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Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to Fiera Capital's earnings call to discuss financial results for the first quarter of 2019. [Operator Instructions] As a reminder, this conference call is being recorded. [Operator Instructions].I will now turn the conference call to Ms. Mariem Elsayed, Director of Investor Relations and Public Affairs. Ms. Elsayed, you may begin your conference.
[Foreign Language] Good morning. [Foreign Language] Welcome to the Fiera Capital Conference Call to discuss our financial results for the first quarter of 2019.On the call with me today are Jean-Guy Desjardins, Chairman of the Board and Chief Operating Officer; Vincent Duhamel, Global President and Chief Operating Officer; and Lucas Pontillo, Executive Vice President and Global Chief Financial Officer. Mr. Desjardins will be available to take questions during the Q&A session following our prepared remarks.Before we begin, I would like to invite you to download a copy of today's presentation, which can be found in the investors section of our website at fieracapital.com. Also, the comments made on today's call, including replies to certain questions may deal with forward-looking statements, which are subject to risks and uncertainties that may cause our actual results to differ from expectations. I would ask you to take a moment to read the forward-looking statements on Page 2 of the presentation.I will now hand over the call to Vincent Duhamel. Mr. Duhamel?
Good morning, everyone. And thank you for joining us. Earlier today we welcomed a new strategic partner and shareholder, Natixis Investment Managers, one of the largest asset management firms in the world with over $1.2 trillion in AUM. Through our new long-term partnership Fiera Capital becomes Natixis' preferred Canadian distribution platform, giving Fiera Capital clients exclusive access to the wide range of investment strategies that Natixis offers. And on a global scale, we will work with Natixis to offer international clients specific Fiera Capital investment strategies, notably private market strategies.As part of the agreement, Natixis has also acquired an 11% stake in Fiera Capital, joining Natcan and Desjardins, a strategic valued partner. Jean Raby, President and CEO of Natixis Investment Managers is joining the Fiera Capital Boards of Directors. We are very excited by this new partnership and what it brings. An increased ability to better serve and build customized solutions for our clients. We view Natixis' commitment to the Canadian market through Fiera Capital as extremely positive and a testament to our leadership in Canada and our growing presence worldwide.Now on to Slide 4 for an overview of the quarter. We're very pleased with our results for the first quarter of 2019, which reflect our pursuit of growth and profitability. Global equity markets rebounded after a very [ well-held ] fourth quarter, helping drive assets under management from December 31 up 10% to almost $145 billion as of March 31. We won $1.6 billion in gross new clients AUM in North America and internationally, mostly in the institutional and private wealth. Year-over-year, revenues grew 19% and adjusted EBITDA increased 35%. Adjusted earnings per share were $0.26 in the quarter compared to $0.24 in the first quarter of 2018.In March, we announced an agreement to acquire a publicly traded Integrated Asset management, a transaction that at closing will add about $2 billion in assets under management to our private alternative investment platforms. This transaction will transform our private lending business into a leading pan-Canadian nonbank lending platform, offering long-term loans and accelerate our growth in real estate with a complimentary niche offering in the industrial property. We are on track to close the acquisition in mid-2019 and expect it to be accretive to 2019 earnings per share.And now on to the review of our operations on Slide 5. In our Canadian division, we increase our AUM and continue to deliver very solid investment performance. Our Canadian teams launched 8 new investment strategies, including Clearwater pan-Asian private lending and global low beta Market Neutral in the second quarter. A global small cap strategy in addition to a new fixed income offering will be launched soon. These new solutions support the highly diverse and differentiated nature of our portfolio, in terms of both geographies and types of products.In the U.S., we continue to pursue a strong pipeline of opportunities. We are winning mandates from high-quality clients across our asset classes and building a solid reputation for ourselves in this market. Now that we have completed the scaling of our operations, our U.S. team is well positioned to deliver on the strategic objectives of our 2022 plan.Moving on to Bel Air. This segment once again grew AUM adding several high-net-worth clients in the first quarter. The new allocation funds launched in the fourth quarter has been implemented in a number of a smaller accounts at Bel Air.In our European division, we continue to expand our activities and have funded new mandates since the beginning of the year, including in Alternative Investments. As well, we have a promising pipeline of global -- opportunities in global emerging markets as well as global equity.We also recently closed our acquisition of Palmer Capital, a leading U.K.-focused real estate investment manager based in London, our second acquisition in this market. Palmer will be folded into Fiera Properties and the transaction will immediately -- will be immediately accretive adding single-digit accretion to adjusted earnings per share.Turning on to our Private Alternative strategies on Slide 6. Our AUM in this asset class now totals $8.5 billion with another $3.3 billion in liquid alternatives. There is strong client appetite for Private Alternative strategies due to their low degree of volatility and local relations to traditional asset classes, attractive returns and recurring cash flows.As mentioned in the Q4 call in January, we concluded a long-term partnership with EllisDon, a major North American construction service provider that will enhance our slew of projects.In real estate, the addition of Palmer Capital Partners expanded our presence in the U.K., [ a key ] opportunity for us adding over $1.3 billion in AUM and becoming the UK arm of Fiera Properties.In line with our strategic plan, we continue to increase the proportion of alternative assets relative to our total AUM. As at March 31, 2019, Alternative assets represented $11.8 billion or 8% of the firm's total AUM.Upon closing the IAM acquisition should add $3 billion in AUM in committed capital to our Private Alternatives platform. Recall that our strategic plan calls for Alternative Investments to represent at least 10% of the firm's AUM or 25% of revenues. We're pleased to be on the track for this goal.At the heart of our performance is our talent. Our teams are driven to position Fiera Capital among the top 100 asset managers in the world that are developing new strategies, generating excellent investment performance, and making us an industry leader. Combined with the added talent that threatens our firms through acquisitions, the Fiera Capital team is stronger than it has ever been to the benefit of our clients and shareholders.In summary, it's been a solid start of the year and we're well positioned to move forward on our strategic plan through 2019.I would now like to turn it to Lucas for our financial highlights.
Thank you, Vincent. Good morning, everyone. Before I cover our financial results I'd like to draw your attention to an accounting change that will affect our results going forward on Slide 7.As of January 1, 2019, we have adopted the new IFRS 16 standard on lease accounting, which you will see reflected in our financial statements. Specifically, as per IFRS 16 our leases will no longer be treated as an operating expense, which will have a positive impact on EBITDA. Instead, the present value of future lease payments will now be recorded as a liability and a corresponding asset on the balance sheet. The asset will be depreciated over time using straight-line depreciation. And an interest expense will be recorded at a diminishing rate. Although neither depreciation nor interest will have an impact on EBITDA, they do affect earnings.IFRS 16 provided a choice to take a complete retrospective approach and restate comparative information or take a modified retrospective approach and not restating the comparatives. Fiera has chosen to apply the modified respective approach. Therefore, compared to Q4 2018, there's a favorable impact of about $3 million to adjusted EBITDA, and 2.1% to the margin.On Slide 8. Our adjusted EBITDA margin continues to trend positively. And the first quarter margin is higher than in Q1 2018, even when accounting for the favorable impact of IFRS 16. As we have stated before, the actions we are taking as part of our strategic plan are aimed at expanding our margins going forward.In addition to realizing operating efficiencies and scalability across our platform, we also aim to increase operating leverage from a revenue perspective, by pursuing more profitable asset mix and by growing our Alternative segment. We also expect margin contribution from our acquisitions through the accretion and diversity of revenues such as the recently announced acquisition of Integrated Asset Management and the long-term partnership with Natixis that was announced just this morning.Turning over to Slide 9 for a look at our adjusted EBITDA for Q1 2019 versus Q1 2018. AUM increased 10% year-over-year driven by the acquisitions of CGOV, Clearwater and CNR, as well as market appreciation and organic growth, drove the base management fees up by almost $17 million. Other revenues were also factor, contributing $6 million higher and mainly due to a gain on foreign exchange hedge contract. We also had higher other income from the Fiera Capital emerging market fund created in June 2018 and higher income from Canada due to other distribution activities. And as I just mentioned, the adoption of IFRS 16 had a favorable impact of approximately CAD 2.6 million. As we integrated new AUM to the business, operating expenses increased accordingly, albeit at a slower pace than the top line. As a result, adjusted EBITDA increased 35% year-over-year to $38.8 million for the quarter.Over to Slide 10 for a look at the quarter-over-quarter comparison. Base management fees increased approximately $500,000. Performance fees were lower as these are usually recorded in the second and the fourth quarters. Other revenues were up $1.5 million, mainly due to the gain on our FX hedging. Here again you'll know the favorable impact of adoption of IFRS 16. And operating expenses were down significantly, in line with the timing of performance fees usually from Q4. As such, compared to the seasonally strong fourth quarter, adjusted EBITDA was down slightly to $38.8 million for the first quarter.On Slide 11. You can see that our average basis points earned over AUM continues to trend upwards as we execute on our stated objectives of pursuing higher-revenue-generating solutions. Last 12 months Q1 2018 average basis points earned for base management fees were 36.4, 3.1 basis points higher than the average for the last 12 months Q1 2018 period.On our next slide, you can see our geographic mix as demonstrated by our acquisition track record and the building out of our operations in various markets. Our global footprint continues to expand. 43% of our AUM and 50% of our revenues are currently generated outside of Canada. Based on the attractive revenue diversification of our firm and our clients' portfolios, our cross-selling opportunities continue to accelerate as our presence grows outside North America, in Europe and Asia.I will now turn the call back to Vincent to discuss our investment performance.
Thank you, Lucas. After experiencing significant market volatility of 2018, the first quarter of 2019 was characterized by strong financial markets. Most of our strategies kept up with the market and are still performing well over the long term. In the quarter, our integrated fixed income team delivered strong performance through effective credit positioning as credit spread narrowed. Our active and strategic fixed income team continues to deliver positive value added over 1, 3 and 5 years.In terms of asset mix, our team's overweight position in Canadian equities and emerging markets and underweight position in bonds benefited balanced mandates. In Canada, the Canadian equity team has proven to be a strong addition to our platform and is already building a very strong performance track record. The global equity strategy continue to add significant value in both Q4 and Q1, protecting client's investments during decline and significantly outpacing the benchmarks as market bounced back early this year.With a focus on quality stock selection in the financial, health care, and IT sectors, and highly efficient risk management, both of these teams are delivering very effective [ assets ] for clients. The past 2 quarters are a testament to our team's ability to preserve capital when performing in difficult market environments, consistently demonstrating downside and upside market captures and earning many of them top quartile ranking.Our private alternative funds continue performing extremely well in 2019. We have progressively built an investment platform that is well suited for the current environment. Investors continue to seek out the reliable stream of returns for investment in real assets and other alternative products. At the same time, we have a strong and dedicated management team and structure supporting and guiding our growth in this business.Our funds continue to deploy capital into projects across the spectrum of our offering, delivering attractive returns on an absolute and relative basis, and contributing well to our overall performance. Our performance strategies are meeting the wide range needs of clients be they liability concerns, [indiscernible] risk management, currency exposures [indiscernible] objectives.Turning to Slide 14 and to conclude. The Canadian economy is set to grow at a slower pace in 2019. Meanwhile, in the U.S. we expect growth to moderate 2019 from a brisk pace of 2018 as the fiscal monetary momentum fades. However, above-trend growth should help to place upward pressure on prices while the consumer remains a pivotal source of strength, which when taken together should put Federal Reserve's rate hike back on the table late 2019 through financial and economic [indiscernible].Looking ahead, many of the initiatives of our 2022 strategic plan are well underway. This execution of the plan marks a turning point in helping to position our firm as a top tier multi-strategy asset manager and becoming one of the top 100 asset managers in the world. Every aspect of our processes, performance and culture will benefit from the actions we are putting in place driving revenues and profitability through diversification, differentiation and scalability.While it is still early, we can say that we are well on track to meeting our objectives. The core element of our strategic plan is building a unified global brand. This will be especially important as we continue to grow through acquisitions. In the past month, we have implemented many initiatives to harmonize our platform, simplify our processes and reduce duplication. This work will continue in all of our divisions. We are defining the global architecture for the firm -- for the future of our firm and some of the initiatives behind this process will kick in the next couple of quarters.These multi-year efforts are expected to drive performance, increase efficiency and margins and accelerate growth of AUM, while providing clients with enhanced service experience. The successful work we have already completed on this front, both in Canada and the U.S. demonstrates our ability to deliver on these projects. We will continue to drive both organically and through M&A. From the organic growth standpoint our suits of products in the institutional and other asset classes is very strong and our teams are continually looking to extend our reach by creating innovative solutions.From an M&A perspective, we look first and foremost for strong cultural fit and seek out targets with either complementary strategies or strategies that will enhance the scale of our operations and meet our set of financial criteria. Our track record of successful integration is a testament to our diligent process and to leverage and scalability that our platform can offer a very compelling proposition.From an investment strategy standpoint, our investment approach will continue to be centered on delivering alpha, being a leader in and providing access to alternative investment strategies and offering customized solutions to our clients to meet their specific needs. We will achieve this by adding depth to existing strategies or expanding our lineup of strategies organically or through acquisition. To build on the momentum we are seeing, we will continue to develop solutions to respond to growing investors' demand for alternative strategies that generate a steady stream of returns through investments in real estate, infrastructure, private lending and agriculture.From a profitability standpoint, we are focusing on the elements we can control. Cost containment and increased efficiencies will continue to be a major focus this year. Operationally we are very pleased with the progress we have made through various initiatives aimed at profitable growth. Many of these will serve as the blueprint for similar projects in other geographies. We also benefit from acquisition synergies such as IAM and from our focus on higher-revenue-generating mandates. In addition, accelerating our growth will involve adapting and broadening our distribution capabilities to more effectively reach clients in international markets.I would like to take this opportunity to extend a warm welcome to our Natixis' Canada partners, including all of Natixis' affiliates. We are excited about our new partnership and look forward to working together to bring even more value to our clients. We always remain committed to generating value for our clients, our shareholders, and our firms.This concludes our prepared remarks. Thank you for listening today. And I will now turn the call back to the operator so that we may take questions from financial analysts.
[Operator Instructions] Your first question comes from the line of Nik Priebe with BMO Capital Markets.
Just wondering if you could expand a little bit just on what channels you might be distributing Natixis' strategy through in Canada? Like, will those be offered predominately to your network of high net worth investors? And if so, would that, like I guess to what extent would you expect that to potentially cannibalize some of Fiera managed strategies?
No, there won't be any cannibalization of Fiera investment strategies. What you have to look at is how the complementarity of some of the strategies that they have in their offering. Natixis has about 24 affiliates and number of strategies that we have -- we do not have on our menu of sources of alphas for our client. Taking for example taxable U.S. fixed income, corporate bonds in U.S. or European real estate or U.S. real estate. And this is where we think both in the institutional and in the high-net-worth business it will be very attractive to really complement the offering that's already existing from Fiera. So it very additive as opposed to cannibalizing any of the strategies that we have already.
And then on the other side of the cross-sell opportunity, like how big of an opportunity do you see with respect to selling Fiera-managed private market strategies into this dynamic solution channel?
Well, especially the -- it's not [indiscernible] distribution channel, but for the solutions group of Natixis. So Natixis has a group that is basically solution to the clients on a global basis, multi-asset offering that they have. And we think in there for the same reasons that we think is complementary for our clients here when we provide solutions to them we have strategies that do not exist, agriculture being one of them, Clearwater, Asia, private lending [indiscernible] private lending, all strategies that will fit very neatly to sources of alphas where they are, and complete the solutions or increase the robustness of the [indiscernible] solutions that they provide for their clients on a global basis.
So it sounds like it's just filling in some of the gaps in the product line up on both sides?
Absolutely.
And on the piece of the transaction that relate to the acquisition of their Canadian operations, could you just give us a sense of what the earnings contribution that business look like? I think it was about $1.8 billion in AUM?
Yeah, it's $1.8 billion. It will be slightly accretive this year.
Slightly accretive.
Your next question comes from the line of Gary Ho with Desjardins Capital Markets.
Just going back to the transaction, can you describe how this came about? Did you approach them or vice versa? And what is Natixis' kind of long-term vision with their 11% stake in Fiera?
Well, I would say it was a long-term dance. This started approximately I'd say, they approached us approximately a year, 1.5 year ago. I'm looking at Jean-Guy here because he was there initially at the start of those discussions with Natixis. I think for them it was really a question of how can they better address and better penetrate the Canadian market. The perception what their perspective was Fiera has emerged as being a strong leader in the Canadian marketplace with probably one of the best penetration with institutional high-net-worth clients and that it was probably the best way to leverage the alpha capabilities that they had through the affiliates and to be able to engage with Canadian clients. So this is -- it's a long-term investment on the part of Natixis. We are the first firm that they have basically taken a strategic position in Fiera. We'll see how we'll be able to evolve with this relationship with the -- with their offering.
And did you get a sense that they might increase that stake over time or anything along those lines?
Well, there is -- when you look at the agreement, there are I guess processed or there are parts of the agreement, put option for example, part of the Jean-Guy that if we achieve certain key successes as an organization they will make -- they have shown the intention of increasing their participation in Fiera Capital.
Okay. That's great. And then Jean-Guy since you're back on the call, noticed DJM Capital sold some shares through this transaction. Just wanted to hear your thoughts on that as well.
Do you know my age?
I would guess 74 if I had to guess.
You got it. And you have -- it's just a reality that I have to think in terms of not only a corporate succession, but also family succession. And I have an important investment in this company and this was an opportunity to bring a little bit of additional liquidity in my family estate. And although I think if you do the calculation, there are no plans to fully retire from Fiera.Obviously, I am increasingly delegating some of my responsibilities to my senior associates, Vincent and Lucas and Jean-Philippe and others along the way. But no, at the end of the process I still own directly, indirectly putting it all together probably something like the 9% percent of the Fiera Capital. And if you do the calculation it's still a substantial amount of money that I have invested in a company. So if you're thinking in terms of what's my commitment to Fiera and how seriously I want to be involved in the business, being a responsible guy I think looking at my, what is still my investment in the business should give you comfort on that front.
Okay. That's definitely very helpful. And then maybe just a quick question as well on dividend policy. Any update on that front? Or are you guys still on the path of increasing a $0.01 in dividend next quarter?
We don't have a comment on that at this point. We reconfirm the dividend as to the level that it was declared last quarter.
We're very comfortable with level of dividend at this point in time.
Your next question comes from the line of Marco Giurleo with CIBC.
My first question is for Lucas, just on the implementation of IFRS 16. And just sort of two-fold question, first on the impacts with respect to leverage and your debt covenants? So like is -- are the debt covenants accounting static and therefore not impacted by IFRS 16? Or is there more there?
Correct. When the agreement was renegotiated last year we already knew that the standard was coming down, so that's been negotiated on the basis that it would be excluding any IFRS impact. So you don't have to worry about that in the calculation.
Okay. So can you update us on where your pro forma debt to EBITDA is after taking into account all of the pending acquisitions, including I guess Natixis Canada?
Yes. So we'll probably -- the Q1 numbers is about 3.1. And our estimation as a pro forma number will be just over 3.5 when we factor all of that in. And that actually includes the buyback portion as well. So we're quite comfortable for where we'll end up with the leverage ratio, which is well within our maximum of 4x.
Okay, great. And next just still on IFRS 16. Given the boost in EBITDA that we saw this quarter and I guess at a 200 boost -- 200 basis point boost to the margin, is there -- what's your thinking around the margin guidance through the end of 2019? Are we still targeting that 30%? Or is that being revised higher?
We're still committed to continuing to increase the margin and our operating leverage, and I think we've demonstrated and proved that. If you go to -- back to Slide 8, the point I made on that was even when you adjust for IFRS we have still shown a year-over-year increase on our margin. Comparably, if you back up some of the footnotes that are there we would be at 25.4 relative to 24 last year. So that is a continued improvement. So that's, as I said, we -- as I mentioned in my earlier comments as well, not only from trying to improve our operating expenses but also from improving our business mix at the top of the house and top of the line. And also managing our product mix relative to alternatives will help us get there.
I think just to add on this point, because this is a conversation that we had in the last call, the last quarterly call especially when we're talking about the margins of December 2018. It's the quality of those margins that also has to be taken into consideration and the diversification and the robustness of the revenue streams that we're able to generate. So we think we're very comfortable now at 25.4 when you adjust it for the impact of IFRS. It is an increase but it's also the quality, down-the-line quality of those margins that makes us quite satisfied with them.
All right, great. And just last one on the numbers. I noticed in your other revenues that came in at $12.1 million this quarter. There was note of foreign currency hedge gain in the quarter. Could you quantify that gain and perhaps provide us with some guidance as to what a normalized run rate for that one will be?
No, I can't do that. At the end of the day I come back to the FX hedging is meant there to take the volatility out of our earnings. So we spoke about how in Q4 we had an adverse impact with regards to FX contracts. We did have a benefit in Q1, I'll call it roughly about $2 million. But try to model that out, it wouldn't be consistent quarter-over-quarter. And so the reality is the hedge does what it's supposed to do, which is again protect us against the FX volatility on our EBITDA. And we're just going to have fluctuations quarter-over-quarter.
Okay. So I mean like ex the hedge gains and losses, normalized other revenue would be somewhere in and around $10 million or?
Yes, that's close. That's right.
Your next question comes from the line of Graham Ryding with TD Securities.
Just a follow up on the last question. Are there any associated expenses with those hedging gains looses? Or does that drop right down to adjusted EPS and EBITDA?
Yes, I think there is not material obviously there are costs associated with it, but that's not going to have an impact on the bottom-line margin.
Okay. So IFRS 16, there was a difference in the impact year-over-year versus quarter-over-quarter, I think it was a $2.6 million lift year-over-year and it's $3 million quarter-over-quarter. Why the difference? And what should we sort be modeling or expecting the quarterly impact would be going forward?
Yes. I mean it's hard to say, right, because it's a dynamic portfolio of leases and then offices. So again, we increased our leases from Q1 of last year to this year, which is why you see that difference in the amount. As we move forward this year, we already have plans to move into a new head office here in Montreal. We're evaluating other opportunities. Every time we do an acquisition, there is lease related -- leases related to those acquisitions. So again, it's going to be a dynamic portfolio and it's always going to be changing.
New York.
In New York as well. That's a scenario that we're looking at at this point, so.
Okay. And then also just adjusted EPS, it looks like IFRS 16 had an impact on that. Can you explain that? I thought it would roughly be a wash, just lower SG&A but higher financing and amortization?
Yes. The thing is we still -- we don't get to take the interest expense portion if you will, but we do add back the depreciation on the right-of-use assets. And the point of view there is in our adjusted earnings do adjust for all the amortization of our intangible assets. And we just want to cherry pick and pick and choose sort of what goes in there. So the amortization of our -- or the deprecation of our right-of-use assets is also factoring into that. And you can see that there is a reconciliation table on Page 33 of our MD&A.
Okay. So you're excluding the amortization lift, but SG&A is coming down. So it's going to be an adjusted EPS benefit, this accounting change?
Correct.
Okay. And then my last question, just on the transaction that you announced. Well I guess 2 parts. The $1.8 billion AUM, is there any price tag associated with that? Or is that just incorporated within this deal that you announced?
It's incorporated in the overall deal that we announced, without disclosing prices [indiscernible].
Okay. Got it. And then National Bank AUM, is there any -- could you remind us where that stands? And is there any reason to think that could change now with their ownership moving from I think 18% to 7% post this transaction?
No. The assets have been relatively stable. I think there is a slow decline that we talked about before that is due that's there in their efforts in diversifying. We already are the largest by margin manager within National Bank. And it's stated they're trying to have an open architecture and offer the other managers in there. So we are aware. And it's part of the plan that there will be a slow decline of importance of National Bank within the portfolio of Fiera.
AUM doesn't tell the whole story because on a revenue-weighted basis those are increasing, it's actually increasing because we're trading off lower margin fixed income products for higher margin alternative assets on that platform.
No, we extended the contract to 2022. It's a firm contract. They are committed to a specific level of assets and revenues to the end of 2020. If they don't meet those asset targets under management there is a penalty, a fee penalty that they have to pay us until -- that goes until the end of 2020. And after that we have a certain degree of freedom to reduce those assets on a pure commercial basis. So we have a contract with them that guarantees us a certain minimum to the end of '22. But between 2020, 2022 on some strategies we don't perform without penalty. They do have the flexibility to take their money somewhere else at that point in time. As long as we perform and we have a happy client, we should not worry about the risk of meaningfully losing assets from National Bank between now and 2022. After that it will be on a pure commercial basis.
Great. Okay. Got it. And is that across several strategies? Or what are sort of the key mandates the National Bank is invested in?
It applies to all the strategies. There is no limitation.
It's an overall relationship, and the penalties and the revenues are tied to the overall relationship.
Your next question comes from the line of Cihan Tuncay with GMP Securities.
Just a couple of follow-up questions on the transaction. First with the $1.8 billion of AUM from the Natixis Canada business. What's the approximate distribution of that in terms of asset class roughly would you say?
I think about 50% is non-Canadian. The rest will be preferred shares and equities and balance mandates. And actually about 2/3 is retail and 1/3 is institutional.
Okay. Got you. Thank you. And just in terms of the broader product shelf of Natixis being accessible by Fiera clients, what's their kind of value proposition or do they have a specialty in terms of asset class or strategy? Like what's their value proposition to offer to your existing client base.
Well, they have 24 affiliates. So we haven't been able to go through in due diligence all the 24 of the affiliates. But from what we've seen so far, there are some really quick low-hanging fruits that are attractive to us. U.S., for example, U.S. taxable fixed income, corporate bonds, European real estate, private debt, European private debt, global macro, those are all different type of strategies that we -- where we know we have an interest in.
Okay. And I know it's obviously a broad range of affiliates that they have. But any commentary on how their performance has been just on alpha generation versus yourselves. Any commentary on that?
Well, we can't really compare because they're different strategies. Like any managers, they have some very strong-performing strategies and they have some others that are probably less performing. For us, we will be looking at each and every one of them and looking if they meet the fiduciary standards that we put to ourselves and how we work with our clients and position strategies for our client. And then we'll select the one where we think will add more value for them.
So then it's an evolving kind of process over time and…
Absolutely, yes.
And when do you think you'll start to kick in those cross-selling opportunities? I mean how liquid is the ramp up there? I know these things could take time, but like is it day one their whole product shelf is available or?
No, our goal is starting this summer we're going to start to engage and try to look in due diligence, the different strategies that we think will be attractive for our clients. So now it's a question of then after that positioning this with our clients.
In fact, if I may add to that, before we finalized this transaction and in the process that was totally independent of the discussions we were having with Natixis. As a result of a contact that was initiated independently by one of their affiliate which offers a global fixed income strategy which we had an interest in we have been discussing the possibility of distributing that global fixed income strategy from one of their affiliates in a process that was completely independent from the discussions we have been having with Natixis over the last 18 months. So and that's how it's going to go. It's going to be a pick-and-choose process of whatever strategies that they have which we have an interest in. And it will be negotiated on an individual basis with each one of those Natixis providers. So it's not a blanket agreement with Natixis on all the strategies that they have within their network. It's manager-by-manager, its affiliate-by-affiliate, strategy-by-strategy.
Got you. So it's going to be more on individual basis. Okay. Thanks for that. And just Vincent, just quickly on the back office optimization program. I know on the Q4 call you mentioned that there had been a significant milestone achieved in Canada and there could be another similar milestone achieved on the custodian consolidation in international operations in Q2 or Q3 of this year. Just any commentary on the update of that? Has that kind of -- do we see that already built into the margin for Q1? Or is there still some uplift left from that?
No. I think that the margin in Q1 where you've seen is the impact of the simplification of our custody arrangements that we have in Canada, but there is not yet in the margin impact of the global reorganization of our ops platform. We just put in place now a global IT and ops infrastructure, but it's not that reflected in the margins.
And is that still then kind of a Q2, Q3 kind of time line or?
For Q2, Q3, a lot of decisions are being taken as we speak now.
Okay, great. Good to hear.
Your next question comes from the line of Jaeme Gloyn with National Bank Financial.
My first question, just want to dig into little bit on the adjusted EBITDA calculation x-ing out the impact of IFRS 16. So just help me walk through this. So we had $38.8 million in adjusted EBITDA reported in Q1 '19, and that excludes $5 million in depreciation and $1.3 million in interest on leases. So how do you get from $38.8 million to let's say, a $36.2 million adjusted EBITDA that would correlate with the 25.4% margin percentage you get from there? But looking for a little breakdown.
Yes. So really I mean the only adjustment you will need to look at in terms of the impact on the EBITDA is actually what the ramp expense assumption would have been. So the adjustment relative to Q1 last year would have been $2.6 million. And as I say in the footnote on Page 8, you can refer to that. You can see that on an adjusted basis the adjustment should be about 1.8%. So the interest on financing leases and the amortization of intangible assets, I mean that's out of the adjusted EBITDA number.
Okay. I'll take a look at that. Next question is around the distribution agreement with Natixis. And I just want to get a better understanding of the economics of that. So client puts their AUM in a Natixis product, what does that generate for Fiera?
Well, first of all the arrangement is we will have those that are going to be Fiera products some advice by Natixis affiliates. Second, we will look in each of one of them. We're looking at it exactly the same way that we're looking whenever we create a new strategy or create or acquire a new organization. There'll be 2 criteria, one is the fiduciary standard that needs to be applied to ensure that those strategies meet the standard that we apply for our own strategies with our clients. And the second one will be a commercial/financial one to ensure that we have, it's attractive enough from a return on investment standpoint for Fiera and for our shareholders.So depending on strategies, you can't just have a blanket one because the U.S. fixed income clearly will be priced very differently than a European real estate strategy within the affiliates. They will have different kind of margins representing the different levels of complications or interest that we have on part of the clients.
Okay. And if I'm thinking about the margin on that AUM that's earned, given that it's [ supervised ] by Natixis, would we think of a like-for-like product being a lower-margin product if it's [ supervised ] by Natixis than…
No, No. That wouldn't be the intent. No, the intent would be that we want to preserve our margins and even improve our margins.
Okay. That sounds good. Now the second part of this question is given that Natixis is now bringing some of these strategies that otherwise weren't available with Fiera, like taxable fixed income, your real estate, U.S. real estate, how does that impact your M&A outlook for those products which would have otherwise have been on your target list, let's say.
Well, that's exactly why we need to have that financial discipline, is that if we were running those strategies and we have the financial, they meet our financial criteria there will be no incentive for us to go and acquire any other firms within that spectrum. It's a partnership that we're building with Natixis, long-term partnerships. So they're addressing. It's just another solution for us to provide, to address the needs of our clients.
Okay, great. And then last one for me just, I'm sorry if I missed this, but the acquisition of the $1.8 billion of AUM from Natixis Canada, are there any other financial implications to Fiera? Or is this sort of a “gift” as part of the transaction?
Well, I wouldn't say it's a gift, but it's a…
It's a good deal.
It's a good deal. Yeah. It's attractive deal for us.
Okay. But no financials disclosed until the closing I suppose.
Yes.
Your next question comes from the line of Scott Chan with Canaccord.
Just going back to Jaeme's question on Natixis. The $1.8 billion AUM, what's the strategy of going back into Canadian retail when you just sold your retail business, your legacy business to Canoe?
Well, we sold because we had found a really good distributor that could leverage the platform that we had at that point in time. This is part of a holistic transaction with Natixis where we're being offered really attractive platform to be able to develop with Natixis and with the underlying affiliate strategy. So we're quite comfortable with that. We have the expertise of doing it and building on with that strategy. It's also an opportunity for us to manage more assets as there's going to be some underlying assets that we'll be able to manage.
And from our perspective, when you sat down with this distribution agreement, like how should we think about kind of like the impact on financials, is it kind of from the flow perspective? This helps you drive towards your medium-term goal of getting 5% [ in beginning ] assets, is there anything else to think about with Natixis…
Well, I would say they probably -- no, the way maybe that you should look at this is it's a great way for us to accelerate growth. And because we're able to offer complementary strategies that will increase the attractiveness of the complete solutions that offer to their clients without having to build the track record, without having to build the investment team or without having to do the integration with acquisition.
Okay. And like how many products do you envision that you kind of take and [indiscernible] by Natixis? Is it just the ones you kind of talk about? Or is there kind of a whole slew of products? Because I know they have a lot of products on the platform. I was just trying to understand…
Well, as I said, looking at the low-hanging fruits, very quickly we could identify probably 10 of them very quickly. But I'm pretty sure when we're going to start to engage with them from a partnership standpoint that we'll identify few more strategies that will be attractive to us.
And in terms of the clientele segment, like would this be more private wealth than institutional I'm assuming?
No, I think it will be both institutional and private wealth. If you think about the business that we're acquiring from Natixis, I believe it's 1/3 that is already institutional. So I think there will be more of that. The agreement covers both institutional and the high-net-worth business.
Okay. And just last question. You kind of called Bel Air having a great quarter, perhaps an update there. I think you kind of talk about a new mandate or solution that that was put on the platform in Q4. Maybe just an update there. Maybe on the San Francisco office too that you opened.
Sorry, I'm not sure. What was the question?
Just an update on Bel Air, you kind of pointed out being very strong in the quarter.
So Bel Air, what we did -- yes, what we did with the finance allocation fund, so what we tried to do with Bel Air was an initiative on the part of Bel Air with our New York operation. It was to try to create a fund that reflects some of the best ideas that -- and that we could pull the assets of some of the smaller clients into an overall more simplified, more economical and solutions to them. So it's a fund that was created, the U.S. [ Equity Act ] fund that was created for the Bel Air purposes.
And that fund is, are these Fiera-manufactured funds? Or are these like use of other funds as well?
Fiera-manufactured fund.
Fiera-manufactured.
Your next question comes from the line of Graham Ryding with TD Securities.
My follow-up questions were answered. Thank you.
Your next question comes from the line of Marco Giurleo with CIBC.
Just a quick follow-up question on Natixis. I'm just wondering what your M&A outlook is now just given that they have a very broad product shelf. And you've been very acquisitive in the last 12 months. So should we expect the pace of acquisitions to slow down?
No, we continue to look at acquisition. Remember, it's always about scalability, diversification of revenues and differentiation that we're trying to look at. So that will continue. But clearly now with Natixis we have an alternative to an acquisition. But we continue to have a very active list, I guess a potential acquisition.
Okay. So would there be like more vertical type of acquisitions?
Yes, the alternative is always the attractive one, but clearly if we find a great vertical attractive, traditional we'll at the right price we're always going to be interested.
[Operator Instructions] Your next question comes from the line of Jaeme Gloyn with National Bank Financial. You line is open.
I skipped over one that I wanted to check in on. It's just around the strategy or the thought process behind the repurchase of the 2.45 million shares this quarter. I don't know share buybacks was previously a stated strategy for the company. And I just want to get a little bit more color around what was driving that decision to do at this time.
Well, as we said before and Lucas has stated previously, we're looking at a holistic way in terms of capital management of the organization and we thought this was a very attractive pricing for the organization. So it's attractively priced stocks, so that's why we decided to do it.
If I may add to that, National Bank announced a year ago that they had plan to sell 10% block of Fiera shares if you recall. They said that in the fall of 2018, right? No, '17, 2017, the fall of '17. They expressed desire to eventually sell that block of 10%. And here internally we seriously looked at buying the the whole block to bring back into treasury. When we compared the value position of buying Fiera shares relative to buying another third party manager like we've been doing in our strategic acquisition development and we must admit that we came to the conclusion that buying Fiera's shares was very, very compelling and attractive proposition relative to buying another third party manager. Obviously based because we have deep knowledge of what Fiera is all about.And then Natixis in parallel was sort of doing its thing over the last 18 months. And we ended up having this transaction as a result of Natixis' interest into buying that 10% block. And we had the opportunity to repurchase for treasury that 2.5% position. So that's the background that led us to be where we are today.
I guess the only follow-up is why would there not have been a normal course issuer bid or potentially substantial issuer bid along the way? The shares have traded around the same level at various points over the last couple of years, so just a quick comment on that.
I mean that could have been an option, but the reality is in the midst of this transaction when you're looking at it there's lots to coordinate and a lot to put together. The whole buyback was completely vetted with the regulators as part of this. And there's a lot of intricacies to how we put this all together. And this is just the dynamic of this particular transaction. So that's how we ended up there.
There are no further questions at this time. Ms. Elsayed, I turn the call back over to you.
Great. That concludes today's call. Thank you for joining us. We'll speak again in the summer.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.