Bank of Nova Scotia (BNS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DundeeWealth's first quarter 2010 shareholders 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. As a reminder, this call is being recorded. I would now like to the turn the meeting over the your host. Please go ahead.

Hi, everyone. It is David Goodman talking. Thank you for going us for a discussion about our 2010 first quarter financial results. In my comments on our 2009 year-end call, I touched on the strong momentum of fund sales and AUM growth in the first couple of months of 2010. I will elaborate on that in a moment. But before I do, I wanted to talk a little bit about some of the financial results. Consolidated revenues for the first three months of 2010 were CAD234.7 million. That is a 42% increase from the same period last year, 54% including the gain realized on the sale of certain collateralized loan obligations. At the same time, selling, general and administrative expenses, or SG&A, for the first quarter of 2010 were CAD72.5 million. That is up from CAD62.7 million for the same quarter of 2009, largely a reflection of higher staff expenses connected to the increased asset gathering activities that I will comment on shortly. I have spoken about our commitment to grow revenue at a faster pace than SG&A.

According to the figures this quarter, we increased revenue more than three times as much as SG&A compared with the same quarter of 2009. Looking at the quarter ended December 31, 2009, revenues are also up from CAD215.6 million, which is excluding CAD32.6 million in gross performance fee revenue that is only reported in the fourth quarter. SG&A in the first quarter of 2010 was down from the CAD81.9 million incurred in Q4 of 2009, mainly as a result of performance fee related expenses being included in Q4 of 2009. Benefiting from improved margins, the Company earned CAD74.5 million before interest,, taxes depreciation and amortization with net earnings of CAD33 million in the first quarter of 2010. This compares with EBITDA of CAD23 million and a net loss of CAD14.6 million in the first quarter last year. Included in EBITDA, as I mentioned, are proceeds from the disposal of a portion of our collateralized loan obligations, or CLOs. Cash proceeds of CAD21.9 million resulted in a gain of CAD18.6 million in corporate investment income.

In the last quarter of 2009, we announced the sale of CAD270 million par value of floating rate notes, formerly asset-backed commercial paper. The disposition of these illiquid investments continues to be a focus for us. We continue to explore ways to increase shareholder value in addition to the margin improvements I outlined earlier. In the first quarter of 2010, DundeeWealth doubled its quarterly dividend to CAD0.07 per common and special share effective April 1st. We also paid a CAD0.025 per share special performance fee dividend. With that context, I will move on to our segmented results. Management fee revenue was CAD134.4 million in the first quarter of 2010, up 52% from the same period last year, primarily a result of a 50% increase in average assets under management, substantial growth in AUM as a reflection of improving markets and the combination of consistent industry-leading asset gathering activities and the strong performance of the dynamic mutual funds.

In the first quarter of 2010, Dynamic Funds led the industry in net sales overall and ranked first among the independent asset managers in net sales of long-term funds, according to the Investment Funds Institute of Canada. The performance of our portfolio management team was also distinguished among peers earning Dynamic 14 Lipper Fund trophies, the greatest number awarded to any fund company. March 31, 2010 AUM of CAD38.8 billion represented an all-time high for the Company, which we have since surpassed. As of April 30, 2010 we have approximately CAD40 billion in AUM. Dynamic's increase in mutual fund market share demonstrates an increasing awareness among new and returning clients alike that the funds are performing consistently well throughout this period of considerable turbulence.

According to IFIC, Dynamic Fund's market share increased to 3.99% from 3.76% at the end of 2009 and 3.13% at the end of the first quarter of 2009. First quarter 2010 revenues of CAD27.8 million in the Capital Markets division also mark an increase when compared with the CAD15.9 million generated in the first quarter a year earlier. Investment banking activities in the division have been generally increasing momentum over the last few quarters and first quarter results benefit from the efforts of our new management team and the expertise they bring to the firm. This is equally true in the Financial Advisory division, where management's efforts to realign the advisor networks, network with new practice disciplines and higher book values have begun to deliver improvements. During the first three months of 2010, revenues in the Financial Advisory division increased to CAD69.4 million from CAD59.2 million in the same period of 2009.

Furthermore, Goodman & Company's share of overall AUA in the Financial Advisory division increased to 23.7% as at March 31, 2010 from 22.6% at the end of 2009 and 19.2% far the first quarter of 2009. Revenue increases across the Board should be considered together with improvements in operations and our healthy balance sheet. So now I invite John Pereira, Chief Financial Officer, to take you through the results in a bit more detail. John.

Thank you, David. Good afternoon, everyone. I will provide you first with an update on our structured investment portfolios. As David mentioned, in the quarter ended March 31, 2010 we disposed of our investment in 12 CLO portfolios for cash proceeds of CAD21.9 million and accounting gain on disposition of CAD18.6 million. At the end of the quarter we continue to hold 15 positions in CLOs with a fair value of CAD26.1 million. At March 31, 2010, we also continued to hold floating rate notes, or FRNs, formerly ABCP, and earnings this quarter included an CAD800,000 adjustment, increasing the fair value of our FRNs to CAD5.6 million after adjusting for principle and interest received of also approximately CAD800,000. Whereas the first quarter last year included an adjustment decreasing the fair value of our portfolio of CLOs by CAD9 million.

We maintained our strong net cash position in the first quarter of 2010 and continue to hold over CAD400 million of cash, cash equivalents and marketable securities on our balance sheet. Turning to DundeeWealth Financial, which includes both our Capital Markets and Financial Advisory businesses, DundeeWealth Financial division revenues were CAD97.2 million in the first quarter of 2010, an increase of CAD22.1 million or 29% when compared with CAD75.1 million for the same quarter last year, but down slightly from CAD100.4 million in the fourth quarter of 2009. At the same time, first quarter SG&A division increased by CAD2.7 million or 10% to CAD30.7 million compared with both Q1 and the last quarter of 2009. DundeeWealth Financial EBITDA of CAD3.3 million this quarter compares with an EBITDA loss of CAD3.9 million for the same period last year. The improvement year-over-year is primarily a reflection of both increased business volume in the Capital Markets segment and cost containment across the division.

The DundeeWealth Financial division generated earnings before tax of CAD2.1 million in the first quarter of 2010 compared with a loss before taxes of CAD6.4 million in the first quarter of 2009. As a result of our corporate advisors moving from the Financial Advisory division into our Capital Markets division in 2010, both revenues expenses in Dundee Capital Markets increased slightly, while the opposite is true for the Financial Advisory division. Notwithstanding, that on an overall basis the amounts were not very significant. In our Financial Advisory division, EBITDA was negative CAD1.2 million in the first quarter of 2010 compared with negative CAD6.3 million in the same quarter last year, whereas EBITDA in the Capital Markets division was CAD4.5 million this quarter, up from CAD2.4 million for Q1 2009. David mentioned that Goodman and Company's penetration in overall Financial Advisory division assets under administration increased 23.7%.

In addition our share of mutual fund AUA in the Financial Advisory segment was up as well, to 32.8% at March 31, 2010 from 31% at the end of 2009 and 25.8% at March 31, 2009. On the DundeeWealth investment side increased AUM through strong net sales and market appreciation both boosted revenues and added certain staff expenses. Investment division revenue increased 56% to CAD136.2 million in Q1 from -- Q1 2010 from CAD87.3 million for the first quarter of 2009. Revenues were also up 6% compared with CAD128.3 million, excluding performance fee revenue, in Q4 of 2009. SG&A for the first quarter of 2010 was CAD38.7 million compared with CAD31.3 million for the first quarter of last year and CAD47.9 million in Q4 of 2009. The increase compared to Q1 2009 was a result of increases in advertising of approximately CAD2 million, increases in sub-advisory fees of approximately CAD2 million, which are commensurate with increases in our AUM, and increases in sales and performance-related expenses of approximately CAD3 million.

A note that in Q4 of 2009 we include performance fee expenses in our SG&A. Excluding these amounts our expenses in Q1 2010 were up approximately CAD1.7 million or 4.5%. The increase is largely due to increased expenses connected with strong sales during peak RSP season. DundeeWealth Investment first quarter 2010 EBITDA was CAD55 million up more than 90% from CAD28.6 million for the same quarter last year, with more revenue being carried through to the EBITDA line. The investment division generated earnings before taxes of CAD28.8 million in the first quarter of 2010 compared with CAD4.1 million in the first quarter of 2009. Average AUM increased by 50% to CAD35 billion in the three months ended March 31, 2010 compared with CAD23.4 billion during the same period of 2009.

The increase in average AUM helped to increase investment division management fee revenue in the first quarter of 2010 to CAD128.7 million from CAD84.6 million for the first quarter of 2009. And finally, trailer service fees in the first three months of 2010 were CAD42 million compared with CAD27.2 million for the same period last year, as a result of increased AUM levels. Thank you, John.

That concludes the formal portion of our call. We will have a replay of the discussion available at Dundeewealth.com. Operator, it is now time we can open up the call to questions. Thank you. Hello.

(Operator Instructions) The first question comes from Stephen Boland with GMP securities. Please go ahead.

Good afternoon.

Hi, Steve.

I guess, David, your net sales continue to be pretty impressive. I guess when we look at performance, the performance in the funds again is very, very strong, but a lot of your competitors have that similar performance as well. So what else do you think is driving clients into your complex? Like what's -- what else is working for you?

I think the performance is clearly one aspect of the equation and I don't want to diminish its importance, but there's also a big part of the equation is the relationship that we have with financial advisors and how we cultivate that and support financial advisors in their practice and how they do business. I think we have over the years within Dynamic Funds built up a strong client first mentality. It has been recognized, I think, four times in the last five years as Fund Company of the Year. And our call center has been recognized repeatedly as one of the top call centers. Our advertising has always been in support of the financial advisor. Our wholesalers rank among the top in the industry and are consistently seeking to improve themselves by, through courses and training. Our website is, has been recognized as state-of-the-art and has been designed to provide the financial advisor with an ease of doing business, not just with our Company but with others as well.

And I think all of those put together have helped us develop a really strong loyalty with the advisory community in Canada. In addition to that, we try and stay close to the advisors through -- we have two, I would say, relatively large conferences a year. One, we've just had in Omaha and we have another one coming up called Leaders Council, where we have all of our managers and sales staff and some of our management team together with the clients to meet everyone face to face and allow them to learn more about our Company. We provide, I would say, significant access to the portfolio management team. Our managers are on the road. They're available to our clients and when the crisis hit over a year ago, we had roughly two conference calls a week for four weeks. We at some times we had well over a thousand lines open and I am pretty sure there was in some cases 20 or 30 people in the room for those lines. So, we have really tried to foster a strong, close relationship. And we have also had a very timely product launch in the Strategic Yield Fund, which helped us gather and gain strong momentum in the sales channel. I may have gone on too long, Steve.

That's all right. Just on the Strategic Yield Fund, I mean it is gathering -- it is CAD1.2 billion I'm not sure what it is now, maybe CAD1.4 billion in assets. Is there a point where you kind of try and get advisors to stop putting money in to shift it to other products or is that part of the plan.

We are not an expert in that, getting them to stop, but we -- I don't think that's really it. I think what we are trying to do is make sure that we provide the advisors with both the service and the tools they need to build portfolios for their clients. Yield is very much a big part of that and financial advisors are seeking sort of the comfort and low volatility from yield portfolios and I think that speaks volumes in the success of Strategic Yield, but we also see the signs of advisors starting to support the balance portfolios and we have some of the top balanced funds in the industry and they are starting to gain some traction as well. So we are starting to see a bit of movement towards that.

Just one further question. On your cash balance it has come down a little bit since year-end, CAD50 million, and I guess you are asked a lot about what the plans were for that cash, talking about talking acquisitions, returning to the shareholders. But I guess when I look at your cash flow statement, your commissions are high and going to client accounts receivable that's a big amount now, I guess, each quarter. On your balance sheet that grew 50% from year-end. What is the reason for that? Is it the securities business just growing that quickly or is it just a timing matter?

Steve, this is John, here. It's honestly just a timing that we had a bunch of client transactions that were occurring right around quarter end. The business is growing, but the significant growth at March 31st really related to the timing of transactions that were occuring at year-end. That's all it is.

Okay. So when you look at your cash flow statement and your cash flow needs for the year and your sales commissions, if you annualize Q1, and I know it's RSP season in there, but you are talking about CAD100 million to CAD150 million of commissions in the year. I mean,is it reasonable to assume that you are going need all this cash just to support the organic growth in the business?

No, I don't think it is fair to annualize that number.

Yes.

Okay. Well, if we -- well, if you can answer the question in terms of what is your organic cash flow requirements do you think for the year? I mean is that a way we should look at your high cash balance?

I think the only significant need for cash would be on the financing of commission revenue and I think you are able to sort of figure out what that's going to be on an annualized basis.

I wouldn't extrapolate the first quarter commissions that we've paid, it was about CAD39 million for the rest of the year. I mean usually.

Oh, I understand that. But I am saying I understand it is RSP season, but if you do 20 for the rest of the year for three-quarters, that's - you are CAD100 million of cash you are going to use. So what I am trying to get at is we are all looking for are you going to acquire something material, but and in fact are you going to need this just to support your organic growth?

No, I don't think we would need it to support our organic growth. I think we generate enough free cash flow from our business to finance if it is CAD100 million, roughy, of commissions, I think we would be able to handle that through internally generated cash flow from the operating businesses. In terms of the cash on our balance sheet, which has been, it's obviously a two edged sword. When markets are wonky you feel really good about having it because you think you will get a great opportunity to deploy it at reasonable rates and to deploy and to buy things at a good price. At the last quarterly conference call I talked about the fact that we don't see us spending all of that in one big transaction. What we thought we would -- our strategy is more looking for, I guess, small to mid size money management teams in areas of expertise that we don't currently have.

Okay, I will requeue. Thanks.

Okay. Thank you.

The next question comes from Ari Black with Thomas Weisel Partners. Please go ahead.

Hi, guys. Good afternoon. I noticed that there was CAD25 million invested in mutual funds during the quarter in the corporate investments, which is a little bit more than usual. Is this towards seed capital for new funds or is it more a result of trying to increase the returns of our cash?

I would say it is both. We launched a short-term bond fund and we allocated CAD25 million to that. It provides us with -- .

Yield of about 4 to 5.

Between 4% to 5% yield, which is better than what we would be normally receiving on cash balances. We thought it was a pretty solid investment.

And any reason why not to increase the investment in that fund then.

At the time we didn't want to be -- it was a brand new fund and we didn't want to represent too significant a portion of it.

Okay. And then are -- I guess I can see this from the IFIC stats coming up soon, but have you started to see any traction into sales of equity funds yet or is it still mostly going to the balance funds?

I guess on our top five selling funds, there's probably one equity fund and two balanced funds and then the rest would be yield.

Are you starting to see the investor sentiment changing somewhat to be more or less risk sensitive or is that -- are we still some a few months, a few quarters away from that .

Quarters? I am not sure how to predict investor sentiment. I think over the last three years we have gone through such a tremendous upheaval in the Capital Markets. We still see the emotional impact of that currently. The headlines in the US, the trading activity just last week, the hearings involving Goldman Sachs, the -- all lead to, I think, some caution in the minds of investors and financial advisors. So I see that continuing for some time and I think it means that the need for investment advise and having a good strategic advisor as your partner in planning your financial affairs, has probably never been stronger. But to think that that will all just be immediately forgotten and we will resume sort of a less of a regard for risk in a portfolio in the near-term, I think is not likely the case. And my dad tells the story about when he graduated from school in the 1960s, his parents cautioned him about what happened in the great depression. So I think these types of lessons aren't quickly forgotten and so I do think there will be a very important role for the management of risk in client portfolios for some time to come.

And just for John, do you have some guidance for the tax rate for the rest of the year? Should we see the rate come up to a 31% level for the second, third and fourth quarters or will we see the overall average even increase to 31%.

Ari, it's John. It really depends on the transactions we do. Like this time around it was impacted by the sale of our CLOs a little bit, but it should stabilize. It is hard to predict though.

Okay. And then -- I don't know if you can provide an update on (inaudible) accounting now, but do you have a sense of what the major impacts will be to income statement yet.

We have disclosure in our MD&A where we basically say that we've prepared skeleton financial statements and we are going through those processes and at the annual MD&A we have got some target base for June 30th set where we will be providing some additional updates.

Okay. Thank, guys.

Thanks.

The next question comes from Paul Holden with CIBC World Markets. Please go ahead.

Hi, good afternoon. Want to ask a question on your Capital Markets business, so nice revenue bump there and you have made a number of additions to your team there in terms of investment banking and sales, do you think those additions made a big difference to the business or do you think there's more potential business to be had there?

I think we have reworked our Capital Markets group significantly over the last couple of years. There's probably about five, I guess, new people who have come on to replace others who have left. But the bulk of the group is still there and we think -- we don't think the -- we think the heavy lifting has been done, in terms of the reorganizations of the team. We think that there's a lot more upside left in the business. We think that our ability to both lead underwritings and be valuable to our clients, but I think we are just touching the surface of it now and we are very excited about that business on a go forward basis.

Okay. And turning back to the investment management business, from an industry perspective we saw a fairly significant slow down in sales in April, wondering what your take is on that, whether it was just purely seasonal or if we are seeing sort of some early signs of investors dialing back the risk and maybe if you can comment on what you have seen May to date as well?

I think it was seasonal. I think we did have a very healthy RSP season. The numbers and the daily net sales numbers coming into that were, I think, pretty robust. We haven't seen the type of slowdown that would suggest that investors are going away and I don't think it happens that way. I think these things -- obviously, we went through a really volatile period with some significant scares, but that's a long time ago, already. Going forward now I think there's obviously concern for risk, but I think there is prudent allocation of capital that's going on with investors who are seeking to protect their assets from inflation.

Okay. And then the last question is related to the target date portfolios that you launched recently. In the US there has been a lot of success with those types of products, Canada not so much. Maybe you can walk us through sort of your thought process launching those products. Do you think demand for them in Canada will sort of catch up to US trends or were you receiving a lot of demand for these products?

Well, that's a good question. We never know what, when we launch a product, if it is going to be the next income trust fund or strategic yield portfolio. What we try and do is listen to our clients, work with our financial advisors and provide them the tools that they need to provide first rate service to their clients. The need in today's environment to manage your portfolio with an eye on risk and everyone defines risk in a different way. We generally define it as the risk of losing money, but you could also be defining it as what stage of life you are going be at when you need the money and there's -- this product provides an ease of asset allocation and it is convenient and useful to advisors. How successful it will be I think we'll have to obviously answer the similar question at the next quarterly conference call as we see what type of traction it gains, but we think it is a good tool and a good service to provide.

Okay. Thanks a lot, that's all the questions I had.

Thank you.

The next question comes from Jeff Fenwick with Cormark Securities, please go ahead.

Hi, good afternoon.

Hi.

So, I just wanted to follow-up on the CLOs that you disposed of in the quarter. Can you just maybe give us a little color on what you sold and what you kept. Did you sale part of the book there that was maybe underperforming and try to keep part of it that was yielding a more consistent cash flow for you. Any kind of color you can provide there?

No, we have been working with some advisors who have been guiding us in that respect and basically whenever on of the, they have various models that they track all of the traunches in and depending on the market conditions any traunch could hit their levels and whatnot and if it does we will sell it. It is not necessary that they are the highest value. It could be some low values that they believe the market is placing a higher valuations than it deserves and based on their recommendations then we sell it. So there really isn't a pattern or anything like that. It is totally dependent on market conditions. And there has been some -- there has been a lot of a band range, a high band of trading in those CLOs and given our opportunity to take advantage of some of that.

So that you are actually seeing a bit more of a market for these things these days in terms of liquidity.

A little bit more liquidity these days, I am not sure what the impact of last week is going to have on them, but up until the end of April we were certainly seeing a little bit more liquidity in them.

Well, it depends on compared to when also. If you go back in time a year, when we held these on our balance sheet and took, in some cases, I think we had written them down at one point to like CAD0.06 on the CAD1.00 at one point in the cycle. These are instruments that you can only sell when someone wants to buy them. And over the last two years, both the, with respect to the floating rate notes or the ABCP or the CLOs, there have been points in time when there's absolutely been no buyers and no trades and our valuation of them was what we recorded on our books. Obviously we are well capitalized. We are not making these dispositions because we need the capital, but in terms of how useful it is for us to have either CLOs or ABCP on our balance sheet, we have thought about that and we have made certain decisions about converting it into cash, which I think are self evident.

Okay, great. And maybe just a follow-up on that, could you give us what the adjusted EPS would have been had you excluded that sale in the quarter, I am getting something around CAD0.12.

That's about right. It is CAD18 million gain. Right, (inaudible)

Okay. And in terms of SG&A, I mean, as you said, you are trying to control the expansion there to be a rate lower than the revenue growth, obviously, up a little bit through the first quarter of this year. Should we just be anticipating a modest progression as you, as your assets rise or was there some seasonality in Q1 that might taper off through the mid-part of the year.

There was a little bit of seasonality in that we did run a RSP campaign.

Right.

But most of the other were a function of, I guess, the success of the RSP campaign because I think most of it related to the increases in AUM and subsequent increases that you would have to pay on AUM.

In Q2 we are going to, as David mentioned, we already had one conference, we are going to have another conference, so typically you will see again a higher, relatively higher expenses in Q2.

And I guess are there any sort of step function type increases here, where you reach a certain level of AUM and you have to back fill with either new PM talent or back office people anything like that we might be having to anticipate?

Well, we are always looking for talented people to join our organization. There is the two conferences that we have in Q2. I don't know how that might impact, but you have that every Q2. So that should be not surprising.

Okay. Great. Thank you very much.

Thank you.

Thank you.

There are no further questions at this time, please continue.

Okay. Well thank you very much for your interest in our Company.

Thank you.

Bye.

Ladies and gentlemen, this now concludes your conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.