Bank of Nova Scotia (BNS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the DundeeWealth fourth quarter 2009 shareholders' call. A brief Q&A 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 involves 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. As a reminder, this call is being recorded.

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, and thank you for joining us on our fourth quarter conference call for '09. It also represents our year-end, and the third conference call of all time.

Before I get too deep into the numbers, I wanted to recap some of the significant achievements in 2009. In March, we launched the Dynamic Strategic Yield fund, and combined with its corporate class version, this fund has gathered over CAD1 billion in its first year, representing the most successful fund launch in our more than 50 year history.

In the second quarter, Dundee Capital Markets co-led the largest [bought] deal in its history as well.

In the third quarter, we continued to strengthen our balance sheet with the repayment of all amounts outstanding under our credit facility, using cash and a portion of the proceeds from the issuance of our CAD200 million long-term note.

In the fourth quarter, we sold about CAD270 million par value of our floating rate notes, formerly asset backed commercial paper, for net proceeds of about CAD139.5 million.

We now have over CAD400 million in cash, cash equivalents, and marketable securities on our balance sheet. We've reduced our SG&A by 10% compared with last year, largely through a workforce reduction of 25%. We continue to target expense reductions where there is room for improvement, while strengthening areas where there's room for growth.

We saw a transition to profitability in our Financial division, with EBITDA of CAD8 million for the year, up from an EBITDA loss of almost CAD40 million in 2008. We've seen significant margin improvements, which resulted in more EBITDA generated from less revenue on a consolidated basis, compared with 2008.

We upgraded our dividend policy so that our shareholders would not only see a quarterly dividend increase, but also receive a portion of net performance we've earned each year. We took this a step further yesterday with the announcement that we were increasing our quarterly dividend by CAD0.035 per common share and special share, for a total of CAD0.07 per share. At the end of 2008, the quarterly dividend was CAD0.02 per share.

We earned CAD32 million of gross performance fee revenue last year, and that is excluding CAD60 million in performance fee revenue, which we elected not to receive on certain hedge funds, to ensure investors would not pay twice for the same performance.

We continue to be recognized as an industry leader. We were named Advisor Choice Investment Fund Company of the Year, and awarded the top prize for both investor and advisory education in 2009, Canadian Investment Awards.

Our call center and client website were both again recognized as best in class. And on the capital markets side, our research analysts were presented with the most awards within the Canadian independent brokerage group at the StarMine Analyst Awards.

We did note that although we took our SG&A down by 10%, there was an increase in Q4 of about CAD17 million over Q3. And that -- but all but CAD3 million of that directly related to performance fees and performance targets being met by the Company. We take our expenses seriously and the prudent management of the Company very seriously, and with that, I will turn it over to our Chief Financial Officer.

(Inaudible), before I turn it over to John, I wanted to just highlight a couple things on the financial side. Our overall revenues declined by CAD39.9 million, to CAD779.5 million in 2009. EBITDA increased by CAD46.1 million, to CAD184.7 million. The bottom line increase is also reflected in net earnings of CAD51.6 million, which compares to a net loss of CAD186.8 million in 2008.

Included in 2009, EBITDA is CAD21.7 million performance fee revenue, net of third party allocations of costs. We did not earn any performance fees in 2008.

Net earnings for the year ended December 31, 2009 also included fair value adjustments related to the Company's floating rate notes, and also known as ABCPs, and collateralized loan obligations of CAD14.1 million, which is CAD10.6 million after tax.

Assets under management increased to CAD36.1 billion as of December 31, 2009, an all time high for the Company. Growth in AUM of 42% year-over-year is the combined result of an industry-leading CAD2.6 billion in net assets gathered, and CAD7.5 billion in market appreciation.

According to the Investment Funds Institute of Canada, Dynamic's CAD2.7 million in net sales of long-term funds in 2009 also outpaced all independent fund companies. Performance fee revenue of CAD32.6 million added to management fee revenue of CAD429.8 million in 2009, for a total of CAD462.4 million, which is essentially flat compared with 2008. A reduction in Financial Services revenue to CAD229.5 million from CAD303.9 million in 2008 was slightly offset by an increase in revenue from capital markets activities, to CAD91.1 million, from CAD69 million in 2008.

Finally, as I mentioned earlier, the SG&A expenses decreased by 10% year-over-year to CAD284.8 million.

2009 was a good year for DundeeWealth. We expect that this momentum will continue into 2010, and the performance of Dynamic in the first two months indicates that we're well on our way.

In February 2010, we had one of the most successful months ever in terms of net sales, and we reached both a new AUM high, an all-time high for total fee earning assets, with CAD69.9 billion.

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

Thanks a lot, David. Good morning, everyone. I'll first take a look at the consolidated Q4 2009 results, and then take a look at the Q4 segmented results.

With more revenues being carried through to the bottom line in Q4 2009, it was one of our best quarters from an EBITDA perspective. EBITDA for the three months ended December 31, 2009 on a consolidated basis was CAD78.1 million, and net earnings from continuing operations was CAD11.2 million, compared to EBITDA of CAD13.1 million and a net loss from continuing operations of CAD126.3 million for the same period last year.

Impacting our net earnings in Q4 2009 was a negative fair value adjustment of CAD25.3 million dollars on our portfolio of FRNs, otherwise known as asset backed commercial paper.

There was also a negative adjustment of CAD117 million in Q4 of 2008 on our investment in CLOs, as well as certain other portfolio investments.

Consolidated revenues, excluding performance fee revenue of approximately CAD33 million for the fourth quarter of 2009, were CAD215.6 million, a 13% increase from the CAD191 million earned in Q3 2009, and a 26% increase from the CAD171.7 million earned in the last quarter of 2008.

Consolidated SG&A expenses were CAD81.9 million in Q4 2009, compared to CAD69.3 million in Q3 2009, and CAD78.9 million in the last quarter of 2008. The increase in the fourth quarter of 2009, as David previously mentioned, is primarily connected to the performance fee revenue related expenses, as well as other performance target attainment in the DundeeWealth Investment division.

Also significant in the fourth quarter, as David mentioned, was the sale of certain FRNs, (inaudible) JBCP. We sold a MAV2 Class A1, and the Class A2 notes for net cash proceeds of CAD139.5 million. The fair value of our remaining FRNs, more than half of which consist of mainly smaller tranches of IA and TA tracking notes, is approximately CAD5.6 million.

The fair value of the CLOs that we continue to hold is CAD39.3 million, representing an increase of 46% from Q3 2009, and an increase of approximately 137% from the carrying value at December 31, 2008.

I will now provide an overview of our Q4 2009 segmented results, starting with DundeeWealth Financial.

DundeeWealth's Financial division revenues were CAD100.4 million, an increase of 14% compared with the third quarter of 2009, and 16% compared with Q4 2008, with 52% of the gross margin generated primarily by the capital markets unit.

SG&A expenses in Q4 2009 decreased to CAD28 million, from CAD34.5 million in Q3, and CAD34.9 million in the last quarter of 2008. The increase in revenues flowed through the EBITDA line for the fourth quarter, a result of significant cost savings initiatives and the resurgence of market activity in the latter half of 2009.

EBITDA is CAD8.4 million in the fourth quarter, compared to negative CAD2.8 million for Q3 of '09, and negative CAD11.8 million for Q4 of '08. In addition, we saw positive EBITDA contributions in both the capital markets and retail distribution units of this segment in Q4 2009.

With respect to DundeeWealth Investments, our average AUM increased to CAD32.8 billion in Q4 2009, compared with CAD24.1 billion for the same period of 2008. Higher average AUM levels were largely responsible for an increase in management fee revenue to CAD120.8 million in the fourth quarter 2009, from CAD109.5 million in the third quarter, and CAD88.2 million in Q4 of '08.

As David mentioned, we also generated an additional CAD32.6 million of gross performance fee revenue in 2009, which was recorded in the fourth quarter, whereas no performance fees were earned in 2008.

Total investment dividend revenues increased to CAD160.9 million, or CAD128.3 million excluding performance fees in the fourth quarter, from CAD116.2 million in Q3, and CAD95.3 million in Q4.

Trailer service fees in the fourth quarter of '09 increased to CAD39.1 million, compared with Q3 -- up CAD3.2 million compared with Q3, and up CAD10 million from the last quarter of 2008, as a result of increased AUM levels.

SG&A costs in Q4 were CAD47.9 million, up from the CAD30.8 million in Q3, and CAD38.8 million in the fourth quarter of '08. David has already mentioned that the significant increase in the DundeeWealth Investment, which as he mentioned, we do not take lightly, is mainly the result of the performance fee revenue related expenses, as well as performance target attainments, with the resulting CAD3 million related to other items, due to promotional factors.

Q4 2009 investment division EBITDA of CAD73.3 million, including performance fees, is up 50% from Q3, and 163% compared with the same period last year.

And that's it.

Thank you, John. That concludes the formal portion of our call. A replay of our discussion will be available at DundeeWealth.com, on the Investor Relations tab of our website. You will soon also find a brochure that provides a summary of our 2009 financial results.

Operator, it's -- now is the time we can open up the call to questions from participating analysts.

Thank you. (Operator instructions). Your first question comes from Gabriel Dechaine. Please go ahead.

Hi, good morning. Just to circle back on the SG&A in the Investment Management division. Your -- it's up -- if you exclude the performance fee stuff, it was CAD10.9 million for performance fee related SG&A, if you exclude that, it's up CAD7 million sequentially. So you are saying there's CAD3 million of other items that's marketing stuff? I interpreted it as that. And then I guess the other CAD4 million or so is some sort of discretionary bonuses based on performance targets being achieved by individuals?

Yes, our number was more -- it was closer to CAD6 million, and it was roughly split half between marketing and promotional items in an effort to support our sales channel, and the other half related to performance targets being met.

So is that marketing -- or should we expect to see more of that? Because we had it happen a couple of times. I think Q2 '09 was also a pretty big period for promotional items. Is that something we should view as recurring, then, every now and then, you're going to see a spike?

Periodic.

It's something we do when we see an opportunity to support the channel. Some of it relates to MER expenses that are capped, and some of it relates to promotional activity and advertising. Some of it will relate to the seasonality of seeing an opportunity in an RRSP season to promote the brand a little bit. And so it's difficult to predict how it's going to play out on an ongoing basis.

But we did see an opportunity to enhance the brand a little bit with some promotion, as we launched our campaign designed to get investors off the sidelines. And that was a strategic and targeted effort.

OK. Well, it's certainly paying off in terms of sales. You touched upon the expenses being capped. Just a -- I know I've asked John this before, but some firms do it differently. Your management fees are net of the expenses you charge to the funds, and the same thing goes for your SG&A. You don't -- those are the net numbers.

So anything in the SG&A in your income statement would -- related to expenses incurred by the funds, would represent the fund absorption, right? If you could, could you give us a sense of how big that is?

Sorry, I'm not sure I understand, like -- what we do for management fees is, there's nothing [net on the management fees.] It's just our management fee rates that we charge, Gabriel.

Right.

With respect to expenses, the expenses for our -- that we charge for the funds, are netted against our overall expenses in DundeeWealth Investment.

Right. So what I was asking was, the -- your management fee line doesn't include the expense ratio, correct?

Right.

Right, okay. And your SG&A doesn't include it either, then.

Our SG&A -- it's in our SG&A, but it's net, right, because whatever expenses that we have, we charge to the fund, and we recover from our SG&A expenses.

Right, so --

In other words, putting it gross on both lines.

But there's some excess, I guess, fund absorption, right?

For certain funds, we have like hard caps, and other funds that David mentioned, we, from time to time, decide that we should support the MER. We're launching new funds, things like that.

Is there any -- like do you give a sense of how big that number is for the year?

It was part of the CAD3 million of additional costs, but it wasn't that significant.

Okay. Just a quick one here on the taxes. Was there a one-time charge related to your future tax asset? You alluded to that in the tax discussion in the MD&A.

Yes. That was because of [substantially] enacted tax rates that happened after Q3, yes.

Right. How much was that?

I think it was about CAD5 million, and you can see it in our tax note in the financial statements.

Is that for the year, or the quarter?

Well, it happened in the quarter, but it's for the year, all right? Because --

(inaudible).

Yes. It's just a --

Thanks, Gabriel. [Let's move on.]

Just one quick one, a good one here. Your advisors -- I just want to -- your AUA, the share of Goodman Funds and the AUA is 31%, and that's up quite significantly year-over-year, and over the historical trend as well. Is that evidence of your taking a more -- making a more concerted effort to generate sales of internally managed products through the advisor channel, or is that something else?

No, I think it's partially reflective of the increased sales penetration that we've had industry-wide, and partially to an effort at increasing a profile of Dynamic Funds within our own advisory group. But the number you referred to is the percentage of the mutual funds, not as a percentage of the total AUA.

Oh, okay.

Okay? Thanks, Gabriel. If you have more questions, then re-queue. We'd like to make sure that everyone has an opportunity to get their questions answered on the call.

Yes, thanks.

Thank you.

Thank you. Your next question comes from Jeff Fenwick. Please go ahead.

Hi, good morning.

Morning.

So just, I guess, a follow-up on yesterday's policy -- or, sorry, dividend policy announcement here. You've doubled the quarterly dividend, and that was pretty shortly after having implemented a new dividend policy. So what's the approach going forward here? How often are you going to review it, and is it some sort of reference point you're looking to in terms of cash flow and earnings, or what's kind of your thinking on that?

I think first of all, dividends are within the mandate of the Board of Directors. So management can absolutely make a recommendation, but it is the -- it's the responsibility and fiduciary obligation of the Board to do the dividends.

From our perspective, the policy that we came up with at the end of the year, we did that at the end of the year because we wanted to -- it was -- it directly related to the performance fees, which we wanted to share with our shareholders in a way that was meaningful. So that had to be done before the end of the year.

On the dividend policy for the Company, all prudence dictates that you know what your financial results are going to be before you make a significant modification to your dividend policy, and our results, because you know what came out today.

Our Board will -- you know, as always, review the dividend policy periodically. Our view is that we wanted to -- our Company has probably the most prudent balance sheet that we've had in years. And with the excess CAD400 million of cash on the balance sheet, our ability to generate strong cash flow out of the businesses, and with the return to profitability of the Corporation, the Board concluded that raising our dividend to CAD0.07 from CAD0.035 was appropriate.

Okay, great. And I guess on the theme of the strong balance sheet, there was some commentary about looking to expand inside of Canada, and I guess suggesting a cautious approach there, but certainly given your cash balance and the better position you're in now, what sort of areas do you think you might target looking at? Any kind of update or color you could offer there would be great.

Yes. What we -- we're looking at the type of transaction that we did a couple of years back with [Orion], as basically being our model for future expansion. We would like to be able to expand the strength of our investment management capabilities into areas where we currently do not have expertise, into areas that could be considered alternative investment strategies, or unique expertise that doesn't currently exist in-house, so that we would be able to augment the bench, and also expand into new areas of investment management, especially in areas where we think performance fees would be justified.

Okay, and I guess geographically, you're fairly content with the approach you've taken in terms of trying to push more of the product down into the US? Or how has that been going?

Well, it's been going slow, but steady. We're comfortable with the course we're taking. We have been prudent in our exposing ourselves to spending too much money without enough results. But we do think that the opportunity, especially in the US, is quite robust for a firm like ours, and it doesn't happen overnight. But we have a really good team, and we're looking to continue to build down there.

Okay. Thank you.

Thanks, Jeff.

Thank you. Your next question comes from Ari Black. Please go ahead.

Hi, guys. Thanks for taking my call. I just wanted to expand a little bit on the expansion to the US. What sort of signs would you look for before investing more resources into the US? The MD&A said that the opportunity would be limited until you would put more resources into that, so I'm just wondering what you're looking for there.

Well, we have made some investment already, Ari. What we don't want to do is duplicate what we already have in Canada. And so, we're looking to be able to distribute the products and investment management expertise that we already have, through what can be viewed as sort of the gatekeeper approach in the US, where large complexes that own their own distribution will put our products on their shelves.

That process and sales cycle tends to have a relatively long lead time, like six months, where due diligence is conducted, and review of the Company, our track record and our portfolio management team, before it's put on shelves like that. But it also has a limited risk exposure in that we don't have to build out our own infrastructure to the same extent we've done it in Canada.

And so, we're looking to continue doing that. We have been active in being interviewed, and interviewing others. And in addition to that, we are looking to add investment teams that we can attract to the organization. As I spoke in the question, in Jeff Fenwick's question, teams that may have expertise that we currently don't have in-house.

Okay, thanks for the insight. And then, on Orion, it's been almost two years now since the acquisition was made. Are you happy with the overall performance to date, and can you comment on any significant mandates that have been won in that business?

Generally, the winning of mandates, I think we put in what their sales figures were for the year, or we don't (inaudible) [that out].

We're very happy with Orion. That transaction, first of all, we think represents the model of the type of transaction we would likely look at doing in the future. We are enthusiastic supporters of the team at Orion. They are a team that's been together for upwards of a decade, producing, I think, exceptional returns. They provide great bench strength to the team at Goodman & Company, become more active participants in the Goodman & Company's partners' meetings, which we have every Tuesday at lunch. And in the exchange of intellectual debate, they have performed extremely well on their hedge fund, and hedge funds and alternative products that they've launched, and they're generating performance fees.

So it is performing right in line with the strategic expectations we had when we went in. Going forward, we would like to deliver more assets to Orion through our retail channel. And -- but that, again, that doesn't happen overnight, and it is -- it's fantastic if we do it, and it will be fantastic when we do it.

But even prior to doing it, I think the Orion team has delivered, and it's been a very beneficial transaction to DundeeWealth.

Are you able to give a ballpark figure on what net sales have been like for Orion?

We have. We disclose that in the end of April, all of our managed assets accounts, Ari.

Okay. Okay, I'll take a look at that.

Thank you.

Thank you. Your next question comes from Steven Boland. Please go ahead.

Good morning.

Hi, Steve.

David, I just -- with the prudent balance sheet that you mentioned, and obviously, you're looking on a number of ways to deploy that, what's your timing? I mean, is this a 2010 event that you end up deploying a good portion of this cash?

Well, in terms of acquisitions of what we'd like to do, we have not yet come across an acquisition that would use up anywhere close to that type of cash. I'm not ruling it out, but these things are very difficult to plan, and even harder to schedule. It requires -- you know, any acquisition or any transaction requires two willing participants at least. And so it's tough to sort of plan it.

But we are actively looking, as I said, for additional investment management teams that we can add to the lineup. But that doesn't cost hundreds of millions of dollars to add. That costs tens of millions of dollars.

And so, in the meantime, we're going to look at prudent ways of managing our balance sheet and managing our business, but I can't tell you that that's something that's going to happen in any given -- like an acquisition of that size would happen in any given year.

Has there been any thought of negotiating with Scotia to buy that piece of their ownership, of your ownership back?

Yes, Scotia has been a shareholders' agreement with Dundee Corporation, and so that would not necessarily be a -- the right conversation for DundeeWealth to have with the Bank of Nova Scotia. But we continue to believe that our stock represents excellent value, and the likelihood is, they might agree with that.

Has there been any progress on -- you know, with Scotia developing products, distribution seems to be on a bit of a standstill. Is that a fair assessment?

You know what? We've had some very meaningful discussions with the bank about areas in which we can cooperate more fully, in terms of helping -- ways in which we can do more business together, just to keep it as general as possible. I'd say the conversations were very open and extremely friendly, and we're going to continue following up with that.

So I think there are more ways that we can work together.

Okay, and just on Dundee Securities, is that business -- you know, the personnel levels, getting to where you're comfortable with it, or are you still looking to hire more teams, more -- continuing to sort of rebuild?

Yes, on the capital markets group, Joanne Ferstman took over that group a little over a year ago, and we identified, I'd say, about four key areas that we needed to add on the personnel side. And I think for the most part, we've done that. And we've added some really talented people on the investment banking side. We recently hired a senior mining investment banker to be based out of Toronto. And I think that's really -- every person that we've brought on has really complemented the team that's already in place.

And you can see, I think, for the first time, we've actually separated the results for the capital markets group, so that it could be valued a little bit more on a standalone basis, separating out the SG&A in our MD&A this year.

We're excited about the business. I'd say we are substantially done, but -- in terms of adding on, but we are always looking to take on good people.

All right, just one more. Your net sales, when I look at the distribution between funds, the Strategic Yield fund, which you mentioned in your opening remarks, seems to dominate now the net sales every month. Is that better or worse than expected, and is that -- the push -- do you continue to push that fund in 2010 through your wholesalers, or is there going to be a focus into trying to get other funds sort of ramped up as well?

The word push doesn't really work for us, because with a financial advisor, they generally have a good idea of the type of product that they need, and it's our job to sort of accommodate the expression of demand, and make sure that we craft an investment solution that meets the needs of both the advisor and their clients.

In today's world, there's no question there's a strong demand for products that can generate above average yield, and that, I think, is the real success behind the Strategic Yield portfolios, and is probably one of the reasons that most of our competitors have launched similar products of their own.

So what we've started to see, in addition to that, is as investors move up the risk spectrum from fixed income to equities, they start coming into the balanced funds that we have, which are starting to gain some pretty good traction as well. The power balanced and value balanced funds have been strong sales contributors in our lineup as well.

Okay, thanks.

Thanks, Steve.

Thank you. Your next question comes from Ari Black. Please go ahead.

Hi, just a follow-up question. With regards to the capital structure, are you happy with where that stands right now, or would you like to add more leverage to a comparable level of the larger peers?

I think we're pretty satisfied with our current capital structure. You know, if the need to access more capital presents itself, we'll respond responsibly.

What we did last year, though, is we expanded our capital structure to include -- obviously, we have common equity. We have preferred shares. We have, and we included in that, our first ever issuance in the corporate debt market. The only thing we don't really have of any significance is a bank line, which we could get if the need should present itself.

And why -- like what's the most restrictive covenant right now for DundeeWealth?

I don't think we have any. Now again, in our debt covenants --

Yes.

We don't have bank debt, so there's no covenants that would be associated with bank debt.

Right.

That's what we got rid of when we paid it all off. The covenants in the corporate debt in the long-term note, I don't think there's anything that restrictive in there, but you can go read it.

Okay.

So I don't think there are any covenants.

Okay, thanks.

Thank you. Your next question comes from Jeff Fenwick. Please go ahead.

Hi. Just one follow-up. I guess on the advisory channel, I mean, there's been significant change there over the last couple of years, and you've really shed a lot of unproductive advisors, and I'm just wondering if we can get an update there on whether you sort of foresee more fine tuning there, or is the outlook here to maybe add some advisors over the course of the year, and what's your thinking on that part of the business?

Yes, you know, these are all sort of one-off business decisions, on the question of adding. We are doing some recruiting, and that's been ongoing. We'd like to bring on top level financial advisors that can represent our brand strongly in the marketplace.

But we have to balance that against what the cost of doing so is, and how that would deliver return to our shareholders, and every decision has to be made as a business decision.

Over the course of the last few years, we've taken out significant expense, out of that channel. It was not being operated efficiently. We put in new management and a new management team, which is -- has done a terrific job on both cost control, but also on adding utility to the advisors that we have. And so, providing services to them, trying to make sure that their businesses operate smoothly, and with -- and facilitate the growth of their business.

So I'm really quite pleased with the way that's going. The number of advisors, obviously, we've brought down over the years, such that the average book size of an advisor has grown steadily in our firm, to -- it's about CAD25 million of average AUM per advisor, which makes the group, for us, much more financially sound. And as we move forward, we're quite focused on getting that group both past breakeven, and eventually, modestly profitable.

Okay, thank you.

Thank you. There are no further questions in the queue at this time.

Thank you very much, everybody.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line, and have a great day.