Affiliated Managers Group Inc (AMG) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Affiliated Managers Group first quarter conference call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero. As a reminder, this conference is being recorded Wednesday, April 23, 2003. I would now like to turn the conference over to Mr. John McNamer (ph) with FRB Weber Shandwick. Please go ahead, sir.

Good morning everyone, and thank you for joining Affiliated Managers Group to discuss results for the first quarter of 2003. By now you should have received the earnings release. However, if anyone still needs a copy, please call my office at 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, Darrell Crate, Executive Vice President and Chief Financial Officer, and Nate Dalton, Executive Vice President in charge of Affiliate Development.

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, competitions for acquisitions of interest in investment management firms and 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 and yearly results and business prospects, the investment performance of certain of AMG's Affiliates will be discussed. The benchmarks that such performance is compared against are deemed by AMG to be the appropriate benchmarks.

AMG will provide, on its Web site, the financial information discussed in this call by means of a replay of the call, a copy of our announcement of this quarter's results or through other presentations, including with respect to any non-GAAP financial measure, a presentation of and reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP. You can access this information at www.amg.com. And now, I'll turn the call over to Bill Nutt. Go ahead, Bill.

Thank you, John. Good morning everyone, and welcome to AMG's conference call discussing our operating and financial results for the first quarter of 2003. I'm Bill Nutt, AMG's Chairman and Chief Executive Officer. With me today are Sean Healey, our President and Chief Operating Officer, Darrell Crate, our Chief Financial Officer and Nate Dalton, Executive Vice President in charge of Affiliate Development.

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.

As you saw in the release, we reported cash earnings per share of $1.11. Despite some recent gains in the equity markets, as you know, in the first quarter market conditions remained volatile with a major indices ending the quarter modestly lower. Given this difficult environment, we are pleased with the relative stability of our results.

Stepping back for a moment in what is AMG's 10th year since founding and our 6th year as a public company. We believe that AMG is successfully meeting the challenges of the very difficult market environment we have experienced over the past several years. Since our founding, we have assembled a diverse group of high quality, mid-sized investment management firms and effectively worked with them in both good and bad markets. We maintain a continued focus on the long term growth of our business and seek opportunities to enhance the growth and profitability of our existing Affiliates, as well as to make a creed of investments in new Affiliates.

We support our growth strategy by maintaining a strong, flexible balance sheet, with an emphasis of the efficient use of our recurring cash flow from operations. While markets have been difficult for the three years now, we are proud of how our partners at our Affiliates have responded, and believe that the quality of our affiliate group and our business model will serve us both well in the current environment, and, of course, when markets inevitably improve.

Turning to our operating results for the quarter, as Sean will discuss in greater details, our Affiliate Development team continued to make excellent progress in working with our Affiliates on both an individual and collective basis to create efficiencies in their business operations, as well as to enhance and expand their product and distribution capabilities. We also continue to make progress in our new investment efforts, and despite a broad decline in transaction activity throughout the industry, resulting from continued volatility in the equity market environment, we continue to see new investment opportunities, many of which involve corporate sellers. And we will continue to identify and cultivate relationships with high quality, mid-sized investment management firms.

Finally, we further strengthened our balance sheet and extended the maturity of our obligations this quarter with the sale of $300 million of convertible securities. We sold the securities on very favorable terms, which Darrell will describe in further detail in just a moment. AMG continues to have a strong balance sheet, which allows us to be appropriately optimistic about making new investments and, when appropriate, the purchasing our stock. With that, I'll turn to Sean to discuss our operating results in greater detail.

Thanks, Bill. Good morning everyone. While the continued declines in the equity market have impacted our business, as Bill noted, the stability of our results reflects the benefits of diversification, as well as internal growth, as a number of our Affiliates continue to generate good relative investment performance and positive net line cash flows. As you saw in the release, net line cash flows from directly managed assets were 64 million for the quarter. The net close in the quarter resulted in a modest increase to our annual [Inaudible] .

Taking a closer look at our Affiliates' performance within each of the high net worth, mutual fund and institutional distribution channels, starting with the high net worth channel. Those were negative 400 million over all. Within the channel, net flows and the investment counseling area, those typically serving ultrahigh net worth investors were generally stable. However, in the broker sold area in the first quarter, investors continued to allocate away from equities to fixed income products. And given our waiting toward equity products, we experienced continued outflows during the quarter.

With respect to the mutual fund channel, we had net outpost of 85 million. Among our larger Affiliates in this channel, Third Avenue Management and the Manager's Funds had positive inflows during the quarter. It was, however, a challenging quarter for Tweedy, Browne, which experienced modest outflows and negative investment performance, as its largest product, the Tweedy, Browne Global Value Fund was down roughly in line with the EFA index.

Notwithstanding a tough quarter, obviously we remain very confident in Tweedy, Browne's and this product's long-term prospects. The fund is rated five stars by Morning Star, and it was also listed in one of the ten best funds in the March 24th issue of Business Week.

Finally, although flows at Friess Associates were slightly negative, its Brandywine and Brandywine Blue Funds continue to have solid relative performance numbers, and are ranked four and five stars respectively by Morning Star.

In the institutional channel, we were pleased with our results, as we saw strong inflows from a number of Affiliates, contributing approximately 527 million in net flows this quarter, with a portion of these flows going to Performance B products. These flows include several significant new mandates among a diverse range of Affiliates, including value-oriented, systematic growth-oriented Frontier and First Quadrant, a quantitative manager.

Turning to our Affiliates' development initiative, as Bill mentioned, our Affiliate Development activities continue to expand as we identify additional growth opportunities and also seek to help our Affiliates find cost saving approaches to managing and expanding their businesses. Earlier this week, we and our affiliate, Lower Asset Management announced the launch of a centralized back office platform. This initiative allows us to leverage this leading edge platform for the benefit of other Affiliates. In addition, by making this platform available to third party investment management companies as well, we have developed an additional business line that provides Rorer and AMG with incremental growth opportunities. With that, I'll turn it over to Darrell for a discussion of our financial.

Thank you, Sean. Good morning everyone. As you saw in the release, we reported cash EPS of $1.11 for the first quarter in line with first calls content with estimate. We reported GAAP earnings per share for the quarter of $0.50. EBITDA was 32.6 million for the quarter, and quarter-to-quarter our margin of EBITDA contribution to end of period assets under management declined modestly from 22.1 basis points in the fourth quarter to 22 basis points in the first quarter of 2003, with the difference principally due to rounding.

Going forward, for forecasting purposes, we believe a margin of about 20.7 basis points will be appropriate. Anticipating a question this is lower than our current run rate because our forecasts assume a growing equity market, which leads to a higher end-of-period assets number in the denominator.

Holding company expenses were just under $5 million for the quarter. These expenses are 14 percent lower than last quarter, and 17 percent lower than the first quarter of 2002, due to lower compensation accruals. We anticipate that holding company expenses for the year will be approximately $20 million.

With regard to taxes, we continue to accrue at a rate of 40 percent and expect to do so until the third quarter when our tax rate will increase to 41 percent. Our cash tax rate was 9.5 percent for the quarter. In February we issued $300 million of floating rate convertible securities, which we referred to as the floating rate convertibles to refinance our existing zero coupon convertibles.

If you'd bear with us for a moment, we'd like to highlight some of the unique, and we believe appealing, features of this financing. If you have additional questions regarding the terms or the structure of the financing, we are available and would be happy to follow up with you after the call. Basic features include a five-year non-call, non-put period and a low cash coupon of LIBOR minus 50 basis points and a base conversion price of $81.25.

An additional feature of this new issue is that it provides a meaningful benefit in the form of implied interest deductions for tax purposes. The effect is that actual cash taxes are replaced by deferred tax accruals. Unlike the deferred taxes related to our intangibles, we are not adding the non-cash deferred taxes related to this financing to the calculation of our earnings, cash earnings measure. As it is possible, given certain circumstances, that these deferred tax accruals may reverse in the future.

To give you a better sense of the value of this tax treatment, about $50 million of implied deductions are forecast over the initial five years of its term. Deductions, which translate into an additional $20 million of after tax value in the form of deferred tax accruals. These deferred tax accruals will become permanent if AMG's stock price is $91.35 or higher at the time of conversion of the floating rate convertibles.

However, because the trading price of our stock at conversion is not knowable today and, as such, we cannot be sure that these deductions will not reverse, we are not adding them to our cash EPS calculation. As always, as 142 intangible related deferred taxes will remain part of our cash earnings measure.

Because of our deferred taxes, we've expanded the tax section of our income statement to illustrate these two components. As you can see, the total differed taxes were 6.6 million in the first quarter of which 6 million related to intangibles. Those were the FAS 142 differed taxes.

Amortization for the quarter was $4 million, consistent with last quarter. Depreciation for the quarter was 1.5 million. Historically, we have added all depreciation back to our cash EPS calculation because the large majority of the depreciated assets on our consolidated balance sheet were replenished from the resources of our affiliate.

While this continues to be the case, the trend is for greater holding company capital expenditures to support the growth of our business. In light of this, we make a distinction in our calculation of cash EPS to include only affiliate depreciation as an add back.

Thus, the total add back for the first quarter was 1.1 million as you see in the new reconciliation page, which has been included in the press release tables. You'll also note that the tables in our press release now include a cash flow statement and a channel analysis, both of which I hope you find helpful.

This reflects our continued effort to give investors additional public company information about AMG while being mindful of our affiliate's confidentiality and that being an important part of them operating their businesses.

Interest expense decreased slightly to 5.4 million during the first quarter, largely as a result of lower revolver outstanding. We expect interest expense to be approximately 5.9 million per quarter for the rest of the year.

Now turning to the balance sheet. At the end of the first quarter we had $250 million available under our credit facility and cash on our balance sheet of 171 million. During the quarter we used cash flow from operations as well as the proceeds from our sale of the convertible securities to repurchase 745,000 shares of our stock for a total purchase price of 33.7 million.

In addition, we paid $101.2 million to repurchase almost half of our outstanding zero coupon convertible senior notes. Realizing a modest gain on their retirement of approximately $500,000.00 and you can see that in Investment Income on the income statement.

Stockholders' equity decreased to 551 million at the end of the first quarter as our earnings were more than offset by our stock repurchase activity. In addition, we announced earlier this morning our Board recently approved an authorization for us to repurchase up to an additional five percent of the shares outstanding or a little more than one million shares of our common stock so that we can continue to repurchase our shares when appropriate.

Turning to guidance on earnings for the rest of the year. You will remember that in our last call we provided guidance based on steady appreciation of the broad equity markets throughout 2003 with estimated annualized growth of approximately eight percent.

Unfortunately, the broad markets during the first quarter did not track to this assumption. So, we'd like to update the range of estimates using the same annual assumption of eight percent appreciation in the broad markets for the year.

Given this market growth assumption and taking into account that the first quarter ended down and that we are not adding back the differed taxes related to the floating rate convertible securities, as well as a portion of our depreciation, we would expect cash earnings per share to be within a range of $4.45 to $4.55 for the year.

As you would anticipate, in addition to market growth assumptions, this guidance also includes related expectations about our affiliate growth rate, the mix in affiliate contributions and the absence of substantial changes in the equity markets.

Changes in any or all of these factors would, of course, impact these expectations. Now I'll be glad to answer any questions.

Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star followed by the one on your push button phone.

If you'd like to decline from the polling process, please press the star followed by the two. You'll hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received.

If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for our first question.

Our first question comes from Henry McVey with Morgan Stanley. Please go ahead with your question, sir.

Good morning. Can you hear me?

Yes, Henry.

One, thanks for the better disclosure. I think that's helpful. I had a couple of questions just on that, actually.

On the cash flow from operations it was actually negative and it looked like there was a big movement in accounts payable -- 25, I think it was -- it was pretty substantial so that you had negative cash flow from operations. What was that?

Yes, it's essentially bonus payments across the affiliates. Wherein, it looks odd as you compare it to 2002. But in 2002, we had actually paid a bunch of the bonuses in December of 2001 instead of the following year.

So if you -- so when you compare it to how they were paid in 2002/2003 when 2002 bonuses were actually paid and the accounts payable was removed in the first quarter of 2003. That's why you see the substantial difference.

OK. Just a couple of -- were there any performance fees in the quarter?

Very few. I mean, far less than a penny.

OK. And then, did you guys -- I know we can back into it, but are you -- I know there's allocation. Are we not getting that? Or did I miss that?

No, they're not. It's just given the broader disclosure it seemed redundant.

OK.

You still have the EBITDA contribution, which is our share in the minority interest with the dollars that the folks at the affiliates are getting.

OK. And then just two other quick ones. Just on -- I know you'd increase the authorization. Where were we, I mean, so what is the total number now?

Actual shares at just about 21 million shares.

OK. And then the other one was just on the changing guidance. How much was just the market and then how much is just the change in the accounting if you were to break it out from where you were previously?

Yes, I think most of it is certainly the market, you know. And as we look through, the new floating rate convertibles were new, so that had no effect. But I can't emphasize enough the degree to which that's providing cash that is not reflected in the earnings measure.

And then depreciation. I would say that's probably four or five cents for the year.

OK. And just to get back to the cash flow from operations should turn back positive in the next quarter, right?

Yes. The cash generating business.

Right. OK. Good enough. Thank you.

Thank you. Our next question comes from Mr. Bill Katz with Putnam Global. Please go ahead with your question, sir.

OK, thanks. Good morning, everybody. And I'd also like to echo the sentiments on greater disclosure. Thanks very much. Of course, by giving more disclosure, you get more questions. So, it'll still be slow, but here we go.

On the institutional business, I'm sort of curious, could you go into a little more detail in terms of where the new business was coming from? I'm sort of curious if it's coming from other equity managers or are you seeing a step up reallocation away from some of the fixed income managers? If you can see that at all? And then the follow on would be, within your commentary on the high network channel, how big is your managed account business right now -- just to sort of get a sense of what the rate of attrition was in that business line.

Sure. Sean.

I'll do the first bit and then I'll ask Nate Dalton to speak to the second part of the question.

The institutional business, broadly, we're pleased to see that the trends that one would expect when equity indices are down and people are moving away from their target allocations that you should see more demand from institutional investors. And I think broadly we're seeing that.

I think we also have a number of affiliates cutting across styles, as I mentioned -- value, growth and quantitative -- who are -- which are doing very well with excellent numbers and very competitive products.

So, we have, you know, a very broad list. I gave you three, but we have a broader list of affiliates that are doing well in their institutional product set. And we expect that to continue. I can't tell you whether there's a reallocation away from fixed income.

But I would say broadly, as I started with the observation, we do expect continued demand from the institutional channel. And we're happy in what we've got so far and expect to continue to more than get our share.

Why don't I let Nate respond to the second piece on the managed account.

Let me add -- the one thing I'd just add on the institutional -- I do think it's all relative competitive positioning.

We are -- when we look at the number of participants in the institutional channel, I think the competitive posture is very, very good.

In the managed account area, I think our broad observation would be we saw flows moving from equity to fixed products -- a little bit. And this is mostly anecdotal. And then also, we saw a broad trend sort of towards value and deeper value within value.

OK, thanks. And Bill, maybe as sort of a follow on question somewhat related. Can you sort of quantify a little bit what you meant by you're seeing more interest from corporate sellers? Is that from companies that have asset management businesses that are looking to divest? Or is that in terms institutional managers?

No, it's more in terms of companies that in the early to mid 90's, indeed even the late 90's, acquired asset management subsidiaries. Maybe an insurance company, broker dealers, others. And we're seeing some of that divestiture activity.

OK. So does the 100 percent sale phenomenon -- something you've eschewed in the past -- is that any kind of issue as you think about incremental acquisitions from that particular channel?

No, in fact, Bill, as you may know, three of the investments that we made over the years came out of this kind of transaction. The divestiture by a corporate seller who found that business not strategic or not something that they could realize the benefits when they did a 100 percent sale.

When we've done so, equity has been allocated on various terms to the management team and post that. One of them that Sean just mentioned in the institutional channel, for example, First Quadrant (ph) has done very, very well.

Just to add to that a bit. Of course there continue to be transactions in the market where you have a corporate seller or not, but a seller that is seeking a 100 percent transaction and where that's appropriate.

The transactions that are appealing to us -- especially in the case of these corporate sellers -- are where the management team of the entity either has currently equity in the business or should have equity in the business.

There's an increasing interest on the part of private equity investors. For example, for management buyout type transactions.

We believe that our approach and the strategic benefits that we provide is much more attractive to those kinds of management teams. And therefore in that subset, but it's a big subset, of the corporate divestiture activity we think we compete very well.

OK. Second broad question I would like to address would be, you know, if you look at the incremental disclosure and you look at the margin calculation across your businesses -- plus your commentary in terms of your earnings guidance -- and then the notion that you have to spend a little more from a cap ex perspective.

I'm just sort of curious, you know. Your ability to sustain the 15 percent, I guess, EBITDA growth that you've sort of become accustomed to. I know this was a topic that came up in the last quarter.

I'm sort of curious if you could sort of comment again on the durability of the model if you sort of go sideways here in terms of the markets. Are any of your affiliates at a point now where you're starting to hit, you know, breakpoints from a revenue and earnings share perspective? And what the impact might be to the holding company?

Why don't I start and others can add to this. It's a broad question, of course. I think we have a very diverse business. We've added disclosure in terms of distribution channel, but obviously great diversity by investment style and product sets, et cetera.

That diversity is a real strength and has allowed us to have a measure of stability with relative to other equity oriented managers -- public or private -- we would happily compare ourselves to. It is a difficult time in the markets.

And so I think while we're not saying that we're at the absolute peak in terms of inflow performance among our peer companies, we do think that our trends broadly reflect the trends in the respective markets.

The rap channel has seen substantial move away from equity into fixed income. We don't necessarily think that's (A) sensible; (B) going to continue forever.

The mutual funds, you know, most broadly -- as you obviously understand -- were, you know, the flows across the industry were flat to slightly down and institutional is sort of picking up.

We think that within each of these channels we have very competitive products, which over time will continue to generate above industry trend line growth rates. But it's difficult to achieve those growth rates when the tide is moving against you.

With respect to what it says about our model, we feel as comfortable as ever. Indeed, we think that the performance during this difficult period -- as Bill said at the outset -- really reaffirms the strength of the model.

Because everybody -- when we were growing faster than everybody in '99 and early 2000 everybody said, oh, well this is just a bull market thing. And now we think that we're showing a lot more stability in a difficult market.

Obviously, there are affiliates at any given point that are doing better or worse than others. But as a group, we're quite pleased with where we stand and optimistic about the future.

OK. And last question -- and thanks for your patience on all my questions. In terms of capital management, I think if I calculate roughly, your leverage ratio -- as you define it as debt as a multiple trailing EBITDA -- is roughly two times. And I think your goal is between two and a half to three to three and a half. Sort of curious if you could reconcile those numbers there versus your appetite for share buyback?

Sure. And the target range has always been just a bit lower than that. I think we sort of say one and a half to three times seems, you know, seems to be an appropriate definition for modest.

You're right. We certainly have some capacity and we're always looking at new investments and balancing that off with repurchasing shares when it's appropriate. So we do think our balance sheet is in a very good position to grow the business in a set of ways. And we are very cognizant of where the shares are trading. And we, I think, are doing the right thing in order to be prepared to take advantage of that as appropriate. And I'll sort of leave my comments there.

OK, thanks guys.

Thanks Bill.

Thank you. Our next question comes from Mark Lane with William Blair & Company. Please go to your question, sir.

Good morning. Three questions. First of all, just to follow up on the trends within the acquisition market on the corporate side, is that, is there a difference in at least, do you see a difference in valuation within, from those type of sellers? And it seems to me that that would be a little bit different. I mean, you've stated that you've done some transactions in that area. But, I mean, the corporate sellers that are looking at selling, I don't, I'm not sure that there's really that many well performing, good performing businesses right now. Can you just talk a little bit more about that?

Sure, Mark. I'll start. I think it's fair to say, there aren't that many that are really well performing, well positioned businesses. In fact, in many instances, they were through 100% sale, they've lost some of that. So, yes, you're correct. There aren't a tremendous number of them. But there are some, as Sean said, particularly those where management has some equity or has phantom equity, or a compensation plan which is tied to the specific performance of the business. And there are a few of those.

We don't actively call upon those, of course. We're more unlike where we're calling upon founder/owners for purposes of succession planning. These are more often cases where the parent decides to leave the business for one reason or another, or frankly, the management team of that affiliate helps them reach that position. In those instances, valuation, yes, is somewhat lower. And the reason for that is that very often it's hard to distinguish that which they have grown on their own from that which has been assets which have been given to them by, for example, insurance company, a broker, dealer, larger asset management firm, or another kind of entity. So you haven't been able to see the same kind of growth as a stand-alone separate entity that you would with an independent firm with a founder/owner management team in place. So generally speaking, yes, those are often at a lower valuation.

Okay.

And I think Bill said this. But just to be crystal clear. These are opportunistic situations which are emerging, especially in a difficult environment. And we're going to take advantage of them where we think it appropriate. Our, so to speak, bread and butter, new investment activity with succession oriented transactions with very high quality mid-sized firms is absolutely going to continue. That flows, as we noted in the past, a bit in very volatile difficult market. But there are a very large number of those firms out there. And we think that our position in the market as a perspective partner is better than it's ever been.

Okay. Second question is. The holding company expense, last quarter you had expected less than $5 million per quarter, now you're expecting $20 million for the year, yet your cash EPS guidance has gone down. Um, where's the extra expense coming from?

The holding company guidance has stayed the same. The change in our guidance stems from the markets not performing in that linear fashion that was consistence with our guidance, in that if you look at where the first quarter ended, markets were down instead of modestly up. And in many respects, our earnings for the year are driven by where the markets are on poor days of the year. So the first quarter being down, and given the effects of compounding, that made it appropriate for us to take a little bit, to, you know, to take the guidance down a bit.

Well, I guess my questions is, the holding company expense, you've always stated in the past that it's mostly compensation and it's highly variable. So I'm looking at my notes from the first quarter, or fourth quarter conference call, and the guidance was under $5 million per quarter. And now we're looking at $5 million per quarter, yet your cash EPS growth is lower. So I would assume that variable comp would be less.

You're exactly right. And when we look at our, what is correctly characterized as our highly variable incentive compensation program, we're not getting to those targets. So the original guidance from where we stood was one that was consistent with a targeted cash earnings per share number. And we're not getting there, so we're not getting into an incremental amount of incentive compensation.

But I think the, just to be clear, the guidance is the same. In other words, the forward guidance that we gave last quarter, did not have an incremental amount in it. So I think we're talking about just rounding, Mark.

Okay. And then clarification on the guidance. There was a change in splitting the depreciation between the affiliate and the holding company level. And you stated that that was about .4 to .5 cents per share. Wasn't there also a change on the deferred tax side as well then, with the treatment of depreciation. Isn't, wouldn't the impact be greater than .4 or .5 cents per share?

You know, in that the deferred tax side is such an incidental amount. And you can see that on the, on what is the...

Income statement?

You can see the little amount that is in income taxes other deferred. So it really is just that depreciation that is attributable to holding company capital expenditures. And while it's all a tiny amount, as I said, we wanted to set up a construct for the definition that takes into account how we view the business potentially developing over the coming period. And then, you know, when you look at the deferred taxes specifically, again, we issued these securities, we looked at the tax benefit and the incremental deferred tax accruals that go along with the security and clearly debated, you know, should we be adding these sorts of deferred taxes back in because they're in all likelihood should become permanent. But there is a key uncertainty that we can't control, which is what our stock price is. And so we wanted to make sure we were taking a very conservative approach to our calculation. And that's why we broke out the other line item. When we did that, there's close to $100,000 of deferred taxes that ends up falling into that line for all the things that we've always mentioned. You know, which are little timing differences in fixed assets and other things, but not at all significant or having an impact on guidance.

Okay, thank you.

Thanks, Mark.

Thank you. Our next question comes from Mark Constant with Lehman Brothers. Please go with your question, sir.

Good morning guys.

Good morning, Mark.

Good morning, Mark.

A couple of things I want to follow up on. One, the cash at the affiliates that you consolidated your cash, is that still in the normal ballpark, around $40 million right now?

Yeah, just a little less.

Okay. And actually to Henry's earlier question about the change in working capital during the period. I actually thought that you had talked about a bigger decline than this last quarter. Is there more to come on that in the second quarter, or has that pretty much worked its way through?

You know, the other component from last quarter was tax payments, actual cash tax payments that were made.

And those were all made?

Yeah, so it's all, they're, you know, we have no outstandings under the revolver today.

Okay. And the holding company expense assumption, flat at $20 million, as you discussed. Have you had any change or further thought with respect to your expectations for non-cash or non-currently accrued forms of compensation, i.e., stock options?

I think the expectation is that the level and timing of option grants is going to continue. Now, obviously, we're, as it has in the past. So no contemplated change.

But I mean, any anticipated change in the relative portion of compensation, I guess is what I'm getting at?

No. I think you can see a small pattern based on our historical results in compensation practices. And that pattern will continue. The only caveat I would add is that, obviously, we're aware that there are pending discussions among the accounting authorities about the treatment of stock options and other equity related forms of compensation. And we're attentive to what those discussions will hold. But there's no conclusion and certainly there's no change in what our expectations are.

Okay. So your current plans and your current expectations for holding company expense do not contemplate a change at this point?

No. Just steady as she goes. Just as we've seen in the past.

And to clarify one other part of what you're talking about with the market impact and the guidance. If I remember correctly, I think you were talking about last quarter, when you spoke to at 8% for the full year. Even though I think at that point market returns were slightly negative. But you were still assuming 8% for the full calendar year. Is part of this changing guidance then reflecting the fact that you're assuming an 8% annualized pace, or what is that, I guess a little less than 6% for the balance of the year, is that from a lower level, is that correct?

Yeah, I mean, if, obviously, all points in time. But what the guidance assumes is that the year ends with the appreciation, you know, the average appreciation of the broad market being 8% and...

For the full calendar year?

For the full calendar year.

Okay. So you're still using that, you're just...

And that that appreciation is steady from March 31st when markets were down, you know, were slightly negative, from that point through the end of the year.

Okay. So this 4, so this range then does not reflect subsequent 2-Q to date's appreciation?

It's, you know, it, 2-Q is a little bit ahead of that straight line from March 31st to the end of the year. But as we've seen, you know, it's a...

It changed quickly so...

We don't want to be adjusting our guidance every day. constant: Just wanted to make sure I understand what you're referencing. Thank you.

Thank you. Our next question comes from John Hall with Prudential Securities. Please go with your question, sir.

Good morning. I have a few questions for you all.

Good morning, John.

Good morning. How are you?

Fine thank you. Darrell, I was wondering if you'd offer a order of magnitude on the capital expenditures coming up?

Yeah, I'd be happy to, and that there's nothing big, nothing significant, and nothing certain. But as we do look around, we certainly see opportunities. And as we're out there looking for a new investment opportunities, there are times where we see opportunities with our individual affiliates. And they're certainly competing choices. So, but why did we change the definition now? And we were taking a look at it. And we basically said there are these opportunities that are out there. And we are uncertain as to what that magnitude could be. But we wanted to make sure that we had a construction that was appropriate given that we might be making some of those investments. Maybe Nate could share a little bit more about how we...

We just announced one of these initiatives maybe it'd be...

Why don't you talk a little bit about that.

Sure, we announced earlier this week the launch of a back office platform that we've worked with our affiliate, Rohr (ph) to build. And basically, we, this is an example where the investment was not material in any sense. But we made a small investment in sort of a leading back office platform that existed at one of our affiliates that we can sort of scale for the benefit of our existing affiliates. It's also something that [Inaudible] we're going to be offering, or Rohr (ph) is going to be offering as a product to other money management firms. And I think as Sean mentioned, you know, this creates another, again, not, not necessarily material at this point. But another potential revenue stream for them and for us. But so this is an example of the, of I think, the type of investments that Darrell is talking about.

Is it something like the advantage outsourcing, the economics of it exist outside the current model? Is it weighted differently towards Rohr?

The, at the end of the day, each of these, if you're trying to generalize, each of these kinds of things could very well be different. In this case, the revenue stream will come through our investment in Rohr and our holding in this business is through our investment in Rohr.

Okay, fine, thank you. And Darrell, with so much cash, roughly 17% of the market value of the firm, where is it?

Oh, gosh. It's invested in very secure places in high quality securities, and we seem to be getting a nice return on that sort of 1.5%.

Okay.

So all short term, all very liquid.

[Inaudible] And Bill, you mentioned private equity firms being competitors again. Could you just offer a little bit more on that comment?

I think in particularly, this came in the context, John, of discussing divestitures by corporate owners or asset management firms. And some of the people who have begun to look at these are private equity firms. As Sean said, we don't think that that is very competitive, particularly from the standpoint of the management of these investment management firms. They're not looking for a private equity investor because what they want to do is simply flip it, either sell it to someone else two years later or three years later, and perhaps in doing so, think about not sharing ownership and certainly not sharing the economics with the management team in a structure that we do. But yes, there are LBO and MBO firms, as well as private equities who from time to time look at these to divestiture situations. We don't think they're really competitive though with the structure that we offer and we've actually had that tested a couple of times.

OK. Thank you very much.

Sure.

Thank you. Our next question comes from John Woodbury with Cobalt Capital, please go with your question sir.

Thank you very much. My question's been asked.

Good morning John. Thank you.

Good morning.

Thank you. Our next question comes from Richard Strauss with Deutsche Bank. Please go ahead with your question.

Yes, good morning. Darrell, I'm just trying to remember, has there ever been this much debt on your balance sheet because I don't remember it close to half a billion?

No. I'll tell you. I think it's appropriate and modest, given the company's size ...

But even if it does, actually less than what it's been in recent years, either flat or lower than what it's been in recent years and so I'm just kind of curious about that.

Maybe it makes sense to just talk a little bit about the capital structure. As John Hall was kind enough to mention and to the glee (ph) who run treasury here, we do have 171 million of short term cash on our balance sheet. I could very opportunistically refinance the lions issue, those Euro coupons that were on our balance sheet this last quarter where we had 228 million dollars of senior debt outstanding. We are able to buy back a little over a hundred million of it, and use the proceeds to buy back a little stock and so, currently [Inaudible] , we've got this 300 million dollar issue that's 5 years before it could be put, before it could be called. He have these lions that are outstanding that will, that could quit a year from now, and then we've got $239 million of mandatory convertibles which will bring another $230 million of proceeds into the company in December of 2004 at a price that's $73. [Inaudible] I would consider that to be equity and we certainly did a fine thing for the firm, for the firm there and when you look at our indebtedness, I think it's long term, and I think we're very liquid on the short term asset side.

And I think you said that you felt that you could take on more debt. Is that correct when you're looking to take on ...

Sure. I mean, given our triple B, triple B minus rating, it would absolutely be a ...

Right, but your debt [Inaudible] I'm getting, is actually above 3, is that what you're ...

You have to back out the cash.

Ok, right. Also, on this deferred tax, let me ask you this. You said it's 9.5 percent to cash. It looks like, I guess, the converse of that would be, the deferred text looked like it went from 28 percent to 31 percent, and I just want to know what is driving that. Was that Third Avenue driving that dynamic?

Third Avenue compared first quarter to first quarter absolutely drives it ...

Fourth quarter?

Pardon me?

Fourth quarter to first quarter.

Yes, the fourth quarter, the incremental deferred taxes principally driven by this new security, which I said in this quarter provided a little over, just about 600,000 of additional deferred tax, but the run rate for that is about 1.5 million per quarter.

Yes. So, is, because it looks like they added like 3 cents to cash earnings. Is 31 percent a good run rate for us going forward?

Well, the answer is, there are 2 questions in there. The first is, that this incremental deferred tax didn't add to our cash earnings calculations because we're not adding back the deferred taxes associated with financing. Even though, as I just mentioned, it's going to provide over 5 years about $20 million of incremental cash to us. But given the uncertainty of how it converts and what the stock price will be, we're not adding it back [Inaudible] deferred taxes growing, but no, on a portion of back growth and in fact, all of that growth, if we do not make a new investment will be due to this new financing, and that growth will not be added back to our cash earnings. So, with that said, about, in the inverse guidance, with regards to referred taxes and just understanding that line item a little bit more. Next quarter, we are going to have a rate of 40 percent, and a cash rate of 2-3 percent, so we can certainly expect 37-38 percent of our tax line to be deferred as in no cash to the government, cash [Inaudible] , and going forward as the business grows, those deferred taxes of the percent of our total tax, and should continue to shrink modestly. Hopefully, that's helpful.

Yes. Ok, Sean? You mentioned on high net worth's that you said that the difficult equity markets have hurt that because you're more focused on the equities business. In essence, since the resurge in some equities began about a month ago, are you seeing a reverse trend in your high net worth's area?

I'm not sure we have. I'm looking to May. I don't think we have data is ... and also part of it is where, you remember with the portfolio services group that we talked about in the last call, we've been introducing additional [Inaudible] it's hard to get a trend line off the period because we're also introducing additional distribution relationships at the same time as, it's still too early ...

And Richard, remember, what Sean said was, in the individual or high net worth channels, you really have to break it into 2 parts. That, which is the ultra high net worth through Tweedy, Gofen, Glossberg, firms like that, and the lap, or broker sponsored portion of it. The first remains relatively stable, as you would expect. We were pleased with that result. The second, it was the broker's sponsor or the rap, which had the reallocation, largely during the first quarter towards fixed income and out of equities. Whether that returns, as you might see in the mutual fund channel as well in the next quarter, it's simply too early to tell.

The only thing I had to add, I do think in the ultra high net worth, that's in [Inaudible] area, we are seeing a little bit of a trend of money moving into those, and maybe that's just our affiliates and their competitive position, but we are seeing flows into those, again, it's just a very short period, so it's hard to ...

And equity ...

Okay, great. Well, thank you.

Thanks Richard.

Thank you. Ladies and Gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using a speaker instrument, you will need to lift the handset before pressing the numbers. One moment please for our next question. Our next question comes from Mark Constant with Lehman Brothers. Please go ahead with your question sir.

Hi. I was just looking forward a little bit to the fourth quarter of '04 with the second traunch (ph) of the freeze (ph) investment and wondered if you could update us on what you would currently expect with equity asset values having depreciated that [Inaudible] cash to be at the moment.

Yes, the incremental payment of freeze (ph) would be just about a little over $60 million.

60 million for the full other 19 percent?

Yes.

Ok, thanks.

Obviously Mark, that's going to be an assumption of where the assets are ...

Just from where we stand today?

Yes.

Thanks.

Thank you. Gentlemen, at this time, we have no further questions. Please continue with any further statements you may have.

Thank you once again for joining us this morning. In some, not withstanding the difficult equity markets of the first quarter, our affiliates, as you've heard from all of us, continue to produce very solid, stable results. Looking ahead, with our affiliates broad product offerings, diversified distribution channel, and their continued focus on generating strong investment and financial performance, we remain confident in our long term growth prospects. Thanks again.

Ladies and Gentlemen, this concludes the affiliative? management group first quarter conference call. We thank you for your participation. You may now disconnect and thank you for using ATT Teleconferencing.