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Executives

Robert J. Bogart - Chief Financial Officer, Executive Vice-President and Member of Executive Committee

Blake Charles Goldring - Chairman and Chief Executive Officer

Mario Causarano - President of AGF Trust Company and Chief Operating Officer of AGF Trust Company

Analysts

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

John Reucassel - BMO Capital Markets Canada

AGF Management Limited (AGF.B) Q1 2012 Earnings Call March 28, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AGF's First Quarter 2012 Financial Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded Wednesday, March 28, 2012.

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 3 months ending February 29, 2012, 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. It's a pleasure to have you join us today for a discussion of our first quarter financial and operating 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 2012 results. Also joining us on the call and available to answer questions is Mario Causarano, President and COO of AGF Trust.

Moving to Slide 4, I'll now turn the call over to Blake.

Blake Charles Goldring

Thank you, Bob, and welcome to everyone who is listening on today's conference call. Since our last update only 2 months ago in January, we're very pleased to see the markets have continued to improve. European leaders worked through the immediate Greek default risk, economic indicators are stronger, consumer confidence is on the rise and support for low interest rates remains in the foreseeable future. While the world has taken a sigh of relief and there's a sense of cautious optimism, we acknowledge there are still some global hurdles to overcome. While all that's going on, the value of advice has never been more important than it is today, and there's a real need to help clients make sense of all the noise that's out there.

Let me provide some highlights of our first quarter of 2012. Investment management assets under management was up 3.9% versus last quarter, lower by 8.8% versus Q1 of 2011, still recovering from the global market decreases in the fall of 2011. The global investment mandates continue to have strong demand and positions us well in both the retail and institutional channels. We just had success in the 2012 Lipper Awards winning in multiple categories. We've seen performance improvements across our investment management platform, including our Dublin operations, partially as a result of changes to personnel and operations that we made in the latter part of 2011.

Institutional business grew their assets over the quarter. Consolidated revenue decreased 4.1% while EBITDA was flat as a result of year-over-year decline in assets under management and a change in business mix to more institutional assets relative to retail. Free cash flow remained strong combined with strong balance sheet and debt capacity and positions us to take advantage of strategic opportunities as they arise.

AGF Trust had a very encouraging quarter with loan assets increasing for the first time since 2008 growing to $3 billion. Trust loan originations increased 255% on a year-over-year basis while improving the credit quality of the book. During the quarter, AGF Trust paid a $20 million dividend to AGF Management Limited. We will be looking to release more capital from Trust throughout 2012, as it is overcapitalized from a regulatory and risk perspective, creating enough capital to fund the strong growth in loan origination.

Turning to Slide 5. The Canadian RRSP season has generally been flat if you look on a year-over-year basis from '11, '12. We saw investors flock in 16 times [ph] balance fund, equity funds had large redemptions compared to positive flows 1 year ago. As an equity-focused manager, this industry trend is a factor in our growth sales being down versus last year. Just to put it in perspective, one year ago, we had over -- equity sales were over $1 billion this time. And this year, we had -- the industry saw a $2 billion outflow in the equity category. However, on a positive note, the redemptions were flat on an absolute basis over the same period. Although it's only been a quarter since the changes we made in investment management organization, we see positive signs in the overall performance, and AGF had 4 or more 5-star-rated funds this quarter versus 1 year ago, and as I mentioned, Dublin's performance has rebounded to top quartile over that time.

We benefited from better markets in the quarter with almost $1 billion in market appreciation. AGF global funds have been a standout for the retail channel, emerging markets, global resources, global core, global dividend, these have all had strong followings from investors. AGF is very proud that during the quarter of the 2012 Canadian Lipper Awards, the AGF emerging market fund continued its reign of success for the fourth consecutive year winning the award for the best 3-year and 5-year returns in the Emerging Markets Equity category. In addition, the AGF resources class was awarded for having the best 5-year returns in the Natural Resources equity category.

We remain focused on our partnership with advisors to meet the needs and to help them guide their clients through every market cycle providing more product choices today than ever before. There are several exciting new products and the relationships that will be announced over the next quarter. AGF is engaged, focused and dedicated to our retail business that we have built and we're going to continue to grow this business into the future.

Moving to Slide 6. We've seen growth in our Institutional business segment this quarter with net institutional inflows of $294 million. As highlighted in our Q3 and Q4 calls, we forecasted some trimming of our AUM in one of our mandates in quant [ph] area that didn't, in fact, occur. We currently expect net sales of about $900 million to fund in fiscal year 2012, driven by new mandates in global institutions, as well as existing clients increasing their exposure and commitment with us. These we'll fund over the next 3 quarters. This year, we'll continue to expand our global footprint by adding more sales personnel and driving more searches through global consultant relationships. The markets we're focused on are the United States, China, Australia and Europe. This distribution channel has had a lot of the recent success for AGF and is complementary to our retail channel as we focus on building out a diversified, global management company.

With that, I will now turn it back to Bob.

Robert J. Bogart

Thank you, Blake. Please note that all of our financial results now reflect IFRS accounting methodologies. As such, the historical results have been updated accordingly to provide an apples-to-apples comparison unless otherwise noted.

On Slide 7, we provided a summary of our consolidated financial results for Q1 '12 versus Q1 '11. Consolidated revenue was down 4.1%, driven by the reduction in AUM due to the equity markets in addition to the channel mix as we had more institutional assets to overall AUM. As well, approximately $3 million in contra revenue was recognized in the quarter associated with fair value adjustments related to the Acuity contingent obligation mark-to-market on the Highstreet noncontrolling interest.

EBITDA was basically flat at $64.5 million for Q1 2012. Net income for the quarter was down 10.6% to $26 million. Diluted earnings per share were $0.27 and that was impacted on a year-over-year basis by $0.04 per share from noncash amortization costs related to prior year's Acuity acquisition.

Turning to Slide 8. Let's look at our investment management segment. EBITDA of $52.6 million decreased 3.8% in the first quarter of 2012 compared to $54.7 million in 2011. EBITDA margins were 39.8% in the same period compared to 39.4% in 2011. SG&A expenses increased 8.6% year-over-year primarily driven by compensation as a result of the addition of the Acuity personnel, a refresh on our technology infrastructure offset by lower stock compensation expense. Our expectations of run rate for SG&A remain in the $180 million range for 2012 given the Q1 run rate, although we'll be closely monitoring expense levels and we'll take the necessary action if there are negative revenue effects in the future.

Turning to Slide 9 in the Trust segment. Trust has backed up its recent trend of increasing loan growth over a solid quarter for new originations. Q1 2012 gross loan originations increased 255% to $177 million compared to $49.4 million in Q1 of 2011. The increase in loan originations was driven by a 339% increase in mortgage loan originations compared to Q1 in '11, as a result of stronger take-up in the SMART Loan program and our partnership program with a large national mortgage brokerage firm.

The RRSP season reflected similar success. We anticipate there will be approximately $7 million -- $70 million in RSP loans originated by the season's end, but $44 million having been booked through February. AGF Trust continued to see improving credit metrics during the quarter with a 47% decrease in loan loss provisions. Increase in origination volumes will require additions to the general allowance for loan losses. However, this may be offset by a reversal of more qualitative assessments on the investment loan book which is reflective of an improving market in credit trends.

Turning to Slide 10. Please note the presentation of the Trust information also reflects IFRS, so there may be some slight differences from previous presentations. Trust revenue for the first quarter of 2012 was $22 million, a decline of 2.7% year-over-year. Loan assets increased to $3 billion compared to the previous quarter, the first such increase in the loan portfolio since 2008. Pricing of higher quality credit loans has caused some net interest margin compression, partially offset by securitization program which provides more competitive cost of funds. EBITDA for the quarter was $10.5 million, an increase of 22% compared to Q1 2011. Blake mentioned Trust also paid a $20 million dividend to AGF in the quarter. We'll continue to look for ways to remove excess capital out of the Trust business as it remains overcapitalized relative to other Canadian financial institutions.

Turning to Slide 11. Free cash flow for the quarter was $41.7 million versus $37.5 million one year ago. In the quarter, we repurchased over 262,000 Class B non-voting shares at a cost of $4.1 million. Dividends and share buybacks as a percentage of free cash flow was 72% for the quarter. Excluding the shares repurchased on AGF NCIB, the percentage of free cash flow returned to our shareholders via dividend was 63%. We will continue to be active in repurchasing our shares through the NCIB when the value of our shares fall below thresholds that we've modeled internally. We continue to view our free cash flow generation as a key strength of the company which will be used to increase shareholder returns, reduce debt and provide the available capital to execute strategic acquisitions as and when the opportunities arise.

With that, I'll turn it back over to Blake for concluding remarks.

Blake Charles Goldring

Thanks, Bob. I'm encouraged by the recent strength of the market and the tone of investors since the last time we spoke. 2000 (sic) has come in like a lion and the north up too -- corny here but I can say it's really like a tiger. We're committed to growing AGF to a global investment management business, and continued to generate better performance and growth in our global mandates to feed the demand for global investing. We see improvements in our operations, especially in Dublin, as a result of strategic operational and personnel changes that we made last year. And I truly believe that there will be a return at the retail levels to equity markets and that this will help improve investor confidence. We believe we're well-positioned to grow and take advantage when this occurs.

That concludes our formal comments and now we'll open it up for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from the line of Geoff Kwan, RBC Capital Markets.

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

The first question I had was just on the net redemptions in the quarter, are you able to provide how the net redemptions went through the quarter on a monthly basis, like was this happening mostly in February? And then also, was there any institutional rebalancings that might have been significant?

Robert J. Bogart

I think it was a little bit -- on the first question, Geoff, the redemptions were a little heavier in February, but not dramatically so. And your second question with respect to institutional?

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

It was just on the retail mutual fund business, if there was any sort of institutional rebalancings, plus or minus, that might have had a material impact on the $680 million that was reported in the quarter?

Robert J. Bogart

No, not during the quarter.

Geoffrey Kwan - RBC Capital Markets, LLC, Research Division

Okay. And then the second question I had was, if we see us narrow over whether or not, say, the next year or 2, it seems like investors are going to remain risk-averse, in other words, buying the big sticker main balanced funds. Aside from better investment performance, is there anything else that AGF can do to try and deal with this trend, if again, if it does persist?

Blake Charles Goldring

Yes, absolutely, Geoff. In fact, we have a number of, I'd say, fairly innovative and exciting new products that are on the shelf which I'm not at liberty to talk about right now. We have a number of client engagement activities that are, frankly, going to be a very active pace in the coming months. So I think that truly, our very much equity-skewed and equities remain out of favor. But through new and innovative products plus proper education, we will see results.

Robert J. Bogart

I think to the product question, that's a Q2 event.

Operator

[Operator Instructions] The next question will come from the line of John Reucassel, BMO Capital Markets.

John Reucassel - BMO Capital Markets Canada

Just Blake or Bob, just on building out the institutional platform, I just want to be clear that you feel you have the investment management platform for that today, but there is going to be some investment on the distribution side, is that where we stand today?

Blake Charles Goldring

That is correct.

John Reucassel - BMO Capital Markets Canada

Okay. And it's mainly in China, Europe and the U.S.? Or is there domestic?

Blake Charles Goldring

We actually have here, John, presence in Canada, so we don't -- there's really no build out necessary. We're staffed so additional efforts would be more from the Asian and European side.

John Reucassel - BMO Capital Markets Canada

Okay. And then I don't know if Mario's there, but does the development of bulk insurance or reduction in rational bulk insurance at CMC impact his business plans at all and why or why not?

Mario Causarano

John, it is Mario here. Sure, I mean, I think everybody's feeling the pinch on the allocation. We continue to use private securitization and so we've done a couple of those and we'll continue to use those. We'll use up our allocation where we can get it, but we're also skewing our mix of bit in terms of alternative business which gives us a better spread as well relative to our cost of funds. So I mean, everybody's feeling it. We're feeling it as well, but it won't impact our plans significantly going forward.

John Reucassel - BMO Capital Markets Canada

Okay. And then I know you have relationship with a national distributor, or national -- but are you at all interested in first-line or is that just not something that you're currently contemplating?

Mario Causarano

It's not on our radar screen. At this point, we've got opportunities to keep originating. We've been in discussions with some other distributors. We've got another one coming on very, very shortly that we've been spending a fair bit of work on in terms of a partnership, and that business is really skewed into the A world and we want to try and mix our business up a little bit differently.

Operator

[Operator Instructions] There are no more questions at this time. I'd like to turn the call back to Mr. Bogart for closing remarks.

Robert J. Bogart

Thank you, operator. Thanks, everyone, for joining us today. Our next earnings call will take place June 27 when we will review our second quarter results for fiscal 2012. Details of that call will be posted on our website, and an archive of the audio webcast of today's call with supporting materials will be available in the Investor Relations section of our website. And with that, I'll say, a good day to everyone. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you once again for your participation. You may now disconnect, and have a great day.

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