AGF Management Limited

Blake Charles Goldring - Chairman and Chief Executive Officer Robert J. Bogart - Chief Financial Officer, Executive Vice President and Member of Executive Committee

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division Scott Chan - Canaccord Genuity, Research Division Paul Holden - CIBC World Markets Inc., Research Division Doug Young - TD Newcrest Capital Inc., Research Division

Thank you, operator. Good morning, everyone.

I'm Bob Bogart, CFO of AGF Management Limited. It's a pleasure to have you join us today for our third quarter results for fiscal '11.

Please note that the slides today supporting today's call and webcast can be found in the Investor Relations section of agf.com. Today, Blake Goldring, Chairman and CEO, and I will discuss AGF's third quarter results.

Also joining us on the call and available to answer questions is Mario Causarano, President and COO of AGF Trust. Moving to Slide 4, I'll now turn the call over to Blake.

Thank you, Bob, and welcome, everyone listening to today's conference call. Since our last update in June, the global economic environment has continued to deteriorate.

Over the summer, the European sovereign debt crisis intensified, U.S. economy continued to falter and investor confidence in the ability of policymakers to respond and enact measurable change was very low.

In response to these uncertainties in Europe and the U.S., global equity and commodity prices have fallen significantly and financial market volatility has increased. In fact, the VIX Index, which measures market volatility, recently edged closer to Level C during the financial crisis and subsequent volatility in 2010.

Against this backdrop, we believe we are well-positioned, though, to address the cycle of volatility and continue to deliver value to our shareholders. Let me give you some of the highlights from the third quarter.

Investment management assets under management increased 13.6% to $48.4 billion from a year ago, driven by the acquisition of Acuity. Since our last update in June, the Acuity fund mergers have been approved by the regulators, and the majority of fund mergers took effect on August 26, 2011.

We've completed the back-office integration of the Acuity operations and are on track to deliver the cost synergies. Consolidated revenue was up 17% and EBITDA was up 18% in the quarter.

Our Retail business continues to trend positively on gross sales with year-to-date gross sales up 15% compared to last year. However, net redemptions continue in the retail space, and I'll speak to that little bit in a minute.

Our Institutional business generated excellent growth this quarter, and we have met organic growth in this business line on a year-to-date basis. Our free cash flow remains strong, with a 6.1% increase compared to the third quarter of 2010.

At AGF Trust, loan assets are stabilizing and we continue to expand our mortgage programs in both the broker and advisor channels, which are expected to drive gradual increases in new originations. Turning to Slide 5, as our stakeholders know, we're one of the largest independent wealth management firms in Canada.

Our assets under management have increased 13.6% to $48.4 billion year-over-year, primarily because of the acquisition of Acuity. However, we're confident that we continue to grow our assets organically as well.

As you can see from this slide, we've had growth across all 3 client segments, Retail, Institutional and High-net-worth, in comparison to Q3 2010. We consider diversification to be one of our strengths and essential to being a successful investment management firm.

Turning to Slide 6. There are positive trends within our Retail sales, with gross sales growth year-over-year driven by the acquisition of Acuity.

Our gross sales growth in the past quarter was 8.1% in Q3 2011 compared to the same period last year and almost 15% year-to-date. As I mentioned, our Retail redemptions are not where we want them to be.

The equity markets have experienced great volatility and the crisis in confidence that I spoke about in Europe and of course, certainly, the United States, combined with the strong Canadian dollar, these have all been headwinds on the Retail side of our business. As you know, we have a lot of our assets in the equity side and a great component of our assets in foreign equities as well.

We have announced several changes in the quarter in our investment management organizations, namely Martin Hubbes has taken on the additional responsibilities of Executive Vice President, Investments, in addition to his CIO role. In his new capacity, he will provide direct leadership to AGF's investment management team currently based in Toronto, Dublin, Singapore, and work closely and collaboratively with AGF's investment management team at Highstreet.

Peter Frost, currently the manager of a 5-Star fund, will join Caterina Prato in the management of Martin's funds: the AGF Canadian Stock Fund, the AGF Canadian Stock Class and the AGF Canada Class. In addition, we've hired Terry Ellis as Head of North American Research.

In his new role, Terry will be responsible for overseeing and developing the research team in Toronto and to provide fundamental research support to North American equity teams. He also is a seasoned investment industry professional with over 15 years of international research experience.

After 18 years with AGFIA or our Dublin operation, John Arnold is retiring effective October 31, 2011. John has made significant contributions to the firm, and we wish him the very best in his future endeavors.

The mandates that John was overseeing, they're now being transferred to Rory Flynn, a long, long time associate who has been -- in fact, who's the second higher in our Dublin operation, and he's going to be reporting directly to Martin Hubbes. I should say that the 30/30/30 philosophy still holds very strongly, but I know that Rory has some important changes which he has -- in a constrained way, which he is working on.

We continue to develop new products and services to meet the needs of clients in every market cycle and life stage. We're confident we're on track in our strategy, and we will get out of the buildings in the redemption side, and there continues to be very strong support in the marketplace for AGF products.

Turning to Slide 7. Over the last 2 quarters, we showed you a more detailed view of our Institutional business and I am pleased to highlight the momentum we continue to build.

We've seen net organic growth both in the quarter and on a year-to-date basis. Due to the large size of Institutional mandate, inflows and outflows in this category are more evident.

During the quarter, we received the expected funding as was referred to in our Q2 2011 earnings conference call, which resulted in $871 million in Institutional inflows year-to-date. Offsetting the inflows, we've experienced some redemption activity in the quantitative mandates as this investment sale tends to underperform in volatile markets.

We currently expect redemptions of $262 million in the fourth quarter, largely driven by net redemptions in our quantitative mandates. However, these are offset by new Institutional inflows.

However, we continue to view our business line in the Institutional side as a global growth vehicle for AGF over the next 5 to 10 years. With that, I'll now turn the call back to Bob.

Thank you, Blake. On Slide 8, we've provided a summary of our consolidated financial results for the third quarter of 2011 compared to 2010.

Consolidated revenue was up 17.4%, driven by higher levels of AUM in our Investment Management segment. Please note, we've recognized $1.7 million in integration costs during the quarter related to the Acuity acquisition.

Overall, SG&A was up 17%, primarily related to the acquisition of Acuity, increased headcount levels and a $2.9 million charge recorded in the quarter related to the Dublin personnel changes. This $2.9 million charge has not been included in the one-time costs or adjusted EBITDA.

EBITDA was up 18.4% to $72.2 million in the third quarter 2011. Excluding one-time costs, adjusted EBITDA increased 21.1% to $73.9 million.

Net income for the quarter was up 7.6% year-over-year to $29.9 million. Diluted earnings per share is $0.31.

Excluding one-time costs related to Acuity, diluted EPS increased to $0.32. Again, I would like to note that the adjusted EPS does not include any charges related to the personnel changes highlighted earlier in the month.

Finally, free cash flow increased 6.1% to $44.9 million for the quarter. Turning to Slide 9.

Let's look at the Investment Management segment. Third quarter revenues in our Investment Management segment were up 22.1% year-over-year to $151.7 million.

As mentioned, this is primarily related to higher AUM levels as a result of the Acuity acquisition. SG&A expenses increased 21.4% year-over-year.

Compensation-related expenses were higher in the third quarter of 2011 as a result of the Acuity acquisition, increased headcount and the aforementioned charges related to personnel changes. As Blake mentioned, we have essentially completed all the back-office integration with Acuity.

We have some additional expenses that will be incurred in the fourth quarter but entering fiscal year '12, we'll have all the cost synergies captured for future periods. We expect no additional acquisition or integration costs going forward.

EBITDA of $61.4 million increased 22.3% on a year-over-year basis. Excluding one-time acquisition and integration costs related to Acuity, EBITDA increased to $63.1 million or 25.7% relative to Q3 2010.

Overall, adjusted EBITDA margins, excluding the one-time costs associated with Acuity, expanded 120 basis points to 41.6% in Q3 '11. Turning to Slide 10.

This slide lets you see our segment performance on a longer-trended basis and smoothing out some of the impacts of market volatility. It shows our Investment Management segment revenue, operating expenses and EBITDA as a percentage of average AUM on the current quarter, trailing 12-month basis and the prior year's quarter.

Note that quarters have been annualized in Q3 '11 in trailing 12-month column, exclude the impact of one-time costs. As reflected in the previous slide, the increase in AUM in addition to the realization of the synergies associated with the Acuity integration have resulted in an increase in the EBITDA yield for the quarter as compared to Q3 2010.

However, the impact of the unfavorable equity markets over the quarter has resulted in a slight yield decline as compared to a trailing 12-month basis. As our business mix moves from Retail to Institutional and as we continue to make additional investments in that line of business, we'll expect to see our EBITDA yield come under some pressure.

The expectation though is that the overall AUM increases will offset any yield reductions. Moving on to Slide 11.

Let's quickly review the Trust segment. Gross loan originations increased from $44.2 million in Q3 2010 to $112.4 million in Q3 2011.

This includes a $28 million loan origination via a strategic relationship. The increase in loan originations was driven by 161% increase in mortgage loans compared to Q3 2010 as a result of stronger takeup in the PFS SMART Loan program and our partnership program with a large national mortgage broker firm.

Turning to Slide 12. Trust revenue for the third quarter of 2011 was $21.4 million, a decline of 11.9% year-over-year directly attributable to the lower average loan balances.

Loan assets decreased 9.4% to $2.9 billion compared to $3.2 billion in Q3 2010, but the focus has remained on underwriting higher quality and more profitable loans. Reflective of the improving credit quality of the book, Trust loan loss provision for the quarter was $2.9 million, a reduction of 38.3% from a year ago.

SG&A expenses in the third quarter were relatively flat with a 1.1% increase year-over-year. EBITDA for the quarter was $9.4 million, a decrease of 11.3% compared to Q3 2010.

The efficiency rate was 43.9%, trending lower on a sequential quarter basis as excess capacity is managed downward. We have continued to expect the efficiency rate to trend down as volumes pick up and the operational capacity is utilized accordingly.

Note that in Q3 2011, we repatriated $10 million of excess capital to AGF Management Limited and that we are actively reviewing our options for further reductions in trust capital over the next few quarters, including dividend payments and/or repayment of subordinated debt, all which are subject to regulatory approval. Turning to Slide 13.

Free cash flow for the quarter was $44.9 million, an increase of 6.1% from a year ago. AGF's ability to generate substantial free cash has allowed us to repurchase shares in the third quarter and increase our dividend by nearly 4% in Q2 2011.

Dividends and share buybacks as a percentage of free cash flow was 74% this quarter. This includes 500,000 Class B nonvoting shares that AGF repurchased during the quarter at a cost of $8 million.

Excluding the shares repurchased, our dividend as a percentage of free cash flow is 56%, which is in line with previous quarters and management expectations. We view our free cash flow generation as a key strength of the company which will be used to increase shareholder returns, reduce debt and provide the available capital to execute strategic acquisitions as and when the opportunities arise.

Finally, we executed on an expansion of our credit facility with our primary banking relationships, entering into a 5-year $125 million facility. Our overall debt levels have not gone up.

We've just increased our capacity at this point and have fixed the interest rate for a portion of our overall debt. Turning to Slide 14.

EBITDA per share increased 10.3% compared to the third quarter of last year, while adjusted EBITDA per share increased 13.2%. Reported EPS was flat year-over-year due to the one-time transaction costs related to Acuity, the Dublin personnel changes and the impact of increased amortization due to purchase price accounting.

Excluding one-time costs related to Acuity, diluted EPS was $0.32. And turning to Slide 15, I will send it back over to Blake.

Thanks very much, Bob. I'd like to just focus on something very briefly but extremely importantly and that is the importance of returning value to our shareholders.

And as what you see on Slide 15, as we look at our dividend record. And our yield at 6.8% is extremely attractive in this environment.

In this period of uncertainty, our consistent strength in free cash flow, our track record of returning value to our investors and our dividend proposition are extremely appealing. As Bob mentions earlier, we're committed to delivering value directly to our shareholders.

And in the third quarter, we purchased 500,000 shares of Class B nonvoting shares. So you can see that we are constantly looking for ways to increase the shareholder value for our investors.

That concludes our formal comments, and now we'll open up for questions.

First question is just relating to the investment income or the other income. Can you kind of explain the $1.7 million positive fair value adjustment that was -- that benefited this quarter?

That was related to the acquisition. So there are exchangeable shares with respect to the Acuity acquisition that were based at a certain price on the close date, and the stock prices moved so that delta in the obligation flows to the P&L now as opposed to...

So it flows through every quarter based on, I guess, the closing share price?

That's correct.

Okay, got you. Second question is just related to the Institutional side.

Basically, the $24 billion AUM, can you give me an approximate split between the pure Institutional and the sub-advisory? And I guess secondly, just for fiscal Q4 to date, how is the RFP pipeline in terms of potential future mandate?

Yes, it's approximately 50-50, Scott.

50-50? Okay.

I'm sorry, and the second part of question, Scott?

Just in terms of potential RFP mandates. You mentioned that there was -- in the pipeline right now, there is a quantitative mandate that you lost.

But just in terms of activity and speaking with consultants or -- and in terms of are you seeing an increasing amount of RFP mandates decreasing from last quarter based on just the market volatility in the market?

No. I don't think Institutional -- the Institutional business is as subject to the vagaries of the market in that the level of activity remains very solid, and that is spread across North America, Asia, Europe, both in private pension funds as well as sovereign.

So it's quite strong in the 3 mandates that have been receiving a lot of the attention that we've mentioned in the previous quarters so those being emerging markets, global resources, global core.

Okay. And I guess just finally, I see that you've completed most of the Acuity integration.

And I guess the last part you guys talked about is just the revenue synergies. Just based on the market right now, what have you been kind of doing strategically to kind of gain synergies from the Acuity on the Retail side?

Well, we've had a number of meetings across the country with advisors. And what's really exciting is that the number of active advisors who actually use Acuity but never use AGF were making a very active moment to get out and get in front of them, in fact.

Our sales team -- our sales leadership are all out at a conference today, in fact, and have been meeting with a number of advisors, talking and sharing the stories. So I'd say that, that's probably the key point.

And in the world of sales, retail sales, it tends to be 3x to 5x of meeting people to finally get your message across. So there has been a good cross-pollinization, if I can call it that, between the AGF supporters and the Acuity-only supporters.

And the only thing I'll add to that, Scott, is that we have had some success on the Acuity Institutional side as well where they've actually sold the mandates.

Like by pool funds, for instance. They happen to be a huge area, which we have not had until the traditional AGF lineup where now I build [ph] offers that went through Acuity.

Bob, are you talking about the Acuity pure Institutional or the Retail pool is gaining traction?

Institutional.

Was there an Acuity Institutional booked in the last fiscal quarter?

There was and there's in part of that $262 million that we're looking forward. Actually, we booked one in Q3 with the expectation of more coming online in Q1 of '12.

But that's not part of that $262 million that we displayed. The point being that there's activity on the Institutional side as well if you're looking for revenue synergies.

First question I have was just on the debt facility. I mean, you've increased the amount that you can borrow.

You haven't changed the amount that you're currently borrowing, and you may be able to get some additional capital AGF Trust. I'm trying to get some color around what the thought process was around expanding the debt facility, whether or not it might be to buy back shares, increase the dividend or acquisitions or something along those lines.

I think it's a couple things, Geoff. One is that rates are at historic lows, so we wanted to partake in a little bit of that.

So the 2 main objectives: increase the debt capacity primarily for dry powder on the strategic acquisition side as opposed to any significant or thought-out repurchase plan on the shares; and then secondly, to take the opportunity to fix some of that overall debt capacity at rates -- at current rates. So those are the 2 primary drivers behind the debt facility.

Sorry. I mean, just expanding on that M&A landscape, how is that looking?

Is it you guys are seeing more opportunities or...

We certainly see a lot of opportunities, probably a little bit of a tail off with the recent market volatility but not significant. And we're seeing them in Europe as well as the U.S., as well as Canada.

Okay. On the net sales, net redemption side, given the market downturn, are you guys seeing -- is it an issue of investors not buying, investors redeeming or both?

I think, Geoff, that the volatility has meant that -- I talked to industry colleagues and different firms. Everybody's experiencing a real slowdown in actual purchasing.

And that's not to be completely unexpected with the volatility and frankly, worries of recession and what-have-you. I think once we get a little more clarity on issues like a way forward out of the sovereign debt issues, I think confidence will start to come back, and that will be good for the industry.

So is it just a gross sales issue not a redemption issue that you think for the industry or is it both?

Yes. I think that the industry as a whole still has a great value proposition and it's very, very attractive.

So it has been a bit of a 0-some gain to date with money moving around looking for performance. But to a great degree, assets that have come into the business have gone into either fixed income and to some degree, the balance on categories.

And that will probably continue for periods.

Yes, we're seeing a little bit of a pickup on the redemption side and particularly with our book, which is skewed a bit towards the international, certainly in Europe and the financial crisis that we're seeing there. So that plus the strengthening Can dollar [Canadian dollar].

These are all kind of themes that we had highlighted over the last couple of quarters.

Okay. And last question I had was with the downturn that we've seen in the markets, is that changing how you're looking at managing the cost side of the business?

And if it does get to that, I mean, how much more -- I mean, you guys went through some cost containment exercise over the past couple of years. How much more is there to do?

Well, I would say that we're comfortable where we're exiting Q3 into Q4 in terms of our G&A. We're obviously diligent to the extent that the market volatility is going to impact on the revenue side will take action.

That said, we're also committed to grow out the Institutional business over the long term because we see substantial growth to that, and that we don't want to necessarily slow that down for a few quarters' worth of market volatility. If it's sustained, we'll make the appropriate changes to the cost structure.

But we're comfortable where we're at right now, Geoff.

First question, with respect to the cost synergies to be realized in 2012, could you remind us sort of what that number should look like?

Well, we never really gave a number, Paul. So I think if you took the kind of the -- if we're exiting Q3 at $55 million in terms of SG&A, we think because of some of the one-time items and whatnot of a better level is $53 million to $54 million, and that's what we'd expect going forward.

So it would already have -- because most of the -- majority of the synergies have been taken out, we've got some incremental operational costs that we'll experience in Q4. But for the most part, the synergies have been realized exiting Q3.

Right. That goes in Q3 [ph].

But I guess it wouldn't have seen the full benefit in Q3, we'll see more of the full benefit including the fund mergers starting in Q4?

That's right.

Okay. With respect to fund flows, wondering -- specifically with respect to fund flows on mutual fund side, how they progressed through the quarter i.e.

how did sort of August compare to June and July?

I think August was a rougher month. Redemptions accelerated a bit in August.

And then, Blake, you made a comment regarding fund flows into fixed income and balanced and that implicitly equity may remain challenged for some time. I would agree with that given that investors' psyches have to be scarred at this point even more so.

So what's sort of your plan to capture a greater share of flows into those 2 mandates, fixed income and balanced?

Well, that was really a strategic rationale behind the acquisition of Acuity. I mean they've got a very strong series of product offerings in that -- in those sectors.

The AGF fixed income team, it's very strong too, robust. We've brought out a good -- in fact, I think of just 2 fund launches that we have, the EM debt and the EM balanced funds.

Both have been very successful product launches. Since the last 6 months, brought in $50 million-plus.

So I see that we've got -- we'll just work hard to get our share of the area where there's going to be flow.

Okay. Final question, correct me if I'm wrong, but my understanding is with a lot of the mandates run out of Dublin, they were overweight European financials, probably a position that's being challenged again today and one that might be hard to sell to investors.

Is there -- given the investment management changes taking place over there, will that sort of overweight position or that philosophy potentially change going forward?

Yes. In fact, Paul, I don't mind sharing with you that I know Rory and his team have -- they're actually out talking today about a number of, I think, significant changes which are real enhancements to the overall portfolio management they have.

And really 3 key areas: One, they're actually increasing the number of stocks that they have in the portfolio. They've tightened the constraints at the sector level, as well as tightened the constraints at the stock level too.

So I think the combination of those -- in fact, we actually run portfolio spread to clients with exactly those attributes. And I have to say it's a very, very compelling performance.

So I think as we get the story out more, certainly those who are there will be very satisfied but also win back some of the outflows that might have [ph] left.

Okay. So given the constraints on the sector allocation, I'll assume then that the weighting to European financials is going down?

That's correct. That's right.

Just, I guess, one. First, just a few clarifications.

The one-time items in the quarter, I just want to make sure the acquisition cost, $1.7 million charged; the severance or the reorg costs, $2.9 million; and then there was a gain on the stock plan of $1.7 million, I just want to confirm that's correct. And I think you mentioned that the reorg and the gain on the stock plan, those 2 items were not a reversed debt in the number that you provided.

Let me break that question up, Doug. So the $2.9 million, the $1.7 million and the -- what was your other one?

The $1.7 million, the gain related to the stock adjustment.

I got that one and then the $2.9 million, then you said there was another one. Oh, the $1.7 million with respect to -- there's two $1.7 million.

Yes, those are all one-time.

And those are all pretax?

That's correct. But we did not -- we only utilized -- as consistent with prior quarters, we've just identified the $1.7 million associated with the integration costs as a one-time.

Okay. And there's no reason we wouldn't -- if we wanted to get a normalized number, there's no rationale for not taking out the 2 items out?

That's correct. There are some other things in there as well.

So that's why I'm giving you guidance around $53 million on SG&A.

Yes, perfect. The second is I guess -- Blake, I guess in your prepared remarks, you talked about the outflows on the Institutional side of $262 million and I'm not sure I caught it, but you mentioned that there was some offsets on Institutional inflows.

Are you expecting that based upon what you're seeing to be essentially flat, or I just want to clarify that?

Yes. No, we're looking at certain mandates that are going to fund next quarter.

That's a net number, Doug.

So that $262 million is a net number?

Yes, based on the pipeline and the time it takes to actually get it funded. At the end of Q3, we've got a pretty good line of sight as to what we actually think will get funded in Q4, and that's our best estimate at this point.

Okay, great. And then the just -- I know, Blake, in your prepared remarks, you talked about -- obviously, it's a very challenging environment out there for all asset managers.

I mean, we're seeing them in the flow numbers. But you mentioned there's been some strong support for AGF and AGF products.

And I just was wondering if you can give us just some examples of that and talk a bit about the support that you're getting from the advisor community.

Well, I mean, we have just been selected by a major distributor to work on a particular RAP product, and this is something which you'll hear more about in due course. That's just fresh.

I would say that there's been ongoing -- for instance, we have a major sales conference going on today and great interest in the AGF story. I just think of our various partners that we deal with closely, that relationships remain very strong.

I met personally with a number of the folks heading up major distribution organizations, and there continues to be a solid level of support for AGF. And again, it's very encouraging that knowing that when things do start to turn around and stabilize, I'd say we're going to have a good group of strong supporters.

And why I say it is people like to have an independent firm and one that offers a wide array of different products, and that's critical. And we had a little bit of underperformance as well on a relative basis, and we've taken some definitive steps which I addressed today to really check that.

So I'd say the combination of all this means that we should be in a well position for continued retail support.

Is there any other changes that you think you need to make?

We're making quite a few.

Absolutely. And then just, I mean, on the RAP product, can you give us any more or is that something that you'd just rather us wait for?

I'd rather not speak of that today.

Okay. And then just lastly, I think on the M&A side, Bob, you mentioned Europe and U.S.

as well. What exactly are you looking at in Europe and U.S.?

Is this more Institutional or would you consider Retail?

Probably more Institutional, Doug, although we would look at -- because I've always been a fan of relationships where it's Retail-like but maybe like with a strong sell advisory capacity where you've got the stickiness of retail but you don't have the inherent risks and costs associated with actually distributing the product through the retail distribution channel. So both of those, I think, hold interest for us.

And are you seeing more or less? Obviously, this -- and what's the competition like because it seems like everybody is focused on doing M&A in the asset management space so I would imagine there's more people at the table.

Is that a fair assumption?

We haven't gotten to the proverbial table, so I couldn't respond to that. But the level of interest has picked up probably because we've been a bit more proactive as opposed to reactive with respect to the space.

And I don't think that we're -- we're not looking at large targets that maybe some of the other FIs might be interested in. I mean, these are going to be more manageable and strategic acquisitions which allow us into new distribution channels, new product capabilities or footholds in new geographies.

That being said, I just have to say too though that anytime somebody does want to do something, we're usually the first port of call, in the sense people like to explore how we've been able to sort of integrate a number of different organizations and so we're an attractive place, frankly, for folks to come and work.

Thank you very much for -- to everyone for joining us today. Our next earnings call will take place in early 2012 when we review our fourth quarter results for fiscal '11.

Details of the call will be posted on our website. Finally, an archive of the audio webcast of today's call with supporting materials will be available in the Investor Relations section of our website.

With that, good day, everyone.