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AGF Management Limited
1/22/2025
Good day. Thank you for standing by. And welcome to the fourth quarter 2024 AGF Management Limited Earnings Conference Call. At this time, all participants are on 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 11 on your telephone. As so much, this call 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 at AGF Management Limited. Today, we will be discussing the financial results for the fourth quarter and 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 today will be Kevin McCready, Chief Executive Officer and Chief Investment Officer. For the question and answer 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 four 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.
Kevin McCready Thank you, Ken. And thank you, everyone, for joining us today. 2024 was a mixed year with elevated interest rates and consumer prices, which dampened investor sentiment in the first half. This is followed by robust markets and positive flows in the second half as interest rates eased. Against this backdrop, AGF performed very well and ended the year on a very strong note. We concluded the year with approximately $54 billion in AUM and fee-earning assets, which is a 27% increase from the previous year. This growth reflects improvements across all lines of business. Our Canadian retail mutual fund business reported net sales of $14 million in the quarter, marking the second consecutive quarter of positive net sales. Supporting our positive mutual fund flows was our strong investment performance, with one-year performance at the 48th percentile and three-year performance at the 41st percentile. Our capital position remains strong. After completing two transactions earlier this year, We have net cash of $38 million and $235 million available on our credit facility. In addition, we have $341 million in short and long-term investments on our balance sheet. Our strong financial position provides us with the flexibility in our capital allocation strategy. Turning to our financial results, adjusted EBITDA for the year was $166 million, which is 26% higher than the prior year. We also reported adjusted diluted EPS of $0.45 for the quarter. On a full year basis, we reported adjusted diluted EPS of $1.67, which is a 25% increase compared to the prior year. Ken will provide more color on our financials in a moment. We also paid a quarterly dividend of $0.115 per share for the fourth quarter. 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 $31 billion, up 25% year-over-year, outpacing the industry increase of 20%. Our ETF and SMA AUM increased 73% year-over-year. I'll provide more color on our mutual fund business and ETFs and SMA AUM in a moment. Segregated accounts and subadvisory AUM also increased by 3% compared to the prior year. Our private wealth AUM increased by 17% compared to the prior year to $8.6 billion. And our AGF Capital Partners AUM and fee-earning assets were $4.9 billion at the end of the year, 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 AGF'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 $8 billion in the quarter, recording the second consecutive quarter of positive net sales. AGF's retail mutual fund business also achieved its second consecutive quarter of positive net sales, with $14 million reported this quarter. We are beginning to see the positive effects from interest rate reductions as investor confidence improves and, over time, hardship from elevated interest rates and inflation debates. We're also seeing positive effects from our penetration and higher growth distribution channels as we've diversified 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 48th percentile, and our three-year performance was in the 41st 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 43% on a compounded basis over the last two years. Included in this number are Canadian and U.S.-listed ETFs and SMA platforms globally. The demand for our market-neutral anti-beta ETF, which offers a strategic hedge against volatile markets, has remained strong, and we are seeing growing interest in the ETF series of mutual funds that were launched earlier in 2024. Further, we have seen consistent growth and momentum in the SMA business across the U.S., Canada, and Asia, where many of our strategies are available on leading SMA and wealth management platforms. Turning to slide nine, I'll provide an update on our capital partners business. A decade ago, we began our journey to establish AGF's footprint in alternative investments. In 2022, we formally established AGF Capital Partners, our multi-boutique alternatives business. During 2024, we made a strategic investment into New Holland Capital, which was announced in February of 2024. and acquired a 51% stake in Kensington Capital Partners in March of 2024. Today, our affiliate managers have over $13 billion of AUM and fee-earning assets spread across private equity, private credit, venture capital, and hedge funds. In January, we launched the AGF-NHC Tactical Alpha Fund as part of our next step in our partnership with New Holland Capital as we continue to build and grow our alternatives business and diversify our capabilities. To further support this growth, we also combined the Kensington and AGF Capital Partners Client Solutions teams into a dedicated alternative-focused distribution team as part of an integrated strategy to deliver a full range of alternative and private market solutions to retail, high net worth, and institutional clients in Canada. As we continue to look for acquisitions in the space, partnering firms will also benefit from AGF's scale, brand, and distribution network to drive further growth. With that, I will turn the call over to Ken.
Thanks, Kevin. Slide 10 reflects a summary of our financial results with sequential quarter and annual 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. In Q4, we saw a quarter-over-quarter increase in total adjusted net revenues driven by higher AUM. This was offset by higher SG&A due to higher performance-based compensation and timing of non-compensation expenses. For the full year, our non-compensation expenses was mostly in line with our guidance. Performance-based compensation is not fully determinable until the end of Q4 due to the design of certain compensation plans. As a result, we often see true-ups in the last quarter as plans are evaluated and payouts are finalized. Adjusted net income attributable to equity owners for the current quarter was $30 million, which is $5 million higher than Q3. For the full year of 2024, adjusted net income attributable to equity owners was $112 million, which is $21 million, or 24% higher than a prior year. This growth is driven by a combination of strong AUM growth, higher returns from our AGF Capital Partners business, and the acquisition of Kensington. Slide 11 provides a further breakdown of our net revenues. Within our traditional asset and wealth management businesses, net management fees were 84 million for the quarter. Net management fees for the full year were 318 million, which is 24 million, or 8% higher than prior year. The improvement in our net management fees were driven by increases in our AUM levels, which improved across all lines of business, as Kevin mentioned earlier. Within our AGF Capital Partners business, adjusted revenues was $18 million in the quarter. Adjusted revenues for the full year was $73 million, which is $40 million, or 119% higher than the prior year. Recurring manager earnings this quarter were $8 million. Full year recurring manager earnings were $26 million, up compared to the prior year, mainly because of the acquisition of Kensington. Revenues from long-term investments were $9 million this quarter. Full-year revenues were $44 million, which is $18 million higher than the prior year. As a reminder, AGF participates as an investor in certain of our partners' LP funds, benefiting from valuation increases and distributions from these funds. Our portfolio of long-term investments has performed very well in the current market environment. Fair value adjustments on investments can be lumpy, We remain conservative in our guidance and target annual returns of roughly 8 to 10 percent. On slide 12, we outline adjustments to our EBITDA. As you might recall, we've closed on our Kensington transaction in March. The transaction gives rise to various LTIP contingent consideration and put obligation liabilities. These liabilities are fair valued each quarter with a difference flowing through to the P&L. These accruals and the fair value adjustments have no immediate cash impact and create noise quarterly, which is why we've adjusted for these items to facilitate easier comparison of quarterly results and provide clearer visibility into our underlying financials. Adjusting for these items, along with severance and other one-time items, our adjusted EBITDA for Q4 is $40 million. Turning now to slide 13, I'll speak more to our SG&A and guidance for 2025. Adjusted SG&A in 2024 was $239 million, exceeding our guidance of $227 million. As shown on this slide, this increase is mostly due to performance-based compensation expenses. We believe that the level of performance-based compensation is appropriate, considering the significant improvements in business performance and the successful execution of our strategic priorities over the prior year. After we reset for performance-based compensation and adjust for an additional quarter of KCPL, we are guiding SG&A expenses to $245 million in 2025. This represents a roughly 3% year-over-year increase. Excluding the performance-based compensation reset, our SG&A is expected to be flat year-over-year. As a reminder, our SG&A guidance does not include costs related to acquisitions, and it assumes performance at the current trajectory. Turning to slide 14, I will walk through the yield on our business in terms of basis points. This slide shows our average AUM, 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 Q4 2024 net management fee yield was 72 basis points, which is one basis point higher than the previous quarter. Q3 2024 net management fee BIPs included additional fund expenses due to timing, normalizing for our previous quarter rates would have been 72 basis points. On a trailing 12-month basis, the net management fee yield of 73 basis points is one basis point lower compared to the same time last year, which is in line with a one to two basis points decline that we've guided to in the past. Adjusted SG&A as a percentage of AUM was 52 basis points this quarter, which is three basis points higher than the prior quarter and one basis point higher than the trailing 12 months. As previously mentioned, SG&A in this quarter was elevated due to higher performance-based compensation. This resulted in an EBITDA yield of 20 basis points in the quarter, which was three basis points lower than the prior quarter and two basis points lower than the trailing 12 months. Turning to slide 15, I will discuss our free cash flows and capital uses. 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. Our trailing 12-month free cash flow was $95 million, and our dividends paid as a percentage of free cash flows was 30%. In the same period, we returned $40 million to shareholders, consisting of $29 million in dividends and $11 million in share buybacks. During the quarter, we repurchased 162,000 shares under our NCIB for approximately $1 million. We ended the quarter with net cash of $38 million, which consists of cash of $53 million and long-term debt of $15 million. We also have $341 million in short-term and long-term investments and have $235 million remaining on our credit facility, which provides credit to a maximum of $250 million. 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. Over the upcoming quarters, we plan to invest capital in our new partners. As existing investments mature, we will recycle the capital, freeing up resources for these new opportunities. Before I pass it back to Kevin, let me take a minute on slide 16 to look at our market valuation. AGF's current market price is about $10.50, and our enterprise value is approximately $640 million. Taking our $340 million of short-term and long-term investments into account, our remaining enterprise value is about $300 million. This implies a 2.5 times EV to EBITDA multiple on our 2024 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 valuation. I will now pass it back to Kevin to close out the presentation.
Thanks, Ken. 2024 was a solid year. Our AUM and fee earning assets continued to climb to $54 billion, 27% higher than the previous year. During the year, we made two significant investments. The strategic investment in New Holland Capital, announced in February of 2024, and the acquisition of a 51% stake in Kensington Capital Partners in March of last year, all while maintaining a healthy balance sheet as we close the year with net cash of $38 million and $235 million remaining on our credit facility. A strong balance sheet will allow us to strategically invest and redeploy excess capital to generate recurring earnings. Strong business momentum translated into strong financial results with adjusted EBITDA reaching $166 million during the year, which is 26% higher compared to the prior year, and adjusted diluted EPS of $1.67, which is 25% higher than the prior year. As we move into 2025, we're committed to building on this momentum and remain focused on our four strategic priorities, which are to deliver consistent and repeatable investment performance, maintain our sales momentum and penetrate high growth distribution channels, continue to build a diversified private capital and alternatives business and meet our core expense guidance while continuing to invest in key growth areas. Finally, I want to thank everyone on the AJF team for all of their hard work. We will now take your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press bar 1-1 on your touch-tone telephone and wait for your name to be announced. One moment for our questions. First question coming from the line of Arya Somerzadeh with Jefferies. Your line is now open.
Hi, thank you. Could you maybe just provide us with some clarity on the lower tax rate in the quarter?
Yeah, hi, Beria. I can help answer that question. Yeah, so if you look at our Q4 results, we generated about $8.8 million in long-term investments. The bulk of that was related to fair value adjustments, which are typically taxed at half the effect The other reason was just a Q4 release of certain approvals that we had related to prior years, so that also had the effect of reducing our tax expense and the overall tax rate. If you look at our effective tax rate overall for the year, it was about 23.1%, which is a slight improvement from the prior year of about 23.8%.
Thank you. So when we're looking at it on a quarter-to-quarter basis, are these accruals something that typically happen in the fourth quarter, or is it something that's not predictable?
Yeah, I mean, so the fair value income, I think that obviously changes each quarter, right? So, for example, in Q3, the fair value income was predominantly driven by distributions, would have been taxed at a more With respect to the accruals, we had to wait until the year end just to ensure that, you know, we were comfortable releasing that reserve. And so this was more of a one-time thing that was more specific to this quarter than others.
Awesome. Thank you for the clarity. I think just from a modeling perspective for your purposes, you know, a 23.1% or so effective tax rate would be reasonable on a go-forward basis. Thanks for the call, Kev.
Thank you. Our next question, coming from the line of Graham Riding with City Securities. Your line is now open.
Good morning. Maybe just on the SGA front, what specifically drove the $11 million increase in the year that you flag as sort of related to performance increase, and then why do you think you can sort of bring that growth rate back down to sort of 3% in 2025. It looks like it was maybe closer to 8% in 2024, if you strip that. Ken, do you think?
Yeah, sure. I'll lead into that one as well. So bear in mind, Grant, we had a pretty phenomenal year this year, right? Just to give you a sense, in Q4 alone, we had about a 40-40. If you look at our three-year and five-year investment performance results, we ranked in the roughly 40th percentile relative to the overall industry. AUM, as you know, has increased significantly. That's also driven up our EBITDA, and as a result, bonus payments. So I think the confluence of those factors compensation as well. The 3% year-over-year increase, I think certain bonus elements, right? So we do expect effectively a higher watermark, if you will, for bonus thresholds. So those levels of bonuses wouldn't necessarily be as high in the forecast year. And as a consequence, what you're seeing year over year is really just an increase in really more of the more normal sort of non-comp-based expenses that we would expect from inflation. I will highlight one last factor, which is that embedded in our $245 million guidance for 2025 is an anticipated investment that we will be making really across our sales channel, and that's really to help us to drive market share gains across all of the products that we're seeing across AGF. Kevin, let me just add on to that.
This also in our guidance for 2025 includes an additional quarter of Kensington. Yeah.
And maybe, Grant, just maybe one last point on just the guidance that we provide for next year, that 245, of course, that's a full-year result. You know, the quarterly results could be a bit lumpy, right? And so just as a reminder, in Q1, as an example, we do tend to have higher SG&A as a result of just the upfronting of various, you know, government taxes, such as CPT and EI for employee disbursements.
In the corner, it looked like you had very strong growth from your ETF SMA AUM, but perhaps some lower growth from that institutional AUM category. Can you maybe just provide some color on what was driving the different growth rates in those areas?
Sure. This is Judy speaking. The SMA focus and the ETF focus is really what we've seen great success in the U.S. We've really pivoted our strategy there to work to get on a number of key dealer platforms. And through those wealth platforms, the SMAs are trending quite strongly, and that's where you see that kind of growth rate occurring. Even internationally, we did see growth through different platform relationships as well. That is trending those assets higher as well. The peer play institutional business, which I'll call the consultant-based business, is very stable, but we are really focusing in the U.S. on our SMA growth.
Okay, great. Any update on just flows in fiscal Q1 to date? Maybe just a few in the chat box and also in the other... Your other key areas?
Sure. Cisco, near to date, is we're sitting pretty flat, actually, going into what we anticipate to be a pretty strong RSP season. And, of course, we're about halfway through the quarter, so we're sitting flat right now.
Okay, that's it for me. Thank you.
Thank you. Our next question, coming from the line of... Tom McKinnon with BMO Capital. Your line is now open.
Yeah, thanks very much. Just a further question with respect to the SG&A guide, 245. I assume you probably have performance feeds in there. Would you be able to highlight how much they would be, or is that – Yeah, and maybe you can highlight how much you think they are, and then this performance reset for 2025, is that really just because you've raised the bar now, and so that if we wanted to put it on the apples-to-apples basis for 2025, that's why you've removed this $7 million? Thanks.
Yeah, hi, Tom. Yes, maybe I'll work backwards on your question there. Yes, the performance fees, we do reset it back for 2025. We don't reset for everything, right? So you can imagine for things like compensation related to higher AUM, we're expecting AUMs to stay at this level, if not increase, right? And so that's effectively something that... folks wouldn't get an adjustment for. We don't explicitly break out our SG&A for performance-based compensation relative to the other expenses. That just hasn't been our policy in the past.
Yeah, Tom, it's Kevin. Let me add to that. So we know right now where managers are sitting in terms of their individual performance. Again, heavily tilted to a three-year number and a five-year number. So we can budget for that. What we don't know is if they do much better than that in the coming year and add on to that, but it should be marginal from there. And, again, if you think about it, we go back to a budget for this year. We reset everything. So we start from zero for the firm relative to its year, 2.4 this year, that 49% jump, we'd all be happy if we did that again. My guess is we're going to be pretty strong, but not that strong. So I think we have some comfort that that number was really outsized because of a bunch of factors. We try to take as much of that into the base budgeting this year that we know, but there's always going to be the unknowns, but I can tell you, if we have that much success, it's We don't break it out in terms of our guides in terms of specific buckets, but assume that we have covered a fair amount of it in the 245 that we know for sure.
Great. And the 2024 guide of 227, if you would have had some performance fees in there, the 11 was... that you show in that chart on slide 13 was the degree to which those performance fees were bigger than you had anticipated. Is that the way to read that chart? Yeah, that's correct. Okay, good. And then just a follow-up question with respect to performance. I mean, down year over year on the both one and three year, what might be driving that? And then I seem to remember you used to have a goal of 50 for one year and 40 for... percentile for three years. Is that still the case? Why not increase those guides? Do you think increasing performance up something higher would be able to move those metrics? Do you think that might have more of a positive impact on flows going forward? Thanks.
Yeah, Tom, let me try to make sure I got that. But just to remind everybody, the first percentile is the best you can possibly be. The hundredth is the worst. When you have, you know, 40-odd relative strategies, some are going to be just out of favor, in favor. So I didn't give them one year. If you can do better than 50, it's pretty good. And over three and five, you can live in the second quartile. That sets you up really well for the VA four- and five-star funds. So we try to drive ourselves downwards toward those top two quartiles, which I would argue being in the 39th percentile in five years is very, very strong. Just compare that to, I don't know where Q4 was last year, but just even when we start Q2, something like that, that five-year number would have been 45, still pretty good. But we continue to improve both those metrics throughout the year. So, again, I look forward to your feedback.
Thanks so much for that. Appreciate it. Thanks.
Thank you. And our next question, coming from the lineup, Gary Ho with the Joplin Capital Markets. Your line is now open.
Hey, thanks. Sorry, I was having phone problems. Hopefully, this wasn't asked. But a few weeks ago, you announced the launch of the AGF Newfoundland Capital Tactical Alpha Fund in the Canadian market. Maybe can you elaborate on this initiative? What are you hearing from clients needing this product and any capital requirements to get this up and running? And I think, Ken, I think in your prepared remarks, you mentioned about recycling capital this year. Maybe expand on that as well.
So maybe I'll go first and then pass it off to Ken. So, yeah, we've been working over the year with both of our partners on various initiatives in terms of us collaborating with them on the various strategies that they run. So what we've launched with New Holland Capital here in Canada, the AGF-NHC Tactical Alpha Fund, is really a feeder fund to a strategy that they has been running for a number of years in the institutional world. That is a multi-strategy, multi-PM product that we feel right now, especially in the retail and high net worth channels here in Canada, and given what some of the prognosticators are saying the next little while might look like in the markets, i.e. uncertainty, volatile, that this type of product and an allocation to this type of product where you low-ball, non-correlated, and diversification will be in demand within advisors' books. It did just launch about a week ago, so a little early for us to know too much about the response. However, when we were doing our sort of market testing last year and some of the initial responses, there is a level of interest because of the certain characteristics that this would bring to a portfolio, especially as people are looking at equity markets and wondering if it's time to take a little bit of that off the table and put it in more of a still performance-generating but a little more risk mitigation strategy. Maybe just quickly, one other thing is we do continue to work on initiatives like this, whether it be programs As Kevin mentioned in his opening remarks, the integration of the business development team with Kensington to create this dedicated focus alternatives team, that's an ongoing and key piece of our strategy around capital partners and the firms that we partner with ultimately.
Maybe you have one or two cuts this year. Let's assume you get to three. These are geared to generate 4% to 5% above whatever the cash rate is with very, very, very little volatility. So I think in the world we're going, I think if we can generate an absolute return for a client that's in that 8% to 9% over time with a minimal drawdown, I think that will be an attractive product after two 25% kind of years in the market. And now a capital question. Ken, do you want to address this?
Yeah, sure. Gary, I mean, as you're aware, we've got $300 million-plus of long-term investments. Some of these investments are in sort of the later years. to have distributions that we would be able to redeploy this capital back into our strategic partners and affiliate managers as we look for long-term growth.
And specific to this one, Gary, we're shooting this with $25 million to show some alignment with the client base.
Okay, great. And then my last question, I know you showed in slide 16, stocks trading at two and a half turns, EBITDA, very depressed territory despite executing on your strategy. Are you, management team, the board, looking at other ways to service value, whether that's looking at your $340 million long-term, short-term investment book, buybacks, SIPs, et cetera? Any commentary on that?
Yes, Kevin, let me take that. I mean, we obviously agree with you. We think the stock's attractive. As you can see, we continue to buy back to our normal NCIB. We'll review our capital, as we always do, in terms of the dividend policy in the next quarter. But like you, we've always thought about this as a balanced approach, when sometimes the stock is more attractive, we'll do things, versus where we want to invest in growth. And so I think we'll take a very balanced approach. But, yeah, we're keenly aware of the valuation attractiveness as well.
Okay, great. Those are my questions. Thank you.
Thank you.
And again, as a reminder, if you'd like to ask a question, please press star 1-1.
We'll give it a moment for more questions.
And I see we have a question from Graham Whiting with Senior Securities.
Just one follow-up. Can you just remind us of your alternative strategies, what you're trying to go to market with in, I guess, more of the private wealth or the retail channel? Like you've obviously launched this new Holland Capital program. I believe you've got a private equity fund with Kensington. Can you just sort of remind us all of your alternative strategies that you think are a good fit for the Retail Wealth Channel?
Yeah, certainly it's Ash Care. So, yeah, you've got two of them there. The new fund that was launched with New Holland Capital would be one of the products. The other two are the Kensington's private equity strategy, which is the long-running evergreen private equity fund that they've been running for decades. over 10 years now. And then the third is our partnership with Staff Group on the private credit side, where we have open-ended evergreen private credit vehicle that does mid-market, lower mid-market direct lending here in Canada. partners over the next little while. We'll be looking at additional products and other sectors depending on the skill sets that join the family, so to speak.
Okay. Thank you very much.
Thank you. And again, if you'd like to ask a question, please press star 1-1 on your touch-tone telephone.
I'll give it a moment. Thank you. I'm not showing any further questions in the queue at this time.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place on April 8, 2025. You may now leave.