AGF Management Limited

Blake Goldring - Chairman and CEO Adrian Basaraba - SVP and CFO Kevin McCreadie - President and Chief Investment Officer

Gary Ho - Desjardins Gray Ryding - TD Securities Tom Mackinnon - BMO Capital

Thank you, operator and good morning everyone. I am Adrian Basaraba, Senior Vice President, Chief Financial Officer of AGF Management Limited.

Today, we will be discussing the financial results for the third 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 Chief Executive Officer; and Kevin McCreadie, President and Chief Investment Officer. Turning to slide four, I will provide the agenda for today’s call.

We will discuss the highlights of Q3 2017, provide an update on the key segments of our business, provide an update on regulatory implications to the 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 turn the call over to Blake.

Thank you, Adrian and thank you everyone for joining us on today’s conference call. AGF remains focused on growth across of our lines of business by delivering consistent investment performance, innovative products.

During the quarter, we continued to execute against our strategy. We added talent in investment management and distribution; talks were terminated with Rathbone’s PLC on a possible merger with Smith & Williamson Holdings, a leading independent private client financial advisory and accounting group, which we own 32.7% interest in.

However, this actually created an appreciation among investors for the value of our stake and creates an impetus to service value. AUM ended the quarter at $35 billion, up 2% relative to Q3 2016 and down 4% from the previous quarter.

The decline was primarily currency-related as the Canadian dollar appreciated related to foreign currencies, including U.S. dollar.

Approximately 60% of our overall portfolio is invested in global securities and 37% is denominated in U.S. dollars.

During the quarter, retail fund gross sales improved 50% and net redemptions improved 87% compared to the same period a year ago. Institutional on-boarded a large European client which was landed last quarter and won another significant mandate, creating a positive committed pipeline at the end of the quarter.

Subsequent to the quarter, InstarAGF continued to deploy capital to meet Essential Infrastructure Fund, bringing the total amount invested to 40%. We now have almost $1 billion in alternative AUM.

The Board confirmed a quarterly dividend of $0.08 per share for the third quarter. Turning to slide six, we’ll 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. Retail AUM increased 2% compared to prior year.

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

The decline was related to an item we disclosed on our last conference call, which is a legacy sub-advisory account in our Q2 pipeline that transacted this quarter. On the institutional side of the business, we generated net sales and significant positive pipeline.

Going forward, we expect institutional growth, as Kevin will address momentarily. In our private client business, we remain focused on growing the client base.

Private client AUM stands at $5.2 billion, which represents 9% growth relative to Q3 2016. Our private client business has been a sure and steady performer with a compound annual growth rate nearly 12% since Q3 2013.

And finally, the InstarAGF Essential Infrastructure fund has now deployed approximately 40% of the capital in the four portfolio investments including most recently a majority equity ownership in Skyservice Investments, a leading Canadian provider of business aviation services. During the quarter, InstarAGF enhanced and expanded its investment team with additional senior professionals with deep expertise in the fund’s targeted sectors of energy, utilities, civil and social infrastructure.

InstarAGF has a robust and diversified investment pipeline of middle market infrastructure opportunities in Canada and United States. Once the fund is 75% invested, we’ll begin marketing our second infrastructure funds.

Turning to slide seven, I’ll provide some more detail on the mutual fund side of the business. The mutual fund industry continued the strong pace in the third quarter of 2017, influenced by strong performance in global equity markets.

Industry net sales for the three months period ending August 2017 were $10.8 billion, an increase of 52% compared to prior year. AGF sales results have also continued to experience significant improvement.

Our mutual fund net redemptions improved by 87% compared to Q3 2016, and we continue to see positive net base throughout the quarter, the trend has continued into Q4. Going forward we expect to continue to sustain improvement by focusing on the following priorities with the aim of increasing gross sales.

One, continuing to enhance our investment performance; Kevin will address this very shortly. Two, developing new strategic relationships and capitalizing on our existing relationships; we’re doing more business with our largest partners including banks, credit unions and insurance companies.

Three, providing innovative products and solutions around specific needs with the official launch of AGFiQ not only 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’ve already begun to see results with the 50% increase in gross sales in mutual funds in the quarter as compared to the same quarter of last year. Before we leave retail, I will provide a brief update on industry regulation.

Following our response on June 9 to the OSC on CSA Paper 81-408, which deals with embedded compensation, on September of 18th, AGF attended a roundtable hosted by the OSC on this topic. The purpose of the roundtable is to facilitate panel discussions on the themes emerging from ongoing consultation.

In particular, the roundtable folks on three primary alternatives to banning embedded commission, namely, one, capping or standardize trailer fees; two, discontinuing or enhancing the asset option; and three, enhancements to disclosure and choice for investors. Several key issues that have yet to be navigated on this subject include, aligning other provinces with the OSC’s view that changes -- that require the advice gap, which was acknowledge as a very important issue and the impact of policy changes on a large group of diverse stakeholders.

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

We have been informed that policy options recommendations to the CSA chairs are now being targeted for spring 2018. It affirmed AGF is committed to providing investors and their advisors with choice.

We believe advisors and their clients deserve the right to negotiate appropriate consultation manner in a transparent way that best meets our needs and all clients to be serviced with the best and most appropriate product for each individual’s needs. We trust that 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 an independent global asset manager, we have diversified our business across multiple channels.

In addition to our retail business, we have $11 billion in institutional and sub advisory AUM and over $5 billion in the high net worth channel. We are also involved in new avenues of industry growth including alternatives and ETFs.

These channels all operate on a fully disclosed basis. And now, I will pass the presentation to Kevin.

Thank you, Blake. As I have stated previously, our long-term target is to have 50% of our AUM above median over three years and 50% of our AUM above median with any one year.

On slide eight, you can see that as at the end of August, our AUM above median over one year was 33%, and our AUM above median over three years was 48%. While our performance receded slightly this quarter, I remain confident that we are on track to meet all the long-term targets.

Our global bias and relatively conservative stance differentiates our performance from our peers. Approximately 65% of our retail and institutional assets are invested in global securities and 40% is denominated in U.S.

dollar. The sharp $0.10 or 8% rally of the Canadian dollar against the U.S.

in the quarter was unfavorable. In fact, nearly all of the decrease in AUM from Q2 2017 to Q3 2017 was driven by the strengthening of the Canadian dollar relative to foreign currency and primarily the U.S.

dollar. Despite short-term currency volatility, we believe global investing remains the solid strategy for the clients and we are committed to being a global firm.

We have experienced a large sub advisory redemption in the quarter, but putting that aside, our core global institutional business experienced positive net sales during the quarter as we received funding into our global strategies from the prominent European investors, which was in the pipeline disclosed on our last call. We expect further AUM growth from this relationship in the future.

We also had a significant sale in our pipeline at the end of Q3, which has funded this week. The AGFiQ suites of solutions are being introduced to the institutional marketplace and are already attracting attention from the investment consultant community and potential clients.

We are confident in our ability to grow the suite of solutions across multiple distribution platforms and geographies over time, and we are happy where our ETFs are tracking today. Our ETFs recently secured shelf space on a major RIA [ph] platform in the United Sates, and as we devote more time to sales and marketing of AGFiQ, we are getting deeper into institutional searches.

During the quarter, we’ve deepened the bench strength of our global equity platform with the appointment of Regina Chi to the position of Vice President and Lead Manager of AGF’s emerging markets strategy. Regina brings 23 years of emerging markets and international investing experience as well.

This hire will allow us to increase marketing of our EM strategy and will also create capacity for our global team. In addition to Regina’s hire, with the concentrated focus on increasing the depth of the global equity team, we had several other hires and promotions, bringing the team up to 14 members from 10.

Our institutional sales team also recently grew with an addition to our Canadian sales effort. We brought on a new Vice President of Sales.

This new hire brings more than 20 years of experience in business development and institutional sales in both the Canadian and U.S. markets.

With that, I’ll turn the call back over to Adrian.

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

Q3 revenue was higher year-over-year, reflecting higher AUM. Sequentially, revenue declined in Q3 as compared to Q2 of 2017.

This relates primarily to the $2.8 million gain on sales of treasury investment we recorded and reported in Q2 as well as an adjustment made in Q3 of 2017 related to the closing of InstarAGF Essential Infrastructure Fund. Remainder of the decline is a result of lower AUM and as I mentioned earlier, this is primarily the result of foreign currency.

SG&A expenses were $49.6 million, which is within guidance; $5.3 million lower than Q2 2017. Recall that in Q2, we recorded $2 million in severance charges.

We expect Q4 2017 expenses to also be within guidance. As for 2018, we’re in the middle of our strategic planning and budgeting process.

Expense control would be a key theme, but we can’t share any targets until the process is complete. So, you’ll hear more about that during our Q4 and year-end conference call in January.

Recall that our 2017 guidance of $205 million was reduced from $210 million earlier in the year. Q3 2017 EBITDA was $28.6 million and diluted EPS was $0.15 and that compares to Q3 2016 adjusted EBITDA of $27.4 million and EPS of $0.13.

Turning to slide 10, I’ll walk you through the yield on our business in terms of basis points. This slide shows our revenue, operating expenses, and EBITDA including fund operations as a percentage of average AUM on the current quarter as well the trailing 12 months view.

Note that the results exclude our earnings from Smith & Williamson, the alternatives platform, onetime items and other income. The revenue yield in Q3 2017 was 120 basis points, slightly lower than the 121 basis points earned in Q2 2017 and the trailing 12 months.

Slight decrease in Q3 is due to a shift into lower fee funds and series. Q3 SG&A decreased to 58 basis points compared to 60 on a trailing 12-month basis.

As I mentioned earlier, expenses came in lower than guidance this quarter. This resulted in a higher EBITDA yield in Q3 2017 as compared to the trailing 12 months.

Turning to slide 11, I’ll discuss free cash flow and capital uses. So, slide 11 represents the last five quarters of consolidated free cash flow as shown by the blue bars on the chart.

The green line represents the percentage of free cash flow that was paid out in the dividend. Free cash flow was $16.4 million in Q3 2016.

Dividend payout ratio was 38%. Our trailing 12-month free cash flow was $58.4 million and restricted dividend payout was 43%.

At quarter-end, we had $33.7 million invested in the InstarAGF Essential Infrastructure Fund, including a most recent fund investment, the InstarAGF Essential Infrastructure Fund is 40% invested. And as Blake mentioned, when the fund is 75% invested, we can begin marketing fund too.

Of our original $50 million commitment to Stream Asset Financial LP, only $7 million remains. Remaining capital will be used for following investments over the remaining investment period.

Considering both the Stream and the Essential Infrastructure Fund, our remaining capital commitment to the alternative platform was $73 million at the end of Q3 2017. We continue to be pleased with the returns from our LP investments, which have a total return profile of approximately 12% and generated cash yield in the 6 to 7% range.

We expect to see uptick in the earnings for management fees from the alternatives platform in 2019, which is after our working capital investments recover. Increased profitability for management fees will emerge as more funds are launched and the platform generates scale.

Moving to other capital considerations. Total long-term debt now outstands at $150 million, down from $170 million at the end of Q2 2017.

Year-to-date, we have repaid $40 million of our long-term debt. Our operating line provides credit to a maximum amount of $320 million.

Going forward, we will continue to be opportunistic with repurchases through the NCIB. Turning to slide 12, I will turn it to Blake to wrap up the call.

Thank you, Adrian. In Q3, we continued to make progress against our stated objectives.

One, retail continues the see improvement in gross and net sales; two, institutional on-boarded a significant European client during the quarter and won another major mandate and we bolstered our talent with key hires in investment management and distribution. With our diversified global footprint and investment platform, we’re well-positioned to take advantage of what the evolving investment landscape has to offer.

Along those lines, I would like to share our primary goals for the remainder of 2017. One, continue to work towards consistent above median investment performance; two, work towards consistent months of net sales of retail mutual fund; three, sustain institutional net sales; and lastly, leverage the AGFiQ platform to establish us unique capability in the areas of quantitative investing and ETFs.

I’m also very excited by an important branding initiative, which we’ll be taking and introducing to the market in the coming weeks and months ahead. I want to thank everyone on the AGF team for their hard work, and I’m proud of the results that we’ve achieved in the third quarter 2017, and we’re all looking forward to completing much before 2017 concludes.

With that, we will now take your questions.

So, maybe I’ll start off with Smith & Williamson here. So, Blake, obviously you sit on the Board, now that talks with Rathbone terminated, have the Tilney guys, come back or management still pushing for an IPO?

Any update on that firm would be helpful.

Thank you, Gary. Smith & Williamson is a top rate, top pedigree organization, which is highly profitable.

Industry over there has consolidated to some degree. And this particular property is extremely attractive.

And along that line, management is committed to servicing value. And we’re on the IPO track.

There have been other overtures. And at this point, I can’t really speculate on where any of these sorts of discussions may go.

Okay. And then, maybe next question is for Adrian, just on the SG&A.

It was a bit lower this quarter than what you guided; doesn’t sound like anything is pushed into Q4. But more generally, I know you can’t give numbers but how you’re thinking about 2018, given that that’s a few months away?

Obviously, expense control is really important, we recognize that. But as I mentioned in my remarks, we can’t really talk in terms of quantifying guidance for 2018 because we are in the middle of our strategic planning and budgeting process.

So, we do plan to update you in January when we do our year-end and fourth quarter conference call.

Maybe I can ask it another way that stuff that you guys are doing, like what are the things that you guys are doing internally to contain sustain costs or improve efficiency and what not?

So, basically Gary, the approach has been, we have managed to reduce our expense base from $210 million, down to $205 million. And at the same time, we’ve invested in nascent growth platforms such as ETFs and alternatives.

And we’ve begun that basically as -- when we get new initiatives proposed for growth, we try to find areas in the company to reduce expenses or find efficiencies. And so, we’re definitely going to be using the same approach for next year.

I can’t identify too much granularity in the areas that we’re targeting for efficiencies, but we definitely ideas in that regard and at the same time we’re going to have some other opportunities to try to grow the company. So, we’ll use that same approach going into 2018.

And then, just maybe just lastly on the potential launch of fund 2 of the Essential Infrastructure Fund, how should we think about kind of appetite for this fund and what might AGF’s commitment look like?

Well, I guess just -- maybe I’ll kick that off. The appetite we expect will be very, very strong.

Traditionally, after you have a first time fund, you look in terms of almost 1.5 times to 2 times sort of the sizing of a subsequent fund. We know when talking to our various co-investors, people are very pleased with that.

And as far as the point of additional capital, we can’t speculate exact until we know exactly what the terms of transaction might look like.

Gary, it’s Kevin. My follow-on just for a second on that is, I think fund 2 is not going to need as much capital obviously the first fund, because it is the first time fund, we need to show significant commitment behind that, but there will be some.

The other thing I’d say, this industry data that we continue to get and the new surveys out continue to show that infrastructure investments from end investors either are happy or want to increase their allocation, continues to be pretty significant. So, we feel it’s in the right space in terms of being in the alternative platform as follow on.

Just jumping back to Smith & Williamson, what’s the sort of timing, if you do go down the IPO track, what’s a realistic window on when that could potentially surface?

I mean, if we were on a path before the Rathbone overture came our way, so obviously depending on market environment, I mean the thought would have been -- we wouldn’t be in market around now originally but we are getting back to work on our efforts in the space, so sometime over the -- within the next year or two.

And then, the capital that you would maybe need to fund the second infrastructure fund from co-investment purposes, would that -- with the idea being that that would come from monetizing your Smith & Williamson investment or how do you find your co-investment in the second?

We try to keep a very balanced approach using capital. And as you saw, as I mentioned in my remarks, we paid off $40 million worth of debt this year.

And all capital is fundable. So, I don’t think we look at one source funding another.

What I can say is that we have got sufficient liquidity and sufficient strength in our balance sheet to continue to fund the growth on the alternatives platform.

Maybe just Kevin, just a little bit of color on the investment performance side; I appreciate things jump around quarter-to-quarter, but maybe just some context. The Canadian dollar was a headwind, but is the Canadian dollar not a headwind also for your peers.

I’m just trying to figure out why was more of a headwind for you this quarter.

Yes, Graham, we saw that -- remember last year when the CAD dollar went 1.47 or 1.37, that kind of move, we have the same effect. We’ve done a lot of work on this.

In the global category, we are more global, believe or not. It’s a global category.

Many of our peers in Canada are Canadian bias even in that category. So, they tend to perform better, when that happens.

And second piece is, we don’t hedge in our two largest equity portfolios, but you add those up about $7.6 billion in AUM, half of that is U.S. and we take active financial hedges in those portfolio.

So, when that happens relative to peers, we do get less upside. Now, in those portfolios, we look work for long-term natural hedges, but those play out over time.

So, we know that. It’s just we will have to watch through but it’s not a process issue.

And then, just I guess lastly, any color on the institutional redemption. You said you had a sizable one this quarter and then you also said you had a win in this quarter -- this current quarter any -- can you quantify any of that?

Yes. I think we talked about it this last quarter.

We had sub advisory and legacy one margin piece of business that someone in-house. We brought in -- I think we had a new $135 million European client that came in during the quarter and then we just -- one that will come in for Q4 that we just funded this week was roughly CAD 400, again global core.

So, the pipeline on institutional, even with some of the redemption activity, I think we are going to end the organically growing, as we have said, that’s been a target. If you remember last year, I think we were net out almost $1 billion on that business.

So, that’s a pretty good year-over-year delta on that. And again, going into Q4 with being in September and having funded $400 million certainly sets us up for a decent quarter we think.

Question on the flows. To what extent where the third quarter retail growth sales of 560 million and the net outflows of 40 million influenced by any ongoing contributions from the strategic partner you landed in the first quarter.

And to what extent was it influenced by any additional or strategic partnership you may have put in place in the quarter?

Certainly, we are working very hard with the strategic partners and proud of our strategic partners. So, we continued to see flows from the relationship, which was with our Canadian bank that we won back in the Q1.

We start seeing the performance of AGF Elements. We’ve seen very solid flow, which has been in that and we’ve got another key client as well that is using our Elements product.

So, they answer is simple, we are seeing ongoing growth with sub-advisory.

If you are wondering whether or not there is a lump or some kind of a large item in there, that’s really just ongoing day-to-day flows. So, there is no reconciling item in there.

Okay, thanks. Now with respect to the ETF business, you got $250 million AUMs here.

And I know you’ve been -- it’s been increasing your penetration in the IROC channel. Is this all retail or is there institutional business, just a clarification there?

And is the increase in these ETFs AUM, has that been in the retail or institutional?

Yes. Tom, it’s mostly all retail at this point in the Canadian side of the book.

In total, with the couple of other things with our U.S. sub, we’re probably close to somewhere around the $1 billion market different ETF.

Some of those are more institutional. But the ones we talk about here, the new AGFiQ that we launched this year are all retail so far.

And have you been able to get any penetration into the MFDA channel as a result? I know you were looking at bringing the product to that channel; has that happened yet?

Not yet, Tom, because many of those channel participants can’t purchase ETFs yet under the regs as we see them. We have toyed with a couple of solutions where we can package that same ETF product into our fund structure potentially for them but we are not there yet.

So, that’s totally a new channel but I think we will wait and see on the regulatory side of that as well.

Okay. And then finally, what sort of scale do you need in the ETFs before the margins on this business are going to be similar to your existing retail margins?

On the last call, we outlined a charter of those $5 billion for ETF AUM over the next 3 to 5 years. And the reason we had the charter really is going to be figure that that will be the point where that business has similar margins to the existing business when you tack on that AUM.

And there is a couple of things to remember about the margins and ETF business. For one, the type of ETFs that we’re offering here are factor-based smart beta; they are not passive.

So, the management fees that will net in the 45, 55 basis-point range, the distribution model for ETFs is much later touch, when business is at scale and lower costs compared to sales and marketing of mutual funds. And obviously with ETFs, there is no requirement for unit holder record keeping.

So, much like any other tradable security, those functions are managed at the dealer level. So, figure out about $5 billion will be an acceptable margin and that should take you over the next three to five years.

And if you look at -- I think you mentioned you had $20 million in this stuff about six months ago, so that’s $230 million; that’s probably all in the growth sales and with virtually no redemptions. Would that probably be the way to think of that?

Yes. That’s correct, Tom.

This is Kevin.

And then finally on SG&A, the MD&A says the salaries and benefits were nearly $1 billion lower year-over-year due to lower performance based comp. But I mean if you look at the performance, it’s basically unchanged year-over-year.

So, what’s driving this lower performance, this lower salaries and benefits number.

So, the performance bonuses that are noted in the MD&A are not investment performance bonuses, they are -- it was more of a growth bonus that we were referring to there. And again there’s going to be variability quarter to quarter in bonuses, compensations and just timing of expenses.

So, the guidance that we gave is 2.05 [ph] per year; works up to 1.25 per quarter and at any given quarter could be a million or two less or a million or two more, although heading to Q4 we expect that we should come in within guidance.

Okay. So, 51 or fourth quarter seems to be reasonable bogey.

Is that correct?

That’s a reasonable comment.

Thank you very much for joining us today. Our next earnings conference call will take place on January the 23rd when we’ll review our results for Q4 and full year 2017.

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.

Good day, everyone.