AGF Management Limited (AGF.B), a global asset management firm, reported substantial growth in its third-quarter earnings call for fiscal year 2024. The company's assets under management (AUM) have reached $49.7 billion, marking an 18% increase year-over-year.
The adjusted diluted earnings per share (EPS) stood at $0.37. AGF's mutual fund AUM grew to $28 billion, up 15% from the previous year, while its exchange-traded funds (ETFs) and separately managed accounts (SMAs) saw a significant 60% increase.
The firm also experienced positive net sales in retail mutual funds, bucking the broader Canadian mutual fund industry trend.
Key Takeaways
- AGF's AUM increased by 18% year-over-year to $49.7 billion.
- Adjusted diluted EPS for the quarter was $0.37.
- Mutual fund AUM rose to $28 billion, a 15% increase from the prior year.
- ETF and SMA AUM grew by 60%.
- The company reported retail mutual fund net sales of $19 million.
- Dividend declared at 11.5% for Q3 2024.
- Net income for the quarter was $24.5 million, with a $2.8 million increase in adjusted net revenues.
- AGF ended the quarter with $3 million in net cash and a commitment of $20 million to capital partners.
- Trailing 12-month free cash flow was $94 million, with 30% allocated to dividends.
- The company repurchased 300,000 shares for $2.5 million during the quarter.
- Share price stood at approximately $8.49, with an enterprise value of $550 million.
- The firm recognized a $3.6 million performance fee from the Kensington acquisition.
- AGF is focused on U.S. market opportunities and anticipates an 8% to 10% return on long-term investments.
Company Outlook
- AGF maintains a balanced approach to capital allocation, emphasizing both shareholder returns and growth investments.
- The company is optimistic about future growth prospects as interest rates show a downward trend.
- AGF is actively pursuing opportunities in mergers and acquisitions, particularly in the U.S. market.
Bearish Highlights
- Quarter-to-date, flows have remained flat, indicating potential variability in future months.
Bullish Highlights
- Strong sales momentum and disciplined expense management are driving growth.
- The company's infrastructure portfolio is performing well, contributing to anticipated returns of 8% to 10% on long-term investments.
- Credit investments show stable valuations, primarily generating income through loan interest.
Misses
- Despite strong overall performance, the company experienced flat flows quarter-to-date.
Q&A Highlights
- The focus on U.S. deals aims to enhance opportunity scale and refine investment criteria.
- The typical deal cycle for U.S. transactions is expected to range from 8 to 14 months.
- Performance-based compensation is running higher due to an 18% increase in gross sales.
AGF Management Limited's financial position appears robust, supported by a strong balance sheet and strategic growth initiatives. The company's commitment to strategic investments, such as the Kensington acquisition, has already yielded performance fees and is expected to contribute to future earnings.
With a steady approach to capital allocation and a focus on expanding its U.S. presence, AGF is positioning itself for continued success in the asset management industry. The next earnings call is scheduled for January 22, 2025, where further updates on the company's progress will be provided.
Full transcript - None (AGFMF) Q3 2024:
Operator: Thank you for standing by, and welcome to the Q3 2024 AGF Management Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Tsang, you may begin.
Ken Tsang: Thank you, operator, and good morning, everyone. I'm Ken Tsang, Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the third quarter of fiscal 2024. Slides supporting today's call and webcast can be found in the Investor Relations section of agf.com. Also speaking on the call will be Kevin McCreadie, Chief Executive Officer and Chief Investment Officer. For the Q&A period following the presentation, Judy Goldring, President and Head of Global Distribution; and Ash Lawrence, Head of AGF Capital Partners will also be available to address questions. Slide 4 provides the agenda for today's call. After the prepared remarks, we will be happy to take questions. With that, I will now turn the call over to Kevin.
Kevin McCreadie: Thank you, Ken, and thank you, everyone, for joining us today. At the end of Q3, our AUM and fee earning assets reached $49.7 billion, up 18% from a year ago. Adjusted diluted EPS was $0.37 in the quarter. In addition, we have $332 million in short and long-term investments on our balance sheet. Our financial position remains strong, which provides us with flexibility in our capital allocation strategy. Our investment performance remains strong. One-year performance was at the 51st percentile, while three years remains steady at the 43rd percentile. We saw positive retail mutual fund net sales of $19 million in the quarter. Finally, the Board declared an 11.5% share of dividend for Q3 of 2024. Starting on Slide 6, we will provide an update on our business performance. On this slide, we break down our total AUM and fee earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. Our mutual fund AUM reached $28 billion, up 15% year-over-year, outpacing the industry, which increased by 13%. Our ETF and SMA AUM increased 60% year-over-year. I'll provide more color on our mutual fund business and ETFs and SMA AUM in a moment. Segregated accounts and sub-advisory AUM decreased by 9% compared to the prior year. As previously disclosed, the decline was driven mainly by a redemption from one institutional client who is shifting towards passive management. Our private wealth AUM increased by 11% compared to the prior year to $8.2 billion, and our AGF Capital Partners AUM and fee earning assets were $4.9 billion at the end of the quarter, up $2.7 billion from the prior year due to the closing of the Kensington transaction. As a reminder, New Holland Capital's AUM of approximately CAD8 billion is not consolidated into AGF's total AUM and fee earning assets at this time. Turning to Slide 7, I'll provide some details on the mutual fund business. The Canadian mutual fund industry experienced net sales of approximately $3 billion in the quarter, ending nine consecutive quarters of net redemptions totaling to $140 billion or roughly 7% of its AUM. In contrast, AGF's mutual fund business only had four quarters of net outflows, which resulted in flat retail mutual fund net sales over the equivalent nine quarters. This quarter, we reported retail mutual fund net sales of $19 million. This was driven by both an increase in gross sales and lower redemptions compared to the last quarter. Additionally, our net sales improvement was seen across all of our channels. As rates continue to come down, we expect that the industry and AGF will benefit from money moving back from GICs. Looking forward, we continue to take a long-term approach to increasing our penetration in high growth distribution channels by diversifying our capabilities and offerings. I want to now give a quick update on our investment performance. AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category with the first percentile being the best possible performance. Our one-year performance was in the 51st percentile. Our long-term fund performance remains solid and strengthened further in the quarter. At the end of Q3, our three-year performance was in the 43rd percentile, and approximately 60% of our strategies are outperforming our peers on a three and five-year basis. Turning now to Slide 8. Slide 8 shows our ETF and SMA AUM. The AUM in this category has grown 51% on a compounded basis over the last two years. Included in this number are Canadian and US listed ETFs and SMA platforms globally. We have seen consistent growth and momentum in the SMA business both in the US, Canada and in Asia, where a number of our strategies are available on leading SMA and wealth management platforms. We have also recently seen an increase in demand for our market-neutral anti-beta strategy, which provides a tactical hedge against the current volatile market. And with that, I will turn the call over to Ken.
Ken Tsang: Thanks, Kevin. Slide 9 reflects a summary of our financial results with sequential quarter and year-over-year comparisons. The financial results in these periods are adjusted to exclude severance, corporate development and non-cash acquisition related expenses, which I will expand on in a moment. Net income attributable to equity owners for the quarter was $24.5 million, which is $0.9 million higher than Q2 and $1.6 million higher than the prior year. This is driven by a $2.8 million increase in adjusted net revenues from Q2, which I can speak to more on the next page. Adjusted SG&A decreased by $0.4 million from Q2 to Q3 2024, mainly due to the timing of certain expenses and lower government-regulated employee benefits, which are typically higher in the first half of the year. Slide 10 provides a further breakdown of our net revenues. Within our traditional asset and wealth management businesses, net revenues for the quarter was $81.3 million, which is $3.7 million lower than Q2 and $4.6 million higher than the prior year. Our net management fees in Q2 were elevated by a performance fee and timing of certain fund costs. Excluding these items, our net management fees are flat compared to Q2. Within our AGF Capital Partners business, adjusted revenues was $18.5 million in the quarter, which is $6.5 million higher than Q2 and $11.2 million higher than the prior year. Recurring manager earnings this quarter was $9.3 million, up mainly because of the acquisition of Kensington. Revenues from carried interest and performance fees from AGF Capital Partners were $1.7 million this quarter, most of which represented net performance fees collected by Kensington. Revenues from long-term investments were $7.5 million this quarter, compared to $4.7 million in Q2 and $4.8 million in the prior year. On Slide 11, we provided details on some adjustments that we've made to our EBITDA as a result of the Kensington acquisition. Certain accruals and fair value adjustments have no immediate cash impact and create noise to our EBITDA quarter-to-quarter. As a result, we have adjusted for these items, which should allow us to more easily compare quarterly results and provide more visibility to our underlying financials. These will be normal course adjustments over time. As you might recall, we closed our Kensington transaction in March. The transaction gave rise to various contingent consideration and put obligation liabilities. These liabilities are fair value each quarter with a difference flowing through to the P&L. We have also created a long-term incentive program for certain Kensington employees associated with performance fees to be received on prior legacy investments. This LTIP is a typical structure for compensation plans in the private equity world and aligns deal team members with achievements of performance. Typically, you will see firms paying out about 50% of carried interest or performance fees through these long-term incentive plans to employees. From an accounting perspective, there is a disconnect between the performance fee revenue and LTIP expense. LTIP expenses are accrued upfront based on all future anticipated revenues, while revenues are only recognized when received. Given that this is a new plan, most of these expenses are front-loaded over the course of the next two years or so. Accordingly, during the quarter, we recorded a $5 million accrual for this LTIP expense. You should expect future revenues to be a multiple of the LTIP accrued. This quarter, we recorded performance fees from Kensington of $3.6 million. The cash expenses associated with this bonus is $2.2 million, which we have deducted from our adjusted net revenue and EBITDA. We believe that the matching of cash impacts of performance fees and associated cash LTIP and contingent consideration expenses provides a sure picture of our P&L. Turning to Slide 12, I will walk through the yield on our business in terms of basis points. This slide shows our average AUM, our net management fees, adjusted SG&A and EBITDA as basis points on our average AUM in the current quarter, previous quarter and trailing 12 months. This view excludes AUM and related results from AGF Capital Partners as well as DSC revenues, other income, severance, corporate development and acquisition-related expenses. The Q3 2024 net management fee yield was 71 basis points, which is 4 basis points lower than the previous quarter and 2 basis points lower than the trailing 12 months. As mentioned earlier, the net management fee yield of 75 basis points in Q2 was elevated due to a performance fee we received and timing of certain fund costs. Excluding these, our Q2 net management fee yield would have been 72.5 basis points. On a trailing 12-month basis, the net management fee yield of 73 basis points is 2 basis points lower compared to the same time last year, which is in line with 1 to 2 basis points decline, which we've guided to you in the past. Scaling our AUM across multiple products and lines of businesses will help offset the rate of decline. Adjusted SG&A as a percentage of AUM was 49 basis points this quarter, which is 2 basis points lower than the prior quarter and the trailing 12 months. This resulted in an EBITDA yield of 23 basis points in the quarter, which was 1 basis point lower than the previous quarter and 1 basis point higher than trailing 12 months. Turning to Slide 13, I will discuss our free cash flows and capital use. This slide represents the last five quarters of consolidated free cash flows on a trailing 12-month basis, as shown by the orange bars on the chart. The black line represents the percentage of free cash flows that was paid out as dividends. We've redefined free cash flows to account for the same adjustments as our adjusted EBITDA. Our trailing 12-month free cash flow was $94 million and our dividend paid as a percentage of free cash flows was 30%. In the period, we returned $41 million to shareholders in the form of dividends and share repurchases under our NCIB. During the quarter, we repurchased 300,000 shares under our NCIB for $2.5 million. We ended the quarter with net cash of $3 million, which consists of cash of $48 million and long-term debt of $45 million. We also have $332 million in short-term and long-term investments. And we have $105 million remaining on our credit facility, which provides credit to a maximum of $150 million. Our remaining capital committed to our existing capital partners LPs is about $20 million. Taking all of this into account, we have ample capital to deploy. Our future capital allocation will be balanced and includes returning capital to shareholders in the form of dividends and share buybacks as well as investing in areas of growth. Redeploying our remaining excess capital to drive growth and generate recurring earnings remains a key strategic priority. Before I pass it back to Kevin, let me take a minute on Slide 14 to look at our market valuation. AGF's current share price of about $8.49, and our enterprise value is approximately $550 million. Taking our $314 million of long-term investments into account, our remaining enterprise value is about $233 million. This implies a 2.2x EV to EBITDA multiple on our 2023 adjusted EBITDA, excluding income from our long-term investments. Comparing this multiple to those of other traditional and alternative asset managers would suggest potential upside to our valuation. I will now pass it back to Kevin to close out the presentation.
Kevin McCreadie: To sum up this third quarter, we continue to make great progress against a number of our strategic objectives. Our investment performance remains strong, our sales momentum was strong, resulting in positive net flows. Our AUM and fee earning assets continued to climb, reaching $49.7 billion, and we are delivering against our AGF Capital Partners strategy through our investments in Kensington and New Holland. We remain disciplined in our expenses while investing for growth. I want to thank everyone on the AGF team for all of their hard work, and we will now take your questions.
Operator: [Operator Instructions] And our first question comes from Nik Priebe of CIBC Capital Markets. Your line is open.
Nik Priebe: Okay. Thanks. Just wanted to start with a question to clarify the way that performance fees are recognized and earned at Kensington. So there was a $3.6 million performance fee recognized in Q3. That's a gross number. So a certain portion of that would be captured by employees, let's say half, and then I think the selling principles are also entitled to something like 10%. So, we should think about 40% of the gross number flowing to Kensington of which you own 51%. So when we put it all together, after deducting the non-controlling interest, we should think about AGF shareholders capturing something like 20% of gross carry at Kensington. Is that correct or am I far off the mark there?
Ken Tsang: Hi, Nik, it's Ken. I think your math and your logic makes sense. You're absolutely right. Kensington this quarter did receive a $3.6 million performance fee, of which when you back out the contingent consideration and the LTIP, that translates to about $1.4 million. That goes to Kensington, of which AGF would be entitled to about half of that. So yes, your math is right. And this is actually a good representation of future performance fees and our share of those performance fees.
Nik Priebe: Understood. Okay. That's good. And then full year adjusted SG&A guidance of $227 million implies a bit of a step down in adjusted SG&A in the fourth quarter. I think to something I calculated around $54 million. Is that realistic from a modeling standpoint? Or are you seeing rising markets edge that number a little bit higher than initially forecast?
Ken Tsang: Yeah. Hi, Nik. Maybe let me take a step back and kind of talk a little bit more holistically about our SG&A. You'll notice that our SG&A came in slightly lower from Q2 from $60 million to $59.6 million. On a year-over-year basis, if you excluded the acquisition of Kensington, our SG&A increased, of which most of that was actually driven by performance fees as well as some increases related to sales and marketing and inflation. But the majority of that was driven by -- sorry, not performance fee, but performance-based compensation, I should say. And that makes sense, right? If you look at where we're at year-to-date, our sales have been up about 18%, our AUM has been up also by about 18%. And so that's driving a little bit of a higher level of performance-based compensation. We haven't adjusted guidance just because there is another quarter left and, obviously, our compensation is sensitive to where the markets play and everything else. But yeah, hopefully, that helps in terms of just explaining some of the movements on the SG&A front. I will note that if you kind of look at our year-to-date results, our revenues have been up and are actually significantly higher than where the SG&A has trended up as well.
Nik Priebe: Understood. Okay. That's great. And then just last question. In your prepared remarks, I think you made a comment about long-term fund sales benefiting from the rotation out of GIC and other high-yielding products. Just looking at the IFIC data for the most recent month in August, money market funds had the largest outflow since 2021. Are you starting to see some evidence of that rotation happening today?
Judy Goldring: Yeah. This is Judy. Thanks, Nik. We are starting to see that rotation particularly into the fixed income. And I think what we're expecting to see is the BoC and the other -- as rates continue to get cut going forward, we would expect to see it move from the money market, which, as you pointed out, hit a high of about $55 billion in assets under management or I think it was a 25% year-over-year increase. So it really is going to be a flow from the money market into fixed income and then likely see it move into the equities and we'll be prepared to be there for that.
Kevin McCreadie: Hey, Nik, it's Kevin. If I can just add to that. If you think about the Bank of Canada cutting three more times from here, that's what the market probabilities are. So you're at 4.25% today. You're probably looking therefore at a GSE rate at the end of the year that probably touches 3% or even a high 2s, and that will start to even drag further on pulling money out. And I'd say the other offset is segments that we've talked about before, maybe in the mass affluent channel, which have been impacted by these much higher rates and mortgage refinancing, and that relief probably starts to help them there as well. So you probably see the redemption rate on the industry start to come down as well. So it's a couple of things that will happen with those lower GSE rates.
Nik Priebe: Yeah. Okay, that’s great color. I’ll pass the line. Thank you.
Operator: Thank you. And our next question will be coming from the line of Chi Le of Desjardins. Your line is open.
Chi Le: Yes, thank you. It is Chi speaking for Gary. So I just want to follow up on the performance fee of $3.6 million. Maybe this is for Ash. If you can provide a bit more color into this performance fee and what's your expectation for performance fee for the rest of the year?
Ash Lawrence: Sure. Happy to. Thanks for the question. So the performance fee was related to a monetization of a direct investment that sat within a co-investment vehicle that Kensington manages. So Kensington earns performance fees or carried interest of its various vehicles, the methodology for calculating them differ somewhat between the vehicles. But the common thread being they're always tied to monetization of underlying investments and the distribution of those gains to investors. Now saying that, obviously, performance fees and carried interest can vary given that they are heavily tied to the transaction market. And as I'm sure -- most people on this call are aware we've been in a subdued private equity market in terms of transaction volume, largely as a result of the interest rate environment for the last 18 to 24 months. We are starting to see signs of that thawing, but I would not say that it's normalized quite yet, maybe in line with some of the comments on the previous question as we do start to see rates come down a little more and the big cut in the US. We would hope that, that would help increase the transaction market, which would then flow through to shops like Kensington being able to monetize more assets and drive some of that performance fee and carried interest calculations. I think we've said previously on a historical basis, we expect that to be somewhere between 5% and 10% at current size, obviously, as the firm scales, that will grow as well. The one last thing I would say is while we've been in a tough environment, the Kensington team has managed over that high-rate timeframe to transact on 8 or 9 of their investments and generated across the pool of the pretty healthy multiples in returns. So I think that's testament to the team over there and what we saw when we made that acquisition. Obviously, a lot of those transactions would predate our closing. But again, I think being able to transact in that environment in the private equity world is a testament to that skill set.
Chi Le: Thank you. That's helpful. And maybe on a related note, just wondering on the M&A front, like, what are you seeing in the pipeline and perhaps your expectation going forward?
Ash Lawrence: Yeah. So we continue -- I think probably for the next few years, you'll hear me sort of open an answer to that question by saying we continue to canvas the market. We do have an active pipeline, and there are a number of opportunities that we've looked at in the last six months. The one thing I will say is we are refining our parameters of what is attractive to us as we move forward and especially now that we have the first couple of deals under our belt. As an example, right now, we are focused exclusively on the US, and that's largely to get a better breadth of opportunities that have a little more scale to them as we refine some of the parameters that we're looking at. That being said, and I think I mentioned this on a previous call post the Kensington and New Holland Capital transactions, these transactions do tend to have long deal cycles. We are generally dealing with the founders and partners of firms, which elevates the relationship aspects of the deal and the time it takes to get to know each other, so to speak. So while we are active, we do expect deal cycles from sort of initial introduction to any potential closing to be anywhere from 8 to 14 months. So it does take us some time to actually get these done.
Chi Le: Got it. Thank you. And just my final one, maybe for Judy. Following up on the flows comment, any comment on what you're seeing in the quarter-to-date?
Judy Goldring: Quarter-to-date, we're essentially flat.
Chi Le: Thank you.
Kevin McCreadie: Yeah. And Chi, this is Kevin. One of the things we've talked about, Chi, and back to the Nik's comments earlier, just to make sure you're all kind of -- the industry is bottoming in here. So we're going to be seeing months of positive flow, months of negative flow. It's just kind of flattening around. But as rates come back down, as Judy said, we'll start to see that pick up. So I'm not surprising we're going to see some flat months and pickup months. But clearly, as we talked earlier in the year, this is probably when you start to see it come back.
Chi Le: Thank you.
Operator: [Operator Instructions] And our next question will be coming from Rini Sharma of BMO Capital Markets. Your line is open. And again, Rini Sharma, your line is open.
Rini Sharma: Hello?
Kevin McCreadie: Yes, go ahead. Can you hear us?
Rini Sharma: Sorry, I wasn't sure if you could hear me. Thank you for taking my question. So, I guess I want to just go a little bit deeper into the revenue from long-term investments. I see that was up considerably compared to the last quarter and the year before. Could you maybe provide some color on to how -- like what your outlook is on the fair value of some of those investments going forward?
Ash Lawrence: Hi, Rini, it's Ash here. Happy to take that question. So, it was higher on a quarter-over-quarter basis, but we generally tend to think, and we've said this on this call before, that over the course of the year, we're expecting anywhere between the 8% and 10% return range on that pool of long-term investments. The current quarter sort of falls right smack dab in the upper end of that zone. But again, we do expect that to fluctuate quarter-to-quarter depending on the performance of the underlying holdings and the broader economic backdrop. So it's not going to be a very consistent run rate, which I think if you look back historically, you'll see it does annualize out to a somewhat consistent number. Generally, we're seeing healthy gains within our infrastructure portfolio and that is where most of the activity is today, which is not surprising given the interest and the environment we're in. Just as a point of reference, we also have long-term investments in the credit space. We tend not to see a lot of fair value increases there. The loan valuations tend to stay relatively consistent. Most of the return coming off that pool is in the form of distributions, which effectively is income generated off the underlying loan interest. Our last sector that we have in our long-term investments, the venture sector, has tended to be relatively flat this last quarter, which I think is good because we've seen that sector go through some challenges, but has largely appeared to bottom out, and we're starting to see that stabilize a bit in our portfolio as well.
Rini Sharma: Okay. Thank you for that. That's helpful. And I guess, I know we spoke about this earlier in the call. What are you thinking -- so just to be clear, the SG&A guidance remains the same for the year. Is that what you were implying?
Kevin McCreadie: Yeah. Hi, this is Kevin. Let me take that. So yeah, what's happened is our core comp that we look at even year-over-year from Q3 of last year is flat. So the issue is really performance-based. Our gross sales are up 18%. That's going to drive higher sales commissions, as Ken said, our investment performance strengthened and that's going to drive higher comp. And there's some components of the market as well in terms of some of our plans as well as we're exceeding our business plans. So you put that together, it's our incentive-based compensation that is running a little bit hotter than where we are. Given we have one more quarter and I think a very volatile market in front of us, that could change that dynamic. So again, while we're running a little hotter, it's all on the performance-based side, which we really don't control. So again, we'll come back in Q4, we have an eye on it, but it's really about managing through what we don't know about this market. So again, change it today one way or the other, I think, would be a guess.
Rini Sharma: Okay. Thank you very much.
Operator: [Operator Instructions] And I'm showing no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place Wednesday, January 22, 2025. You may now disconnect.
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