Affiliated Managers Group Inc (AMG) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Affiliated Managers Group fourth quarter results conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to Ms. Brett Perryman, Vice President of Corporate Communications for AMG. Please go ahead, ma'am.

Thank you and thank you for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 2003. By now, you should have received the press releases regarding our investment in Genesis, our fourth quarter earnings and our stock split. However, if anyone needs a copy, please contact us at 617-747-3300 and we'll fax you one immediately following the 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 but not limited to those referenced in the company's Form-10K and other periodic SEC filings.

In this call, the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its Web site, a replay of the call and a copy of our announcement of our results for this quarter and the full year as well as a reconciliation of any non-GAAP financial projections to the most directly comparable financial measure. You can access this information at www.amg.com.

With us on the line to discuss the company's results for the quarter are Bill Nutt, Chairman and CEO, Sean Healey, President and Chief Operating Officer, Darrell Crate, Executive Vice President and Chief Financial Officer, Nate Dalton, Executive Vice President in charge of Affiliate Development and Seth Brennan, Executive Vice President in charge of New Investments.

Bill will begin the call with an overview of AMG's results and highlights for the quarter and a year-to-date. Sean will then provide additional details about AMG's operating results and Darrell will discuss AMG's financials. After a discussion of the company's results for the quarter and the year, Seth will provide an overview of AMG's pending investment in Genesis. We would then open up the lines for questions. And now, I would like to turn the call over to Bill.

Thank you Brett. Good morning, everyone and welcome to AMG's conference call discussing our operating and financial results for the fourth quarter and the full year 2003. I am Bill Nutt, AMG's Chairman and CEO and 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.

Seth Brennan, Executive Vice President in charge of New Investments has also joined us to talk about our just announced investment in Genesis asset management, which will take place after we discuss the quarter.

I would like to begin with an overview of our operating results and financial highlights for the quarter and the full year. Sean will then provide additional details about AMG's operating results. Darrell will then take us through the financials. And finally we will turn to Seth for a discussion of our investment in Genesis. As always, we look forward to your questions at the end of the call.

Let me begin by summarizing AMG's results. As you saw in the earnings release, we reported cash earnings of $1.29 for the fourth quarter and $4.81 for the full year. AMG entered 2003 well-positioned for growth and we are pleased with the results we achieved both for the quarter and the full year. Our affiliates produced strong investment performance and net client cash flows during the quarter, and throughout the year. While we're happy with our results for 2003, looking back more broadly, we are especially pleased with the stability of our results over the prior three years of difficult equity markets.

During this period, the diversity among our affiliates' investment styles and distribution channels and our affiliates' ability to continue to generate growth through net client cash flows allowed us to continue to produce solid earnings, notwithstanding the adverse equity market environment. Looking ahead to 2004, as the equity market environment has continued to improve, AMG remains well-positioned for strong growth through excellent investment performance as well as additional net client cash flows.

Turning to our new investment area, we're pleased to announce our investment in Genesis asset managers, which we will discuss in detail in a moment.

Looking ahead, we are confident that our prospects from making investments in additional affiliates in 2004 are quite strong. We made real progress throughout this past year in further developing relationships with high-quality, mid-sized firms. In addition, with the improved equity market environment, the principals of these firms are once again focusing on succession planning. And AMG is in an excellent position to capitalize on the relationships we have cultivated over the years with these high quality mid-sized firms. Looking ahead, we believe that we will continue to add materially to our earnings growth through accretive new investments. With that I'll turn to Sean to discuss our operating results in greater detail.

Thanks, Bill. Good morning everyone. As Bill noted, we generated strong results for the quarter and the year as improved equity market conditions of positive net client cash flows helped us produce solid earnings growth.

As you saw in the release, net client cash flows were approximately 830 million for the quarter, with about 700 million of inflows into directly-managed asset products. These net flows resulted in an increase in our annualized EBITDA contribution of approximately 2.1 million. With approximately 95% of our EBITDA generated by equity products, AMG benefited from the growth in the equity markets during the quarter and throughout 2003.

While our affiliates produced excellent results across a wide range of asset classes and investment styles, our significant exposure to high quality small and mid-cap equities was helpful as these categories again performed well in the quarter.

Taking a closer look at our affiliates' performance within each of our principal distribution channels. In the high net worth channel while flows from ultra high net worth investment counseling clients at affiliates such as Welsh and Forbes were positive, out flows in the broker-sold area resulted in negative net flows of 310 million for the quarter.

The outflows in the broker-sold channel were principally in one wrap product and increasingly offset by positive flows in the channel through our portfolio of services groups initiative. In addition, given the generally lower fee rates and margins on wrap assets, outflows in this area have not had a significant impact on our EBITDA.

Looking ahead, we're excited about growth opportunities represented by bringing a breadth of high quality product into the channel through our PSG platform.

We had good results in the mutual fund channel with net in flows of 1.2 billion for the quarter, among our larger affiliates in the channel, Tweedy Browne, Brandywine and Third Avenue, continue to receive favorable ratings from analysts and the media. Tweedy Browne's global value product, while maintaining an excellent long-term record did had a difficult relative performance year in 2003, given that the firm hedges its positions to the dollar and most of its competitors do not. Although I should note that Tweedy's stock selection was excellent as they out performed the hedged EFA index by over 500 basis points for the year.

Third Avenue has had an excellent year as the firm's assets grew 61% through outstanding investment performance and strong net client cash flows. Third Avenue has had tremendous success in implementing its safe and cheap investment style across a number of asset classes. The firm's international value fund, launched just over a year ago, ranked in the top 2% of International funds for the year according to LIBOR. In addition, Third Avenue's real estate value fund continues to rank at the top of its morning star category.

Finally the Managers Funds also had a solid quarter and an excellent year as the firm grew its assets by nearly 45% during 2003 through strong investment performance and net client cash flows.

In the institutional channel we had 32 million in net outflows in the quarter because while several of our affiliates won significant new mandates in the quarter, including First Quadrant, these positive flows were offset by some one-off client losses at other affiliates. Looking at it more broadly however, we had net flows in excess of 1.8 billion in the institutional channel 2003 with a number of affiliates including First Quadrant, Davis Hamilton, Freiss and Systematic having strong positive flows.

Turning to our affiliate development initiatives, we worked throughout the year with affiliates on both an individual and a collective basis to promote growth. Among our major accomplishments was the formation of portfolio services group, or PSG, to distribute broker-sold separate account products for AMG affiliates which do not currently participate in this channel. PSG has raised more than 400 million since its inception earlier this year and in the fourth quarter we extended this initiative by creating a joint distribution partnership between PSG and the Manager's Funds to market the Managers Funds' mutual funds into the brokerage channel.

And then in the first quarter of this year, we further extended this initiative and are now distributing other affiliates' mutual fund products at selected broker dealers.

Finally, we continue to work closely with the Managers Funds to expand the firm’s fund offerings through acquisitions. Given Managers' sub advisory structure the growth potential in this area is considerable. Last fall we announced the pending acquisition through them of the Conseco fund, a family of eight Mutual Funds with approximately 400 million of assets under management. This is the second such acquisition we have done through the Managers Fund and we continue to see significant opportunities to execute similar transactions this year. 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 EPS of $1.29 for the fourth quarter in line with first call's consensus estimates. We reported GAAP EPS for the quarter of 78 cents with performance fees contributing less than a penny. EBITDA was 40.6 million for the quarter. Quarter-to-quarter our margin of EBITDA contribution to end-of-period assets under management decreased from 21.6 basis points in the third quarter of 2003 to 20.9 basis points in the fourth quarter.

We believe a ratio of 19.8 basis points for the first quarter is appropriate as assets have continued to grow this quarter and the full earnings impact of this growth lags by a quarter. Accordingly we believe this ratio will increase to 20.6 basis points in the second quarter as we realize the effects of both the Genesis closing and the prior quarter's growth.

Holding company expenses were 7.3 million for the quarter, an increase over the third quarter due to a higher incentive compensation accrual in the fourth quarter resulting from our meeting a set of earnings growth objectives for the year established by our compensation committee at the beginning of 2003.

We expect holding company expenses to be approximately 6 million in the first quarter, and increase in subsequent quarters to -- with an expected full year amount of $26 million reflecting expected variable incentive accruals based on expected cash EPS growth and the additional expenses for some modest expansion of the holding company, including staffing support for the centralized compliance initiative we launched earlier this year.

With regard to taxes, our tax rate in the fourth quarter was 41%. We expect this rate to remain the same for the first quarter of 2004. Our cash tax rate for the quarter was 10.7%. Total deferred taxes were 8.9 million for the fourth quarter. Of this amount, we only add back to cash earnings the 6.1 million that is related to intangibles, and these will not reverse but for sale or impairment. I would note, however, that the additional 2.8 million was cash actually received by AMG. Looking ahead we expect our deferred taxes to be about 32.9 million for 2004, of which we intend to add back 25.7 million to cash earnings.

Amortization for the quarter was 4 million, depreciation for the quarter was 1.5 million, with $1 million of that amount attributable to affiliate depreciation. As you recall, affiliate depreciation is the non-cash 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 5.7 million for the fourth quarter.

And now turning to the balance sheet, at the end of the fourth quarter we had 250 million available under our credit facility and holding company cash of approximately 200 million. Stockholder's equity was 614.8 million.

And now before turning to our discussion of guidance for future -- for future earnings for the year, let me spend a moment talking about our practices and accounting policies regarding equity-based compensation for management.

As you know, with limited exceptions, our equity-based compensation historically has been in the form of stock options. While we expect this continue to be the case in 2004, looking ahead, we intend to increasingly use restricted stock as our primary equity incentive for management reflecting in part the relative maturity of the company.

In connection with this transition we have modified the structure of our existing options through an exchange of currently outstanding unvested options for vested options on restricted stock that are generally similar to the prior vesting arrangements. We will use this same option on restricted stocks format for our new option grants in 2004.

Let me clarify the impact that this change will have on our financial reporting. We expect a new FASB announcement on options and equity compensation to be released this quarter for comment and the final pronouncement to become effective in 2005.

Given the changes we have made to our option program, we do not anticipate any charges now or in the future related to options that have been granted prior to the effective date of the pronouncement. When the pronouncement is issued we will evaluate it and advise you regarding the form and the possible accounting impact, if any, future equity compensation awards will have.

Turning to guidance on future earnings, while we're not providing specific guidance on individual analyst estimates, we would like to provide some guidance on earnings for 2004.

Assuming an 8% annual growth in markets from here until the end of the year, we would expect cash earnings to be in a range of $6 to $6.10. This range does not include additional earnings from performance fees, accretion from additional investments in new affiliates or the effect of stock re-purchases, and are based on current expectations about our affiliate growth rates and the mix in affiliate contributions as well as the expected closing of our investment in Genesis at the end of the first quarter. Substantial changes in the equity markets would of course impact to those expectations. Now, let me turn the discussion back to Bill.

Thanks, Darrell. What we'd like to do now is have a brief discussion of Genesis and why we think the firm is a very attractive addition to AMG. I will then turn it over to Seth who will go through in greater detail the firm and the transaction. Darrell will follow Seth with a brief overview of the financing of the transaction and the financial benefits AMG expects to realize from this investment.

First, Genesis is an outstanding firm and a leading institutional manager of emerging markets equities. Genesis has a high quality, deep management team that has consistently produced excellent long-term investment results for its clients. We have been calling upon Jeremy Paulson Ellis and Carol Yarbrough at Genesis, since 1996 and as a result of our long relationship, we are confident that Genesis and its management are an ideal fit for AMG and our investment approach.

Genesis manages over 7 billion in emerging markets equity securities through separate account and commingled portfolios for institutional clients. In addition to Jeremy Paulson Ellis, its Chairman, and Carol Yarbrough, Managing Director, Genesis has a talented team of nine other senior investment professionals with significant experience in investing in emerging markets. Genesis is an excellent investment for AMG in its own right. And it has the additional benefit of continuing to add to the diversity of our sources of EBITDA.

Genesis provides AMG with meaningful participation in emerging market equity investments and also strengthens and expands our institutional client base in the United States as well as in Europe and Australia. I'll now turn to Seth for a more detailed description of Genesis and the transaction itself.

Thank you Bill and good morning everyone. I am also very pleased to welcome our new partners at Genesis to AMG. As Bill mentioned, Genesis is a premier emerging markets equity manager with an outstanding reputation and a superior long-term track record. We believe this partnership will be very positive for Genesis and its clients as well as for AMG and our shareholders.

Genesis was founded in 1989 and is principally based in London. Its success to date reflects the depth of expertise amongst its investment professional and the strength of its investment process. Genesis employs a disciplined, fundamentally driven approach to research and stock selection in emerging markets equities. The firm combines quantitative analysis with in-depth company interviews to identify companies likely to benefit from structural changes in their home country or region. And within this universe invest in companies located in countries that have demonstrated political, social and institutional stability.

Their goal is to achieve capital growth over the medium to long term while mitigating country risks through extensive geographical diversification. As a result Genesis has a superior long-term investment record. In 2003, the Genesis emerging markets composite was up 63.2% almost 700 basis points over the MSCI emerging markets index. Genesis has also outperformed the index for each of the trailing one, three, five and 10-year periods as well as since inception.

As Bill mentioned, Genesis has an outstanding client base with over 80 leading institutions predominantly in the U.S., and has a growing presence in Europe and Australia comprising nearly 15% of assets under management. Genesis has been -- AMG has been calling on Genesis for over seven years. We identified the firm early on as a promising potential AMG affiliate. Because of the independence and the entrepreneurial orientation of Genesis's management team, their outstanding reputation and commitment to quality, and a culture of valuing equity ownership by the key principles as critical to the long-term success of their firm.

Genesis was attracted to AMG's model of implementing a succession solution that preserves and enhances the independence and entrepreneurial incentive of our affiliates and brings the potential to take advantage of the broader resources that AMG can offer. After getting to know AMG over the years and talking to several of our current affiliates as references, the principals of Genesis decided last year to move forward exclusively with AMG, to provide liquidity to the firm’s outside shareholders consisting primarily of institutional investors and retired employees, and to facilitate a long term solution to their succession need.

To summarize the transaction, AMG has agreed to acquire a 60% interest in Genesis with the remaining 40% of the equity ownership in the firm to be retained by a broad group of 10 partners who are most important to Genesis’ success. Of note, while many of the firm's investment team are increasing their ownership in the firm as a result of the transaction, there also is a substantial portion of Genesis equity reserved for future allocations to current or future partners. As is typical to our transaction approach, these 10 partners have agreed to long-term commitments to the firm as well.

As is consistent with AMG's partnership structure, the operations of Genesis will remain unchanged and the firm will continue to function independently under the active direction of its current management team. The purchase price is not disclosed but I will note that the valuation was consistent with that of our previous investments and with our stated valuation discipline. Finally, the transaction is expected to close at the end of the first quarter or early in the second quarter pending customary approvals. Darrell will now discuss the financing of the transaction and the financial benefits AMG expects to realize as a result of our investment. Darrell.

Thanks, Seth. Consideration for this transaction will be financed entirely with the cash on our balance sheet. After the closing of this transaction, at the end of the first quarter, we estimate that we will have approximately 135 million of holding company cash available for additional investment, as well as 250 million in capacity under our credit facility which can be increased to 350 million at our discretion. Pro forma for the deal, leverage is measured by net debt divided by run rate EBITDA, will be approximately 1.7 times, which is at the lower end of our target leverage range.

With regard to earnings impact, the investment is accretive to both cash EPS and as included in the guidance that I gave you and also accretive to EPS.

Stepping back, I would echo Bill and Seth's enthusiasm for our investment in Genesis. We think that this is a high quality firm with great people and that the investment is quite attractive to AMG, both in terms of its impact on our earnings as well as the further diversification it provides to our earnings stream. With that, we would be pleased to answer any questions about our earnings results or the transaction.

Thank you. [OPERATOR INSTRUCTIONS]. The first question is from Mark Constant with Lehman Brothers. Please go ahead.

Hi. Good morning guys.

Good morning, Mark.

Lots going on today.

Lots going on today.

The questions, if you can bear with me, one, we'll do in kind of reverse order, Seth, I think you used the term when you were talking about Genesis that it was within your valuation parameters. Just looking at their performance and the scarcity of peers, is it safe to assume that you are kind of at the high end, but not sort of new territory in terms of valuation multiples?

Right. I think Mark, it's safe to say we're not in new territory but we're very comfortably within the range. It was from a valuation standpoint very consistent with our last investment in Third Avenue.

OK. Can you give us a sense, and I might have missed this when you were running through the performance numbers, but what their client cash flows have done to their run rate EBITDA in the last couple of quarters, just ballpark, in terms of organic growth rates?

Last year most of their growth came from investment performance although they have had increasing momentum in the net client cash flow department. But, I don't know if they would be comfortable with us sharing the specific data. But suffice it to say, both last year and also looking forward, the asset class and Genesis are both showing lots of momentum.

And it's positive net?

Absolutely.

OK. And maybe for sort of Bill and Sean's perspective on this as a final Genesis question. I obviously, see the diversification benefit in, you know, its still probably only 4, 5%, I guess of your retained EBITDA going forward, but, unlike, I guess, may be some of your prior deals like Essex (ph) where you've been a little more sort of contrary in timing, are you guys at all concerned that this may be a little late in the emerging market cycle in terms of rebound? Or is that something you try not to speculate on?

Well, I think it is, of course, pure speculation to try to guess the direction of emerging markets equities. I think; if you look at where the emerging market indices and principal firms therein trade on a relative basis to other indices, other markets. It's -- one can make the argument that now is actually still quite a good time and there's still more to come. I think, we are comfortable with the firm's forward prospects, more than comfortable, excited about the firm's forward prospects for growth from net client flows and we think that, on a long-term basis, even if we're unlucky about the near-term market dynamics in emerging markets on a long-term basis, we think this is a fantastic firm and a great team that we're partnering with.

Right.

If I could just add, you know, one thing in addition to the diversity of style, the markets in which they participate, but some of their competitors, particularly those that are much larger, have products which are closed or have not had the kind of performance that Genesis has been able to generate. So, we really are enthusiastic about their continued growth.

OK. And Darrell, a couple of things. You ran through the equity-based comp thing probably a little faster than I could write. Can you just describe what the change is going to be in terms of what the new instruments, the exchange, I didn't follow that. My understanding was that you continue to use options through '04 and switch to RSUs in '05. I just didn't understand the transition discussion.

Yeah. The plan is to continue to use options in '04. A pronouncement is going to come out this quarter that below seeing comments on and it should be implemented, which would have expensing of options in 2005. What we're certainly saying is that we, in 2005 are going to be looking to use restricted stock instead of options, given what we know now as our primary mechanism for equity compensation. That change, that's one issue.

The second is the exchange that we did because what we are doing is exchanging our existing options that are options on common stock for new options on restricted stock that have similar vesting provisions, and what this does, one of the financial statement effects of that, is that there will not be a charge for previously granted, or unvested options in 2005. While also this vehicle ties management in a little bit longer with some longer vesting provisions than what we have currently under our options.

OK, got it. And just in terms of the P&L, it looked like the sequential interest expense went down when the debt did not. Was there anything in terms of runoff of amortization of some financing costs or does this at least move up in the holding company expense or anything like that?

Yeah. Synthetically it did move up a little bit there and you are just right.

Was that all in interest expense?

Yes. That's really what accounts for it.

And finally, the, in terms of the ratios of non-holding company operating expenses and minority interests to owner's allocation -- and to revenues and owners' allocation respectively -- you know, those bounced around as they often do in fourth quarters. Should we kind of look at the full year as indicative of those ratios going forward? I know it's cosmetic, but -- ?

I would. But I would focus, you know specifically -- and you're right for constructing the full model -- but I would look to the guidance on the EBITDA contribution point because again that cuts through this mix issue, which is the growth affiliates and these other things. And we really do look for that to be in 19.8 basis points in the first quarter and 20.6 basis points after we close Genesis, because again integrating Genesis will change the mix of these things.

By then, understanding that it is cosmetic, before those -- before the impact of Genesis is the full year ratios of the sort of you know above the EBITDA ratios, are those indicative?

They would be appropriate to carry forward.

OK. Thank you.

Thanks Mark.

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

Thank you. Good morning. I'm just looking, 60% seems at the lower end of your range in terms of ownership.

That's very typical.

OK. But it does range from what? Like 60 to 80?

No. It goes from about 55 up to 70, no more than 70. That's been consistent, Richard, as you know, from the various earliest transactions, Hartwell in '94 through Welsh and Forbes, Third Avenue and Brandywine recently. So we've always stayed in that range between 51 and 70.

The last one we did, Richard, Third Avenue, consistent on pricing as I said. And also coincidentally the same structure and ownership percentage.

OK. Just also in terms of -- I think this is the first investment in a while. And just in terms of the -- if we were to put a number as to, you know, the number of affiliates that you would like to make a year at this point, maybe you could just give us a sense as to how that -- how that number has changed, if it has changed, what you are targeting? And, you know, if you could just layer on top of that the investigations. You know, what has this added to your due diligence process? Has this slowed down your process quite a bit? How should we be factoring in the changes that are going on right now into your process?

Richard, this would be our fourth investment in 24 months. The others being Freiss Associates, Welsh and Forbes, Third Avenue Value. This would be the fourth. So we have been active. There are periods, particularly when the markets are as poor as they were for the three previous years, when we might not be as active simply because for the best firms, they are focusing on their clients' service and investment performance, but we remain very active in that. We don't have any specific target. We look to cultivate over a long period of time, as Genesis is an example, we began our discussions with them in 1996 to develop relationships with the best firms, so that when they want to move forward, they move forward exclusively with AMG.

That's a great way to do your due diligence. Because, essentially throughout all those meetings, we've been doing our due diligence on this firm since 1996. So, it's a much better structure from the standpoint of due diligence. This is an institutional firm, of course not in the mutual fund channel. But, we of course, use outside law firms as well as outside accounting firms and AMG's own personnel to do the due diligence. I would not say in this instance that it was necessarily greater or lesser than others. It's the same high standard we've applied to every investment that we've made.

I think, just to add to that a bit, as you know, but just to clarify for everyone, we don't have an acquisition budget where we tell ourselves that we're going to do X number of new affiliate investments in a year and the impact of accretion from new investments is not in any of the analyst's forecasts and certainly not in our own. That being said, on a go forward basis, for reasons that Bill identified, the environment and our competitive position in the environment are at very good points for us and we are extremely optimistic about our prospects for additional investments going forward, without putting a specific number to it, including in high quality mutual fund firms.

There are a very large number of firms out there who are, of course, who are not in the mutual fund channel and not affected but even in the mutual fund channel, lots of great firms that are completely unaffected and our due diligence has always been very thorough. And it is going to be the same and more so on specific points going forward with mutual fund firms.

OK and then just one last question. The gains in high net worth were about 3.5% adjusting for the out flows it was about 4%, you know, quite a bit less in the mutual fund area and in the institutional area. So, I'm trying to figure out how much of the issue I realized. You talked about this one wrap program but is this also an investment performance issue, or is this just a mix issue, maybe there's more high net worth in fixed income type products.

Let me ask Nate to respond to that.

OK.

You've actually got it exactly right. It's a big piece of this is in fact the mix, if you think about the, especially in the ultra high network category, where it is lesser of the straight, you know, kind of equity. So I think you are understanding it exactly right.

OK. Great. Thank you very much.

Thanks Richard.

Thank you. Our next question comes from Bill Katz with Buckingham Research. Please go ahead.

Yeah, thanks. Can you hear me? OK.

Yeah Bill. Good morning Bill.

OK. Good morning guys. Congratulations on the transactions. A question, Bill and Sean, maybe you guys want to weigh in a little bit, this is, I think, your first deal outside the states. I am sort of curious, does this sort of, maybe, leap frog you a little bit in priority in terms of thinking about outside the US? And could we start to see maybe more deals as you get your brand offshore?

Let's start with -- we've been calling on firms outside the United States, primarily in Canada and the UK, almost since inception. There are differences. They are what I would refer to as cultural, tax, and accounting differences, which we have to take into account. But the principal reason why we like Genesis is for exactly the reasons that we like all of the firms we've invested in the United States. They have an entrepreneurial management team that values retained equity. They have a culture of growth. They are committed to the Next Generation and most importantly to their clients.

So, in that respect, they are the same. But they are different and Seth made the point that while they are almost entirely institutional, most of those institutions are in the United States. They are large, consultant driven, both public and private pension plans. But they have developed and continue to grow rapidly both in Europe and Australia. So, it is different in that regard and we like that.

I would add to that from a different direction. I think that while we have, as Bill said, been calling on international firms for years and I think have increasing penetration in terms of developing relationships with a number of high quality mid-sized firms there. It is absolutely the case that we are not as well known among our target universe outside the US as we are here. And on the margin, we think it will be very helpful to have an affiliate that is actually based in London in this case, but outside the US And I would also say that the Genesis principals led by Jeremy Paulson (ph) are terrific in terms of being spokespersons for their firm and their product and their way of investing. And we are very hopeful and optimistic that like our other affiliates, they will over time be great spokespeople for AMG as a partner and on the margin over time, we do think it will be helpful.

OK. Thanks. Second question I have goes back to maybe being a little bit too nit picky. But just in terms of your commentary around the high net worth, you said, that the none, I guess, the one affiliate that's having problems, you said everything else beyond that is actually increasingly contributing to sort of flows. Yet, if you look sequentially, your flows in that business I think were more negative. I was just wondering if you could help quantify a little bit more and some of the initiatives there that give you the optimism for '04.

Nate.

I'm sure. Thanks. Well, there is a, I think, if you look across the year, just one observation, I think if you look across the year, actually the fourth quarter was modestly better. I mean still outflows but compared to the rest of the year. I think, we in prior calls, and I think the way to think about this is probably two components to the, you know, what we call the high net worth distribution channel. And I think Sean spoke to this earlier.

The first component is kind of the ultra high net worth investment counseling kind of business. And you will recall that that was from earlier calls that were sort of modestly negative. And we think, we told you this on an earlier call. We thought that was a turning, and in fact if you look at this quarter. We had positive flows, not sort of strong positive flows but positive flows in that segment of the high net worth distribution channel. So, that's a piece of it. A big piece of it, as Sean also indicated, is this, you know, kind of broker sold wrap business and a lot of the out flows that you're seeing and have been seeing, frankly, are coming from one particular, one particular product.

That is increasingly offset, which is I think, almost verbatim what Sean said earlier, increasingly offset by improving flows at this Portfolio Services Group initiative. And the thing that's giving us a great deal of confidence as we look at this is, we are taking outflows from a single product and starting to replace them with inflows and growth across a breadth of high quality product, leveraging, you know, a single growing distribution sales force across a breadth of high quality product obviously is going to produce a more stable asset base in that channel.

Long-term, we think, it's also better because you are able to better support the business, you know, breadth of product against a single sales force creates a whole bunch of leverage. As Sean also indicated, we are going to continue further leveraging that into higher margin product taking that into the mutual fund business, or we have begun doing that taking that into the mutual fund business. So long-term, the broker-sold component on both, the high net worth piece and on the mutual fund piece, is a part of the business that we're very excited about.

OK. My last question is for Darrell. In terms of your targeting leverage ratio I think you generally have targeted to 1.5 and 2.5 times. I sort of fell like on the last couple of calls you have said you would be willing to go beyond that if the right deal came along. What sort of is your guidance as you think about the incremental leverage ratio going forward? Thanks.

That's true. You know, you got it just, right which is between 1.5 and 2.5 is where we should be most of the time. But that said, we could move outside of that up to 3 times or even a little bit more, given our credit rating. And, of course, for the right deal, it would make sense to utilize that capacity. The take away is that where we are right now with cash on our balance sheet and capacity and leverage, is that we need close to $0.5 billion of ability to execute deals.

OK. Thanks, guys.

Thanks.

Thank you. Our next question comes from Mickey GokoCleave(ph) with Endeavor. Please go ahead.

My question was answered, thank you.

Thank you.

Thank you. Our next question comes from Mark Lane with William Blair & Company.

Hi, good morning, everyone.

Yeah. Good morning Mark.

And congratulations.

Thanks.

A couple of questions. First of all, on the flow side, were there any large institutional mandates that were won during the quarter that have yet to be funded that will be funded in the first quarter that you can talk about?

Why don't we let Nate deal with that?

Sure. We're not going to do, you know, sort of specifically, the answer is yes, that there are, there are additional mandates.

I think a couple of quarters ago, you actually had quantified kind of a backlog?

Yeah. There were a couple of quarters ago – it was a very sort of strong, you know, extraordinarily large sort of piece there. I don't think that's what we're talking about here but there are mandates that have been won that have not funded.

OK. And then, on the wrap business, can you tell us how big Rorer's business was at the end of the year? And is it a performance issue? Could you give us any performance numbers? Or you know, in terms of quartile, because, I think, last quarter the expectation was that you were seeing some stabilizing within that business, but certainly, you know, we didn't see that in the fourth quarter?

I think that the statement at the end of that captured it accurately. I think, we were relative, there is underlying obviously, you know, performance as a component of what you're seeing here. The sales force at Rorer is a very good, strong sales force and we think they are doing all the right things. Part of it is where the product sits in the mix of products that are available and that just, you know, is what it is and will be fixed. You know, our view will be fixed as products come in and out of favor. Part of it is relative performance, which has been challenging. But I hope that's --

That's fine. And then, on the holding company expense for Darrell, I was, you know, a little bit surprised about the sequential increase in holding company expense, which on an after tax basis is about 5 cents per share and you know, what really happened in the fourth quarter? I understand the market was up kind of low double-digit. But cash EPS growth for the year, I think, was like 9% and so, what would have accounted for such a big increase in absolute incentive comp and on a percentage basis? It seems like it was almost binary that just because there was such a strong fourth quarter that there was such a significant increase that took away a lot of upside this quarter?

Some of it, and it breaks down into a couple of components. Some of it was building up the holding company for some specific initiatives and some of it was an incentive compensation accrual as our cash earnings growth did get into the teens. And there's a set of objectives that are laid out at the beginning of the year, some of which are objective and some of which are subjective. And we feel very good about our performance this year, the compensation committee felt good about the things that we've been doing this year to build this business, not only for existing affiliates but how we are positioning ourselves for new investments. And so it was the appropriate charge to take. And then looking forward to next year, it's more of the same, which is we have certain initiatives some of which Nate just mentioned, where we're seeing some building momentum.

On the other side, we've done quite well with our compliance group and they continue to build and that's a cross-affiliate initiative that we'll build into. And I think we also, just look at our expectations for the year, not only for our existing base, for all the things that they are doing on their own. There are sets of things that we're doing to help them. And we look at our new investment pipeline and are certainly pleased with the investment in Genesis. And all of that will lead to, as we do good things, an increase in some management compensation.

So, if the absolute increase was, say, a million and a half to 2 million above plan sequentially, how much would be incentive comp and how much would be internal compliance and other support investments?

Yeah. I think it's certainly a mix. And again, there are accruals. And I'm hesitant to you know give specific amounts because they are not grounded in, of course, you know what will be our reported earnings for the year. What we're trying to do with the holding company expenses for 2004 is give you some guidance. Some of that wraps in expectations of how we see some things coming together.

I'm sorry. I'm just talking about the fourth quarter, I'm sorry.

Yeah. In the fourth quarter, I'd say there was a little over $1.5 million that was additional accruals that came from incentive compensation. And some was just additional compensation to other folks in these cross affiliate initiatives.

OK. And then on the regulatory side I know last quarter you talked about, you know, you hadn't seen any of the “trading issues”, market time and late trading of course. Can you just talk about what you've done in additionally in the fourth quarter to look at the compliance side? And just to reassure us that you continue to feel good about what you found there, and that you've dug further in the last quarter than you previously had?

Sure. Let me -- I'll answer that question, but let me just finish on the compensation accrual point, because I think it's useful to give guidance in terms of what expectations should be for 2004. And what we've provided in our guidance, obviously subject to uncertainties in the future, is a level of earnings that represent significant growth. The possibility of incremental incentive compensation accruals above what are embedded in the guidance would only be in scenarios where the growth is above -- is even higher and above the levels that we've guided to. So it's -- well anyway, hopefully you get a sense from that as to how we think about things. It really is only increases following substantial increases in earnings.

Right. I understand.

On the regulatory front, we have a centralized compliance initiative, which was underway through the summer coincidentally. And in that program, or as part of that program, have hired a significant number -- I think we're now up to four new hires. I'm looking at Nate. In that area, of very high quality professionals, and this is on top of the universe of high quality professionals that our affiliates already have. And so I think a bit is a byproduct of that program. Also, of course, a refocusing that every asset management firm, including our affiliates, has undertaken following all of the regulatory actions.

You know through all of that, we have increased our level of diligence on a forward basis. We thought we were pretty good already. But we've enhanced that and looking back, we have gone through years and years of files and records, et cetera, and are still in a position to say that there is you know we've found none of the Spitzer type problems. So, you know we're feeling good about where we are but we're certainly prepared, in terms of the resources we're devoting to the compliance area, to make sure that we maintain a spotless record.

Thanks a lot.

Thank you. Mark.

Thank you. Our next question comes from Sam Kitson with Black Rock. Please go ahead.

Yeah hi, guys. Just a couple of questions. I'm a little newer to the story. Could you give me what your stated evaluation parameters on acquisitions? You guys have referred to them a couple of times.

That's sure, sure. You know, historically, since our earliest days, we've paid and sought to pay you know a fair market price for the investments that we make, but not obviously to seek to compete entirely on price and instead have the structure be, you know, one of the more appealing things that we offer, as well as the affiliate support things that we can do. And over the years we've paid consistently between sort of 8 to 10 times run-rate cash flow at the time the transaction is agreed to. We have in the past paid below that range. But the majority of our transactions have fallen right within those two numbers.

OK. And then I may have just missed this. What was the pro forma net debt to run rate EBITDA number that you gave?

That is just about 1.7 times.

1.7 times and my assumption is that you guys don't include the mandatory convertible securities as –debt in that calculation?

That's correct.

And just a final thing here. What is the conversion price on those securities?

The upper end of the range is $84.06.

OK. Thank you very much.

Thank you.

Thank you. Our next question comes from John Hall with the Prudential Investment Group. Please go ahead.

Good morning everyone. Real quickly a question to you, Darrell

Good morning, John.

You mentioned a cash still left at $135 million?

After we pay for the fine investment that Seth has brought onboard.

Right. What's the date that's associated with that 135?

Well, we're hoping to make your models work well and close it around March 31st. But it'll probably be a week or two on either side of that date.

Does that 135 contemplate any tax payments?

There is a little tax that, as you know, that draws on our cash a bit in the first quarter. But that includes, of course, you know, the cash that we're going to generate in the first quarter by adding to our existing holding company less what we're going to pay for the shareholders of Genesis.

So yes, it does contemplate -- ?

It does contemplates some tax similar to what we've paid in prior years, you know, which is about $5 to $10 million of extra tax.

OK. And looking at the minority interests that come up a couple of times, is it safe to say that seeing it grow is a reflection of earnings growing faster at affiliates that you effectively own less of?

Yes. It's generally, yes. Those revenues are actually growing faster at firms where we, on a relative basis to the average, own less. But I would just emphasize that all growth at affiliates is good.

And then one question on Genesis. In looking at the level of assets that they manage, it seems that they don't have a lot of employees there. They seem to be pretty lean. In the analysis that you did, Seth, are you anticipating a kind of cost increasing for them?

Well, they actually have, John, around 80 employees, a smaller fraction of that, 14, are in the investment professional category. But they would say that they are very adequately staffed for the amount of money that they manage and the number of countries and industries that they cover. As you know, emerging markets change over time.

And so I think they would anticipate that down the road they will be adding new partners and have set aside a meaningful portion of their retained equity in order to be able to attract those people to the extent that they need them. But they are very comfortable, as are we, with the capacity that they have to manage their current book as well as to continue to grow.

I would also add to that, it's an opportunity to talk about why our structure I think is a real benefit for AMG shareholders because the way we structure these investments, the operating leverage, for better or for worse, stays with affiliates so that as expenses would increase at Genesis or any of our affiliates, that doesn't have an effect on AMG's earnings.

Right. OK. Thanks very much.

Thank you John.

You have no further questions at this time. I'd like to turn the conference over to Mr. William Nutt.

Well, thank you all, once again for not only joining us this morning and listening to a relatively long call, but also for some awfully good questions. I think in sum, we're pleased with our affiliates’ investment performance and positive net client cash flows for the fourth quarter and the full year. We're also pleased to welcome Genesis this morning to our family of affiliates. We at AMG remain confident in our prospects for our affiliates’ not only future performance in cash flow, but also our ability to continue to execute the same kinds of transactions that you saw in the Genesis transaction that we've just described. So thank you very much.