year. And therefore, we expect that over the next couple of quarters, the spend to start to decline on that as we sort of roll off of the big implementation projects. So last year was certainly going to be the highest of the ERP-related expenses that we were putting through the financials.

[Michael Brown, KBW]

Okay. Thank you for taking my questions.

[Operator]

We'll now take our next question from Chris Walsh from Buckingham Research. Please go ahead. Your line is open.

[Chris Walsh, Buckingham Research]

Hey, good morning. So you guys mentioned how investments in technology will be providing a competitive advantage for the future. I was just wondering can you help us understand a little bit more granularity some of the investments you've been making. I know you guys just mentioned the ERP system, but presumably, you've been investing in a range of technology. And since we're getting a good amount of questions from investors on this, we're just curious how is that going to better position Lazard in the marketplace and particularly versus other independent peers, who seem to be making similar investments.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Okay. So let me take this. Look, sort of been waiting for this question, because it's sort of been hovering around. If you in very simplistic way think about the Asset Management and the Advisory business as the ultimate prediction business. I mean, Asset Management, you're trying to predict the performance of a security relative to an index and whether you should be buying or, if you're a hedge fund, selling that particular security, or selling that particular security.

In the Advisory business, it's essentially an event prediction business using a mix of judgment and wisdom, experience complemented by analytical tools. You're trying oftentimes, to give advice to a clients to try to predict an outcome of a particular event, whether it's an M&A transaction, a merger, buying or selling a company, spin-off, buyback, earnings miss/hit, what you do, things like that.

Data analytics, artificial intelligence are tools to improve our ability to predict and are tools that improve our ability to predict outcomes. And so, the ability to utilize those tools, to complement the judgment with the experience of our people on both sides of our business, is going to improve our ability to perform.

It's almost that simple. And I think that there's many new capabilities that are available and potential insights that are available through utilizing these tools. And what we're doing is trying to implement them in our business as quickly and as efficiently as we can, because we think that's going to really give us edge. And that's really it in a nutshell.

[Chris Walsh, Buckingham Research]

Got it. That makes sense. Thank you. And then, just one follow-up. Obviously, mix shift in AUM in the Asset Management business has implications for the fee rate, which has over the last several years, been very stable around 50 bps.

I'm just curious, given your expectation for pricing trends and net flows, particularly into some of the newer strategies that seem to be gathering the majority of net new assets, what are your expectations for how the fee rate in that business will trend in coming quarters and then even further out? Thank you.

[Evan Russo, Chief Financial Officer]

Sure. So, look, on the fee rate, for AUM, as you mentioned, I mean, it's been trending around 50 basis point line, plus or minus. This quarter, the decline in the fee rate, gladly, had a lot to do with mix shift, as you point out. It's the difference between having more of your AUM in the sort of the higher -- the more higher-basis-point products, the higher-fee product line that we have versus some of the lower.

So thinking about it as emerging market and other international asset strategies versus fixed income and some of the quant strategies, which are lower-fee platforms. And so, a lot of it has to do with that mix shift, and we've been seeing that kind of go from time to time.

I said, look, we're in a business that has and will continue to see fee pressure. And we've seen some of it so far over the last year or so, but we expect it to continue. We're going to continue to -- expect to see that continue throughout the year and into the future.

And we are going to continue to innovate products and find newer and interesting things to do that we think are going to add significant value to the platform. And we're going to continue to watch over, obviously, the mix shift as well. But you're right. As we kind of trend more towards the quants and other focuses, you'd expect that mix shift to continue and see a decline in the fee rate over time if that comes back.

That said, last year, we also saw significant movement down into this first quarter as well in some of the higher-fee-paying strategies significantly. And so as that AUM continues to grow as markets develop, we will -- we could expect to see some rebound on that as well.

[Kenneth Jacobs, Chairman & Chief Executive Officer]

Yeah. And by the way, given just the mix shift, as an example, we see much more movement towards our quant business, which may be lower fee. That does not necessarily mean -- actually quite contrary, does not mean lower margins.

[Chris Walsh, Buckingham Research]

Make sense. Thank you.

[Operator]

We'll now take our next question from Kevin -- Jeff Harte from Sandler O'Neill. Please go ahead. Your line is open.

[Jeff Harte, Sandler O'Neill]

Hey, good morning, guys. Most questions have been answered. But I wanted to just kind of circle back to one from earlier. Understanding that you just issued some more debt, I don't want us to get too far ahead of ourselves here. But can you talk a bit about your appetite for additional debt issuance to fund the buyback? Because from an economic sense, paying 4 3/4% in interest to buy back a 5% dividend yielding stock makes a lot of cash flow sense.

[Evan Russo, Chief Financial Officer]

Yes. Look, Jeff, it's Evan. That's a lot of what we were thinking when we took on the additional debt to buy back shares. I mean, it was cash accretive and continues to be cash accretive to us buying back shares with low-cost debt, and so we did it.

That said, look, we're a conservative firm. We like our ratings the way they are. We like the leverage level that we're at. Part of what we've done with taking on the additional leverage was really just going back to get towards some of the historical leverage level that we were at from a debt-to-EBITDA basis. And so with the strength in the business over the last couple of years, we had the ability to take on a little bit more debt without increasing significantly the risk of the firm.

That, combined with a longer maturity profile, which is extension, as well as lower rates that we're paying on the debt made it a risk neutral type transaction, in our mind, to kind of go back to those level. And ultimately look, our goal from a share repurchase perspective is to utilize cash flow from the business.

We generate significant cash flow, as we have in the past years. And we've always delivered that back to shareholders. And last year, towards the end of the year, as we announced, historically, we had spent -- given back to our shareholders -- returned capital to our shareholders through the form of special dividend.

And last year, as you saw, we took down the special dividend level in lieu of -- in order to augment more of the share repurchase program and to increase more aggressively the buyback level at these share price levels. And so I think that's a strategy we've taken on. And I think as we've said, we continue to be -- want to be aggressive in buying back shares over the remainder of the year with our excess cash. And we'll continue to do so.

[Jeff Harte, Sandler O'Neill]

Okay. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.