Lazard Ltd (LAZ) Q2 2008 Earnings Report, Transcript and Summary

Good morning and welcome to Lazard's first half and second quarter 2008 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. [Operator Instructions]. At this time, I will turn the call over to Judi Mackey, Lazard's Senior Vice President and Director of Global Communications. Please go ahead.

Thank you. Good morning, and thank you for joining this conference call to review Lazard's results for the first half and second quarter of 2008. Participating on the call today are Lazard's Chairman and Chief Executive Officer, Bruce Wasserstein; Vice Chairman, Steven J. Golub; and Chief Financial Officer, Mike Castellano. A replay of this call will be available on our website www.lazard.com beginning today after 1 p.m. Eastern Time. Today's call may contain forward-looking statements and these forward-looking statements are based on our current expectations and projections about future events. They are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in Lazards's filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. Management cannot guarantee future results, level of activity, performance or achievements. Moreover, Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements. Investors should not rely upon forward-looking statements with predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Further, investors should keep in mind that Lazard's quarterly revenue and profits can fluctuate materially depending on many factors, including the number and size of completed transactions on which we advise, as well as on seasonal factors. As such, Lazard management believes that annual results are the most meaningful. Accordingly, Lazard's revenue and profits in any particular quarter may not be indicative of future results. It is for this reason that Lazard hosts conference calls twice per year to review our first half and full year results. I will now turn the call over to Mr. Wasserstein.

Thank you for joining us. This morning we've reported record first half and second quarter results for our operating revenue, our financial advisory revenue, and our asset management revenue. We also reported a second quarter record in M&A revenue. We are pleased with the performance of our business in these turbulent times. Our core operating business of financial advisory and asset management achieved strong results despite the ongoing softening of these markets. We are also focused on the long term. We continue to invest in our business, while providing our clients with strong experienced teams of top talent. Our professionals are sought after by both strategic buyers and sellers, as well as asset management clients in this uncertain environment. We have continued to hire senior talent, have been opening new offices and entering new regions. We continue to develop new asset management products. Although the outlook for market activity for the remainder of the year remains unclear, we are confident of the vitality of our firm and we believe our intellectual capital business model will continue to succeed. Steve Golub will now discuss our business and performance in more detail. Steve?

Thank you, Bruce, and good morning everyone. Net income on a fully exchanged basis decreased 31% to $80 million or $0.71 per share diluted for the first half of 2008, compared to $116 million or $1 per share for the first half of 2007. Net income on a fully exchanged basis increased 5% to $64.6 million or $0.54 per share diluted for the second quarter of 2008, compared to $61.5 million or $0.53 per share for the second quarter 2007. As Bruce mentioned, I will elaborate on our core operating business revenue, which includes both our Financial Advisory and Asset Management businesses. Our core operating business revenue increased 9% to a first half record of $848 million and grew 15% to a second quarter record of $467 million. This follows the first quarter of 2008, where our core business grew modestly over the first quarter of 2007 and follows the full year of 2007, during which we reported record results. Financial Advisory operating revenue increased 7% to a first half record of $501 million and increased 18% to a second quarter record of $289 million. M&A operating revenue increased 9% to $391 million in the first half of 2008 and increased 37% to a second quarter record of $225 million. As I stated in our press release this morning, the volatile environment heightens the need for our experience, diversity, and global breadth to meet and overcome the challenges for our clients. During the second quarter, we completed a number of important transactions. These include Trane's $10 billion sale to Ingersoll-Rand, Resolution's £5 billion sale to Pearl Group, Zinifex's A$6 billion merger with Oxiana, Louis Dreyfus' €2 billion sale of its remaining stake in Neuf Cegetel to SFR, Quanex' $1.7 billion merger with Gerdau and the spin-off of its building products business to shareholders, and Bear Stearns' $1.4 billion sale to JPMorgan Chase among others. We continue to serve as independent, strategic advisors on many precedent-setting, cross-border and exceedingly complex transactions, including serving as lead advisor to InBev in its $52 billion acquisition of Anheuser-Busch, the largest cash M&A transaction in history; Gaz de France's recently completed €44 billion merger with Suez, forming a world energy leader in gas and electricity; the Haas Family Trusts in the $18.8 billion sale of Rohm and Haas to Dow Chemical, one of the largest chemical transactions; the independent directors of KKR Private Equity Investors in its combination with KKR; The Royal Bank of Scotland Group's $7 billion sale of Angel Trains to a consortium of global infrastructure investment funds led by Babcock & Brown; and APP Pharmaceuticals' $5.6 billion sale to Fresenius, strengthening the combined German-American entity's leadership in injectable hospital based markets. Financial Restructuring operating revenue was $48 million for the first half of 2008, compared to $38.7 million for the first half of 2007, and was $32.7 million for the 2008 second quarter, compared to $29 million for the second quarter of 2007. Notable restructuring assignments completed in the second quarter of 2008 include advising Plastech Engineered Products in connection with its Chapter 11 bankruptcy and asset sales; Movie Gallery on strategic issues, creditor negotiations and development of a plan of reorganization in connection with its emergence from bankruptcy; and IAP Worldwide Services in connection with the out-of-court restructuring of its bank debt among others. We continued our work on a number of other restructuring assignments both in and out-of-court in the second quarter 2008. We are advising on Chapter 11 restructuring assignments with Tropicana Casino & Resorts, TOUSA, Wellman Inc., and several others. As is typical Lazard's restructuring group, we also have a number of non-traditional strategic assignments, including advisory work for Centro Properties Limited, Tarragon Corporation, WCI Communities, the UAW in implementing its VEBA settlements with GM, Ford and Chrysler, Vertis Inc., and the Journal Register Company among others. Corporate finance and other operating revenue decreased to $62 million for the first half of 2008 compared to $68 million for the first half of 2007, and decreased to $31 million for the second quarter of 2008, compared to $51 million for the second quarter of 2007. These results were due to a decline during the second quarter in the value of fund closings by our Private Fund Advisory Group and public offerings advised by our Equity Capital Markets Group. Our Equity Capital Markets transaction assignments in the second quarter of 2008, including advising Eurotunnel among others on the follow-on capital raising transactions and advising on a number of convertible security offerings, including for Endo Pharmaceuticals. Our Alternative Capital Finance Group also has served as placement agent on a number of private investment in public equity transactions, including Trico Marine and on registered direct offerings, including Dendreon Corporation. Turning to our Asset Management business, our Asset Management business has continued to do well and is providing a wider range of investment solutions for our clients. We are also continuing to expand our Asset Management business both by geography and by product. Asset Management operating revenue increased 13% to a first half record of $347 million and 11% to a second quarter record of $178.8 million for the first half and second quarter of 2008, respectively. Management fees increased 15% to a first half record of $315 million and 10% to a second quarter record of $157 million for the first half and second quarter of 2008, respectively. Assets under management at the end of the second quarter were $134 billion. With net inflows in the second quarter of $2.6 billion, Lazard has now achieved positive net inflows in nine of the last 11 quarters. Mike Castellano will now provide more details on our financial results.

Thank you, Steve. Bruce and Steve have addressed the key elements of our business results and success. Additional details can be found in our earnings release. However, I would like to clarify a few points regarding our operating revenue, corporate revenue, compensation, non-compensation expenses, and our capital positions. And then we'll be happy to answer your questions. First, although we are pleased to report that this year's record first half and second quarter revenues are stronger than the same periods of 2007, the second half of the year remains uncertain because the markets remain unpredictable. We expect that Financial Advisory revenue and income will continue to fluctuate from quarter to quarter and that the result patterns may differ from year to year. This is why it is always best to measure our results on an annual basis, particularly in this uncertain market. Corporate operating revenues were a negative $13 million in the first half of 2008, compared to income of $51 million in the first half of 2007. The 2008 corporate revenue was adversely impacted by markdowns and losses previously reported in the first quarter of 2008. However, our corporate operating revenue was a positive $26 million in the second quarter of 2008 compared to $33 million of corporate operating revenue in the second quarter of 2007. The 2007 results included a gain of $9 million representing our interest in the net proceeds from the sale of LFCM Holdings of a portion of its interest in Panmure Gordon. The improvement in the second quarter corporate operating revenue compared to the first quarter of 2008 was primarily due to reducing the volatility of our portfolio of debt securities to more closely align it with our long-term hold strategy. For example, the portion of the portfolio designated as trading was reduced to $243 million at the end of June, down 47% from the end of 2007 and down 9% from the end of the first quarter of 2008. The ratio of compensation and benefits expense to operating revenue remains stable at 56.7% for the first halves and second quarters of both 2008 and 2007. The ratio of non-compensation expenses to operating revenue was 23% and 19.7% in the first half and second quarter of 2008, compared to 18.6% and 18.9% in the respective 2007 periods. The ratios for the 2008 periods exclude the effect of amortization of intangibles related to the acquisitions completed in the second half of 2007. Next I'd like to discuss our capital. On May 15, 2008, Lazard settled the Forward Purchase Contracts underlying the Equity Security Units or ESUs for $437.5 million in cash and issued 14.6 million shares of common stock. Also on May 15, Lazard Group settled the remarketing of its $437.5 million of senior notes underlying those ESUs by repurchasing the remarketed notes for a total of $438.6 million. At June 30, Lazard reported total shareholders' equity of $353 million. Equity on a fully exchanged basis was $526 million. During the second quarter, Lazard purchased 1.245 million shares of common stock for an aggregate cost of $46 million and our remaining share repurchase authorization at June 30th was $243 million. We are pleased that during the quarter we have further strengthened our financial position by retiring the $437 million of senior notes, significantly increasing stockholders' equity, and maintaining our cash position at over $750 million while continuing to invest in our businesses. In conclusion, we believe that we are well positioned in these markets. Thank you for joining us today and we'll now take your questions. Question and Answer

Thank you. [Operator Instructions]. And we'll take Prashant Bhatia with Citi. Go ahead, your line is open.

Hi.

Good morning, Prashant.

Good morning. Just in terms of the competitive landscape, in the past you've been fairly aggressive in investing during downturns and I guess, is this downturn to some extent going to result in maybe acceleration of your investment plans? Are you seeing good opportunities to pick up talent from competitors that maybe you haven't seen in the past?

Hi, this is Bruce. Definitely that's true. We continue... as I said in the remarks, we continue to invest in the future and obviously our strategy implicit with accumulation of cash and the preparedness that we've had was thinking that this sort of environment might be the case and that we'd see some opportunities come up both on the personnel and possibly acquisition side. But we are going to look at things very carefully and really, we have to be very discriminating as to what adds to the franchise. So, we are looking at opportunities very carefully and we'll continue to do so. There are clearly obviously a lot of people who would like new jobs out there and we have to determine whether that's to our long-term advantage.

I'd just... I'd just add to Bruce's comments. You could see that some of the hirings we've announced in both our businesses, Asset Management and Financial Advisory. On the Financial Advisory side, recently you've seen us announce, we hired two senior guys to head up our aerospace and defense team in Mike Richter and Bill Farmer and we've expanded out our little market business and hired several people and opened their offices in Charlotte. So, we've continued to invest in our businesses, as we're seeing appropriate, and you can see some of that show up in our increase in our non-comp expense. One of the reasons is, we've been adding offices around the globe and both from acquisitions and adding offices.

Okay. Great.

Yes, that's especially true, it's Bruce, in Asset Management, where you may have noticed we've added new teams of people and obviously their productivity, there is a lag time between hiring and productivity, but you put your finger on it that is our strategy.

Okay. And then just you've interacted with a lot of pools of capital that have invested in the financial services base here. Just wondering have you seen a shift or some kind of evolution in their appetite to continue investing in financials over time or how has that changed as some of the financial stocks have continued to go down post getting capital from external sources?

Yes, the financial world is an interesting subject for us. We made the decision globally a while back to continue building the team to create what we think is one of or the eminent financial services practice globally. And you may have noticed publicly, but also on matters that are non-public, we are involved in a very high proportion of the work going on in the financial services world. What's clear by observation is there are investors who want to take advantage of opportunities in... in that world and we continue to deal with them, I think, the issue or people, as you've seen in the past week is, when is the opportunity, the right timing. And... but there are sources of capital out there, it's in a way to look at it is that there is a large pool of contingent capital, but you have to be at a point where the bid and the ask mean.

I'd add... it's Steve, you are going to see an increasing trend and you are seeing it now, capital raising through asset sales by financial institutions and you will see an increasing trend in that vein over time.

Okay. And just on the alternative side, we've seen somewhat of a slowdown industry-wide in terms of hedge fund flows. It looks like your flows are actually picking up and you are seeding new alternative strategies. So, just curious where are you finding the demand from on the client side. What particular types of strategies and what are they looking for you to do for them?

I think although we have a list of strategies we're interested in investing in, the fact is you need the right exact team that would fit well with our structures. So, basically it's a mix between what works strategically and what works in terms of finding the right people. But certainly, absolute returns, things that are semantics [ph] in some sense. Our new area is wrapping around a larger quantitative capability around our traditional products and creating a new generation of products are part of our focus, but as you can imagine, we spend a huge amount of time anticipating what in the next five years, people will want around the globe and then by the way it does differ by geography, the styles, references, the mixes. And what we try to do is to anticipate that and create records for our products, so that they can prosper in that environment. So, that's partly what you see is our funding some of these growth strategies.

Okay. And one final question. I think there had been a mention a few months ago on considering building out a little bit more of wealth management type business, any progress on that or what stage are you at in that initiative?

Our ideas are welcome, but we are... yes, we are continuing to develop that at a, I'd call at a deliberate pace, but we are continuing to develop that for the long term. If you were to say... and again that's a measure of the way we think about things, but if you look at the 10-year future of Lazard, I think you would have a very significant wealth management program.

Okay, great. Thank you very much.

Thank you very much and we will go next to Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

The first question is a little bit impressionistic. Given your results, given some of the landmark transactions that you have in the pipeline, given the success of Asset Management, why do you appear to have taken such pains to have a very muted tone about the outlook?

Let me try that. It's Steve, Guy. Let me try to answer that for you. We obviously had record revenues in both businesses in our second quarter and only after that in the month of July, we announced over $100 billion, that we worked on announced transactions of over $100 billion and we also closed a number of transactions in July. So, we've seen a continuation of what we had in the second quarter, things like the Gaz de France transaction closed and obviously that had been in our pipeline for a while. We have seen some deals take longer to close and so you get to the issue of... if something going to close in December or January, it doesn't change the fundamentals of the vitality of the firm or the focus on the firm for the long term, but obviously could change results in a given quarter. And given the volatility that's out there, it doesn't say at all that we think the level of discussions out there have changed. We've continued to see the business on the announced side and the completion side in July continue the trend that we saw in the second quarter. But we would very much rather overachieve than overpromise to you. And so, it's in that vein that you know we've tried to deliver than what we've said to people. I really do think we are in this mode of wanting to rather than overpromise given this environment.

And I think if you go back and look at the record since we've been a public company, we've been... when we talk about future prospects of the industry, they've been reasonably accurate. It is a very volatile environment and we in no way are trying to create any negative implications because as Steve says, in fact the short-term data is positive. It's just that realistically it has been an uncertain environment and we are very aware of that because we can see the write-offs that have been going on and some of the issues to come for other people, but this firm is fortunately in very good shape.

And Guy, the only other thing I would add is look, we are in this volatile environment right now and that heightens the need for the kind of model we have, the independent trusted advisor, the experience our people bring to the table, the diversity of our practice, the global breadth of our practice will help to meet the challenges of our clients and we are seeing that. We are seeing active discussions. It's not like we are saying that we see a change in the level of discussions that are out there at all. But the timing of the revenues is just more uncertain in this kind of environment. But the vitality of the model, we think, is really there.

Yes. But also there is a premium on the level of the skill needed for complex, difficult transactions and situations versus a few with the commoditization of the business. So, in many ways the environment fits our comparative skills.

Okay. That certainly helped clarify a little bit. Thanks. Maybe you can give us a sense for the nature of the flows that you see in Asset Management, the $2.5 billion? Are you seeing more from new clients or from existing accounts? Is it coming more from U.S. or from international clients? And finally maybe a sense for the products that are receiving the flows?

Well, I think the flows... Guy, it's Mike Castellano here. The flows are coming from, some of the areas that we've seen very active and the chance [ph] where we have very strong both absolute and comparative performance. And one of the things that we mentioned is that you're seeing, again one of the trends being people looking for more of an absolute performance. So, things like a thematic themes, if you will, pardon the repetitiveness there. That kind of a product where you are not really looking at one industry or companies within industries, but you are looking for more of a theme across different sectors. And we've been very successful in that as many people know and have been attracting a number of assets. We've also had one of the top ranked emerging market products. So, there continue to be flows in there. And with some of the newer products that we saw, they have been seeding you see for the first time in a while a little bit of pickup as you look at the product spread on the Asset Management that we have in the earnings release. The alternative products or the hedge funds have finally began to pick up seeing some of the benefits of the products and the teams we have been creating and bringing in.

But it's also fair to say that the prospects are very exciting globally, that is not only do people want to invest in emerging markets etcetera, but we are actively seeking businesses and business from sovereign funds in Asia, the Middle East, etcetera and have focused on that and I think our prospects are bright.

But in terms of what you actually saw in the first quarter or the first half, can you give us a sense for the breakdown as to domicile of client? Is it mostly non-U.S. clients bringing you fresh assets or still mostly U.S. clients and again, are we seeing money coming to you from new clients or more from existing accounts adding?

I think it is a little bit of a combination of both, Guy. And one of the things that we talked about is you go back five years, let's say, Lazard's client days was heavily weighted towards the U.S. although we were... our specialty was more in international products. And one of the strategies that we started and Ashish Bhutani, who as you know is now running the business has been accelerating, is really taking the idea, okay, if we got the strength in international products, let's build out our capability to attract international clients. So, we have expanded our businesses in the UK, Germany, regional products in Australia, and Japan. And that strategy is... and our marketing efforts have been very successful to the point now where you have seen, in the data we have put out and posted in our website in the past, we basically now got about a 50-50 balance of clients that are U.S. versus international. You might see a little bit more against the skewing towards the international side over the next couple of years, because again that's been our new area of... relatively new area of focus for marketing. That's not to say we haven't gotten U.S. products, new clients from the U.S. side as well. But you'd just see a little bit more coming out of the international because of the marketing effort that we've put in there.

If you think about Ashish's strategy, Guy, it's really to provide a wider range of investment solutions for our clients across the border and try to expand by product and geography. And as Mike said, it'd be worth, you could take a look a the website, we'll put up later and we do every quarter, I think it will give you a feel for the trend.

Thank you very much. And we will go next to Michael Hecht with Banc of America.

Hey, good morning guys. How are you doing?

Good morning, Mike.

I was hoping you could give us a little more color on the geographic split of your M&A revenues in Q2, and I guess also how much of your business is kind of coming from pure strategic assignments versus maybe assignments that have kind of a financial sponsor leg involved in them? Just trying to get a sense both whether international assignments are holding up better than the U.S. and how the drop-off in private equities impacting your business? Thanks.

I'd tell you geographically. If you looked at our business, we've certainly been trying to expand it for that section of rest of world, which is we have been trying to grow. If you look year-to-year in any given year, business has been 50-50 Europe, North America, it's trended more in the first six months here towards North America. You'll be able to see it up on the website later today in terms of the specifics on it that does give out the mix, but there's no particular trend there. It has been little weighted more towards North America. We have continued to see active opportunities [inaudible] the first quarter amongst strategics, where the Euro was approaching 1.60, where the private equity folks have been off to the side and looking at opportunities here in the United States and globally. And we're going to continue to see companies looking at that both pan-European, the European companies and looking towards the U.S. and looking globally. We think those trends and discussions will continue.

Just to add, amplify, to Steve's remarks, basically the U.S., Europe balance is pretty much whether it varies by quarter really is not significant. It's pretty much where it's been, it's about a 50-50 mix in the end. We... in the U.S., we've added a middle market component, which we may globalize. So, you get temporary aberrations in the statistics, but I think it's also important to emphasize that we're very pleased with our acquisition we made in Australia. And I think it's interesting on your sorts of questions because that business is more resource driven and infrastructure driven and things of that sort, and it's on a somewhat different cycle basis than other businesses. So, if you look at our business overall and I know it's confusing people because people think of M&A as a homogenous business and the advisory role that different banks play is homogenous, but it's not. We are in a special niche of the business, which is the high-end strategic advisor. And as Steve said earlier, as times get more complicated actually the demand for that service becomes higher whether it's in restructuring or anticipating the need for changes in strategy, that's the first point. Second point is our base of business is essentially broadly the strategic part of the M&A business. And so the ups and downs of financial sponsors affect those less than other people. There is an effect, but it affects us less and you can see that actually if you go through the publicly stated results of other firms on Financial Advisory revenues, you'll see there is quite a difference between our results and other results partly driven by those two factors. One, the niche that we are in in the market in terms of the service we offer. And secondly, the nature of the client... the nature of the client base. So, that gives you some flavor of our approach.

Thank you. And we will go next to Eric Veiel with T. Rowe Price. Please go ahead.

Yes. Just a quick question from my. Can you help us think about the non-comp expenses going forward, sort of the 99-ish million that you did this quarter? What kind of ins and outs should we expect over the back half of the year and into 2009?

I think... good morning, Eric. The...

Good morning.

Certainly the increase from last year is affected as we talked about a little bit... remember we did the two acquisitions in the second half of the year in Australia and in middle markets. So, comparisons year-to-year have to allow for the fact that's in the second... in this year, but not last. And then sort of the movement of the continued weakening of the dollars impacted the... again the absolute level of expense. I think in this... stripping out the amortization of the intangibles, which is in that $99 million for about $3 million, you would have seen in the 10-Q in the first quarter and you will see again in this one. That's going to significantly taper off now. I think in the past 10-Q, we talked about maybe another 800,000 this year versus the 3.7 in the first half of the year and it will continue to be at that much lower level now for the next... for the future. So, the core non-comp expense closer to something like 97, that probably is good an estimate is to look at. Because we're going to continue to invest in the businesses whether that's in recruiting, in marketing efforts, we're taking advantage now as we've talked about in terms of our business model. Now people are seeing the differentiation of what we've been talking about of our model versus some of the others and we're going to certainly be using this as an opportunity to expand our marketing efforts in that which will come through in the expense line and you're seeing some of that already. And the other thing is the... we're continuing to looking at outsourcing some of the things that we do internally, which there has been shifting, and we will shift some expense from comp down to non-comp. And you saw a little indication of that this morning. You may have seen having State Street put out an announcement that we've signed an agreement with them to outsource some of our back office functions for our... that support the investment management business, the Asset Management business. So, not a huge shift of cost, but there will be another impact, it's going to have that sort of 99 level, maybe a little bit higher sort of being, but I would think in the near term to be run rate, because... I think the worse thing we can do is to really not take advantage of the current market to continue to differentiate ourselves.

Thank you very much. And we will go next to Michael Hecht with Banc of America. Go ahead, your line is open sir.

Sorry, I was on mute. Hi guys, can you hear me?

Yes, we can, Mike.

Okay, sorry. Just to follow-up on... any color on the backlog of other corporate finance transactions, including your Alternative Capital Finance business and also on the fundraising business, any outlook there? I mean second half is usually not bad for capital raise, but I think there has been a lot written and focus on just kind of slowing pace of flows for alternative, including hedge funds and private equity, so just any color you're seeing there?

The backlog, Mike, it's Steve... the backlog has continued to be pretty good. I mean the issue runs to what I was saying earlier that something that you see in the private... Private Fund Advisory Group is an example. The strength of the business is there, whether a deal happens to close in December or January in terms of the fundraising, backlog has been very strong. Could it take a month or too longer to close something? It could. But generally the activity has been good.

Thank you very much. [Operator Instructions]. We will go next to Guy Moszkowski with Merrill Lynch for a follow-up question.

Hi. The capital moves that you talked about, really just a conversion of a mandatory convertible with no real cash impacts one way or the other, is that correct?

That's right. That's correct.

Okay. I did notice that there was a decline of about $28 million in the AOCI in the quarter. On the other hand, you did refer to reduction in the volatility of the debt securities portfolio. I mean is that related to the AOCI change? Did you... were you able to make some changes so that you didn't have the same kind of mark-to-market volatility? Was there some recovery in the marks from the first quarter in that corporate bond portfolio? What color can you give us on that?

That really didn't have anything to do with the... with the... I'm sorry, it had nothing to do with the AOCI portfolio. What's happened is that with the conversion of those Equity Security Units and the additional... and I apologize for getting a little technical and the conversion of that into equity. The minority interest that relates to LAZ-MD is now a highly positive number. And so, when I said earlier that our equity on a fully exchanged basis is $526 compared to what you see as the stockholders' equity, that's because we'll include for that number $173 million of equity related to LAZ-MD, which is showing up in minority interest. A portion of that ended up being a reclassification out of OSCI. So, it's just really the technical geography of it. We think still that's the right measure to look at it because as you also maybe... I'm sure you are aware, Guy, you'll... coming next year the new accounting rules are going to say those two numbers for GAAP reporting is going to be combined anyway.

Yes, so we have the dilemma, which was an excellent point, Guy. We have a dilemma of that the way we see it economically and the way the accounting standards we'll see it next year are different than the way we have to report it today. But that's why we stated as on a fully converted basis.

Thank you very much, and we have a follow-up question from Michael Hecht with Banc of America. Go ahead.

Hi, guys, just two quick follow-ups. First on... with the lock-offs on the LAZ-MD shares that came off in May, I mean seeing any uptick in attrition and can you give us a sense of where the MD on the Financial Advisory side, the headcount ended the quarter? I guess it was around 155, I think, at the end of Q1? And then I guess just specifically, any plans to increase that over... what's the outlook for the increase in that over the second half of the year?

Okay. I think what we are basically doing here is, certainly no massive attrition plans will continue to as any manager would, continue to pull, prioritize, hire and the net effect on personnel has been that we have over the last year or so increased the number of people, professionals working in both Asset Management and the M&A side, but it is obviously an opportunity to accelerate our high-quality recruiting program. As far as attrition, it's very limited, we don't expect the best team of units, etcetera to have any impact and people understand that because much of the pay is done in shares even if people sold in the secondary, the amount of employee ownership will land up very similar because of the accumulation of shares over time. It will balance out over some period of time for the continuing MDs.

Mike, as Bruce was saying, basically saying is that people receive part of their compensation, restricted stock units would vest over time. So, if you took secondary that we did in November '06, even also people sold some shares to get some diversification, also the senior people end up having more shares today than they did then, because they are getting new shares in the form of restricted stock units. And if you look at our headcount numbers, and you see in the 10-Q you'll see they are up year-over-year. We've continued to invest in both businesses.

Thank you. [Operator Instructions]. And we will pause for just a moment. And there appear to be no additional questions or comments at this time. I'll turn the conference back over for any additional or closing remarks.

Thank you all for joining us today for our results. Have a good day.

And this concludes today's conference call. Thank you for your participation, and have a great day.