Affiliated Managers : 11-11-22-AMG Q3'22 Transcript

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EDITED TRANSCRIPT

AMG.N - Q3 2022 Affiliated Managers Group Inc Earnings Call

EVENT DATE/TIME: NOVEMBER 07, 2022 / 1:30PM GMT

OVERVIEW:

AMG reported 3Q22 economic EPS of $4.21.

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NOVEMBER 07, 2022 / 1:30PM, AMG.N - Q3 2022 Affiliated Managers Group Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Jay C. Horgen Affiliated Managers Group, Inc. - President and Chief Executive Officer

Patricia Figueroa Affiliated Managers Group, Inc. - Head of IR

Thomas M. Wojcik Affiliated Managers Group, Inc. - Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brian Bertram Bedell Deutsche Bank AG, Research Division - Director in Equity Research

Craig William Siegenthaler BofA Securities, Research Division - MD and Head of the North American Asset Managers, Brokers & Exchanges Team Daniel Thomas Fannon Jefferies LLC, Research Division - Senior Equity Research Analyst

Michael C. Brown Keefe, Bruyette, & Woods, Inc., Research Division - MD

Patrick Davitt Bernstein Autonomous LLP - Partner, United States Asset Managers

William Raymond Katz Crédit Suisse AG, Research Division - MD

P R E S E N T A T I O N

Operator

Greetings, and welcome to the AMG Third Quarter 2022 Earnings Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Patricia Figueroa, Head of Investor Relations for AMG. Thank you. You may begin.

Patricia Figueroa - Affiliated Managers Group, Inc. - Head of IR

Good morning, and thank you for joining us today to discuss AMG's results for the third quarter of 2022. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our actual results materially, and AMG assumes no obligation to update these statements. A replay of today's call will be available on the Investor Relations section of our website along with a copy of our earnings release and a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call. In addition, we posted an updated investor presentation to our website this morning and encourage investors to consult our site regularly for updated information.

With us today 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'll turn the call over to Jay.

Jay C. Horgen - Affiliated Managers Group, Inc. - President and Chief Executive Officer

Thanks, Patricia, and good morning, everyone. This has been a remarkable last 12 months. We have seen the combination of higher inflation, rising rates and geopolitical risks drive simultaneous declines in both equities and fixed income, resulting in unprecedented disruption in client portfolios. At the same time, it has also been a remarkable period for AMG, having delivered 5% year-over-year growth in Economic earnings per share in both the third quarter and the year-to-date period as the overall diversity and strong performance of our business, together with capital allocated to new investments and share repurchases, more than offset the impact of double-digit market declines.

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NOVEMBER 07, 2022 / 1:30PM, AMG.N - Q3 2022 Affiliated Managers Group Inc Earnings Call

And given our strong year-to-date performance, we expect earnings per share to grow approximately 10% in 2022 on top of the 37% earnings growth we delivered in 2021. Notably, our results in these two years have been generated in dramatically different markets. In 2021, world markets grew significantly against the backdrop of low rates and easing monetary policies, in stark contrast to the severe drawdown in 2022 amid tightening monetary policies and geopolitical risks.

AMG's strong performance across disparate market environments highlights the efficacy of our model and the diversification of our business. And as we'll discuss today, we believe AMG is uniquely positioned for success and continued growth in the new environment.

Our business profile is intentional and unique. We have strategically evolved AMG over the past decade by deliberately investing in a diversified group of leading independent managers across a broad array of asset classes. Our high-qualitypartner-owned firms have collectively provided us even greater ballast against the changing environment by strengthening AMG's overall earnings power and stability, enabling us to participate in upward trending markets and simultaneously providing us a buffer against volatility and dislocation. Our Affiliates have distinguished themselves through their investment performance, and enhanced their potential to generate organic growth. We believe there are several factors that will drive client behavior going forward, and that AMG, and our Affiliates are positioned to benefit from these trends.

First, portfolio construction is going to take center stage. After a decade of highly correlated increases in risk assets, this year, investors received a reminder, in many cases a painful one -- of the value of portfolio construction and diversification. As the lessons of the Global Financial Crisis waned over time and markets continued to rise, investor focus on the risk and return considerations that are so critical in building a balanced portfolio over market cycles slowly eroded. As a result, portfolios became far too heavily weighted toward growth at inflated valuations -- in both the public and private markets. Investors either chose to chase growth or unknowingly participated in that chase. Going forward, clients will need to construct portfolios to address the longer-term emerging risks and trends that this new market environment will bring.

Second, the diversification and capital protection provided by liquid alternatives will be critical in building more resilient portfolios. The excellent performance generated by AMG's Affiliates in the current environment provides ample evidence that investors who had previously chosen to underweight these strategies can no longer ignore the meaningful advantages of integrating them into their portfolios. The performance of liquid alternatives, particularly in times of market disruption, remind us of the foundational lessons of portfolio construction. And we strongly believe that these strategies and our Affiliates, including Systematica, Capula, Garda, Winton and AQR are all well positioned to benefit from future allocations to uncorrelated return streams.

Finally, we believe that thoughtful portfolio construction will require even greater valuation-sensitivity and risk awareness. The outlook for risk assets has shifted given changes in long-term assumptions on risk-free rates and terminal value. As investors recalibrate their portfolios, we expect a return to a more fundamental, value-sensitive approach to investing, and our Affiliates are well-positioned for future allocations given their focus on quality and value strategies.

We believe that taking an active approach will be critical to achieving clients' risk and return objectives across both public and private markets. Given their entrepreneurial independent models and alignment with clients, our Affiliates are well-positioned in volatile markets to deliver differentiated long-term returns. Critically, alpha generation is driven by skill, not scale. We believe that knowledge, experience and dynamic decision-making are going to be essential for navigating the new environment.

And while we are still in the early innings of this evolution, our Affiliates are positioned to benefit from the increasing need for active management in portfolios across both liquid and illiquid strategies.

As I said earlier, AMG's business model is uniquely advantaged by our ability to shape our business and scale our earnings power through investments in new and existing Affiliates. As we execute on our strategy of investing in areas of secular growth, our partnership approach continues to resonate with the highest-quality independent firms. In October, we made a minority investment in a new Affiliate, Peppertree Capital Management, a leading $4 billion communications infrastructure firm that is well-positioned to benefit from the ongoing tailwinds surrounding the demand for data. This new partnership enhances our participation in real assets and is our first Affiliate wholly dedicated to infrastructure, bringing further diversification to our business profile. The Peppertree team was attracted to AMG's partnership approach, which preserves their operational autonomy and investment independence while providing access to our strategic capabilities.

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NOVEMBER 07, 2022 / 1:30PM, AMG.N - Q3 2022 Affiliated Managers Group Inc Earnings Call

As we add more Affiliates in areas of secular growth, we will continue to evolve our business composition towards in-demand strategies, driving long-term organic and earnings growth. Going forward, we expect to see a number of high-quality investment opportunities emerge in the new environment. And with our strong capital position, further enhanced with the proceeds from the sale of our minority stake in Baring, we have increased flexibility to allocate capital across AMG's unique opportunity set to the areas of highest growth and return.

I want to underscore again our commitment to a disciplined capital allocation framework. Capital decisions are fundamental to our strategy, and we evaluate every opportunity on a risk-adjusted basis, factoring in the impact of the investment to our business, cash flows and franchise. Capital decisions require judgment and our allocation discipline is embedded across all elements of our process and culture.

While we believe that growth investments in new and existing Affiliates will drive long-term shareholder value, given our disciplined allocation framework, we have also returned significant capital to shareholders by retiring more than 25% of our shares over the last 3 years.

Finally, we are pleased with our results and our business momentum. Our positive forward outlook reflects our confidence in our strategy and our Affiliates' positioning in this new environment. Our results once again demonstrate that AMG and our high-quality Affiliates represent the best of active management in both public and private markets. As clients reallocate portfolios, we are confident that AMG's Affiliates, and our shareholders, will benefit from the growth and value creation that will follow.

And with that, I'll turn it over to Tom to review the details of the quarter.

Thomas M. Wojcik - Affiliated Managers Group, Inc. - Chief Financial Officer

Thank you, Jay, and good morning, everyone. The combination of excellent investment performance and our disciplined approach to capital allocation, enabled AMG to deliver 5% year-over-year growth in earnings per share in the third quarter. As you heard Jay discuss, this year's market environment has demonstrated to investors the importance of the principles of portfolio construction -- diversification, uncorrelated returns, and liquidity.

Clients are beginning to recalibrate portfolios, and we have intentionally built our business to capture the demand trends ahead of us. Our confidence in our business momentum is supported by outstanding Affiliate investment performance this year, most notably in liquid alternative strategies, resulting in our strong outlook for full year 2022 earnings growth.

That earnings growth, aided by strong performance fee earnings, contributes significantly to cash flow generation, and combined with the proceeds from the Baring transaction, further enhances the capital we can deploy toward long-term growth opportunities.

We took the first step in that deployment in October with our investment in Peppertree Capital Management, in line with our strategy to increase our participation in private markets and real assets.

In the current environment, our unique value proposition to shareholders is expressed through a number of key elements -- strong investment performance, consistent performance fee earnings, significant capital generation and balance sheet strength, and our ability to deploy capital towards secular growth areas and return capital to our shareholders -- collectively positioning AMG to continue compounding earnings over time.

Turning to our third quarter results. Economic earnings per share were $4.21, and grew 5% year-over-year as the impact of our new investment activity and share repurchases more than offset the decline in markets, foreign exchange rates and net flows. Net client cash outflows for the quarter were $8.8 billion, and excluding certain quantitative strategies, were $6.5 billion.

Turning to performance across our business and excluding certain quantitative strategies. Within our Alternatives businesses, we reported another strong quarter with $3 billion in net inflows, primarily driven by private markets fundraising at Pantheon, Comvest, Abacus and EIG. Our Affiliates continue to generate outstanding investment performance, and their excellent long-term track records across credit, real estate, secondaries and infrastructure continue to drive fundraising momentum, and we expect our newest Affiliate partnership with Peppertree to be additive to our overall illiquid alternatives growth profile going forward. Within our liquid alternative strategies, performance remains outstanding, and we are

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NOVEMBER 07, 2022 / 1:30PM, AMG.N - Q3 2022 Affiliated Managers Group Inc Earnings Call

confident that our diverse set of Affiliates and products in this area will benefit from increasing client demand as investors seek differentiated sources of return and diversification within their portfolios.

Turning to equities. Industry dynamics remain challenging. Within global equities, net outflows of $6.5 billion were an improvement compared to the second quarter, but above longer-term trend levels. Redemptions were concentrated in growth-oriented strategies, consistent with the broader industry. Despite these near-term challenges, we remain confident in the quality of our global equity managers and their ability to generate strong performance and flows across a full business cycle.

In U.S. equities, we saw net outflows of $1.3 billion in the quarter. Long-term performance in U.S. equities remains excellent, and our Affiliates, including Beutel, River Road, and Frontier, continue to enhance their positioning amid the strong relative performance of value equity strategies.

Finally, in multi-asset and fixed income strategies, we saw net outflows of $1.9 billion in the quarter, primarily driven by a single low-fee, cash management redemption.

Turning to financials. For the third quarter, Adjusted EBITDA of $220 million included $23 million of net performance fee earnings. Economic earnings per share of $4.21 grew 5% year-over-year in the quarter and in the year-to-date period, benefiting from new investment activity, excellent investment performance and share repurchases, which more than offset lower markets and a stronger dollar.

Now moving to fourth quarter guidance. We expect fourth quarter Adjusted EBITDA to be in the range of $330 million to $380 million, based on current AUM levels, reflecting our market blend, which was up 3% quarter-to-date as of Friday. This guidance is adjusted to reflect the removal of $10 million of Q4 EBITDA and approximately $30 billion of AUM following the close of the Baring transaction. The range does not include the impact of our latest new Affiliate investment, which will be reported on a one-quarter lag beginning in the second quarter of 2023, and is expected to add approximately 1- 2% to EBITDA on a full year basis.

Additionally, the guidance range includes strong net performance fee earnings of $150 million to $200 million, given the excellent performance in the large and diverse set of strategies that are expected to contribute in the quarter. As we highlighted on our last earnings call, performance fee earnings at AMG are a well-diversified and stable component of our earnings stream with asymmetric upside potential, which we are experiencing this year.

Many of these performance fee generative strategies serve as ballast to our long-only strategies with low, and in some cases, negative correlation to equity markets, ultimately making AMG's overall earnings power stronger and more resilient across market cycles.

Turning to specific modeling items. For the third quarter, our share of interest expense was $28 million, and we expect it to be $29 million in the fourth quarter.

Controlling interest depreciation was $2 million, and we expect a similar level for the fourth quarter.

Our share of reported amortization and impairments was $42 million for the third quarter. We expect it to be approximately $35 million in the fourth quarter.

Our effective GAAP and cash tax rates were 24% and 15%, respectively, for the third quarter, and we expect GAAP and cash tax rates to be at 25% and 20%, respectively, in the fourth quarter, reflecting higher income expectations.

Intangible-related deferred taxes were $13 million this quarter, and we expect $16 million in the fourth quarter.

Other economic items were negative $1 million in the quarter, which included the mark-to-market impact on GP and seed capital investments. In the fourth quarter, excluding any mark-to-market impact on GP and seed, we do not expect any contribution from other economic items.

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