Affiliated Managers Group Inc (AMG) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Affiliated Managers Group first quarter results 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 28th, 2004. I would now like to turn the conference over to Ms. Brett Perryman with the Affiliated Managers Group. Please go ahead ma'am.

Thank you. And thank you for joining Affiliated Managers Group to discuss our results for the first quarter 2004. By now you should have received the press release. However, if anyone needs a copy please contact us at 617-747-3300 and we'll fax you a copy 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 10 K and other filings we make with the SEC from time to time.

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 website a replay of the call and a copy of our announcements of our results for this quarter as well as a reconciliation of any non GAAP financial projections to the most directly comparable GAAP 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 and Nate Dalton Executive Vice President in charge of Affiliate Development. Bill will begin the call with an overview of AMG's results and highlights for the quarter. Sean will then provide additional details about AMG's operating results, and Darrell will discuss AMG's financials. We will then open up the line for questions. And now I would like to turn the call over to Bill Nutt. Bill?

Thank you Brett. Good morning everyone. Welcome to AMG's conference call discussing our financial and operating results for the first quarter of 2004. Let me begin with an overview of our results and highlights for the quarter. We are pleased with our results for the quarter. As our affiliate's strong investment performance and positive contribution from net client cash flows produced EBITDA results of 7-8% quarter over quarter. As we all know, although the equity markets were up sharply in the beginning of the quarter, they pulled back in March finishing the quarter nearly where they began. Our earnings growth during the quarter demonstrates the breadth and diversity of our equity investment products and the strength of our affiliate's investment disciplines. Looking broadly across the equity markets, the international and domestic, small and mid cap categories continued to perform well, and our products within those sectors produced strong returns on both an absolute and relative basis. Particularly those managed by affiliates which provide a greater contribution to our earnings.

In addition to generating solid internal growth, we made excellent progress during the quarter in executing the other major element of our growth strategy, that is, making investment in new affiliates. In January, we announced our definitive agreement to invest in Genesis Asset Managers a premier investment manager of emerging markets equity securities. Genesis is principally based in London, and it will be our first affiliate outside the United States. Genesis has had an outstanding record and great management team and the firm continues to produce strong results. We expect to close the transaction by the end of May pending the final regulatory approvals including from the U.K., and we look forward to looking working with our new partners at Genesis.

Looking ahead, we believe our prospects for executing additional investments in new affiliates are strong. As we continue to build on the relationships we have cultivated with high quality, mid sized firms and as our reputation as the leading succession planning partner grows. Of course, as I said before, these discussions take time given the relationship oriented nature of our process. Although it is hard to predict the precise timing of new investments, we are confident of our ability to continue to add to our earnings growth through accretive new investments. Finally, as you saw in the quarter, we refinanced our outstanding mandatory convertible securities with the sale of 300 million of new mandatory convertibles issued on a even more favorable basis. These securities further strengthen our balance sheet and enhance our capacity to make additional investments in new affiliates. With that, I'll turn to Sean to discuss our operating results in greater detail.

Thank you Bill, good morning everyone. As Bill noted we are pleased with our results for the quarter. With respect to client cash flows, as you saw in the release, we had net client cash flows in directly managed assets of 173 million for the quarter, resulting in an increase of approximately $800,000 to our annualized EBITDA. With approximately 95% of our EBITDA generated by equity products, AMG benefited from the growth in the equity markets early in the quarter and sustained this growth despite the market downturn in March. As Bill noted both net client cash flows and investment performance have been especially strong among our larger higher margin affiliates. Because firms such as Tweedy Browne, Third Avenue, and Friess Associates make a greater contribution to our EBITDA both in an absolute sense and terms of the margin to us of incremental growth and assets, growth at these firms can have a more meaningful impact on our results.

Taking a closer look at our affiliates performance within each of our principal distribution channels. We had good results in the mutual fund channel with net inflows of approximately 220 million for the quarter. Among our affiliates in this channel, Third Avenue, Tweedy Browne, Friess Associates and The Managers Fund, all produced solid results. Third Avenue had excellent investment performance and net client cash flows across a wide range of investment products. The firm has nearly doubled in size since we completed our investment a little more than 18 months ago, and it continues to generate growth through the consistent application of its safe and cheap investment philosophy. The Third Avenue Value Fund ranked in the top 1% of Lipper's mid cap value fund category for the quarter and the real estate and international value funds also performed well both for the quarter and year to date. Third Avenue's cash flows in the Mutual Fund Channel were very strong during the quarter although this was somewhat masked by the ending of a single sub advisory relationship totaling almost $400 million. This account carried a lower fee than their average fee rate for the product, which is small cap value, and the firm looks forward to replacing these assets with higher margin business.

Tweedy Browne also had a strong quarter with their global value product outperforming both the hedged and unhedged EFAE by more than 400 basis points. The funds returns currently rank in the top quintile of the Lipper Global Fund Category over the past 1, 3, 5 and 10 years, and it continues to perform well for the year to date. Outperforming its peer group average by 800 basis points, which places it in the top 1% of its category.

While the equity market in environment was slightly more favorable for value oriented products, our growth-oriented funds also generated strong performance. Friess Associates, Brandywine and Brandywine Blue Fund each posted their fourth consecutive quarter of solid growth, outperforming the S&P by approximately 300 and 500 basis points respectively. In the institutional channel we had 560 million in positive net flows lead by First Quadrant, which had another terrific quarter. Friess and Third Avenue continued to gain momentum in the channel and both firms won significant new mandates during the quarter. Our affiliates are well positioned for continued growth in the institutional channels as investors increasingly look to small and mid-sized investment managers with strong investment disciplines which can provide their clients with focused, highly tailored investment management and client service.

In the high net worth channel we had net negative flows of 600 million as positive flows for several affiliates through our Portfolio Services Group initiative were offset by continuing outflows in one broker-sold product. Given the generally lower fee rates and margins on wrap assets outflows from this product have not had a significant impact on our EBITDA. Looking ahead, we see potential for growth in the broker-sold channel, as we're now disturbing a broad range of high-quality products through PSG. To expand on the last point, PSG, which was launched in the first quarter 2003 is now servicing approximately 600 million in client relationships on behalf of 12 affiliates. In addition, in January of this year, PSG began marketing affiliate's mutual funds into a select portion of its broker dealer relationships. This expansion is important for two reasons: First, it will allow us to leverage the brokerage sales force we are building at PSG to sell higher-margin assets; second, it will allow us to leverage some of our stronger retail brands such as Third Avenue and Brandywine through our brokerage sales force. While this expansion was just announced, our early successes have been very encouraging.

In addition, we completed the acquisition of the Conseco Funds through The Managers Funds at the end of the quarter, bringing the firm’s total product offering to 27 different no-load and load mutual funds. Given the Managers Funds sub advisory structure, the growth potential in this area is considerable and we continue to see significant opportunities to execute similar transactions in the future.

Finally, as our affiliate development initiatives continue to gain momentum we have hired additional personnel at the holding company both to identify and develop new growth opportunities for affiliates and to provide additional resources in areas such as compliance and technology. With that, I'll turn it over to Darrell for discussion of our financials.

Thank you Sean. Good morning everyone. As you saw in the release, we reported cash earnings per share of 92 cents for the first quarter and that is in line with First Call’s consensus estimate. We reported GAAP earnings per share for the quarter of 57 cents. EBITDA was $43.8 million for the quarter. Quarter to quarter our margin of EBITDA contribution to end of period assets under management increased from 20.9 basis points in the fourth quarter 2003 to 21.4 basis points in the first quarter of 2004. In our guidance model, which assumes steady market growth of 2% each quarter, we expect this ratio to be 20.2 basis points for the second quarter. This fully incorporates the inclusion of Genesis by the end of next month. Holding company expenses were 6.9 million for the quarter. We expect holding company expenses to increase slightly in subsequent quarters with a full-year amount of $28 million, reflecting additional expenses for the affiliate's development personnel Sean mentioned earlier, for expenses related to the new requirements under section 404 of Sarbanes-Oxley, and for variable incentive accruals which are based on expected cash EPS growth. If actual results do not meet our expectations, we would expect to reverse a portion of these incentive accruals consistent with our past practice.

With regard to taxes, our tax rate in the first quarter was 41%. We expect this rate to decrease to 40% for the remainder of the year. Our cash tax rate for the quarter was 14.8%. Total deferred taxes were $8.1 million for the first quarter. Of this amount, we only add back to cash earnings the $6.1 million that is related to intangibles as these will not reverse but for sale or impairment. I would note however, that the additional $2 million of these deferred taxes was cash actually received by AMG. Looking ahead, we expect our total deferred taxes to be about $8.4 million for the second quarter of which $6.2 million will be in tangible related deferred taxes that we will add back to cash earnings.

Amortization for the quarter was $4.1 million. Depreciation for the quarter was 1.5 million. With a million dollars 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 7.3 million for the first quarter. During the quarter, we addressed the expected conversion of our 2001 mandatory convertible securities by effectively refinancing the issue with a similar security with more attractive terms. The 2001 $230 million mandatory convertable will convert into approximately 4.1 million shares of stock in November of this year. We were able to issue $300 million of new mandatory convertibles with a lower coupon and an attractive 53% premium and use a portion of the proceeds to repurchase approximately 3.5 million shares of our stock to offset the November share issuance. Furthermore, we were able to add approximately $100 million of cash to our balance sheet. Since there will be two mandatory convertible security issues outstanding between now and November, we forecast interest expense to be $8.8 million, $10.9 million and $5.8 million for the second, third and fourth quarters respectively.

Now turning to the balance sheet item. At the end of the first quarter, we had $250 million available under our credit facility and holding company cash of three - approximately $300 million. We will use a portion of this cash to fund our invest in Genesis later in the quarter and the rest will remain available to fund additional growth initiatives and new investments. We will also continue to use our cash to opportunistically repurchase stock consistent with our past practice. Stockholders equity was $422.9 million, a decrease of approximately $192 million. This decrease is principally related to our stock repurchases during the quarter.

Turning to guidance on future earnings, while we are not providing specific guidance on individual analyst estimates, we'd like to provide some guidance on earnings for 2004. Assuming 2% quarterly growth in market from March 31st until the end of the year, we expect cash earnings to be in the range of $4.00-$4.10 cents. This range does not include additional earnings from performance fees, accretion from additional investments in new affiliates or additional repurchases of our stock, and the range is based on current expectations about our affiliate growth rates and mix and affiliate contributions, as well as the expected closing of our investment in Genesis by the end of May. Substantial changes in the equity markets would of course impact those expectations and now we will be happy to answer any questions that you might have.

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 one on your push button phone. If you'd like to remove your question 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 and if you are using speaker equipment you will need to lift the hand set before pressing the numbers and before asking your question. One moment please for the first question. The first question comes from William Tanona with J.P. Morgan. Please go ahead.

Good morning guys.

Good morning, Bill.

Just a couple of quick ones here. First the institutional return on assets under management seemed to be higher than it typically has trended. Were there performance fees involved in that?

Which ratio are you looking at, Bill?

The revenues to average AUM on the institutional side?

There were some performance fees in the quarter but they contributed less than a penny to earnings in the first quarter.

Okay. In terms of Friess Associates, I know you guys have another slug of shares that you have to purchase, or equity stake that you have to purchase, I think it’s a remaining 19%, when exactly is that coming due? Can you remind us?

That is in November of this year and it’s about $100 million.

Your guidance there does not include that acquisition or does that include the acquisition?

No, it does include that acquisition as it happens at the end of the year. You don't see clearly the full-year impact of that repurchase.

Okay. Lastly, in terms of performance, I mean, can you give us some specific funds that were strong on the mutual funds side? I mean you guys actually blew out numbers pretty considerably there.

Yeah I - It's Sean and maybe I'll ask Nate to jump in on this. I think as I mentioned in going through, a nice dynamic that we have at work is that some of our larger affiliates are, both in terms of absolute size and in terms of their margins to us, are doing exceptionally well. I would highlight again Tweedy Browne especially their global value product, Third Avenue in pretty much all of their products, and Friess Associates which has really done a great job in the last year or so. I don't know Nate what you --

Especially on their large cap product, but yeah, Tweedy has had exceptional performance especially on their global product as had Third Avenue.

I highlighted the one anomaly in the Third Avenue numbers which, but for this account, which they are very confident they are going to replace pretty quickly with higher-margin clients, they are really just doing a fantastic job.

Okay, and then just lastly, and terms of the, you know, obviously the article in The Wall Street Journal last week or was two weeks ago with respect to First Quadrant, would you guys mind commenting and giving us your perspective on that?

Over the past two years, First Quadrant has gone through a very successful management transition. As Sean said a few moments ago, First Quadrant's investment performance, new clients, cash flow from existing clients has been excellent. Rob Arnott is no longer with First Quadrant or AMG, of course, and the Journal article absolutely does not reflect our excellent relationships with the partners at First Quadrant and indeed with the partners of all of our other affiliates.

Okay. Thank you.

Thanks, Bill.

Thank you. The next question comes from Bill Katz with Buckingham Research. Please go ahead. Mr. Katz please go ahead with your question.

Yes hi. Can you hear me?

Yeah, hi Bill.

Okay, Sorry about that. Quick question for you on- this is mainly a question for Bill and Sean in terms of big picture acquisition, I thought I saw somewhere that you have a range of target affiliate size of between a billion and 25 billion and, my memory may not serve me correctly, but I thought that was a step up from your prior guidance. So I was just sort of curious if you're broadening out the net a little bit in terms of size of acquisition. Does that infer anything in terms of the outlook for smaller size affiliates?

I would say - Here is how I would describe our net, which is not a term we use. We have devoted substantial resources and as you heard me say, actually increased the resources in the affiliate development area, to invest as partners with our affiliates in acquiring smaller firms or teams. And so, more than in the past, I think we're aggressively seeking investments that are below a billion or around a billion to acquire with our affiliates. In terms of stand-alone affiliate investment, obviously we are always going to be interested in very high quality, very fast-growing firms that are at the lower end of the size range which is -- call it notionally a billion. Obviously, we are much more focused on the EBITDA that we're acquiring. And in terms of how we think about the ideal size, it’s typically putting to work $100 million and so depending on the multiple, that's a firm with, call it 10 to 12 million in EBITDA that they would sell to us. Remember they're selling 60% or so to us. So $100 million is about where we like to be at the lower end and then at the upper end, while we don't say there is an absolute upper end, several hundred million dollars is probably the right range to think of. We find a very large number of firms within that mid size universe and as you've heard us say in the past, we feel that we're very well positioned to continue to make investments.

Okay. That leads me to my second question. Just to play devil’s advocate a little bit, you're sitting on a pile of cash your stock is cheap, well to me it is cheap, seemingly, you're trading on a low multiple, and you didn't, sort of, finish off what you sort of pre-announced you would do in concert with the mandatory convert. Am I reading wrong, but it seems like the deal pipeline seems not as imminent as maybe it was coming into the last quarter. You know, why not be a bit more aggressive on the stock rather than opportunistically at this point?

Darrell why don't you start then I'll comment on the -

Yeah, I think stepping back, you know, I think as our share holders have come to know us, we are very disciplined about taking the capital that the business earns and making sure that we're finding the highest IRR possible for those dollars. When we evaluate repurchasing stock, we look at the pipelines, we look at our opportunities; and as you know, as AMG has continued to develop the quality of the affiliates that we are attracting and making affiliates is, I think, exceptional. As we look at this pipeline and while we can never control the timing from quarter to quarter or month-to-month on a transaction, it should be clear to folks when we're sitting on this amount of cash we're looking at some transactions that we're clearly excited about that are consistent with our return objectives. If that weren't the case, we as you suggest Bill, would materially change the posture of our repurchase position.

I would add to that that we are saying clearly that we have an attractive pipeline. We think we're very well positioned to make additional new investments. But as Bill noted, very difficult to predict the timing of those new investment seven when you're in active discussions with a firm. We are very disciplined in our pricing and very careful in our due diligence, so we're not afraid to back away even if we spend a lot of time working on a project. And of course, the nature as Bill said, the relationship nature of our investment process means that we are not making investments as a byproduct of an auction type process. The firms - They are one-on-one discussions and the firm's principals are making a lot of complicated decisions about internal issues at their firm and very often they want to take things on a slower track. But that being said, we remain confident in our forward prospects.

Okay, just two other quick questions. On the Genesis transaction, if I'm doing the math right, and I might not be given sort of different benchmarks that they go up against, it looks like they a had a pretty robust quarter in terms of asset flows. Is most of the growth - I think you announced the deal they were close to 7 billion of assets and the pro forma numbers you put in your press release would imply about 8 billion, is most of that from new business or is that more the market appreciation? Just sort of curious.

It's coming both ways. They've had some very good successes on the investment flow standpoint but also strong investment performance especially strong, you know, going into this quarter. So it is coming from both.

Equally both or -

Yes.

Okay. The last question, just focusing on the high net worth side of the business, I understand Rorer continues to sort of loose a little on the assets, but you have been several quarters in a row now where you've had relatively elevated outflows and, notwithstanding what sounds like good success in PSG, that I guess continues to be somewhat of a frustrating line. When do you think that that type of number could swing positive in terms of net addition rather than net subtraction?

This is Nate. I think starting with the product, and there's a couple of components to your question here, but starting with the product, the one product we're talking about, the Rorer's large cap product is still under pressure and we can't say that we expect those outflows to reverse in the short-term. The firm Rorer is a great firm with a good long-term record, very strong marketing force. But moving from that to the broker-dealer segment portion of your question, we - you know this is one product within the segment and the portfolio services group flows, as you noted, are increasing and I think the number Sean gave earlier -- they've got about $600 million now of separately managed accounts that's not counting the mutual fund portion of it. And then looking at the high net worth channel more broadly, the trend at the higher margin part of that channel, you know, sort of the ultra high net worth segment, had been positive. That sort of flattened this quarter and a lot of that was seasonal, state income tax planning kinds of things. We expect the resumption of the positive trend in the ultra high network part of the high net worth business especially at our higher margin firms like the Tweedy Brownes. And similarly, you know, flows at those higher margin firms in other channels, the mutual fund institutional etcetera, obviously have been good and we expect to see that continuing.

Okay. Thanks for your patience in all my questions.

Thank you, Bill.

Thank you. The next question comes from Mark Lane with William Blair and Company. Please go ahead.

Good morning. Just a follow-up on the Rorer question, can you give some idea of how large the asset is within the broker-sold business and maybe what the performance was in the first quarter and was there any change in their relationship - any of their key relationships? Did they get knocked out as a preferred provider? What is - what else is going on behind those numbers because it’s, you know, an area that you have been looking for some stability over the past two or three quarters and it just is not happening?

There are a couple components to this so let me try and catch them all. As I said, this is just one product in that segment of that channel. Obviously, is still a significant sized product, but the performance -- and a component of this, honestly, is how much - is partly the product positioning and all that. They continue to be rated a buy or whatever the equivalent rating is at each of their large relationships so nothing is changing there. They continue to have good relationships in the field, and they continue to do a good job there. In terms of predicting when the – whether the outflows will reverse in the short term or whatever, we obviously can't do that.

Just stepping back, Rorer contributes 6-7% of our EBITDA. This is one product in one channel. You should -- folks should understand that we are taking a disciplined approach to evaluating the product, understanding it, we are working on this issue. But again, when I look at this product’s contribution to all the things that we're doing at AMG, it’s something that doesn't particularly concern me. That all said, when we see the flow number, it is something we want to address the we think we've got good people focused on doing that. If I could time the market and tell you how things work there are a lot of other things that we'd be able to do. So I feel -

Is there any insight on performance in that product in the first quarter or how it has performed in the last year or three years?

Its got a great long term record. It has underperformed the S&P in the medium and short term. The firm is very focused, is devoting the right resources to work with their product and they are not changing their discipline. I mean its inevitable that any product, any equity product is going to have periods when it is out of favor. Part of the benefit we think AMG brings to our investors is that we've got great diversity. So when we have a relative value product that is not in favor, and maybe they're not executing exactly as they wish to be, but we're very confident in that team and - as are they and that over time that will come back. When you have a product that is not doing as well as you'd hoped, you've got others that are doing exceedingly well and we certainly feel that, as Darrell noted, relative declines in this product are more than offset by gains in other products, and happily for us, other products which actually carry a higher margin to us.

Okay. On the expense side, you mentioned about the higher compliance costs and adding some additional resources for affiliate development. The $2 million increase in holding company expense guidance, can you give a little bit more insight on where that is going exactly? How many people have you hired at the holding company level to do affiliate development? Is it four or five people or eight to 10 more lower level productive people? How is that split up?

We have hired four to five is probably the right characterization for how we're -.

We'd like to think that the higher level people are productive as well.

As I say, maybe not to digress or editorialize, but when we look at things like Sarbanes-Oxley compliance, I think we've done a very good job with compliance. We want to make sure we continue to differentiate ourselves that way when we look at what we need to do in order to have those attestations go well. As many of you know, by the end of 2005 accountants not only give an opinion of our financial statement, but on an evaluation of all of our processes. We want that to be comprehensive and we want to do it well and that costs, you know, that's not cheap. So, my view is that that is an expense we will see this year and it will be an expense that will cost less to maintain that same high-quality posture going forward.

Okay, and then just back to the bigger picture acquisition question, following up on Bill’s question, as you get larger, now at $100 billion, are you looking at acquisitions that may be a little bit less traditional than some of the things that you've looked at in the past? It seems the sweet spot has been the $100 million deal, the $5-$7 billion type of assets under management. Maybe looking at some larger deals that are not majority-owned deals, but that would allow you to spend that same amount of money but maybe have access to a larger pool of assets over time?

That is a good question, Mark. I will start and then maybe Bill are others will jump in. I think we are absolutely spending time meeting new firms, developing relationships, and thinking on our own about additional opportunities to invest in high-quality, mid-sized asset management firms. Now the definition of mid-sized, that has some flexibility. I think we wouldn't absolutely rule out the possibility of investing in firms which most people probably wouldn't think of as mid-sized but where there is an appropriate fit with our approach and what the firm is looking for. One area that offers, we think, in the medium to long term, a great opportunity for us is the whole area of alternative products. There are many fine hedge fund firms out there that are, perhaps not today, but ultimately over time will seek to find succession solutions and are currently and prospectively thinking about their business as a business for the long term. And those kinds of firms and the nature of their revenue mix, may mean that we adapt our investment structure slightly from what we have done in investing in traditional long-only managers. We think it is in the category of finding additional opportunities but not at all departing from the very substantial opportunities we continue to see in what we're calling traditional AMG investments. I don't know Bill if you -

I would simply add, Mark, that as you know – as Sean calls it, the traditional prospect universe is basically between 1 billion and 15 billion and interestingly, as the markets have recovered domestic equity markets in particular, but I would also say some of the international markets. That universe itself continues to grow and so there are lots of opportunities within that traditional universe where, as we now being more than a decade old and people needing prospects have been able to see how well our affiliates have done in both up and down markets. Over a long period of time. And we have seen how well they have done with succession planning, getting equity to the next generation, our opportunities there get larger and larger. But to the point that we made just a moment ago, as well as to Bill Katz’ question, we do look at both smaller firms which might be appended to one of our existing affiliates or if they are a mutual-fund unit like the Conseco funds that were closed this quarter to be added through managers. Lastly, we do look today more at some larger opportunities where we might do, as Sean said, a structure which isn't identical to but consistent with the basic model that we follow. So, yes, there is a broader universe in our traditional area but there are also the addition to that of smaller firms and larger firms.

Great. Thank you.

Thank you. The next question comes from Mark Constant with Lehman Brothers. Please go ahead.

Good morning guys. I just want to clarify a couple things I heard. One, with Genesis, am I correct in remembering that that $7 billion in assets at the time of announcement was 7.0 and if so is that to 8.0 or is it - I'm just try to get a better sense of the order of magnitude of the growths?

I think when we shook hands, it was below seven, when we announced it it was a smidge over seven, and today it is just under eight.

Okay, but the price was fixed at shaking hands?

Yes. And thank you Mark. Unusual for our transactions and just given the nature of a disparate group of non management outside investors, we did have a fixed price in this case and so all of that appreciation will redound to our benefit.

Okay. The convert coupon. I thought I heard you say, Darrell, in your comments that the new convert - I mean, I understand the conversion premium is dramatically higher but I thought that the convert coupon, all things included was like 65 basis points higher on the new one. Did I miss something there?

Yeah. Of the coupon it breaks out into two categories. The actual coupon, the debt coupon on the security, is in the fours. But there is a cash pay which goes to equity which is 65 basis points higher than our existing 2001. So the cash pay is 6.65% on the bond.

You'll accrue the interest based on the 6.65 though; right?

Yes that's correct.

What is the significance of the separation of the two pieces?

The accounting, not to get into too much detail, but when we go through this next accounting project, there is a portion of that bond, which would be the portion of the coupon which would go to equity where then the interest expense would be focused on the stated coupon on the bond which would be the lower rate.

You will still accrue the interest expense only you will have some accounting increase in stated equity simultaneously?

Correct. And we’ll see how the exposure drafts come out over these next bunch of months as they look at how convertibles are to be treated.

But it'll really only affect the stated GAAP equity anyway?

That's right.

Did I hear you correctly when you said the tax rate 40% for the rest of the year as opposed to just the second half?

That is correct. Second quarter, third quarter, fourth quarter.

I thought, Sean, in your remarks that you had suggested certainly as Rorer has become less significant in the whole that the weight of those outflows had become less meaningful to the real economic EBITDA number that we focus on, yet that was still, it certainly wasn't bad, but it was still not quite as good as the fourth quarter or what we'd hoping for, on that front at least. Is it really - Would you attribute that to little bits and pieces here and there? Was it mostly that $400 million piece from Third Avenue? What was the - If it wasn't really Rorer was it some of a bunch of little parts that kind of constrained that total? The contribution to EBITDA, see what I'm getting at?

Not really. I think across the complex that probably the 400 which I identified was the biggest swing factor.

Bigger than the Rorer factor?

Yeah, I would say so. I think in terms of EBITDA contributions to us, absolutely.

Yep, that's what I'm getting at.

And within high net worth we also had, as Nate noted this phenomenon which is seasonal and expected to some extent, although it’s a little worse than we would have hoped where the ultra high net worth investment counseling firms had slight outflows instead of the consistent inflows, which has been the pattern. We are very confident it’s going to resume the normal pattern for the rest of the year.

So even if I was to assume that Rorer remains under pressure, I think to use your term Nate, that in the absence of another Third Avenue giving up the sub advisory account kind of phenomenon, and God forbid they actually replace some of it next quarter, we should see something more like the fourth quarter or better in terms of EBITDA contribution from flows. Is that fair?

Yes.

Thank you.

Thank you, Mark.

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

Thanks, good morning. Not too many questions left to ask at this point. Darrell, if you could just indulge me I think I missed it when you talked a little bit about what the — your guidance was for interest expense over the balance of the year, can you just repeat that. And then I just had a question related to the acquisition environment.

Sure, when we look at the interest expense for the three quarters, it’s 8.8 million in the second quarter,10.9 million in the third quarter and $5.8 million in the fourth quarter.

Great. I'm just curious to the extent –- with all the potential changes and investigations coming down the pike in the fund industry, has this, say you're looking at any potential affiliates in the fund business is this either the decreased your near term appetites to do a deal there or changed anything around the parameters in terms of what you're willing to pay or even just had people in that part of the market pull back from their willingness to sell at this point. How has this impacted the pipeline if at all?

Rob, I don’t, first of all I don't think we would pull back. We obviously do a great deal of due diligence on these firms. We like the no-load channels primarily although as you saw with the Conseco funds that were added to Managers funds, we now have some load funds as well. I think frankly there is something of a trend and that is for a number of industrial or manufacturing or other kinds of companies who got into the mutual-fund business, thinking that it only went one direction and only the provided an incredibly high margin of product, that with some of these regulatory things they are rethinking that. I think there are going to be a number of companies who probably shouldn't have actually been in the fund business, dispose of or sell their smaller fund groups and we're very well positioned to take those in. The Managers funds platform works very well or on a stand-alone basis, we're happy to do so. Yes, there are going to be changes in the fund industry. I think the use of brokerage for sales for example, not being allowed more disclosure, but I think at the end of the day if it has any impact at all on our prospecting, it will be simply that we will have more opportunities to look at fund groups like Conseco that can be added to Managers funds.

Great. Thanks a lot.

Thank you. At this time, there are no further questions. Please continue with any closing comments.

Thank you all again for joining us this morning. In sum, we're pleased with our affiliates investment performance and positive net client cash flows in this quarter. We at AMG remain confident of our prospects for our affiliates future performance and our ability to execute investments in new affiliates. Thanks again.

Thank you, sir. Ladies and gentlemen, this concludes the Affiliated Managers Group first quarter results conference call. If you'd like to listen to a replay please dial 303-590-3000 or 1-800-405-2236, with pass code 575228. Once again your dial in numbers are 303-590-3000 or 1-800-405-2236 with pass code 575228. We thank you for your participation today. You may now disconnect.