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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Q1 2018 AGF Management Limited Earnings Conference Call. My name is Adrienne, and I will be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the call over to Adrian Basaraba. Mr. Basaraba, you may begin.
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 financial results for the first 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 the agenda for today's call. We will discuss the highlights of Q1 2018, provide an update on the key segments of our business, review 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. And 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 Q1 2018, we continued to, in fact, execute against our strategy and stated goals. I'll begin with some highlights. AUM ended the quarter at $37 billion, down 1% from the previous quarter but up 5% year-over-year. Excluding large institutional movements, our mutual fund business achieved net sales of $20 million compared to net redemptions of $225 million in the first quarter of the prior year. We accomplished this despite market volatility. We have a large pipeline of committed sales in institutional from global clients. Investment performance over 1 and 3 years improved to 49% and 61% of AUM above median as compared to 44% and 37% reported in Q1 2017. We launched a new marketing campaign for AGFiQ, our quantitative investment platform, and we introduced 2 new ETFs, a global ESG factors ETF and a global infrastructure ETF, bringing our total lineup of Canadian ETFs to 9.InstarAGF has made significant progress investing its committed capital. We also resolved one of the uncertainties related to implementing our transfer pricing settlement, resulting in an expected cash refund of $16 million. The board confirmed a quarterly dividend of $0.08 per share for the first quarter. We reported an adjusted diluted earnings per share of $0.14. Turning to Slide 6. We'll provide updates on our business performance. On this slide, we break down our total AUM in categories disclosed in our MDA and show comparisons to the prior year. We experienced growth across all our lines of business. Mutual fund AUM increased by 4% compared to prior year. I'll talk more about this in just a moment. Institutional, sub-advisory and ETF AUM increased year-over-year by 5% with a positive committed pipeline for institutional and our ETFs gaining traction in the marketplace. We expect growth from these lines of business going forward. In our private client business, we remain focused on growing the client base. Private client AUM stands at $5.5 billion, which represents 6% growth relative to Q1 2017. And finally, alternatives AUM is higher by 27%, reflecting the final close of the Essential Infrastructure Fund on June 27, 2017. The InstarAGF Essential Infrastructure Fund has now deployed approximately half of its capital into 5 portfolio investments. As noted on previous calls, once the fund is close to being fully invested, we can expect to begin marketing our second infrastructure fund. Based on InstarAGF's current investment pipeline, we anticipate initial close of Fund 2 sometime in 2019.Turning to Slide 7. I'll provide some detail on the retail business. Despite market volatility, AGF sales improvement continued. Excluding large institutional movements, we saw a 45% increase in gross sales compared to the industry growth rate of 9%. On that basis, our retail mutual fund business achieved net sales of $20 million compared to net redemptions of $225 million in Q1 2017. Our sales momentum has continued into March. As at March 26, our month-to-date net sales were $58 million. The recent acceleration in net sales is coming from the advisor channel, which is encouraging. We're gaining traction in the IIROC space. Our sales team has been able to use our ETFs as a door opener to sell both ETFs and mutual funds in the IIROC channel. We're also seeing a large proportion of sales going to F and high-net-worth series as the industry moves to a fee-based model. We continue to nurture our key strategic partnerships, which all remain in net sales and are showing steady year-over-year growth. At AGF, we continuously review our product lineup to ensure that we have the best representation possible in key categories and at competitive price points.Following up on the product enhancements that we shared in December, we announced fee reductions to AGF Emerging Markets Fund and AGF Fixed Income Plus Fund on March 8. As you're already aware, we appointed Regina Chi to the role of Vice President and lead PM for our emerging market strategies in August. Regina has brought renewed focus to our emerging markets team. A fee reduction on emerging markets fund was in part intended to support Regina's transition and build momentum for our emerging market strategies.We have a significant amount of momentum in our retail business, and as Kevin will discuss shortly, our investment performance for the past 2 quarters has been strong and consistent. We believe this will be a positive factor in sustaining this momentum. Although market volatility has not impeded our momentum, a sustained market correction that negatively impacts the entire industry could impact growth trajectory. Turning to Slide 8. I'll now pass the presentation to Kevin.
Thank you, Blake. As I stated previously, our long-term target is to have 60% of our AUM above median over 3 years and 50% of our AUM above median in any 1 year. For the current quarter, our AUM above median was 49% over 1 year, 61% over 3 years. This is the second consecutive quarter that we have achieved our 3-year target. Our consistent investment performance demonstrates our disciplined investment process and helps to deliver on our value proposition to clients.On the institutional side of the business, we experienced net redemptions of $357 million in Q1. On the previous call, we indicated we had a positive committed pipeline, our funding for a large global equity commitment was delayed from Q1 to Q2. In addition, to the amount of carryover, our pipeline includes new mandates in Canada and the United States. U.S. win was our first AGFiQ, which was able to leverage instability to create bespoke products for specific needs to win a material institutional mandate.Our sales team has accomplished a great deal over the past few quarters. Demand for global and AGFiQ strategies are growing, and our fee activity remains strong. This bodes well for continued sales in this channel. As Blake mentioned, on February 12, we introduced 2 new ETFs, a global ESG multifactor ETF and a global multifactor infrastructure ETF. Both ETFs utilize the expertise of our in-house AGFiQ team and the quantitative factor-based investment processes. We plan to launch a third ETF, a global multisector bond ETF, later this year.Looking forward, we anticipate the CSA will have the alternative funds framework in place later this year. The expectation is that the framework will allow publicly offered mutual funds to invest in asset classes or use investment strategies not otherwise permitted under 81.102. Such as short sale and borrowing investing in illiquid assets and taking concentrated positions.We are evaluating options for product design over our investment capabilities. We are looking to leverage AGFiQ's strength in factor-based investing while also exploring potentially partnering to provide an immediate suite of unique solutions. 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 first quarter of 2018, we recorded $10 million of one-time tax expense recovery related to the transfer pricing case. In Q4 2017, we recorded a $10 million gain related to a legal settlement. So for ease of comparison, we've included adjusted numbers, which I will refer to in my remarks. Total revenue was $3.7 million higher compared to Q1 2017 and flat compared to Q4 2017. Average AUM in Q1 2018 was slightly higher than Q4 2017. However, revenue was muted due to lower income from capital invested in alternative LPs. LP earnings can vary quarter-to-quarter, and the current quarter was lower because of increased deal activity and related expenses, which were recorded in the LP fund. Q1 SG&A was $53.1 million, which is $3 million lower than Q4 2017. Not including $1.2 million in severance charges, Q1 2018 SG&A was $51.9 million, and that's within our guidance of $210 million per year. As mentioned on previous calls, the $210 million does not include severance charges and could be higher if a further acceleration of our business performance materializes. Considering revenue and expense levels, Q1 2018 EBITDA from continuing operations was $24.9 million, and adjusted diluted EPS was $0.14. That's higher than the $0.11 earned in both the sequential and prior year comparative quarters. Turning to Slide 10. I'll walk you through the yield on our business in terms of basis points. Slide 10 shows our revenue, operating expenses and EBITDA, including fund operations as a percentage of average AUM on the current quarter as well as trailing 12-month view. Note that the results exclude our earnings from Smith & Williamson, the alternatives platform, one-time items and other income. The revenue yield in Q1 2018 was 118 basis points, which is flat compared to the 118 earned in Q4 2017 and lower than 119 basis points earned on the trailing 12 months. The decrease in Q1 2018 compared to the trailing 12-month is due to a shift into lower fee products and series.Q1 SG&A decreased slightly to 61 basis points compared to the 64 basis points in Q4 2017 and the 62 basis points on a trailing 12-month basis. Recall that expenses in Q4 were higher mainly due to the performance-related comp and rebranding costs. This resulted in a flat EBITDA yield in Q1 2018 as compared to the trailing 12 months. Looking forward, we expect 1 to 2 basis points decline in revenue overall. That could accelerate if we see accelerated growth in ETFs or AGFiQ-type institutional mandates. Turning to Slide 11. I will discuss free cash flow and capital uses. Slide 11 represents the last 5 quarters of consolidated free cash flow, as shown by the orange bars. The black line represents the percentage of free cash flow that was paid out as a dividend. Free cash flow was $10.5 million in Q1 2018. Dividend payout ratio was 60%. Our trailing 12-months free cash flow was $58.9 million, and our respected dividend payout ratio was 43%.Considering both Stream and the Essential Infrastructure Fund, our remaining capital commitment to the alternatives platform was $64 million at the end of Q1 2018. We expect this commitment to be invested over the next 2 to 3 years.We have invested considerably in a platform with capital commitments, operating support and working capital infusions. With the EIF fund now approximately half invested, the strong pipeline of deals, we're now planning for the launch of our second infrastructure fund in 2019. The second fund, which has a target of $1 billion in commitments, will provide the scale required to recover our working capital and begin to record more significant profits for our interested management. As announced in our March 8 press release, we expect to receive cash refund of $16 million with respect to our transfer pricing matter as we move closer to full resolution. Moving to other capital considerations. Total long-term debt now stands at $170 million. Our operating line provides credit to maximum amount of $320 million. Going forward, with the share price where it is, we will definitely consider utilizing our NCIB. Turning to Slide 12. I will turn it to Blake to wrap up today's call.
Thanks, Adrian. Q1 was a solid quarter. We're experiencing positive trends that position us well for the future and we experience growth on 4 of our key platforms. Momentum for our mutual fund business is accelerating. We achieved net sales of $20 million in Q1 and $58 million so far in March for total net sales of $78 million year-to-date. We are winning institutional clients from multiple jurisdictions, and they're investing in multiple strategies. InstarAGF Essential Infrastructure Fund is moving closer to being fully invested, and we expect initial close of Fund 2 in 2019. Along those lines, I'd like to reiterate our primary goals for the remainder of 2018. We want to continue to record positive quarters of retail fund sales. We want to sustain organic growth and institutional and position InstarAGF for a launch in the second -- of the second Essential Infrastructure Fund. We have to continue to leverage the AGFiQ platform to establish this unique capability in the areas of quantitative investing and ETFs. And finally, we want to contain expenses with an aim to drive increased profitability. I want to thank everyone on the AGF team for all their hard work. I'm very proud of results that we achieved in the first quarter of 2018, and I'm excited to accomplish much more throughout the year.We'll now take your questions.
[Operator Instructions] And the first question comes from Gary Ho from Desjardins Capital.
Just first one, just on the net flows. Good momentum into March. Obviously, there's monthly fluctuations. But how sustainable is having positive flows on a consistent basis? And as well, on the institutional side, Kevin, can you elaborate on the institutional upflows in Q1 and how you envision the institutional pipeline to unfold in 2018?
Gary, it's Blake here. So momentum is, I think, a result of a number of things. And I guess, firstly, is having the proper performance. And we've been making that a priority of ours, and we've achieved our goals. Certainly, when you have 49% above median on a 1-year basis and 63% (sic) [ 61% ] on a 3-year basis, that really helps, and that will carry through. But secondly, it's also part of relationships. And we have put a lot of effort into making sure that we got the right people focused on the right strategy of really speaking to, frankly, a lot more of the IIROC advisers. We've got product developments come up with some very interesting and, frankly, novel of products in the multifactor ETF space, which have been very helpful for us to crack into core office advisers. And so from that perspective, if you think of the volatility that occurred in this year and the fact that our overall gross sales are up 45% versus the industry, which are up 9%, I can tell you that I've been around for quite a long time. Momentum continues to build.
Gary, it's Kevin. On the institutional piece, we had about $350-ish million in redemptions from a couple of large clients. One of them was a partner with the [ in source ] of a big chunk from us, which is not expected. But we think the basis is pretty stable. In terms of the pipeline, we referenced in that late January call something we thought was going to fund over the next month. And just some of these are very complicated, but we expect that funding to happen in April. In addition to that, we picked up a number of new wins, both global as well as reference in the AGFiQ suite, which probably puts our committed pipeline for Q2 to fund right now as we stand someplace of about $1.2 billion-ish of assets. So it's a good mix and a good mix of geographies as well as products.
Sorry, so that $1.2 billion is just Q2? Or that's a standing pipeline for Q2, right?
That will fund, we think, over the next month or so. So yes, that's Q2.
Okay. Perfect. Second, Kevin, while I have you, can you comment on how you've been positioning your portfolio recently, given the downturn on volatility seen in last few weeks?
Yes. Well, I'll just reference, we run a very, very large balance suite. In that suite of products, we have been underweight fixed income to a pretty good degree. We may obtain a small overweight to equities and with a fair chunk of cash acting as really a buffer for equity market volatility. So we're probably sitting in that suite maybe 7%-ish in cash right now. So it's been the mix of things in there but it's also been the underlying fund performance has been very strong. If we look at our complex, Gary over the last 3 months, and I would caution, it's only a 3-month period, but it's actually a pretty good slice of the world, right? You had that a very large push in the equity markets in January and then the volatility, that we've seen in February and March, but the complex through the 3 months is running roughly about 70% of our assets in the top-2 quartiles. So solid positioning in terms of underweight and overweight in terms of fix and equity and sitting on more cash, but it's the underlying performance actually inside of all the strategies right now are performing very well.
Great. And then just maybe I'll sneak in one more just around capital uses. Adrian, you mentioned being maybe a little bit more aggressive with the NCIB. Can you elaborate on this? How much could you potentially buy back? And what is the primary metric that you look for when buying back stock?
Gary, thanks for the question. We really don't look at a metric, so to speak. What we're looking for is a balance in terms of how we use our capital. And if you think about it, as Blake mentioned, with our gross sales being up 45%, that's going to require some capital to pay DSC. And we mentioned that our alternatives AUM is up 27% year-over-year, and we're going to continue to make commitments to new funds to grow that platform. And with all the business momentum we're seeing, we're obviously going to invest back in the business. But if you look at where the stock price is today, we absolutely would consider buying back more shares. But we don't want to give a specific target or guidance because it does tend to be a little bit of a dynamic situation when we're buying back shares.
And the next question comes from Graham Ryding from TD Securities.
Can you hear me?
Yes.
Great. The institutional redemptions that you flagged that were within your mutual funds, are these fund of fund platforms for your strategic partners? Or how we should think about what those institutional outflows are related to?
One was the legacy EM clients that we had actually -- it was sitting in our retail fund truly institutional clients that we knew was probably going to go -- that was probably one big chunk. And the second was a discrete mandate that we ran for a -- again, a third-party partner that in-sourced it. Again, nothing that's in the fund of funds world.
Yes, Graham, it's Adrian. I'll add to that. What we're trying to do is provide sort of the underlying trend. And case in point, in March, when we quoted the $60 million, it's actually $80 million. But we adjusted that number down because we did have an institutional win that went into our mutual funds. But the reason that we're adjusting for these institutional flows in and out is to give you that underlying trend that, I think, analysts and shareholders are interested in seeing.
Okay, that's helpful. But you haven't adjusted in the past for these institutional inflows or outflows within your mutual funds, have you?
Yes, we have, actually. There's the chart that we have in our deck consistently has that little note where we show the net sales. And we adjust them for the institutional ins and outs.
Okay. And then your ETFs, can you just tell us what the AUM is at today or is at the end of the quarter and how much that is up year-over-year?
Yes, Graham, it's Kevin. We started, as you know, that suite late January of last year. And so over the year, we probably are sitting in today roughly $340-ish million in AUM. And as I told people over time, this is a long-tail gain for us. These are truly active multifactor, which is the highest growth component of the ETF industry in Canada. But we expect that to build out through the business over the next 5 years. So we're happy with the progress. And as we mentioned on the call, we're actually seeing some pretty good traction in terms of the IIROC channel with them but also in the way that we have a dialogue with an adviser, think about also bring into that conversation our mutual fund complex. So it serves a couple of purposes, but as I said, it's going to be a good long tail build, and we're happy with the progress right now.
Okay, great. Is that all retail AUM? Or is there any institutional AUM within that $340 million?
That is mostly retail AUM, yes.
Okay. And are you getting any traction on just AGFiQ on the institutional side?
Yes. So basically think of AGFiQ as an engine, right, and that engine provides multifactor inputs for those ETFs. But those things, sort of quantitative methods can be used to customize a specific portfolio for that client. So the win that we also referenced as part of that committed pipeline is roughly north of $0.5 billion of several accounts coming from one new partner in the U.S. that is utilizing AGFiQ to actually customize or create a bespoke portfolio of factors. So this is something we've talked about in the past and we've seen emerging trends in the pension market, not just in the U.S. or North America and probably broadly as people start to move away from either purely being passive or finding something in between that passive solution versus the pure active solution. So again, this is a capability. It can be wrapped in various different vehicles, and the ones in the institutional space are obviously separate accounts at this time.
And the next question comes from Tom MacKinnon from BMO Capital.
Question about the [ 6 63 ] in terms of the mutual fund gross sales in the quarter. I was wondering if you might be able to tell us what percentage of that was ETF and sub-advised. And I've got just a couple of follow-ups on that.
Tom, your question was what percentage of the gross sales are sub-advised?
Yes. Or ETF.
I would say, just as we noted, Tom, on the ETF side, ETFs have always been slow. So most of that it has come through our classical fund business. There's not a large sub-advise win in there. And as we've said, we've tried to isolate out the institutional flows to look at through retail adviser-driven sales in there.
And going from 0 in terms of the ETF this time last year to about $340 million now in AUM, how much of these gross sales in the quarter were ETFs? Were they maybe 1/10 of it? Or...
Very small of that, Tom.
That is relatively small, Tom. Because that build has been from over the years, so it will be de minimis in terms of the number.
And how much of it was -- you mentioned the IIROC channel here. And you did get penetration in the IIROC channel, helped by ETFs. So the gross sales didn't seem to be ETFs they seem to be classic mutual funds sold into the IIROC channel. Is that...
Correct. That's correct, Tom.
Okay. Would these have been fee-based or DSC?
As we've said, we are seeing a good pickup like everybody in the industry in the fee-based side. So there's a mix of the DSC in there as well. But as you know, we don't give that split.
Okay. And then you increased your debt in the quarter. Was that to help to fund some of this DSC increase? Or is help to fund these level of gross sales? What was that for?
Tom, it's Adrian. Yes. In Q1, we always have a draw-down on our debt because it's when we pay our bonuses. But if you look at debt year-over-year, we've actually reduced our debt level. So Q1 2017, we were at about $200 million. And at the end of 2018, we're at $170 million. So we're reducing it over time. There's always an uptick in Q1 right after we pay bonuses.
And then one final question with respect to Smith & Williamson. I think we were expecting a $3 million dividend in the second quarter. Was that paid in the first quarter? And any update on potential monetizing of this asset?
In fact, yes, we did proceed the dividend early, Tom. As far as Smith & Williamson, I have to say, the organization is doing extremely well from a performance perspective. We previously reported that we are working towards an IPO at some point in 2019. And those plans are still all on track.
And the next question comes from Geoff Kwan from RBC.
Just was following up on Tom's question. So the ETF data whether the AUM and the sales, that's included in your retail numbers. Or is that institutional sub-advisory category?
Yes. So if you look on our table in our MD&A, that's included in the institutional and sub-advisory category. So the mutual fund net sale figures that we're talking about, those are the mutual fund legal structure.
Okay. So the classic kind of mutual fund business then?
Yes.
Okay, okay. Just the other question I had was on, I know you've talked about, with the share price and share buybacks and also needing cash for other stuff, but when I look at the dividend payout ratio over the last 12 months, it's roughly about a 55-ish percent payout ratio. Just wondering how you guys are thinking about the dividend in terms of a potential for a dividend increase?
Yes, thanks, Geoff. It's Adrian. I think that, again, as I said earlier, we're looking for sort of a balanced use of cash. And obviously, dividend is one of those factors. I think what we would look for is a sustained increase in our free cash flow related to the momentum that we talked about in our sales. And if we were to see that, we would certainly share more of that with our shareholders. I did mention that during the quarter, when we're thinking about it, one of our biases is probably going to be towards the NCIB, just given our share price levels right now. But absolutely, returning capital to shareholders is a priority for us.
[Operator Instructions] And your next question comes from Paul Holden from CIBC.
Just a couple accounting questions to start. So for clarity, in terms of the $10 million cash refund you're getting back from CRA, does that hit the balance sheet as of Q1? Or should I be making some kind of adjustment to the net debt for that $10 million?
Yes. So the $16 million that we're going to be receiving back is sitting as a receivable on our balance sheet, and it'll change from a receivable to cash once we get the check.
Okay. That $16 million is coming from a foreign tax jurisdiction, correct?
Yes.
And then the $10 million coming back from CRA is already on the balance sheet?
Yes. So we -- that was basically paid in Q1 essentially to facilitate the refunds. But that's essentially -- well, the $10 million you're referring to whether you're referring to the provision release, that's a provision. But the $10 million we paid in the quarter is also essentially a receivable that we'll get back in Q2 as well. So the total is $26 million.
That's what I'm trying to get at. Yes. So that's why I thought, the $26 million. Okay. Good. And then the other accounting question is with respect to the amortization and the recognition of other intangibles. So it dropped quite a bit Q-over-Q to $84 million this quarter. Is that a good run rate going forward?
Yes. That's a decent run rate going forward. And essentially, as the pools amortize down, they'll be no longer amortized because it's nothing left to amortize. And that's generally why the amortization is coming down.
Understand. Okay, that's helpful. And then with respect to the gross sales number, so now we have a sense of how you have adjusted it for Q1 last year. And if I recall correctly, you also had an institutional inflow in Q2 last year. So is it possible for you to give us the adjusted gross sale number for Q2 last year?
The adjusted gross sale number for Q2 last year, I think, Paul, is probably something that we'll maybe take offline. We don't have that number in front of us.
Okay. Okay. And I got the -- or you were giving the impression that you're going to push much harder on the ETF initiative this year. So correct me if I'm wrong there. But maybe if I'm right, maybe you can kind of give us some goalpost in terms of what you'd like to accomplish in terms of whether it's AUM or sales kind of 12 months from now.
Yes. Paul, it's Kevin. Think of it this way. I don't think of it as an ETF. I think of it as a capability, right? So inside of AGFiQ is really our quant piece. And I like the fact that we have both the quantitative front end of an emerging curve along with our classical fundamental base business both active. And how we deliver that quant capability could be in a bespoke portfolio, could be an ETF. But we are seeing more interest in both institutional as well as advisers in factor-based investment. So I think when you see our push, it may not say ETF. The push may say really around how we think about factor-based and quantitative methods inside of an investment process. So we're agnostic to where this large institutional client base comes from a bespoke portfolio or the advisory wants to buy one of our multifactor ETFs. In terms of the ETF business, and I referenced the fact that we think of it as a long game, we'd like to get it to $5 billion over the next 3 to 5 years. And that $5 billion, as we said, the margins on our ETF business will start to look like our fund of business. So that scale for us in that. And again, just to remind you, there's no backlog or sort of tail that comes with that ETF because you're buying it on an exchange. So that's where we can have a different price point there but still maintain that scale and margin that looks like our find compass.
Understand. Okay, that's helpful. And then final question, is it possible to quantify the impact from the fee reductions on those 2 funds you've highlighted?
Yes. So the annualized impact will be $5.5 million from those -- from the fee reductions.
And that concludes our question-and-answer session. I'll now turn the call back over to Adrian for final remarks.
Thank you very much for joining us today. Our next earnings call will take place on June 27, 2018, when we will review our results for Q2 2018. 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.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect.