Bank of Nova Scotia (BNS) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Dundee Wealth, Inc. third quarter shareholder's call. A brief question and answer period with registered analysts will follow the formal portion of the 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 would now like to turn the meeting over to Mr. David Goodman, President and Chief Executive Officer. Please go ahead, Mr. Goodman.

Thank you. Good morning everyone, thank you for joining our Q3 conference call on Dundee Wealth's financial results. This is an exciting time for us. Our balance sheet is the strongest it has been in some time and we're in a good position to take advantage of unprecedented opportunities to grow our business. This quarter we raised CAD200 million in a bond offering with five-year notes and we used the proceeds to pay down all our bank debt.

I will provide you with an overview of our interim, unaudited financial results for the three and nine months ended September 30, 2009 released this morning. John Pereira, our CFO, will then take you through some key points in more detail.

In the first nine months of 2009 the Company earned a CAD106.6 million before interest, taxes, depreciation and amortization with net earnings of CAD40.4 million. EBITDA for the three months ended September 30, 2009 was CAD42.9 million. This compares to an EBITDA of CAD33 million for Q3, 2008. Accordingly, we produced CAD10 million more of EBITDA on CAD10 million less of revenue showing that our cost-cutting efforts are starting to pay off.

Net earnings include an upward adjustment of CAD48.9 million to the fair value of our asset backed commercial paper investments, partially offset by an adjustment of CAD9.5 million to the value of our portfolio of collateralized loan obligations.

Consolidated revenues for the quarter ended September 2009 were CAD191 million, up slightly from a CAD187.6 million for the three months ended June 30, 2009 but down from the CAD200.8 million reported for the third quarter last year. If we compare Q3 '09 to Q2 '09 we show revenue increase of approximately CAD3.5 million translating into increased EBITDA of approximately CAD2 million, which show some of the benefits of the scale of our operations.

Management fee revenues were CAD114.3 million compared with a CAD123.8 million from the same quarter last year. As you know, the Company may also earn performance fee revenue when the investment performance of certain eligible assets under management exceeds an applicable benchmark.

For the first time, we've disclosed performance fee accruals year-to-date. As of October 31st, 2009 the Company had CAD6.6 billion in assets under its management subject to performance fees. Based on market conditions at October 31, 2009, unrecognized net performance fees before tax would be approximately CAD11.7 million.

As of the end of the quarter, Dynamic was number one among independent asset managers in net sales of long-term funds year-to-date according to [IFAC]. Our portfolio management team added market appreciation of about CAD6.1 billion to the CAD1.7 billion in net sales additions achieved in the first nine months of 2009, an increase of 32% in assets under management since December 31, 2008.

Revenues from capital market activities in the quarter ended September 30, 2009 were CAD20.7 million compared to CAD9.9 million for the same period last year. Dundee Wealth retail financial services revenue in the quarter of 2009 was CAD62.7 million compared to CAD75.6 million for the same period last year.

As you are probably aware, we've been strategically reducing the size of our independent advisory channel with a focus not only on profitability but also on quality. We have trimmed the group down approximately 1,100 advisors from over 3,000 at the end of 2003. To support the business building efforts of this group we've launched an online platform called MyPractice, which gives financial advisors quick and easy access to client administration and relationship management tools so that they can spend more time working with the perspective and existing clients.

Richard MacIntyre has been appointed head of this retail position. Richard has extensive business consulting expertise and a rich working experience with independent financial advisors in the U.K. and Canada.

Our group of over 40 corporate advisors has transferred from the independent retail channel to the Dundee Capital Markets division to take advantage of synergies with our investment research banking and trading activities. This group is being lead by [John Panneton].

For the nine months ended September 30, 2009, SG&A expenses decreased 14% with the same period last year and on target with cost containment projections for the year. SG&A expenses for the three months ended September 30, 2009 decreased by 2% compared to the previous quarter, while consolidated revenues increased by the same percentage.

Now I'd like to invite John Pereira, the Chief Financial Officer, to take you through our results in a bit more detail. John.

Thank you, David. Good morning, everyone. As David mentioned, consolidated revenues in the third quarter of 2009 increased to CAD191 million from a CAD187.6 million in Q2, reflective primarily of the increases in assets under management.

Consolidated SG&A expenses decreased by approximately 2% or CAD1.6 million to CAD69.3 million in the third quarter compared to CAD70.9 million in the second quarter of 2009. SG&A in the quarter was still impacted by certain additional legal accruals in the Dundee Wealth Financial Division.

Consolidated EBITDA for the quarter increased to approximately CAD42.9 million as compared to CAD40.7 million in Q2. Consolidated net earnings for Q3 were approximately CAD12.9 million compared to CAD42.1 million for Q2. Included in our consolidated earnings for the third and second quarters respectively are pre-tax, fair value adjustments gains of CAD2.9 million and CAD46 million on our FRNs or otherwise know as ABCP holdings.

Valuations across most structured finance asset classes are driven primarily by changes to the prevailing credit spreads, the associated volatility and the leverage within the underlying portfolio of assets. These factors may significantly impact evaluation of our floating rate notes.

In the third quarter of 2009 the narrowing of credit spreads continued at a slower pace than in the second quarter of this year. The reduction in volatility that was very prominent in the second quarter also continued at a slower pace. In addition, there was also a credit downgrade by DBRS to our Class A2 of our FRNs. As a result, during the quarter we also received CAD2.3 million of principal repayments in addition to CAD0.6 million of interest on our ABCP holdings.

We have now received a total CAD28.2 million in principal repayments and interest of CAD17.4 million in respect of these investments. The amounts received have been applied to reduce the carrying value of our FRN holdings prior to any mark-to-market adjustments.

After taking these repayments and the above market factors into account, the fair value of our FRNs has been estimated to be CAD172.8 million at September 30th, 2009 representing approximately 50% of their par value and resulting in an upward adjustment during the quarter of CAD2.9 million before tax.

In addition to the above, the value of our CLO portfolio increased by approximately CAD19.7 million, mainly due to improved general capital market conditions. This increase has not been included in our earnings as current accounting guidelines require us to reflect this increase in other comprehensive income.

While the factors underlying the valuation of our FRNs/ABCP and our CLOs improved in the third quarter. Credit spread volatility continued to be significantly higher than historical levels and estimates of fair value may change materially in subsequent reporting periods.

With respect to Dundee Wealth Financial, this Division's revenue during 2009 continued to be impacted by the market events in the latter part of 2008 as well as the sales for Quebec based independent advisors to Industrial Alliance.

Third quarter revenues were CAD87.8 million, down 7% from the second quarter, mainly as a result of declines in corporate finance and principal trading revenues in the capital market burials.

SG&A costs in the third quarter of 2009 included increases in legal accruals contributing to an overall CAD3.2 million increase in SG&A costs during this period compared with costs incurred in the second quarter.

EBITDA for the quarter was negative CAD2.8 million for the nine months ended September 30th and was negative zero point -- sorry was negative CAD2.8 million for the quarter and for the nine months ended September 30th was negative CAD0.4 million. However, the results on both a year-to-date and quarterly basis show significant improvements over the same periods of last year, reflecting the cost savings initiatives that have been undertaken.

At Dundee Wealth Investment, although down year-over-year, management fee revenues are up CAD12.6 million, or 13%, in the third quarter compared to the second quarter of 2009, as a result of higher average AUM. AUM at September 30th increased by approximately 13% to CAD33.6 billion over AUM at June 30th. As a result of increased AUM, trailer service fees in the third quarter of 2009 increased by CAD4.5 million as compared to the second quarter, which is in line with increases in our AUM.

SG&A costs in Q3 of Dundee Wealth Investment decreased to CAD30.8 million from CAD34 million in the second quarter, mainly as a result of certain discretionary promotional activities untaken in the second quarter that did not recur in the third quarter. As a result, EBITDA increased by CAD11.5 million, or approximately 31%, at CAD49.1 million in the third quarter from CAD37.6 million in Q2.

In addition, net earnings before tax increased by approximately CAD11 million to CAD24 million, CAD24.1 million, for the quarter from CAD13.0 million in Q2.

David?

Thank you, John. That concludes the formal portion of the call. We're going to open up the call to questions. We'd ask if you could limit the questions to one question and then I guess re-queue to do any -- have any further questions after that. Over to you, operator.

(Operator Instructions). The first question will be from Gabriel Dechaine from Genuity Capital Markets.

Good quarter. I just want to ask about I guess my one question and I'll re-queue, one-time items here you only highlighted the mark-to-market gain on the ABCP but I guess wouldn't if we also would have to add back that CAD3.2 million of severance charges in the brokerage division -- oh sorry, yes it's CAD3.2 million, or is that something we should think of as recurring because you're constantly kind of tweaking your operations to make them more efficient. What would your comment be on that?

It would be severance accruals [are] necessarily anticipated to be recurring. However, they're also additional legal accruals in that Division as well.

Okay and just I'll sneak one in here but in the Brokerage Division could you give me a breakdown of your advisors, how many you have and how many MFDA versus IDA? I haven't seen that number in a while.

Yes I think we're showing 1,100 total advisors. I am not sure that we've broken it down in our disclosure to MFDA and IDA.

Okay I'll re-queue.

[Ari Black] from Thomas Weisel Partners.

I just wanted to confirm that performance B number of CAD11.7 million. Is that net of the compensation expense?

Yes it is.

Okay so the gross would be around CAD15 million or if you're able to disclose that general ballpark?

Well, you know, this is the first time we've even disclosed any accrued number and so we're not disclosing a gross number. We're giving you the net number. The -- and it's an extremely volatile number, as you can appreciate, Ari, it can be higher; it could be lower; it could be zero or it could be higher than where it is now. Given that our dividend policy changed and that some of this gets paid out, what we thought we would do is let you know what our running total was with two months left to go in the year, very difficult number to predict though.

That's great to see and are you able to tell us if the bulk of that is coming from the focus [less] resource fund or am I doing the wrong calculation or are you not disclosing that?

We haven't. We're not giving a breakdown but I think if you're running a model a lot of the information on how the fees are calculated is contained in the disclosure documents for the underlying funds, so you can probably back out an approximation but this is all very much an approximation because it depends on events that haven't happened yet.

[Jeff Fenwick], [Carmark Securities].

I just wanted to follow up on the Dundee Wealth financial commentary. Just wondering, can you give us some color around are you satisfied that you've done the bulk of the realignment within that business now with Joanne moving over there and then some changes going on? I think you mentioned a little bit about that in your comments. And then is this just a question now of cranking through more revenue into the business or how are we going to see that profitability, like the profitability line improve there?

I think what I can say is really there's two parts to this. There's the Retail Division and there's the capital markets. On the capital markets -- or in both cases I think a lot of the heavy lifting has already occurred. We have new leadership. We have refocused efforts. On the retails side we were able to get a lot of costs out over the last twelve months and we were able to do that at a time when revenues did decline quite dramatically on the retail side.

On the capital market side we do think that we are going to be able to deliver much stronger revenue growth through a stronger association with the entire Company. We have obviously a new Head of Capital Markets joined the Firm. We have new investment bankers in Calgary and so we're excited about the prospects as we move forward.

Steven Boland, GMP Securities.

I just want to go to the Investment Management Division and just focus on the SG&A, which continues to be I guess track down even quarter-over-quarter. You know, is it possible, even with AUM rising, that you can hold that kind of margin or I guess hold the absolute level going forward over the next several quarters because the improvement is quite dramatic actually?

Well, we hope to continue to improve. However, it certainly depends on the level of sales that we garner because for Dundee Wealth Investment there is a certain level of sale expense that is included in that SG&A line. So if we have continued success in our sales it's possible that that line would increase as a result.

There's nothing like I guess you did about CAD31 million of SG&A in the Division. There's nothing, you know, one time in that. I mean, this is really what you guys have been aiming for over the past 12 months. I just want to be clear that this is sort of a run rate that we can start looking forward to.

Yes I think that there's nothing dramatically unusual for SG&A expenses in the quarter.

Yes it's been our goal, Steve, to A, become a little more predictable but, even more important than that is, to flow as much of the revenue through to the bottom line of the Company as we can, both in terms of EBITDA and net earnings. The results this quarter are starting to show that in terms of producing a higher EBITDA number on a lower revenue number, I think is starting to demonstrate that and if we compare Q3 over Q2 we do have a modestly higher revenue number and most of it, of the revenue, like over half of it went through to EBITDA as well. So it's starting to show.

Great. Just quick follow on, David, with the launch of the U.S. funds, can you explain the rationale on how those are going to be distributed and what your expectation is for that, for those U.S. funds and that business down there?

Yes we're keeping our expectations low and we hope to keep our costs low as well but the strategy is that within an hour's plane ride we get access to a marketplace that is in population is double what we have in Canada and in new worth is well in excess of double. The story we can tell about Canada, about resources, commodities and -- is beginning to resonate south of the border and we are seeking a distribution strategy that would allow us to gain access to platforms in the United States to distribute the money management capabilities that we have in Canada.

Okay so that's sort of the next stage of where you are, you've launched the product but you're--

Yes we've launched. We're very early stages. It's obviously a very competitive landscape and so we're not seeking -- at this stage we haven't invested a lot of money but we have invested significant resources and we have some really talented people that are looking at ways to get us access to distribution for an offering that we think is the right one for the times and is somewhat under represented in the U.S.

Okay that's great thanks.

(Operator Instructions). We have a follow-up question at this time from

Just in terms of your cash position after your debt issue and net of paying down that bank line, you've got a significant excess cash position now. I just want to get a sense for what your plans are for this. Are you looking more in terms of strategic investments in the business and what the nature of those would be and then how would you balance that against your already stated desire to increase the dividend to the benefit of shareholders?

Okay, first of all, the first thing we're going to do with the cash is we're going to feel good about it, okay so that's the first step. We've obviously come through a very difficult time over the last couple of years and to have our balance sheet in a strong a position as we have it in today, both in terms of cash and marketable securities, and now seeing some value being attributed to the asset backed commercial paper and CLO portfolios, we're very comfortable with the strength of our balance sheet. But, you know, our cash doesn't earn us very much money and so it's appropriate for us to look at opportunities on a prudent basis to see if there's an acquisition or an investment that we can make that would meet our growth projections for the Company. But in all of that our first obligation is prudence.

In terms of dividend policy, that is something that comes from the Board and we did increase our dividend last quarter. Included in that is a change to our policy to pay out a portion of the net performance fees to the Company and I think it bodes well for our Company to be in the strong financial position right now.

And just the acquisitions, are we talking more like on the bolt on nature, like some of the few you made over the past year and a half?

We'd certainly look at doing something like that again if the opportunity presented itself. I have to be really careful on -- it's impossible to predict an acquisition because it involves two parties and you can't -- and you don't really know what will be available but, in terms of a strategic fit for our organization, obviously something that would increase either our ability to manage money or our ability to get more access to distribution would both be looked on favorably.

Then the expenses in the Investment Management Division, they were down sequentially because you had some promotional expenses in the last quarter. I guess, is there a seasonality message there they could be down in Q3 because it's a slower period but we could see a pick up in Q4 and Q1 because it's RSP season? Like, how much variability is there going to be in that line?

I think we generally hold our conferences in Q2 and so there is some seasonality there. We don't normally have -- in some cases we'll have a conference in Q3 but I don't think we've ever done one in Q1 or Q4.

And then the last one, your prop trading book in the capital markets, you had another good quarter there. How big is it? Like, what's the value of the inventory there?

We don't disclose that. Okay, thanks for your questions, David.

We have a follow-up question from Ari Black.

I just wanted to touch on some of Gabriel's comments. Are you able to comment on whether you were interested in acquiring the Blackmont business from CI and, if not, was it a matter of fit or was it the size of it or was it price?

Yes no we don't make comments on that type of thing, Ari, as you can appreciate.

Yes okay I thought I'd try.

Well, it's your job to ask and it's my job to say no.

And also, can you provide color into the other revenue portion of the retail business? I think it was about CAD5.1 million. It seems a little bit higher than the last two quarters.

It's mainly due to margin interest on our books.

Okay so we should see that level maintain then?

Yes.

Okay great.

Thanks, Ari.

Thank you and there are no further questions registered on the telephone lines at this time, Mr. Goodman.

Okay well thank you very much for your interest in Dundee Wealth.

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time. We thank you very much for your participation.