CI Financial Corp (CIXX) 2004 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the CI Fund's third-quarter results conference call for April 14, 2004. Your host for today's call will be William Holland, President and CEO. Mr. Holland, please go ahead, sir.

Thank you, Michelle. Good afternoon and thank you for joining us for our third quarter investor call. Before I get started I would ask that you observe our disclaimer, since we will be using some non-GAAP measurements as well as forward-looking statements.

By any standards, CI's third quarter was exceptional. It was very important because it was the first full quarter to include the three acquisitions we announced in August -- Synergy, Skylon and Assante.

Let me quickly review the financial highlights of the quarter. Net income was 87 million or 29 cents per share. EBITDA -- 145 million or 49 cents per share, up 36 percent. Free cash flow was 86.2 million or 29 cents per share, up 71 percent.

Operating margins increased by 10 full basis points to 115 basis points over the prior period a year earlier. Operating expenses, which are those paid by the mutual funds, have decreased by 19 percent over the last year to 27.6 basis points.

In terms of performance of CI assets, it was our best quarter in almost five years. With total fee generating assets increasing to $62 billion, an increase of almost 10 percent for the quarter.

CI funds were up 9.6 percent to 35.3 billion. Assante up $11.7 to $8 billion. Venture Link up 7.7 to $200 million. Skylon and closed-end (ph) products up 30.8 percent to 1.1 billion. The Institutional Assets grew by 14.3 percent during the quarter to $5 billion. As of April 12th, the fee generating assets of the Company are now up an additional 2 percent from the quarter end, to $63.3 billion.

In terms of sales in the third quarter, we had long-term net sales of almost $700 million -- consisting of $183 million for CI funds, 186 for Assante funds, Venture Link Labor sponsored were 16, and Skylon was 310 million.

Sales momentum continued into March with net sales of $218 million led by CI at 125 million. Giving us total sales for the RSP (ph) season, which we consider to be January, February and March, of $835 million -- which was led by CI funds at 350 million and Assante at 263 million.

Quickly looking at some of the operational highlights of quarter -- I think the highlights would include primarily the integration successes. We integrated 100 percent of Synergy into CI. Assets of synergy are now 29 percent higher than when we announced the acquisition in August. And it added $5 million to our EBITDA in the third quarter.

Skylon is also 100 percent integrated. Assets for Skylon are up 58 percent since the deal was announced, and it added $2 million to EBITDA in the third quarter.

The Assante deal is all also working out very well. The operation of Assante are being restructured, with an objective of greatly improving their technology, customer service, and their processing. Assets at Assante are up 18 percent since we announced the deal in August. And Assante added approximately $31 million to CI's EBITDA in the third quarter.

Mutual fund expenses continued to be reduced during the quarter to our lowest levels ever, demonstrating considerable to benefit to the unitholders of CI mutual funds, as well as the shareholders of CI Fund Management. I will now pass the call onto Steve MacPhail for a quick financial review of the third quarter. Steve?

Thanks, Bill. Starting with revenue -- for the quarter ended February 29, 2004, we earned 255 million in total revenue. For the first time giving CI annualized revenue of over $1 billion. This is up 70 percent from last year.

The largest contributor to revenue was management fees, which were up 56 percent to 206 million. Administration fees, which are predominantly fees earned on Assante's assets under administration, were 26.5 million, up from 1.2 million in the prior year. Redemption fees declined slightly to 11.5 million, and represent less than 5 percent of revenue. Other income grew to 11.2 million, reflecting growth in CI's institutional business and other income earned by Assante.

With respect to expenses, you can see that overall expenses rose 4 percent to 121.3 million. Looking at the major expense components, net SG&A expense rose from 5.5 million to 14.7 million. The increase is attributed to net SG&A expenses associated with Assante, as net SG&A specific to CI actually declined slightly year-over-year. Net SG&A includes the effect of a 7.1 million reversal of option expense, due to marking to market the potential expense on CI options. So, if you exclude the reversal, net SG&A expense totaled 21.8 million.

Investment adviser fees were 16.4 million, increasing 26 percent from the prior year -- which is about half of the increase in assets managed. Investment dealer fees were 18.8 million and represent the commission paid to Assante financial advisers on assets under administration.

Trailer fees rose 42 percent to 55.8 million, slightly less than the growth in assets.

Amortization of deferred sales commission was 7.5 million, down from 46 million in the prior year. The decrease reflects the change in CI's amortization policy from three years to seven years, and reduced levels of unamortized DSE.

Other expenses declined 39 percent from 13.2 million to 8.1 million as the prior year included an adjustment to the Assante investment.

The chart titled Fund Operating Expenses shows the expenses CI incurs in operating its funds. The costs of which are recovered from the funds. Though they don't impact CI's bottom line, we feel it's important to show what we have done for our unitholders. In the quarter ended February 29, 2004, average expenses to operate funds were 28.9 basis points. If we exclude the Assante funds, the average was 27.6 basis points, down 19 percent from the prior year. To put the 27.6 basis points in perspective, when we acquired the Synergy funds, their average operating expenses were about 65 basis points, more than double what CI is achieving.

CI's operating margin is based on the Asset Management aspect of our business. For the quarter ended February 29, 2004, CI's operating margin was 115 basis points -- up 10 percent from 105 basis points last year. The main contributor for the increase was the increase in management fees from the inclusion of the Assante assets and from an asset mix improvement due to market appreciation of our equity funds.

This page shows the Assante dealership on a stand-alone basis. These numbers are all detailed in the quarter of the MB&A (ph) and in the segmented results in the notes to the financial statements. Overall, the dealership showed net earnings of approximately 1 million for the quarter. Improving dealership earnings will ultimately come from increasing gross revenues and running the dealership more efficiently to reduce the level of SG&A expense.

Net income for the quarter was 87 million, up 301 percent from the prior year. This equates to 29 percent cents per share up from 9 cents per share last year. If we adjust for the reversal of the accrued option expense, which had the effect of increasing income, net income was 83 million or 28 cents per share, up over 200 percent from last year.

EBITDA for the quarter was 146 million, up 67 percent from the prior year or on a per share basis, 49 cents. Again, adjusting for the option expense reversal, EBITDA was 138.4 million or 47 cents a share, and an increase on a per share basis of 27 percent from the prior year.

Operating cash flow for the quarter was 126.3 million, includes a benefit of $20 million from synergy tax losses. The largest use of cash was commissions of 39 million, which are up from 24 million in the prior year due to higher sales. Free cash flow is 86 million, more than double the prior year level out of which CI paid 30 million in dividends, leaving a net amount of 56.6 million.

Thank you, and Bill will now provide a short summary.

Thank you, Steve. Just a final couple of thoughts. The fourth quarter has started very promising -- actually, managed assets are up over 8 percent from our average assets during the third quarter. Our operating costs continue to move down, approaching 25 basis points, and we think we can take them lower than that over time.

The enhancements that are being made to Assante dealership will considerably approve improve their competitive position of Canada's most productive financial planners. A free cash flow continues to increase allowing for a continuation of dividend increases and share repurchase program. A final point -- these acquisitions are clearly working out well, and have far exceeded our expectations. Positioning us to be in a better -- to look at future opportunities that might be available to us. I would like to thank you all for joining us for our third quarter call and we would now take questions from the analysts.

(Operator Instructions). John Reucassel.

Just a couple of questions on -- the operating margin -- the 115 basis points -- does that include the reversal in there too, or does that exclude that?

That excludes that -- we adjust for that.

Okay, that's better. And a question for you, Bill, you mentioned the buyback on the stock for free cash flow. But, given that Sunlife (ph) owns about 34 percent of the firm, are you worried that their percentage of ownership might go up too much without paying some sort of premium for the stock? Can you give me your views on that, and using the excess cash for buybacks?

We clearly have excess cash, and that is something we have to take into consideration when buying back the shares. Sunlife has a standstill until the -- July of next year. So, the only way they can increase their ownerships through our issuer bid. And when we realize that has to be taken into consideration. This year, we bought back about 1.7 million shares, which is far lower than we have repurchased in the past. So, I think I will leave it at that we are looking at it, and it is certainly something that we have to consider. But we don't really have a firm position on that right now.

Are you -- when the standstill comes off, are you considering some type of poison pill or something like that for -- subsequent to that deal expiring?

Well, we haven't considered a poison pill at this point, because I think the standstill effectively deals with those issues. I don't like poison pills for a number of reasons, including the most obvious -- it makes it look like you are trying to entrench management. But, I think that there is a lot of things for Sunlife and CI to negotiate over the next couple of years as a standstill gets closer to expiring. So, this is just kind of one of probably several issues we will look at.

Thank you very much.

Timothy Lazarus, Griffiths MacBurney and partners.

A question for Steve -- and it has to do with Assante's AUM -- not its distribution business. Just looking at that 7 or 8 billion, or whatever that number happened to be currently, of proprietary product, if you will, how can you -- can you compare what the margins on that business alone would be on a net basis point spread compared to what CI's was prior to bringing them together? I'm trying to figure out how accretive that book of business was.

Well, Tim, we don't disclose that separately in the financial statements. But, overall, the Assante business did contribute to a margin increase. I think we can conclude that the majority of the margin expansion we went through was attributed to Assante, if you factor out the fact that we saved another 2 basis points on investment adviser fees, so of the 10 basis point change, probably about 6 of it came from the expanded margins on the Assante business. I think you'll have to kind of reverse calculate it from there.

And can the same thing be said for Skylon and Synergy?

Yes. But, the Skylon assets are much smaller and the Skylon margins are set up slightly differently than mutual fund margins because we do not pay trailer fees on them. So, the net margin is very attractive on them. They don't fall in the same parameters as what a normal mutual fund would be with a management fee, say, of 2 percent and anywhere from a 50 to 100 basis point trailer fee

Two other questions, if you don't mind. One is just -- Steve, again -- the sensitivity to your cash option plan that you have -- can you give us what the sensitivity is to EBITDA for a dollar move above the sort of current high watermark -- for every dollar move in the stock price upwards?

At this point in time, probably in the vicinity of a gross amount of $9 million before tax. So, the EBITDA is before tax numbers so about $9 million.

What you do not know, Tim, and why the sensitivity you're trying to calculate is not always 100 percent, is you cannot predict of option CI has outstanding when people will exercise them. If you look (indiscernible) tables for the financial statements, you will see that quite a number of CI options mature within the next two years. So, you might want to try to model in that the stock price went up $2 what the effect would be. I don't think it is fair to assume that every option holder would be there for a $2 rise in the share price. I cannot predict that -- what people do with there options.

And just a last one for Bill. I guess the RSPCs (ph) season is safely behind us now, and arguably over the last couple RSP seasons this would be defined as one at least that was positive. Can you comment on what you think the market is going to look like in terms of demand for mutual funds and other managed products in this sort of spring and summer slow period, if you will? Do you expect to continue positive net sales?

I think that either side of 0 is my best guess at this point. Sales dropped off almost immediately after the middle of March. I look at April and I think that, in terms of long-term assets, we will probably as a Company be positive 10 or $20 million.

It has slowed down considerably. Canada is clearly not seeing the flows that the U.S. mutual fund market is. It is still what I consider to be a very challenging period.

In terms of the structured products, which Skylon participates, that also has slowed up considerably, after a huge first quarter of offerings out there. So I look at the spring, summer which is traditionally a slow period, as probably being a little bit of a letdown, after what was considered to be a pretty good RSP season.

Thanks very much. I will queue back up if I have anymore questions. Thanks.

Shant Nambian (ph).

A few questions on Assante. First one is -- looking at what you had for I guess the first 15 days at Q2 on dealer expenses SG&A, and looking what they came in at Q3, it looks like you improved the cost structure there quite a bit. Could you just talk to some of the steps you have taken to improve that?

One of the big things that took place initially is we changed the entire senior management team with Joe Canban (ph) coming in. And so there was significant reduction in what I will call corporate overhead at the time, Shant.

The second key area where we moved in right way to reduce expenses was utilizing our technology-base immediately with respect to Assante, and so that allowed us to change a lot of money that is being spent on certain projects and reduce it considerably. So that was a second big change in getting some of those expenses down.

A third-place where things have changed is Joe Canada (ph) has implemented, which you might have read about already, an overall restructuring of that whole business -- simplifying it with the net result that there are fewer people there today than there were at the beginning. And fewer monies being spent on non-, what I will call, strategic issues.

So, all those have added up to an improvement in some of the operating expenses. Though I would say it's still early in the game.

Okay. Were there any nonrecurring items in the quarter in terms of severance or anything like that?

There were bits and pieces of severances in there, but nothing that we would (indiscernible) as significant.

Okay. And just on the Asset Management business at Assante, looking at their SG&A, they are at a higher platform than you guys. You guys -- in total, it's about 11 basis points -- you were running at 8 before. Is it possible to assume that you could bring it back down to that 8 or even a little bit higher than that? Or is it just a function of the business mix?

I think you have to look at our first priority, Shant, is actually improving the service levels across-the-board on all aspects of the Assante business. And that does require a fair investment in technology and just operational changes in training that do not exist there today. So, it is premature to say that number is going to drop down dramatically. So, over a one to two-year period, I am convinced that we can deliver those things on a much more cost-effective manner than they would have been delivered in the past.

So, yes, it will come down. I am not going to say to what level it will ultimately come down, but it will be somewhere between where CI is and where they are today.

And just one last question. I guess maybe for Bill. You guys have had pretty good momentum following the acquisition of Skylon, in terms of your structure products. Is this an area you are going to want to continue on? And do you see that growing organically? Or do you think maybe acquisitions on that front?

I think it is possible we could look at acquisitions on that front. But our intention here is to grow it organically. I think it will slow down over the next little while. But it is likely the window will open up for structured products again, sometime during the year. And I think that we have had some good success early on, and we are going to take a look at products that are maybe a little different from what some of the offerings are out there today anyway.

Okay, thanks.

Jim MacReynolds (ph).

I guess three questions. The first one -- just following up on a couple earlier. I think you had previously mentioned about six to seven new structured issues over the course of, I guess, fiscal '04, but let's go on a twelve-month forward basis over the next twelve months. Six or seven sounds like it's somewhat aggressive for Skylon. Is that kind of a fair statement?

Well, I think that doing six in the first twelve months of our ownership of Skylon is still quite an achievable goal -- I do.

And, I guess flipping through to the Assante, you have obviously done very well what that since you acquired it. Do you expect kind of a net sales level to stay in the 50 to 60 or $70 million range on a monthly basis? Or certainly that is expected to tail off as well with the broader industry?

I think that's probably too high. I think it is likely we could average maybe 40 for the remainder of the year. And I would be very happy with that. Their sales have far exceeded our forecast of Assante sales. So, we are very pleased with it. And if we took 40 out for the rest of the year, we would consider it a pretty good year.

Okay. That's great. And then two, I guess, quick housekeeping items. First, on the 145 million in EBITDA, does that include Tabel (ph) asset depreciation, which I think, looking at the cash-flow statement, is about 2.8 million in the quarter?

If you want take out capital asset depreciation, you would have to subtract the 2 million out it.

Okay, no, that's fine. Lastly, I guess I had factored into my model some DSC amortization from Assante. And obviously, with seven point (ph) million this year or in the quarter -- I'm not sure how much of that is Assante if any, or where, alternatively that Assante amortization shows up?

It is a low number.

It is?

On the Assante side. But if you are really desperate to have the two -- that number broken down, just call Doug Jamison (ph).

Sure -- no, that's fine. Thank you.

Timothy Lazarus.

I wanted to talk about cash-flow with you guys. Clearly, this quarter, because of that $20 million, I guess, tax benefit, inflated the free cash flow to a level that is probably not sustainable. Is that safe to say?

Tim, you are absolutely correct -- but, also, the first quarter -- don't forget because of the higher sales you saw commissions go up significantly year-over-year. So, if you look if you move into the next quarter, the factors that will come into play are -- one, as Bill mentioned, our assets right now are up 8 percent from the average level. So, that has an inherent positive affect just on the business overall.

The sales slowing down -- you'll see a reduction in the amount of commissions being paid relative to the RST (ph) season. So that will happen. So those offset partly the effect of the -- in this case, of that tax benefit. So it will come down, but not by the full 20 million.

Have you got a sense of what your run rate free cash flow might be over the next twelve months?

I haven't done a 12 month forecast. But, I think in the next quarter we're fairly confident it will be over 100 million.

100 million in Q4?

In Q4.

Okay. That's it. Thanks for a much.

(Operator Instructions). Thank you, sir. There are no questions at this time.

Thank you very much for joining us for our third quarter conference call.

Thank you. This concludes today's conference call. Please disconnect your lines and have wonderful day.