AGF Management Limited

Adrian Basaraba - SVP and CFO Blake Goldring - Chairman and CEO Kevin McCreadie - President and CIO

Gary Ho - Desjardins Capital Graham Ryding - TD Securities

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

Today, we’ll be discussing the results for the third quarter of fiscal 2018. 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 4.

I’ll provide an agenda for today’s call. We will discuss the highlights of Q3 2018, 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 2018.

After the prepared remarks, we will be happy to take questions. With that, I’ll turn the call over to Blake.

Thank you, Adrian and thank you, everyone for joining us on today's conference call. During Q3 2018, we continued to execute against our strategy and stated goals.

I’ll begin with some highlights. AUM ended the quarter at $38.8 billion, our highest level since 2013 with growth across all lines of business.

Year-to-date, both our retail and institutional businesses earned net sales and showing significant year-over-year improvements. Our pipeline includes two strategic sub-advisory wins that will be invested in our mutual funds.

We reported adjusted diluted earnings per share of $0.20, which is 33% higher than the prior year. We achieved final resolution on the transfer pricing case, which resulted in a $4.5 million tax provision release related to the release of penalties.

The Board confirmed a quarterly dividend of $0.08 per share for the quarter. Starting on 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. Assets under management are up 11% year-over-year, and we experienced growth across all lines of business, which includes mutual funds, institutional, private client, and alternatives.

In particular, institutional, sub-advisory and ETF AUM increased 19% due to strong organic growth, and alternatives AUM increased 12% due to co-investments for InstarAGF’s latest investment. As noted on previous calls, once the fund is close to being fully invested, we can begin to market our second essential infrastructure funds.

Based on InstarAGF’s current investment pipeline, we anticipate initial close of fund two in 2019. Turning to slide 7, I’ll provide some detail on the retail business.

Fiscal year to date, the mutual fund industry recorded net sales of $17 billion, down 56% compared to last year. The ETF industry saw similar trends with net creations down 15% year-over-year.

Despite this softness in industry net sales, AGF sales trajectory continued to improve. Excluding large institutional series movements, our retail mutual fund business achieved net sales of $73 million year-to-date compared to net redemptions of $360 million last year.

After Q3, two strategic partners made significant allocations to our mutual funds. This bodes well for our sales trajectory for the fourth quarter.

The improvement in sales reflects our continued focus on clients. Year-over-year, our MFDA and IIROC gross sales for the quarter are up 16% and 23% respectively and we continue to have success with our key strategic partnerships, all of which remain in net sales.

As you know, we undertook a major brand refresh last year, which has also contributed to our sales success. Third party research shows a significant improvement in advisor perceptions of AGF.

On that statement, I know what this company stands for. Our score has improved from 74% in 2016 to 95% in 2018.

In August, we expanded our preferred pricing offering, which allows eligible investors to automatically benefit from the lowest fee option available. This change along with the management fee reductions announced earlier this year were part of a multi-year initiative to ensure our product shelf is competitive and meets the evolving needs of our clients.

We’re confident we’ve achieved these goals. Before we leave retail, I’ll provide a brief update on industry regulation.

On September the 13, the CSA released its proposed rules on embedded commissions, which included a ban on the sale of DSC and low-load purchase options. In a reaction to the CSA’s announcement, the Ontario Ministry of Finance released a statement indicating the Ontario government does not support the proposed regulatory changes as currently drafted.

At this point, we're waiting for further clarity from the CSA and OSC on next steps. As a longstanding participant in the Canadian financial services industry, we will continue to be an advocate for regulatory environment that is grounded in the needs of all investors.

We strongly believe and upholding the value of advice preserving investor choice and limiting the negative effects of unintended consequences. In anticipation of the industry changes, we created a lineup of products that provide our clients with the opportunity and choice they require in this evolving investment landscape.

Regardless of the outcome, our business is well positioned to meet the needs of our clients. Turning to slide 8, I will now pass the presentation to Kevin.

Thank you, Blake. As I’ve stated previously, our long-term target is to have 60% of our AUM above median over three years and 50% of our AUM above median in any one year.

For the current quarter, our AUM above median was 18% over three years and 31% over the one-year period. Our portfolio has a quality bias due to our disciplined risk management processes.

Similar to last quarter, such investments have underperformed while securities with momentum characteristics have continued to increase in value. As you can see on slide 8, one year in global factor return is 5% of momentum, positive 2% for beta, and negative 1% for earnings yield.

Furthermore, trailing earnings yield, dividend yield, low volatility have all seen performance diminish over the last several quarters. We believe the quality inherent in our portfolio is appropriate for our investors over the long term.

We don't believe that it will be prudent to chase momentum or hire beta strategies at this stage of the cycle. Our Morningstar ratings are largely unchanged and particularly for our large funds are comparable to industry peers.

During the third quarter, we implemented the Office of the CIO, which includes leadership representation from all investing disciplines and regions. The Office of the CIO will play an integral role in shaping the broader investment strategies across AGF platform and we’ll work with individual portfolio managers to determine and continue to implement risk guidelines and investment policies.

We will also review and monitor performance portfolio holdings, risk exposures, and ESG integration. Moving on to the institutional side of business, not including retail, sub-advisory, and ETFs, we recorded net redemptions of 300 million in the third quarter.

As noted before, institutional sales can be lumpy quarter-to-quarter. Year-to-date, our institutional business still has a net positive sales of $0.5 billion as the on-boarded clients with investment in AGFiQ and our fundamental active strategies.

Our institutional sales team is focused on building momentum for our AGFiQ strategies. We are seeing considerable interest in AGFiQ customized and hedged equity solutions for pension funds, OCIO providers, and investment consultants.

We are also seeing increased interest on our emerging market strategies. As you know, Regina Chi joined as lead portfolio manager for our emerging markets team last year.

Year-to-date, performance for the AGF emerging markets funds is right in the 22 percentile, a significant improvement from the last several years. With that, I’ll turn the call back over to Adrian.

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

During the third quarter of 2018, we recorded $4.5 million of provision release related to relief from penalties for the transfer pricing case. For ease of comparison, we have included adjusted numbers, which I’ll refer to in my remarks.

Total revenue was $2.3 million higher compared to Q2 2018 and $6.2 million higher compared to Q3 2017. The increase is largely due to higher earnings from Smith & Williamson, and our LP investment in alternative funds.

SG&A was $51 million, which is $4.2 million lower than Q2 2018, primarily due to timing of marketing expenses and lower compensation. We expect full year SG&A to stay within our guidance of $210 million.

As mentioned in our previous call, the 210 does not include severance charges and could be higher when further acceleration of business performance materializes. Q3 2018 EBITDA from continuing operations was 32.2 million and adjusted diluted EPS was $0.20, $0.06 higher than prior quarter.

Turning to slide 10, I will walk 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 our average AUM on the current quarter as well as trailing 12-months view.

Note that the results exclude our earnings from Smith & Williamson, the alternative platform, one-time items and other income. The revenue yield in Q3 2018 was 112 basis points.

The 4 basis point decrease compared to the trailing 12 months is related to management fee reductions, which came into effect April, the 1, expansion of the lowest fee series, which came into effect in August, as well as the growth of our institutional business, which earns lower fees. Q3 SG&A is 55 basis points, which is 5 basis points lower compared to the trailing 12 months, which is probably due to increased AUM and as mentioned before, timing of market expenses and lower compensation.

This resulted in an EBITDA yield of 23 basis points, which is 2 basis points higher compared to the trailing 12 months view. Before I leave this slide, I’ll address our revenue rate in more detail.

Our revenue tends to decline approximately 2 basis points per year on total AUM, simply because our sales generally go into funds with lower fees as compared to our redemptions, which tend to be in funds with relatively higher fees. Separate from this trend, we expect that management fee reductions announced earlier this year and the expansion of our preferred pricing offering would reduce revenue by about 2 basis points on total AUM in 2019 relative to 2018.

This quarter, the trend accelerated slightly due to the growth in our institutional line of business and as you can see on slide number 10, average AUM for institutional sub-advisory ETFs and private clients is $1 billion higher in Q3 compared to the trailing 12 months. Over the near term, our net revenue rate reduction might accelerate as growth in the ETFs and AGFiQ institutional mandate gain more traction.

We’re pleased with our product positioning from a pricing perspective after executing on multi-year strategy to align our fees. Turning to slide 11, I’ll discuss free cash flow and capital uses.

This slide represents the last five quarters of consolidated free cash flow, adjusting for one-time items as shown by the orange bars on the chart. The black line represents the percentage of free cash flow that was paid out of the dividend.

Adjusted free cash flow was 12.8 million in Q3 2018, which is $6.9 million higher than Q2 2018. This increase is mainly due to improved financial results and slightly lower DSC due to seasonality.

Excluding one-time items, our trailing 12 month free cash flow was 42 million and our dividend payout ratio was 60%. Considering both stream and the essential infrastructure fund, our main capital commitment to the alternatives platform was 37 million at the end of Q3 2018.

We expect the majority of this commitment to be invested over the next two years. I’m glad to announce that we have achieved final resolution on the transfer pricing matter.

We expect to receive a cash refund from our penalty relief in the upcoming quarters. Moving to other capital considerations, we repurchased approximately $2.6 million worth of shares through the NCIB in Q3 and we consider opportunistically repurchasing more shares in the future.

Total long term debt now stands at 170 million. And our operating line provides credit to a maximum of 320 million.

Turning to slide 12, I’ll turn it over to Blake to wrap up today’s call.

Today, AGF is a well-diversified successful growing and financially strong organization. As you may have heard now for 18 years as CEO, I am excited to share with you my decision to transition into a new role as Executive Chairman for AGF.

I’m equally pleased to announce that Kevin McCreadie has been named to Chief Executive Officer and Chief Investment Officer and that Judy Goldring has been named as President and Chief Administration Officer. These changes will be effective at the start of AGF’s next fiscal on December the 1, 2018.

I believe that leadership renewal is a hallmark of great organizations, especially one that has a deep bench strength that we do at AGF. I have enormous satisfaction knowing that the firm is set up for success, based on the strategic decisions that we've made and AGF’s team efforts in driving toward these goals.

It’s with immense prides I look back at what we've achieved. When I assumed the role of President in 1997 and subsequently the CEO position in 2000, I set out an aggressive strategy to broaden AGF’s business beyond its traditional retail and mutual fund routes to become a diversified global asset management firm.

This meant not only expanding our reach outside of the Canadian market, but establishing our diverse set of business lines and client distribution channels, including global institutional investors and private client opportunities that best complement AGF's growing retail footprint. Today, we have done just that.

In 1997, almost 100% of AGF’s assets were held in the firm's retail mutual fund business, whereas today, AGF has established a more diversified business with 50% of the assets in retail, 47% in institutional and private client assets and the remaining 3% in alternatives. Additionally, in 2000, AGF took important steps toward realizing our vision to become a global company by opening new offices around the world.

Today, AGF has 14 offices with over 60 investment management professionals across our offices based in North America, Europe and Asia. AGF is now successfully position as a leader in international investing, has deepened capabilities and alternatives and quantitative investing, while also firmly establishing processes, integrating good stewardship and sustainable investing practices right across our platform.

I’ll wish that [ph] AGF have to take advantage of what the evolving investment landscape has to offer. As such, I have determined, together with the board, that the timing is right to transition the leadership of AGF to Kevin McCreadie.

Kevin is ideally suited to lead the new AGF, given his extensive experience in investment management and his past four years of dedicated and proven leadership of AGF’s investment management and institutional sales teams. Kevin will continue on as Chief Investment Officer, in addition to assuming his CEO responsibilities for the firm and will leverage the office of the CIO structure that he implemented in August.

The introduction of this new structure within his team was a critical step in Kevin's succession journey to becoming the next CEO for AGF. Judy Goldring is an integral member of the executive management team where she assists in the development and execution of AGF strategy.

Judy’s promotion to President and Chief Administration Officer for AGF is a natural step for her in her career with AGF and is in a recognized, industry leading senior executive and past inductee into women's executive network top 100 Hall of Fame. I would like to congratulate both Kevin and Judy on their new responsibilities with AGF.

This will also be my last earnings conference call as I look forward to launching my own next chapter with the firm. I want to thank everyone on the AGF team for all their hard work.

I'm very proud of the results that we achieved in the third quarter of 2018. We’ll now take your questions.

Thanks. Good morning.

Just on the management transition, Kevin and Blake. Blake, you’re taking on the Executive Chairman role.

Just what are -- how involved you’d be on a day to day basis side of things? And then second, for Kevin, I know you're having the new Office of the CIO.

Can you explain how involved you’d be on the CIO front versus the strategy side with the CEO role?

Thanks, Gary. This is Blake.

My particular focus is going to be on dealing obviously with the board matters. I sit on a number of different boards within the organization, Smith & Williamson most notably.

We also have major initiatives on our alternatives side, where I see this as an area of great interest for me and our strategic relationships, as you’re going to appreciate, I've got a pretty large Rolodex built up over, well more than 30 years in this industry.

And Gary, hi, it’s Kevin. Yeah.

I plan to continue to be involved on the CIO side. I grew up in this business as an -- on the investment side of the house.

So, but by putting the structure in place, I’ve basically taken the heads of our global team, heads of our North American team, Chief of our Quant strategies, our Chief Risk Officer, and the head of trading and put them basically in their governance structure that will help me. But I plan on staying active as the CIO.

I think it's important for an investment organization to have that touch and feel, but as well as I think as you know, we, as a team, have been active together in building the strategy broadly across the firm with lot of the new hires we brought in over the last several years, with some of the promotions we’ve made. So, I see the balance is sitting pretty nicely.

I don't see it as a strategy either way.

And then on the Smith & Williamson, good earnings contribution there this quarter. I think it’s roughly 7 million.

That might seem it’s a bit high on a quarterly basis. Just wondering what the good run rate to use and just want to clarify if that is a net of tax number.

And secondly, just on the S&W, are they still tracking an IPO in the back half of 2019.

So Gary, it’s Adrian. I’ll handle the first part of the question and I’ll hand it over to Blake.

So yes, Smith & Williamson did have a good quarter. The results that we report are after tax.

And I guess, as you've noticed, the results can be lumpy, but maybe the best way to look at it is if you step back, at current speed Smith & Williamson produces about $20 million in equity earnings and about $10 million in dividends per year and the organization has been growing and we expect that to continue.

Just on the IPO front, I can confirm that things are on track and moving ahead, and so contemplated towards the end of 2019 for an IPO.

Okay. Got it.

And then just my last question, Adrian, while I have you there. Just on the expenses, it sounds like you're quite comfortable with the annual guidance of 210.

But can you kind of share with us how you think, as we head into 2019, and perhaps can you talk about some of the drivers behind that as well.

Yes. So, for 2019, we’re in the middle of our strategic planning and budgeting process, and expense control as always is going to be a key theme, but we're not ready to 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. But again, I'll reiterate the expense control is a key theme that we're working on for our strategic plan.

Hi. Good morning.

Just the comments around the pipeline for the sub-advisory mandates within your mutual funds, is there any color on, I think, you said it's coming through this quarter fiscal Q4, but any you can quantify on that front?

They've actually landed already, and I think you'd be looking at a couple of hundred million dollars.

Couple of different mandates too, Graham.

Okay. So these would be like your strategic partnerships that -- is that how we should think about it.

That’s correct.

Okay. The fund performance, you provided some color, Kevin, around your emphasis on quality and not momentum.

I don't know, is there any further color you can provide us on what you see would be required for fund performance to move towards your targeted one year and three year targets?

Yeah. No, Graham, couple of thoughts on this one.

If you go back to the end of the year, just to remind you, we were about -- 60% of our assets were in the three year bucket or over the median. We've had again two large funds that are highly consistent over time, Global Core, and Global Dividend, same manager, same team.

And, if you look at that set of funds, they represent a pretty significant weight in our complex, probably 14% between the two of them. And then when you think about them in some of our balance accounts or fund of funds, if we just put those two funds at the median right now, the complex probably sits roughly at, when you include their representation in those other funds and those two, they are probably something like 50% to 52% over the one and three.

So we're not that far off and given it’s two funds and given the fact that over time, Global Core can take the bigger of the two. It has had a track record of beating its benchmark on a three-year basis by 97 or so percent and I think on a five-year basis, 98% of the time in those rolling periods.

So, given the environment and given the investment process there, which is a, think of it as a cash flow, return on investment type strategy, which is inherently leading you to quality and things with more value potentially, not value or deep value, but just things that have a valuation connotation, it is not uncharacteristic to see this at this point in the cycle. So I’m pretty comfortable, hopefully, does that give you enough color?

No. It's good.

You lost me a little bit on the 50% to 52% over one and three years, how do I reconcile that with the numbers?

Yeah. The way to think about it Graham is, if I took those two funds, those two large funds, Global Core and Global Div [indiscernible] that they were in the third quartile, but they were exactly at the median of fiftieth percentile, right, and their representation inside of our big elements portfolio and again, if you just move those two large funds to the median, those other -- the impact on elements would push them significantly into the second quartile as well.

So, the complex is actually just being moved around by these two funds and that's how you move them, the whole complex into the low-50s if you will. So it's not a – when we look at it, it's not a broad problem, it's a narrow problem that is impacting the balanced portfolios if you will, the fund of funds.

So bottom line, it doesn't feel like you're overly concerned that there's a systematic fund performance issue here and this is cyclical and this is sort of just you, your positioning relative to where the market is right now?

Correct. Even our growth strategies right now, Graham, for instance, which are in the top decile, top quartile over multiple periods, we’ve even, the PAM [ph] has been on that front for 10 years, one of the best in the businesses, derisk that fund, probably as low as technology weight right now that he’s had.

So I think it’s where we’re in the cycle that is probably more driving some of that and I think it’s probably just prudent. So, not concerned and nothing systematic.

Thank you very much for joining us today. Our next earnings conference call will take place on January the 23, 2019 when we will review our results for Q4 2018.

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

Good day, everyone.