Affiliated Managers Group Inc (AMG) 2002 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Affiliated Managers Group conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If any one should require assistance during the program, please press "*" then "0" on your touchtone telephone. If anyone should disconnect then wish to rejoin the conference, he may do so by dialing 1-888-467-1742. As a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce your host for today's conference call, Mr. John McNamara of FRB Weber Shandwick. Sir, you may begin.

Good morning. Thank you for joining Affiliated Managers Group to discuss results for the quarter and six months ended June 30th 2002. By now, you should have all received the earnings release. If anyone still needs a copy, please call my office, area code 212-445-8435; and we'll fax you a copy immediately following the call. With us on the line from AMG are William Nutt, Chairman and Chief Executive Officer; Sean Healey, President and Chief Operating Officer; and Darrell Crate, Executive Vice President and Chief Financial Officer. In this conference call, certain matters discussed will constitute forward-looking statements under the Federal Securities Laws. Actual results and the timing of events could differ from that contemplated by the forward-looking statements due to a number of factors including changes in securities or financial markets or in general economic conditions, competition for acquisitions of interest in investment management firms, and the company's ability to complete pending acquisitions, the investment and financial performance of the company's existing affiliates, and other risks detailed under the caption "cautionary statements" in the company's Form 10-K. In connection with the discussion of AMG's quarterly results and business prospects, multi-affiliate products and the investment performance of certain of AMG's affiliates will be discussed. Investment management services accessed through multi-affiliate products are provided by the affiliates of AMG and not AMG itself. And the information provided is not an offer or solicitation for any investment product or service. Now, I would like to turn the call over to Bill Nutt. Go ahead, Bill.

Thank you John. Good morning everyone. Welcome to AMG's conference call discussing our operating and financial results for the second quarter of 2002. I'm Bill Nutt, AMG's Chairman and Chief Executive Officer. And with me today are Sean Healey, our President and Chief Operating Officer; and Darrell Crate, our Chief Financial Officer. I'd like to begin today's call with an overview of our results and highlights for the quarter. Sean will then provide additional details about AMG's operating results and our affiliate development activities. Finally, Darrell will take us through the financials. As always, we look forward to your questions at the end of this call. It goes without saying that we are in the midst of a very difficult equity market environment, which has continued into this quarter. Given the adverse markets, our affiliates are producing solid results. Our earnings growth in the second quarter reflected the breadth and diversity among our approximately 150 different firms and investment products, our balanced exposure to value and growth equity investment styles, and our ability to generate earnings growth organically from net client cash flows. Finally, our structure itself insulates us somewhat from market declines, because we have less exposure to the operating leverage of our affiliates. Darrell will speak to these points in greater detail in just a moment. Recent market trends have been frustrating to all of us. Despite these current conditions, we remained confident in the long-term growth of the asset management business and of AMG's growth in particular. Our affiliates are a diverse group of high quality, mid-sized firms with proven long-term track records. Our structure, which provides our affiliate managers with direct equity ownership in their firms, is a powerful incentive for AMG's mangers to continue to generate strong long-term financial performance. We believe the consistency of our results over time has demonstrated the strength and success of our strategy. Finally, as you saw in the release, our board recently approved an increase in the shares we are authorized to repurchase. We are very aware, given our current stock price, of the attractive opportunity to further invest in AMG's affiliates through share repurchases. And going forward, we will certainly look to buy our stock. With that, I'll turn to Sean to discuss our operating results in greater detail. Sean.

Thanks Bill. Good morning everyone. As Bill mentioned, our affiliates produced solid results during another difficult quarter in the equity markets. Generally speaking, as you would expect, our value-oriented products including those managed by affiliates such as Tweedy Browne, Rorer, Systematic and Skyline have been less affected by adverse equity markets; however, several of our growth-oriented managers such as Friess, Essex, and Davis Hamilton had good quarters relative to their peers and benchmarks. Further reflecting the advantages of diversity among our affiliates, First Quadrant, our quantitative manager had an excellent quarter. A number of different products are confirming in their nature, and they produced strong results during the quarter including some performance-based. We were pleased that we continue to generate organic growth in earnings from net client flows in the quarter. Aggregate client cash flows were slightly positive with outflows of a 107 million in directly managed assets and positive flows of a 118 in overlay assets. However, importantly, given a favorable mix of flows among affiliates, from an earnings standpoint, we had continued growth from net flows with an increase in annualized EBTIDA contribution of approximately 1.1 million for the quarter. Let me turn for a moment to our pending investment in Third Avenue Management, which is expected to close next month. As you know, Third Avenue is a value-oriented manager focused on safe and cheap investments including real estate and distress securities. The firm has an excellent long-term track record and continues to post solid returns for its clients. Although Third Avenue has experienced some market-related declines, the firm is well positioned given its product mix and has generated strong [client] cash flows with approximately 300 million in net flows for the quarter.

Since the quarter ended, a number of our affiliates have received positive recognition for their strong long-term performance. First, we have four firms named among the top 100 mutual funds in the August edition of Money magazine. In addition, the changes in the Morningstar methodology generally had a positive effect on the rating of our -- ratings of our firms. The firms named by Money magazine included each of Tweedy, Browne's American Value and Global Value products; Friess Associates' Brandywine Funds, which has been on the list since when Money began publishing it five years ago; and finally, the Third Avenue Value Fund. In addition, following the change in the Morningstar rating methodology and pro forma for our investment in Third Avenue Management, over 80 percent of our EBITDA that's generated in the mutual fund channel comes from funds that are rated four or five stars. Finally, we continue to make progress on our multi-affiliate separate account products, which are now pulling multiple attribute portfolios or maps. And we're recently selected to provide another series of maps for Wells Fargo. The product is similar to the one we launched last January [indiscernible] and consisted the series of diversified portfolios managed by independent specialty managers selected from among our affiliates. The portfolios are designed to meet a range of asset allocation preferences and are available to separate account investors at reasonable asset levels. With that,I'll turn it over to Darrell for a discussion of our financials.

Thank you Sean. Good morning everyone. As you saw in our release, we reported cash earnings per share of a $1.12 for the second quarter, 3 cents above First Call's consensus estimate with performance rate adding about 2 cents per share. These performances are not included in the analysts' estimates, and we do not include them in our internal forecast. We report cap earnings per share for the quarter of 67 cents. EBITDA was 37.4 million for the quarter. Quarter-to-quarter, our margin in EBITDA contribution to end-of-period assets under management increased from 20.4 basis points in the first quarter to 23.4 basis points in the second quarter. The margin is slightly higher, because end-of-period assets were lower than beginning assets. Going forward, we believe a margin of about 21.5 basis points will be appropriate. Holding company expenses were 6 million for the quarter. These expenses include incentive compensation accruals, which you know are highly variable. As we have indicated in the past, we're compensated based on the annual growth in our cash earnings per share. The earning's growth targets are set by our compensation committee and to the extent we do not achieve targeted annual growth in cash earnings for whatever reasons, including market performance, these accruals would decline or even reverse. With regard to taxes, we continue to accrue at a rate of 40 percent and we expect this rate to be appropriate for the rest of the year. Our cash tax rate was 18.4 percent. Amortization for the quarter was 3.4 million; depreciation was 1.5 million for the quarter. Remember, in our structure, adding back depreciation as a non-cash charge is appropriate because the replacement of the depreciated asset is paid out of the operating allocation at each affiliate. Total intangibles were 996.8 million at the end of the quarter and stockholders' equity grew to 568.3 million. Looking back over the past nine quarters, in fact, I think that you will see, [that] was being able to produce consistent cash earnings in periods of significant instability in the equity markets. Given the recent volatility in these markets, I thought it would be helpful if I took a moment just to talk in greater detail about our business model and some of the reasons we've been able to generate stable cash earnings each quarter, particularly in environments where the industries have declined meaningfully. The stability in our cash earnings is driven by the diversity among our affiliates, net client cash flows, our partnership structure itself and reinvestment of our earnings in what we believe is a disciplined and prudent way. As you have heard both Bill and Sean say before, the diversity among our affiliates is a key strength of our business. Our EBITDA is generated almost equally by affiliates in the high network, mutual funds and institutional distribution channels, giving us broad exposure to various segments of the market.

In addition, approximately half of our EBITDA comes from growth-oriented managers, while the other half is generated by value-oriented managers, which has enabled us to maintain earnings stability over the long term. Our ability to achieve consistent results in difficult market environments is bolstered by our ability to generate earnings contribution for the net client cash flows. As we have seen in this quarter, the ability of higher fee affiliates, where we have greater participations like Tweedy, Brown to attract client cash flows, means that we can have positive EBITDA contribution from flows, even in periods where aggregate net client cash flows might be [nil]. As you know, we have seen in the past and we continue to anticipate greater growth among those affiliates with higher fee products or where we have larger financial interest. Finally, our partnership structure itself contributes to earnings stability. The easiest way to think about this is that AMG has a priority share in the revenues of our affiliates. To illustrate, our structure begins with a revenue sharing agreement, which allocates a fixed percentage of revenues to cover the affiliate's expenses. We call this percentage the operating allocation. The remaining fixed percentage or the affiliate's revenue is distributed to AMG and Affiliate Management partners according to their respective ownership percentages. We call this portion the owner's allocation. Under this structure, when revenues fall, we are protected from a decrease in operating margins, because those decreases are first absorbed by the operating allocation, principally a portion of the additional compensation to the most senior members of each affiliate's management and then would preferably absorbed by the portion of owner's allocation, that is owned generally by [very esteemed] members of each affiliate's management.

If you look at AMG's income statement, [indiscernible] consists of first, a large portion of the compensation and related expenses line, which as you know, includes the consolidated compensation and expenses of our affiliates and second, all of the minority interest line, which represents the Affiliate Management owner's portion of the owner's allocation. Obviously, at some level of market decline, we will begin to share a portion of this negative operating leverage with our affiliates. However, given where we are today, I do not foresee that happening at any of our affiliates at any point this year. While our partnership structure may seem somewhat complex, our business is very simple. We receive cash representing our share of our affiliates' revenues and then subtract from that amount our cash expenses, which are holding company expenses, financing costs and cash taxes and the result is our cash earnings number, which we report each quarter. All of our non-cash expenses are just that. Expenses that we record for accounting purposes but which have no impact on the actual cash we have on hand. Well, we state that our definition of cash earnings isliterally the cash we can put in the bank. To conclude -- while, of course, we'll report our GAAP earnings, we highlight cash earnings because we believe that's the most transparent method to show the actual cash generated by AMG's business. Returning to our capital structure, we focus on maintaining a strong balance sheet and financial flexibility. We have built a capital structure that is designed to deliver the highest flexibility at the lowest cost while achieving our objective of maintaining a strong balance sheet and investment grade rating. Let me review the components of our capital structure. First, we maintain a revolving credit facility led by a strong group of banks. Second, last year we completed two financings. The first of these was our issuance in May of approximately 227 million at zero coupon convertible senior notes. These notes were issued with a 50 basis point coupon and have an initial conversion premium of 40 percent. The second transaction in December of 2001 with the issuance of 230 million in mandatory convertible securities. Each security consist of a five-year senior note with a 6 percent coupon and a three-year forward equity sale at a minimum price of $73.10. The net result of these components of our capital structure and our cash flow from operations is that as of the second quarter, we have 25 million outstanding under our credit facility and 87 million in available cash on our balance sheet. Looking forward, we expect to have about 50 million outstanding under the facility after we had closed our investment in Third Avenue.

We still have well over 200 million available under the facility at that point. The capital structure provides us with a number of sources of available liquidity and a minimum that zero coupon convertible notes will remain outstanding for roughly two years. While it's difficult to anticipate what investors will do two years from now, we have numerous options to modify our refinancing notes if they are not converted. Turning to the mandatory convertibles securities, as I said the securities contain a three-year forward equity purchase contract so that in two and a half years, we will issue stock at no less than $73.10 and at no higher than $84.07 per share. Under the terms of the security, at the time we'll issue the stock, we'll receive an additional 230 million in proceeds, which we'll then have two more years to repay. In addition, as I mentioned, we may see an investment grade rating from both Standard & Poor's and Moody's. While we believe that maintaining a modest amount of financial leverage is prudent, let me emphasize that the cash flow from our affiliates provides a recurring after-tax cash stream of roughly a $100 million. In terms of the usage of this cash, over time, the major use is new investment activity, which is of course entirely in our discretion. A second discretionary use is for share repurchases, and finally, a last and less material use of cash over time would be the purchase of additional equity in our affiliates. Let me spend a moment on this last point. Remember, these purchases of affiliate equity, our earning assets; they would increase AMG's cash flow. More importantly, as we've described in the past, our obligations to purchase affiliate equity are carefully scheduled to limit amount purchased in any given year from each affiliate.

Equity put back to AMG out of sequence is generally purchased at little or no cost to us. In any event, we worked carefully with our affiliate management partners to ensure orderly transitions of equity in each of our affiliates. I hope this overview has given you a clear understanding of the stability of our cash earnings even in difficult environments as well as an additional understanding of AMG's financial strength and our flexibility. Finally, in an effort to provide some guidance on earnings for the remainder of the year, as we have seen, the market this quarter had been extraordinary volatile and our expectations have understandably changed even since the end of the second quarter. Given where we are today, if markets remain flat, from today, for the rest of the year, we would expect earnings to be approximately $4.30 cents. Obviously, if markets were to appreciate from here, our earnings would be higher. To give you a sense of the range, if we are to have appreciation from now to the end of the year of 3 percent, we think our earnings would be closer to $4.40. Now we'll be happy to answer any questions.

Thank you. Ladies and gentlemen, if you have a question at this time please press the "1" key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the "#" key and if you are on a speakerphone, please lift the handset before asking your question. One moment for our first question. Our first question comes from Henry McVey from Morgan Stanley.

Good morning, can you hear me?

Yes Henry [indiscernible].

Hi Henry.

Good morning Henry.

Couple of questions, one, Darrell, I was little bit surprised that you said, 21 -- that you said, 21.5 basis points...

Right.

Is the jump -- is that related to Third Avenue or just, I mean to me, I'm having a hard time getting a feel for fees as a percentage of what we look at slightly different view when we get [indiscernible].

He is right and it's...

Henry, you are right and it's a little -- it is certainly more difficult as assets and markets jump around a bit. Yes, that -- there is part of that, part of the bump from -- let's look at first quarter when it was 20.4, part of it is just mix improving and affiliates, where we have higher fee product or we [earn] more -- are attracting inflows. But it is also the addition of Third Avenue, which will close probably mid-August.

Next thing I guess, just given what's going on in the environment, I mean, have you guys thought about options in expenses, have you thought about giving more disclosure in terms of the way you partner with affiliates so people feel more comfortable with the structure and then I'll got one more after that?

Okay. Well, look to -- just the first two. With regard to options, we think it's prudent at this point to wait for a fully formed guidance regarding any changes in accounting rules and of course, we couldn't violate any of those rules and you know, see what best practices turn out to be. With regard to the structure and deals with affiliates, today in our comments, we tried to make it quite clear to everyone what the structure is, how it works and I think in all of our footnotes and in 10-K, we've done a good job of disclosing what those obligations look like.

And just a follow-up. You talked -- I mean you guys announced the share repurchase, it'd be interesting to get little more color on that and then just on your cash flow, you know, the holding company expenses had bumped up to 6 million. It just looks like to me in this environment, that you would have some flexibility there and that also seems to be echoed in your comments.

Henry, it's Bill. As you saw in the release and as I mentioned at the beginning of our prepared remarks, the board did expand our repurchasing authority up to an additional 5 percent of the shares outstanding. I certainly can't tell you today what -- at what price or the amount of shares that we would repurchase. But it would be material. We want to retain of course as much flexibility in our financial structure and I'll turn to Darrell to answer the rest of that.

The effect would be that holding company expenses is -- as we said a large portion of those are variable expenses. And of course the holding company expenses are targeted towards, you know, annual cash earnings per share growth. So to the degree that that is -- that the cash earnings per share growth is left than we anticipated; we would certainly see those holding company expenses coming down.

Let me ask another one, when you give the guidance on [forward thirties], is that including a $6 million run rate at the holding company?

No, it isn't.

Okay. Thanks a lot.

Thanks Henry.

Thank you, our next question comes from Richard Strauss from Goldman Sachs.

Okay. Yes just a follow-up on the holding company because it looks like it's going to cost you about 16 cents this year in additional expenses. Maybe you could just give us some color as to what that -- because the assets really haven't changed in the last year or even since the end of 2000, what that exactly is?

Why don't I start with that, Richard. First, I would say, we're not focused on assets as we said we're focused on growth and cash earnings and where there is growth, which comes from a number of sources. But, you know, it's pretty easy to identify when you see it. Where there's growth, then we are rewarded in terms of additional incentive compensation; where there is not growth, for example last year, if you want to compare our proxy to our peers, we had a good year in many respects -- substantial stock price, depreciation, etc. But the cash earnings, principally because of the market action, did not really rise that much and so our incentive compensation was down substantially from the prior year and you saw early accruals being reversed. This year we anticipated -- and all of you analysts had embedded in the forecast you prepare -- material growth in cash earnings. In the first two quarters, we were on track to achieve that. Now to the extent that we do not achieve it and obviously a few weeks into the quarter, things are not very encouraging but it's still early in the quarter and we'll just have to see. Darrell indicated in response to the part of question that as the cash earnings growth declines or as we see less growth, you will see absolute declines in the accrual levels and perhaps even reversals of accruals from the first two quarters.

Okay. And then on Third Avenue, and I think you've mentioned earlier, Sean, that you've bought in $300 million, which is great this quarter. But you also said there was, you know, they were subject to the environment like everybody else of course, let me ask this, was this deal structured with an upfront consideration and then with earnings payouts or was it just one lumpsum, well you know, and then -- is there the ability to renegotiate it all, should this environment continue?

Well, the typical transaction structure -- and I won't say that we never do -- but we typically have for a portion of the equity that we're acquiring, a payment upfront and then over time spread out schedules in the future. As Darrell described, we will repurchase additional equity. That's many years from now in this case. The multiples that we paid have been, we think, fair to selling firms and their principals, but attractive to our shareholders. I would say -- I would put it this way with respect to even today as we've said with all of the decline since we know it's the investment, the multiple that we are paying in that transaction is below the level of transactions that others in the industry have consummated, it's still accretive and they are doing fine. Although obviously, as you can see just by looking at the NAB's or their funds, that they are, you know, suffering some declines. They happen to be relatively well positioned given real estate and some distressed investments and a value focus. So that's where we stand. I don't want to speculate on what might happen if markets further deteriorate in a material way from here. I will say that we do include in our purchase agreements the ability to have an out in the agreement if there is a material adverse effect in the business including markets. But we are very comfortable with where we stand and very committed to moving forward with that.

Okay, one more question just, what do you think the average management fee of your value products are versus your growth products?

Probably higher, but it's hard to -- you know, the largest affiliate is Tweedy, Browne and their fees are at the high end, but it's a...

But it's -- they are -- importantly as well that, you know, looking at fees to -- fees on the product, again it's -- like what contribution do they make to AMG and I think as we've...

we had no [indiscernible].

...the amount of the firm that we own.

That's right. So for example, with Tweedy, with a very high fee products in their mutual funds and that is the channel where you see the highest fees, we also own a larger portion of Tweedy than many of our other firms. So they are on values making a significant contribution...

Great.

...so we are right at the top.

Okay thank you.

Sure thanks.

Thank you, our next question is a follow-up from Henry McVey from Morgan Stanley.

Yes, I just had one more. Darrell, on the contribution -- the contribution of the allocation-- if you look at owner's allocations, and then a percentage of contribution of that, and it went from -- it's been running around 60, you know kind of 72 to 74 -- 75 and also then spiked down to 63, is that related -- what is that related exactly...?

I would look to last quarter's ratios with regard to revenue, it's owner's allocation and then EBITDA contribution because the way the performance fee worked this quarter, it skewed some of the results. In addition, new market volatility in assets skewed some of those numbers as well. That's why I was, you know, trying to focus people on that bottom number, that 21.5 basis points. And then if you use the -- [indiscernible] percent revenues and percent owner's allocation from last quarter, you're in a - you're in a pretty good shape.

: Henry McVey: Okay, this one. Thank you.

: Darrell Crate: Thanks Henry.

:Operator: Thank you. Our next question comes from Mark Constant from Lehman Brothers.

Hi, good morning guys. I did almost wonder if you shouldn't just start paying out all your after-tax-free cash flow and the same investors still want to sell a stock [that are not] growing 11 percent cash yield...

We've wondered that ourselves.

Anyway, I wanted to ask a question, a follow-up on some comments that both you Will and Darrell referenced regarding the lesser than typical operating leverage, I guess this is the way to look at it. I know you guys still have substantial cushions between book carrying values of your affiliates, and their still current market values. ; But with respect to the revenue splits and the sharing arrangements, can you give us a sense as to how much cushion you still have left? Obviously, even affiliate compensation is variable as market conditions direct and I know, there is some extra cushion left in there at the times of the transactions, and they have appreciated since in most cases pretty significantly. But do you get to a point any time soon where there are pressures at the affiliate levels on their margins?

Let me ask Darrell to respond to that, Mark.

Yes, and not to address specific affiliates, because to begin, you know, the structure is different with each. And --but when we - but we look clearly in aggregate at affiliates, there is clearly cushion and I think you did a good job of articulating what those are. Again compensation, that's to the senior managers, and then also the minority interest that's at each of those affiliates. And as we look at this, you know, -- you just look at the minority interest line in the financial statement -- that's a lot of money. So -- and then again in the -- in that -- within that compensation and related expense line, which is also a considerable portion of the income statement, there's a meaningful amount of that as well that represents the first cushion. So, hopefully that's helpful because when you...

I guess thinking about the minority interest is -- as you - as sort of an additional cushion to their -- I guess that comes out of the pocket of the former or the still current owner I guess. But I assume there's no sense of grumbling from those folks that they are experiencing the negative leverage in this kind of an environment?

No, and it's a -- you know, asking again, it speaks to the advantage of our structure, and how we operate with affiliates, and indeed, these are owners of their firms, and they are -- there's no grumbling at all.

Okay, thank you.

Thank you, our next question comes from Mark Lane from William Blair and Company.

Good morning.

Good morning Mark.

Just a couple of questions. You touched upon performance fees, and I understand that there's better growth at those affiliates who generate higher fees, etc.. But almost all the major industries and categories of equity markets were down in the second quarter, and therefore, I'm trying to figure out how operating revenue was up 9 percent sequentially; if you can explain that a little bit. Second question is on interest expense; interest expense is up the first quarter. My understanding was that some of the amortization from the banking fees that were flowing through their -- from the convert deal may -- were going to -- most of that was going away this quarter. I was wondering why interest expense actually went up?

Yes, interest expense is -- well, so to answer them in a -- in reverse order. One, that the interest expense, the alliance -- the full insurance cost of alliance was finished in this quarter. So going forward, if you look at third quarter, I would anticipate even with the closing of Third Avenue that interest expense will go down, probably to $5.7 million. In this quarter, there is - it really is the -- getting rid of all the remaining issuance cost related to the line.

Okay.

And then with regards to revenue, I think this certainly speaks to why diversity is our friend and is a real strength. And how we're able to consistently generate, you know, good cash earning, you know, in difficult market. Because out of the 150 investment products you can say that there are - there were certainly some that were positioned where this market environment was favorable for them. And those also happened to be products that were connected with performance fees. Those revenues and the increase in revenues were certainly generated out by those performance fees. And additionally, as you can see we had $1.1 million at EBITDA contribution from net new flows; that also - you know, well it's $1.1 million of EBITDA; that's considerably more when you look at the revenue line. So...

What was the contribution for performance fees on revenue?

It's -- still is about 2 cents down below and I'd say that the fee was in the several million dollars range.

Okay. Several million dollars meaning more than 3, more than ?

Yes. It's a - it was - given the - given that these contracts are concentrated with a couple of products and a couple of clients, it would be inappropriate to give specific amount. But that is - when you look at the ratios that I was talking about with Henry earlier, if you look back to, you know, first quarter level for those ratios, that's the appropriate way to think about the business going forward.

Okay, and then I missed the question or the comment you made about capacity, post-Third Avenue -- the closing of that deal, how much capacity will you have - cash capacity will you have at the holding company level and through available credit facilities?

We'll -- the combination of those will be over $200 million.

Okay. And last question would be, the traditional way you look at leverage that the two to three and half times, does that change at all, given the current environment? Are you less comfortable with bumping up against the higher end of that range given the skittish environment?

Yes. Well, I think for starters that that range is established [being] consistent with the criteria as per what would be investment grade. And that we're not willing to say that we're changing our range, but that said, you know, this is an environment where we're going to be very disciplined and very prudent about what we do with our cash. And of course, at our leverage levels now and leverage levels in just after we close Third Avenue, you know, we're still at that lower end of the range; that gives us the capacity to do something, but certainly you know, I would agree that getting to the higher end of the range in this environment is not what we are planning on doing.

Great. Thank you.

Thank you. Our next question comes from Michael Freudenstein from JP Morgan.

Hi, it's actually Bill [Tinnona] on behalf of Michael. I know, we've already talked about this briefly, but ownership allocation as a percentage of net revenues came in a little bit higher than it has historically. And I don't think I understand why that was, was it because of a gain from your sale of Paradigm? Was it because you purchased additional equity in other affiliates? Or was it because you guys had redrafted some of your operating agreements with affiliates?

It was none of those things. I'll say what it was. And one was again, you know, shift to higher fee products, you know, in firms in which we earn more and the performance fee. So none of the other items -- not a gain on sale, not redrafting of agreement, you know, none of that. And as you can see, you know, Bill when you look down to EBITDA as a percent of owners' allocation it actually went down and that's the offsetting factor to the change in revenues to owner's allocation. So, you know, as I said it's -- go back to the first quarter ratio and those are the ratios to be - to use going forward in your forecast.

Okay and what was your gain on Paradigm this quarter?

Well, we did not book a gain or a loss in the Paradigm transaction.

Okay. And over to the operating expenses, if I look at total operating expenses and then subtract out your holding company expenses, I see that expenses ran about 2.8 million more than what was allocated to it under the operating allocation. Could you give me some color on that as well?

I'm not sure what that means because you know, there's only, you know -- every revenue dollar is either operating allocation or it's owner's allocation. So those operating -- those dollars in operating allocation are used for expenses at affiliates and dollars in owner's allocation are distributed to the owners, both AMG and the affiliates. And holding company expenses, of course, are embedded in, you know, they come up after our share, which is the EBITDA contribution, which is the cash we receive from affiliates.

Sure, but if I look at owners' allocation, which is about 69 million, take total revenues; it leaves with about 60 million in operating allocation, correct?

With that minority interest.

Yes, and the minority interest is the other portion.

Okay, but just looking at owners' allocation with 69 million?

Right.

Yes, it leaves you with 60 million in operating allocation, which only have two components: either owners' or operating, correct?

Right.

So if I look at total expenses and then take out holding company expenses, I come up with operating expenses about 63 million, but the operating allocation was only allocated about 60 million. So I was just looking for some kind of color as to the, you know, $3 million difference.

There again, that's the performance fee, you know, working its way through the system. As those performances are booked as revenue but the affiliates -- while we share in those performance, fees the way it works with the specific affiliate is that there's a portion of the fee that will stay with that affiliate.

Okay. Thank you.

Thank you. Our next question comes from John Hall from Prudential Securities.

Good morning.

Morning John.

Good morning John.

Yes, I've got two quick ones. I was wondering if you could comment on how the current -- that's the equity market is impacting your ability to put a fine point on, I guess, on transaction on investments for you right now? And does that, kind of reduce the likelihood that we'll see anything in the next three to six months? And then also I was wondering about -- you know, following on Darrell's comments -- he talked about equity put back as use of capital. Has there been any affiliate equity put back that you know about? Do you know any on its way?

Let me divide those. Sean, why don't you take the -- John's first question about the pipeline and Darrell, you or I can do the equity put back.

I think your question broadly is what's in the pipeline? What do we forecast in terms of near-term transactions? I would say first, we are -- as we always are -- absolutely committed to continuing to develop relationships with high quality mid-size firms and that's, as you know, how we make our investments. We don't wait for investment bankers to send us books and compete in auctions. And we think that's an important thing to understand in appreciating how we've been able to do what we've done and the pricing discipline. Where we end up in terms of progressing from relationships to executing transactions is very largely, as you understand, a function of what perspective the affiliate management partners want to do; and in the current environment, it's just very difficult to predict where things are going to go; and it's, generally speaking, much less likely that folks who are running firms -- and there are very many firms that are doing just fine not withstanding the, you know, the market volatility we're currently experiencing and they will do transactions. I just -- I think it's unlikely they will choose to begin discussions -- transaction discussions -- in the near term. With respect to predicting, I think it is -- because of what I said, it's probably correct that you're going to see less activity than you would see if the markets had remained stable, but you know, there are a very large number firms out there that we continue to talk to and some of them have products that are negatively correlated with the equity markets, which is attractive in the current environment. And so we're going to continue to do what we would do but I would say [that wasn't] less likely to want to do things in the current environment. And we are, generally speaking as Darrell and Bill have said, focused on being prudent and disciplined in maintaining flexibility now.

And with regards to affiliate equity and AMG repurchasing affiliate equity, we spent time with all of the affiliate equity owners. And of course, the schedule is worked out at the time of the transaction, which would have us repurchasing equity frequently with each individual -- maybe half of that equity 7 to 10 years after the transaction and the remainder beyond that -- and of course, that's the earliest the equity can be -- that AMG can purchase it back. As we've had conversations with all the affiliate equity owners, we don't foresee there being any meaningful amounts of equity coming back, you know, in any of the next three years. And when I say, you know, "meaningful," in that if we're generating from the business a $100 million of cash flow, I would say that we could be putting back, you know, less than 10 percent of that in repurchasing equity from affiliates.

Great. Thank you very much.

Thank you. Our next question comes from [John Woodbury] from [Clover Capital].

Hi guys. Was there an amount that you repurchased in the quarter, prior to the authorization?

Yes, sure it was. He is not talking about the affiliate equity.

Yes -- no -- yes, we did make some modest purchases in this quarter.

Okay. I guess I'll have to wait [to] theque.

Yes. I mean, John, you understand that the close two earnings [would] be -- it can't be in the market.

Got you. Okay. Second question. What is the portable amount of your affiliates this year?

When we look -- up to $30 million.

That's it...

It's the portable amount. But as I said, we've spoken with many of the individuals who are at these firms; and overwhelmingly, none are interested in putting back their equity at this. I [can say] very few...

None right here. Here's my last question, just to understand correctly -- 220 of cash earnings for the first half of this year, and if the markets stay absolutely flat from this level over the next two quarters, you know, based on you're your earnings, if everything else remains the same; you are in 210.

That is correct.

And if the market would pop 3 percent then you would earn the same 220 in the second half of this year.

That's correct.

That's -- that's amazing. Well, thanks very much.

Thank you. Our next question comes from Glenn Krevlin from Glennhill Capital.

Yes, good morning. I was just wondering, could you just tell me where the balance sheet is going to be after the Third Avenue transaction? You told me what the credit lines, you think, are going to be; but you didn't say the cash position. And also why the cash position got down sequentially?

Some of it is timing differences, when you look at the consolidated cash -- actually, our holding company cash which is the excess that we have, went up quarter-to-quarter. And when we purchased Third Avenue; immediately after that transaction, we'll have no excess holding company cash. And we will have about $50 million outstanding under the revolver. And as you know, at the end of the quarter, the cash earnings will certainly [trip in] and convert into cash that's in our bank account, you know, building to the -- at that $100 million in the cash earnings run rate.

So you will effectively have the two converts into that 50 million drawn on your line?

That's correct.

Okay. Thank you.

Thank you, our next question comes from [John Chin] from Merrill Lynch.

Hi. It's actually Bill Katz sitting here for John. Sorry, I had to hop into call a little late. So this might be a little redundant. But I just want to go back to what you are saying in terms of your earnings outlook. I'm just trying to put a couple of pieces together. I think if I heard you correctly, you said that the EBIDTA yield would sort of be around the 21.5 percent range. That is little more flexibility on holding company expenses, all else being equal, and that you might feel a little more aggressive in terms of capital management. So how -- and on top, you sort of talked about the below-average operating risk for the model. Why you're sort of talking down numbers here? Are you just being conservative or is there -- are you now sort of at a point where some of the affiliates are starting to bear significant margin pressures?

No. I think -- and I' am sorry Bill that you missed my comments, because we went into, you know, very detailed explanation of how the structure works. And so we will be happy to give you the replay number. But apart of that -- and there is also a very clear statement in my script that we do not -- you know, at this point, do not say [it's arrangement] for the rest of the year. We will be bearing any of the operating leverage of our affiliates. So with that, it's -- when we say $4.30, I think that that's a very good number relative to what's been going on in the markets. I mean you've seen indices just [indiscernible] down this quarter, 17 to 20 percent in the [indiscernible]. So where we gave -- at the end of this quarter, we were certainly comfortable with where estimates are; but as you can see in this quarter, as markets have come down significantly, we need to understandably, you know, change our view. And as you work that -- if you work that market change through the model and giving you a view, that if they were flat from today to the end of the year, we think $4.30 is the right number.

And I would just add. If you thought that the market could replace the declines from this quarter -- in other words, if you said at the end of the second quarter, how did we feel before the 20 percent down lag in the first few weeks of July? We were certainly comfortable with the prior estimates, not withstanding that it had not been a very strong quarter in the market. So it really is just trying to address this very recent change in the markets and give investors our latest best view of where things stand.

Just trying to play [indiscernible] a little bit, I think I understand the model. The other question I have is -- could you go into a little more details of the [adds] and flows, if you will, on the asset flows in the quarter, maybe by additional channel or by asset clash? And how are you thinking about the new Wells Fargo alliance and you know maybe update on what's going on in the First Union channel as well?

Sure. I'll start with the last one first, which is, it's going great. I mean we were thrilled that Wells Fargo picked us over other entities that you could imagine have a similar breadth of products; so to be chosen, we think, is a real testament to the work of our affiliates and quality of our affiliate group. It is still early days of these products. I'm not going to give you a specific asset number; but it's very encouraging and positive. And we think that as the product expands, we're pleased with our position, sort of, in the marketplace in terms of the sponsors that are electing to go with us. So that's all in the good category. It's still relatively early days. Close among affiliates, I think, as you could tell, they were -- and you can -- if you think in that sort of way our affiliates that have higher margin or where we own more of them are, and which ones they are, given that the earnings contribution from net close was reasonably good organic growth. Obviously, that gives you a sense as to where the flows came. Tweedy, clearly, you can tell from the public data, continues to perform well and to garner substantial flows. As I look at the list of the affiliates, there is a -- still in the quarter, there is, you know, a very broad group of affiliates that had positive flows; and the flow is by and large that were -- the outflows by and large were in -- first of all, were not enormous to any affiliate or certainly not in the aggregate -- but to the extent that we have a modest outlook, they're [tended] to be concentrated in more growth oriented products. And the value guys did reasonably well. We've mentioned in the prepared remarks that First Quadrant had a terrific quarter in performance. They also did well in flow. So hopefully that gives you a flavor.

And then just one follow-on the question there. Instead of [indiscernible] as imagined, there have been any sort of incremental change in investor behavior either on the institutional channel or retail but specifically in the high network channel -- I was also sort of curious to get your response. Is it still through retail or are we are starting to see some type of sea change in terms of allocation to all processes?

I think it's still too early to tell. We've maintained close contact with our affiliates and are very pleased with the way they are managing through this difficult period. We don't, as you know, talk directly to the client so it's sort of very much secondhand. I think we're -- maybe it's not what you want to hear because it's not that contrary an indicator. Well, we think people are being reasonably -- so far as we can tell secondhand -- the clients are being, you know, reasonably calm about all that's going on, and you know, given -- if we're talking high network -- you -- maybe that shouldn't surprise you too much. But this data point is, as I said, very much secondhand.

And one just technical question. On the P&L why was the -- what was the jump in SG&A sequentially due to?

Again, looking at the -- those are expenses that rolls off from affiliates. So there again it [extensively] increases at individual affiliates that are allocated in that way.

But no.

No, there is no indication as that -- there is no trend that's indicated in that number.

Okay, I'm still curious. Did you ramp up or did any of the affiliates ramp up advertising or anything along those lines in light of some very good performance, maybe, as the market snapped back to get sort of an outsized mind share or market share?

It's an increase that -- as I'm looking at it here is -- it's just a lot of little things across all the affiliates.

Okay. Thank you very much.

Thanks a lot Bill.

Thanks Bill.

: Operator: Thank you. Due to time constraints I would now like to turn the program back to management for any further remarks.

No.

If there are any questions John, we're -- we're more than happy to take them.

We think this is a good opportunity for shareholders. So if there are any more questions, we'd be glad to take them. We are not under any time constraint.

Once again ladies and gentlemen if you have a question at this time please press the "1" key on your touchtone telephone. There appear to be no further questions at this time.

John, hearing on, I was just in a spell again. First, let me thank all of you for your participation today, and we really do appreciate the questions because it's an opportunity for us to make clear, not only the business structure but how it operates not only in growing markets but in declining markets as well. We've spent an additional amount of time on a number of these subjects, and we hope that that's been helpful to you. Obviously, the second quarter was a difficult quarter, but I think it is fair to say that as you see from Darrell's discussion of the financials we believe that we had a good quarter in terms of our continued ability to grow, not at a pace which necessarily is what we have in the past, but still solid performance from our affiliates. Number two, we continue to have a great deal of faith in the asset management business as a whole and particularly in AMG's participation in that business. So we look forward to better days, and if the market improves, I think you will see that even to a greater extent as Darrell explained when talking about projections for the future. We try to make as many of these things clear, that is the performance of our affiliates, our financial strength, our flexibility in that regard, and we very much again appreciate your participation.

It looks like we may have one additional -- do we have an additional?

Is there a question that has come in?

We have one final question from [Shinido Itcher] from AM Investment Partners.

Right, that'll be great. Hi.

Your question please.

I'm sorry. That was a mistake.

Okay thank you then.

No problem. Well, thank you all again and as you can tell we're quite willing to answer any questions people have. We tried to be very clear in what we've gone through this morning, but we welcome your calls. Thank you very much.

Thank you very much.

[Thank you] for your participation in today's conference. This does conclude the program; you may now disconnect. Good day.