Bank of Nova Scotia (BNS) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to DundeeWealth's third quarter 2010 shareholders call. You may listen on the conference call or log on to www.DundeeWealth.com for the webcast presentation. A brief question-and-answer period with registered analyst also follow the formal portion of the call Before I turn the call over to Mr. Goodman, I will read now be reading a cautionary note. Any forward-looking statement contained in this presentation involve risks, uncertainties and assumption 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 turn the meeting over to Mr. David Goodman President and Chief Executive Officer. Please go ahead Mr. Goodman.

Good morning everyone. Thank you for joining our discussion of DundeeWealth's financial results for the third quarter of 2010. We do have a slide presentation that is up on our website at DundeeWealth.com if you'd like to follow along there. I'm excited to be able to discuss with you today not only a strong third quarter but also the dividend enhancement approved by our Board of Directors yesterday. We have chosen to change our dividend policy, replacing quarterly dividend payments with monthly payments. The new monthly dividend rate of CAD0.05 represents a 3.5% on DundeeWealth's closing price of CAD17.32 on November 4, 2010, as per TSX. This is the third increase to our dividends in less than two years and increases our annual dividends to investors of record by 114%.

With a strong balance sheet and continuing confidence in the future earnings potential of our Company, it is a pleasure to continue to reward shareholders in the form of a higher dividend rate. Indeed over the last three years, our Company has increased its dividends by 650%, and we still have excess cash on our balance sheet. As I've said in the past, we are constantly in search for opportunity in which to prudently deploy our cash, both in a manner that adds value for our shareholders, while, to the furthest extent possible, remains accretive to the Company. To that end we continue to search for acquisition opportunities in Canada and south of the border and that will not change in the months ahead. But those ambitions will not distract us from the constant intention I've promised our investors, and in that respect, our Board decided that this important community would be well-served with a dividend increase at this time.

Let's turn to the results. We have a slide discussing the achievements of the Company, and if you look at our list of recent achievements and knowing many of you have attended past calls, I debated how to present in a fresh way some of the same sales successes and growth momentum that we've been lucky enough to report on a consistent basis for the last couple of years.

I'm asked regularly about our magic formula or our secret sauce or to what do you attribute your success. And the reality is, we are not so unlike our peers. We are in the same business, we share many of the same enterprise goals, but earlier this week at one of our annual conferences, I pointed out to an audience of financial advisors that the culture of our Company, and I talked about the culture of DundeeWealth today and what we foresee in the years ahead, I talked about the fierce independence with which we empower our financial advise, and in which we look root the particular brand of entrepreneurialism that we offer to clients and encourage in our employees at the same time. I think this sense of empowerment, of unfailing support of independent thinking, really does differentiate us in the market. Our market share continues to increase, outpacing the field in a very competitive landscape. In my view, that says a great deal about the value of our advice, the value of our Company. But I thought what I would do is just present a top 10 list of some of the achievements of DundeeWealth.

Number 10, we are home to the eighth largest fund company in Canada. We are the fastest growing of the top 10 fund companies for the last five quarters. We are also number one among independent asset managers year-to-date in terms of long-term fund sales, number three if you include the banks. We are number one in the industry year-to-date in terms of net sales, outpacing our nearest competitor by more than to two-to-one, including the banks. As of September we had more than 80% of our assets in the first and second quartile over just about all measurable periods, one, five and 10 years. We have the top-performing mutual fund year-to-date, and for the one-year period among all 15,600 mutual funds tracked by Morningstar in the United States.

Number four, in the 2010 Environics Perception Study, advisors ranked Dynamic number one in the category of quality of fund managers. They ranked us number one in the category of performance of products, and they also chose us as number one for overall performance. And finally we announced this week that we have reached record highs in both assets under management and total fee-earning assets. If you are wondering how we intend to maintain this momentum, I urge you to look at the last several years, and not just the last several months. We are a growth story, a growth story that's been ongoing for 10 years, a consistent and stable growth story. We have an amazing investment team, talented executive team, dedicated employees and a turnover rate that is relatively low for our industry.

With that introduction I'd like to take you through the numbers that correspond with these achievements. On the slide entitled Fee Earning Assets, despite persistent market volatility that continued into the third quarter of this year, our assets under management of CAD42.6 billion at September 30, 2010, are up 12% from June and 18% from December of last year as a result of strong fund performance and the sales momentum I will discuss further in a moment. As I mentioned, we reached all-time highs in October for both AUM at CAD44.4 billion and total fee-earning assets at CAD78.5 billion. This builds on a five-year AUM annual compound growth rate of 20%.

On the slide entitled Mutual Fund Market Share, you can see that Dynamic Mutual Funds market share continued its assent in the third quarter, reaching 4.29% at September 30, 2010, which compares with 4.11% at June 30, 2010, and 3.76% at December 31, 2009. As with our AUM, this growth is not new. Our market share has shown consistent growth over the last five years with a compound annual growth rate of 11%. With respect to gross sales, our ability to gather assets has been proven over time. We have a 14% five-year compound annual growth rate on gross sales. These figures are for Dynamic as per the Investment Funds Institute of Canada, so that you can easily compare our performance to our peers. CAD6 billion in gross mutual fund sales year-to-date is an increase of 60% from the same period last year and nearing the historical year-end high of CAD6.9 billion achieved in 2008.

On net sales, our ability to gather assets is enhanced, and this has been enhanced by our ability to retain them. Total net sales for Dynamic according to IFIC, posted even more aggressive five-year compound annual rate of 29%. Net sales of CAD2.9 billion year-to-date is an increase of 71% compared with the same period of 2009 and exceeds the previous year-end high of CAD2.7 billion for 2008.

Net sales relative to peers, this slide shows net sales year-to-date relative to our peer group. For those looking at the slide, the comparison is obvious. For those of you on the call, the chart shows that Dynamic's net sales of CAD2.9 billion more than double that of our closest competitor. At the same time, market appreciation associated with fund performance contributed a further CAD2.8 billion in the first three quarters Of 2010. In addition, for the month of October we reported almost CAD1 billion dollars in net sales, which includes approximately CAD543 million in third-party institutional sales and a healthy CAD339 million in long-term mutual fund sales, as well as addition in alternatives products and to our international subsidiaries. For a detailed breakdown you can refer to our October press release filed at DundeeWealth.com.

I am just going to refer to the slide entitled Consolidated Financial Highlights. These achievements contributed to the strong results we reported this quarter. I will review highlights from our financials for the nine months ended December 30, 2010, then I'll ask our CFO John Pereira to take you through the quarterly results.

Looking at our overall results for the first nine months of 2010, you'll see that we delivered on our commitment to increase revenues at a faster pace than SG&A, six times faster in this case. Consolidated revenues of CAD688.8 million and the first nine months of 2010 are up 30% from CAD531.3 million for the same period a year prior while SG&A of CAD212.3 million is up just 5% from CAD202.9 million, this translated into EBITDA growth of 105%. That's CAD219 million in EBITDA and an EBITDA margin of 32% for the first nine months of this year compared with CAD106.6 million in EBITDA and an EBITDA margin of 20% for the same period in 2009. The growth carried through to the bottom line, increasing net earnings by 115% and earnings per share by 107%.

Net earnings for the first three quarters of 2010 were CAD86.9 million, compared with CAD40.4 million for the same period last year while earnings per share were CAD0.58 compared with CAD0.28. As a note, revenues EBITDA net earnings for the nine months ended September 30, 2010, include a CAD34.9 million, or CAD24.1 million after tax, accounting gain on the disposition of collateralized loan obligations. Net earnings for comparable period of 2009 include a net fair value adjustment gain on CLOs and floating notes of CAD39.4 million, or CAD28 million after tax. John, I am going to turn it over to you to take us through the quarterly results in detail.

Thank you, David. I'll start with the consolidated financial results for the quarter. In the quarter ended September 30, 2010, we recorded EBITDA of CAD70 million, net earnings of CAD26.4 million and fully diluted earnings per share of CAD0.18. That compares with EBITDA of CAD74.5 million, net earnings of CAD27.5 million and CAN0.18 per share for Q2 of this year. Note that our Q2 EBITDA and pre-tax net earnings include a CAD14.7 million CLO gain, while Q3 CLO gains were only CAD1.6 million. Compared with the third quarter of 2009 when we had EBITDA of CAD42.9 million, net earnings of CAD12.9 million and earnings per share of CAD0.09, the current quarter showed significant improvements.

Our EBITDA margin for the current quarter is 31%, a notable improvement from 22% in Q3 of last year, and excluding the CLO gains, our Q2 EBITDA margin was 28%, showing a three-point improvement in the current quarter. Revenues in the third quarter of 2010 were CAD223 million, while SG&A was CAD68 million, compared with second quarter revenues of CAD231.1 million, including the CLO gain and SG&A of CAD71.8 million. For the quarter ended September 30, 2009, revenues were CAD191 million and SG&A was CAD69.3 million.

On the next slide we'll turn to DundeeWealth Investment. EBITDA in this segment was CAD66.7 million, and is up 10% from CAD60.4 million in Q2 of this year, and 36% from CAD49.1 million in the third quarter of 2009. This segment generated revenues of CAD147.9 million in the third quarter of 2010, small increase compared with CAD143 million for the second quarter of this year and up significantly from CAD116.2 million generated in the third quarter last year. The increase is a result of higher average assets under management this year. SG&A and trailer fees were CAD34.4 million and CAD46.3 million, respectively, in the third quarter of this year, compared with CAD38.5 million and CAD44.1 million, respectively, in Q2, and CAD30.8 million and CAD35.9 million, respectively, in the third quarter of 2009.

On the next slide we'll talk about performance-fee-eligible AUM. The Company may also earn a performance fee when the investment performance of certain eligible AUM exceeds an applicable benchmark. They are generally determined on December 31 of each year and are typically recorded in fourth quarter earnings. As of October 31, 2010, the Company had CAD8.7 billion in AUMs subject to performance fees, which builds on a five-year compound annual growth rate of 21% to December 31, 2009.

Based on market conditions at October 31, 2010, unrecognized net performance fees before tax would be approximately CAD19.6 million. This amount could change significantly before the end of the year, and not only a performance fees very difficult to calculate, they are even more difficult to predict. Currently some of our largest fund are close to high water marks. Should they surpass, their high water mark that performance fees generated could be significant. However, like I said before, this is something that is very hard to predict and subject to changing significantly based on market conditions.

Let's take a look at sour DundeeWealth Financial segment and the capital markets area. EBITDA in this area was CAD5.6 million for the third quarter of 2010 and is up from CAD4.7 million in Q2 and CAD4.9 million in Q3 of last year. The division generated revenues of CAD28.7 million in the three months ended September 30, 2010, up from CAD26.1 million in the previous quarter and CAD20.7 million in the third quarter of last year, as market conditions continued to improve. Variable compensation in the current quarter is CAD10.1 million, which compares with CAD9 million in Q2 of this year and CAN7.7 million in the third quarter of 2009, while SG&A expenses were CAD13 million, CAD12.4 million and CAD8.1 million, respectively. A portion of the year-over-year increases in revenues and expenses was attributable to the re-classification of corporate advisors into this division.

In the retail distribution area, EBITDA losses continued to narrow in Q3 of this year to CAD0.5 million dollars compared with CAN900,000 in the second quarter of this year and CAD7.7 million in the third quarter of 2009. Revenues in this division were down slightly quarter-over-quarter to CAD61.1 million from CAD63.8 million. Q3 revenues of CAD67.1 million included contributions from Q3 2009 revenues of CAD67.1 million, including contributions from the corporate advisor group, which as I noted earlier are now included in the capital markets area.. Variable compensation was CAD44.3 million in the third quarter of this year, compared with CAD47.7 million in the second quarter and CAD48.4 million in the third quarter of 2009, while SG&A remained flat quarter-over-quarter with CAD17.3 million in Q3 and CAD17 million in Q2 of 2010. A significance decrease from the CAD26.4 million in Q3 of last year, and is largely connected with the re-classification of the corporate advisors.

I'll conclude with a review of our strong balance sheet that David has referred to earlier. We continue to improve our cash flows from strong operating results and the disposition of our portfolios at CLO investments. Currently we have CAD521.5 million in cash and cash equivalents as of September 30, 2010. This amount includes approximately CAD173.2 million, which is held at regulated entities in our Financial segment and which may not be readily accessible due to regulatory capital requirements and client activity. We also disposed of a significant portion of our CLO portfolios in the first nine months of 2010 for cash proceeds of CAD40.6 million. The remaining CLO investments have a fair value of CAD9.3 million. And lastly we have CAD162.5 million of available for-sale securities on our balance sheet. David? Thanks, John. That concludes the formal portion of our call. A replay of our discussion and webcast will be available at DundeeWealth.com. Operator, we are available to open the call up to questions from participating analysts.

Thank you. We'll not take questions from the telephone lines. (Operator Instructions) There will be a brief pause while participants register for questions. Our first question is from John Aiken of Barclays Capital. Please go ahead.

Good morning. Well I guess wow and congratulations are in order. I guess maybe I should have stuck around. David, when you approached the Board with the proposal for the change in dividend and policy, what metrics were you looking at in terms of formulating your payout ratio. Was it earnings, EBITDA, cash flow or something internal?

We looked at a lot of different factors, John. From a Board's perspective, they need to be satisfied that we can afford to pay the dividend, and obviously the amount of cash that we have available to the Company is a significant factor, our ability to generate free cash flow on an ongoing basis is a significant factor, our internal -- we generated forecast for our business and how we think we'll do in the future, including what assumptions we would have to make for market growth, net sales growth, AUM growth, all play into the analysis. But fundamentally, we've come a long way over the last three years and the Board was quite comfortable that we could afford this dividend.

That's great. Just a quick follow up. Deposits had been in decline, is this a flow back into the market or is this something that competitors are pricing a little more aggressively than Dundee?

It's probably a little bit of both. We are starting to see a bit of an acceleration in terms of people buying more funds. And advisors -- the activity on gross and net sales seems to be picking up a little bit, and I wouldn't say we've moved all the way to full-on buy equities, but our balance funds are attracting a lot of attention. So I think it's probably a combination of both factors.

Great. Thanks for the color, David.

Thanks, John.

Thank you. Our next question is from Jeff Fenwick of Cormark Securities. Please go ahead.

Hi, good morning. Just wanted to ask specifically about your retail distribution area. You've done a great job of cutting a lot of cost out of that business and streamlining the advisors that you have within it. What is your vision for that business now going forward? Are you happy to have it be a break-even business that feed into the investment side, or where do you think you would like to take that business going forward?

The business has certain constraints in terms of how profitable it can be just as a standalone entity, given the payouts. But -- so we'd be pretty satisfied at roughly break-even or a little bit better than that. The strategic benefit of that group, though, shouldn't be underestimated. We have about 34% or so, or about CAD6.5 billion roughly of funds from that group. It is a really good relationship for the Company to have in terms of product intelligence and market intelligence and -- but we want it to be -- we've worked hard to the point where we really think we have a very high-quality retail distribution for us.

We have taken a lot of the cost out, but we have also added a lot of tools so that our financial advisors are being given the best opportunity to be heros to their clients. And we now think that we have the -- we've built a really solid foundation on that business and we'd like to expand it. We think it makes a lot of strategic sense and we think we have a very competitive offering for retail financial advisors that are not satisfied where they currently are.

And you mentioned some of the systems and tools upgrades you've offered that constituency. Maybe a can little color there around how you've been able to grow your penetration within that group. It seems like a pretty significant shift over the last, call it a year or 18 months.

I think for the most part, we've had a significant shift with all advisors, not just the ones that are in-house or at DundeeWealth. Our funds have performed exceptionally well, our sales team has been ranked extremely highly, we've been able to provide both service and performance to all our clients across all constituency.

With respect to DundeeWealth advisors, we had to improve the quality of their experience at DundeeWealth. They -- we're trying to move towards a paperless practice, we're trying to provide them with Web-based tools that give them the support they need to run their practice and devote their time to servicing their clientele, and I think we've made really significant strides on that front, and we are getting a lot of very positive feedback on it.

I guess secondly, on a different topic, the run rate there on your SG&A has been actually ticked down a bit in the quarter within the investment side. What's the play there, was it just a little seasonal reduction in marketing or business development or are we actually going to see this being closer to what the run rate is going forward?

It's tough to sort of take a quarter and say that's your quarter. If you look at -- we do have seasonal marketing activities where we have conferences at different times of the year. We tend to have a couple of big conferences in the April/May timeframe, and on occasion we have one or two other conferences, and I think in Q4. The Q3 tends to be relatively few conferences.

Thank you.

Thank you. Our next question is from Stephen Boland of GMP Securities.

Good morning.

Hi, Steve.

Just I guess one question. David, you changed your compensation on your low-load products a couple of months ago, but it seems like the -- looking at your sales numbers, it didn't really make any kind of impact. What was the reaction from advisors and how have you continued the good momentum in the sales despite that change, which is always, I guess -- can always be a concern for management teams.

Well we haven't had a very big reaction because I don't think it was a really significant issue for our business. We kept getting asked questions about it on conference calls or in meetings with analysts. So we took a hard look at it and we basically brought our low-load structure a little more in line with what was out there with our competitors. Some of our funds that attract performance fees, though, could easily afford to have a bit of a higher commission structure, given the complexity of the product. So I'd say the response has been relatively muted. We still are gaining significant sales momentum as you can see in the numbers we report.

Okay. That's great. Thanks.

Thank you. Our next question is from Paul Holden of CIBC. Please go ahead.

Hi. I just want to go back to John's question on dividend policy. I understand you just ratcheted it up significantly, but I guess what we are looking for is a potential trigger point in terms of what could be the next dividends increase, or how do you think about dividend policy? Is it a payout ratio, is it growth, as you mentioned, maybe some color on that?

Yes,I don't think we are yet ready to commit to a static payout ratio. I think for now -- I think we should enjoy our current dividend policy, which is a significant increase. In terms of how we deal with the cash flow that we are able to generate from our business and the excess cash that we are able to generate from our business, our Board would certainly have to look at the acquisition opportunities that are presented to the Company and the growth prospects. This is a long-standing review process that is constant by our Board, and going forward, it's directly related to the financial stability of the Company and the confidence we have in the strength of this organization.

Great. And with respect to acquisitions, you've talked about having a strong appetite for seeking out acquisitions. With the change in dividend policy, does that change that appetite at all?

Not at all. I think the dividends policy is independent of that. We can well afford the dividend that was declared, we -- and we can afford to make acquisitions.

Okay, and maybe you can provide us with an update on the acquisition front, if you are seeing more or less opportunities coming up.

I can say, yes, we are seeing more and less opportunities come up. We have a team internally where we use our capital markets group, and we have been looking for appropriate acquisitions to make for the Company. We don't -- obviously we are not in a position where we can report anything. We have nothing to disclose, but we continue in that review and we continue in that search to look for ways to add to our Company accretivley.

Final question is with respect to net sales. You've had a lot of success with the strategic yield fund, which is a good thing, but at some point in time sales for that particular product you have to think are going to wane, and some people might argue that that's a risk to your net sales stroy. Can you tell us how you think about that? Are you trying to encourage maybe more net sales going to other funds, or you just take whatever investor demand is dictating?

I think the reality is there's a little of both. Some advisors do their own analysis and they pretty much know what they want, and our ability to move them of off their position is probably limited to nil. In other cases, we present our very diversified and broad product line-up to -- through both our wholesale channel and our conferences, and as a result, I think we actually had a very diversified portfolio of top 10 funds, both by manager investment style and product offering. We've been able to -- we have done exceptionally well with our dynamic strategic yield portfolio and we continue to see strong support of that.

But we are also seeing really strong support of the value funds -- of the valued balanced fund, of the power balanced fund, and so we think we have a reasonably broad offering that is available. And if yield isn't the destination of choice, we have a significant number of funds that have performed exceptionally well. We've been talking a lot to our channel about the global offerings that we offer at Dynamic Funds because some of the performance of our global funds are top decile. And so we've had a lot of marketing with Noah Blackstein and Chuk Wong and David Fingold and Alex Lane to expose our clients, to let them know that we do have a broad offering.

Okay. So I know I said that was going to be my last question, but you led into another one, which is maybe global expansion, and maybe you can provide an update on what is taking place in the US.

We continue to be very excited about the developments in the US. I believe our current assets are in excess of CAD150 million of assets under management from pretty close to a standing start. We've had some really good traction on the resource side where, typically when US investors think of Canada, they think of metals and materials and resources and so our portfolio, our precious metals fund there is the number-one-ranked fund in the US for one year. So one year probably does not a track record make, but it has provided us with a reasonable amount of traction where we are getting some attention. So we continue to be excited. We think the typical US investor has been underserved by the offerings that have been available in the United States, and we come with a new Canadian approach that may get more adoption.

Great. Thanks a lot for your time.

Thank you.

Thank you. Our next question is from Scott Chan of Cannacord Genuity. Please go ahead.

Hi, David. Hi, John. Just had one question. Just on the institutional side, I guess in October, Orion won some -- I guess one large significant account and maybe a couple others. In terms of, I guess, growing that business, are you guys marketing your internal funds as well, too, or plan to, because you guys have such good long-term, especially tenure track records in the market?

Yes, we do have an institutional presence where some institutions have selected mandates for the team at Goodman & Company to run. Orion has been a really good investment for us as they continue to build their franchise across the country. In addition, we've managed to have, as we -- Goodman & Company is also on the shelf for institutional, so too is Orion on the shelf for retail. We've had a lot of success bringing Orion into the mutual fund line-up to gather assets there, where we launched a tactical bond fund that gained pretty good traction right out of the gate.

And, I guess just a follow-up, just for Goodman & Co., what mandates are you guys marketing or there's demand for one the institutional side right now?

It's a good question. The demand has been pretty broad-based. The small cap has been something that has been quite attractive to some institutional programs. Alex Lane has some really good numbers, and we think that's attractive. But obviously we have some pretty good high-profile-performing managers across the board, so I think that they would all be available.

Okay. That's great. Thanks a lot guys.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Goodman.

Thank you very much. That ends our call.

Thank you. The conference has now ended. Please disconnect your line. Thank you for your participation.