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spk06: Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2023 HEF Management Limited Earnings Conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference. Ms. Quinn, you may begin.
spk07: Thank you, Walter Rader, and good morning, everyone. I'm Jenny Quinn, Vice President and Interim Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the first quarter of fiscal 2023. 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 address questions. Turning to slide four, I'll provide the agenda for today's call. We will discuss highlights of Q1 2023, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position, and finally, followed by outlining our focus for the remainder of 2023. After the prepared remarks, we will be happy to take questions. With that, I will now turn the call over to Kevin.
spk05: Thank you, Jenny, and thank you, everyone, for joining us today. In the first quarter of 2023, markets experienced volatility. That volatility has continued into March and will likely remain for as long as there is uncertainty about the overall state of the economy and the banking system. Despite the volatility, we reported AUM and fee earning assets of $41.9 billion at the end of Q1, which was flat from Q1 of 2022. This reflects our strong business momentum, as the S&P 500 was down 9% over the same comparative period. Our mutual fund business reported net sales of $221 million in the quarter, marking the 10th consecutive quarter of positive mutual fund net sales, supporting our positive fund flows was our strong investment 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 targeted an average percentile ranking versus peers of 50% over any one-year period and 40% over the three years. At the end of Q1, our average percentile ranking was in the 36th percentile over the past one year and the 33rd percentile over the past three years, with 60% of our Series F funds having a four or five-star overall Morningstar rating. We are also pleased to report that at the end of Q1, 70% of our strategies on a one-year basis and 75% on a three-year basis outperformed our peers. In addition, four of our funds, AGF Global Select Fund, AGF American Growth Class, AGF Global Convertible Bond Fund, and the AGF Fixed Income Plus Fund earned the Fund Grade A-plus awards, which were given annually to investment funds and their managers who have shown consistent, outstanding, risk-adjusted performance throughout the year. Diluted EPS for the quarter was $0.26 per share. Finally, the Board declared an $0.11 per share dividend for Q1 of 2023 for shareholders of record on April 11th, representing a 10% dividend increase. This is the third consecutive year but we have increased our dividend. The increase is a recognition of our strong business momentum and capital position and is in line with our balanced capital allocation approach. 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 disclosed in our MD&A and show comparisons to the prior year. Mutual fund AUM increased 2% year over year, I'll provide some color on our mutual fund business in a moment. Institutional, sub-advisory, and ETF AUM decreased by 3% compared to the prior year, mainly due to the market. Our U.S. SMA relationships continue to generate positive flows as we continued our strategy to expand the U.S. SMA business. We're currently onboarding one of our strategies onto one of the largest wealth management platforms in the U.S. and expect AUM in this category to grow gradually over time. Liquid alternative products continue to attract interest from investors who are looking for a strategic or tactical hedge for their portfolios. Managed by our quantitative team in the US, our market neutral anti-beta strategy is designed to generate positive returns in volatile markets and preserve capital in a downturn. At the end of the quarter, AUM for this strategy has increased by 63% to $932 million over the past year. Finally, We continue to see interest from institutional investors across multiple strategies and jurisdictions, which bodes well for future sales. Our private wealth business continues to demonstrate resiliency, with AUM decreasing 2% year-over-year due to market declines. Our private capital AUM and fee-earning assets were $2.1 billion at the end of the quarter. It is our goal to grow and diversify our private markets business and to be one of Canada's emerging leaders in private markets investing. We have a pipeline of private capital opportunities that we are working through and will continue to take a measured approach in evaluating the opportunities to ensure an alignment to our strategic plan and to deliver shareholder value. Turning to slide seven, I will provide some details on the fund business. Mutual fund industry experienced net outflows for the fourth consecutive quarter, reporting net redemptions of approximately $8.5 billion. Despite the challenging industry backdrop, our mutual fund business remained in positive net inflows for the 10th consecutive quarter and recorded $221 million of net sales. AGF's outperformance to the industry is attributable to our strong investment performance, our strong brand, and the diversity of our sales channels and our team's continued efforts to build key relationships with our clients and partners. With that, I will turn the call back over to Jenny.
spk07: Thanks, Kevin. Slide 8 reflects summary of our financial results for the first quarter, with sequential quarter and year-over-year comparisons. EBITDA before commissions for the current quarter was $27.1 million, $3.1 million lower than Q4 2022, and $12.9 million lower than the prior year. As a reminder, Q1 2022 results included $3.9 million of interest income related to a previously resolved transfer pricing matter. New this quarter, we have presented management, advisory, and admin fees, net of trailing commissions and investment advisory fees. Net management fees are directly related to our AUM levels and is a more relevant key performance indicator to measure as our business continues to expand into various fee structures. This does not include revenues from private capital business, BST revenue, and other income, which are separately shown as other revenues on slide eight. Net management fees for the quarter were $73 million, which was in line with the increase in average mutual fund assets compared to Q4. Compared to Q1 of last year, net management fees decreased by $4 million due to lower mutual fund average assets and a lower net management fee rate. SG&A for the quarter was $53 million. Excluding severance, SG&A for the quarter was $52.8 million, which is $3.8 million higher than Q4 and 4.9 million higher than prior year. The increase against Q4 includes a $2 million timing impact of higher government-regulated employee benefit expenses, which are paid annually in the first quarter. SG&A in the quarter was also influenced by performance in stock-based compensation, reflecting strong investment performance with an average one-year percentile ranking improving from 41% at year-end to 36%. In addition, we saw a 39% increase in the AGF.E share price. The year-over-year expense increase also reflects investments into the business as we continue to execute against our strategy. AGF Private Capital contributed EBITDA of $4 million in the quarter, which is $4.5 million lower than Q4 and $3.6 million lower than Q1. EBITDA from Private Capital managers this quarter included $400,000 of carried interest revenues, recognizing strong performance in one of our long-term private capital investments managed by SAS. As a reminder, Q4 results included $1.2 million of carried interest revenue. EBITDA from private capital LP funds was $2.9 million, which is $4 million lower compared to both Q4 and Q1 of last year. AGS participates as an investor in the units of private capital LP funds, benefiting from valuation increases and distributions from the funds. which can be variable quarter to quarter and impacted by the timing of monetization. On a long-term basis, we expect to earn returns of 8 to 10% from investing in private capital LPs. Valued EPS was 26 cents this quarter compared to 32 cents in Q4 and 18 cents in Q1 of last year. The decrease against Q4 is mainly due to lower contributions from private capital LP funds, which can be lumpy. The increase against prior year was supported by the elimination of the deferred selling commission purchase option, which came into effect June 1, 2022. Turning to slide nine, I will walk you through the yield on our business in terms of basis points. This slide shows our net management fees, offered expenses, and EBITDA before commissions as a percentage of average AUM on the current quarter, as well as sequential quarter and trailing 12-month view. As a reminder, To provide a more normalized view of the yield we earn, we've excluded AUM and related results for the private capital business, as well as VST revenue, other income, severance, and corporate development costs. The Q1 2023 net management fee yield is 75 basis points, which is flat to prior quarter and one basis point more than the trailing 12 months. The decline versus the trailing 12 months is driven by the mix of underlying products and series. The net management fee rate is impacted by the percentage of mutual fund assets and the product and series mixed within those assets. Gradually, over seven years, the DSE band will increase the trailing commission rate as assets come off schedule and move to a front-end trailing commission rate. Scaling our AUM across various products and fee structures, specifically with our strategic partners, will help offset the rate decline impact on revenue. We will continue to monitor this. SG&A is a percentage of AUM, with 54 basis points this quarter, two basis points higher than Q4, and three basis points higher than the fairly 12 months, driven by a combination of increased performance compensation, additional investments into the business, and timing, as previously mentioned. EBITDA yields 21 basis points in the quarter, which is two basis points lower than Q4, due to the timing impact of government-regulated employee benefits mentioned previously. Adjusted for the timing impact of SG&A, EBITDA yield was in line with Q4. Turning to slide 10, I will 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 $76 million, and our dividend payout ratio was 35%. In the same period, we returned $65 million to shareholders. That includes dividends, sharing purchases under our NCIP, and the $24 million substantial issue rebate completed in November 2022. Since the monetization of our investment in S&W in the fall of 2020, we have returned $159 million to our shareholders. Our cash balance at the end of February was $24 million, and we have $243 million in short and long-term investments. We have 120 million remaining on our credit facility, which provides credit to a maximum of 150 million. We are comfortable increasing our net debt to EBITDA up to 1.5 times should the right opportunity arise. Our remaining capital commitment to our private capital business is 34 million. Not included in this is our anticipated commitment of 50 million U.S. dollars to an upcoming third fund managed by INSTAR. Capital commitments may be funded from excess free cash flow But keep in mind, there will also be further recycling of capital as monetizations occur, which will help to fund future commitments. Taking all of that into account, we currently have excess capital available. Our future capital allocation will be balanced and includes returning capital to shareholders in the form of dividends, share buybacks, as well as investing in areas of growth. Redeploying our excess capital to generate return earnings is a key strategic priority. We will have further updates on this in coming quarters. Turning to slide 11, I will turn it back over to Kevin to wrap up today's call.
spk05: Thanks, Jenny. In the first quarter, we continued to make progress against a number of our strategic objectives. Despite the market environment, our AUM and fee-earning assets remained resilient. We continued to outperform the industry and recorded the 10th consecutive quarter of positive mutual fund net flows. We also continued to deliver strong investment performance through our disciplined processes and focus on risk management. Finally, the board declared a quarterly dividend of 11 cents per share, representing an increase of 10%. As we continue to navigate through the uncertainties in the market, we remain focused on building on the momentum from the past few years, managing the risks and our results, and creating value for our shareholders over the long term. On our fourth quarter call, we communicated SG&A guidance for fiscal 2023 of $202 million. Our guidance does not include costs, related to corporate development and severance and assumed investment performance, the AGS stock price, and sales at a certain level. Due to the variable nature of performance and stock-based compensation, changes in any of these areas can result in a change to variable compensation expenses. At this point, we are holding expense guidance at $202 million for the year as we continue to monitor the trends. As a reminder, our strategic priorities are to continue to deliver consistent and repeatable investment performance, maintain our sales momentum and generate net inflows, while building a diversified private markets business. We'll meet our expense guidance and continue to invest in key growth areas and enhance our corporate sustainability programs. We have a strong balance sheet to strategically invest and redeploy excess capital to generate recurring earnings and return capital to shareholders. Finally, I want to thank everyone on the AGF team for all their hard work. We will now take your questions.
spk06: Thank you. Ladies and gentlemen, if you have a question at this time, please press the star 1-1 on your touch-tone telephone and wait for your name to be announced. One moment, please, for our questions. And our first question coming from the line of Gary Ho with Discharging Group. Your line is open.
spk04: Thanks, and good morning. Kevin, can you talk about the increase in seed capital to $224 million in this quarter versus $200 million at Q4? What strategy was that put into, and are there any other imminent capital calls? And then just on the fair value adjustment as well, it was a little bit light versus last year. It sounds like you're still expecting that 8% to 10% return on seed capital over the long term. or are there something else that's running through that line this year, just keeping the marks on those assets in a higher rate environment?
spk05: Yeah, thanks, Gary. Let me take that in order. Yeah, we did have two investments that were made on two calls that were capital calls, two different strategies, one on a new partnership with First Ascent Ventures, and then one of our capital calls on one of our infrastructure funds. So that was the reason you saw the increase in the alternative line. In terms of the marks, Q1 is always a little lumpy because we weighed upon some of our GPs to get their audited financials in. And so, as we've always said, this is a line on that will be lumpy from time to time. We still think $4 million to $5 million per quarter is kind of an average way to think of it for the year. So, think of it as $20 million per year through that one.
spk04: Okay. Got it. And then second question, just moving on to the higher SG&A this quarter. I know Q1 can be a bit lumpy. And Kevin, you mentioned several items that could move that SG&A line, including investment performance, HEF share price, et cetera. So what gives you confidence right now? I know it's still early in the year that you'll hit that $202 million full-year guidance.
spk05: A couple of things. One is it's early in the year. Two, obviously, the two big drivers that we can't control, obviously, are investment performance, which if it remains strong and continues to accelerate, that will have a variable. It could have a variable the other way if it softens a bit, too. At the same time, we are running probably the industry-leading sales right now, so if that continues to pace while we budget for it, if it comes in higher than that, that will have a But those are the two we can't control. I would say the rest of it right now looks to be tracking. So that's why I say we're okay with the guidance of rapid. And Jenny, you have any thoughts on it?
spk07: No, just to say in the quarter, in the first quarter, too, there was some seasonality. So you can't take that 202 and just divide it by four, which I know you're aware of, Gary. So we saw about $2 million of that higher increase in Q1 related to the CDP and EI payments that we make in the first quarter.
spk04: Okay, got it. And then maybe just last one, I'm not sure if Judy's on the line, but are you able to quantify the net flow so far in March? And then as well, maybe for Kevin, in terms of the retail side, gross sales, where are you seeing clients funneling cash into? And given the noise over the past few weeks, have you seen clients kind of sit on the sidelines a little bit more?
spk01: Yeah, thanks, Gary. I mean, I'm going to take this opportunity to emphasize we did hit our 10th consecutive quarter of net positive sales. And as you pointed out, In your report, net sales of 221 for the quarter, that is really one of a handful of firms on a net positive basis for the quarter. And we're really, as Kevin said, really proud of the team and how they're performing in that regard. When we look as well, I think it's also notable when you look at the RSC season, January was really soft. February came back, obviously. But the industry just for the season was down about 90%, and we were down about 35%. So again, we continue to outperform, which is something that we're proud of, but we're very much tracking. So month to date for the month of March, we remain in positive flows of about 45 million, and we're seeing that across all positive flows across all client segments as well. So again, pretty strong right now. We're feeling fairly optimistic, but I mean, you can talk about the markets, Kevin.
spk05: Yeah, Garrett, I'd echo what Judy said. I mean, it's a tough environment out there, and I think we continue to manage through it really well. The fact that all of our channels are in positive flow tells you it's not one area that we're seeing it. It's everywhere, which is the health of the business, if you will. In terms of investor sentiment, I was out. I saw probably a large number of advisors on multiple meetings out west last week. There is some nervousness about the market right now. Having said that, there's also a lot of cash that's come out and sitting on the side that's waiting to go back. So I think to the extent that last week's event around the banking sector in the U.S. maybe has pulled forward the idea of a recession. That means this market can move forward sooner. I think that sets up wealth or return to some of those flows later in the year. Obviously, if we were to be in a contracted period, which we don't see, some type of greater financial contagion where the banking sector weakened much further and was sustained that way, that would change the view, but that's not what we're seeing today. In terms of product area, I think you asked product as well. Where is this coming from? It's pretty broad-based. It's not one thing. It's really a pretty good breadth of things.
spk04: Okay. Got it. No, those are my questions. Thanks very much. Thank you.
spk06: Thank you. And our next question coming from the line of Jeff Kwan from RBC Capital. Your line is open.
spk02: Hi. Good morning. I need just to expand on Gary's question on the SG&A side. As you mentioned, obviously, share price, performance, and sales are a bit out of control and can influence your guidance. But maybe ask it in different ways. If the share price were to have stayed where it had closed yesterday, performance that you saw in Q1 stays the same through the rest of the year. And the net sales, when you just for the seasonality you have in Q1, but when you just for the bid, you kind of maintain the momentum through the end of the year. Presumably, that would have the SGA be higher than the 202. Is that a fair way to look at it? And if so, do you have even a ballpark of how much that would move things up?
spk05: Yeah, I'll take that, Jeff, to going backwards on the share price first. We've hedged a large chunk of that exposure. That's probably 20% of our shares or our share-based compensation, which is not hedged. which we're going to try to cover off some point this year. So that won't have a lot more variability from here. It was the sharp jump on that unhedged piece from what we ended last quarter of something in the sixes to the nines, right? That was a big material impact. So, you know, that I think is something you should not see repeated. In terms of the investment performance, if it continues to accelerate, there could be some variability there. The same with the sales. If they're tracking to what we just saw, then I think we're okay. But again, it's too soon to tell. But you're thinking about it the right way. If they're pacing right where they are, we should be roughly where we think it is on the 202. If they accelerate, obviously that would be a variable that goes against that. But too soon to make that call today. It's a good news problem, unfortunately, but it's one that we have to, you know, we can't control.
spk02: Okay. On the institutional side, just wondering if there's kind of any update on how the pipeline and the outlook for RFPs and whatnot look like today.
spk01: Yeah, thanks. I'll take that one. Jeff, you know, we are seeing some very strong RFP activity, particularly internationally in the Asian communities and countries as well as in the Middle East. We'll remain to see how those pan out. We do have some great activity in the U.S. in terms of getting on to a number of SMA and TAMP platforms. And so we've mentioned in the past we're on SmartX and BestNet, BestMark. We're looking to get on a few more. And as those continue to grow with a couple of key partner relationships as well, we do expect to see a real pickup in terms of activity momentum in the U.S. And so we're very optimistic around that business, and we just continue to, you know, push hard, particularly in the U.S.
spk05: Yeah, one of the things, Jeff, I would add to what Judy said is even our U.S. business, which, you know, despite what you read and how tough that environment's been on flows too, our U.S. business has actually been pretty strong in terms of flows. So, you know, again, it's not just the broader global institutional, but our U.S. business, which when you look at the headlines about some of the market issues, we haven't seen it impact our flows at this point.
spk02: Okay. And just last was more of a housekeeping thing. When you historically reported your retail net sales, you kind of had the total number and then the number backing out some of the larger institutional numbers. Was that not a factor in this quarter? In other words, the reported number was also the number when you adjust for those larger institutional transactions that can sometimes come into the retail numbers?
spk01: Yeah. Our reported number of 221 is actually adjusted for $6 million, one small redemption from an institutional client. So unadjusted, I guess, is 227.
spk00: Okay, great. Thank you.
spk06: Thank you. One moment, please, for our next question. And our next question coming from the line of Nick Pryor with CIBC. Your line is open.
spk00: Okay, thanks. The trailing 12-month investment performance continues to improve. When you do the attribution analysis on it, what are the biggest drivers of that performance when you break it down between asset allocation and security selection. Do you have a bias towards defensive positioning or is there anything that really stands out driving investment performance here?
spk05: Yeah, and if we obviously look at each strategy, it's very different, right? When we report that number, that's the entire complex. So think of something of 40 plus or close to 40 strategies in there. So all different flavor styles, you know, whether it be more value tilted, more growth tilted, So it's hard to answer from an attribution and security selection because you're lumping in 40 things. I would say when we look at it, it has been on our balance suite driven by the fact that we, last year, were defensive. So sitting on more cash, using some more liquid alternative hedges in there, using a real assets product in there, using ways to think about the bond market differently. Some products have private credit in there. So obviously on the balance, it was a defensive positioning, but also a mix of things. Individual strategies, obviously, we had a pretty good conscious on risk last year. So across the board, our discussion was about this aggressive rate hiking cycle. Some of our managers were able to manage the cyclicality and the shift from a way more growthy things to more cyclical things. So I think it's important. broad base, as I said, and it's not one particular strategy, so it's really hard to answer the attribution and security selection across 40 things, but I'd say it was probably positioning around being more defensive broadly across the suite of things.
spk00: Yeah, no, fair enough. And your AUM mix does skew towards US and global equity strategies. Just in that context, Are you able to describe, and I'm cognizant of the fact that you have a variety of different strategies and different mandates, but are you able to describe how you would be positioned relative to U.S. regional banks specifically? Is there anything notable there that may impact investment performance subsequent to quarter end?
spk05: Yeah, let me give you a quick update. We have no exposure to regional banks in any of our portfolios. We've had no exposure to CS or Credit Suisse in any of our portfolios. None of the Tier 1 AT1 bonds that went to zero or are in any of the European, none of those bonds across any of our global fixed income mandates. So whatever we just saw over the last couple of weeks will not impact any of the portfolios.
spk00: Okay, very good. I'll leave it there. Thank you.
spk06: Thank you. And again, as a reminder, if you have a question, please press star 11 on your touch-tone telephone. And our next question, coming from the lineup, Tom McKinnon from BMO Capital. Your line is open.
spk03: Yeah, thanks. Good morning. Question just with respect to private markets. Kevin, you certainly talk favorably of them. Wondering how we should be looking at the $5 billion alternatives program. target that you have, what the pipeline's like for that, and where we would be seeing seed capital go from the current $224 if you were to build out to that $5 billion. And then how do you look at balancing the increased volatility that could perhaps come with increasing that investment? I'll stop there. Thanks.
spk05: Yeah, thanks, Tom. A lot in that. Let me start with $5 billion. Yeah, we're still on pace for it. As I said, it's A couple of quarters ago, the market environment was going to impact timing, but we still feel pretty comfortable. It's a 2023 achievable. Market conditions have not gotten better in terms of, again, there is just a logjam of people. Again, buyers like us are looking at better valuations, so I would argue the environment's better as a buyer. Sellers are looking at the past valuations. They'll obviously meet in the middle. Our pipeline of things that we're looking at is very, very strong. And so I'd say to execute the strategy is probably in a better place than it's ever been. In terms of the marks, I think you have to look at the private markets like individual assets. So if you were in late stage growth equity type stuff that has gone through its third or fourth round, you'd be questioning whether that's been marked appropriately given they're about to go public. We don't have any exposure in that kind of a asset class or if you're in the buyout world and, again, thinking about leveraging up here to do something. Again, not where we're playing. Think about where our current mix of assets is in infrastructure assets, which tend to have some type of correlation to inflation. So whether it be port increases, surcharges related to inflation. So core infrastructure actually holds up pretty well. Think about private credit. Also where we have been a long-term player with A great partner there who has done great with underwriting. So it's never been a better time for private credit, so I don't worry about the marks there. Think about the fact that the banks are pulling back from lending, especially from what we just saw. You will see underwriters have the ability to create great terms. And probably the borrowers would have gone to the banks. The credits that we're going to be underwriting are probably going to be better. as an industry. So those are where we're playing today. So I don't worry about the mark issues as much as I would for some others who are playing in different asset classes right now. And so as we build it out, obviously, we're going to be opportunistic. You know, again, the long-term view that Ash has, and he's only been in the seat a year, is really to build out a platform of things that over time are appealing to advisors and our institutional clients. But from an exposure standpoint today, I'm not concerned about the current mark-to-market situation.
spk03: And in terms of where the C would go, where would the C capital, would that double as you built this out?
spk05: Yeah, we've talked about this a lot with you guys over the last couple of years. As we build that platform out, there'll be some things we'll be seeding. So I think it's still a number that is probably 250 to 275 over the next few years. But things are going to monetize and come back. So that number is probably even that feels on the high side. as a couple of our funds are toward the later parts of their lives. So you'll see monetizations and cash flows coming back. The faster we build it out, we may get to that in a temporary basis. But that's how you have to think. It won't certainly be double time on that front.
spk03: Okay. So thanks very much.
spk06: Thank you. And I'm not showing any further questions in queue at this time. Ladies and gentlemen, this concludes today's conference. Thank you for participating. AGF's next earnings call will take place on June 21, 2023. You may now disconnect.
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