Greetings and welcome to the AMG Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Anjali Aggarwal, Vice President, Investor Relations for AMG. Thank you. You may begin.

Thank you for joining AMG to discuss our results for the third quarter of 2019. 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. We assume no obligation to update any forward-looking statements made during this call. AMG will provide on the Investor Relations section of its website, at ir.amg.com, a replay of the call, a copy of the announcement of our results for the quarter, and a reconciliation of any non-GAAP financial measures that are not announced on this call, to the most directly comparable GAAP financial measures. As a reminder, we have also included an updated investor presentation on this section of our website. AMG encourages investors to consult the Investor Relations section of its website regularly for updated information. With us on the line to discuss the company's results for the quarter are Jay Horgen, President and Chief Executive Officer; and Tom Wojcik, Chief Financial Officer. With that, I will turn the call over to Jay.

Thanks, Anjali, and good morning everyone. As macro factors continue to fuel uncertainty and volatility in markets, AMG's diversification and unique partnership structure, provides stability and enable us to continue to evolve our business to meet long-term client demand trends. Boutique managers have a proven ability to outperform in more volatile markets, and given their long-term performance track record, our affiliates are well positioned to benefit as client deep differentiated risk adjusted returns that only active managers can provide. More broadly, with AMG's unique competitive advantages built over the last 2five years, we are confident that our business will generate long-term growth and shareholder value. AMG reported economic earnings per share of $3.16 for the third quarter. Net client cash outflows of $19.7 billion, were driven primarily by certain quantitative strategies across liquid alternatives and global equities, and included a single low fee redemption of $5 billion. As we said last quarter, and as Tom will discuss in more detail, it's important to note that these outflows, had a disproportionate impact on a reported AUM, relative to their more modest impact on our earnings. While we expect outflows in these quantitative strategies to continue in the near term, we anticipate that AMG’s aggregate level of net outflows, will moderate in the fourth quarter, given a number of large institutional and some advisory wins, which are expected to fund by year end. Notwithstanding our near term flow results, we are well positioned for strong organic growth over time. AMG is diversified across a broad array of strategies and active management, including a significant position in product areas currently benefiting from secular client demand trends. I want to take a moment to discuss these growth areas within our alternatives, multi-asset and fixed income categories. The first is our illiquid managers, Pantheon, EIG…

Thanks, Jay, and good morning everyone. AMG reported stable economic earnings per share, and generated strong free cash flow in the third quarter. Despite industry volatility and near term net outflows, our unique business model continues to demonstrate resiliency, as we've positioned for future growth. Net client cash outflows of $19.7 billion, were concentrated in certain quantitative strategies across liquid alternatives and global equities. As Jay said, while outflows will likely continue in these strategies until performance stabilizes, we see fourth quarter aggregate net outflows moderating, notwithstanding year end seasonality, given the number of expected institutional and sub-advisory funding. As we mentioned last quarter, it is important to understand the difference between flows and their impact on our financial results. In the current quarter, more than 75% of outflows were related to affiliates where we have a minority interest, or in low fee products that collectively make up only 10% of EBITDA, and therefore have a more modest impact on current and future earnings growth. Turning to flows by asset class. In alternatives, we reported net outflows of 9 billion, driven by certain liquid alternative strategies, and partially offset by positive contributions from illiquid products. As noted, these outflows included a $5 billion low fee currency overlay redemption that was unrelated to performance. While long-term investment performance in liquid alternatives remained strong, with 65% of assets under management outperforming benchmarks over a five year period, more recent performance in this area has been mixed. Certain of our quantitative strategies have been impacted by value factor exposures, while others, for example at Winton and Systematica, are generating strong near term results. We continue to see outperformance in our fundamental liquid alternatives book, including relative value fixed income strategies at Capula and Garda, both of which are generating solid organic growth, supported…

Thank you. [Operator Instructions]. Our first question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

Hey guys, good morning. Could you just talk about the new investment opportunities I guess in the more near term part of the pipeline for the opportunities that do feel more actionable? Are they - how would you, I guess, classify those small or large asset classes more proprietary versus formal processes, et cetera?

Great. Thank you, Chris. It’s Jay. Yes. Let me just talk about our pipeline broadly and then give you some attributes of it today. Stepping back, our strategy of partnering with excellent firms, has and always will be a cornerstone of our growth strategy. Obviously that's still true today, and we look forward to continuing to grow our business through making new investments. The other thing I would just say is, the management team, including me, are spending more of our time on new investments. My background obviously is in M&A. it’s something that I'm excited about and this extra effort and resources to the effort, we think will continue to drive additional transactions over time. We’re building momentum in our pipeline. We see good diversity of types of businesses, all high quality, all attracted to our model. I would characterize it as global in nature. I would also characterize it as all sizes. What's interesting about investing in growing firms is, obviously it's not just the capital you put out in a single transaction. It’s the growth that you can see from the business, both because these are entrepreneurial businesses, but also to the extent that they're in front of significant client demand trends that can add significant upside to these businesses. Our unique business model puts us in an enviable position where we can, through continued successful execution, scale our business with little or no integration risk, allowing our affiliates to remain autonomous to that unique competitive advantage of AMG. We can simultaneously grow our earnings and enhance our long-term growth profile through new investments. We can also invest alongside of our affiliates, both in distribution capabilities, but also invest in their individual growth opportunities through allocating capital to affiliates. So all of those things come from a successful new investment strategy. And when we look at it today, we do see momentum in both the near intermediate and longer term pipeline. Most of what we are - most of what is in our pipeline today is proprietary, coming through long-term relationships that started many years ago, whether that was relationships with - that I started when I was in new investments, or with Sean or Nate. All of those relationships have been transitioned now. And we see that the proprietary conversation that we're having, really is important to our process because we are sorting through due diligence, and we are also sorting through the partnership itself as we have these long-term relationships, get to see businesses evolve, and they get to understand our business model better. So when it comes time, and I think we've said this before, structure and pricing is only part of the partnership. It's really the long-term autonomy and alignment of interest that we offer through our model that really attracts these firms to us

Thank you. Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Thanks. Good morning everyone.

Morning.

Morning.

So first just on flows, we know AMG tends to have tougher 4Q, just given several seasonal and cyclical factors. And I heard the commentary in the prepared remarks that net outflows showed moderate or improved. I wasn't sure if this meant total flows, or if this meant sort of core flows after backing out some of those seasonal and cyclical factors.

So a good question, Craig, and we’ll clarify. I’ll let Tom take that one.

Thanks, Craig. So maybe I'll just kind of recap flows overall in the quarter, and then try and give you a little bit of color on what we see on the horizon, and address your seasonality question. As you recall, coming into the quarter on our July call, we talked about where we saw flows landing overall in the third quarter. And really excluding that one large low fee currency overlay mandates that I referenced, outflows for the quarter were pretty flat against last quarter. Again, more than 75% of the outflows that we saw came from certain quant products, most notably in liquid alt absolute return strategies. And these flows were on a base that today is only contributing 10% of our EBITDA. So given the combination of fee raise and ownership levels, and the affiliates from products that contributed the outflows, the impact on our earnings is generally going to be much less than what the headline flows suggest. We also continue to believe that quantitative strategies are going to be important in terms of their contribution to future growth, and we're already seeing very strong performance in certain affiliates in that area, including at Winton and Systematica. We did also see some outflows in the quarter in active equities, primarily driven by global risk off trends. But importantly overall, performance in these areas continued to strengthen, and we have more than 83% of our fundamental active equities products now outperforming benchmarks over the five year period. And we've also seen some incremental capacity come online recently in some of our high performing EM managers. So that's an area overall where we see a lot of future upside potential. In terms of upside, Jay also talked about illiquid alternatives, where we're seeing strong fundraising in Pantheon, EIG, and…

Yes. And let me just add, and that was good detail from Tom. I'll just summarize by saying, look, even beyond this next quarter, we see continued growth in private markets, wealth management and traditional and alternative fixed income, as we've said in our prepared remarks. In addition, I don't want to underscore - I do want to underscore that our performance is improving across our fundamental equity affiliates - equity and liquid alternative affiliates, as market volatility has increased. So we view this as a positive as we look forward to 2020. In aggregate between these growth opportunities and improving performance at our fundamental managers, we see that that represents about 90% of AMG’s EBITDA. And then the last thing I would say is, when you look at the fourth quarter, and we talked about institutional and sub-advisory wins, some of those wins are in quantitative products. And so that's an important thing to note as we would say more broadly, these products are very important to client portfolios, and we're seeing that come through in the fourth quarter.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Hey everyone. Good morning to. A question for you guys around EBITDA yield on assets, both in the fourth quarter and over time. And I think Tom, in the guidance, you guys talked about 10.5 to 12.5, but that included performance fees and some of the reposition expenses. I think the long of that will be fairly close to the - kind of the base, just the management fee EBITDA yield. So I guess, part one, does that sound right? and two, given the kind of mix shift in the business between affiliates and products, and obviously the ownership stakes are different, how do you guys think about that, call it 10, 10.5 basis point yield evolving over the next of couple years

Sure. So why don't I start, and then maybe Jay can address sort of the end of your question in terms of just the forward trajectory. First off, there were a couple of things when we talked about guidance in terms of that 10.5 to 12.5 basis point range, just to make sure that you have in your numbers. The first, as you mentioned, was a performance fee range of 20 basis points - of $0.20 to $0.60 per share. But we also gave you a little bit of color on our expectations around some expenses related to some of the strategic initiatives that Jay walked through. That will be about $0.15 to $0.30 per share. So that’s embedded into that guidance. So you can kind of think about getting to more of a core run rate if you backed out some of those one-time expenses that we gave you color on. More broadly, if you actually look at kind of stability in our fee rates and sort of stability in that overall ratio, you have a handful of things that are going on. First, we've talked about the fact that our flows overall have really been influenced by areas where we have either lower fee products, or minority ownership positions. So while headline flow numbers have been rather sizable, the actual impact that we've been seeing on EBITDA, has been much less, particularly over the course of the last couple of quarters. And then as we go forward, we talked a lot about areas of our business that are very strong contributors to our EBITDA, that are either growing now in terms of the illiquid area, the wealth management area, and the fixed income areas that Jay spoke about, or that have very strong performance, and we believe are well positioned against client trends for future growth in the fundamental equity space.

Yes. the one part of your question that Tom picked up on, and I'll just state more flatly, which is, as we look forward, a growing contribution of our business is coming from the private market, the wealth management, multi-asset and fixed income areas. And that does not only put a level of stability on that number. Those businesses are growing. But also if you look past, or look into the kinds of assets that we're raising there, you see very long duration, very sticky asset levels. And so we do see that as a positive. So it’s hard to capture it in just a number, but you're seeing the quality of that number go up.

Thank you. Our next question comes from the line of Bill Katz with Citi. Please proceed with your question.

Hi. Good morning. It's Ben Herbert on for Bill. Thanks for taking the question. Just was hoping we could go back to liquid alt and global equities, and definitely appreciate the commentary on you saw contribution. But can you just help us kind of ring-fence the remaining AUM at risk there, and maybe some sort of timeline on deposit outflow expectations there over kind of the near term horizon?

Yes. So thanks, Ben. Maybe I'll use that question to answer it in a lot of many different levels. So our efforts have been localized in the quantitative liquid alternatives, and long only equity quantitative strategies. And we did say, and I just mentioned a minute ago, that those products are seeing inflows in certain areas, especially with large institutional clients. Some of those wins are going to show up in our fourth quarter, and we mentioned that. So the attractiveness of these products are very much apparent in even our near term pipeline. Our largest manager of course of these types of strategies is AQR, and I'd like to just maybe address that more broadly. As I did last quarter, and I will say it again, and probably have to say it again in future quarters, AQR is very much a highly diversified business with 180 billion in AUM. Just to remind everyone that we made that initial investment with the business with 12 billion, and AQR has grown and diversified its business across several different distinctive business lines, including long only quantitative equities, systematic fixed income, absolute returns and total return alternative strategies. And within each business line, they have multiple products that address a range of client needs and risk tolerances. Growing from 12 billion when we made the investment, to where we are today was not a straight line, as many of you know, and a number of you have the history here. We’ve had a number of other periods of softness that only to come back stronger after that period of softness. We continue to believe in their ability to generate excellent long-term investment returns, given their proven culture and process, the strength of their leadership team, and their multi-decade track record of business success.…

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with our question.

Thanks. Good morning. Just on the reallocation of resources, Jay, you walked through a number of things. It sounds like real estate consolidation, some compliance, things that you - services you can combine for your affiliates. But - and I think you said 20 million of capital that’s freed up from this I guess. Is this going into new investments in terms of the priorities? I just want to kind of walk through that again in terms of areas that you specifically have changed, and then what you - where you're kind of reallocating those resources or capital to?

Yes. Thanks, Dan. Good question. Let me just start by stepping back and tell you what we're trying to do here. On the call, we sort of flatly stated our strategy is to generate long-term value by investing in leading active managers, as you know, through a proven partnership approach, and then allocating our resources to our opportunity set, to the areas of highest growth and return. There are a couple of areas that follow from this. There’s a couple of points to follow from this. First, we're going to focus on our strengths and competitive position, which does include new investment. It’s our primary use of capital. Second, we're going to continue to build and position our business for growth, which really means delivering our scale to our affiliates, either through the service offering of strategy distribution capital and other resources, or more resources in new investments and other growth areas. So really what we're doing is pivoting using our resources, our talent base, our entrepreneurial culture and aligning that with growth opportunities, which could include growth opportunities for existing affiliates, growth opportunities in new affiliates. All of that said, in periods where we have excess capital, we’ll be disciplined in returning capital to shareholders. The one other thing I would say is, maybe just while we're on the point of capital, I might turn it to Tom and just talk a bit about our capital strategy.

Sure. So if I think about capital management overall for AMG, as you know, the diversification and unique structure of our partnership agreement, enables us to generate significant and predictable unencumbered free cash flow. And we have a lot of flexibility in how we allocate that capital as a result. As Jay talked about a couple of times, we continue to believe that the highest and best use of our capital over the long-term, is through new investments, where our unique model enables us to partner with affiliates with little or no integration cost or risk. These investments deliver immediate diversification and earnings accretion, and simultaneously enhance our organic growth profile, including adding immediately saleable products in areas of future client demand. We’ll also continue to return excess capital through share repurchases and dividends, as we've done in the past. And since 2017, we've reduced our diluted share count by more than 12%, in addition to paying out nearly 160 million in cumulative dividends. As I mentioned, we repurchased $110 million in shares in the third quarter, slightly ahead of the pace of the guidance we gave you in July. And I also noted that we expect to repurchase 100 million or more in shares in the fourth quarter, and that that amount could vary based on a variety of factors. As you know, we completed the BlueMountain transaction earlier this month, and received approximately 90 million in proceeds. And we have a lot of confidence in our business and our future growth trajectory. So we feel good about buying back our stock at current levels, and we'll continue to monitor deal activity, market conditions and leverage levels, as we execute on our capital plans going forward.

Thank you. Our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Please proceed with your question.

Good morning, and thanks for taking the question. Maybe just one more on M&A. can you provide us with an update, just on balance sheet capacity, just given some of the things that you guys have done over the past few years in deal activity hasn’t been as active? And I guess more on the debt side, I guess just particularly given your equity evaluations in the industry being a little bit more challenged. And then also just priorities on the asset management side versus the wealth management side in terms of the types of transactions. Thanks.

So maybe I can start on the capacity side and then Jay can answer the second part of your question. So from a capacity perspective, as I just mentioned, our business generates a substantial amount of unencumbered free cash flow. So first and foremost, we have that as a resource as we're looking at new investment opportunities, and obviously looking to fund out of free cash flow. In addition, as you mentioned, we have taken actions over the course of the past several quarters and really over time, to optimize the shape of our balance sheet. We are an A rated company. We have $1.25 billion in revolver capacity, as well as in aftermarket ability to issue stock for transactions as well. So from a flexibility perspective, we have a tremendous amount of flexibility financially to be able to execute against the opportunities that we see in front of us.

Yes. the other part of your question, and I appreciate you asking another new investment question, because I do want to talk a bit about pricing in the market and then a bit more color on the types of businesses that could fill in from the - my prior answer. So just on pricing, and I think everyone knows this about our model is, we partner with affiliates, and we are only purchasing a portion of the equity at the time of the initial transaction, which really takes some of the weight off of pricing over longer, because over periods of time, the equity that is retained is expected to be worth more than the equity that we initially purchased. We also try to find ways to structure transactions so that value really is a concept over time, and therefore the economics to AMG is consistent with an opportunity cost of capital that we see across our other opportunity set, including repurchasing our shares. So we really are investing in businesses through our partnership model, that cost of capital consistent or better, if you will, than our own repurchase of shares. As it relates to the types of transactions that we're looking at in our pipeline today, I would mention, similar to the growth opportunities we have in our business, we have a number of opportunities in the private market, the number of opportunities in fixed income alternatives. Those are businesses that are in our pipeline today, and we're moving them along. We also continue to look at emerging markets as an opportunity thematic, and ESG impact investing, again another growth area for us. And so we are seeing those types of opportunities again across the size range.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Horgen for any final comments.

Thank you all again for joining us this morning. And as you heard, through our unique business model, along with our ability to execute against our strategy, we are confident in our ability to generate long-term sustainable growth and create shareholder value over time. We look forward to speaking with you next quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Have a wonderful day.