Fiera Capital Corporation

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Sierra Capital's earnings call to discuss financial results for the fourth quarter and four year of 2023. Note that phone lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answers period. As a reminder, this conference call is being recorded. And if you would like to ask a question during the time, simply press star 1 on your telephone keypad. And if you would like to withdraw from the question queue, please press star N2. Thank you. I will now turn the conference over to Marie-France Gay, Senior Vice President, Treasury and Investor Relations. Please go ahead.

Thank you, Sylvie. Good morning, everyone. Bonjour à tous. Bienvenue à l'appel de conférence de FIERA Capital pour discuter des résultats financiers du quatrième trimestre et de l'année 2023. Welcome to the FIERA Capital Conference Call to discuss our financial results for the fourth quarter and full year of 2023. Note that today's call will be held in English. Before we begin, I invite you to download a copy of today's presentation, which can be found in the investor relations section of our website at ir.fieracapital.com. Also note that comments made on today's call, including replies to certain questions, may deal with forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ from expectations. I would ask you to take a moment to read the forward-looking statements on page two of the presentation. On today's call, we will discuss our Q4 2023 results, starting with an update on our AUM flows, followed by highlights of our public and private market platform, as well as our private wealth business. We will then review our financial performance. Our speakers today are Mr. Jean-Guy Desjardins, Chairman of the Board and Global Chief Executive Officer, Mr. Lucas Pontillo, Executive Director and Global Chief Financial Officer. Also available to answer questions following the prepared remarks will be Jean-Michel, President and Chief Investment Officer, Public Markets, John Valentini, President and Chief Executive Officer, Private Markets, and Maxime Minard, President and CFO of FIERA Canada and Global Private Wealth. With that, I will now turn over the call to Jean-Pierre.

Thank you, Marie-France. Good morning, everyone, and thank you for joining us today. After a difficult 2022 and amid the concerns that aggressive increases in interest rates would cause a recession, markets were surprisingly strong in the 2023, bolstered by the moderation in inflation, resilient economies, and strong corporate earnings. However, we experienced volatility during the year, arising from, amongst other things, a regional banking crisis, large-scale geopolitical events, and the changing expectations of the path of policy rates due to sticky inflation. The last quarter of the year ended on a strong note for both equity and bond markets as economies began to soften and central bankers signaled the end of rate hikes. In a year characterized by rallies and corrections, We are pleased with the resilience of our investment platforms to provide superior returns to our clients and the associated benefits to our business. We reported assets under management of $161.7 billion at December 31st, an increase of 4.1% or $6.4 billion versus that reported on September 30th and up 3.2 billion or 2% compared to last year. Assets under management in our private markets division remained constant at 18.5 billion in a year where the entire industry faced challenges in new fundraising. New mandates were, by and large, offset by the return on capital and income distributions to our investors. The significant rebound in financial markets in the last two months of the year drove a rise in assets under management in our public markets division, which saw an increase of $6.6 billion, or close to 5% in the quarter. This increase was almost entirely attributable to public markets excluding assets under management subadvised by Pinestone, which grew by $6.3 billion during the quarter. The increase was due to a positive market impact of $8.1 billion and was partially offset by $1.8 billion of negative organic growth, largely driven by lost mandates and rebalancing in long-duration fixed income mandates for clients in Canada and the U.S. For assets sub-advised by Pinestone, there was a slight increase in assets under management, as lost mandates of $2.6 billion were more than offset by the positive market impact of $3.6 billion. The vast majority of lost assets under management, sub-advised by Pinestone, related to a large Canadian financial intermediary client, and were transferred directly to Pinestone. The same client is also expected to redirect an additional $3.1 billion during the first half of 2024 as part of their ongoing transfer of assets to Pinestone that was initiated at the beginning of 2023. We now expect that this leakage directly to Pinestones from this Canadian financial intermediary will be coming to an end at the end of the second quarter. Looking at the full year in public markets, assets under management increased by 2.9 billion. While favorable market impact increased assets under management by 17.1 billion, this was offset by negative organic growth of 13.6 billion. Of the 13.6 billion of negative organic growth, 10.7 billion or 79% related to assets sub-advised by Pinestone. It is important to note that of this amount, only 6.3 billion related to lost clients that transferred directly to Pinestone. The balance was made up of 3 billion related to lost clients who exited the Pinestone subadvice strategies altogether, and $1.4 billion related to existing clients who simply reduced their allocations to these strategies. The favorable market impact for the year on assets under management subadvised by Pinestone was $7.3 billion, which more than offset the pure leakage of $6.3 billion seen through the year. Going forward, excluding the assets under management outflows related to a large Canadian financial intermediary, management expects the assets under management reduction from last mandate transferring directly to PINESTONE to be in the range of 2 to 3 billion this year. Following 2024, we expect the leakage going directly to Pinestone to be in the range of $0 to $2 billion. On a full year basis, the public market platform excluding Pinestone saw an increase of $7 billion in assets under management. While the division benefited from $9.8 billion in positive market performance, it also won $3.8 billion in new mandates across equity and fixed income strategies. This was partially offset by $6.6 billion of outflows, mainly in lower-fee fixed income strategies. I will now turn to our commercial and investment performance across our platforms in the fourth quarter, starting with our public markets platform. The public markets platform, excluding assets under management sub-advised by Pinestone, experienced a negative organic growth of $1.8 billion in the quarter, largely due to outflows in fixed income, mostly from financial intermediaries in Canada, as well as rebalancing from institutional clients, a portion of which was reallocated into equities. Our equities platform was essentially flat on the quarter, with minor outflows in Canadian and emerging market equities offset by inflows in U.S. equities and Atlas Global Equity, which saw 400 million in net organic growth for the year. This growth combined with market impact resulted in assets under management reaching 2 billion for the Atlas Global Equity team, an increase of 55% for the year. The strategy continues to see great momentum, with further inflows expected to crystallize in early 2024. Now turning to investment performance in public markets for the quarter. In equities, it was a strong quarter for most developed market strategies, as equity markets shot up in the last two months of the year. The majority of our strategies beat their benchmark, with the Keynesian equities small cap and Atlas global equity leading the pack, with over 4.5% and 3% of outperformance, respectively. The frontier market strategy continued to excel in the fourth quarter with an additional 200 basis points of outperformance, adding up to over 18% of value added for the year, delivering significant performance fees for 2023. Our emerging markets select strategies. which began in January 2021, also had an excellent year with over 22% of outperformance relative to its benchmark. This was also recognized by Bloomberg News and the Financial Post, citing that the fund outperformed 99% of its peers beating all but 12 of the 4,383 funds in its peer group. Fixed income markets also rallied in the final quarter of 2023 as expectations shifted towards a soft lending with cooling inflation leading to expectations of rate cuts. All of FIERA's flagship Canadian and foreign fixed income strategies generated positive relative returns. The global multi-sector income strategy continued to excel in the fourth quarter, generating over 170 basis points of odd performance and an impressive 8.77% of value added for the year. Sierra Capital has a strong track record of odd performance, with 98% of its public market strategies beating their benchmark over the five-year period. This excellence was acknowledged on numerous occasions in 2023. We were recognized as a top performer at the Global Manager Research 2023 Top Performer Awards, which pay homage to asset managers and funds available to Canadian institutional investors. In addition, five of the funds and ETFs we sub-advise for our investment partners, including three fixed income and two equity funds, won Lipper Fund Awards in 2023 in recognition of their exceptional performance over the three, five and 10 year period. Turning to our private market platform. The expectation of an economic downturn made for a more challenging capital raising environment in 2023 as many investors selected to overweight cash or to maintain liquidity in case of uncertain events. This resulted in a more muted growth for our private markets platform, which saw a total of $1.7 billion in new subscriptions during the year. Net contributions included return of capital to clients of just over $330 million And we also saw client reductions of about $700 million, mostly in the real estate core fund. We also distributed $640 million to clients, converted $900 million of capital from committed to deployed in the year, and maintained a pipeline of $1 billion available for deployment into future opportunities. with respect to investment performance for private markets. In real estate, the sector saw downward valuation pressures in 2023 from rising capitalization rates affecting returns. Notwithstanding this, underlying fundamentals demonstrated stability, particularly in the industrial and multi-residential sectors where FIERA strategies are overwhelmingly concentrated. There are encouraging signs that pressures are subsiding, which bodes well for future growth, particularly given the undersupply and high tenant demand for these segments. The FIERA Real Estate Industrial Fund continues to generate best-in-class performance with an 8.5% absolute return for the year, ranked number one in the Property Fund Index, and recently crossed the $1 billion threshold in assets under management. In infrastructure, the portfolio continues to have over 50% of assets that are in the climate infrastructure that supports a future with a changing climate and circular economy needs. 2023 was a challenging year for the fund as high interest rates, inflation, and global supply chain disruptions have affected the equity of operating businesses in which the fund is invested. Discount rates have also put pressure on valuations. The infrastructure portfolio is composed of long-term, high-quality, essential infrastructure assets with excellent upside potential, which remain resilient despite the downdraft in valuations in 2023. Our private credit strategies continued to perform well as they benefited from strong yields. Clearwater capital lending opportunities generated strong returns reaping the benefits from fees payable on several loan repayments. The infrastructure debt strategies also saw very strong performance with a one-year absolute return exceeding 14%. The outlook for the private credit strategies is optimistic as this asset class remains top of mind with investors, where many expect to increase their allocations in 2024. In private equity, the strategy generated strong performance in the quarter and achieved a one-year absolute return in excess of 15%. This is attributed to broad-based positive developments across the portfolio, including healthy earnings growth for several investments, offsetting down drafts caused from the higher interest rate environment. The team closed two transactions in the quarter and continues to have a robust pipeline. Lastly, the Global Agricultural Fund closed two deals in the quarter. Grove Juice in Australia in October and Inoliva in Portugal and Spain in November. The fund delivered additional distributions to investors in the quarter, along with solid operational performance and capital gains. And finally, the newly established sustainable Timberland is anticipating its first close by the end of the first quarter 2024. Moving on to private wealth. Private wealth assets under management were essentially flat on the year as market performance offset negative organic growth in public markets and income distribution in private markets. Although assets under management were stable, we did see an increase in base management fees for the division for the quarter and the year. This largely pertains to the previously mentioned pricing increase initiated in September related to private wealth which are increasingly accretive as the full benefits flow through. As previously highlighted, the new pricing is reflective of the value change of activity that private wealth clients are receiving, which includes advice, access to private market funds, and the uniqueness of our asset allocation capabilities through our feeder fund structures. Now with that, I will turn it over to Lucas for a review of our financial performance.

Thank you, Jean-Guy. Good morning, everyone. I will now review the financial results for the fourth quarter and the full year of 2023. To start, we are pleased with our performance in 2023, which contributed to a significant improvement in virtually all of our financial measures when compared to the prior year. Starting with total revenues. Across our investment platforms, we generated total revenues of $211 million in the current quarter, up $26 million or 14% over Q4 of the prior year. Base management fees were flat as increases in private markets helped offset decreases stemming for outflows and fixed income and equity mandates in public markets. Performance fees for Q4 2023 were $42 million compared to $22 million for the same period last year, an increase of $20 million or over 88%. Earnings in joint ventures were $9 million in Q4 2023 compared to $6 million the same period last year, an increase of $3 million or 52%, while commitment and transaction fees were down just over $1 million. Other revenues were over $5 million in Q4 2023 compared to a negligible amount in the same period last year, primarily due to insurance proceeds received on a previously disclosed claim, interest income on cash balances, and higher administration fee revenues as part of the fee increase initiatives in Canadian private wealth. For the full year 2023, total revenues of nearly $687 million were more than $5 million higher than the previous year's total revenues of just over $681 million. As performance fees and other revenues more than offset declines in public market base management fees and private market joint venture earnings and commitment and transaction fees for the year. Looking more closely at private markets. Private market revenues for Q4 2023 were 72 million compared to 62 million for the same period last year, an increase of 10 million or 16%. Base management fees increased to 45.2 million or over 3.5 million and 8% from the same period last year, driven largely from institutional clients in Canada and EMEA investing in our agriculture and real estate strategies, with higher average AUM stemming from new subscriptions and market appreciation. Performance fees of $10.5 million in the quarter increased by nearly $5 million, or 87%, when compared to the same period last year, and were driven mainly from our Agriculture Fund and Asia Credit Lending Opportunities Fund. Earnings in joint ventures can vary significantly from quarter to quarter due to the long-term nature of the underlying projects within FIERA Real Estate UK. This quarter, we saw $3 million increase compared to the prior year quarter as a result of that timing. Additionally, commitment and transaction fees were down just over $1 million due to lower volumes of deals from clients in Canada generating this type of revenue. We wrapped up the year with private markets contributing to a continually growing proportion of Fiera Capital's total revenue. With almost $220 million in revenue for the year, this represents 32% of total revenues for full year 2023 compared to 30% for the previous year. Year over year, private market revenues increased by almost $16 million, or 8%. This, despite a difficult year for fundraising across the industry. On a base management fee basis alone, private market revenues were up 20 million or 13% in 2023 when compared to last year. A continued testament to both the diversity and the differentiation of our private market platforms. Performance fees for private markets were also in line with our expectations as roughly 16 million for the year, which represented almost a 6 million or 50%, 7% increase over last year. Due to the lower than expected fundraising during the year, commitment and transaction fees were down to almost $19 million in 2023, representing just over a $5 million decrease from the prior year, effectively offsetting the year-over-year gain in performance fees. Turning to a review of public market revenues. Compared to the fourth quarter of 2022, public markets' total revenues also increased $11 million to just under $134 million in Q4 2023, up from 122 million in the same quarter prior year. Base management fees, they cut line slightly from the year same quarter last year by 3.5 million to finish the quarter at just over 102 million. This was primarily due to lost fixed income and equity mandates from clients in Canada, along with losses from pine stone equity mandates in the US. This was offset by an increase in revenue generated in our financial intermediaries channel in EMEA from higher average AUM, along with increases in revenue from private wealth, as we see the continuing benefit of our recent repricing changes. Performance fees in public markets were strong during the quarter. We saw an increase of 15 million in performance fees compared to Q4 of last year, primarily from our emerging market strategies in Europe and institutional clients in Asia. On a full year basis, public markets revenues were down to $453 million compared to $471 million the prior year. Base management fees decreased from $449 million in 2022 to $418 million in 2023 to in large part to lower average assets under management for public markets throughout 2023, as well as higher weighting of fixed income mandates in the asset mix. The decrease was also impacted by the fact that 6.3 million in revenues for the year was now recognized in performance fees and other revenues as opposed to base management fees. Performance fees in 2023 were roughly 35 million when compared to the 22 million in 2022, again driven mainly by the strong performance of our emerging market strategies in Europe. With regards to SG&A, SG&A expense excluding share-based compensation was $133 million for Q4 and in line with $132 million for the same period last year. On a full year basis, SG&A expense was $481 million for 2023 compared to $490 million for the prior year, a decrease of over $9 million or almost 2%. Turning to adjusted EBITDA and adjusted EBITDA margins. We generated adjusted EBITDA of nearly 78 million in the current quarter, an increase of 25 million or 47% compared to the same prior year period. This led to an associated adjusted EBITDA margin of 37%, far surpassing the 29% achieved in Q4 2022. On a full year basis for 2023, we generated adjusted EBITDA of 206 million compared to 192 million for 2022. We are pleased with the return of our last 12 months adjusted EBITDA margin of 30% compared to 28% in 2022, particularly when considering the investments being made in establishing a regional distribution model. Looking at net earnings and adjusted net earnings, the company recognized net earnings attributable to shareholders of over 39 million or 30 cents per diluted share during the fourth quarter of 2023 compared to the net earnings of 3 million in the corresponding period of 2022. Adjusted net earnings for Q4 2023 were just over $50 million, or $0.37 per diluted share, exceeding results achieved in Q4 2022 by $17 million, or $0.05 per diluted share. On a trailing 12-month basis, adjusted EPS was $1.21 per share. With respect to free cash flow, last 12 months free cash flow was just over $89 million for the fourth quarter of 2023, an improvement of $30 million over the same prior year period. The significant improvement in our last 12 months free cash flow represents the realization of our previously communicated expectations that LTM free cash flow would be close to or in line with our dividend by the end of 2023, after reversing one-time charges in 2022, which caused a significant drag during the period. It is also important to note that performance fees recognized during the quarter have no impact on the free cash flows in the current quarter, as working capital requirements associated with the fees receivable offset the benefit in net earnings. The free cash flow benefits from our strong performance fees in the fourth quarter will only be realized in Q1 2024, further increasing our LTM free cash flow at that point. Turning to financial leverage, net debt decreased by about 20 million from the third quarter to the fourth quarter to the fourth quarter from 623 million to 604 million as cash and cash equivalents increased to 66 million in Q4 compared to 42 million in Q3. As such, our net debt ratio decreased from 3.4 times in Q3 of this year to 2.9 times in Q4 of 2023. The first time our net debt ratio is below three times in over a year. At Q4 2023, our funded debt of $483 million, as defined by our credit facility agreement, was also lower compared to the $405 million in the prior quarter and resulted in a lower funded debt ratio of 2.65 compared to 2.92 in the third quarter. We also remain steadfast in our commitment to returning capital to our shareholders. As such, I confirm that the Board has declared a quarterly dividend of 21.5 cents per share tabled to unit holders of record on April 11th, 2024. This maintains a trailing 12-month dividend of 86 cents per share. I'll now turn the call back to Jean-Guy for his closing remarks.

Thank you, Lucas. 2023 was a transition year for Fiora Capital, where we initiated the transition from a global distribution model to a new regionalized distribution model focused on on building local capabilities which will allow FIERA to expand and strengthen its presence in the U.S., the Europe, Middle East, and Africa region, and Asia. To this effect, Klaus Schuster was appointed Executive Director and CEO of FIERA EMEA in May. Rob Petty, as Executive Director and CEO of FIERA Asia in September, Eric Roberts as Executive Director and CEO of Fiera US in November, and we concluded with the nomination of Maxime Minard as President and CEO of Fiera Canada and Global Private Wealth as announced in January this year. The regionalized distribution model will drive closer proximity to clients, better knowledge of local markets, and executive leadership for all employees in each region. We have a solid plan for growth by increasing sales and distribution resources, including entering and opening offices in new key markets to develop new business opportunities. We are committed in acting swiftly on this plan as evidenced by the recent announcements of new offices in Switzerland and Abu Dhabi. The Switzerland office will be located in Zurich and serve as a primary hub for Fiera Capital's intermediaries business in Europe, the Middle East and Africa. The local team will also be responsible for the strategic growth of the institutional business in Germany, Switzerland and Austria, as well as cultivating and growing relationships with family offices, private banks wealth and asset managers, and large ISA platforms across Europe. The office in the heart of Abu Dhabi represents the first step in Sierra Capital's growth plans across the Gulf region, where it has forged enduring ties and strong relationships with sovereign wealth funds, family offices, pension funds, and major listed corporates in the region. Sierra is itself an investor in the Gulf region, both in its active positioning across its emerging markets and frontier markets strategies, in addition to its dedicated MENA mandate. Investors of all tiers have a growing preference for multi-asset portfolio solutions across public and private market strategies, which can be tailored to meet specific asset allocation criteria. Our offering in the Middle East will replicate the bedrock on which Sierra Capital's success has been built, a philosophy of investing in quality over long-term horizons in the absolute pursuit of steady and financially sustainable alpha. I will now turn the call back to the operator for the question period.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchstone phone. you will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. And the first question will be from Etienne Ricard at BMO Capital Markets. Please go ahead.

Thank you, and good morning. To circle back on the new distribution model, You previously raised the potential for growth sales to pick up meaningfully by 2025. Now that you have appointed new leaders across geographies, what are the next steps for 2024 as you look at increasing the visibility of your strategies?

A question for me, I assume?

That's correct.

Okay. Now that we have the regional leaders in place, it's really a question of execution and having the highest quality people to assume that execution responsibility. And the responsibility of those regional leaders over and above having... having put in place their organizational structure that they believe is the one that should be put in place. And there's a high degree of consistency between the four CEOs, by the way, which is a good thing. Their responsibility is to establish priorities in different markets. So find the right leaders on the institutional side lead the consultant relationship part of it, the direct distribution aspect of it to institutional clients, also to have the right leader on the development of the intermediary channel, and the same thing on the high net worth side of it. So the key from here is execution. And my job is, after what I've done last year as the CEO of the firm, is to support the regional CEOs to whom we have delegated those responsibilities and who assume the responsibility of generating the acceleration in sales and new business this year. And like I said before, and you mentioned it, I think the real momentum will be in 2025. My job is to support them, and I make myself available to support these regional CEOs when and if they feel that my presence will help them succeed. So that's the key. It's execution from here.

Maybe if I can just let Max speak to his first 51-day journey here at FIERA and his impressions in that regard. But just to highlight to that point, we had our first off-site last week where not only we brought in each of the regional heads, but also all the lead portfolio managers to sort of set the strategy and the tone for 2024. And it reaffirmed the assumption that we had that just given the uniqueness of each one of the markets that we operate in, both from a competitive perspective and sort of a growth opportunities perspective, that this was really the right model for us. And listening to each of their unique views in terms of how to tackle their markets, both the opportunities and the challenges, I think will really set the tone for success this year. So with that, Max, if you... Yeah, thank you, Lucas.

So I think the opportunity to be a global organization from a manufacturing standpoint and have the ability to get closer and be more closer to our distribution channel our immediate opportunity for us. Number one thing is I think we want to create more proximity with the consulting relationship. Our existing relationship, particularly in Canada, is probably one of the bigger opportunities when we think about short-term opportunities to introduce new solutions to our existing clients. And there's immediate opportunities where we could increase our market share within the pension markets, namely defined contribution, OCIO, family offices, large pension assets. So early in my journey here at but I certainly see a tremendous opportunity for us to increase our market share in the pension market and also see some pockets of segment opportunity within what I consider to be mid-market institutional through multifamily offices and the likes where we could offer the entire investment platforms to potential investors.

Okay. I appreciate the details. And as a follow-up, considering... a more constructive market environment relative to three months ago. For what asset classes do you see the best organic growth potential over the next year? In other words, do you first expect flows to improve in fixed income, followed by equities and private alternatives, or could we see strengths across asset classes?

Listen, it's really across the board. We already see, in fact, we already know of a substantial increase in some of our fixed income strategies. And obviously, the interest rate environment will be very conducive to support that. So it feeds that kind of interest in the investing community. We can see a significant impact happening on the private market side. notwithstanding the beginning of an increase in the interest of investors on the real estate side of things, which is, I think, quite appropriate as a matter of fact, but it's happening. And that should be picking up steam if central banks initiate the beginning of an interest rate decline. We think it's going to happen in the third quarter of this year. So that will feed into this movement. So we're seeing that across the board because higher interest rates have been a headwind for the growth and the distribution of new business in the private market side of things. And as interest rates move on their way down, move down over the next – That's likely to be an affair that will last probably at least a year and a half before we go back to a neutral stance on monetary policy. That momentum should be picking up for private market strategies in the course of that 18-month period, starting, like I said, this June. On the equity side... Listen, we have exceptionally performing equity strategies. It's mind-boggling. Even ourselves, sometimes we say... Hello, can you hear me? Yeah. Even ourselves, sometimes we say this is quite special. We have a Canadian equity strategy that is a great performer in the Canadian market. We have, out of our business in Dayton, Ohio, in the U.S., We have a SMID U.S. equity strategy that is super performing. We have a U.S. large cap strategy. We have an EFT strategy out of date in Ohio, the same portfolio management group that is extremely competitive. And out of London, we have our Atlas global equity strategy, which I've mentioned is right now significantly building momentum and attention. Now, you put all that together, You know, I think people have recognized that we have an exceptional investment platform with exceptionally competitive investment strategies. Now that I think we have in place powerful regional leadership and a strong focus at the regional level on the need to have professional and well organized distribution, I think if we succeed in putting those two things together, we're quite optimistic about the future. And like I said, 2025 will be the year where we'll know if all this transition that we've been going through will be yielding the results that we expected.

Great. Thank you very much.

Thank you. Next question will be from Nick Creve at CIBC. Please go ahead.

Okay, thanks for the question. Lucas, I think you mentioned on free cash flow, the free cash flow from the performance fees will only be recognized subsequent to quarter end. What component of the $42 million would be allocated to the investment teams versus what would be captured by FIERA? I'm just trying to size the magnitude of the impact on Q1 free cash flow.

Yeah, it's, well, I mean, in terms of, you know, they vary by team, quite frankly, and we've had, you know, basically three different teams that contributed to it. You know, I'd say at the end of the day, we are projecting for Q1 to be anywhere between 105 to 110 million of free cash flow for the quarter. So I'll give you an indication of how we would trend sort of above the current trend line.

Okay, very good. And the first quarter, is that when variable incentive comp tends to get paid out? Like is that inclusive of – I always thought of the first quarter as being a bit of a low point for the year just based on the pattern of variable comp.

Yes, you're right. There's two aspects to it. There's the variable comp component, but more importantly, there's the benefits component to salary and wages, which is not an expense you can amortize during the year and you have to take early on in the first quarter. So you're right, those two elements do affect the first quarter. But we expect them to be more than offset by the performance fees in that regard.

Okay, okay, that's good. Oh, so the 105 to 110, that's an LTM number you're referring to, obviously. Correct, absolutely. Got it, got it. Okay, sure, makes a lot more sense. And then when I look across the investment performance statistics that you present, the frontier market strategy really stands out on both an absolute relative basis and I'm just kind of curious, what does the demand look like for that capability? Like, are you seeing an uptick in RFP activity? Are you putting more of a concerted effort behind the marketing efforts of that strategy? Just be interested to hear a little bit more about that one.

Yeah, so Jean-Michel, so yes, we've seen a lot of attention to those products last year. I think the main one that we have started to talk to the market to is the Emerging Select, This product just turned three years old last year with tremendous performance and we have seen a lot of demand, I guess, for that. We expect a lot of this to transform into new mandates during the year, this year. So we have a lot of capacity there. I think the first, this is a smaller market product. I think we can raise anywhere between to entry billion in their short period of time with no problem.

Got it. Okay, that's great. That's it for me. Thank you.

Thank you. Next question will be from Gary Ho at Desjardins. Please go ahead.

Thanks, and good morning. First question is just on the net flow side, the $5 billion in Q4. I understand, you know, the $3.2 billion from Pinestone, a chunk of it's from National, but I'm surprised that at the $1.8 billion outside of the PineStone channel, your performance has been pretty stellar, 98% beating benchmark. And generally, Q4 markets have been pretty supportive. Maybe can you help me think through kind of what drove the redemptions, if performance isn't the issue and market's been pretty supportive? Is there one or two redemptions that kind of took that number higher? Just wanted to pick your brain on that.

Yeah, I think it's a great question, and any of those things are not related to, I guess, the platform or the performance, as you mentioned. A lot of it comes from rebalancing, and we've seen a lot of redemption coming from fixed income and treasury accounts. We have a lot of large institutional clients and insurers that, I guess, use us as their bank accounts, and sometimes those flows are positive or negative, and it just happened that in the last quarter, we had significant outflows in those, I guess, short-term and treasury accounts. And obviously, there's just no concern for us. It just happened that it happened during that quarter. Over the long run, you expect those flows to be to net to zero over the long run.

Okay. That's helpful. And then next question maybe for Lucas. Just on the expense side, encouraging to see the 30% margin you achieved for the full year. Some of your asset manager peers mentioned greater increased focus on cost containment, keeping a tight lid on headcount for 24. Some of them targeting kind of low single-digit SG&A expense growth. So just wanted to hear your thoughts this year with respect to SG&A and excluding performance fees. We know that can be lumpy. But what are you targeting in terms of SG&A expense growth? And is 30% EBITDA margin achievable this year? Maybe chat about the build-out. of your decentralized distribution model and the incremental cost associated with that?

Yeah, thanks for that, Gary, because you've highlighted a key point here, which is, you know, along the way, be it over 23 and going into 24, we have been quite mindful of our cost structure, and we've been addressing costs, particularly with the intention of being able to subsidize the distribution efforts that we're making, which have not been insignificant as we're building out these teams in each of the regions. So as you can see, we've been pretty flat year over year in terms of the overall spend. And I do think it is a testament to the fact that we're effectively recycling the dollars where we're trying to contain costs in certain areas and redeploying them for growth. So the expectation for going into 2024 is indeed to be able to achieve that 30% margin and to maintain a flat cost structure as we continue to say to reallocate capital to sort of more distribution focused activities.

Okay. And I think John is on the line. Just want to hear your thoughts on the private alt side. After maybe a slowish year, feels like activities may be starting to pick up. What are you seeing on both monetization and maybe capital deployment side? And then maybe on monetization, are there any significant performance fees to be crystallized if activity picks up?

Yes. Hi, Gary. So with respect to private markets, maybe... provide a bit of perspective on the last year and provide a forward-looking view of what we see. So last year was a challenging year across private markets. The denominator effect that we entered the year in because 2022 had an impact where many funds coming in were impacted by increased overall allocations to their privates that had an impact. And the environment of increasing interest rates and inflation obviously had an impact. So people were on pause for allocating to privates, particularly real assets, where it's one of our core strengths. So that impacted fundraising. Overall fundraising in the market was tough. However, you know, those three factors are not factors going into this year. I mean, when you look at the interest rate inflationary environment and also the public market environment. So people are focused back on allocating capital, and we started to see that. I mean, we released a first close on our private credit strategy, so we do see the environment being significantly more positive and just the momentum in sales of our strategies. We see a much better market environment this year than last year. I think you alluded to performance fees. I think our strategies are more mature than they've ever been. I mean, a lot of the strategies we've developed over the last years, now we have portfolios with significant AUMs starting to get scale with five-year, six-year, seven-year performance. So I'm quite confident that we will continue to see performance fees increase. on going forward from our private market strategies. So I don't know if I addressed all of your questions, Gary. Yeah, no, just a couple.

More specifically on that one, Gary, because I know it's probably what you're thinking in terms of how much of these performance fees get replicated again in 24. And particularly on the private market side, the $15 million that came in for the year, $16 million, was directly in line with our expectations. So it's about $5 or $6 million higher than it was last year. But to John's point, just given the scale and the diversity of the platform now, we expect that to be a more constant amount going forward in private markets.

Okay, that makes sense. Thank you very much. Those are my questions.

Thank you. Next question will be from Jeff Kwan at RBC Capital Markets. Please go ahead.

Hi there. Good morning. The first question was just with the regional distribution model in place, the new hires, and Jean-Guy, your comments on execution. Just wondering how quickly we should be thinking about how quickly you might be able to get traction on the gross sales activity under the new model.

It's Max. I'm going to volunteer the answer on this one. I think it's about accelerating the sales process. So it's not like – We turn the switch on and off. There's already been a very effective distribution model. What we do by going regional is I think we get closer to the source of how we get execution in terms of increasing the velocity of RFPs, getting closer to consultant, closer to the sales cycle, and helping in order for us to introduce additional solutions to the existing client base. That's the number one thing. Then after, as you deploy additional resources through the market, you are able to identify immediate opportunities in markets where we think we have significant added value and are highly competitive in the Canadian market, particularly in other markets for my peers, CEOs. And as we've gone, and Lucas mentioned that we did a full off-site last week, we've identified immediately what are the low-hanging fruits for us in terms of how can we accelerate that process in some of the segments where we have a differentiating factor from a full investment platform, and also how can we execute faster by deploying the right resources in those different segments. So I think what you should expect for the years to come or the year to come is certainly an increased activity in areas where we are highly competitive and we have the right investment solutions and also to see new segments growing. adding incremental value to our bottom line by identifying those immediate opportunities for us.

Okay, thank you for that. Just my second question is, the dividend, it's been unchanged for the past couple of years. I wanted to get your view on, you know, what's the potential for increasing the dividend at some point over the next 12 months.

The one consideration in that for us right now is when we'll get to Q4 of this year. If we want to remain in the dividend aristocrats index, we will have to increase the dividend at that point. So certainly it's a consideration. Not the only one, but that's certainly one of them that's out there. And again, it speaks to a broader capital allocation decision between also debt reduction, which we're committed to, as well as potential buybacks. So all to be considered for this year. But as I said, I think the key one to your question is the fact that if we want to remain in the index in Q4, we would have to consider an increase.

Okay. Yeah, that's what I was kind of getting at. Thank you for that.

Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchstone phone. And your next question will be from James Gloin at National Bank. Please go ahead.

Yeah, thanks. I just wanted to dig in first on the OpEx. And I believe, Lucas, you're sort of guiding towards flat operating expenses 24 versus 2023. And so just wanted to dig in a little bit in terms of, you know, given the spend on the global distribution model, where you might be finding some savings elsewhere in the business to help fund that flat OpEx. guidance. And I believe that was on an absolute dollar basis, but maybe confirm and sort of discuss that.

No, you're correct. And, you know, the short answer is we've made significant investments in our technology and operations platforms over the last few years. And we're finally starting to reap the benefits of, you know, process re-engineering, changing. You know, while we've gone to this regional model from a distribution perspective to really be closer to our clients, and distribution being a local sport. A lot of the back office synergies that we talked about in terms of keeping that centralized and keeping that global has been coming to fruition over the years. So as I say, I think this is where we've been seeing the benefits come in over 23, and we expect to continue to getting some in 24 to help fund that. So when you're looking at overall this G&A, you might continue to see a creep up from revenue-related expenses, as Gary already alluded to, in terms of particularly the impacts from performance fees there. But when you're looking at overall sort of our management of compensation, we're flat. And commissions as well from distribution, obviously. But the cost structure itself is looked to maintain flat.

Okay, understood. And then second question is related to let's say like the other revenue sources, share of JV, you know, those drivers, you know, obviously there's some seasonality in Q4, but the step up over last year was quite significant as well. And so is that a step up? Is that a growth rate that we can kind of expect for 2024? How should we be thinking about some of these other revenues? I know they're lumpy, but maybe a little bit of insight or visibility that you can provide would be helpful.

Yeah, you know, I'd love to be able to give you some chairman, just the reality is, and we keep sticking to the tagline that, that they're lumpy. And that's just the reality of it. There's, you know, there's a pipeline of projects, you know, quite frankly, for us, we even had two surprise to the upside in Q4 of this year, which was, which was helpful. Uh, but it depends. And I think particularly on the real estate side, given the challenges that we saw in, in 2023, uh, it made it more challenging to bring some projects online and to market, you know, will that cause an acceleration in 24? perhaps. But as I say, I'd rather not put out any guidance there because it's one of those things where it just really does depend on when the keys are handed over at that point.

Yeah, maybe just to comment on that. I mean, the share of earnings, the JV earnings we report are really related to value-add strategies we run in real estate. And rather than running those strategies through funds, We run them through joint venture partners that are basically investing institutional capital. So it's just a question of because of the structure we have, we report them as earnings as opposed to really performance fees, but it's profits and performance fees being generated by specific projects we have with partners. And they're principally value-add real estate strategies. So the comment as to where... Historically, this number has been significantly higher when we've had a very strong real estate market. The UK real estate market has been weak over the last year. And I wouldn't say it would necessarily, I still say it's not in the strongest position, but we will continue to have earnings of a similar nature like this. But the potential, it could be significantly higher once the real estate environment is you know, becomes more of a, I'd say, back into a bullish market because we've generated significantly more in earnings in the past coming from this revenue stream.

Thank you very much.

Thank you. Next question will be from Graham Riding at TD Securities. Please go ahead.

Hi, Lucas. Just to confirm on the working capital piece, I think typically Q1, there would be a drag on that front. I believe you said that would be just sort of related to variable comp being paid out. But this year, you think because the performance fees are strong, on the net performance fees, that's going to more than offset. Is that the right interpretation?

Correct. I mean, what happens is in the fourth quarter, you recognize the revenue that goes into your earnings. But then because you don't actually collect the performance fees, you have to take the working capital charge on the receivables. So it's a net wash, and what happens in the first quarter, we'll reverse that receivable, get in the cash, and you'll see the working cap lift, which actually helps the free cash flow at that point. And again, given the reality of the performance fees in Q4, you'll see that positive pressure in the first quarter.

Okay, understood. And then just on the Pinestone mandates, I think your guidance, you know, I could ask this to John Gee or anybody, but I think it was $2 billion to $3 billion of further leakage in 2024 and then $0 to $2 billion in 2025. Just conceptually, why would you still be – guiding or expecting some further leakage? Like, why would clients not, if they were going to transition away directly to find someone, why would they have not done so already?

Well, what you just said is exactly what I think. But, you know, for a question of prudence, it would have been inappropriate if I had said that we expect that leakage after 2024 will be zero. So I think it's just a question of providing a certain element of conservatism and prudence, which we do and we manage on that basis, that not knowing anything with 100% certainty, that's why I've used a range of zero to two. That's the only reason. But what you just said, is absolutely right in terms of what you normally would be expecting. People who had the intention or the desire, or if you take this large financial intermediary, which for business model reasons, made a decision to shift something like $7.5 billion, which comes to an end at the end of the second quarter this year. People who have the intention, who have the reason, who have whatever structural constraints that leads them to move directly would normally have done that in the course of the first two years, which would be 23 and 24. So your logic about what happens after the first two years, I think, is pretty solid.

That's it for me. Thank you.

Thank you. And at this time, it appears we have no further questions. Please proceed.

Thank you, Sylvie. That concludes today's call. For more information, do not hesitate to either call me or take advantage of our website at rr.pierrecapital.com. Thank you for joining us. Merci.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.