AGF Management Limited

Thank you for standing by, and welcome to the Q2 2025 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 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 of AJF Management Limited. Today, we will be discussing the financial results for the second quarter of fiscal 2025. Slides supporting today's call and webcast can be found in the investor relations section of AJF.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 preferred 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 second quarter of 2025 saw continued volatility as global markets grappled with the potential implications of ongoing trade wars. Despite the market volatility, Q2 was another strong quarter for AGF. I'll begin with some highlights. AUM and fee-earning assets were $53.5 billion at the end of Q2, up 12% from a year ago. Compared to Q1, our average AUM was down 3% due to the market volatility experienced throughout the quarter. AGF Investments' retail mutual fund business reported net sales of $65 million in the quarter, with 20 basis points of mutual fund AUM. outpacing the Canadian mutual fund industry. Our SMA and ETF business remains strong. AUM increased 54% year-over-year to $2.8 billion. We reported adjusted and diluted EPS of $0.39 in the quarter. In addition, we have $426 million in short- and long-term investments on our balance sheet, net debt of $50 million, with $166 million available on our credit facility. We have capital available and flexibility in our capital allocation strategy. Subsequent to the quarter, AGF Investments won the Mutual Fund Provider of the Year Award at the 2025 Wealth Professional Awards Ceremony. This recognition celebrates our involving and innovative product lineup, as well as our dedication to delivering exceptional value to our clients. AGF was also honored as an Excellence Awardee in the Employer of Choice category. Finally, the Board declared a $12.50 per share dividend for Q2 of 2025. 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. AGF Investments' mutual fund AUM was $31 billion, up 15% year over year, outpacing the industry increase of 11%. The growth of our ETF and SMA AUM remains strong. I'll provide more color on our mutual fund business and ETF and SMA AUM in a moment. Segregated accounts and sub-advisory AUM increased by 2% compared to the prior year. Our private wealth AUM increased by 7% compared to the prior year to 8.6 billion. And our AGF Capital Partners AUM and fee earning assets were 4.7 billion at the end of the quarter. 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 seven, I'll provide some details on the mutual fund business. On the back of the volatility in the equity markets in the quarter, the Canadian mutual fund industry saw net positive sales in the quarter of $1 billion, or five basis points of AUM. AGF's investments retail mutual fund business outpaced the industry and achieved 65 million in net sales in the quarter, or 20 basis points of AUM. AGF's equity funds continue to see net inflows in the quarter with particular interest in the AGF Enhanced US Income Plus Fund and AGF European Equity Class. Our AGF Enhanced US Income Plus Fund, which was launched earlier this year, aims to provide long-term capital appreciation and generates a high level of consistent income by employing dynamic option strategies. Our award-winning European Equity Class has garnered interest from clients and advisors on the back of a strong European equity market relative to the U.S. in the first half of 2025 and renewed interest in this category. I want to now give a quick update on our investment performance. AGF Investments 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 46th percentile Our three-year performance was in the 51st percentile, and our five-year performance was in the 41st percentile. Approximately half of our strategies are outperforming our peers on a three- and five-year basis. Turning now to slide eight, I will talk about our ETF and SMA AUM. The AUM in this category has grown 41% 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 a volatile market environment, one of our liquid alternative products, our U.S.-listed market-neutral anti-beta ETF, stood out for its ability to offer a hedge to equity markets by providing protection during drawdowns while maintaining upside participation. For example, in the recent market downturn from mid-February to early April, while the S&P was down 19%, this ETF produced positive returns of plus 18%. Further, we have seen consistent growth and momentum in the SMA business across the U.S., Canada, and now 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 $40 million, which is $8 million lower than Q1. This was mainly due to an outsized long-term investment gain in Q1. Compared to the prior year, our adjusted EBITDA was $3 million higher, mainly due to higher AUM levels. SG&A came in at $60 million this quarter, $4 million lower than Q1, and consistent with Q2 of last year. The decrease from Q1 reflects seasonally lower government-regulated employee benefits which are largely paid in the first quarter, as well as reduced performance-based compensation, mainly due to timing of RRSP season sales. Adjusted net income attributable to equity owners for the quarter was $26 million, and adjusted EPS was 39 cents. Free cash flows for the quarter were $24 million, down $8 million from Q1, primarily due to higher distribution income in the last quarter. Slide 10 provides further breakdown of our net revenues. Within our traditional asset and wealth management businesses, net management fees were $84 million for the quarter, which is $1 million lower than the prior quarter and $3 million higher than the prior year. Our net management fees are directly related to our AUM levels, which were lower this quarter due to market volatility. Within our AGF Capital Partners business, adjusted revenue was $15 million, representing a $9 million decrease from the previous quarter. The decrease in revenues were due to outsized revenues from long-term investments in Q1. 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 LLTIP contingent consideration, and put option liabilities. These liabilities are fair valued each quarter with a difference flowing through to the P&L. These accruals and 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. Adjusting for these items with severance expenses, our adjusted EBITDA for this quarter is $40 million. Turning to slide 12, 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 EBITDA yield this quarter was 24 basis points, which is two basis points higher than prior quarter and the trailing 12 months. The increase was driven by lower SG&A, with a slight offset in the net management yield of one basis point. The decline in net management fee yields reflects the success of our strategic efforts to expand across advisory channels, particularly those aligned with fee-based platforms. 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 on the chart. The black line represents the percentage of free cash flows that was paid out as dividends. Our trailing 12-month cash flows was $106 million, and our dividend paid as a percentage of free cash flows was 28%. In the same period, we returned $39 million to shareholders consisting of 30 million in dividends and 9 million in share buybacks. During the quarter, we repurchased 237,000 shares under our NCIB for approximately $2.4 million. We ended the quarter with net debt of 50 million. We also have 426 million in short-term and long-term investments and have 166 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. AGF's current stock price of about $12 and our enterprise value is about $850 million. Taking our $426 million of short-term and long-term investments into account, our remaining enterprise value is about $424 million. This implies a 3.6 times enterprise value to EBITDA multiple on our 2024 adjusted EBITDA, excluding income from our 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 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. Our investment performance remains solid. Our sales momentum is strong and continues to outpace the industry. We remain disciplined in our expense management while investing for growth. The strength of our balance sheet and capital position will provide us with flexibility in our capital allocation strategy and their resilience to weather a challenging market environment. I want to thank everyone on the AGF team for all of their hard work, and 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 Gary Ho with Desjardins Capital Markets.

Your line is open.

Thanks. Good morning. My first question, just given the volatile markets last few months, and we did see Ithac data kind of move from net redemptions in March, April to positive territory in May. Just wondering if you saw kind of similar trends in your net flows numbers, and also curious to hear kind of which funds, I think you highlighted a couple that you guys have seen a bit more momentum, including the European equity strategies. And what are you seeing in terms of that momentum and that carry through in June so far?

Thanks, Gary. It's Judy calling. Judy here, I should say. Yeah, we saw certainly similar trends in our own business as it was in the industry. As was reported, we saw net sales of $65 million for the retail net sales. And it was our fourth consecutive quarter of positive retail sales, which is... a really good trend for us. As well, we were encouraged because we were actually outpacing the industry in terms of those flows. So that really does come on the back of really strong performance on a couple of our key growth mandates, the Global Select and American Growth mandates, along with, as mentioned by Kevin in his remarks, the European Equity Mandate. That is an interesting trend. We are a two-time Lipper Award, you know, 1-3-5 year top performing fund and it really has been interesting to see the interest in that mandate as there's been sort of a less, more interest I guess in the European markets at this point given their performance. So those have been sort of the areas of the flows that we've been seeing.

And then the momentum so far in the June month so far?

So into this quarter, it's still early days obviously and to the end of, almost the end of June. But we're essentially flat at this point is sort of how I'd best phrase it.

Okay, great. And my second question, I think there's some new U.S. proposed rule, Section 899. This talks about taxing of dividend kind of foreign company pays for U.S. entities. Does that impact your U.S. equity funds at all strategies? And how are you positioned on that front?

Hi, Gary. This is Ken here. Yeah, so there's still some uncertainty with respect to whether this bill will pass and obviously in what shape or form. But just to maybe set the context, this bill really does relate to specifically withholding taxes on U.S. domiciled companies that pay dividends and interest. And so obviously it will impact the broader industry landscape beyond just AGF. Having said that, though, I think we are relatively muted from an exposure perspective. Our funds are pretty global in nature, and so it allows our managers to allocate away from more exposed U.S. names. Our fund's also more growth-oriented. So, again, if most of our returns are coming from capital appreciation, dividend interest is a smaller component of our fund, so it's, again, relatively muted. And I'd say, lastly, we do have a pretty broad suite of products, as Judy had mentioned earlier, shifting away from into European funds could be actually a catalyst and could actually allow us to drive market share growth.

Yeah, maybe if I can add on to that, Gary, it's Kevin, which is we also as a component of fixed income, we're probably one of the lowest from an asset mix standpoint. So you're going to have a lot of managers in the industry who have a large U.S. fixed income businesses, which are going to be more impacted than we would just given how minimal fixed income is our lineup.

Okay, copy that. All right. And then just the last question, did notice a pickup in buyback in the quarter, most that you've done in over a year. What's your thoughts here? You also have a slide highlighting your attractive valuation. Should we expect similar buyback activity in your term? Just also want to hear your thoughts on that and also capital allocation priorities.

Yeah, Gary, maybe I'll start. It's Kevin. Yeah, we've always had a balanced approach to our capital, which is pressing different levers at different times. More recently, we've been on the growth lever with some of the investments we've made into capital partners to build out our alternatives business. We also, again, think about the dividend. Payout ratio at 28% is pretty conservative at this point, so we would probably agree with you. You'd say it's probably accelerating some of the purchases within our NCIB right now, especially as we've talked previously. Kind of our pipeline and the industry pipeline of just deals out there right now has kind of jumped up a bit. So while we're waiting for that to clear up, you could see us probably be a little bit more aggressive on that side.

Okay, great. Those are my questions. Thank you.

Thank you. Our next question comes from Tom McKinnon with BMO Capital. Your line is open.

Yeah, thanks very much. Good morning. You mentioned some lower management fees going forward, changes in fees on some funds. If you can elaborate on that, and does that still kind of fit into your one to two basis point decline guide in terms of fees?

Yeah, sure. Hi, Tom. Yeah, I could pick it off. I mean, you know, certainly year over year, our management basis points would have gone down a little bit more than normal. I would reference that actually a year ago in the same quarter, we did have some outside success fees that would have, I guess, artificially elevated some of the management fees here. So it's probably if you normalize for that, that would probably take the management fee dips down about one and a half basis points from last year. Having said all that, I mean, I think the shifts in our management fee, I think it is a testament to the success we are seeing in the sales that are coming through. Just to give you some example, I mean, the growth into fee-based IRA channels is seeing more of an asset shift from mutual fund series to F-series funds. We've also seen, as we had alluded to earlier, some tremendous success in both our ETFs as well as our SMAs products, which I think we've talked about in the past. You know, those products do tend to drive lower management fee dips. but come along with virtually no marginal costs. And so what you're seeing overall is, you know, our AUM and revenues are actually increased, even though you'll see some of the management bits decreasing. And at the same time, our SG&A expenses have been relatively flat year over year.

Yeah, maybe I can just follow on that, Tom. It's Kevin, which is, you know, those parts of the business are sectorally changing. You're going to see us, you know, look at just our SMA business year over year at 54%. Right. So to Ken's point, the revenue margin or the basis points and revenues will become maybe less material over time as we shift into these other categories. And it's just going to be about if we can put that volume on. But we're seeing pretty good growth across these new channels, which is actually what we're trying to do.

Okay, thanks. And the follow-up is just with respect to adjustments to the SG&A. I mean, I get some of these contingent consideration put options stuff, but we've had severance now. kind of ongoing here for four quarters in a row. Why is that stripped out? And when, I guess, will you have an adjusted SG&A that doesn't have severance or corporate development and other expenses in?

Yeah, Tom, maybe I'll start. Maybe Ken can follow me. I mean, severance, obviously, we've been trying to be disciplined around the expense line. over time. So we want to invest for growth, but at the same time, we've got to pare back some of the other things we've been doing. We've always had a pretty good discipline around that. So severance, I don't think, ever goes away. If we ever did a large-scale program, which we don't need to do at this point, you'd see something where we call out a one-time charge. So obviously, the severance is just a normal course of our expense management. In terms of every now and then, you will also see us when there are deal costs related to some of the acquisitions that we've incurred. those will be more muted here until we find the next transaction. But they also should be thought of as kind of one-time, but you should not see those pick up too much in the near term, is my guess.

If severance is normal course, then why is it stripped out?

It's not normal course, I'd say, Tom. I mean, severance does become seasonal, and it's timing based on individuals that we feel are... You know, I mean, well, it just comes with operating the business, and it does have inflow. I wouldn't say that it's a normal course thing for us.

Okay, thanks.

Thank you. As a reminder, if you have a question at this time, please press star 1-1 on your touchtone telephone.

Again, if you have a question, please press star 1-1 on your touchtone telephone.

I'm not showing any further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place on September 24th