Bank of Nova Scotia (BNS) 2010 Q2 法說會逐字稿

Thank you for standing by. Your conference call is ready to begin. Good morning, ladies and gentlemen, and welcome to DundeeWealth's second quarter 2010 shareholders call. You may listen to the conference call or log on to www.DundeeWealth.com for the webcast presentation. 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 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 the 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, everyone, for joining us for a discussion about our 2010 second quarter financial results. Before we get started, there's some housekeeping to review as we continue to build on our initiative to speak regularly with our shareholders through analysts and those who listen on our calls. We've added a webcast component to our conference call today for the first time. You may listen via conference call or join the webcast at DundeeWealth.com. John Pereira, who will be speaking later, will refer to certain slides that are available on the website.

I'm happy to see many of the same themes we've discussed with you on previous calls holding strong this quarter. Consistent progress in the areas we continue to identify as a priority is crucial to the company's growth and our ability to add value for our shareholders. Over the last three years, I have spoken about our ongoing sales momentum and a turnaround in the retail division. We have promised disciplined expense management, margin improvements and added transparency. We have been delivering in those areas we have identified as priorities since my first remarks to you as CEO of DundeeWealth in 2007, despite the challenges we faced later that year and the market collapse of 2008. Our results this quarter are further evidence of these achievements.

So where are we now? Statistically, 8th place is where we fit in the Canadian fund company chain with our fee-earning assets now at the highest level in the history of the firm. Practically, what does this say about where we are going and how far we have come? We are in 8th place with a market share of 4.11%. That's up from 10th place with a market share of 3.33% in June of 2009. So when you see Dynamic Funds at the top of the sales charts quarter after quarter, it is important to recognize that we're not leading as a result of scale. In fact, we've been generating more sales on less assets under management than many of our peers consistently for the past five years.

We continue to nurture our relationship with the advisor community and invest in these revenue-generating activities through innovative product creation, best-in-class customer service and value-added services. We recently launched the Dynamic Emerging Markets Fund, giving investors access to two of the country's top portfolio managers and a growth value-blended style approach unique with this asset class in Canada. And we actively support the independent thinking of our portfolio managers which provides value in a way that is unachievable through passive management and index hugging.

The relationship-building exercises at Dynamic are not unlike the client-centric approach to our management of the DundeeWealth retail advisory network. The retail division adds strategically to the value of our organization. It supports our position as an advocate for investing with advice, keeps us up to date on the needs of and trends in the advisor community, and it is an invaluable distribution channel for our funds.

Our goal has been to narrow the gap reflected in recurring losses in this division in order to take advantage of these strategic benefits, but at also taking a hit on profitability. On that point, it's a pleasure to report that we have come close to break even for the first two quarters of this year, despite challenges presented by the markets. We are now focused on helping our advisors grow their businesses.

And then there are the investment ideas and sophisticated advice offered by new depth brought to the Dundee Capital Markets team. Key personnel additions at Dundee Capital Markets has allowed us to strengthen relationships but keep partners, resulting in a steady increase in investment banking activities over the last year. As these relationships deepen further, we expect to take on additional lead mandates and capture a larger portion of the kinds of deals that will help the Dundee Capital Markets division make a meaningful contribution to our bottom line.

We have been focused on expense management and improving margins across the board with an eye on earnings, not just the EBITDA line. Last year, we showed that we could remove costs in a meaningful way. In the first six months of this year, we've demonstrated we can grow revenues while keeping those costs contained, carrying more through to the bottom line. In the first six months of the year, excluding CLO sales, we were able to grow revenue by 18% (sic - see Press Release) over last year. And EBITDA grew by 43% (sic - see Press Release), while keeping costs contained at 8%.

At the same time, we're in the envious position of having a strong treasury. Our cap position has grown to more than $450 million, and we remain free of bank debt. We continue to make investments in our most lucrative activities for organic growth and are actively pursuing opportunities to deploy our cash in a way that makes sense for the long term. In the meantime, we are proud to hold this cash on our balance sheet in a manner that lends to our stability as market volatility persists.

I believe every part of our firm is well positioned to grow organically. We have built the foundation of a best-in-class management team and personnel who have all been tested by crisis and opportunity. This is true across every division of the organization. As such, there is no division of this firm that could not take advantage of the synergies of an acquisition. We intend to take advantage of the right opportunities whenever and wherever they might present themselves, and we will do so prudently.

With that context, it's a good time to start talking numbers. I trust you've had an opportunity to log on to DundeeWealth.com to follow John's slide presentation. And with that, I'd like to invite John Pereira, Chief Financial Officer, to take you through our financial results in detail. John.

Thank you, David. Good morning, everyone. I am going to start off where David left off. With respect to our financial position as at June 30, 2010, we had over $450 million in cash and cash equivalents. And our net cash position increased in the second quarter as we continued to generate operating cash flows and dispose of CLOs. The dividend paid on common and special shares in the second quarter of this year is, again, $0.07, and up from $0.02 paid in the second quarter of last year.

Looking at our overall results, we continue to increase revenue at a faster pace than SG&A, as David mentioned. In the first six months of 2010, consolidated revenues increased 37% to $465.8 million, from $340.3 million for the same period last year. At the same time, SG&A increased just 8% to $144.3 million from $133.6 million over the same period. The result is EBITDA of $149 million for the six months ending June 30, 2010, up from $63.7 million last year, together with the significant improvement in EBITDA margin.

Our aftertax net earnings increased to $60.5 million for the six months ended June 30, 2010, from $27.5 million for the same period last year. Earnings per share, fully diluted, were $0.40 per share in the first two quarters of this year compared with $0.19 per share for the first two quarters of '09. As a note, revenues, EBITDA and pretax net earnings for the six months ended June 30, 2010, include a $33.3 million, or $23 million net of tax, gain on the disposition of CLOs. In addition, included in net earnings for the six months of 2009 is a fair value adjustment gain of $46 million, $32.7 million net of tax related to our floating rate notes, formerly ABCP, partially offset by a $9.5 million fair value adjustment loss, $6.7 million net of tax in our CLO portfolio last year. Excluding the CLO gains in the first two quarters of 2010 and the FRN CLO adjustment in the same period of '09, our revenues, EBITDA and net earnings are still substantially higher this year.

Turning over to fee-earning assets, despite widespread market disruption in the second quarter of this year, AUM of $38 billion at June 30 is up from $36.1 billion at the end of '09 as a result of the fund performance and strong sales momentum that David spoke of. And as of July 31, we now have $39.4 billion in AUM. And in fact, AUM has grown steadily over the last five years with the exception of 2008. Total fee-earning assets increased to $72.2 billion in July.

In the second quarter of 2010, we were close to returning to the quarterly revenue levels experienced prior to the market collapse of 2008. And excluding the CLO gain of $14.7 million for the quarter, second quarter 2010 revenues were $216 million, up approximately $28 million from the $188 million in revenues for the second quarter of '09. Management fees continue to represent the largest portion of total revenues at 61%.

Looking at our second quarter EBITDA trend over the last five years, with the exception of 2009, you can see the effect of increasing revenues and the impact of our recent cost containment efforts. Q2 2010 EBITDA of $75 million is up from $41 million last year and even more significantly, it's up from the '08 and '07 levels. If we exclude CLO gains of $14.7 million, our second quarter 2010 EBITDA still exceeds previous Q2 levels.

Turning to DundeeWealth Investment, revenues were $279.6 million in the first half of 2010, up from $190.8 million for the same period last year, as management fees in division climbed to $263.6 million (sic - see Press Release) from $181.5 million, the highest ever generated over a six-month period, excluding performance fee revenues. The increase is the result of higher average assets under management in the first six months of 2010 of $35.7 billion compared with the same period last year when they were $25.2 billion.

Selling, general and administrative expenses and trailer fee revenues were $77.2 million and $86.1 million respectively in the first half of 2010 compared with $65.3 million and $58.6 million respectively in the same period of '09. The increase in both cases is connected to the increase in revenues I just spoke of. This resulted in an EBITDA increase of 74% to $115.4 million in the six months ended June 30th, 2010, from $66.2 million for the same period of '09.

With respect to net sales in the first half of 2010, we, through Dynamic Funds, continue to lead the industry in total net sales according to the Investment Funds Institute of Canada. And over the full year in 2009, Dynamic had net sales of $2.5 billion as reported by ending. Currently, we are at $2.3 billion for the six months of this year. Furthermore, that's almost 85% of our high of $2.7 billion over the full year in 2008 according to (inaudible).

This leads us to market share. Dynamic's mutual fund market share continues its ascent in the second quarter, as David mentioned, reaching 4.11% at June 30, 2010, compared with 3.76% at December 31 '09. Dynamic is the fastest growing company among the ten largest asset managers in Canada, the pace it has maintained for the last four quarters.

Our ability to outperform our peer group in terms of sales as a percentage of AUM has been consistent over the last five years, notwithstanding our increase in AUM over this time. This serves as a good indicator of the stability of our growth momentum. And in fact, we've been generating net sales of more than 5% of AUM over every period for the last five years.

Looking at our DundeeWealth financial segment, Capital Markets division, EBITDA of $9.2 million for the first two quarters of this year was down from $13.5 million for the same period last year, mainly as a result of the declines in proprietary trading. Revenue gains in the investment banking and retail commissions from corporate advisors offset these proprietary trading losses in the first half of this year as the division generated revenues of $53.9 million in the first six months of 2010, up from $44.9 million for the first half of '09.

Variable compensation was $21.2 million in the six months ended June 30, 2010, compared with $15.4 million for the same period of 2009. And SG&A expenses were $23.5 million this year, up from $16 million in the first half of '09, as costs for the Corporate Advisor Group, now included with Capital Markets, mirrored the revenue contribution.

Our retail distribution division saw a $9 million improvement in EBITDA. The EBITDA loss of $2.1 million for the first two quarters of this year is a significant improvement from the loss of $11.1 million for the same period last year. Revenues of $133.2 million in the first six months of 2010 are up from the first half of 2009 when revenues were $124.2 million, notwithstanding the impact of the corporate advisors.

Variable compensation was $98.7 million in the first two months of 2010, compared with $92 million for the same period last year. At the same time, there is a reduction in SG&A expenses, bringing them down to $36.6 million from $43.3 million in the first half of '09, mostly connected with the move of the corporate advisors to the Capital Markets division, as noted a moment ago.

That concludes our financial position. Thank you. And now I'll turn you over to David again.

Thanks, John. Appreciated those slides. It reminded me that I actually gave the wrong percentages when I spoke. In fact, in the first six months of the year, excluding CLO sales, we were able to grow revenue by 27% over last year and EBITDA by 82%. I think I gave different numbers in the first part of the presentation.

So, Operator, with that, we're available for questions.

Thank you. We will now take questions from registered analysts. (Operator Instructions) Our first question is from Paul Holden from CIBC. You may go ahead.

Hi. Good morning.

Good morning.

Morning.

First question is related to the change in your low-load commission structure that took effect July 1st. So you posted very strong net sales in July, despite the change. Wondering what kind of feedback you're receiving from IAs and your wholesaler distribution force.

There's been a limited amount of feedback. The change was, I'd say, relatively subtle. It was -- did not impact all of our funds. Many of our funds have performance fees attached to it. And those were absolutely unaffected. There were some funds that were affected. We've had an open dialogue with our wholesalers and advisors explaining the rationale of our decision. And I'd say that that has been well understood and gone relatively well, and we move on.

Okay. So it's safe to say, then, that no real pushback on the change.

There's been a little bit of pushback, but I would say it's been relatively small.

Okay. Fair enough. Second question relates to performance fees, and you brought up a number of your funds are eligible to accrue performance fees. Any kind of color you can provide us on performance of those fees and sort of accrued performance fees year to date?

We accrue it into the net asset value of the fund. And the description of how we calculate that performance fee is contained in the prospectus of each fund. So it would be possible, Paul, for you to estimate those performance fees. And if you need guidance on that, I'm sure John can help you with it after the call. But we do not provide that disclosure at the level I think you're looking for it on this call.

Okay. Fair enough. Final question is related to priority of use for excess cash. You have a lot of cash on your balance sheet and excess regulatory capital. Is there a priority at this point to buy back shares? You've been pretty active with your NCIB.

Yes. We have bought back some shares in the last quarter, primarily because we see our stock as significantly undervalued. We are the fastest growing. We've improved our margins. We've delivered on all our commitments, and yet we still trade at a discount to some of our key competitors and in some cases, a very significant discount where we have like -- trade at roughly 5% of our assets under management. And so we've taken advantage of that in the marketplace, buying back some shares. But we're not going to buy back, in all likelihood -- we're not going to dent our significant cash position too greatly with that. We are looking to grow our business. We would love to make an accretive acquisition. We have been, I'd say, quite focused on that in the last quarter, looking at potential opportunities. But we have every intention of acting prudently in that regard and taking advantage of opportunities as they present themselves.

Thanks a lot for your answers.

Thank you.

Thank you. (Operator Instructions) There are no further questions registered. I'd like to turn the meeting back to Mr. Goodman.

Thank you very much, everyone.

Thank you.

That ends the call.

Thank you. The conference call has now concluded. Please disconnect your lines at this time. And we thank you for your participation.