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Artio Global Investors, Inc. (NYSE:ART)

Q4 2012 Earnings Call

February 14, 2013, 8:00 a.m. ET

Executives

Peter Sands – Head of Investor Relations

Tony Williams – CEO

Frank Harte – CFO

Rudolph-Riad Younces – Head of International Equity

Rachael Braverman – VP, Counsel

Matthew Chodos – VP Artio Global

Analysts

Adam Beatty – Bank of America/Merrill Lynch

Michael Kim – Sandler O’Neill

Bill [Inaudible] – Citigroup

Operator

Operator

Good morning and welcome to the Artio Global Investors fourth quarter and year-end 2012 earnings call. (Operator Instructions)

Our host for this call will be Tony Williams, Chief Executive Officer, Frank Harte, Chief Financial Officer, and Peter Sands, Head of Investor Relations. Now I'll turn the call over to Mr. Sands.

Peter Sands

Good morning everyone and thank you for joining us for today's conference call to review our fourth quarter and full-year results. Tony will review the business including performance and [inaudible] and Frank will take you through the details of our adjusted financial results. Following that, we will take your questions along with our corporate counsel, Rachel Braverman and our Head of Financial Planning and Analysis, Matthew Chodos.

Before I turn the call over to Tony, I would like to remind you that in light of the SEC's fair disclosure rules, management is limited in responding to inquires in a non-public forum. Therefore, we encourage you to ask all questions of a material nature on this public call.

Some of the information we present today may be forward-looking in nature, specifically regarding the proposed merger we announced this morning for which related cautionary notes can be found in the press release we issued at around 2:00 a.m. announcing the transaction. Other cautionary notes can be found in the risk factors section of our most recent annual report on form 10-K.

The forward-looking statements in this morning's remarks are subject to a number of important factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. Including but not limited to legal or regulatory proceedings or other matters that affect the timing or ability to complete the proposed merger as contemplated or affect the satisfaction of the conditions precedent to the consummation of the proposed merger. Investors and security holders are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this call.

I would also like to highlight that in connection with the proposed merger, we will be filing a proxy statement with the SEC. investors are advised to read the proxy statement when it becomes available because it will contain important information.

In addition to our reported GAAP results, we believe investors should review our non-GAAP adjusted results, a reconciliation of which is provided in the exhibit to today's earnings release. Our earnings release is available in the investor relations section of our website at artioglobal.com where an online rebroadcast of this conference call will be made available.

I would also like to point out that unless otherwise stated, we will be discussing performance metrics based on fast I mutual funds and NFP's. Performance metrics and Lipor ranking covering periods subsequent to the end of the fourth quarter are through January 31, 2013 unless otherwise stated.

Now I will turn the call over to Tony.

Tony Williams

Thank you, Peter, and good morning everyone.

As you will have seen in addition to our earnings release this morning, we announced that we have entered into an agreement with Aberdeen Asset Management pursuant to which Aberdeen will acquire Artio Global Investors for $2.75 cash per share. With the decline in our assets under management the last couple of years, we felt there would be significant benefit in partnering with an organization like Aberdeen, which has vast financial strength and a delivered footprint of analytical resources.

As mentioned in the press release, we are excited about the opportunity for our high grade and high yield teams, which will be added to Aberdeen's existing capabilities at the closing of the transaction. Our international equity and global equity teams will continue to manage those strategies until the merger is complete after which Aberdeen will take over management responsibilities subject to client consent.

Like us, Aberdeen is an investment centric organization. And we are confident that our clients will benefit from its global footprint of resources as well as the vast financial strength of the firm.

Subject to the satisfaction of customary conditions specified in the merger agreement, we expect the deal to close by the end of the second quarter or early in the third quarter of this year.

Gamma Holding AG, our former parent company and largest shareholder along with our chief investment officer, Richard Powell, and our head of international equity's ray of units all entered into merging agreements under which they have agreed to vote in favor of the transaction. In aggregate, these parties represent approximately 45% of Artio Global's total shares outstanding.

We will be filing an 8-K, which will provide a summary of key terms regarding the merger agreement as well as attaching it in its' entirety.

I would like to take a moment to thank our clients and shareholders, many of whom have been with us for some time. We believe this merger is in your best interest. And we're confident that the Aberdeen umbrella will be beneficial to you.

Turning back to our fourth quarter results, for 2012 fourth quarter, [inaudible] generated adjusted net income of $1.5 million or $0.02 per diluted share bringing our full year 2012 adjusted net income to $15 million or $0.25 per diluted share.

In line with the decline in earnings we experienced in 2012, we have suspended our quarterly dividend. Consequently, dividends for 2012 totaled $0.06 per share.

At the end of the fourth quarter, firm-wide assets under management totaled $14.3 billion, down 19% from the end of the third quarter driven by $3.8 billion of net outflows, which more than offset market depreciation. For the full year 2012, firm wide net outflows totaled $18.6 billion.

As it was announced earlier this week, at the end of January, assets under management totaled $14 billion.

Turning to the market backdrop, the final quarter of the year closed on a positive note with nearly all markets hosting gains despite the ongoing difficulties facing many European nations and concerns over the fiscal cliff in the U.S.

As for our performance in flows, if I look at the fourth quarter and the more recent month of January, we've had a very strong performance period. The fourth quarter was good pretty much across all our core strategies. And January has proved a great start for the year with all strategies except Global Equity placing in the top third of the group's performance over the month. With international equity one and two posting in the first and second percentile were [inaudible] respectively.

Looking at the 2012 fourth quarter in more detail, starting with our faced income strategies, which represented roughly two-thirds of our overall assets under management as of December 31, within high grade, our total return bond fund saw continued good performance beating its benchmark for the fourth quarter and ending the year over 200 basis points ahead. Although this resulted in third quarter Lipor rankings for performance over both periods, its long-term performance remains very competitive. Specifically at year-end, it ranked in the 29% as Lipor rankings on performances over both three and five years. And in the 8% and 11% respectively for performance over ten years since its inception.

For the fourth quarter, our high grade strategy experienced net outflows at $95 million partly offset by market appreciations. $50 million of these net outflows came from some advised medium term cash products as a result of organizational strains in the underlying fund. And this was [inaudible] business for us.

For completeness, the balance of the net outflows in this strategy came from the mutual fund vehicle while institutional vehicles experienced net inflows.

Our high yield strategy produced strong performance versus its [inaudible] peers ranking in the top quartile for performance during the fourth quarter and in the 34% for 2012. At year-end, its long-term peer group rankings were also very competitive with a top quartile Lipor ranking for performance over five years and a top [inaudible] ranking for performance since inception.

Furthermore, at the end of January, the I-class shares of this strategy reached their ten year anniversary achieving a top [inaudible] Lipor ranking for performance over that timeframe. It was also recently awarded an additional star by Morningstar bringing it to four stars, an important distinction within intermediated channels. All of which are strong positives in terms of its' competitive positioning and ability to attract and entertain assets going forward.

During the fourth quarter however, our high-yield strategy did see net outflows totaling $544 million primarily from retail vehicles, which was partly offset by market appreciation.

Turning to our international equity strategies, our international equity strategies posted a very strong return for the fourth quarter resulting in Lipor rankings in the 13% for those strategies over that period.

But in benchmark, both are internationally ranked between one and two fund ended the fourth quarter around 190 basis points ahead of benchmark bringing them much closer to benchmark for the full year.

And did I mention, this out performance continued in January, which is very encouraging. We feel good about the way these portfolios are behaving in the current market environment and believe the realignment of the team we undertook in the fall has had a positive impact.

Net outflows from our specialty equity strategies totaled $2.8 billion for the fourth quarter. And for the month of January, these strategies experienced reduced net outflows of around $400 million.

And with that, I will turn it over to Frank.

Frank Harte

Thanks, Tony, and good morning everyone.

For the three months ended December 31, 2012, we generated a loss on a GAAP basis of $1.5 million or $0.03 per diluted share. For the year ended December 31, 2012, we generated a loss on a GAAP basis of $47.5 million or $0.80 per diluted share.

Before getting into the details of our adjusted results, I thought it would be helpful to review the difference between our GAAP and non-GAAP adjusted results for the fourth quarter.

As mentioned during our third quarter conference call, we made organizational changes that resulted in a $4.9 million charge of which $700,000 was non-cash we recorded during the fourth quarter mainly within compensation expense. This charge is not included within our adjusted results.

The remainder of my discussion will be based primarily on our adjusted non-GAAP results, details of which including a reconciliation to the GAAP results are contained in exhibits three to five of our news release.

Adjusted net income for the 2012 fourth quarter was $1.5 million or $0.02 per diluted share as compared to $10 million or $0.17 per diluted share for the 2011 fourth quarter. The decrease was driven primarily by lower investment management fees partially offset by lower expenses.

On a sequential basis, adjusted net income and diluted earnings per share for the 2012 fourth quarter decreased 61% and 71% respectively primarily as a result of a decrease in revenues and an increase in the average diluted share count, which were partially offset by lower expenses.

On a full-year basis, adjusted net income totaled $15 million or $0.25 per diluted share as compared to $73.4 million or $1.23 per diluted share for 2011.

Turning to revenues, total revenues and other operating income of $20.8 million decreased 60% from the fourth quarter of 2011 driven primarily by a 60% decrease in investment management fees as average AUM declined 52% to $15.9 billion. And the average speed rate declined to 51 basis points over the same period.

On a sequential basis, total revenues and other operating income decreased 23% driven primarily by a 23% decrease in investment manager fees associated with a 17% decrease in average assets under management and a decline in the average speed rate.

The effective fee rate of 51 basis points for the 2012 fourth quarter declined as compared to the year ago and sequential quarter fee rate due to a greater proportion of fixed income assets within our overall average assets under management.

Looking at operating expenses, operating expenses decreased 22% sequentially and 41% as compared to the 2011 fourth quarter due to reduced expenses across all expense categories.

Turning to compensation, adjusted compensation costs decreased 27% sequentially as a result of lower salary and benefit costs related to lower headcount, reduced incentive compensation accruals, and lower costs associated with our long-term incentive program.

Adjusted compensation costs decreased 49% from the year ago quarter for the reasons just mentioned.

Our fourth quarter adjusted compensation ratio was 50.2% of revenues, a decrease from the sequential quarter ratio of 53.6% driven by a decrease in overall compensation cost partially offset by lower revenues.

On a full-year basis, adjusted compensation costs decreased 29% or approximately $26 million primarily due to lower incentive compensation costs as well as lower salaries and benefits reflecting the decline in headcount.

In addition to the impact of compensation, shareholder servicing and marketing expenses decreased 19% sequentially and 45% as compared to the 2011 fourth quarter due primarily to a decrease in average mutual fund assets and lower marketing expenses.

Adjusted general and administrative expenses declined 13% sequentially and 20% from the 2011 fourth quarter due to lower costs across most expense categories.

For the 2012 full year, shareholder servicing and marketing expenses were down 39%. While adjusted general and administrative expenses declined 15% both for the reasons just mentioned.

Moving to operating margin, our adjusted operating margin was 14% for the 2012 full year and 3% for the 2012 fourth quarter.

Moving for non-operating income, adjusted non-operating income for the current quarter primarily includes approximately a $1.7 million in mark to market gains from our sea capital investments and out global credit opportunities hedge fund and our merging markets local debt mutual fund. Adjusted non-operating income for the full year primarily includes $4.6 million in mark to market gains related to the sea capital investments just mentioned.

Our adjusted non-operating loss excludes the amount attributable to non-controlling interest which are shown gross on a GAAP basis. We believe this presentation to be more reflective of the economic results of these activities.

Moving to taxes, audio global's adjusted effective tax rate for the fourth quarter of 2012 was 35.2% as compared to 44.3% for the year ago quarter and minus 8.6% for the sequential quarter.

Out 2012 full-year adjusted effective tax rate was 33.7%, 8.4 percentage points lower than the 2011 full-year tax rate of 42.1% primarily due to the reversal of previously established [inaudible] 48 reserves and true-up adjustments upon the finalization of the 2011 tax return.

I will now briefly discuss our capital position and balance sheet, which is included this quarter as exhibit seven of our news release.

Approximately 2.2 million shares remain outstanding under our existing buy-back program as we did not repurchase any shares of our common stock during 2012. As of December 31, 2012, total stock holds equity amounted to $141 million or $2.35 per outstanding share of which $2.26 per share is cash excluding consolidate investment products and sea capital.

We continue to build cash in the business. And our quarter-end had a cash balance of $91 million, which reflects an increase of $12 million in the quarter. Cash excluding consolidate investment products plus sea capital totaled $136 million as of quarter end as compared to $127 million as of September 30.

And with that, I will turn the call back over to the operator and we'll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). The first question is from Adam Beatty from Bank of America/Merrill Lynch. Please go ahead.

Adam Beatty – Bank of America/Merrill Lynch

Thank you and good morning. Just a question on the fee rate, in terms of the decline sequentially. Was that pretty much entirely due to mix-shift, were there any other factors at work there? Thanks.

Frank Harte

Hey, Adam, it’s Frank. Entirely due to mix-shift.

Adam Beatty – Bank of America/Merrill Lynch

Okay, appreciate that. And then just moving to expense reductions through the quarter, if you could, could you give some color on kind of the timing of those, whether they were pretty much in place at the beginning of the quarter, or took place during the quarter, and maybe a little of outlook on that if you could?

Frank Harte

Yes, sure Adam. I would say that the bulk of the reductions that were made were made at the beginning of the quarter associated with the – some of the discussions we had during our third quarter call.

Adam Beatty – Bank of America/Merrill Lynch

Okay, that makes sense. That’s all I had today, thanks very much.

Operator

Thank you. And the next question is from Michael Kim from Sandler O’Neil. Please go ahead.

Michael Kim – Sandler O’Neil

Hi guys, good morning. First, can you maybe just talk about how the deal with Aberdeen came about, and maybe what were some of the options the board was considering in terms of other potential transactions versus remaining independent?

Tony Williams

Yes. Listen its Tony here. In accordance with fiduciary (NASDAQ:GT) obviously, we considered a number of alternatives. Ultimately we determined that a sale with Aberdeen would be the optimal outcome. There’s not much more to it than that.

Michael Kim – Sandler O’Neil

Okay. I guess one of the …

Tony Williams

Clearly more detail will be provided in the proxy, as to when it is published.

Michael Kim – Sandler O’Neil

Okay, fair enough. And then I guess related to that, one of the benefits of the deal for Aberdeen seems like it just allows them to expand their presence here in the U.S. But on the flipside, is there an opportunity for your fixed income strategies to maybe leverage their global footprint?

Tony Williams

Listen, part of the reason for the deal from our perspective, is we think there’s an enormous opportunity to grow the footprint of our fixed income products. They have already over $58 billion of investments from clients within the North and South American geographical base. They have over 233 staff. Clearly they have a global reach from a distribution perspective, that’s an opportunity for them and ultimately for our investment teams over time to expand the assets under management.

So, yes, you’re absolutely right Michael, that’s a key opportunity going forwards, from a value perspective. At the end of the day, our investment products, our fixed income (guys) will have exactly the same product and exactly the same format within Aberdeen. And Aberdeen has a very significant financial base, and a very extensive opportunity going forward, which is extremely positive for our [inaudible] management teams. And one which we expect them to be – we know they’re very happy with, and one in which we expect to develop over time.

Michael Kim – Sandler O’Neil

Okay. And then just along those lines. Does the deal suggest that maybe scale is becoming increasingly important in the fixed income business? So, was it somewhat of a competitive disadvantage for you guys being, you know, somewhat smaller than some of your competitors?

Tony Williams

Look, at the end of the day as you know, in any part of the asset management business, scale is important. But it’s (equity gold) fixed income. But clearly, fixed income being slightly lower margin than equities, it’s even more so. So yes, scale is key.

For our teams though, they will continue to provide exactly the same portfolio management approach, exactly the same investment process, the same teams going forward. And they will continue, one expects, with exactly the same strong track record of performance.

You know, the guys have delivered over the short-term, medium-term, and long-term very, very competitive performance. Within the Aberdeen framework, they will be delivering that with increased resources, increased analytical capability, and very importantly increased financial strength.

So, we do see this as a mechanism by which those teams and the client base can benefit from enhanced distribution, and enhanced assets over time. And yes, you know, the global footprints of Aberdeen is a significant benefit when one thinks about the portfolio management team.

Michael Kim – Sandler O’Neil

Okay. Thanks for taking my questions.

Operator

Thank you. The next question is from Bill (inaudible) from Citigroup. Please go ahead.

Bill [Inaudible] – Citigroup

Okay, thanks very much for taking my questions. What – am I’m sure it will be in the proxy, but I’m sort of curious. What kind of walkaway provisions does Aberdeen have? Is it baseline revenues or any one retention if you will? Or if any?

Rachel Braveman

This is Rachel. The transaction is subject to, you know, [inaudible] closing conditions that include U.S. Anti-Trust approval. You know, obviously approval of majority of our shareholders and approval of certain of the Artio Global Mutual Fund shareholders. Beyond that, you know, you’ll see additional detail in the 8-K we’ll be filing later today regarding the merger agreement.

Bill [Inaudible] – Citigroup

Okay. Second question is; I think, and I was reading things quickly this morning, so I apologize if this is somewhat inaccurate. But, I thought I read that Aberdeen was on the tape saying that your run rate revenues is $71 million and that would be down from the $82 million run rate in the fourth quarter. So, I’m just sort of curious given that’s a pretty hefty decline from the fourth quarter versus what you reported for January. When that we should surmise that the attrition has continued into early February at this point?

Frank Harte

Yeah, any of those frankly. I think the way Aberdeen calculated that number was basically the end of year AUM, you know times our fee rate that we disclosed as the average fee rate during the fourth quarter. So it’s a theoretical number, you know, based on a point in time and the most recent average fee rate.

Bill [Inaudible] – Citigroup

Okay. So, if I understood your question – your commentary Frank, the expenses are sort of a run rate for the full quarter. Is this a logical or reasonable run rate to be assuming on a go forward basis from a (model) perspective?

Frank Harte

No, I mean, I think – you know, I think Bill, as we’ve probably shown during the past 18 months, we’ve taken I think about $60 million out of our cost base. I think we continue to look at our cost base and rationalize where appropriate. There’s a number of initiatives that we have going on to reduce our expense base. Some of these things have a lag on it, but we’ll continue to proactively monitor our expense base and adjust as appropriate.

Bill [Inaudible] – Citigroup

Okay. And just a last one for me, and thanks for taking my questions. Just on the fixed income and institutional client base, just sort of curious on how much heads-up they had ahead of this transaction. But any initial reaction they’ve had to the transaction, the change of control, and what that might mean for the (NASDAQ:RP) pipeline, or just the assets at large?

Tony Williams

Hey Bill, this it’s Tony. They haven’t had any heads-up clearly, you know, it’s probably companies constrains sadly on what we’re able to say to our clients in advance of any announcement of a transaction. So, we’ll be talking to them during the day, and over the next few days to make sure that their very comfortable with it.

At the end of the day, the most important thing to understand is that our fixed income groups are moving across to Aberdeen with absolutely not a change whatsoever. So, our [inaudible] and high yield strategies will continue to be managed in exactly the same way as they are today. And the fixed income teams are very happy with the opportunity this presents to them.

So, I didn’t see any reason for any concern at all amongst our client base. In fact, I think it’s a significant positive, because Aberdeen clearly has a very, very strong financial base. They are investment centric in exactly the same way as we are. And I think our fixed income teams in particular will have a very happy time within the Aberdeen framework given the global reach that they have, the global resources that they have, the investment community that they have, and the access to analytical benefits that they have. So, I do think this is a very significant benefit for our client base overall. It’s part of the reason why we felt this was an appropriate transaction to [inaudible]

Bill [Inaudible] – Citigroup

Okay. All right, thank you for taking all my questions.

Operator

Ladies and gentlemen it appears we have no questions in the queue. (Operator Instructions) We have no more questions at this time. I will turn the call back over to Mr. Sands.

Peter Sands

Thank you everyone for joining us today and for your interest in Artio Global Investors’. If you have further questions, please contact Investor Relations at 212-297-3891, and all media inquiries should be directed to Neil Shapiro at Intermarket Communications on 212-754-5423. And that concludes todays call, you may how disconnect, thank you.

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