Bank of Nova Scotia (BNS) 2009 Q2 法說會逐字稿

All participants please stand by; your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the DundeeWealth Inc. second quarter shareholder's call. A brief question and answer period with registered analysts will follow the formal portion of this call. Before I turn the call over to Mr. Goodman, I will now be reading a cautionary note. Any forward-looking statements contained in this presentation involve risks, uncertainties, and assumptions and should not be taken as guarantees of future performance. Actual results could vary materially from those anticipated in forward-looking statements. All financial information is quoted in Canadian Dollars. I'd now like to turn the meeting over to Mr. David Goodman, President and Chief Executive Officer, please go ahead.

Good morning, everybody and thank you for joining us on our first shareholder and analyst conference call. I have in the room with me, I guess the full gamut of our Investor Relations team. I have Robert Pattillo, who is an Executive Vice President, Brand and Communications; Amy Satov, EVP of Legal and Compliance. I have our current CFO, John Pereira and our former CFO, Joanne Ferstman who is currently Vice Chairman and Head of Capital Market.

At our annual meeting, I spoke about our Company's commitment for building a shareholder-first experience at DundeeWealth. I talked about increasing the transparency of the Company and our commitment to building shareholder value over the long term. This form of discussion is among several steps we are pursuing to deliver on that commitment. Last night, we released our interim, unaudited financial results for the three and six months ended June 30, 2009.

In the first six months, 2009, the Company earned $63.7 million before interest, taxes, depreciation and amortization, with net earnings of $27.5 million. EBITDA for the three months ended June 30, 2009, was $40.7 million. Net earnings include an upward adjustment of $46 million for the fair value of our asset backed commercial paper investments. We'll hear more on this from John a little later. We will also tell you about certain payments received on our ABCP investments this quarter.

Consolidated revenues from continuing operations in the quarter ended June 30, 2009 were $187.6 million, up 23% from $152.7 million for the three months ended March 31, 2009, but down 19% from the second quarter last year. Management fee revenues were $100.9 million compared with $126.3 million from the same quarter last year. There is no denying that as an industry, we still have a distance to go before we see a full recovery from the sharp decline in assets industry wide. Our sales performance is certainly a sign that we are on the right track and position to capture the upside of a market recovery. As of the end of the quarter, dynamic funds maintained its position as industry leader in net sales of long-term funds in Canada for according to [FX].

Our portfolio management team added market appreciation of $3.2 billion to the $1 billion in net additions achieved in the first six months of 2009, an increase of 17% in AUM since December 31, 2008. Despite the dust from last year's market collapse that still lingered in the quarter, DundeeWealth managed to beat two of its own records. As of June 30, the Dynamic Strategic Yield Fund had $261 million in AUM, making it the most successful new product launch in the Company's 50-year history. Also, DundeeWealth Capital Markets Group co-led a public offering of approximately $380 million, making it the largest co-led bought deal in the firm's history.

Improvement in the performance of the Capital Markets division as a whole is evident in the numbers. Revenues from Capital Markets activities in the second quarter ended June 30, 2009, were $29 million, up 82% from $15.9 million in the first quarter. Our Retail Financial Services revenue in the second quarter of 2009 was $61.8 million, up slightly from the quarter. We are confident that the profitability of this area is positioned to increase as a result of cost containment measures and a general reshaping of the advisory networks.

At our Annual Meeting, I also spent some time on valuation. I want to reiterate our objectives of increasing profit margins across all lines of the business, of bridging the valuation gap between DundeeWealth and our peers, and of improving the overall shareholder experience. As of June 30, the Company had cash and marketable securities that exceeded our corporate debt. We've reduced corporate debt by 43% to $96.6 million from $169.6 million at December 31, 2008.

Selling, general, and administrative expenses decreased 7% in the second quarter of 2009 compared with the same quarter last year. Excluding expenses associated with acquisitions in 2008, SG&A decreased 12% in the second quarter and 19% in the first six months of 2009 compared with the same periods last year.

Now before I hand over the microphone to John Pereira, I should probably address yesterday's announcement that we're increasing our dividend rate for the first time in many years. You might be wondering why or why now, first of all, we consider it a modest increase. The total dividend expenses were approximately $12 million before. I think they're going to be approximately $20 million after the increase. Our dividend yield is still quite modest compared to our peer group. But we think, given all that we've gone through that now was the right time to start the process of considering our dividend policy and that's why the changes were made.

Now I'd like to invite John Pereira, our Chief Financial Officer to let you know how these results fared against our performance in the first quarter and maybe elaborate on a few of my remarks. Following John's commentary, we're going to have some Q&A. So over to John.

Thank you, David. Good morning, everyone. One of the items that impacted our net earnings this quarter was a fair value adjustment related to our investment in ABCP. As David mentioned, net earnings included an upward adjustment of $46 million in the fair value of our ABCP investments. Valuations across most structured finance asset classes are driven primarily by changes in prevailing credit spreads, associated volatility, and leverage within the underlying portfolio of assets. These factors may significantly impact the valuation of our ABCP or floating rate notes as they are now referred to.

In the second quarter of 2009, there was a significant narrowing of credit spreads and a corresponding reduction of volatility, resulting in the fair value adjustment gain previously mentioned of $46 million or $32.7 million net of tax. During 2009, we also received principal repayment of $25.9 million and interest of $16.8 million in respect of these investments. The amounts received were applied to reduce the carrying value of the notes.

At June 30, 2009, we're carrying the notes at [$172.8] million, representing 50% of their par value. In comparison, in 2008, we recorded a fair value adjustment loss of $75.9 million or $53.9 million net of tax. While the factors underlying the valuation of our notes improved in the second quarter, credit spread volatility continues to be significantly higher than historical levels and estimates of fair value may change materially in subsequent reporting periods.

As David mentioned earlier, consolidated revenues in Q2 increased by 22% or $34.9 million to $187.6 million from $152.7 million in Q1, [reflect] that primarily the increase is in AUM and increases in capital market activities. Consolidated selling, general and administration expenses increased by approximately 13% to $70.9 million in the second quarter compared to $62.7 million in the first quarter. Contributing to these increases were promotional events that typically occur in the DundeeWealth Investments in the second quarter as well as increased legal accruals in DundeeWealth Financial division.

EBITDA increased by 78% in the quarter to approximately $41 million from $23 million in the first quarter. Net earnings for Q2 excluding the ABCP valuation adjustment of $32.7 million net of tax were approximately $9.4 million. This compares favorably to the first quarter when we reported a net loss.

In our DundeeWealth Investment division although down year-over-year, management fee revenues are up $12.8 million or 50% in the second quarter compared to the first quarter of 2009 as a result of higher average AUM. AUM at June 30 increased by approximately 16% over AUM at March 31. As a result of increased AUM, trailer service fees in the second quarter of 2009 increased by $4.2 million or approximately 15% compared to the first quarter of the year, in line with increases in our AUM.

As mentioned previously, certain discretionary promotional initiatives undertaken in the second quarter of 2009 contributed to a $2.7 million increase in SG&A cost incurred by DundeeWealth Investment over the first quarter of this year. EBITDA for the division increased to $37.6 million in the second quarter from $28 million in the first quarter and net earnings before tax increased to $13 million for the quarter from $4.5 million in the first quarter.

In our DundeeWealth Financial division, retail distribution revenues increased to $60.1 million in the second quarter compared to $58 million in the first quarter while gross margin remained flat at approximately $13 million in both periods. Capital Markets revenues increased to $44.9 million in the six months ended June 30 with the second quarter experienced an 82% increase over the first quarter. These results were largely related to corporate finance and principal trading activities. EBITDA in the DundeeWealth Financial division increased to $6.3 million in the quarter from a net loss of $3.9 million in the first quarter, mostly related to the capital market activities.

That's it. Over to you, David.

Thank you, John. We'd now like to open the line for questions, operator.

Thank you. We will now take questions from the telephone lines. (Operator Instructions). The first question is from Gabriel Dechaine from Genuity Capital Markets. Please go ahead.

Hi, good morning. First conference call, thank you. Stock's up nearly 12%, so that's a good indication, I guess.

We are having another call tomorrow.

Oh, great. Just want to -- there is a few topics here I want to cover, ABCP, the disposal, I guess, is it -- was it a disposal or just redemption of notes, are they matured, and is it -- does it look like -- it looks like they were done at 100% of par value given the decline more or less matches the decline in the par value of the floating rate notes?

The payments we received were principal repayments, they weren't disposals and they were $25.9 million. For those particular notes, they were relatively close to par value, but not quite there and the rest of the money was basically interest received from the previous period when it was still in restructuring phase.

Okay. And with the remaining floating rate notes, are you -- because the market's starting to open up from what I understand, is there any opportunity there for you to free up some more capital through dispositions of these assets and obviously are using that pay down debt and increase your dividend. So that would be, I guess a benefit to shareholders as well?

I think it's a little early for that type of discussion, Gabriel. We're not aware of the market opening up to that extent in any event. But these are assets that are on our balance sheet. We've gone through the fair valuation analysis to come up with what they're worth. Where they trade or how they trade is -- that hasn't happened yet, so I think we just want to wait and see on that.

Okay. Just turning to the brokerage operations, Joanne is on the call there, and nice to see it return to profitability, and I want to -- the revenues are mounting, but also the costs and you allude to changes in the compensation structure that helped improve the margins there. Could you expand a bit on that and what specifically has been done to the compensation structure?

I don't think that we alluded to changes that have occurred. I think that we were just pointing out today that there is a calculation of the variable cost for the capital markets professionals. And so there was a slight increase in the margins for the capital markets activities, I guess year-over-year, but no significant changes to the [comp payors].

Okay. And then the performance fees, I guess the -- my main question here is, what's the outlook -- current -- well, what's the current status of where you stand in terms of performance versus some of the high watermarks that was from last year's performance? And then I guess the Dynamic Power Hedge Fund is one of the larger generators of performance fees, that didn't have a high watermark and you've reinstituted one. Are we at a point where its NAV is at par with the end of 2007?

I am not sure that we've got all the way back to that although the fund has had a substantial increase. We did impose on ourselves a high watermark on that fund that did not have one. Our view was that we had been paid for performance in the past and we shouldn't be seeking to be paid twice for the same performance and so we modified that. On a go-forward basis, I think the -- we do not accrue corporately anything for performance fees until we actually earn them. And as you know, these things are -- they are difficult to predict. It's like predicting what the market is going to do and then predicting how you are going to do in comparison to it, extremely difficult. So, we tend to not focus too much on them until we actually earn them. But I think if you wanted, the information is available on a per-fund basis to calculate what the performance fee would be if certain results are achieved.

Okay. Just my last one on low-load funds, I just want to use the published number showing the average commission paid, I couldn't see it. Could you give me a sense of what percentage of your sales and also your assets are in low-load fund and how you view the stickiness of those assets, because the trailer on low-load funds tend to be fairly generous and you got to offset that with some hope that if they run over the long run?

No, we haven't seen any significant changes from previous years with respect to that. That's all I got.

So it's still 150% of your sales?

I don't think we ever said that. That number sounds really, really, really high.

Okay, thank you.

Thank you.

Thank you. The next question is from Richard McCormick from Blackmont Capital. Please go ahead.

Good afternoon. Gabriel, I think asked most of my questions, I just had a question around SG&A. I am trying to figure out a difficult thing, which is the sort of run rate we can look for with SG&A. I know there were some moving parts when it came to marketing expenses in the Investment Management division. Can you give us any color on what -- was this a little bit seasonal? It was just a -- our SG&A was a little higher than I'd expect, that's a -- for most divisions as well as corporate. So any color you can give us on that or --?

Q2 normally has some conferences that we do. We go to Omaha and we have something called the Leaders Council that we do. This year, we did it in Montreal and that normally occurs in the second quarter.

Okay.

So, I would expect it wouldn't look -- it's probably a little bit less than the Q2 from a year earlier. But, it is likely to be an expense that occurs in future Q2s but I wouldn't annualize the number.

Okay, okay, perfect. And just on your --?

And in addition, we had a litigation accrual that we chose to take in Q2 this year.

Okay, perfect. And just on the net sales front, I mean the two High Yield Bond Funds there or High Yield Income Funds have been obviously very important and they account for more than 50% of net sales typically. Are you still seeing -- it seems like demand is still very high. Are you still seeing that out there for these two, the Strategic Yield and the High Yield Bond Fund.

Yes, we've seen really strong sales come into the Strategic Yield portfolios and the High Yield Bond Fund. We're also starting to see some movement into some of our balanced funds and the net sales contribution is starting to broaden there and diversify a little bit. So, we're quite pleased with that.

Okay, perfect, thank you.

Thank you.

Thank you. [Operator Instructions]. The next question is from Steven Boland from GMP Securities. Please go ahead.

Good morning.

Good morning, Steve.

I'm sorry, David. Did you actually give the number out of what percentage of sales is in low load? I am not sure you guys gave --

No, we never -- we've never disclosed, I think those breakdowns. What we said is we haven't seen a significant difference from prior years.

What's the hesitancy in providing that (inaudible)?

You know what, we're trying -- this is our first call, Steve. So, we're just getting used to how to do this. Generally speaking, we're going to limit our disclosure to what is in our MD&A and probably not go beyond that. And then we'll consider how we go about in the future, putting together the answers for the questions that we receive.

Okay. Second, I mean all the cost-saving initiatives are obviously showing up on the numbers. Where do you think you are in terms of that overall restructuring? Are we still going to see further announcements of a restructuring going forward?

I think, we did most of the heavy lifting in this Company already. I mean, we've dramatically restructured the firm over the last two years with the lion's share of it happening over the last year. And, so, I don't think you're going to see anything like that, but we recognize that we have to continue to focus on margins, on the profitability of the Company, on delivering value not just to the EBITDA line, but to the net earnings line as well. So, we remain quite focused on that. But I got to tell you, I don't think we're going to cost cut our way to prosperity. There has to also be a recognition that we -- for a growth Company, we're seeking to significantly increase our assets under management through the creation of new funds and our portfolio management team is quite diversified and we have the ability to gather assets in new areas and make investments in new areas. So we're going to look to do that as well.

Okay. Since Joanne is there, I'll -- Joanne, can you talk a little bit what the changes that you've implemented over at Dundee Capital? Obviously a good quarter, helped by the markets. I am just wondering what changes you've implemented thus far?

You know what, the changes are ongoing, and we obviously throughout the firm, not only in the capital markets part of the business have taken a close examination of all of our business lines, to make sure they are operating as efficiently as possible. We're retooling some of the areas in Capital Markets and still doing some recruiting in certain areas. So, we're looking forward to making some announcements on that in the near future.

What vision do you see that business, is it just to maintain profitability, is it to -- you guys start putting more capital into play? Your principal trading numbers were pretty robust in the quarter. What's really the goal for that business in your mind over the next couple of years?

I think what we've seen is that our Capital Markets business can be -- can have a meaningful contribution to the bottom line of the Company. There are other firms out there like the one you work for that are out there, the public companies, they've demonstrated that these can be profitable businesses. And in our Company, we have a very, I guess diversified relationship with public companies and potential new issues in this country. We've a lot of recognized expertise in the resource sector and we think we can take advantage of our relationships and our expertise to have a much bigger impact on being in Capital Markets, specifically Investment Banking. So, strategically, I think we would like to upgrade ourselves to be included in more deals, to add a few people to -- on the Investment Banking side to help us in that regard. But we're pretty happy with what our group has -- I guess the foundation we've been able to lay in this business group right now is really solid. Now, we think we can build on that to have something that's meaningful and strategic to the organization.

Great. Last question, just with your large shareholder, Scotia, is there any talks, any progression in terms of the new product development, anything like that together?

I'd say yes and no. We maintained contact, we speak to them, we're pretty happy with the results we've had with the Dundee Bank of Canada. That has -- that's profitable to us. It's grown significantly. So, I think we've shown in the early stages of this relationship that we can work together and create some value for each other. How we translate that in the future, I still think is very much a work in process and a discussion that needs to continue.

Well, thanks very much. Thanks for you doing the conference call.

Thanks, Steve.

Thank you. (Operators Instructions). There are no further questions registered at this time. I'd like to return the meeting to Mr. Goodman.

I'd just like to say thank you for your interest in the Company. You will be hearing from us in good times like today and in bad times in the future. We intend to hold these calls every quarter and we appreciate your feedback, the type of information that you need to better evaluate our Company and we will continue working to make it a more shareholder-friendly experience. So thank you very much. [Bye for now].

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.