AGF Management Limited

Blake Goldring - Chairman and Chief Executive Officer Kevin McCreadie - President and Chief Investment Officer Adrian Basaraba - SVP and Chief Financial Officer

Gary Ho - Desjardins Capital Graham Ryding - TD Securities Geoff Kwan - RBC Capital Markets

Thank you, operator and good morning everyone. I am Adrian Basaraba, CFO of AGF Management Limited.

Today, we will be discussing the financial results for the second quarter of fiscal 2017. Slides supporting today’s call and webcast can be found in the Investor Relations section of agf.com.

Also speaking on the call today will be Blake Goldring, Chairman and CEO and Kevin McCreadie, President and Chief Investment Officer. Turning to Slide 4, I will provide the agenda for today’s call.

We will discuss the highlights of Q2 2017, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position, and finally close by outlining our focus for the remainder of 2017. After the prepared remarks, we will be happy to take questions.

With that, I will pass the call over to Blake.

Thank you, Adrian and thank you everyone for joining us on today’s conference call. During the quarter, AGF celebrated our 60th anniversary.

In 1957, AGF began as a single innovative idea to pool the funds of Canadian investors to provide greater access to the U.S. market.

Today, we remain focused on growth across all our lines of business by delivering consistent investment performance, innovative products and best-in-class service quality. We made further progress executing against our strategy, the past quarter.

AUM ended the quarter at $36.4 billion, up 4% from the previous quarter and up 8% relative to Q2 2016 reflecting increases across all lines of business. During the quarter, the retail gross sales improved 30% and net redemptions improved 62% compared to the same period a year ago.

Investment performance over 1 and 3 years improved 50% and 53% of AUM above median as compared to 44% and 37% reported at the end of Q1. These results reflect broad-based improvement across our fund lineup.

The InstarAGF Essential Infrastructure Fund achieved its final close during the quarter bringing total capital committed to $740 million. The fund is one of the largest infrastructure funds of its kind ever raised in Canada by a first time fund manager, which reflects our distribution capabilities, the quality of the InstarAGF team and the distinctiveness of its North American middle-market focus.

Earlier this year, we launched AGFiQ as the platform for our quantitative business officially bringing our factor-based investing under one umbrella. Today, the launch has been very well received by the market, which positions AGF well for future growth in this growing segment.

On April 24, we opened the New York Stock Exchange with the official U.S. launch of AGFiQ.

Our private client business continues to grow steadily. AUM stands at $5.3 billion, which represents a 16% increase relative to Q2 2016.

The Board confirmed a quarterly dividend of $0.08 per share for the second quarter. Turning to Slide 6, we will provide updates on our business performance.

On this slide, we break down our total AUM in the categories disclosed in our MD&A and show comparisons to the prior year. As we continue to execute against our plan during the quarter, we saw positive growth across all platforms.

In retail, we have leveraged our improved investment performance and distribution strategy. AUM increased 8% compared to prior year.

I’ll talk more about retail in just a moment. On the institutional sub-advisory and ETF front, AUM was also higher.

In addition to leveraging the strong performance of our global team, we continue to profile our capabilities of factor-based investing. In our private client business, we remain focused on growing the client base.

Private client AUM stands at $5.3 billion, which represents a 16% growth. Our private client business has been [Indiscernible] performer, with a CAGR of nearly 10% from Q2 2013 to Q2 2017.

Finally, our alternatives business achieved final close of the Instar Essential Infrastructure Fund. Approximately 30% of the fund’s capital has been deployed and the team is focused on investing the balance of the capital raised.

InstarAGF continues to see robust and diverse deal flow in the middle-market infrastructure market in Canada and the United States. Once the fund is closed – close to being fully invested, we will begin marketing a second fund, which we expect to do late next year.

Looking forward, we see opportunities for continued growth as our retail business continues to trend higher. We also believe that the long-term trend of institutional and sub-advisory AUM will be positive.

In Q3, we will benefit from a positive pipeline in institutional offset by an expected redemption by a sub-advisory client. The net revenue impact will be negligible.

Turning to Slide 7, I will provide some more detail on the mutual fund business. The mutual fund industry continued with a strong pace in the second quarter of 2017 influenced by strong performance in global equity markets.

Industry net sales for the 3-month period ending May 2017 were $12.8 billion, an increase of 34% compared to prior year. Momentum from the strong RFP season has continued, which bodes well for the remainder of the year.

AGF sales results have also continued to experience significant improvement. Our mutual fund net redemptions improved by 62% compared to Q2 2016 and we continued seeing positive base throughout the quarter, a trend that has continued into Q3.

You will recall that in February, we reported net sales of mutual funds. June is also looking like a strong month, which indicates that our momentum has continued.

Going forward, we expect to continue the sustained improvement by focusing on the following priorities with the aim of increasing gross sales. One, continuing to enhance our investment performance, Kevin will address the firm-wide numbers which reflect broad-based sequential quarter improvement.

Two, developing new strategic relationships and capitalizing on our existing relationships. In addition to the significant win we experienced last quarter, we are also doing more business with our largest partners, which include banks, credit unions and insurance companies.

Three, providing innovative products and solutions around specific needs. With the official launch of AGFiQ now in our rearview mirror, we have a compelling capability around factor-based investing that positions us to launch innovative products, including ETFs.

It will also allow us to partner with firms to provide unique solutions. We have already begun to see results with a 30% increase in gross sales and mutual funds in the quarter as compared to the same quarter last year.

Before we leave retail, I will provide a brief update on industry regulation. On June 9, AGF submitted a response to the OSC on CSA Paper 81-408, which deals with embedded compensation.

It’s important to note that regulators have not made a decision yet regarding the embedded compensation issue. Consultation with the industry and stakeholders is ongoing and this paper represents the next step in that process.

AGF has earned the support of the financial industry that not only protects investors, but also upholds the principal of providing investors with options and choice. We believe that regulatory reforms should continue to be advanced in the interest of investors, where firstly there is a credible evidence that the current system is harmful.

Second, that sufficient research is being performed to understand all unintended consequences such as limitation of choice or creation of advice gaps, and lastly that there is a call to action from investors themselves. Through a recent study published by the Gandalf Group titled Canadian Investors’ Survey, AGF noted that the following data relevant to the CSA’s paper.

Firstly, 62% of investors were very satisfied with regard to their advisers’ transparency about fees and commissions they pay and only 7% were dissatisfied. Second, 53% of investors said that they read every disclosure statement and additional 36% read that information occasionally.

And finally 24% of investors expressed that if mutual funds no longer had embedded commissions paid from the funds they would be less likely to seek out advice from an advisor. In addition PWC recently published a report titled economic impact assessment of banning embedded commissions in the sale of mutual funds.

The report caution that planning commissions will lead to an advice gap and a lower savings rate as well as higher cost of advice. The report further estimated that those who were deprived of advice would be – would on average accumulate $240,000 less in savings.

These are serious issues and based on substantive data that we review today, we believe that regulators focus efforts on the financial literacy of investors and continue with enhancements to disclosure. As I mentioned recent studies support this view and appear more compelling than an outright ban of embedded commissions.

We trust the regulators will continue to consider access to products and the importance of advice, particularly for small investors as they consult on these important issues. Regardless, we positioned our business for any particular outcome.

As a firm, AGF is committed to providing investors and their advisors with choice. We believe advisors and their clients deserve a right to negotiate appropriate compensation model in a transparent way that best meets their needs and as such will provide advisors and their clients with the product options they required to build their portfolios.

We have diversified our business across multiple channels. In addition to our retail business, we have $11 billion in institutional sub-advisory AUM and over $5 billion our high net worth channel.

We are also involved in new avenues of industry growth including alternatives and ETFs. These channels already operate on a fully disclosed basis.

So we feel good about not having all our eggs in one basket. With that, I will now pass the presentation to Kevin.

Thanks Blake. As I have stated previously, our long-term target is to have 60% of our AUM above median on 3 years and 50% of our AUM above median in any 1 year.

On Slide 8 you can see that as of the end of May our AUM above median over 1 year was 50%, in line with our target and 53% of our AUM was above median over 3 years. I am confident that we are now on track to meet all long-term targets.

As I have said in our previous call our global bias and relatively conservative stance have impacted performance versus peers. Over the last six months global equity delivered strong performance supported by improving global economic data and rising sentiment.

We remain confident in our portfolio positioning for the long-term. Our short-term performance has reflected our global strategy as our year-to-date AUM above median is now 71%.

The institutional business was essentially flat from a sales perspective during the quarter. As sales and our global core strategy were offset by redemptions from legacy clients.

Looking forward activity continues to be strong. Blake alluded to in Q3 we will receive funding from a prominent European investor into our global core strategy and expect further AUM growth from this relationship in the future.

In addition, we continue to see growth in other areas of our diversified platform. The successful final close of the essential infrastructure fund is a testament to the strong distribution capability and the quality of the team at InstarAGF.

We raised an additional $190 million during the quarter and nearly $0.750 billion overall. This is a significant achievement and the fund now represents one of the large first time funds of its kind in Canada.

In combination with Stream Asset Financial, our midstream energy fund, we have raised nearly $1 billion alternative platform. We believe that real assets will continue to play in portfolio diversification and we expect this platform to provide steady growth in the future.

As I mentioned last quarter, on January 30, we launched seven ETFs to the Canadian marketplace. And on April 24, AGF further reinforced its growing presence in the U.S.

exchange traded fund marketplace with the official launch of AGFiQ Asset Management. In connection with the Canadian ETF launch with AGFiQ suite of solutions are being introduced to the institutional marketplace and are already attracting attention from the investment consultant community.

We are confident in our ability to grow the suite of solutions across multiple distribution platforms and geographies over time. With that I will turn the call back over Adrian.

Thank you, Kevin. Slide 9 reflects the summary of our financial results for the current quarter with sequential and year-over-year comparisons.

Total revenue was $10 million higher in Q2 as compared to Q1. The increase in revenue was primarily due to an increased level of AUM.

In addition, we have recognized the $2.8 million gain related to the sale of security we sold from treasury. SG&A expenses were $54.9 million and included $2 million of severance charges in the quarter.

Q2 expenses were also influenced by timing of certain expenses and higher performance related bonuses. We expect the remaining quarters of 2017 will be more in line with our expense guidance which is $205 million for 2017.

Q2 2017 EBITDA was $29.2 million and diluted EPS was $0.16 as compared to Q2 in 2016 adjusted EBITDA of $27.7 million and adjusted EPS of $0.13. Recall that in Q2 2016, we incur one-time costs related to transitioning of our fund accounting and custody services.

Turning to Slide 10, I will walk through the yield on our business in terms of basis points. The slide shows our revenue, operating expenses and EBITDA including fund operations as a percentage of average AUM for the quarter as well as the trailing 12-month view.

Note that the results exclude our earnings from Smith & Williamson, alternatives platform one-time item and other income. With respect to revenue the operations reflect slight decrease in revenue yield versus trailing 12-month view.

As we discussed on previous calls, we are seeing a decrease in management fee revenue yield due to a mix shift and the impact of management fee reductions came into effect in April 2016. Revenue yield in Q2 2017 was 121 basis points and was slightly lower than 122 basis points earned in Q1 2017 and the trailing 12-month.

Q2 SG&A increased 63 basis points compared to 62 basis points on a trailing 12-month basis was primarily a result of severance we incurred along the other factors that I mentioned. Turning to Slide 11, I will discuss free cash flow and capital uses.

This slide represents the last five quarters consolidated free cash flow, as shown by the blue bars on the chart. The green line represents percentage of free cash flow payout dividend.

Free cash flow was $10.4 million in Q2 2017. Q2 2016 free cash flow was $16.4 million, recall that Q2 2016 we were seeing a $6.7 million cash payment related to the initial closing of the InstarAGF Essential Infrastructure Fund.

After adjusting for this, free cash flow in Q2 2017 was comparable. Dividend payout ratio was 60% in the quarter.

On a trailing 12-month free cash flow was $54.9 million and the dividend payout ratio was 46%. We now have $33 million invested in the InstarAGF Essential Infrastructure Fund.

As a result of the final close of the essential construction fund on May 31, we received a return of capital of $9.6 million which brought our investment in the fund down to a proportionate share of total commitments. As the fund issues capital calls, we will invest the reminder of our commitment over the next 2 years.

Of our original $50 million commitment to Stream Asset Financial LP only $7 million remains, remaining capital will be used for follow-on investments for the remaining investment period. Assuming both Stream and Essential Infrastructure Fund our remaining capital commitment to the alternatives platform is $74 million.

We continued to be pleased with the level of free cash flow generation from the alternatives platform. As we explained on prior calls, we generate returns from our infrastructure platform in two ways.

Our LP investments will have a total return profile of approximately 12% generated cash yield of 6% to 7% range. Management fees will also emerge as the platform generated scale.

We expect to see an up-tick in management fees in 2018. Moving to other capital considerations, total long-term debt stands at $170 million and $198 million at the end of Q1 2017.

Year-to-date we have repaid $20 million of our long-term debt. Our operating line provides credit to a maximum of $320 million.

Going forward we will continue to be opportunistic with repurchases through the NCIB. And turning to Slide 12, I will turn it over to Blake to wrap up today’s call.

Thank you, Adrian. Q2 was another solid quarter and we continue to make progress against our stated objectives.

EBITDA and EPS increased relative to the prior year quarter and first quarter. Retail continues the improvement in gross and net sales, the trend continuing in June.

The InstarAGF Essential Infrastructure Fund achieved its final close with total capital committed of $740 million and AUM increased all – increased across all lines of business for the second straight quarter. 2017 is our 60th anniversary at AGF and over our six decades of leadership and innovation marks a change and so too has our business.

We have grown from our traditional mutual fund roots to a diversified global asset management firm that covers all major market segments and geographies. With our diversified global footprint and investment platform we are well positioned to take advantage of what the evolving investment landscape has to offer.

On those lines, I would like to share our primary goals for the remainder of 2017. One, sustain our improved investment performance; two, work towards consistent months of net sales of retail mutual funds; three, execute our growth plan for institutional sales; and finally, leverage the AGFiQ platform to establish this unique capability in the areas of quantitative investing and ETFs.

I want to thank everyone on the AGF team for their hard work. I am proud of the results we have achieved in the second quarter of 2017 and I am excited to accomplish more during the remainder of the year.

Thank you. I will now take your questions.

Thanks. Good morning.

Maybe I will start off with a question on SG&A expenses. So if I ex out the severance, SG&A was roughly $53 million and that’s [tied to] [ph] kind of versus what you implied in your $205 million guidance.

So, Adrian, wondering how confident you are in hitting that, I know you gave some comments, but was wondering if you can provide some examples or drivers in bringing cost down in Q3 and Q4?

Yes. Thanks, Gary.

So, that’s correct, in Q2, expenses were over $54.9 million, that’s $3.7 million higher than the guidance if you do the math, $205 million per year over each of the quarters. That was mainly due to $2 million in severance charges and we do not account for that when we give our guidance.

There is also higher performance-related bonuses and really some timing in terms of why we were slightly higher in guidance. But as I mentioned in my remarks, if we look out to the remaining two quarters in 2017, we are confident that we will hit our quarterly expense guidance in those two quarters.

Okay. And then maybe a question for Blake or Kevin, now that you have a final close of the infrastructure fund and potential launching of fund 2 next year, would you consider branching out in other alternative offerings?

Yes, that’s definitely our plan, Gary.

And can you give us some color like what areas it will be kind of interest to you guys?

Well, actually it will be a little premature where we are looking at a number of areas in the alternatives space, but let’s just leave it there that we will see how it develops.

Okay. And then maybe for Adrian, can you walk me through – so when you model out the alternatives platform, so what – when can we see some of the benefits hit the bottom line here?

Yes. Thanks, Gary.

Maybe I will start with a little bit of context. So, right now, we have got $74 million invested in the LPs.

So, you will notice that we earned $2 million from the LPs in Q2. And as Stream and InstarAGF calls more capital, we will invest more and therefore we will earn more as LP investor.

And as I mentioned in my remarks, we are targeting about 12% returns and with 6% or 7% cash yield. Now, more to your point, as an investment manager, one of our goals is obviously to earn more significant amount of recurring fees.

And so I would expect that management fees from the existing funds were going to tick up in 2018. That’s when we expect our working capital investment to be recovered.

And later in 2018, we will start marketing our second essential infrastructure fund. And when we can get the second fund into the market, we will make more money just because it will be a larger fund and we are going to leverage existing resources.

And as Blake alluded to, we are looking at other development opportunities to seize growth faster in the space. And we are fully aware that we need to generate scale to make money and to justify the substantial capital in operating commitment we have made to the platform.

And so without getting too specific, I’d say that we target about $5 billion in alternative AUM and we would want to achieve that within 3 to 5 years. And at that level of AUM, the business should have margin similar to our existing business.

Great. Okay, thanks for the color.

And then maybe just lastly for Blake, any update on Smith & Williamson? I noticed that comp side tracker up 10% to 30% year-to-date.

Valuations look pretty attractive. Any update on monetizing these non-core assets?

Thanks. You rightly pointed out valuations have gone up.

The whole sector has performed well. And in particular, Smith & Williamson continues to do very well.

I would expect to see an increase in the dividend that we will receive from them in Q4 and we are very pleased now with the management in excess of £19 billion and they are performing according to how we would expect them to perform. So, I don’t have any update beyond that at this stage.

Okay, perfect. That’s it for me.

Hi, good morning. You talked about your overall platform sort of being diversified across different asset classes.

Your mutual fund business is just over half of your AUM. But I assume it contributes more to your overall EBITDA.

Can you give us any color of what the sort of mix on EBITDA level is between your mutual fund business and your other platforms institutional high net worth and whatnot?

Hi, Graham, it’s Adrian. We don’t break out our profitability by line of business, but I think you are correct to point out that the legacy business, which is the largest amount of assets and the largest as far as scale contributes to the majority of our earnings.

Many of the other businesses, some of them being nascent, we are making investments in those businesses with a target to reach the level of profitability of our core business over time.

Okay. That’s what I thought, but that’s – I appreciate the color.

On the ETF side, I assume your fees are lower than your sort of fee-based actively managed mutual funds. I guess once these ETFs get to I guess sufficient scale, what are you expecting from overall margins, can they contribute EBITDA margins comparable to your mutual funds that are at sufficient scale?

Yes. So, little color on that, Graham.

So the investment we are making in the ETF business, we are doing that on the – within the expense base that we have and is included in our guidance. So, it’s important to keep in mind.

And it is going to take some time for ETFs to cover the cost and grow in a healthy margin, but once we are at scale, when you think about ETFs, even though they have lower fees, that’s manageable, because there is couple of interesting factors there. One is that we are providing factor-based smart beta type products, not passive.

So, management fees are going to be in the 50 basis point range and I will let Kevin expand on that a little bit in a moment. The distribution model for ETFs is also a little bit lighter touch and we are leveraging the existing distribution force to do that.

The other thing is that there is no requirement for unitholder record keeping. So, much like any other tradable security, all those functions are covered at the dealer level.

So, we think that when we have got say $5 billion in ETFs, that business should be again similar to the alternatives platform. These are nascent businesses.

We think the $5 billion level is where we start to see margins similar to the existing business.

Okay. Appreciate that.

Your gross sales up 30% year-over-year, can you give us a little bit of color on what products and what channels you are seeing that growth come from?

We are seeing – it’s Blake, we are seeing through relationships in the banking channel. We have made a concerted effort to make more inroads in the IIROC channel.

So that has been working out well on more managed platforms or elements continue to enjoy great support out there, particularly in the MFDA channels. Things really driven by very solid performance right across the entire platform, we are pleased that by our various strategic partners as well we are doing more business with them and we continue to work with the strategic partners.

And so when you talk about your relationships in the IIROC channel, that’s separate from the strategic partnerships that you are referring to?

That’s correct.

Great. And then any color, I missed - you gave a little bit of color on the institutional sales, but any color on what the results were in the quarter.

I didn’t see it in the MD&A?

Yes, Graham, it’s Kevin. No, institutional is basically flat to the quarter, so we had some normal flow activity out from some clients and then we had some incremental fundings from existing clients, so didn’t onboard any new clients there, but we have a positive pipeline going into Q3.

Great, thank you.

Hi, good morning. I know that looking at margins isn’t necessarily the best way to evaluate asset manager these days, but just with ETFs margins, roughly about half of some of the publicly traded peers.

And obviously, scale is a part of the reason there. But just really wanted to think, when we take into account the fee pressure environment that we are seeing in the industry, can you kind of talk about like do you think the industry and also AGF specifically can eventually get a lift in the margins?

And around AGF specific to the second part of my question is can you talk about what some of those factors that would allow you to get that margin expansion?

Yes. So, Jeff, I am going to take it first kind of more on the strategic and high level and then I am going to turn it over to Adrian.

And I just see that the margins where they currently sit we would expect to see this increase over time. And what we have been able to do is invest significant volume in brand new platform, so the ETF platform as well as the infrastructure area, which these are going to be significant contributors to the AGF performance in the years ahead.

So, yes, I can say that yes, we have the lower at this current time relative to our competition. However, I can say it’s not without in fact consciously of reinvesting in areas of growth.

Yes. The only thing I would add to that, I think really the strategic answer is the most important one there.

But if we were looking at the short-term, I guess, the way to maintain your margins is if you want to get into new businesses, you can do some big deals to get into those areas. But what we have chosen to do is actually get into partnerships where we are partnering for IP and providing working capital and save money.

And we are growing businesses from the ground up. So when you do that, you get on the short-term, you experience a lower margin and eventually you are into that margin as the businesses grow.

So, I am just trying to reinforce what Blake said on that.

I guess, my question is a little bit more, is it more single lift in the revenues? Is it being able to moderate the growth and expenses or both?

Yes, I mean there are obviously two sides to it. So, as I mentioned earlier, we have basically this year we reduced our expense guidance at a time where I think many asset managers were announcing slight increases in expenses.

While we did that, we have invested in multiple platforms for growth. So, our attention is to grow the top line, while also managing the expense line.

Again this year, we were successful in reducing our expense base.

Okay. Just my next question was on the institutional side of the business, do you guys actually have, I think Kevin mentioned like it was positive on the pipeline for the upcoming quarter, do you have an actual dollar number?

And I know in quarters past, you guys have that slide that kind of gave a little bit more detail there. Are you guys not going to be providing that going forward?

Yes, Geoff, it’s Kevin. Now, we are going to actually start giving different breakouts on some of the other businesses.

So we are just going to be talking about that pipeline in terms of overall positive or negative. So – because we found it got too convoluted.

So suffice to say, it’s positive, but we are going to be moving to more broader business line type disclosure over the next couple of quarters.

Okay. And just my last question was the SCA kind of came out with a paper today with their final findings on the asset management industry.

Just wondering if you had a chance to review any thoughts on implications for Smith & Williamson? I know the interim findings were consistent with what they had in the final, but just wanted to get your thoughts?

Yes. As I look at this morning, Geoff, so I echo your comments.

It’s going to be more about fees and the overall transparency of costs, including commissions. It’s pretty much the same what was in the original paper, nothing new there.

And as Blake said, I think that will evolve. In terms of our institutional business which has an impact on MiFID II, that’s something we are working towards the correct timeframe and deadline as most in the industry are so.

Nothing, I would say, that comes out of that. That troubles us.

Okay, thank you.

Thank you very much for joining us today. Our next earnings call will take place in September 27 when we review our results for Q3 2017.

Details of this 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.

Good day, everyone.