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spk05: Welcome to the Q2 2022 AGF Management Limited Earnings Conference Call. My name is Vanessa, and I will 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. To queue up with your question, you can press 0, then 1 on your touchtone phone. I will now turn the call over to Adrian Basaraba. You may begin.
spk00: Thank you, Operator. Good morning, everyone. I'm Adrian Basaraba, Senior Vice President and Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the second 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 distribution, will also be available to answer your questions. Turning to slide four, I'll provide an agenda for today's call. We'll discuss the highlights of Q2 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. And with that, I'll turn the call over to Kevin.
spk01: Thank you, Adrian, and thank you everyone for joining us today. Second quarter of 2022 saw continued market volatility and weakened investor sentiment. Despite the challenging backdrop, we had another solid quarter. I'll begin with some highlights. We reported AUM and fee earning assets of 40.3 billion at the end of Q2. Our mutual fund business reported net sales of 132 million, marking the seventh consecutive quarter of positive mutual fund net sales. We reported diluted EPS of $0.14, up $0.07 from a year ago. Investment performance in the quarter outperformed target. AJF 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 targeted an average percentile ranking versus peers of 50% over any one year and 40% over three years. At the end of Q2, the average percentile ranking was 41% over the past one year and 39% over the past three years. AJF's fund performance improved relative to peers across a broad range of categories and styles through our disciplined investment process that includes an embedded focus on risk. We ended the quarter with $36 million in cash, $189 million in short and long-term investments, and no debt. We remain well-positioned to weather the current market volatility and have capital available to strategically invest to generate recurring earnings and return capital to our shareholders. This quarter marked AGF's 65th anniversary. In honor of this milestone and to mark Earth Week, AGF announced a partnership with Trees for Life to plant trees for each employee at the Clairville Conservation Area in Brampton. Finally, the Board declared $0.10 per share dividend for Q2 2022. Starting on slide six, we'll provide updates on our business performance. On this slide, we break down our total AUM and fee earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. Mutual fund AUM increased by 3%. I'll provide more color on our mutual 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 year. During the quarter, we continue to expand our US SMA business and onboard several of our strategies on SmartX Advisory Solutions SMA platform. Our US SMA relationships continue to generate positive flows and AOM is expected to grow gradually over time. We 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 4% year-over-year. Our private alternatives AUM and fee-earning assets were $2.1 billion. It is our goal to reach $5 billion in AUM and fee-earning assets by the end of this year. However, our timing of this target could slip into 2023 as we take a measured approach when evaluating our pipeline of opportunities given market realities. Achievement of the target will also depend on timing of fund closes. Turning to slide 7, I'll provide some detail on the mutual fund business. Mutual fund industry, which after a slow start at the beginning of the year, turned into net redemptions of approximately $11 billion for the three months ended May of 2022, whereas our mutual fund business remained positive, reporting net sales of $132 million for the quarter. AGF outperforming the industry is attributable to our fund's performance and the diversity of our distribution strategy to meet the unique needs of our clients in different markets. Effective June 1st, sales intermutual funds on a deferred sales commission basis are no longer available. As I have mentioned in the past, our business is positioned for industry changes with a lineup of products that can accommodate a variety of fee arrangements and purchase options, such as ETFs, SMAs, and F-Series for fee-based accounts. We continue to work with our partners to support them through the transition as well as review our products to ensure they remain competitively positioned. With that, I'll turn the call back over to Adrian.
spk00: Thank you, Kevin. Slide 8 reflects a summary of our financial results for the second quarter with sequential quarter and year-over-year comparisons. Even before commissions for the current quarter was $35.4 million, which is $4.6 million lower than Q1 2022 and $7.2 million favorable compared to the prior year. The decline relative to Q1 is mainly due to the $3.9 million of interest recorded in Q1 related to the previously resolved transfer pricing matter. When we look at management fee revenue, it was $1.6 million lower than Q1 2022, which is in line with assets under management. Private alternatives EBITDA was $5.3 million $47.3 million lower than Q1 2022. AGF participates as an investor in the units of alternative LP funds, benefiting from valuation increases and distributions from the funds, which can vary. On a long-term basis, we expect 8% to 10% returns from investing in private alternative LPs. SG&A for the quarter was $47.3 million, which is essentially flat to prior year, and $0.8 million favorable to Q1 2022, excluding severance. Diluted EPS was $0.14 this quarter compared to $0.18 in Q1 and $0.07 in Q2 of last year. We experienced negative markets during the quarter, and the volatility has continued into June. Persistent market downturn negatively impacts our profitability, and cash flow as a significant portion of our revenue is driven by market-sensitive AUMs. In general, for every billion-dollar reduction in average AUMs, not including private alternatives, net revenue would decline by approximately $8 million annually. Keep in mind, 70% of our AUM is linked to equity market exposure. In light of this, I want to address our 2022 SG&A guidance of $198 million. Given the current market environment, you can expect our SG&A to be approximately $1 million lower per quarter compared to our previous guidance, which would bring us to $196 million of SG&A for fiscal 2022. As a reminder, our SG&A guidance does not include service and costs related to acquisitions should any materialize, and it assumes performance at its current trajectory. Significant changes in sales or investment performance could result in variability in compensation expenses. We will continue to monitor the environment, but will be thoughtful and disciplined with our approach to expenses. Turning to slide 9, I'll walk through the yield on our business in terms of basis points. The slide shows our revenue, operating expenses, and EBITDA before commissions as a percentage of average AUM on the current quarter, as well as a trailing 12-month view. Note that AUM and related results from private alternatives and other income are excluded. The EBITDA yield of 32 basis points is three basis points higher compared to the trailing 12 months. Revenue yield of 115 basis points is a one basis point improvement, and trailers were lower by one basis point at 35 basis points. 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 that was paid out as a dividend. Our trailing 12-month free cash flow was $60 million, and our dividend payout ratio was 43%. We aim to have a balanced approach to capital, including investing for growth and returning capital to shareholders. Over the last two years, we have returned $117 million to shareholders. That includes dividends, share purchases under our NCIV, and the $40 million substantial issuer bid completed in November 2020. Year to date, we've been active on the NCIB, repurchasing 2 million shares at a cost of 15 million. Investing for growth is an imperative, especially because we have excess capital. This is an attractive situation considering the current market disruption. Our cash balance at the end of May was 36 million. We have 189 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 dollars. While we 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 alternative business is $69 million. Not included in that figure is the $50 million committed to an upcoming third fund managed by INSTAR. Capital commitments may be funded from excess free cash flow, but keep in mind there's also going to be recycling of capital as monetizations occur. which will help us fund future commitments. Our excess capital position will be bolstered by the June 1st elimination of deferred selling commissions. This benefit reverses over time, but it will provide a temporary uplift in free cash flow. Over the past 12 months, we paid $66 million in deferred selling commissions. Reemploying this excess capital to generate recurring earnings is a key strategic priority. We would consider small acquisitions, tuck-ins, and partnerships to add or complement our suite of products, especially in the private alternative space. AGF's value proposition is bolstered by a strong history of success and product innovation, and we offer access to distribution channels, a top-notch operational and governance infrastructure. Outside of private alts, we would also consider opportunities that are strategically in line with our priorities. Over the past few months, we continued to evaluate our pipeline of capital deployment opportunities. However, in the current market environment, conditions to complete a transaction have become more challenging. We will have further updates on this in coming quarters. Turning to slide 11, I'll turn it over to Kevin to wrap up today's call. Thanks, Adrian.
spk01: Q2 was another strong quarter for us. We recorded the seventh consecutive quarter of positive mutual fund net flows and continue to opt to reform the industry. A strong business momentum translated into strong financial results. EBITDA before commissions was $35.4 million. 26% higher than the same time last year, and the diluted EPS for the quarter was 14 cents, 100% higher than the same time last year. Finally, in early June, we welcomed employees to our new head office at CIBC Square. The move marks the official start of our hybrid work approach, which is an important step forward as we evolve our business practices as well as our culture. With $36 million in cash, $189 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 and return capital to shareholders. We are currently experiencing a fair amount of market volatility and expect it to continue until it is clear what the impact of tighter monetary policy is on inflation and economic growth. We remain focused on managing the risks and our results. We will take appropriate measures to reduce our SG&A should the market, although unlikely, remain at this level for a sustained period. As we look forward to the remainder of the year, we are focused on building on the momentum from 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, maintain sales momentum and generate net inflows, build a diversified private alternatives business Meet our expense guidance while continuing to invest in key growth areas and enhance our corporate sustainability programs. Finally, I want to thank everyone on the AJF team for all of their hard work. We will now take your questions.
spk05: Thank you. We will now begin our question and answer session. If you have a question, please press 0, then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, with your question, please enter the cue by pressing zero then one on your touchtone phone. Please stand by while we assemble our cue. And we have our first question from Gary Ho with Desjardins.
spk02: Great, thanks. Good morning. Just first question, you know, just on the retail flows, pretty solid numbers just in light of the industry here. Can you provide a bit more color, kind of what type of funds you're seeing inflows into? And maybe a question for Judy as well. I'm not sure if you have the number handy, but how does the June retail number look? And maybe comments on the outlook here.
spk04: Great. Thank you, Gary. Thanks for the question. Yeah, we certainly were pleased with the sales over the last quarter as we reported with net sales of $132 million, and that marked the seventh quarter of net positive sales for us, so we were very pleased, particularly against the backdrop of the industry, which did move into net redemption numbers. But for the month of June, against the backdrop of the volatility and transition of some of our partners with respect to the DSC ban, We're really quite pleased as we've remained relatively flat for the month, standing at about months to date of about minus $18 million right now. I guess we attribute the flows really to very, very solid performance. We are seeing the product with our strongest inflows going into global equities, U.S. equities, along with Global Balanced and some of our sustainable funds as well. And so we think we're going to fare pretty well going into the next bit. Obviously, if there's a sustained downturn, we will not obviously be immune to that. But we don't have as great as an exposure to the fixed income. And we've seen that there's been obviously a dramatic downturn in that series of mandates. We only have about 25% exposure to fixed income. And so I think we should fare better than other firms that have a greater exposure. And I don't know, Kevin, if you want to add any more color to that.
spk01: Yeah, and Gary, to Judy's point, I think obviously if we're in this and it's deeper and longer, obviously the industry is going to be in a tougher place. We won't be immune to that, but we're holding in really well. I think June is probably for the industry is going to be pretty ugly as well. So relatively flat feels pretty good at this juncture. I'd say the other thing to Judy's comments around fixed flows, if you were a firm that was selling a lot of fixed income the last couple of years, we'd have probably the worst two quarters of fixed income and got to go back to the 90s, if not longer. And so I think when people get their statements, you're going to see further probably outflows in the industry as people move to GICs, which are now in the mid-threes. You're seeing that pick up pretty dramatically on bank balance sheets. So I guess depending upon what your product mix is, you're going to be more or less subject to that outflow because of the fixed situation, which, as Judy said, we're relatively less exposed than others.
spk02: Okay. And any color on the institutional side? Given the changes here, any rebalances, what are you hearing from?
spk04: Sure, let me speak to that. First of all, we're seeing good momentum among our SMA platforms. We have a strategy, particularly in the U.S., where we're expanding exposure to different platforms and putting some of our strategies through an SMA vehicle. And so we've seen, for North America, about $51 million in net positive on the SMA platforms, which has been very good, and we continue to see that as a growing opportunity. We are modestly net negative for the overall traditional pipeline for institutional, but we are seeing very strong activity in the RFPs, and as we've commented, our strong performance is really helping in the core areas of global equity, U.S. equity, global balance, and global sustainability.
spk02: Okay, perfect. And then, Kevin, just going back to the private alts discussion, noted in the MDNA, you kind of showed the private alts AUM right now at 5.2% of total. But when you look out, you know, three to five years out, you know, what would that look like? You know, would that be kind of 10% of total? Or how does the board or management look at the private alts opportunities? And then as a related question, maybe provide a bit of an update on the EIF Fund 3 fundraising going.
spk01: Hey, Gary. We don't do a five-year forecast that we share, obviously, with folks on any of our businesses. But safe to say, if you think about it, the industry work we've done on this alternatives will be the fastest-growing place, if you think about that. So if we do what we think we can do, it will change the mix of our businesses. And even with the other businesses growing, if this grows, much faster. So, you know, without giving you a five-year forecast, assume that the shift will be pretty dramatic over the next five to ten years. We still feel pretty good about, as I said, we've got a $5 billion target out there over to get to by the end of this year. And I've said it may slide a little bit as deal activity has just kind of dried up. Everyone is sitting back right now. And so the good news is I think valuations will get cheaper on things that we may want to invest in. It just may take us longer because of the volatility that's out there. And then your other question was around EIF-3. Yeah, we don't comment on specific funds, Gary, other than to say that our partners, and there are many of them, will have different fund closures over the course of the year. So that's part of how we anticipate getting up to that target by early next year.
spk02: Okay, maybe I'll just sneak one more in if I can. Adrian's going back to the expense guidance now, 1.6. What are you assuming in terms of growth sales in those numbers? Just wondering what other variables could move that higher or lower for the second half, and I'm not sure you can give us some outlook for 23.
spk00: Thanks, Gary. So when we think about our expense guidance, there's a few things that we sort of keep in mind. One is that we've experienced growth, and expense levels are an industry concern, but keep in mind we have outpaced the industry on growth. particularly on retail net sales. As we mentioned, we just recently reported our seventh quarter of positive net sales. And we've got very strong investment performance. So, you know, we feel like we're in growth mode. So we're going to continue to watch our expenses. And if there's a sustained downturn, we might have a different approach. But, you know, we have the luxury of not having to panic here because we've got a strong balance sheet and strong cash flow. So... But to answer your question specifically, Gary, the 196 basically assumes the run rate that we're experiencing now in net sales. It does not assume a significant market rebound or a significant downdraft from here. It excludes severance and it excludes corporate development expenses. So hopefully that gives you a bit more color.
spk02: Okay, great. That's it for me. Thank you.
spk05: Thank you. As a reminder, if you have a question, please enter the queue by pressing zero, then one. Our next question is from Jeff Kwan with RBC Capital Markets.
spk03: Hi, good morning. My first question was just on the DSC ban. Have you noticed that any sort of change in behavior in terms of advisors and whatnot, you know, their buying patterns or level of buying, obviously trying to isolate it from what's been going on in the markets?
spk04: Thanks, Jeff. I'll just start with that and maybe Kevin or Adrian want to add. Obviously, the ban took effect on June 1st. I think what we had been noticing is that patterns of trends among the advisors and various dealers that we partner with was adjusting over the last period of time. As transitions were occurring, we were working with our partners. I think choice is really what has... sort of taken the forefront. So we are making sure we have different variety of fee arrangements and purchase options on our products to assist with that transition. And so we didn't notice anything dramatic that occurred as a effect of June 1. And I think what is supportive of that is that we remained relatively flat in our sales month to date. So again, it's not necessarily a trend on three weeks of sales, but at a sort of minus 18 number for the month of June so far, we're feeling pretty pretty confident that there really wasn't a dramatic shift in behavior in the short run.
spk03: Okay. Adrian, I have a question, just going back to the SG&A guidance and on the, I guess, the sensitivity around sales activity. Are those compensation, is it driven by kind of what that level of absolute sales are? Is it a relative versus industry or some sort of mix?
spk00: Thanks, Jeff. On the compensation expenses, there is not a mechanism that will adjust it relative to competition. It's an absolute amount that we set at the beginning of the year. And to the extent that our sales folks make sales and get to certain levels, that will obviously increase or decrease the comp.
spk03: Okay. And just my last question was just you talked about the balance sheets and maybe you doing an acquisition possibly with the excess capital that you have. How is that environment right now? Are asking prices reasonable or do they still need to be adjusted given what's been going on in the market?
spk01: Hey, Jeff, it's Kevin. Yeah, I mean, as you can see in the public market space, there's not much getting done. Just take a look at just IPOs. That also falls through to private deals and other things right now. So I guess sellers still want multiples they saw a year ago. Buyers want today's multiples, so I think it's going to take a bit for that to get unlocked. But there's a lot of things that are just stuck out there right now. Having said that, I've been in this industry a long time. Firms with clean and strong balance sheets with strong cash flows, if they can take advantage of these kind of dislocations and opportunities, it really benefits you. So if anything, we feel that we're going to probably be more active when things do unclog a bit. But also we're going to take a disciplined approach. We've always said it's about the future. which is growth, but it's also about our dividend policy as well as buybacks. And you probably see us be a little bit more active on the latter, given where the share price is.
spk03: Okay, perfect. Thank you.
spk05: And thank you. We have no further questions in queue. I would like to thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. AGF's next earnings call will take place On September 28, 2022, you may now disconnect.
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