AGF Management's CEO Discusses F1Q2014 Results - Earnings Call Transcript

Mar.26.14 | About: AGF Management (AGFMF)

AGF Management Limited (AGF.B) F1Q2014 Earnings Conference Call March 26, 2014 11:00 AM ET

Executives

Robert J. Bogart – Executive Vice-President and Chief Financial Officer

Blake C. Goldring – Chairman and Chief Executive Officer

Analysts

Paul Holden – CIBC World Markets, Inc.

John C. Aiken – Barclays Capital Canada, Inc.

Graham Ryding – TD Securities

Geoffrey Kwan – RBC Capital Markets

Gary Ho – Desjardins Securities, Inc.

Stephen Patrick Boland – GMP Securities LP

Scott Chan – Canaccord Genuity Corp.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AGF’s First Quarter 2014 Financial Earnings Conference Call. (Operator Instructions).

As a reminder, this conference call is being recorded, Wednesday, March 26, 2014. Your speakers for today are Mr. Blake C. Goldring, Chairman and Chief Executive Officer of AGF Management Limited; and Mr. Robert J. Bogart, Executive Vice President and Chief Financial Officer of AGF Management Limited.

Today's call and accompanying presentation may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements and actual results could differ materially.

For additional information regarding such forward-looking statements, factors and assumptions, AGF directs you to the caution regarding forward-looking statements, which is contained on Page 2 of the presentation, AGF's MD&A for the three months ended February 28, 2014, and AGF's most recent Annual Information Form.

I will now turn the call over to Mr. Bogart. Please go ahead, Mr. Bogart.

Robert J. Bogart

Thank you, operator. Good morning, everyone. I'm Bob Bogart, CFO of AGF Management Limited. Thank you for joining us today for a discussion of our first quarter 2014 financial results. Please note that the slides supporting today's call and webcast can be found in the Investor Relations section of agf.com.

Today, Blake Goldring, Chairman and CEO, and I will discuss our first quarter 2014 financial results.

Turning to Slide 4. The agenda for today's call we will discuss the highlights of the first quarter, provide a business update on the key segments of our business, review the financial results, discuss our capital and liquidity position and finally close with an outlook for the remainder of 2014. After the prepared remarks, we will be happy to take questions.

With that, I will turn the call over to Blake.

Blake C. Goldring

Thank you, Bob, and thank you, everyone, for joining us on today's earnings call. Global equity markets are continue to be strong since the end of our fiscal year. Developed markets outperformed emerging markets and Canada shown strength as resources have recovered from their lows. The markets have advanced despite geopolitical uncertainty, most notably the situation in the Ukraine.

The resilience being shown by the market is encouraging and it help investor sentiment. Canadian investors have shown confidence is evidenced by the rotation to equities. Equity fund net sales for the total month ending February 2014 were $20 billion higher in the same period ending in 2013. Bond flows decreased by $22 billion over the same period. Global funds are now attracting net sales. Weakness in the Canadian dollar should further influence the move to global investing.

AGF have seen an uptick in both equity and fixed income sales. Our improved fixed income sales $1 with the industry trend. This is largely due to the success of AGF floating rate income fund, which protects against rising rates.

Recently rising rates have come into focus. Tertiary yields rose last week as Federal Reserve Chair, Janet Yellen hinted that rate types could come as early as six months after the central bank winds down its bond-buying stimulus program later this year.

With that backdrop let’s review the Q1 2014 highlights on Slide 5. Assets under management increased by 5% since November 30th. This was due to organic growth and market performance realized in the quarter.

Earnings per share from continuing operations were $0.20 per share. Reported EPS including discontinued operations was $0.23 per share. We have success in the retail business as demonstrated by 13 months of improvement net redemptions versus prior year. Our goal net sales depends on investment performance, which was particularly strong during the quarter.

Institutional net inflows were strong and our infrastructure was successfully launched. The Board approved a $0.27 per share dividend, consistent with previous periods and our commitment to shareholders.

Turning to Slide 6. Investment performance continues to strengthen. Assets under management above medium standard 38% over one year and shorter term performance at even more encouraging, almost 60% of AUM was above medium during our fiscal Q1.

The improvement as a result of efforts we have made to bolster our investment capabilities. An example is our Dublin team, which manages global and European value mandates. The changes implied in the investment process, particularly the portfolio construction and risk management and delivered lower volatility without sacrificing alpha generation. 100% of Dublin’s AUM is above median over one year and the short-term trend continues to hold true as well.

Global core performance remains strong. and in 2013, we received upgrades from two large consultants. Global core is ahead of its benchmark for short and long-term periods. We continue to be ranked among the best in the world on a key institutional metrics over 10 years we are top quartile on excess return as well as risk-related measures.

We’ve substantially completed the build out of our North American team, including the hire of respected Canadian Growth Manager, Peter Imhof. We are currently in the midst of our CIO search and I am very encouraged by the quality of candidate we are interested in the opportunity. The search is progressing well and we expect to make an official announcement in time for our next call.

Net redemptions have improved for 13 months versus prior year as shown on Slide 7. Let me provide a comment or two on what’s behind the improvement. the AGF have three strategic priorities for our retail business. Number one, enhance the firm’s overall investment performance; two, develop the more compelling product pipeline by providing innovative solutions around specific needs; three, we are closing the strategic business partners to facilitate distribution. We have had success with all three of these strategies.

I saw previously to the progress we are making on our performance and this is translating in improved both. We have had success in innovating new products. We address the specific needs around rising rates, income and stock market volatility.

AGF Floating Rate Income Fund and AGF Focus Funds, we launched in May 2012 and have over $700 million in assets under management. AGF U.S. AlphaSector Class was launched in August 2013, now has over $240 million in assets. This fund addressed advice on investor concerns around stock market volatility. The fund implies risk-controlled strategies in down markets, but still providing equity exposure for upside cash and positive markets.

We continue to call with our relationship with strategic partners and we have secured $320 million new mandates with strategic retail partners over the last 12 months, the $110 million, one in the first quarter. We also notified another large allocation that we’ll fund in June. We are achieving our goal in retail, strong investment performance, innovation and winning business with our strategic partners.

Turning now to Slide 8. I want to get into some detail on our institutional business. At the end of the fourth quarter, we reported $756 million institutional pipeline. This was made up of $1.1 billion of committed sales and $343 of redemption notices. This entire pipeline funded in Q1 2014. we have under $56 million of committed sales, which is offset by redemption notices.

In addition to that committed activity, we are also participating in about 10 promising searches for a variety of our global mandate with over $2 billion in assets under management. These searches originated from Continental Europe, the Middle East, U.S., UK and Canada. A number of these searches at the Global Core, where clients are looking to invest in our UCITS structure. We now have UCITS funds with material scale that can compete with high demand categories in multiple countries and channels.

We are working hard to capitalize on this opportunity and extend our presence in European market. We continue to see interest in our emerging market strategy and a secular trend for growth in emerging markets remains intact. However, relative performance of EM indices creates a risk of redemptions in legacy accounts. This is why diversification in our institutional product offering is important.

We developed a suite of Canadian strategies targeted at domestic clients. We also have a new entry in the institutional and emerging market space. Our emerging markets value, which will soon be added to the Smith and Williamson platform, a distribution in the United Kingdom We have added a new infrastructure capability as part of our alternative asset management platform. This new initiative is in response to the strong demand in the institutional marketplace for long dated real assets that generates strong recurring cash flow.

This type of business well suited for liability, immunization and inflation protection. Many of our clients have targeted allocations away from public markets into real assets that these have investment – that they have these investment characteristics.

The investment strategy will initially focus on mid market opportunities in North America. Initially, investments were made in the form of equity capital and projects and companies across its spectrum of infrastructure sectors, including civil and social infrastructure, water, waste water and renewable energy.

Our targeted investor base would be mid tiered pension plans. We work in partnership with them to address their need for access to infrastructure investments. This I believe is a great example of AGF deploying capital in an effective manner. The seeding of the structure will generate returns in capital and a running yield for addressing a key strategic capability that would generate recurring management revenues.

The institutional business can be lumpy, but we feel confident that with a strong value proposition that we have, that this is going to an area of the growth for us. Our expanding investment capabilities, global product platform, strong performance in our global strategies are few reasons we’re excited about the institutional business going forward.

Turning to Slide 9, I’ll now turn the call over to Bob to review the financial, capital and liquidity information.

Robert J. Bogart

Thanks, Blake. in our published financials and MD&A, you'll notice that our presentation has been divided into continuing operations and discontinued operations. This is consistent with the presentation of results from previous quarter. Discontinued operations are identified as a single-line item just below the income from continuing ops.

Slide 9 reflects a summary of our financial results from continuing operations for the current quarter, as compared to the previous quarter and from Q1 2013. We’ve also presented adjusted numbers, which exclude significant one-time adjustments. This presentation is consistent with our MD&A.

EBITDA for the quarter was $44 million, up 18% from previous quarter’s adjusted EBITDA of $37 million. This increase is primarily attributable to a decrease in SG&A driven by lower cash and stock compensation in addition to lower fund absorption costs. EBITDA compared to prior year Q1, increased 3% from $45 million, driven primarily by lower AUM and its impact on revenue. First quarter EPS came in at $0.20 per share, compared to $0.11 per share adjusted in Q4 2013 and $0.17 per share in Q1 2013.

During the quarter, we also recognized an after-tax gain of $2.8 million attributable to the disposition of AGF Trust, in connection with the sale recognition of additional contingent consideration; it could be triggered based on performance of the loan loss provision post disposition. Essentially, the loan loss is better than a prescribed limit; additional consideration was due to AGF. So, during the quarter, we’ve revised previous estimates, just as the additional consideration will be $10 million. Consolidated EPS, which takes into account the additional purchase price consideration, was $0.23.

Turning to Slide 10, I’ll walk through the basis points yield on our business. This is a slide, we regularly show on our calls. It lets you see our performance on a longer trended basis and smoothing out some of the impacts of market volatility. It shows our investment management revenue, operating expenses and EBITDA as a percentage of average AUM on the current quarter and the prior year's quarter, as well as a prevalent 12-month view.

Note that the results reflect the core investment management business excluding one-time items and other income. With respect to revenue, the operations reflect a quarter-over-quarter increase in revenue yield due to an increase in mix of retail business per dollar of AUM.

SG&A, normalizing for stock compensation expense has decreased compared to Q1 2013 on an absolute basis. However, we see here that SG&A was higher as a percentage of AUM, compared to prior year as a result of lower AUM levels.

We’ve shown the impact of stock-based compensation expense separately, because of the recent volatility in the stock price. Stock price movement during the quarter caused it too down on our stock compensation expense. This is lower relative to Q1 2013, where we experienced a 33% appreciation in our stock price, across the two of other stock compensation expense.

During the quarter, we introduced a share settled scheme for the outstanding restricted stock units issued to employees. This will reduce the volatility in our stock-based compensation expense going forward. In fiscal 2014, we expect the SG&A to be around $175 million, consistent with our guidance provided during the fourth quarter call.

Turning to slide 11, I’ll discuss free cash flow and dividend coverage. This slide represents the last five quarters of the free cash flow, shown by the blue bars on the chart. The cash flow represented is consolidated free cash flow. The free cash flow from quarter-to-quarter can be impacted by a variety of items, including changes to DSC paid, timing of cash taxes and dividends received from minority investments.

Our DSC funded in the quarter increased $2 million over Q4, reflecting the improved gross sales. This is a positive change, as those gross sales are generating future revenue. Additionally, we paid $2 million of cash taxes related to a final payment for fiscal year 2013.

Our Q1 payout ratio came in at 120%. however, adjusting for the timing of the items mentioned previously, free cash flow was sufficient to fund a dividend in the quarter. In the current equity market levels, we forecasted any dividends report required in 2014 fiscal year will be minimal.

The cash balance is lower from year-end levels, reflecting the CRA payment, year-end bonus related compensation payment than use of the NCIB. We aim to enhance free cash flow by executing against the strategic plan to improve the core business and by building up the alternative asset management platform.

Launching the platform will give us exposure to investments with a very attractive return profile, including the running yield. The funds, once established, will attract AUM from the institutional client base and will generate recurring revenue and incentive fees.

A realization of significant incremental free cash flow won’t happen in the single quarter. so in the intervening period, we are prepared to support the dividend as long as financially prudent, given our revenue growth and free cash flow outlook and balance sheet position. However, as discussed in the past, the decision that the board will make on a quarter-by-quarter basis.

We were selectively active with the NCIB in the quarter. we repurchased approximately 1.8 million shares for a total consideration of $22.1 million. Over the past 18 months, we have repurchased 12 million shares, or roughly 12% of our total shares outstanding at an average price of $11.56 per share.

Going forward, the NCIB will be used opportunistically, as capital will be reserved for new investments and dividend support as required. We will also use some of the NCIB capacity to purchase shares in connection with the changes to our restricted compensation program and the establishment of the Employee Benefit Trust.

Now turning to Slide 12, I'll turn the call back over to Blake to wrap up.

Blake C. Goldring

Thanks, Bob. I would like to close by outlining our priorities for the remainder of 2014. We aim to continue the upward trend in overall investment performance. So appointing a new CIO will be a key area of focus. We’ll continue to leverage new products, improved investment performance and strategic relationships to continue the upward trend in retail.

For the institutional business, we capitalized on the opportunities we have with the global products and our UCITS structure, which will help facilitate distribution. Alternatives will be leveraged to the long-term organic growth opportunity. We have renewed the NCIB and we use it opportunistically repurchase shares.

Our balance sheet remains strong and we will support the dividend. I want to thank everyone on the AGF team for their hard work over the quarter and on positive results that we have achieved so far in 2014.

Thank you very much. And now, we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Paul Holden from CIBC. Please go ahead.

Paul Holden – CIBC World Markets, Inc.

Thank you. Good morning.

Blake C. Goldring

Good morning, Paul.

Paul Holden – CIBC World Markets, Inc.

First question relates to the $20 million investment you made in the quarter in Midstream Energy. I assume that relates to what Blake was talking about in terms of AGF initiatives to invest in various infrastructure assets. Can you tell us a little bit more about that? Like, is that being done through a partnership? Is that related to Instar in any way? Maybe just a little more on the thoughts and strategy there?

Robert J. Bogart

Paul, it does not relate to InstarAGF, it is a structured finance investment to the midstream space. The investment represented an opportunity to increase the yield in our cash flow, we’re gaining some exposure to a potential investment opportunity in the unit event and that’s all, but we’ll have more to say about this in the coming quarters as it evolves.

Paul Holden – CIBC World Markets, Inc.

Okay. And is there a possibility then of using this feed capital to eventually launch a fund type structure for these investments? Is that the path you are going down?

Robert J. Bogart

It could lead to that.

Paul Holden – CIBC World Markets, Inc.

Okay. With respect to the UCITS platform, how should we expect that to grow over time? Is it going to be lumpy like the traditional institutional business? Or is it going to be a little bit more smooth?

Blake C. Goldring

Well, the UCITS market is approximately €6 trillion in size. So, it’s a very big opportunity for us and we’re just entering that now. And to your point, the end investors tend to be fairly diverse, even have rate to the retail to larger midsize organizations, institutions that would invest. So, there is a potential, be a little bit more of lumpy, but we think it not pronounce we would get the straight institutional investment.

Paul Holden – CIBC World Markets, Inc.

Okay. So somewhere between retail and the straight institutional.

Blake C. Goldring

Yes.

Paul Holden – CIBC World Markets, Inc.

And in terms of your, with the UCITS again, you plan to roll that out to Asia. Any kind of timeline or guidance you can provide on that?

Blake C. Goldring

Not at this time. Our focus on the great opportunities we’re seeing in Europe are such that we’re really focusing there. However, as I say, we got our dealer size in different markets right now.

Paul Holden – CIBC World Markets, Inc.

Okay. And you mentioned that you have strong performance in your Dublin funds, particularly over the one-year timeframe. Can you give us a sense of net sales into those funds? Are we seeing a good recovery? Are they in positive net sales yet or still in net redemptions?

Robert J. Bogart

There in net redemptions, there’s still default. But I think the projects that we’re making on the level of outflow that Blake just discussed in the call is really encouraging. Much of that can be attributable to an improving one-year performance number. So, we’re seeing a strong correlation in our shop [ph] to redemption rates improving significantly over a short-term performance. That said it hasn’t translated into improved gross sales, so stronger performance over the longer period of time, it’s going to be required to drive that to the positive.

Blake C. Goldring

I can see that retailers ask to see the Dublin group across the country, so they’re going to be coming over and getting back and talking about what they’re doing and how they’re achieving their performance and what they see for the market. Their great interest of course in Europe and I’d also add that, the weakest in the Canadian dollar and I mentioned in my comments that we’re seeing a lot more uptick and great interest in all different of our goal strategies.

Paul Holden – CIBC World Markets, Inc.

All right. And final question is percentage of AUM above median on a three-year basis. Do you have that number handy?

Blake C. Goldring

Right today the actual figure is 0.2%.

Paul Holden – CIBC World Markets, Inc.

Okay. Thanks for your time.

Blake C. Goldring

Thanks, Paul.

Operator

Our next question comes from John Aiken from Barclays. Please go ahead.

John C. Aiken – Barclays Capital Canada, Inc.

Good morning. In your prepared commentary you talked about several uses of cash like exceeding the infrastructure, potentially supporting the dividend in the normal course issuer bid. With the actions that were taken over the quarter, we have actually seen AGF now go to a net debt position instead of a net cash position. With all of these uses of cash, is there any upper bounds on – that you would like to or that you would like to restrict the net debt level at, in terms of either EBITDA, earnings, or some absolute dollar value?

Robert J. Bogart

Paul, sorry, it’s John, right.

John C. Aiken – Barclays Capital Canada, Inc.

Yes.

Robert J. Bogart

We haven’t and we’re not prepared to set those parameters. I think we’ve got $286 million in cash and investments on the balance sheet with net debt of $22 million. So, we’re quite comfortable with our capital situation at the stand today. As Blake mentioned, it’s our goal to utilize that capital to support returns that will over the investment cycles, generate mid-teen IRRs. So, the capital committed to the alternative platform, it’s supports the strategic objective, building out an asset management platform, that’s going to generate EBITDA while providing a running yield on our capital. So, I think the sensitivity around the free cash flow generation that as a percentage of the dividend, it’s going to be addressed through that business growth.

John C. Aiken – Barclays Capital Canada, Inc.

Okay. And, Bob, you talked about settling some of the employee compensation, true, actual issuance of the shares. Can you let us know, I mean, I know there is a whole bunch of different variables in there. But potentially, how much should the NCIB might be utilized for the development of this new program?

Robert J. Bogart

In the area of a 1 million shares, John.

John C. Aiken – Barclays Capital Canada, Inc.

Okay, great. Thank you very much.

Robert J. Bogart

You bet.

Blake C. Goldring

Okay.

Operator

Our next question comes from Graham Ryding from TD Securities. Please go ahead.

Graham Ryding – TD Securities

Hi, gentlemen. Maybe I can just start on the SG&A side. So, you are holding to your guidance of $175 million. Just want to be clear, does that include any expenses you anticipate to launch your infrastructure initiative?

Blake C. Goldring

No, it does not.

Graham Ryding – TD Securities

Okay. And, but it does sound like you are expecting reduced volatility in the RSUs component, just given you are moving to a different policy and hedging and whatnot.

Robert J. Bogart

Right, Graham. We’ve envisioned about a $1.5 million of compensation related, stock compensation related expense on a quarterly basis.

Graham Ryding – TD Securities

Okay, okay. That’s helpful. Jumping to the institutional side of your business, Blake, you gave some good color there around the global core and the 10 mandates that you are actively participating on. I guess my question would be, what’s your typical success rate and your experience when, I guess, converting RFP mandates? Is there a typical sort of hit rate that you operate on?

Blake C. Goldring

Yes. It’s actually been very good, in fact, I was talking just yesterday, with our global team, that said great team away with the Global Core, and it’s actually, fairly significant mode. I could see the figure, but I wouldn’t want to extrapolate that into what we actually might transpire, but it’s been in the area of 70%. But again, don’t take that as indicative of the future once they are not going to [ph] clear all the $2 billion that we have in the pipe today.

Graham Ryding – TD Securities

Okay, great. And then, what’s the activity like – my impression is that the emerging markets is the other area that you focus on currently, heavily on the institutional side. What’s the activity like for RFPs there?

Blake C. Goldring

Well, we’ve had $1.3 billion new institutional money into the EM for past year. So I mean it’s still, I see an area bit more muted, clearly the whole EM agency has not fallen, and this whole issue of the taper coming off, and has created some uncertainty with regard to EM generally. but as an asset class, we showed it permeably that it’s an area of our ongoing growth into the future.

Robert J. Bogart

In Q1, Graham, we actually received the funding from accretive clients in Europe in the EM mandate. So, we still think that the secular trends to EM investing remains intact.

Graham Ryding – TD Securities

Okay, great. And then the disclosure you gave around your new sales, like with your institutional pipeline, the new sales you are expecting on the expected redemptions, what mandates are those from?

Robert J. Bogart

They are across the board, but – that the largest redemption was emerging markets.

Graham Ryding – TD Securities

Okay, great. And then, just lastly, can you give us an idea of – you mentioned that you focus also with Canadian strategies for domestic institutional clients. What would that represent as a percentage of your institutional AUM, roughly?

Blake C. Goldring

It would be actually quite small today, Graham, but it’s one area where we see terrific upside. I’ll just highlight strategies such as a Highstreet or we have Canadian balance, we have Canadian Equity Core, the strategies, which we see and are getting some traction with. so we are optimistic with the domestic side as well.

Graham Ryding – TD Securities

Okay, great. thanks. that’s it from me.

Operator

Our next question comes from Geoff Kwan from RBC Capital Markets. Please go ahead.

Geoffrey Kwan – RBC Capital Markets

Hi, good morning. The first question I had was just expanding on Paul’s question on; you’ve got the Instar initiative. you’ve got this energy one. Is this something that we may see more of in terms of these new kind of seed investments? And then, similarly related to that is the cash that you are making for these investments, I’m assuming it’s fair to assume that these – because they are probably liquid is – should be more kind of restricted cash or as treated as investments, in other words, not some sort of cash equivalent.

Robert J. Bogart

Right. I don’t know how we’ve been asked, they wouldn’t be highly liquid, Geoff. but to your early comment, we’re focused on the launching of the alternative asset, the platform with the core infrastructure fund, that’s really our focus. And opportunistically, there are investments that will present themselves that we’ll look at, and if they meet the return requirements and liquidity requirements, we’ll give them a loan loss. but I’d say that our real focus is on the development of much of the core infrastructure fund later this year.

Geoffrey Kwan – RBC Capital Markets

Okay. So it sounds – is it fair, then, to say that you may get presented with stuff, but you are not proactively looking for additional opportunities along the lines of Instar and the energy partnership?

Blake C. Goldring

Correct.

Geoffrey Kwan – RBC Capital Markets

Okay. The next question I had was, when I take a look at the absorption expense year-over-year, the retail AUM didn’t change too much from Q1 last year. And the absorption expense went from $4.5 million to $3.5 million. Just wondering if there is any sort of color around it, if there were changes to fee caps or anything along those lines?

Robert J. Bogart

Yes, I think that the big change was, we had announced last year or in Q4 2012, if my memories serves me correctly that there were certain funds that we were actually reducing the management fee on. and we did it in the form of a management fee waiver that went through the fund absorption line.

Those fees, we just decided to make them the permanent. And so, a part of that fund absorption is now going to be found as a concrete revenue essentially in the management fee revenue line. So that’s part of the explanation with respect to the reduction in fund absorption, increased AUM in the retail side is also a reason. and finally, we increased modestly some of our cash and some of our larger funds.

Geoffrey Kwan – RBC Capital Markets

Okay. And then, just last question I had was, the tax rate was 26% in the quarter. Is that kind of where you think it will play out for the year?

Robert J. Bogart

That’s a good assumption.

Geoffrey Kwan – RBC Capital Markets

Okay, great. Thank you.

Robert J. Bogart

Thank you.

Operator

Our next question comes from Gary Ho from Desjardins Securities. Please go ahead.

Gary Ho – Desjardins Securities, Inc.

Thanks so much. First question, wondering if you can comment on the $2 billion opportunities on the institutional side and when we might see that come in? Is that more back half of 2014 event?

Robert J. Bogart

Okay. I just want to be clear about that again, those are opportunities. Those are not sort of funded commitments that we have in our portfolio, I just want to make that really, really clear.

Gary Ho – Desjardins Securities, Inc.

Yes, yes.

Blake C. Goldring

But we have a blend of various funds products that we are looking at everything for global core, emerging markets, European equity and few others that we’re actively working on to. And we typically are in the sort of four or six-month type period.

Gary Ho – Desjardins Securities, Inc.

Got it. Okay. The next question is housekeeping item. On the depreciation items, there was DSC customer contract’s intangibles, total of all of those roughly, I think $17.6 million versus roughly $20 million to $22 million over the past few quarters. Are there anything unusual there and anything you can comment on the sustainability of this quarter’s level going forward?

Robert J. Bogart

Let me add some of it is just customer contract that has been written off. And so the amortization will be lower going forward. We’ll see a decrease in intangible amortization, some non-comp agreements related to previous acquisitions have expired. And so we estimate the impact of that change will be a lower of the amortization expense by $1 million starting in Q2 on a quarterly basis.

Gary Ho – Desjardins Securities, Inc.

so this quarter’s run rate is the good indication for the…

Blake C. Goldring

Yes.

Gary Ho – Desjardins Securities, Inc.

Okay. and lastly, just wondering if you can give us an update on the CRA transfer pricing review?

Robert J. Bogart

There is no update from the previous quarter. we haven’t heard back from the CRA.

Gary Ho – Desjardins Securities, Inc.

Okay, perfect. Thank you.

Robert J. Bogart

Thank you.

Operator

Our next question comes from Stephen Boland from GMP Securities. Please go ahead.

Stephen Patrick Boland – GMP Securities LP

Good morning.

Blake C. Goldring

Good morning.

Robert J. Bogart

Good morning, Steve.

Stephen Patrick Boland – GMP Securities LP

I guess I’m going to go back to the free cash flow issue and I know it is tough to look at on a one-quarter basis. But Bob, just based on your comments, you kind of said that your belief here, excluding the one-time items in the quarter, is that you believe that like free cash flow should be closer, equal to, your dividend or I guess your payment here this quarter, or for the year – sorry. Is that a fair comment?

Robert J. Bogart

Yes. I mean I think either there is a – as we look at it over the years, Steve, you can appreciate we’re not fully focused on a quarter-by-quarter basis. but I fully appreciate my guys are focusing on it. But there are large dividend payments that we’re receiving from Smith and Williamson investments, which will happen in Q2 and Q4. Those need to be taken into consideration. so we’re comfortable at, in over the next three quarters that free cash flow and dividend payments will be very close to 100%.

Stephen Patrick Boland – GMP Securities LP

Okay.

Robert J. Bogart

Maybe a little higher. but over the year, we’re anticipating a fairly flat ratio at the 100%.

Stephen Patrick Boland – GMP Securities LP

I presume that carries some sort of assumption of new business or where your asset levels are going to be or market assumption, or is that just keeping your asset levels where they are right now and annualizing that?

Blake C. Goldring

Yes. I don’t want to give you all my secrets, Steve. but we don’t bake in any market action. we do bake in anticipated flows, both for the regional institutional side driving that result.

Stephen Patrick Boland – GMP Securities LP

Okay. So I’m just trying to get – I look at your balance sheet in two or three quarters. Once you make the remaining co-investment, the taxes you could add – nothing could add another $30 million. Like you are potentially – could be in a position where you would be in net debt of maybe $100 million or even more, based on your free cash flow assumption here. Is that still a number you’re comfortable with?

Robert J. Bogart

Yes. I did remind – remind yourself on the InstarAGF fund that it’s going to get launched at the end of December, and the capital that you’re going to be making a commitment to with respect to that fund may happen over 18 to 24-month period. So it’s not a just 100 that we’ve laid out, as our ceiling commitment is going to be made in Q4, Q1 of next year.

So the fact that you’ll be able to, we’ll be creating, making improvements in the core business, and also creating a sustainable cash flow business through this alternative platform going forward. We’ll align those figures in terms of the – what you might perceive to be a significant net debt. And again, we’re not concerned with the net debt position either today, which we think is around $22 million or at the end of the year, which will be, maybe $50 million, we’re comfortable with that position.

Stephen Patrick Boland – GMP Securities LP

Okay. And, based on that, I mean is it reasonable to expect a large buyback or is that kind of being kind of like a third priority at this point?

Robert J. Bogart

We’re opportunistic with respect to the NCIB and we will as well as I mentioned in the previous question, an answer to previous question. We will be repurchasing shares for the Employee Benefit Trust at some point earlier.

Stephen Patrick Boland – GMP Securities LP

Okay. Sorry, I will just keep going on this. Next quarter comes, is there any large one-time operating cash flow numbers that are going to swing each way, like do bonuses have to be paid out or anything like that, that is going to make that 120 number be the same or should we see the improvement in Q2 and I do hate putting it on a quarter by quarter basis, but it may kind of reduce spirits?

Robert J. Bogart

We don’t guide on free cash flow, Steve, but I will say that there are no large unusual items that we’re contemplating for Q2.

Stephen Patrick Boland – GMP Securities LP

Okay, all right. Thank you guys.

Blake C. Goldring

Thank you.

Operator

Our next question comes from Scott Chan from Canaccord Genuity. Please go ahead.

Scott Chan – Canaccord Genuity Corp.

Thanks. Blake, just going back to the global searches and the $2 billion and just kind of a bit confused on the previous questions, but are these searches? Are these actual kind of like meetings going on regarding that the $2 billion global mandate? I’m just trying to get a sense of, you mentioned the hit rate of 70% previously, but kind of tempered that. I'm just trying to get a sense of that $2 billion, how much of that could get funded? Like half or less than half?

Blake C. Goldring

The searches, I can’t. I would like to say 100, but the reality is that it never as 100. So, I mean to say, historically, it has been a very good hit rate. We are into searches today; some of those are into more advanced stages. So, I can’t at this stage, stay tuned that we’re going to close.

Scott Chan – Canaccord Genuity Corp.

Okay.

Robert J. Bogart

Scott, just to clarify, these are meaningful conversations with clients, right, through consultants and/or direct conversations with AGF.

Scott Chan – Canaccord Genuity Corp.

Okay. And, Blake, as part of just the priorities, you talked about improving strategic relationships. And I think you gave some numbers pertaining to retail in the quarter in the past year. Can you give us a couple of examples? I mean, is this related to Primerica or is this kind of maybe perhaps other additional relationships that you've cultivated in the past year?

Blake C. Goldring

We have been number for instance, with Scotia, Standard Life, Manulife, just to mention a few credential that continues to be a very good partner of ours, and working on a number of others as well.

Scott Chan – Canaccord Genuity Corp.

Okay. And, Bob, just going back to the infrastructure, I maybe missed it. The $20 million, is that just like an investment that you have made by yourselves into a midstream asset, looking to get yield?

Robert J. Bogart

That’s correct, Scott.

Scott Chan – Canaccord Genuity Corp.

That's correct. Okay, to get yield. And then, going forward, with the core infrastructure fund, are you going to seed, I guess with committed capital, is there a certain percentage that you are going to help seed with the remaining $80 million? I know it's going to be more lumpy in terms of the timeframe, but is that the rationale for the remaining $80 million or some of that could maybe be used for more of these type of investments, yield investments?

Robert J. Bogart

Yes. Just to be clear that the $100 million, I presume you’re getting $80 million by subtracting the $20 million from the $100 million that?

Scott Chan – Canaccord Genuity Corp.

Yes.

Robert J. Bogart

That’s not correct math. So, the $100 million is dedicated to the InstarAGF’s platform.

Scott Chan – Canaccord Genuity Corp.

Okay.

Robert J. Bogart

And that will be as I mentioned to Steve’s question, that will be funded over anywhere from an 18 to 24-month period.

Scott Chan – Canaccord Genuity Corp.

18 to 24-month, okay. Is that going to be based on the committed capital – demand from the mid tier pension clients, or is that going to be the commitment that you guys are…

Blake C. Goldring

It’s really, it would be the capital calls, based from the fund will be consistent with the assets that are identifying to purchase. And so there will be a capital call, therefore the assets come into the fund.

Scott Chan – Canaccord Genuity Corp.

Okay, understood. And we’ve talked about a lot of the other entities. Is there any update on the Highstreet Fund – even though there has been a lot of changes over the past year there?

Blake C. Goldring

Yes. I can tell you absolutely, reproved under the leadership of Ben Legge who is the President of Highstreet and we’ve been – we and a number of them – actually very significant mandate with the Scotia, just be with the snow last week, with an overlay of approximately $75 million. But the performance is really what is key there. and I can tell you that the flagship Canadian equity funds delivered just in last year alone, 830 basis points now over a one-year period. So, I mean that continues to show some terrific growth. I would expect we’ll be back in the institutional space very strongly, that’s a quartile, very, very slim.

Robert J. Bogart

Just with respect to Smith and Williamson, you asked about other investments. We’re very pleased with the progress of the business and the investment to-date, that’s now got 15 billion sterling, or approximately 27 billion in AUM under management. They’re having a perfect year with what we hope to see double-digit increases in earnings on a year-over-year basis. and that coupled with the weakening can dollar versus the sterling has been a real boost in terms of our equity earnings and what we think will be increasing cash flow by the dividend.

Scott Chan – Canaccord Genuity Corp.

Okay. And can you just remind me the AUM of Highstreet currently?

Robert J. Bogart

About $1.5 billion.

Scott Chan – Canaccord Genuity Corp.

$1.5 billion. Okay, perfect. Thanks guys.

Robert J. Bogart

Thank you.

Operator

We have no further questions at this time.

Robert J. Bogart

Thank you very much for joining us today everyone. Our next earnings call will take place on June 24, when we’ll review our second quarter results for fiscal 2014. Details of that call will be posted on our website. Finally, an archive of the audio webcast of today's call with supporting materials will be available on the Investor Relations section of our website. Good day everyone and thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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