AGF Management Limited

Welcome to the Q1 2022 AGF Management Limited Earnings Conference Call. My name is James, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the Q&A session, if you have a question, please press star 1 on your phone, and also note that this conference is being recorded. I'd now like to turn the call over to Adrienne Basaraba. Mr. Basaraba, you may begin.

Thank you, operator. Good morning, everyone. I'm Adrian Basarab, Senior Vice President and Chief Financial Officer of AGF Management Limited. Today, we'll be discussing the financial results for the first quarter of fiscal 2022. Slides supporting today's call and webcast can be found in the Investor Relations section of AGF.com. Also speaking on the call today will be Kevin McCready, Chief Executive Officer and Chief Investment Officer. For the question and answer period with investment analysts following the presentation, Judy Goldring, President and Head of Global Distributions. We'll also be available to address your questions. Turning to slide four, I'll provide the agenda for today's call. We will discuss highlights of Q1 2022, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position, and finally, close by outlining our focus for the remainder of 2022. After the prepared remarks, we'll be happy to take questions. With that, I'll turn the call over to Kevin.

Thank you, Adrian, and thank you everyone for joining us today. The first quarter of 2022 saw increased volatility and a downturn in the markets as the world grappled with the conflict between Russia and Ukraine, the rise in inflation, and ongoing concerns about the COVID-19 pandemic. With respect to the conflict in Ukraine, AGF joined industry and business community participants in early March in signing an open letter encouraging our government leaders to take additional actions in support of the people of Ukraine and against Russia. Prior to the conflict, AGF had approximately $24 million in or six-hundredths of 1% of our total AUM and fee-earning assets of Russian holdings under management. Through this initiative, we have divested 13 million of such holdings in early March and are committing to divesting the remaining holdings as exchanges allow for divestment. Despite the rise in market volatility, Q1 was a strong quarter for AJF. I'll begin with some highlights. AUM and fee-earning assets were $42 billion at the end of Q1, an increase of $2.7 billion compared to Q1 of 2021. Our mutual fund business reported net sales of $330 million in the quarter, marking the sixth consecutive quarter of mutual fund net sales. We reported diluted EPS of 18 cents, up 125 percent from the eight cents reported a year ago. In addition, four of our funds, the AGF Global Select Fund, AGF U.S. Small and Mid-Cap Fund, the AGF Global Convertible Bond Fund, and the AGFIQ Global Multi-Sector Bond ETF to earn fund-grade A-plus awards, which are given annually to investment funds and their managers who have shown consistent, outstanding, risk-adjusted performance throughout the year. Private alternatives are an integral part of our growth strategy, and in mid-February, we welcomed Ash Lawrence as Senior Vice President and Head of Alternatives to lead the growth of this business. Finally, the Board declared a 10 cents per share dividend for Q1 2022, for shareholders of record on April 8th, representing an 11 percent dividend increase. Starting on slide six, we will provide updates on our business performance. On this slide, we break down our total AUM and fee earning assets in the categories this flows in our MD&A and show comparisons to the prior year. Mutual fund AUM increased by 10 percent. I'll provide some color on our fund business in a moment. Institutional sub-advisory and ETF AUM decreased compared to prior year mainly due to one large client redemption that we disclosed in the previous quarters. Looking ahead we continue to see positive flows from two large US institutions who selected a number of our strategies on their SMA platforms. AUM from these relationships will continue to grow gradually over time. We also continue to see interest from institutional investors in a number of our strategies including our global and sustainable offerings, which bodes well for future sales. Our private client businesses continue to demonstrate consistent, steady growth, with AUM increasing 13% year over year. Our private alternatives AUM and fee-earning assets were $2.2 billion. It is our goal to reach $5 billion in AUM and fee-earning assets by the end of this year. However, timing of this target could slip into 2023 a bit, as we progress through our pipeline of opportunities in the alternative space and depending on timing of fund closes. Turning to slide seven, I will provide some detail on the mutual fund business. After a record year, the Canadian mutual fund industry net flows softened in early 2022, reporting net sales of $18 billion for the three months ending February 2022, down 55% year over year. Excluding net flows from institutional clients invested in mutual funds, our net sales were $330 million compared to $376 million in Q1 of last year, down only 12% year-over-year, outperforming the industry by 43 percentage points. AGF sales outpaced that of the industry. When comparing Q1 to prior year, gross sales for our retail mutual funds decreased by 4% to $989 million compared to a decrease of 8% and long-term funds for the industry. We saw strong flows into multiple categories, including global and U.S. equities and sustainable opportunities. AGF's outperforming the industry is attributable to the diversity of our distribution strategy. We are focused on building distribution channels that cater to our clients' wealth advisory segments and our strategic partners, including a focus on the mass affluent market. Before I return the call back to Adrian, I want to give a quick update on performance. AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category, with the first percentile being the best possible performance. We target an average percentile ranking versus peers of 50% over any one year and 40% over the three-year period. At the end of Q1, average percentile rankings were 56% over the past one year and 46% over the past three years. It is important to note that three-year performance of our top-selling funds have largely remained in the top quartile. With that, I will turn the call back over to Adrian.

Thank you, Kevin. Slide 8 reflects a summary of our financial results for the first quarter, the sequential quarter, and year-over-year comparisons. Even before commissions for the current quarter was $40 million. which is $4.5 million favorable to Q4 2021 and $13.2 million favorable compared to the prior year. When you look at management fee revenue, it was flat with Q4 and $11 million higher than Q1 2021, in line with mutual fund average assets. Private alternatives, EBITDA was $7.6 million this quarter, comparable to Q4 2021 and $4.4 million higher than Q1 2021. The increase compared to Q1 is driven by earnings on our invested capital. AGF participates as an investor in the units of underlying funds it manages, benefiting from valuation increases and distributions from the funds. Income from invested capital can be lumpy quarter to quarter, but on a long-term basis, we expect 8% to 10% returns from investing in private alternative LPs. Total revenue this quarter also included $3.9 million of interest related to the previously resolved transfer pricing matter. the amount is effectively a refund of some interest we paid. SG&A for the quarter was $49.3 million, which included $1.4 million of severance. Excluding severance, SG&A was $47.9 million, which is $2 million favorable to Q4 and essentially flat to the same time last year. Deleted EPS was $0.18 this quarter, compared to $0.19 in Q4 and $0.08 in Q1 of last year. EPS in the quarter was impacted by the momentum of our mutual fund business. Our mutual fund deferred sales charges, which are paid upfront to advisors, increased by 26% compared to Q4 2021, reducing EPS by 4 cents. It's important to note these are short-term strains driven by strong sales, which will result in higher profits and free cash flow over the long term. On the other hand, the $3.9 million of CRA interest relief lifted our EPS by 4 cents in the quarter. Compared to Q1 in the prior year, the EPS increase is driven by higher AUM levels and income from private alternatives business. Before I leave this slide, I want to reiterate our 2022 SG&A guidance of 198 million. As a reminder, our SG&A guidance does not include severance and costs related to acquisitions, should any materialize. And it assumes performance at its current trajectory. Significant improvements in sales or investment performance could result in higher variable compensation expenses. We are being thoughtful and disciplined in our approach to expenses while also investing for growth. Turning to slide 9, I'll walk through the yield on our business in terms of basis points. This slide shows our revenue, operating expenses, and EBITDA before commissions as a percentage of average AUM on the current quarter as well as the trailing 12-month view. Note that AUM and related results from private Alternatives, one-time items and other income are excluded. The revenue yield this quarter is 114 basis points, one basis point higher compared to the trailing 12 months. Trailer fees this quarter were 36 basis points, which is flat to the trailing 12 months. SG&A was 49 basis points, one basis point lower compared to the trailing period. This resulted in an EBITDA yield of 29 basis points, which is one basis point higher compared to the trailing 12 months. Turning to slide 10, I'll discuss free cash flow and capital uses. This slide represents the last five quarters of consolidated free cash flow on a trailing 12-month basis as shown by the orange bars on the chart. The black line represents the percentage of free cash flow paid out at the dividend. Our trailing 12-month free cash flow was $58 million, and our dividend payout ratio was 42%. In addition to dividend payments, we're also active on the NCIB. We're purchasing 1.4 million shares at a cost of $10 million. Our cash balance at the end of February was $44 million. We have $182 million in short and long-term investments and no debt. We also have a credit facility available, which provides credit to a maximum of $150 million. While we currently have no debt, we're comfortable increasing our net debt to EBITDA up to 1.5 times, should the right opportunities arise. Our remaining capital commitment to the private alternatives business is $71 million. Not included in this is our anticipated commitment of $50 million to an upcoming third fund managed by Instar. Capital commitments may be funded from access-free cash flow, but keep in mind, we'll also be further recycling of capital as monetizations occur, which will help to fund future commitments. Taking all that into account, we currently have access capital available. Our dividend-to-free cash flow ratio is 42% in the trailing 12 months, and in June 2022, deferred selling commissions will no longer be paid. which will further increase our free cash flow. Over the past 12 months, we paid $66.4 million in DSC payments. While the DSC ban is advantageous to agents' free cash flow in the short term, it will reverse over time. As our business and resulting free cash flow grows, our future capital allocation will be balanced and include returning capital to shareholders in the form of dividends and share buybacks, as well as investing for growth. This quarter, in recognition of our strong results for Buff's financial position, and confidence in our business, HHS Board of Directors declared an increase in the quarterly dividend from $0.09 to $0.10 per share. Redeploying our excess capital to generate recurring earnings is a key strategic priority. Over the past few months, we have made progress to begin building a pipeline of capital deployment opportunities. Executing on this priority will be a catalyst for e-bidder growth and value creation. Turning to slide 11, I'll turn it to Kevin to wrap up today's call.

Thanks, Adrian. Q1 was another strong quarter. We recorded our sixth consecutive quarter of positive mutual fund net flows and continue to outperform the industry on a year-over-year basis. Our strong business momentum translated into strong financial results. EBITDA before commissions was $40 million, 49% higher than the same time last year, and diluted EPS for the quarter was $0.18 per share, 125% higher than the same time last year. Finally, as Adrian mentioned, the board declared a $0.10 per share dividend for Q1 2022, representing an 11% increase. This year, we will be celebrating AGF's 65th anniversary. In 1957, AGF began as a single innovative idea to pool the funds of Canadian investors and provide greater access to the U.S. market. It has now become and grown to become a diversified global asset manager covering major markets and geographies. Our mission is to bring stability to the world of investing, and throughout the years, AJF, together with its clients, has navigated through various market environments. This month also marked the two-year anniversary of our transition to remote work. We have spent considerable time over the past year planning and looking ahead to a post-pandemic future of work that will embrace flexibility as part of AJF's new hybrid model. We believe hybrid work will better support our workforce with a seamless in-office and home working environment that supports work-life balance while encouraging greater collaboration to enable our best work as we continue to deliver for our clients, shareholders, and our employees. As we look forward to the remainder of the year, we are focused on building on the momentum of the past few years and creating value for our shareholders over the long term. Our strategic priorities are to deliver consistent and repeatable investment performance while maintaining our sales momentum and generating net inflows. We want to build a diversified private alternatives business while meeting our expense guidance and continue to invest in key areas of growth. At the same time, we want to enhance our corporate sustainability programs. With $44 million in cash, $182 million in short and long-term investments, and no debt, we have a strong balance sheet to strategically invest and redeploy excess capital to generate recurring earnings. Finally, I want to thank everyone on the AGF team for all their hard work. We will now take your questions.

Thank you. We can begin our question and answer session. If you have a question, please press star 1 on your phone. If you wish to be removed from the question queue, you may press the pound sign or the hash key. And if you are using a speaker phone, You may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 1 on your phone. Our first question is from Gary Ho of Desjardins Capital.

Thanks. Good morning. Kevin, now that Ash has joined the team for a few months now, any thoughts on what interests you in terms of which private health strategy has the best opportunities? And if you can comment on the pipeline that you guys have.

Yeah, thanks, Terry. Yeah, Ash joined us in February, so obviously it's probably week five. So too soon to walk through. I know he is working through how to refine the strategy that we have laid out, obviously, to be an alternative. So we're probably too preliminary to go through where we're heading there. But I'd say, obviously, some of the key tenets are, as we've talked before, all of our end clients, whether they be the institutional world, high net worth brokers, institutions, endowments, even just high net worth clients, are all seeing increased asset allocations to alternatives. So if you think about that, the core public markets that we serve are starting to shrink. So this is a pivot that I think is a long game that will play out over many years. So obviously things that will work to be able to be distributed to our client base are going to be front and center to that strategy. But obviously too soon to tell. In terms of pipeline, we are looking at a number of things. We remain pretty committed to our goal of getting to that $5 billion by the end of the year. As I said in my just prepared comments, that may slip into 2023 a bit, and that's just around timing of some closings of funds. But, you know, I think we're pacing it. And, frankly, what we want to get to is have Ash catch up to us with that strategy so we can get really moving as we get to kind of the middle part of the year, if you think about it.

Got it. Okay. My second question, Judy, you know, good to see the net flows trending well above the industry average here. Maybe two-part question. One, what is driving that in your view? Is it performance? Is it categories that you sell? Or is it strategic partnership that you have? And then second, how's the net flows trending so far post Q1 results here? Has the recent market volatility perhaps negatively impacted retail sentiment here?

Oh, thanks very much for the question. Just answering the second one first. Month to date for the month of March, we're seeing close to about 100 million net positive. So I think we can say confidently we've come off of our P season in a pretty strong position. As Kevin noted, we had at the end of the first quarter our sixth consecutive quarter of net positive sales. And with the month of March being net positive, we're really seeing 18 months of straight positive sales, which we're really, really pleased to see. I think, you know, the way we view it is, you know, people seem to think that these The reality is we've been working on this for a very long period of time. We do have very strong performance across a number of key categories. The discipline investing in our mission is something that we do live and breathe, and I think what we're seeing across 60% of our products, we are in net positive flows because we've been delivering the performance, but I think more importantly, as you'll see during the first quarter, protecting on the downside. So we're delivering the value proposition that we want our investors to experience. And then, you know, we have during the pandemic period really ramped up on our social media experience, the digital experience for our investors and our advisors, providing tools to the advisors for their practice, as well as delivering very enhanced thought leadership pieces that I think are very leverageable and very informative. So overall, that layered in with our client relationships, pretty solid, you know, period of time that we're seeing in the net positive month of March, as well as the last 18 months. So As we look forward, you know, I think we just have to pace across what the market is going to do. Generally speaking, you know, we're not seeing any degradation in the gross sales at this point. Of course, we have above industry average on the redemption rate, and so we're anticipating steady as she goes for the next couple of periods, again, subject to what happens in the market given such volatility.

Yeah, I would just say, Garrett, Kevin, I would just add on what Judy said, you know, We say above average on the redemption rate, meaning we're better, our redemption rate's coming in better than where the industry is by a number. Part of that, I think, is some of our mass affluence strategies, which are stickier than maybe others. But I'd say other things, obviously we have to keep an eye on where this market goes if we have a sustained downturn in here. that lasts for several quarters or something of that nature, that will probably dent the industry-level sales. We won't be immune to that, but we're pretty comfortable with where we are, as Judy said, with the positioning of both the products that people want and the performance.

Okay, great. Thanks for the color. And then just lastly, Kevin, while I have you, you've been active on your buyback. You had the dividend bump now, and you're staring down a significant bump in your free cash flow in a few months. When I think about the next 12 months, you know, how does the, you know, capital allocation look like here?

Yeah, you know, Gary, very consistent with what we've said over the last bunch of years, right? It's a three-pronged approach. One is dividend, obviously, and we feel very comfortable given the fact of where our business is, cash on our balance sheet, no debt, et cetera, as well as that, as you've mentioned, this increase in free cash flow. The second will be, obviously, buybacks. We have been very active, as you've noted, in the first quarter. Relative to last year, we were in blackout a lot because of some corporate activities. So you should see us to be active here in 2022. And then three, obviously, using that free cash flow bump to start to organically and inorganically start to grow the firm on strategy with, again, things that either in the alternative space or bolt-ons to our core capabilities. So we'll get that cash back to work, but again, that kind of the three-pronged approach.

Okay, great. That's it for me. Thank you.

Our next question from Nick Preby of CIBC.

Okay, good morning. I just wanted to start with a question on the pipeline of corporate development opportunities that you're exploring on the private alt side. From a high level, how do you approach valuing a platform like that where you might have, you know, a combination of unfunded capital commitments that are not yet generating an earning stream, as well as carried interest potential, both of which are difficult to value. What kind of multiples do you look at for those types of businesses, or how do you think about that in general?

Yeah, so we think about the alternative business as giving us a multi-pronged set of returns. One is when we find a group that we want to partner with, obviously there's some seed that we put into that fund or that vehicle to get it up and running, so we'll earn a return on that like an LP or as a cornerstone investor. Two, management fees that would accrue to that structure or that partner that we would share. And then three, obviously the carry interest component, hopefully over time. All of those have different connotations. Carry is lumpy, so it's hard, plus you can start to spin it off regularly to put a regular multiple on that. But the more things we do, you should start to see carry flow through over time in a more regular fashion. Management fees, obviously you can put a pretty straight multiple on that if they're growing. as you would the industry. And then I'd say a third where the industry gets sticky is on the return as an investor. And a lot of you guys look at that differently. But I think when you put it together, we are looking for a return set that is, in my mind, a 10% to 12%-ish kind of thinking when you put that whole stack together. And that's how I would model it.

Okay, that's helpful. And then maybe one for Adrian. I was wondering if you could refresh us on the background to the CRA interest refund you recognized in the quarter. And would you expect to receive anything further over the course of the next year or so on that front?

Thanks for the question. Yeah, this relates to a previous taxation matter, and we would not expect further refunds of interest going forward.

Okay, fair enough. And then the last one before I pass the line. There was about a $5.5 million mark-to-market gain on your long-term investments in the quarter in the context of a risk-off equity market environment. Can you just give us some color on what investments were marked up there in Q1?

Yeah, maybe I'll start, Nick, and hand it to Adrian. Yeah, those are marks that flow through to our Q1 that really come through some of our partners through Q4 before that volatility. These are long-term assets in many cases, so immune to the mark-to-market that you see daily within the public markets, so you're not going to see the same volatility flow through. And it's really a recognition of some of the recoveries that we've seen in some of those industries from the pandemic from early in 2020 that have not really been dented by this, if you think about it. So those are just the... I'd say the marks look pretty normal to us in a world that is recovering from the pandemic.

Understood. Okay, that's it for me. Thank you.

As a quick reminder, if you have a question, please press star 1 on your phone. And our next questioner is Graham Writing of TV Securities.

Hi, good morning. Could you just maybe give us a reminder of how you're thinking about the key pieces of moving from where you're at in the private alts AUM today versus your target of $5 billion? How much of that could be acquisition-related versus fundraising-related? And any color on what those funds would be?

Yeah, hey, Grant, it's Kevin. Let me start, and maybe I'll pass it over to Adrian or others. So, yeah, I think about it this way. There are a couple of ways we can do this. As we've done today, we've partnered with folks and built structures together where, again, we get all three pieces of that earning stream. That is a seed investor, that return of our capital. We get carry and we get management fees. Those would require us to put some capital in as a seed investor, probably not more. There are those things that we can truly take a majority stake in or a minority stake in would be a capital outlay in a classical M&A fashion. So with that would be some capital coming off our balance sheet, probably a more mature earning stream. So think companies that have done one or two funds and are starting to monetize things in terms of EBITDA, et cetera. So while you put capital out, you probably pull through management fees, even some carry potentially faster. So it will be a combination of partnering on structures where we get all three, maybe owning a piece where we get an accelerated view toward the EBITDA piece of it. But I think you have to think of a blend. We do not yet at this point, as I said in the first question, with Ash just being onboarded, have a clear view of that mix of either how that shakes out, a mix of what the product set looks like other than something that we should be able to distribute to our client base, or in our geography, which obviously we always get that question as well. So all of that is probably TBD over the coming quarters. I mean, Adrian, you've got a good third of the class? No?

And then with any of your existing relationships, is there any, do you have any visibility on, you know, the outlook for just organic fundraising potential?

Yeah, I mean, it's too soon to tell. Obviously, we have a couple of partners that are probably going to be in market with other funds over some period of time, which we participate in. You know, there are places that we like that are attractive right now to us where we have partners. So I think private credit where we have, recently been in market, we could see that accelerating fairly decently. So I'd say, yeah, that is a third piece. I just assumed that those existing partners will continue to work with. So apologies for neglecting to mention that in my first statement.

Okay, understood. the US SMA platforms that you're involved in? What are the strategies there that you have participating in those platforms and what sort of flows are you seeing to date?

Let me start and then Kevin can add in there. We are focused on a distribution strategy in the US which does look at the SMA opportunities. And so, for example, one platform we got onto last year, which is with some of our key products, which is in the U.S., and SMID product, sorry, down in the U.S., we have received about 200 million Canadian in a one-year time period, which is a pretty successful sort of launch. And as you know, these strategies are very effective because they sort of just drip in over time. Another platform, you know, again, starting just earlier this year, We're seeing about 13 to 15 million in the course of just a few months. And we continue to look at other platforms to get on to, again, across largely the sustainable mandate and our U.S. Select and our SMID product.

Yeah, and I think I mentioned about the U.S. Gram is that if you think about it, we have some mutual funds that are 40-act registered. We have some ETFs that are registered down there. But the SMA... platforms are really going to be the emerging platforms. There are a lot of the U.S. distribution points. You don't require some of the vehicle and structures that you do under, again, either an ETF or a fund. So the ability to drive into these platforms, I think, is pretty high for us.

Okay. The mass affluent market, you flagged that as an area of focus. is maybe just the sort of rationale behind that. Do you view that as a less crowded space, or why is it that cohort in particular that you're targeting?

Yeah, we have a strategy that's kind of a barbell, right? We know where the biggest books are getting bigger on the IROC side, so it's been a conscious strategy to take further share gains there, which we have. And again, as they get bigger, you want to play with those. And then on the other side of the barbell, if you look at Canada and the G7, Probably the fastest growing of the G7 population-wise. And if you look at that, it's going to be in the mass affluent space. And we have a partner there that is probably the fastest grower in that space. So I think we have the right outlook on it, which is a partner up with someone who touches that end client where we provide product to it. And if you think about that demographic growth, for us, it seems to be the right balance between those big books and having someone help us on that growing piece of the business by population density.

Okay, understood. And then my last one, if I could, just on the institutional side, were there any, it looked like flows were probably fairly neutral in the quarter, but just some confirmation on that, and then anything in the pipeline, either positive or negative.

Yeah, there's no pipeline redemptions, and we are generally, as you say, neutral over the quarter, and as I said, our focus for growth really is on the U.S. SMA opportunities, which we see is very opportunistic and We're well positioned on that platform.

It's funny, Graham, the way our business works, right? You tend to get redeemed after your performance recovers. A couple of strategies that we were having the issues with actually had incredibly strong performance over this run, probably coming out of the pandemic, right? As people moved away from that pedal to the middle growth and stuff. And so it feels stable, but it's always after the fact. But the performance in those strategies had caused some of those redemptions. has improved dramatically, as we would expect, given the type of strategy it is. It's more global. It has more valuation in its thought process, et cetera.

And what I can say is the RFP activity has really picked up, and so we've seen some of the highest number of RFPs that we're currently responding to, so looking positive.

Is that your global select and your sustainability strategies? Is that what you're referring to?

Largely, yeah. Certainly sustainability is definitely in high demand across the board worldwide. We're seeing it across every jurisdiction.

That's it for me. Thank you. Thanks, Graham.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place on June 22, 2022, and you may now disconnect.