AGF Management Limited

Thank you for standing by, and welcome to the Q1 2025 AGF Management Limited Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll 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, Mr. Tseng. You may begin.

Thank you, Operator, and good morning, everyone. I'm Ken Tseng, Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results of the first quarter of fiscal 2025. 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 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. The first quarter of 2025 saw increased volatility as global markets grappled with the potential implications of trade wars and the highly uncertain macro backdrop. Despite the rise in market volatility, Q1 was a strong quarter for AJF. I'll begin with some highlights. AUM and fee earning assets were $53.8 billion at the end of Q1, up 20% from a year ago. Our retail and mutual fund business reported net sales of $342 million in the quarter. which is a significant improvement from Q4 and Q1 of last year and outpaces the growth of the Canadian mutual fund industry. Three of AGF investment funds, the AGF Global Select Fund, AGF American Growth Fund, and the AGF Fixed Income Plus Fund earned fund grade A plus awards, which are given annually to investment funds that have delivered consistent, outstanding, risk-adjusted performance throughout the year. Earlier in the year, we launched two new alternative products in the Canadian market. One with our AGF Capital Partners business, the AGF NHC Tactical Alpha Fund. This fund is an absolute return-oriented strategy that aims to generate attractive, risk-adjusted returns across market regimes while maintaining low beta to traditional asset classes. The second one with our AGF Investment business is the AGF Enhanced U.S. Income Plus Fund. This fund aims to provide long-term capital appreciation and generate a high level of consistent income by employing dynamic option strategies. Both products seek to provide lower volatility, which bodes well for the current market environment. We reported adjusted diluted EPS of 48 cents in the quarter. In addition, we have $403 million in short and long-term investments on our balance sheet, net debt of $52 million, with $161 million available on our credit facility. We have capital available and flexibility in our capital allocation strategy. Finally, the Board declared a 12.5 cent per share dividend for Q1 of 2025, representing a 9% dividend increase. This is the fifth consecutive year where we have increased our dividend. 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. Our mutual fund AUM was 31 billion, up 19% year over year, outpacing the industry increase of 15%. Our ETF and SMA AUM increased 74% year over year to $2.9 billion. I'll provide more color on our mutual fund business and ETFs and SMA AUM in a moment. Segregated accounts and sub-advisory AUM decreased by 9% compared to the prior year. As previously disclosed, The decline was driven mainly by a redemption fund of our institutional clients who shifted to passive management early in 2024. Our private wealth AUM increased by 10% compared to the prior year to $8.6 billion. And our AGF Capital Partners AUM and fee-earning assets were $4.6 billion at the end of the quarter, up $2.5 billion from the prior year due to the closing of the Kensington transaction. As a reminder, New Holland Capital AUM of $9 billion is not consolidated into AGF's total AUM and fee-earning assets at this time. Turning to slide 7, I'll provide some details on the fund business. Despite choppy equity markets and the expectation of further volatility ahead, the Canadian mutual fund industry experienced net positive sales in the quarter of $11 billion, or half of 1% of AUM. AGF's retail mutual fund business outpaced the industry and achieved 342 million of net sales in a quarter, or 1.1% of our AUM. This was driven by our gross sales, which increased 67% year-over-year compared to a 31% increase for the industry. AGF was able to capitalize on the return of net flows into equities, allowing us to grow at a faster rate than the industry. While our fixed income net flows also increased at a healthy rate. And now I want to give a quick update on our investment performance. 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. Our one-year performance improved to the 39th percentile, and our three-year performance was in the 44th percentile, and approximately two-thirds 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 45% on a compounded basis over the last two years. Included in this number are Canadian and U.S. listed ETFs and SMA platforms globally. In the current volatile market environment, our liquid alternative products offer a hedge to the equity markets by providing protection during drawdowns while maintaining upside participation. For example, in the recent market downturn since mid-February, While the S&P 500 was down 12%, our U.S. listed market neutral anti-beta ETF produced positive returns of 20%. The AUM across the Canadian and U.S. ETF on this strategy reached almost $900 million. 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. I will now pass it over to Ken to discuss our financial results.

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. Adjusted EBITDA for the quarter was $48 million, which is $8 million higher than Q4. This was driven by both an increase in net revenues and reduction in SG&A. Compared to the prior year, our adjusted EBITDA was $2 million lower. This was mainly due to an outsized long-term investment gain in Q1 of last year, which I can elaborate on later. SG&A this quarter of $64 million included lower performance-based compensation and non-compensation expenses, but was slightly offset by timing of government-regulated employee benefits, such as CPP and EI, which are paid annually in the fourth quarter. The increase in SG&A compared to the prior year was due to the consolidation of Kensington. Adjusted net income attributable to equity owners for the current quarter was $32 million, which is $2 million higher than Q4. As a reminder, our Q4 effective tax rate was lower due to the release of certain tax accruals at year end. Our free cash flows are higher this quarter as a result of receiving $9 million of distribution income from our long-term investments. Slide 10 provides a further breakdown of our net revenues. Within our traditional asset and wealth management businesses, net management fees were $85 million for the quarter, which is $2 million higher than the prior quarter and $10 million higher than the prior year. The increase from both periods is driven by higher overall AUM. Within our AGF Capital Partners business, adjusted revenue was $24 million in the quarter. Recurring manager earnings this quarter was $8 million, broadly in line with the prior quarter and up compared to the prior year because of the acquisition of Kensington. Revenues from long-term investments were $16 million, which was $7 million higher than the last quarter and $8 million lower than last year. While fair value adjustments on investments can be lumpy, we remain conservative in our guidance and target annual returns of roughly 8 to 10%. On slide 11, we outline adjustments to our EBITDA. As you might recall, the AGF Capital Partners business gives rise to various LTIP, contingent consideration, and put obligation liabilities. These liabilities are fair valued each quarter with the difference flowing through the P&L. These accruals and fair value adjustments have no immediate cash impacts 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 expenses, our adjusted EBITDA for Q1 is $48 million. Turning to slide 12, I will walk through the yield of 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 related to results from AGF Capital Partners, as well as DSC revenues, other income, severance, corporate development, and acquisition-related expenses. The Q1 2025 net management fee yield was 71 basis points. which is one basis points lower than a previous quarter and trailing 12 months, driven by a mix of underlying products and series. This decline is in line with a one to two basis points annual decline, which we've got it to in the past. As part of our strategy, scaling our AUM and revenues across various products and free structures, specifically with our strategic partners, is mitigating the impact of the rate decline on our net management fees. We will continue to monitor this. Adjusted SG&A as a percentage of AUM was 49 basis points this quarter, which is three basis points lower than the prior quarter and one basis points lower than the trailing 12 months. This resulted in an EBITDA yield of 22 basis points in the quarter, which was two basis points higher than the previous quarter and in line with the trailing 12 months. Turning to slide 13, 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 in the chart. The black line represents the percentage of free cash flows that was paid out as dividends. Our trailing 12-month free cash flows was $106 million, and our dividend paid as a percentage of free cash flows was 28%. In the same period, we returned $38 million to shareholders. consisting of $29 million in dividends and $9 million in share buybacks. During the quarter, we repurchased over 200,000 shares under our NCIB for approximately $2.4 million. We ended the quarter with net debt of $52 million. We also have $403 million in short-term and long-term investments and have $161 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. Before I pass it back to Kevin, let me take a minute on slide 14 to look at our market valuation. AGS current share price at around $9, and our enterprise value is around $650 million. Taking our $403 million of short-term and long-term investments into account, our remaining enterprise value is about $250 million. This implies about a two times EV to EBITDA multiple on our 2024 adjusted EBITDA excluding income from long-term and short-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.

To sum up this first quarter, we continue to make great progress against a number of our strategic objectives. Our AUM and fee-earning assets continue to climb, reaching nearly $54 billion in the quarter. Our investment performance remains solid. Our sales momentum was strong and outpaced the industry. We remained disciplined in our expense management while investing for growth. We increased our quarterly dividend by 9%, now five years running. The strength of our balance sheet and capital position will provide us with the resilience to weather the current challenging market environment. I want to thank everyone on the AGF team for all of their hard work. We will now take your questions.

Thank you. If you have a question at this time, please press star 1-1 on your touchtone telephone. One moment for our questions. Our first question comes from the line of Nick Privy of CIBC Capital Markets. Your line is now open.

Okay, thanks. I just wanted to start with a question on the $9 billion of distribution income. It seemed a bit higher than usual this quarter. I'm just wondering, is there a seasonal element to that, like maybe some infrastructure investments that pay a distribution around year-end and get recognized in fiscal first quarter? Was there anything else that drove the higher distribution income this quarter?

Hi, Nick. This is Ken. Thanks for your question. The short answer is no, not really a seasonality element to it. With the exception of our private credit funds, which are paid normal distributions, the remaining funds tend to be fairly lumpy and would be dependent on the GP's discretion.

Got it. Okay. And then I was just looking at note three to the financial statements. There's a continuity schedule that shows the change in long-term investments. And in the quarter, it shows a $57 million purchase of long-term investments. That just seemed a little chunky to me, kind of over and above what you'd expect from a normal capital call. So I was just wondering if there's a bit of additional color you could provide on what that was related to.

Yeah, Nick, it's Ash here. Happy to take that question. So during Q1, there were a couple of investments we made to support some of our new partners, the first being an investment into a private equity fund that our partners at Kensington run, and the second being a seed investment into a new fund that we launched here in Canada with our partners at New Holland Capital, the AGF NHC Tactical Alpha Fund. That is the vast majority of the figure that you referenced, so that is largely going in to support new products and new partners that we've added over the last year.

Got it. And is that sort of the entirety of what you'd expect to commit to that platform, or do you have any other commitments in the pipeline as well?

At the moment, we have a little bit that we're planning on some new products, but we don't have timing on that yet. It relates to when new products are launched. That could be either later this year or into next year. But at this point, it's largely new product related and a few smaller follow-on investments.

Got it. Okay, that's it for me. I'll pass the line. Thank you. Thank you. One moment for our next question. Our next question comes from the line of Gary Ho of Desjardins Capital Markets.

Your line is now open.

Thanks. Good morning. Maybe just continuing from the next question there on the long-term investments. I think it's the first time we are seeing north of $400 million for that line item. Just was wondering about the level invested in alts overall as we look out for the balance of 2025. Are you comfortable with that $400 million line? When you look out, and also I think, Ken, you mentioned 8% to 10% still reasonable. So does that suggest maybe a softer fair value adjustment line for the balance of this year, or are you just being a bit more conservative there?

Hi, it's Ash. Maybe I'll start. So when you think about our long-term investment line, a significant portion of that is what I would describe as late-stage fund investments or fund investments that are sort of later in their investment cycle. Those investments have actually done quite well over the last five to 10 years, and so some degree of that growth in our long term investments is success related. It's the power of compounding returns as we've seen those investments grow. As we have previously mentioned, we expected to start to see some of our capital being distributed back to us as these assets started to monetize. But obviously, that requires accommodative M&A markets. And as we're presently in, we'll have to see if that clears up later in the year, given all the turmoil right now. We would view this level as somewhat elevated versus the overall capital partners business. Again, it's success related. So I think what we would hope to see is some of our partners, general partners, start to think about monetizing when markets are accommodative to that. That said, as both Kevin and Ken have mentioned, we're fortunate enough to have a healthy balance sheet. And so for my answer to the last question, This is still allowing us to invest in growing the AGF Capital Partners business and supporting our new affiliate managers while we're patient and waiting for some of our older vintage capital to get returned to us. Just on your 8% to 10% question, yeah, I think we continue to feel comfortable with that on a longer-term basis. Again, it can be lumpy, so it's not necessarily straight-lined over the course of a year, but that continues to be our guidance that we're comfortable with for that line.

Okay, that's helpful. And then maybe a question for Kevin, just putting on your CIO hat here for a sec. Just going into kind of last few weeks here, how were you and your team positioning your portfolio? Very volatile markets. Can you speak to maybe sectors you've been favoring or avoiding as well as regions and how have performance held in more recently?

Yeah, thanks, Gary. You know, obviously, We've all watched the markets gyrate around. If you think about our AUM, it's probably less volatile today than it's ever been. If you think about if we consolidated New Holland in, you know, it's almost 20% of our assets are in alternatives today, and many of them are liquid alternatives, which help provide us with some stability. So where we've seen some volatility in our classical long-only parts of our portfolio, nothing more than we'd expect, In fact, performance has been kind of in line to do better. And, you know, we have a pretty diversified long-only lineup. But our liquid alternatives have done really quite well. And whether that be the anti-beta ETF we referenced earlier or some of our more liquid, you know, enhanced equity income offerings. So I think the mix of assets is held in really well, probably better than we would have thought if we were sitting here 10 years ago with mostly a long-only lineup of mutual funds. In terms of positioning right now, I think it's hard for anybody to position in this. We're probably holding more cash than we've had in our more balanced products right now. Most managers are probably holding a little bit extra cash. So I'd say we're not changing because obviously this is a self-inflicted policy-driven kind of correction, not one that is something more structural from what we've seen in past large corrections. So it's hard to actually position for when someone tweets or changes a view. and get these kind of moves around the market. So until we get some certainty, we're probably going to be more defensive.

Okay, that's helpful. And then my last question, both your gross and net retail flows were very strong in the quarter. Maybe a question for either Judy or Kevin. Any comments on what strategies are driving that in the quarter? And I'm assuming there's some nervousness post Q1. How should we think about kind of March numbers and April so far?

Yeah, I'll start. Certainly, we've had some very strong performance in our growth mandates, and so the flows in Q1 were largely into those strong performing mandates and products. What we're seeing going forward, we're relatively flat quarter to date now as we sit here, and with this volatility, we are seeing investors take a more cautious approach. But as I think Ash reference, we've launched a tactical alpha fund. We also have an enhanced income plus fund and other liquid alternatives along with our fixed income suite. And those products, I think, will serve the investors well during these uncertain times.

Yeah, Gary, if I can just add, I mean, as I said, the industry is probably everybody in the same place here with this uncertainty. So no surprise you're going to see advisors, if this lasts two or three more quarters like this, probably hold more cash too. We're not seeing it yet, but anecdotal behavior would suggest that advisors are probably starting to get a little weary of this as well. So you may see people move back to cash a little bit if this persists, but we're not seeing it yet.

Okay, great. That's great, Keller. Those are my questions. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Aria Samarzadeh of Jefferies. The line is now open.

Good morning. Thank you. Can you remind us of your capital priorities and how you think about your dividend payout ratio? The dividend increase announced was much higher than the increase announced last year. And while this is great news for investors, I'm just trying to get some color on how you think about the payout ratio and how you balance that with buybacks. as buyback activity has moderated in recent quarters and given where the stock is trading, are you planning on taking a different approach to buybacks or potentially adjusting any of the parameters for your automatic buyback plan?

Hi, Ari. It's Ken. I can take that one. We are fortunate to be in a very strong capital position right now and are well positioned to really take advantage of market dislocations, right? And so You made the right point. We did feel that with our strong free cash flows that we were in a good position to increase that dividend yield. You're right. We will obviously balance out capital allocation across dividends, share buybacks, and opportunistic M&A opportunities as they arise. And in this current environment with where the stock price is, we certainly are a buyer of the stock. So I would expect to continue to do that in the foreseeable future. And again, just as Ashley alluded to earlier, obviously the opportunity to continue to fund our strategic partners and be available to look at opportunistic acquisitions as they come about as well.

Okay, great. Thank you. And then could you give us a little bit of color on how the flows are looking on the SMA platform?

So the flows continue to be quite strong. I mean, you've seen the CAGR over two years at 45% and we continue to see that the consistent sort of flows going into the SMA platform. We also are continuing to try to get on to other platforms. And so we do expect as the banks and independent dealers continue to grow in this space that this will be a continuing to grow growing area for us.

Yeah, Ari, if I could just follow Judy. We're seeing the industry move to more what I call a product agnostic approach where it's no longer just about selling a fund. It's sometimes going to be a fund that's in an ETF series or it could be in an SMA. So we know that that is growing in terms of a mindset shift. So you'll probably see, if you look at just our SMAs year over year, up in the neighborhood of 70-odd percent. So that tells you that shift is that really at the platform and dealer levels is starting to move away from just a fund or a vehicle or a wrapper, but more of a capability. So you should see that increase over time.

Thanks for taking my questions.

Thank you. If you have a question, please press star 11 on your touchtone telephone. And our next question comes from the line of Tom McKinnon of BMO Capital. Your line is now open.

Yeah, thanks very much. Just as you move kind of more into the liquid alts here as a result of uncertainty in the market, maybe you can tell us how the fees might relate on that versus your more traditional mutual fund business.

Yeah, I mean, morning, Tom. It's Kevin. You know, we've priced appropriately, so obviously fund launches, we look at where the competition is, and so you'll see them pretty much in line with a traditional F-series in cases of funds. In case of our ETF offerings that are in a more liquid fashion, those are typically in the 45 to 55, so higher than a passive ETF because you're getting essentially a market neutral, sophisticated instrument inside that ETF. And so again, if you think about it, we do not have the same back office tail that we would have with a mutual fund in that offering because obviously we don't have to cut a daily NAV and all the things that go with clearing and settlement related to running a fund. So again, think of them as operating margins are probably comparable to a fund.

I would just add also that on the alternatives side, in particular geared towards retail investor, those tend to be a much higher margin than the traditional mutual funds that we currently have today.

Okay, and the one to two point, if you can just elaborate what that's capturing that you talk about in terms of any kind of... decompression, does it capture any of this ETF mix shift that you've been alluding to?

Yes, it does, Tom. I mean, we've historically guided to one to two basis points per annum, right? So if you looked at our 71 basis points this quarter, that's in line with, if you look at us this time last year, it's about a two basis point drop, so that is consistent. I will highlight that the basis points here, it excludes, obviously, the alternatives business as well, which, you know, are generating higher BIPs, but obviously not factored into that equation.

Okay, thanks.

Okay, thank you again. If you have questions, please press star 1-1 on your touchtone telephone. And our next question comes from the line of Tom McKinnon of BMO Capital. Your line is now open.

No, I just asked the question and they kindly answered it. Thanks.

Okay. Thank you. I'm showing no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGS next earnings call will take place on June 25th, 2025. You may now disconnect.