AGF Management Limited

Thank you for standing by, and welcome to the Q3 2024 AGF Management Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Tseng. You may begin.

Thank you, Operator, and good morning, everyone. I'm Ken Tsang, Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the third quarter of fiscal 2024. Slides supporting today's call and webcast can be found in the investor relations section of AGF.com. Also speaking on the call will be Kevin McCready, Chief Executive Officer and Chief Investment Officer. For the Q&A period following the presentation, Judy Goldring, President and Head of Global Distribution, and Ash Lawrence, head of AGF Capital Partners, will also be available to address questions. Slide 4 provides the agenda for today's call. After the prepared remarks, we will be happy to take questions. With that, I will now turn the call over to Kevin.

Thank you, Ken, and thank you, everyone, for joining us today. At the end of Q3, our AUM and fee-earning assets reached $49.7 billion, up 18% from a year ago. Adjusted diluted EPS was 37 cents in the quarter. In addition, we have $332 million in short and long-term investments on our balance sheet. Our financial position remains strong, which provides us with flexibility in our capital allocation strategy. Our investment performance remains strong. One-year performance was at the 51st percentile, while three years remained steady at the 43rd percentile. We saw positive retail mutual fund net sales of $19 million in the quarter. Finally, the board declared an 11.5% share of dividend for Q3 of 2024. Starting on slide six, we will provide an update 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. Our mutual fund AUM reached $28 billion, up 15% year over year, outpacing the industry, which increased by 13%. Our ETF and SMA AUM increased 60% year-over-year. I'll provide more color on our mutual fund business and ETF and SMA AUM in a moment. Segregated accounts and supervisory AUM decreased by 9% compared to the prior year, as previously disclosed, but the decline was driven mainly by a redemption from one institutional client who was shifting towards passive management. Our private wealth AUM increased by 11% compared to the prior year to $8.2 billion. and our AJF Capital Partners AUM and fee-earning assets were $4.9 billion at the end of the quarter, up $2.7 billion from the prior year due to the closing of the Kensington transaction. As a reminder, New Holland Capital's AUM of approximately $8 billion Canadian is not consolidated into AJF's total AUM and fee-earning assets at this time. Turning to slide seven, I'll provide some details on the mutual fund business. The Canadian mutual fund industry experienced net sales of approximately $3 billion in a quarter, ending nine consecutive quarters of net redemptions, totaling to $140 billion, roughly 7% of its AUM. In contrast, AGF's mutual fund business only had four quarters of net outflows, which resulted in flat retail mutual fund net sales over the equivalent nine quarters. This quarter, we reported retail mutual fund net sales of $19 million. This was driven by both an increase in gross sales and lower redemptions compared to the last quarter. Additionally, our net sales improvement was seen across all of our channels. As rates continue to come down, we expect that the industry and AGF will benefit from money moving back from GICs. Looking forward, we continue to take a long-term approach to increasing our penetration in high-growth distribution channels by diversifying our capabilities and offerings. I want to now give a quick update on our 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. Our one-year performance was in the 51st percentile. Our long-term fund performance remained solid and strengthened further in the quarter. At the end of Q3, our three-year performance was in the 43rd percentile, and approximately 60% of our strategies are outperforming our peers on a three- and five-year basis. Turning now to slide eight. Slide eight shows our ETF and SMA AUM. The AUM in this category has grown 51% on a compounded basis over the last two years. Included in this number are Canadian and US listed ETFs and SMA platforms globally. We have seen consistent growth and momentum in the SMA business both in the U.S., Canada, and in Asia, where a number of our strategies are available on leading SMA wealth management platforms. We have also recently seen an increase in demand for our market neutral anti-beta strategy, which provides a tactical hedge against the current volatile market. With that, I will turn the call over to Ken.

Thanks, Kevin. Slide 9 reflects a summary of our financial results with sequential quarter and year-over-year comparisons. The financial results in these periods are adjusted to exclude severance, corporate development, and non-cash acquisition-related expenses, which I will expand on in a moment. Net income attributable to equity owners for the quarter was $24.5 million, which is $0.9 million higher than Q2 and $1.6 million higher than the prior year. This is driven by a $2.8 million increase in adjusted net revenues from Q2, which I can speak to more on the next page. Adjusted SG&A decreased by $0.4 million from Q2 to Q3 2024, mainly due to the timing of certain expenses and lower government regulated employee benefits, which are typically higher in the first half of the year. Slide 10 provides a further breakdown of our net revenues. Within our traditional asset and wealth management businesses, net revenues for the quarter was $81.3 million, which is $3.7 million lower than Q2, and $4.6 million higher than the prior year. Our net management fees in Q2 were elevated by a performance fee and timing of certain fund costs. Excluding these items, our net management fees are flat compared to Q2. Within our AGF Capital Partners business, adjusted revenues was $18.5 million in the quarter, which is $6.5 million higher than Q2 and $11.2 million higher than the prior year. Recurring manager earnings this quarter was $9.3 million, up mainly because of the acquisition of Kensington. Revenues from carried interest and performance fees from AGF Capital Partners were $1.7 million this quarter, most of which represented net performance fees collected by Kensington. Revenues from long-term investments were $7.5 million this quarter, compared to $4.7 million in Q2 and $4.8 million in the prior year. On slide 11, we provided details on some adjustments that we've made to our EBITDA as a result of the Kensington acquisition. Certain accruals and fair value adjustments have no immediate cash impact and create noise to our EBITDA quarter to quarter. As a result, we have adjusted for these items, which should allow us to more easily compare quarterly results and provide more visibility to our underlying financials. These will be normal course adjustments over time. As you might recall, we closed our Kensington transaction in March. The transaction gave rise to various contingent consideration and put obligation liabilities. These liabilities are fair value each quarter with a difference flowing through to the P&L. We have also created a long-term incentive program for certain Kensington employees associated with performance fees to be received on prior legacy investments. This LTIP is a typical structure for compensation plans in the private equity world and aligns deal team members with achievements of performance. Typically, you will see firms paying out about 50% of carried interest or performance fees through these long-term incentive plans to employees. From an accounting perspective, there is a disconnect between the performance fee revenue and LTIP expense. LTIP expenses are accrued upfront based on all future anticipated revenues, while revenues are only recognized when received. Given that this is a new plan, most of these expenses are front loaded over the course of the next two years or so. Accordingly, during the quarter, we recorded a $5 million accrual for this LTIP expense. You should expect future revenues to be a multiple of the LTIP accrued. This quarter, we recorded performance fees from Kensington of $3.6 million. The cash expenses associated with this bonus is $2.2 million, which we have deducted from our adjusted net revenue and EBITDA. We believe that the matching of cash impacts of performance fees and associated cash LTIP and contingent consideration expenses provides a truer picture of our P&L. Turning to slide 12, I will walk through the yield on our business in terms of basis points. This slide shows our average AUM, our net management fees, adjusted SG&A, and EBITDA as basis points on our average AUM in the current quarter, previous quarter, and trailing 12 months. This view excludes AUM and related results from AGF Capital Partners, as well as DSC revenues, other income, severance, corporate development, and acquisition-related expenses. The Q3 2024 net management fee yield was 71 basis points, which is four basis points lower than the previous quarter and two basis points lower than the trailing 12 months. As mentioned earlier, the net management fee yield of 75 basis points in Q2 was elevated due to a performance fee we received and timing of certain fund costs. Excluding these, our Q2 net management fee yield would have been 72.5 basis points. On a trailing 12-month basis, the net management fee yield of 73 basis points is two basis points lower compared to the same time last year, which is in line with one to two basis points declines, which we've guided to in the past. Scaling our AUM across multiple products and lines of businesses will help offset the rate of decline. Adjusted SG&A as a percentage of AUM was 49 basis points this quarter, which is two basis points lower than the prior quarter and the trailing 12 months. This resulted in an EBITDA yield of 23 basis points in the quarter, which was one basis point lower than the previous quarter and one basis point higher than trailing 12 months. Turning to slide 13, I will discuss our free cash flows and capital use. This slide represents the last five quarters of consolidated free cash flows on a trailing 12-month basis as shown by the orange bars on the chart. The black line represents the percentage of free cash flows that was paid out as dividends. We've redefined free cash flows to account for the same adjustments as our adjusted EBITDA. Our trailing 12-month free cash flows was $94 million and our dividend paid as a percentage of free cash flows was 30%. In the period, we returned $41 million to shareholders in the form of dividends and share repurchases under our NCIB. During the quarter, we repurchased 300,000 shares under our NCIB for $2.5 million. We ended the quarter with net cash of $3 million, which consists of cash of $48 million and long-term debt of $45 million. We also have $332 million in short-term and long-term investments, And we have $105 million remaining on our credit facility, which provides credit to a maximum of $150 million. Our remaining capital committed to our existing Capital Partners LPs is about $20 million. Taking all of this into account, we have ample capital to deploy. Our future capital allocation will be balanced and includes returning capital to shareholders in the form of dividends and share buybacks, as well as investing in areas of growth. Redeploying our remaining excess capital to drive growth and generate recurring earnings remains a key strategic priority. Before I pass it back to Kevin, let me take a minute on slide 14 to look at our market valuation. AGF's current share price of about $8.49 and our enterprise value is approximately $550 million. Taking our $314 million of long-term investments into account, our remaining enterprise value is about $233 million. This implies a 2.2x EV to EBITDA multiple on our 2023 adjusted EBITDA excluding income from our long-term investments. Comparing this multiple to those of other traditional and alternative asset managers would suggest potential upside to our evaluation. I will now pass it back to Kevin to close out the presentation.

To sum up this third quarter, we continue to make great progress against a number of our strategic objectives. Our investment performance remains strong. Our sales momentum was strong, resulting in positive net flows. Our AUM and fee-earning assets continue to climb, reaching $49.7 billion. And we are delivering against our AJF Capital Partners strategy through our investments in Kensington and New Holland. We remain disciplined in our expenses while investing for growth. I want to thank everyone on the AJF team for all of their hard work. And we will now take the questions.

Thank you. If you have a question at this time, please press star 11 on your touchtone telephone. And one moment for questions. And our first question comes from Nick Preby of CIBC Capital Markets. Your line is open.

Okay, thanks. Just wanted to start with a question to clarify the way that performance fees are recognized and earned at Kensington. So there was a 3.6 million performance C recognized in Q3. That's a gross number. So a certain portion of that would be captured by employees, let's say half. And then I think the selling principles are also entitled to something like 10%. So we should think about 40% of the gross number flowing to Kensington, of which you own 51%. So when we put it all together after deducting the non-controlling interest, we should think about AGF shareholders capturing something like 20% of gross carry at Kensington. Is that correct, or am I far off the mark there?

Yeah, hi, Nick. It's Ken. I think your math and your logic make sense. You're absolutely right. Kensington this quarter did receive a $3.6 million performance fee, of which when you back out the contingent consideration and the LTIP, That translates to about $1.4 million. That goes to Kensington, of which AGF would be entitled to about half of that. So, yes, your math is right, and this is actually a good representation of future performance fees and our share of those performance fees.

Understood. Okay, that's good. And then full-year adjusted SG&A guidance of $227 million implies a bit of a step-down in adjusted SG&A in the fourth quarter, I think to something I calculated around $54 million. Is that realistic from a modeling standpoint, or are you seeing rising markets edge that number a little bit higher than initially forecast?

Yeah, hi, Nick. Maybe let me take a step back and kind of talk a little bit more holistically about our SG&A. You'll notice that our SG&A came in slightly lower from Q2, from $60 million to $59.6 million. On a year-over-year basis, if you excluded the acquisition of Kensington, our SGA increased, of which the most of that was actually driven by performance fees, as well as some increases related to sales and marketing and inflation. But the majority of that was driven by – sorry, not performance fee, but performance-based compensation, I should say – And that makes sense, right? If you look at where we're at year-to-date, our sales have been up about 18%. Our AUM has been up also by about 18%, and so that's driving a little bit of a higher level of performance-based compensation. We haven't adjusted guidance just because there is another quarter left, and obviously our compensation is sensitive to where the market's play and everything else. But yeah, hopefully that helps in terms of just explaining some of the movements on the SG&A front. I will note that if you kind of look at our year-to-date results, our revenues have been up and are actually significantly higher than where the SG&A has trended up as well.

Understood. Okay, that's great. And then last question, in your prepared remarks, I think You made a comment about long-term fund sales benefiting from the rotation out of GICs and other high-yielding products. Just looking at the IFIC data for the most recent month in August, money market funds had the largest outflow since 2021. Are you starting to see some evidence of that rotation happening today?

Yeah, this is Judy. Thanks, Nick. We are starting to see that rotation, particularly into the fixed income, and I think what we're expecting to see is the VOC and the other... as rates continue to get cut going forward, we would expect to see it move from the money market, which, as you pointed out, hit a high of about $55 billion in assets under management, or I think it was a 25% year-over-year increase. So it really is going to be a flow from the money market into fixed income and then likely see it move into the equities, and we'll be prepared to be there for that.

Hey, Kat, if I can just add to that. If you think about the Bank of Canada cutting three more times from here, if that's what the market probabilities are, so you're at four and a quarter today, you're probably looking, therefore, at a GSE rate at the end of the year that probably touches three or even a high twos, and that'll start to even drag further on pulling money out. And I'd say the other offset is segments that we've talked about before, maybe in the mass affluent channel, which have been impacted by these much higher rates and mortgage refinancing, that relief probably starts to help them there as well. So you probably see the redemption rate on the industry start to come down as well. So it's a couple of things that will happen with those lower GFC rates.

Yeah, okay, that's great color. I'll pass the line. Thank you.

Thank you. And our next question will be coming from the line of Qi Li of Desjardins. Your line is open.

Yep, thank you. It is Qi speaking for Gary. Just want to follow up on the performance fee of $3.6 million. Maybe this is for Ash. If you can provide a bit more color into this performance fee and what's your expectation for performance fee for the rest of the year?

Sure. Happy to. Thanks for the question. So the performance fee was related to a monetization of a direct investment that sat within a co-investment vehicle that Kensington manages. So Kensington earns performance fees or carried interest off its various vehicles. The methodology for calculating them differs somewhat between the vehicles, but the common thread being they're always tied to monetization of underlying investments and the distribution of those gains to investors. Now, saying that, obviously performance fees and carried interest can vary given that they are heavily tied to the transaction market. And as I'm sure Most people on this call are aware we've been in a subdued private equity market in terms of transaction volume, largely as a result of the interest rate environment for the last 18 to 24 months. We are starting to see signs of that thawing, but I would not say that it's normalized quite yet. Maybe in line with some of the comments on the previous question, as we do start to see rates come down a little more and we saw the big cut in the U.S., We would hope that that would help increase the transaction market, which would then flow through to shops like Kensington being able to monetize more assets and drive some of that performance fee and carried interest calculations. I think we've said previously on a historical basis, we expect that to be somewhere between 5 and 10 at current size, obviously, as the firm scales. That will grow as well. The one last thing I would say is while we've been in a tough environment, The Kensington team has managed over that high rate timeframe to transact on eight or nine of their investments and generated across the pool of them pretty healthy multiples and returns. So I think that's a testament to the team over there and what we saw when we made that acquisition. Obviously, a lot of those transactions would predate our closing, but again, I think being able to transact in that environment in the private equity world is a testament to that skill set.

Thank you. That's helpful. And maybe on a related note, just wondering on the M&A front, what are you seeing on the pipeline and perhaps your expectation going forward?

Yeah, so we continue. I think probably for the next few years, you'll hear me sort of open an answer to that question by saying we continue to canvas the market. We do have an active pipeline, and there are a number of opportunities that we've looked at in the last six months. The one thing I will say is we are refining our parameters of what is attractive to us as we move forward, and especially now that we have the first couple of deals under our belt. As an example, right now we are focused exclusively on the U.S., and that's largely to get a better breadth of opportunities that have a little more scale to them as we refine some of the parameters that we're looking at. That being said, and I think I mentioned this on a previous call post the Kensington and New Holland Capital transactions, these transactions do tend to have long deal cycles. We're generally dealing with the founders and partners of firms, and the time it takes to get to know each other, so to speak. So while we are active, we do expect deal cycles from sort of initial introduction to any potential closing to be anywhere from 8 to 14 months. So it does take us some time to actually get these done.

Got it. Thank you. And just my final one, maybe, Judy, following up on the Flo's comment, any comment on what you are seeing in the quarter to date?

Quarter to date, we're essentially flat.

Yeah, and one of the things we've talked about, and back to the next comments earlier, just to make sure you're all kind of, the industry is bottoming in here. So we're going to be seeing months of positive flow, months of negative flow. It's just kind of flattening around. But as rates come back down, as Judy said, we start to see that pick up. So I'm not surprised we're going to see some flat months and pick up months. But clearly, as we talked earlier in the year, this is probably when you start to see it come back

Thank you.

And as a reminder, if you would like to ask a question, please press star one one on your touch tone telephone. And our next question will be coming from Rene Sharma of BMO Capital Markets.

Your line is open. And again, Rene Sharma, your line is open.

Hello?

Yes, go ahead. Yes, go ahead.

Can you hear us? Sorry, I wasn't sure if you could hear me. Thank you for taking my question. So I guess I want to just go a little bit deeper into the revenue from long-term investments. I see that was up considerably recently. compared to the last quarter and the year before. Could you maybe provide some color onto what your outlook is on the fair value of some of those investments going forward?

Hi, Renee. It's Ash here. Happy to take that question. So it was higher on a quarter-over-quarter basis, but we generally tend to think, and we've said this on this call before, that over the course of a year, we're expecting anywhere between the 8% and 10% return range on that pool of long-term investments. The current quarter sort of falls right smack dab in the upper end of that zone. But again, we do expect that to fluctuate quarter to quarter depending on the performance of the underlying holdings and the broader economic backdrop. So it's not going to be a very consistent run rate, which I think if you look back historically, you'll see it does annualize out to a somewhat consistent number. Generally, we're seeing healthy gains within our infrastructure portfolio. And that is where most of the activity is today, which is not surprising given the interest and the environment we're in. Just as a point of reference, we also have long-term investments in the credit space. We tend not to see a lot of fair value increases there. The loan valuations tend to stay relatively consistent. Most of the return coming off that pool is in the form of distributions, which effectively is income generated off the underlying loan interest. Our last sector that we have in our long-term investments, the venture sector, has tended to be relatively flat this last quarter, which I think is good because we've seen that sector go through some challenges but has largely appeared to bottom out, and we're starting to see that stabilize a bit in our portfolio as well.

Okay, thank you for that. That's helpful. And I guess I know we spoke about this earlier on the call. What are you thinking? So just to be clear, the SG&E guidance remains the same for the year? Is that what you were implying?

Yeah, this is Kevin. Let me take that. So, yeah, what's happened is our core comp that we look at, even year over year from Q3 of last year, is flat. So the issue is really performance-based. Our gross sales are up 18%. That's going to drive higher sales commissions, as Ken said, our investment performance strength, and that's going to drive higher comp. And there's some components to the market as well in terms of some of our plans, as well as we're exceeding our business plans. So you put that together, it's our incentive-based compensation that is running a little bit hotter than where we are. Given we have one more quarter and I think a very volatile market in front of us, that could change that dynamics. So, again, while we're running a little hotter, it's all on the performance-based side, which we really don't control. So, again, we'll come back to Q4. We have an eye on it, but it's really about managing through what we don't know about this market. So, again, change it today one way or the other, I think, would be a guess.

Okay. Okay. Thank you very much.

And, again, if you have any questions, please press star 11 on your telephone. And I'm showing no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place Wednesday, January 22, 2025. You may now disconnect.