AGF Management Limited

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

John Aiken - Barclays Capital, Research Division Geoffrey Kwan - RBC Capital Markets, LLC, Research Division Scott Chan - Canaccord Genuity, Research Division Paul Holden - CIBC World Markets Inc., Research Division

Thank you, operator. Good morning, everyone.

I'm Bob Bogart, CFO of AGF Management Limited. Thank you for joining us today for a discussion of our fourth quarter and fiscal 2012 financial results.

Please note that the slides 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 our fourth quarter and fiscal 2012 financial results.

Turning to Slide 4 of the agenda for today's call, we will discuss the highlights of the fourth quarter and provide a business update on the key segments of our business, review the financial results, discuss our capital and liquidity position and finally close with an outlook for 2013. After the prepared remarks, we'll be happy to take any questions.

With that, I'll turn the call over to Blake.

Thank you, Bob, and thank you, everyone, for joining us on today's conference call. The last 12 months were challenging for both the global equity markets and the asset management industry as a whole.

Investors were subjected to Middle East turmoil, European geopolitical issues and a fiscal cliff, with a more problematic U.S. deficit discussion to take place this coming spring.

Investors continue to shy away from equities even with the backdrop of U.S. markets returning double-digit returns.

Those investors that are seeking and taking a longer-term view of the equity markets are being rewarded now. That said, we have believed for sometime there will be a significant rotation into equities that could unfold and last over the next decade.

With that point, we see positive early indicators in 2013 particularly in the U.S. markets, which will fund equity flows there in the first few weeks of January with the largest in 5 years.

That fall in exodus from U.S. Treasury as investors pulled more than $6 billion from the category in the last 6 months.

Likewise, the institutional investors are also sending bullish signals. According to research conducted by investment executives, asset allocators assigning -- are now assigning more funds to equities than at any other times since February 2011, confidence in world economic outlook reaches most positive since April 2010, investor appetite for risk is at its highest in 9 years.

At AGF, this portends well for us given our focus in equity investing as we have very good business environment in which to operate. Now with that backdrop, let's review the fourth quarter highlights.

Overall, fund performance continued its steady improvement, ending Q4 with 44% of the Retail mutual funds ranked by Morningstar in the first and second quartile, up from 19% a year ago. We experienced a setback in our Institutional business when certain investment professionals left the organization last year.

The Institutional business had a terrific momentum till that point and a healthy pipeline may take another few quarters to put it finally behind us. However, in the fourth quarter, we've experienced relative stability in our pipeline, which is welcome news.

We are cautious that we are not out of the woods yet. This will continue to play over the next 2 quarters of 2013.

The global team has been reconstituted with a very strong and improved capability. Our priorities to our clients were to rebuild the team, maintain performance of the funds and retain assets.

I'm very proud of the team that we, to say, that we have met each of those commitments. New product launches for 2012 have been experiencing excellent traction with our retail distribution and I'll touch on that as part of the retail update.

We experienced a spike in retail redemptions for the quarter related to sub-advisory platforms, and I'll also provide more color to that in the retail update as well. Cost restructuring that we set forth on the Q4 -- Q3 call has been completed and we see that in the run rate of SG&A for 2013.

The normal course issuer bid, the NCIB, was completed in the fourth quarter and we've reduced our outstanding float by approximately 8% and as a result, our dividend payable was reduced by 3 -- $8.3 million. Finally, the board approved a $0.27 per share dividend, which was paid earlier this month.

Turning to the Slide 6. This slide reflects the improving performance of our retail funds from November 2011 to the end of November 2012.

As we have stated on previous calls, our #1 priority has been improving our investment performance for our assets under management. In the past year, we have improved the percentage of retail funds to 44% above median as compared to our peer group.

We need to make further progress in 2013. Our goal is to be 60% above median on a 1 and 3 year number.

[indiscernible] back, the improved performance is attributable to the work we undertook starting over a year ago that continued during 2012 and will remain a focus for 2013. Key highlights of the changes include: One, Martin Hubbes, stepped aside from managing flagship funds to focus purely on being a Global CIO, those responsibilities; second, we had comprehensive changes with the North American platform.

We added a new head of research, implemented a more rigorous and standardized research process, developed 2 new tactical asset allocation processes to support a suite of products. Three, we executed leadership and process exchanges in the Dublin team.

Fourth, we implemented wide ranging changes to our compensation structure to encourage retention. Just as important, we're seeing the improving performance in the categories that are garnering the most sales within the industry and a fixed income, equity income and balanced products.

Although this is not yet translated to gross sales, we fully expect that it will. It is important to note that this is not -- this is a marathon, not a sprint and we will continue to make performance our #1 priority within the firm.

Turning to Slide 7. In assessing our capabilities, we at AGF believe that we have a competitive advantage with our global investment platform and we intend to leverage that capability moving forward.

We have a clear investment process and experienced team, strong performance returns across every time frame. Our emerging markets and our global capability are top 10 in the world based on e-vestments [ph], risk-adjusted returns over a 5-year period.

We leveraged this platform across a variety of mandates, including global core, emerging markets, global dividend, and EN balance. We've also leveraged this platform across our Retail and Institutional distribution.

We will continue to invest in our global capability and assess new opportunities to extend to adjacent categories to take advantage of the AUM capture opportunities. In our view, this asset class will increase in demand over the next decade and we have the team, resources and the distribution to take advantage of that demand.

Our global platform has significant capacity and we expect a multibillion-dollar asset management growth opportunity over the next 3 years in the global categories. We'll be looking to develop additional capabilities in 2013.

We are interested in U.S. market to be a $30 trillion market by 2015.

We completed a thorough assessment of where we want to play, performed by what -- informed by where they're significant money in motion, which categories present the best opportunity for AGF that align well with our existing distribution capabilities and investment culture. We have more to say about this as the year progresses.

Turning to Slide 8. I want to get into some detail of our Retail business.

We love the Retail business. We're also very well aware that there is a challenging market for growth in the near term.

There's some cyclical headwinds that I described at the top of the call regarding investment -- investor reluctance to buy equity funds and I agree, market volatility. Money remains on the sidelines or in lower fee income products.

These challenges play into the strength of bank distribution at the expense of the independents. While we wait for the great rotation back in equities, we continue to innovate on the product development front.

In response to the investor demand for yield, AGF launched its floating rate fund last May. This unique fund, sub-advised by Eaton Vance, provides investors' exposure to floating rate loans that can serve to reduce interest rate risk while not significantly impacting income.

We're very pleased by the fund's performance to date, and it clearly has more than $100 million under management. We're targeting $15 million per month in net flows for 2013.

Just as important, this type of product can't be replicated by brokers and this has been a door opener to provide our wholesalers access to a channel that's been underserved by AGF in the recent past. We also introduced a suite of fund products that offer the managed portfolio of fixed income and equity securities in a single fund, with active tactical asset allocation.

These products address different income and inflation protection needs of investors. Finally, we are reverting -- we are reviewing low volatility products as a way to capture AUM for those investors that want to increase their equity exposure but limit their outside capture.

As an equity focused firm, we expect to perform better in a stronger equity environment. We believe 2013 is off to a strong surge in the global equity markets and we are well positioned to take advantage of the inevitable rotation.

To this extent, we expect to deliver high year-over-year gross sales -- higher year-over-year gross sales in 2013 relative to 2012 across all our product lines. As I mentioned at the start of the call, in the fourth quarter, we experienced a spike in retail redemptions.

The spike was related to our retail sub-advisory platform business. Two large relationships removed our AUM from their respective platforms predicated by economics of the distribution partner.

These outflows are approximately $450 million of what we consider to be one-off redemptions and do not view our other strategic relationships as being at risk and the AUM stable. In fact, we expect to add over $200 million in AUM through our sub-advisory platform in Q1 of this year.

With respect to EM, although redemptions increased this year, we've seen the redemptions stabilized to more normalized levels. This fund remains one of our best grossing funds across the AGF platform.

Turning now to Slide 9. I want to get in some detail in our Institutional business and our priorities for 2013.

Our Institutional business had an excellent multiyear track record of growth until the global team restructure that occurred last year. At the beginning of 2012, we had $20 billion of assets under management in the institutional and sub-advisory segment.

That represented a doubling of the assets from 2008 and we had over $1 billion in commitments in the institutional pipeline. Unfortunately, the disruption that you're all aware of that erased our healthy pipeline and caused a reset of the Institutional business.

We made a commitment to our clients that we would rebuild a team with better capability and we maintain the high standard, the investment process, philosophy and performance, all of which were accomplished. It's our view that the watch period placed on our global platform by consultants and institutions will end as the year progresses.

We remain cautious about existing mandates and as we stated in the past, fine actions could span as much as 6 quarters from the departure last April. There are positive signs to reigniting growth in these mandates.

In January, we've been receiving unsolicited inbound calls to meet on both the EM and Global Products. This is a positive sign and it is a result of the continued strong performance and quality of the team.

Although we remain cautious, we always believe that our initial return to organic growth would be incremental asset under management allocations from those who knows us best, our existing clients. In fact, we have received a sizable incremental allocation in December from a European-based client, which is reflected in our pipeline.

It is our expectation that more assets under management -- AUM allocations will be forthcoming in 2013. We've made a significant investment in our investment management and distribution capabilities in the Institutional business, and we're confident that this will be a multibillion-dollar growth business for us over the next 3 years.

From a domestic perspective, we're excited about a Canadian core low-tracking air strategy managed by Marc-André Robitaille. Coupled with our capabilities in the equity income space provides several fronts to generate organic growth in the Canadian market.

Moving to Slide 10. I'll now review the institutional pipeline in more detail.

This graph shows our institutional pipeline in net flows for the quarter and the year. On the left side of the chart, we highlight the outflows in the fourth quarter that were identified as part of our Q3 call.

The second bar represents the full year 2012 net redemptions in the business totaling $4.2 billion. As I mentioned previously, we view the next 2 quarters cautiously and flows could be potentially volatile.

With that said, we currently sit with a small pipe -- positive pipeline. This is a net number that incorporates several new mandates as it has been slightly offset by outflows.

It's worth noting that throughout the disruption experienced in 2012, our net redemption for the global mandates amounted to less than $60 million within the Institutional business. We think it is a testament to the investment process and the actions taken by AGF to minimize disruptions for our clients.

It is important to highlight that EM, in particular, is a capacity-constrained mandate. That's evidenced by a recent announcement by a leading global competitor in the category that they were closing their EM strategy to new money.

In summary, we are being cautiously optimistic about returning to positive flows towards end of 2013. Turning to Slide 11.

I'll now turn the call over to Bob to review the capital, liquidity and financial information.

Thank you, Blake. If you've had a chance to look at our published financials at MD&A, you'll notice that our presentation has been divided into continuing operations and discontinued operations.

Now, this is consistent with presentation of our results from our third quarter of 2012. Discontinued operations are identified as a single line item just below the income from continuing operations.

This Slide 11 reflects a summary of our financial results for fiscal 2012 as compared to fiscal 2011. We've also broken out the results into continuing operations versus consolidated results.

Consolidated results include 8 months of AGF Trust financial results prior to its disposition. Revenue was down 12.9% driven by the reduction in AUM due to the redemptions in the Institutional and Retail business lines.

This decrease in revenue is generally in line with the rate of our AUM reduction over that same period. EBITDA decreased 20.6% to $189 million for fiscal 2012 relative to a year ago.

Adjusted EBITDA was $194 million for the year. Full year EPS came in at $0.55 per share for the year and adjusted EPS at $0.89.

Fiscal 2012 EPS had several one-time items, including goodwill write-down and a change in the Ontario provincial tax rate. EPS for the fourth quarter continuing operations were $0.14 per share as compared to $0.19 a year ago.

Turning to Slide 12, we show some trended quarterly results. This chart reflects our EBITDA and revenue over the last 5 quarters.

We believe that Q4 represents a more normalized view of our revenue and EBITDA moving forward. Account that the third quarter EBITDA was impacted by several one-time items, including restructuring charges related to the SG&A reductions.

SG&A for the fourth quarter reflects the impact of those costs reductions as, well as a few one-time items that were in our favor. On a run-rate basis, we expect SG&A to be in the $42 million to $43 million range per quarter.

We're closely monitoring that number as we progress throughout the year as there is some variability to the cost structure, primarily driven by performance compensation. Turning to Slide 13.

This is a slide that we regularly show on our calls that lets us see our segment performance on a longer trended basis, excluding out some of the impacts of market volatility. It displays our investment management segment revenue, operating expenses and EBITDA as a percentage of average AUM in the current quarter, in the prior year's quarter, as well as a full year view.

All the quarters have been annualized and the results exclude the impact of one-time cost. With respect to revenue, the operations reflect an increase in revenue yield due to a higher mix of Retail business per dollar of AUM, as the relatively larger redemptions associated with lower fee institutional assets have caused that rate to increase.

Our SG&A, although reduced in Q4 in absolute terms, remained slightly higher than fiscal '11 as a percentage of AUM. On an adjusted basis, excluding one-time cost, EBITDA yield for fiscal 2012 decreased from fiscal '11, although we see the slight improvement in Q4.

Turning to Slide 14. I'll discuss free cash flow and dividend coverage.

Now this slide represents the last 5 quarters of free cash flow shown by the blue bars on the chart. The cash flow represented is consolidated free cash flow and Q4 2012 is the first quarter without any free cash flow generation by the AGF Trust.

As a result of the Trust disposition, the payout ratio, defined as dividend as a percentage free cash flow, has trended higher. Indeed we see the Q4 payout ratio at 112%.

It's important to note that free cash flow from quarter-to-quarter can be impacted by a variety of items including timing of cash taxes, dividends received from minority investments. But just assuming that Q4 cash flow is annualized and we continue to repurchase the shares of the NCIB facility in 2013, our expectation for our dividend to free cash flow metric will be 104% as represented by the green bar.

Now to put that into perspective, that will require approximately $4 million of dividend support for 2013. That level of dividend support over the short term is not a concern.

As we mentioned in previous call, the annual free cash flow from Trust was converted to cash on the balance sheet to approximate $370 million as of November 30, 2012. So moving to Slide 16, I'll turn it back to Blake to wrap up today's call.

Thank you, Bob. For the past few quarters, we provided you with specifics as to what to expect over the next quarter.

We are pleased that we have executed in our commitment from the last conference call. 3 points were executing against our SG&A reduction, completion of our NCIB and advancing the product review and setting forth a clearer picture of the product -- new products that we'll be offering in advance of RSP season and the retail channel.

As we exit 2012, I want to outline the priorities for 2013 and our expectations. Firstly, we continue to make progress in our fund performance.

We want to exit 2013 with 60% of our funds above 1-year medium. This is important for advisers and our salespeople and will be a catalyst for increase in gross sales in the retail channel.

To that end, we expect retail gross sales to improve year-over-year. We expect this year's RSP season to be better than last year for equity sales across the industry.

We expect rotation back to equities over the first half of the year gaining momentum through 2013. For Institutional business, we expect to be winning net new business as we exit 2013.

We expect there will be volatility as we end the watch period through the spring. We remain conservative on the near-term business growth.

We have very high expectations of growth over the medium and long term. We will invest to grow our business.

As we mentioned, we see opportunities to add resources and grow the global platform capabilities to take advantage of a multi-year, multibillion-dollar opportunity to distribute through the retail and institutional channels. In fiscal year '13, renew the NCIB and we'll be active throughout the year, selectively repurchasing shares.

The business does well in strong equity markets. Our team believes the market's due for a return to equities.

I want to thank everyone on the AGF team for their hard work over this last quarter and our shareholders for their continued support. With that, we'll now take your questions.

Blake, you mentioned that you are seeking to renew the normal course issuer bid, and is there any -- can you give us any update on the timeline as to when you think the regulatory approval might come through?

I think it should be imminent. I mean, very, very fast track.

And, Blake, we saw AGF was very aggressive with the share buyback in the latter part of 2012 after the sale of the Trust went through. Can we assume that, obviously, contingent on share pricing, that you may seek to be as equally aggressive with this round of the buyback?

John, it's Bob. We'll -- our plan is to exercise the NCIB over the fiscal year.

I think we're a little bit time constrained in terms of when the Trust closed last year, exercise the full NCIB facility. So we'll be selectively acquiring shares throughout the year.

Just had a question on the institutional side of the business. Can you talk about when you were having the outflows or what you're seeing today, are you seeing it more in some of the Highstreet and some of the growth on other mandates?

I'm just trying to get a sense with the different products, which ones maybe continue to have near-term challenges versus opportunities for others?

Yes. It will be really more the tail end of some Highstreet and Acuity.

I mean, we really stabilized on any other product area.

Okay. And the other question I had was on the sub-advisory businesses.

Your comment, Blake, around the economics of that. These clients just felt it was more economical to bring it in-house or was -- I'm just trying to make sure I understand what the rationale for it was.

I guess, I want to underscored it's not performance related in the cases. And with institutions, in one case, they were actually exiting the business.

And along that line, sold their platform to a competitor and there was a change. And the other situation, it was probably some form of rationalization, but I can tell you that we'll be coming right back, got a confirmation that winning back onto that same platform.

So anyhow, that was really the comment that I made.

Okay. And last question I had is, you're referencing the data that we're seeing out of the U.S.

with the equity flows. You kind of alluded to the comment, I guess, with expectations RSP season.

Can you kind of talk about what you're seeing right now? Are you seeing that so far in the data that you're seeing for flows in Canada and that whether or not it's also resulting in both dollar and shift mix?

Sure. I'm going to make a comment and I think Bob wants to say something.

We've seen actually a 10% increase in our gross sales just in the month of January alone. So it's definitely coming back and there's a better sense out there.

But Bob?

Yes, I was just going to make that point, Blake. That there was softening, Geoff, in December in advance of all the fiscal cliff discussions but we're seeing an uptick in January.

That's both dollar and as well as the mix in terms of shift towards equity funds?

Not so much that. It's pretty much equity income and balance in fixed income.

That's where we're seeing it. The products that we introduced in the fall, we're getting good traction in respect to those.

So are you seeing better dollars but not necessarily the benefit yet?

That's correct.

When you're talking about the key distribution relationships, and I know in the past Primerica has been a pretty large relationship with you guys. I think my last guess was about $4 billion to $5 billion.

Can you give us an update on that relationship, if it's been growing? And if there's any other key relationships that you want to disclose?

I'd say, we enjoy a very strong relationship and very active with them personally, attending a number of events and speaking over the course of January. So I can say our relationship is excellent.

And we continue to work at other sub-advisory type relationships with different organizations. One very large partner has just increased our allocation to us.

So I think that continues to be strong.

Okay. And on the management fee side, I'm just surprised it was up quarter-over-quarter and just the math kind of doesn't work out when your average AUM was down 3%.

I know retail was slightly higher on a proportional basis. It looks like fixed income balance was a bit of a higher proportion too.

Am I missing something? Or is this like a good run rate?

It was -- the 119 bps that you guys disclosed, a good run rate going forward if the business stabilizes? It just doesn't...

Scott, management fee revenue quarter-over-quarter is pretty much spot on. We are up $300,000 or so.

So the delta was really in Smith and Williamson and some fair value adjustments.

On the management fee side though?

Management fee side was flat.

Right. I know the delta on the other income but the management fee is being flat.

I mean, is that a function just of the different mix between Retail and Institutional?

Yes. I mean, I think the loss that we had with respect to some of the Institutional business, particularly with Acuity and Highstreet was at significantly low volume -- or low rates.

Okay. And then just a last question.

Just on the emerging markets on the institutional side, you guys have done a pretty good job of retaining assets. And I know in the last 3 quarters you stated that you can see some volatility there.

Have you had year-end conversations from 2012? And if you've had, what's the feedback you're getting from existing clients?

They are very positive. And I say one of our key clients recently increased in allocation.

The team has been very busy. Certainly talking with our existing clients and just for instance, in the United States, we have a major client called Touchstone and we are increasing the amount of sales that we're receiving daily through the Touchstone.

So a great window on the U.S. retail market.

Just going back to the emerging markets. You say on the retail side that redemptions have now normalized.

Does that mean that fund is still in net redemptions? Or is it in, actually in positive net sales now?

Still in net redemptions, Paul.

Okay, but sort of in line with your other funds; is that what you mean by normalized?

Well, yes, exactly. In terms of the overall -- as opposed to the spike that we've experienced in the second and third quarter.

And even to the fourth quarter because EM was present on -- had big presence on those sub-advisory platforms. So we expect to see more stabilized redemptions in line kind of the overall redemption rate for the organization.

Okay, got it. And then ballpark in terms of the amount of AUM, you've lost mandates and fee, changes in PM.

Do you have that number?

On the change in the PM?

Yes.

I think we're in the $900 million range.

And then, I mean, you have -- you're taking a number of actions on the product development front. Maybe to help me understand a little bit better, you can kind of go through at a high level the results of the product over -- review you completed in the quarter?

Is there sort of maybe giving me some sense of where you see the product gap? And how you're responding to that specifically related to the review you just completed?

That's going to be a review primarily focused on the Institutional business, Paul. And it's going to be premature to speak to that.

I mean, there are some fairly obvious themes that are emanating from the U.S. institutional market, primarily alternatives, real estate, credit.

Those are all areas that are appealing to us. However, we have to make sure that they fit from an investment culture perspective.

And that we'll have the capability through our distribution platform to effectively leverage that type of capability. So more to come on that.

We're just not -- we're not prepared to be too specific at this time.

Okay. And at this time, have you kind of determined which ones you might build out organically versus which ones you might have to acquire?

We certainly have done that. I mean, as we have stated in the past, that our best use of capital with the less risk, albeit you've got some time, takes you longer to get to market, is organic growth.

And we think leveraging our global capability, both meets the demand for institutional investors throughout the globe, as well as can be easily leveraged through the investment process that we've created with the global team and the resources that we have on the global team. So we're excited about leveraging that way.

Acquiesce [ph] x U.S. would be an example of an adjacent strategy that we think we can get to market fairly quickly.

Okay. Can you give us some sense then, in terms of execution for 2013, what we should be looking for in terms of roughly the number of mandates you might be able to add organically?

That would be forward-looking information and not to do that, Paul. So, to Blake's comments during his comments, we expect to be net new exiting 2013 with a strong pipeline.

And then final question with respect to potential acquisitions. How active are you?

How actively are you looking at acquisitions today? Maybe you'd give us some sense of the opportunities out there.

That's going to be an outcome as we complete the product gap review. And to the extent, it's something that we don't have the capability and we feel is a necessary capability that we need to acquire then we'll be moving through that gate.

But first off, we want to get comfortable in terms of where the strategic plan will be with respect to the capabilities, and then we'll figure out a build or buy strategy.

Thank you, operator, and thanks, everyone, for joining us on today's call. Our next earnings call will take place March 27 when we review our first quarter results for fiscal 2013.

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.

And with that, good day, everyone.