Affiliated Managers Group Inc (AMG) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Affiliated Managers Group third quarter results 2003 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 today's conference, please press the star followed by the zero on your push button phone. As a reminder, this conference is being recorded today Wednesday, October 22nd, 2003. We'll now like to turn the conference over to Mr. John McNamara. Please go ahead Sir.

Thank you. Thank you for joining Affiliated Managers Group to discuss results for the third quarter and nine months ended September 30th, 2003. By now, you should have all received a copy of the earnings release. If anyone still needs one please call my office at area code 212, 445-8435 and we'll fax you a copy immediately following the conference call.

In this conference call certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors including changes in the securities markets, or in general economic conditions, the investment performance of our affiliates and their ability to market their investment strategies, legal and regulatory requirements and conditions, and other risks referenced in the company's form 10-K and other periodic S.E.C. filings.

AMG will provide on its Website a replay of the call and a copy of our announcement of this quarter's results as well as a reconciliation of any nonGAAP financial projection to the most directly comparable financial measure. You can access this information at www.amg.com.

With us on the line from AMG to discuss the company's results for the quarter are Bill Nutt, Chairman and Chief Executive Officer, Sean Healey, President and Chief Operating Officer, Darryl Crate, Executive Vice President and Chief Financial Officer, and Nate Dalton, Executive Vice President in charge of affiliate development.

Mr. Nutt will begin the call with an overview of AMG's results and highlights for the quarter and the year to date. Mr. Healey will then provide additional details about AMG's operating results and finally, Mr. Crate will discuss AMG's financials. We'll then open the line for questions.

Now I'll turn the call over to Bill Nutt. Go ahead Bill.

Thank you John. Good morning, everyone. And thank you for joining us on this call. We're pleased to report our operating and financial results for the third quarter of 2003. Our cash earnings per share grew 8% quarter over quarter, to $1.25. As our affiliates generated strong investment performance and net client cash flows in a period of continuing improvement in the equity market conditions.

Looking across our affiliate group, AMG was well positioned for growth during the quarter, through our broad exposure to equity products. In particular, as you know, we have significant number of small and mid cap equity products which achieved especially strong performance in the third quarter.

As Sean will discuss in further detail, our affiliates also generated material net client cash flows during this quarter.

Turning to our new investment activities, and as we have discussed last quarter, the improvements in the equity market environment have also helped to enhance the prospects for our M&A activity. We continue to cultivate relationships with the highest quality asset management firms in our target universe of mid-sized firms. As we've stated in the past, these discussions inherently take time, and it is of course, hard to predict the precise timing of new investments. However, we are confident that over time, we will add materially to AMG's earnings growth through the successful execution of additional investments in new affiliates.

Before I turn things over to Sean I'd like to respond briefly to the questions some of you have been asking regarding the late trading and market timing issues that are receiving so much attention in the mutual fund industry. This is obviously an area of rapid development, and it is too early to predict what new regulatory requirements will emerge, or how they may affect the industry.

Having said that, apart from the S.E.C.'s industry-wide information requests, neither we nor our affiliates have received any inquiries from any regulatory authorities. We have, together with our affiliates, conducted a thorough review of these issues, and we have not found any of the so-called Spitzer issues, that is, no late trading, no violations of our prospectuses or the trading laws, no prohibited disclosures of portfolio information and no sale of market timing rights. With that I'll turn things over to Sean to discuss our operating results for the quarter in greater detail.

Thank you Bill. Good morning everyone. As Bill noted our affiliates produced solid results in the third quarter as they benefited from the continued improvements in the equity markets. With respect to client cash flows, our affiliates generated strong flows of about 1.4 billion during the quarter, with about 1.1 billion of inflows to directly managed products. These net flows resulted in an increase in annualized EBITDA contribution of approximately $600,000. Looking across our affiliate group both our growth and value oriented managers produced strong investment performance for the quarter.

Top performers among our growth oriented affiliates were Friess Associates Frontier and Essex. Morningstar recently named Friess’s Brandywine Fund to its analyst’s picks list citing the funds long term returns and consistent investment strategy.

On the value side we continue to see solid performance in a number of affiliates including Third Avenue and Systematic. Third Avenue has produced excellent results both for the quarter and the year to date and its funds continue to gain positive recognition. Earlier this month Morningstar announced that its Real Estate Value Fund is ranked No. 1 in its category for the five-year period ended September 30th, 2003.

Taking a closer look at our affiliates performance within each of our principal distribution channels. Starting with the institutional channel our affiliates generated $1.3 billion in net flows. As search activity and funding commitments increased during the quarter a number of our affiliates generated very strong flows including First Quadrant and Davis Hamilton. In addition to positive net flows into their mutual funds products, Friess associates and Third Avenue produced solid institutional flows in the quarter as they continue to build momentum in this channel.

With respect to the mutual fund channel we had net inflows of 341 million. Tweedy Browne experienced modest outflows but these were more than offset by positive flows at Third Avenue Friess Associates and the other affiliates in the channels.

In the high net worth channel we continue to experience outflows in the broker sold area and over all net flows in this channel were negative 202 million primarily due to continued outflows in one product. Several of our affiliates generated positive flows in this channel however including Essex and Frontier through our PSG separate account distribution platform.

Turning to our affiliate development activities during the quarter, we continue to gain momentum in a number of areas. We worked with our affiliate Rorer to structure a partnership agreement with SEI Investments to further develop Advantage Outsourcing Solutions, Rorer's BackOffice outsorting platform. Under the terms of the agreement Rorer will work with SEI to expand AOS’s technical capabilities, and to bring this BackOffice solution to the next level. Rorer will continue to use the AOS system to manage its own BackOffice as well as those of other AMG affiliates that choose to use it while SEI will focus on developing AOS’s third party client base.

In addition, we announced the pending acquisition through our manager’s fund subsidiary of the Conseco funds, a family of eight mutual funds with approximately 400 million in assets under management. These funds will be an excellent addition to the Managers Funds’ product offering and consistent with managers’ subadvisory structure they will be subadvised by their existing portfolio managers.

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 the release we reported cash earnings per share of $1.25 for the third quarter, two pennies above FirstCall's consensus estimate. Performance fees accounted for about a penny of these earnings. We reported GAAP earnings per share for the quarter of 75 cents, EBITDA was 39.3 million for the quarter. Quarter to quarter our margin of EBITDA contribution to end of period assets under management increased from 20.5 basis points in the second quarter to 21.6 basis points in the third quarter, primarily as a result of our capturing the full billing cycle benefit of our second quarter AUM growth. We believe a margin of about 21.5 basis points is appropriate for the remainder of the year.

Holding company expenses remained constant at about $5 million for the quarter.

With regard to taxes, as we indicated on the last call, we accrued at a rate of 41% in the third quarter. We will accrue at this level for the fourth quarter as well. Looking ahead to 2004 our effective tax rate will vary between 40 and 41%, dependent upon the relative growth of our affiliates. Our cash tax rate was 12.1% for the quarter. Total deferred taxes were approximately 8 million for the third quarter, of this 8 million, we only add back to cash earnings the 6 million that is related to intangibles, as these will not reverse but for impairment or sale. However, I'd like to note that the additional 2 million was cash received by AMG.

Looking ahead to 2004, we expect our deferred taxes to be about 32 million for the year.

Amortization for the quarter was 4.1 million. Depreciation for the quarter was 1.6 million of which 1.1 million was attributable to affiliate depreciation. As you recall affiliate depreciation is the noncash charge we include in cash net income as the replenishment of these depreciated assets is paid by the affiliates and not AMG shareholders.

Interest expense was 5.9 million for the third quarter.

Now turning to the balance sheet. As of the end of the third quarter we had $250 million available under our credit facility, and cash on our balance sheet of $231 million also available capacity. Stockholders equity was $594 million. While we're not providing specific guidance on individual analyst estimates, we'd like to provide some guidance on earnings for the remainder of the year and for 2004. Given stable markets we expect earnings to be in the range of $4.75 to $4.80 for 2003. As we look ahead to 2004, assuming 8% market growth, we would expect earnings to be in the range of approximately $5.30 to $5.45. These ranges do not include additional earnings from performance fees, accretion from investments in new affiliates, or the effective repurchases of our stock and are based on current expectations about our affiliate growth rates, mix and affiliate contribution and the absence of substantial changes in the equity market. Of course, given these various factors, actual earnings could be lower or higher dependent upon how events unfold.

With that, we would now be happy to answer any questions.

Thank you sir. 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 1 on your push button phone. If you would like to decline from the polling process, please press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection and the questions will be polled in the order they are received. If you are using speaker equipment we do ask that you lift the hand set before pressing the numbers. Our first question comes from Mark Constant from Lehman Brothers. Please go ahead.

Good morning guys and Bill, by the way, appreciate the very clear and thorough introductory remarks with respect to the regulatory investigations.

Couple of questions on some things you mentioned in the release here, Sean, in your remarks you actually talked specifically about Essex and Frontier in your early progress with the development of the PSG platform. Could you or Nate give us an update on what you're doing on that initiative?

Sure. Actually why don't I let Nate comment on that.

Sure. The initiative PSG, this is the platform that we are building out on one of our existing affiliates' distribution for separate account distribution for those of our affiliates who aren't otherwise participating in the kind of wrap or broker channel. Progress is great. I think we added during the quarter added another affiliate participating in the platform that was systematic and we're probably close to adding another on top of that. We added some additional sponsorship for product. And close at this point are averaging in the kind of $5 to $10 million a week for these I guess in the other product, other sort of updates we've hired some additional wholesalers, we have -- we're looking to hire a couple more wholesalers and we're integrating a new guy who we hired away from Lord, Abbott to kind of manage the sales floors. So, progress was great and we're happy with it and see more to come.

Okay, great. Darrell, couple of other things. Could you give us -- I read the press release with SEI and Rorer and befuddled by some of the terms that are used. Can you maybe spell out for us a little more clearly the nature of that transaction from a financial standpoint, please?

Yes, in this quarter we had a little less than a penny's effect from AOS but that's going to be an ongoing stream as they develop this business.

But I mean how does that -- what is your stream – it’s another income I assume?

Yes.

And is that fee income from AOS or what is the nature of the revenue I'm trying to understand?

There's an outright purchase that is contingent upon a set of factors that will unfold over the next six to nine months. And then on an ongoing basis for several years we will own a portion of the revenues that are derived from the product that we -- that they develop, but with the basis of the Rorer BackOffice.

Okay. So there will be comparable, if I understood you correctly, comparable purchase proceeds and other income for the next couple of quarters and then revenue, is that the right way to look at it?

Yes, yes. As we look at it now, it does not materially affect the -- our guidance one way or another.

Okay. But we'll still see that penny or so for the next couple of quarters?

Exactly.

Then later in total operating revenue?

Right, to the quality of earnings point. I think the earnings that are in this quarter from AOS are good quality earnings and we're going to dependent upon how again events unfold with AOS and how SEI develops it that could turn into a more meaningful stream in the future.

And our forward guidance Mark doesn't really include any contribution from the share of the revenue out into the future. It may be -- may be a lot but right now we're not --

We're being very conservative how we think about that developing. But while being conservative we're excited about the prospects in the partnership with a firm like SCI to develop this type of technology.

Great, great. And last question, the Conseco Capital deal, is that you know kind of akin to what did you with Smith Breeden, where you pick up higher OI low risk kind of fee stream, and, if so, do you see a lot of other opportunities out there maybe even some bigger ones to pick up assets of that type?

The answer is absolutely yes. We see a lot of opportunities to make investments, or acquisitions, in partnership with our affiliates. And there are certainly a large number of transactions which would involve acquisitions of mutual funds into our Managers Fund subsidiary. Nate, again, why don't you give 30 seconds of specific background on the Conseco transaction which you were principally involved in.

Sure. I think the question was right on, as was the answer. It's very much akin to the Smith Breeden kind of transaction where we pick up the funds and the incremental cost to us running them is next to nothing. And again just like Smith Breeden, we saw some specific funds in their lineup that round out on the lineup of products to the forward piece, you know, again, I think there are more of these out there, including, you know, possibly bigger ones.

Okay. And actually, I promise this is the last one

No problem.

The commentary about your prospects for new investments is very similar to what you said last quarter. I know you can't pull these things forward. You kind of got to take them when they come. But should we conclude from these comments specifically that nothing you were working on has fallen out of bed, it just hasn’t come to fruition, is that fair?

I think that's pretty much fair. As you know Mark the timing of these things isn't always in our control.

Right.

But the environment, the responses to not only the calls that we made over the years, I mean some going back five and six years, the likelihood that someone would respond favorably to the question is now a good time for us to go forward, is high.

Okay. Thanks again.

Thanks.

Thank you. Our next question comes from Bill Catch with Putnam Lovell. Please go ahead.

Just to follow up on the last questions on acquisitions. Just sort of curious -- Bill obviously you’re taking into consideration the regulatory environment here, but, does that in any way neuter the likelihood for increase of deal flow given the markets have improved and/or change your thought process on incremental affiliate by mix, i.e., maybe a greater focus on wealth management or institutional?

I don't think so, Mark or Bill. I just don't think so. We do as you may know very thorough due diligence process. That process is done both with our internal legal counsel and financial people but we also use Price Waterhouse, Goodwin Proctor, and a number of other lawfirms in connection with that due diligence process. We obviously – we now know for things to look for that we probably would have looked for but not placed as much emphasis on as we did in the past. But no I don't really think so.

As you know what we do is try to call upon as many of the best of the small to mid size firms that we can. We do so over a period of years and over a period of years rather than in an auction or other format, where you only get three weeks or a month, maybe, to deal with the issue, we called upon them. We've met different levels of management within the firm. So we have a better grasp on where they are, how their compliance programs are working, whether they've had these kinds of issues. So we think we're a little bit better at that than you would be in the context of a specific auction. But, no, we'll continue to look at the mutual fund area.

Okay. Second question I have is just on the institutional channel, I think it is the first time in recent memory that you've talked positively about flows in Essex. I'm just sort of curious if you could talk a little bit about the pipeline there specifically and how performance is stacking up relative to the competition. Thanks.

Sean, why don't do you that.

Performance is excellent. I think we had indicated in the past that one shouldn't be surprised that aggressive growth equity products don't sell well in a period where the style is relatively out of favor. And it takes a bit of time, perhaps more time than it should, for clients and indeed their consultants to come around to allocating back into that category, and into obviously the better performing firms within that category.

I don't want to comment specifically on numbers projected flows for Essex. But I would say we are -- we and they are absolutely very optimistic about their prospects given the quality of their performance and obviously we are just beginning to see that.

Okay, thank you guys.

Sure, thanks Bill.

Thank you. Our next question comes from Robert Lee from Keefe Bruyette and Woods. Please go ahead.

Quick question, you talked about the last couple of calls abouted building out the PSG platform, I haven't heard quite as much about the Managers Funds. I mean, obviously you have the Conseco transaction. Can you maybe update us with some of your plans for building out that platform in terms of hiring wholesalers whatever it may be?

Sean why don't you start with that.

Well, I think the Managers funds platform is spotlighted this quarter because we made an acquisition into it and we are pleased with how that's going. I think Nate, I don't know whether you heard that portion of his response, Nate has said earlier on this call about how well we're doing there and described some of the momentum going on. I think Nate why don't you elaborate on your earlier response, and give some sense of, for example, wholesaler team buildout, et cetera.

Okay. Sure thing. I think there is -- there is additional wholesaler hiring going on at Managers. And there are some, you know, some specific growth opportunities that we see with them, just give a little bit of a preview for example. The Conseco funds that we're buying are load mutual funds, for example. And this is going to be opening up a range of opportunities in terms of distribution for that mutual fund platform, meaning the Managers Funds most broadly. That is really our first real foray into that area. So, the fact that we focused some of the earlier comments on PSG doesn’t mean at all to diminish the progress we’re making with Mangagers Funds. I think things are going great there.

Okay. I just have one follow-up question. On the wrap separate account business, you mentioned having, I guess, one product in particular that sort of caused most of the outflows. A bunch of your competitors, not that a lot have reported yet, but a couple of them have reported actually pretty decent-sized sequential improvements in their wrap separate account business. Could you talk a little bit about what product is maybe generating the outflows there and to what extent you think you know maybe that's -- do you think that's going to continue for a while, do you think it was sort of a one-time event, can you give us some color on that?

The product as we mentioned in the past is Rorer's large cap value product, which, after a period of phenomenal success and great performance as well as very substantial positive inflows is going through a period of relative underperformance. And they saw over the past few quarters outflows that were noticeable, certainly not material, given the scale of the product. I think the -- the flows, the outflows, have stabilized, and their performance has turned up. And so I think we feel pretty good and they feel pretty good about a period of relative stability and then as with any product, you have to wait a little while for the return to good performance to be manifested into a return to strong inflows. I would say that, as we noted several of our other affiliates are having some real success in that category, including those driven by utilizing the TSG platform. So long term very optimistic about Rorer and we feel good about that distribution channel and as you heard all of us say, we are certainly making further investments in building up our capabilities in that channel.

Great, thank you very much.

Thanks Robert.

Seeing no more questions at this time I'd like to turn the conference back over to Mr. Bill Nutt.

Thank you all once again for joining us this morning. In sum, we're pleased with our affiliates' investment performance and positive net client cash flows for the quarter. In addition we're confident of our prospects not only for our affiliates future performance but our ability to invest in new affiliates going forward. Thanks again.

Ladies and gentlemen, this concludes the Affiliated Managers Group third quarter results 2003 conference call. Thank you for participating in today's conference. You may now disconnect.