CI Financial Corp (CIXX) 2004 Q4 法說會逐字稿

Please go ahead, sir.

Thank you very much, and welcome to our fourth-quarter investor conference call. I'd like to first draw your attention to the disclaimer because we will be making some forward-looking statements, as well as using non-GAAP measurements.

The fourth quarter was a pretty good ending to what was really an exceptional year at CI Fund Management. Our net income for the quarter was $75.4 million, or 26 cents a share. For comparison's sake, it's probably more useful to adjust it for option expense and marketable securities, which would be 28 cents, up 87 percent over the previous year.

EBITDA is probably a little better indicator of our performance on a year-over-year basis. We had fourth-quarter EBITDA of 45 cents per share reported. Again, if we normalize it by adjusting for options and marketable securities, the number is 49 cents a share, up 44 percent over the same quarter last year.

Other financial highlights would include free cash flow of $63.7 million, up 38 percent on a year-over-year basis. Our operating margins moved up to 116 basis points, which was an increase of 6 percent over last year. And very importantly, our fund operating expenses -- those are the expenses that are paid by the mutual fund unitholders -- declined by 20 percent on a year-over-year basis to 27.6 basis points during the fourth quarter.

Looking at our assets under management, they were about flat for the quarter at $44.4 billion, and just about the same as of June 30. If you look to the bottom right-hand corner, you see that the numbers -- our total assets have jumped up to just around $66 billion, and that reflects the closing of the IQON acquisition during the fourth quarter.

Net sales during the quarter were reasonably respectable -- $500 million, of which CI contributed $267 million; Assante, $162 million; VentureLink, which is our labor-sponsored funds (ph), $5 million; and Skylon, which is our structured products, $68 million, for a total during the quarter of $502 million.

Sales softened a bit in June, which is really not unusual -- it's a pretty seasonal effect -- to about $52 million. And the bulk of the sales, 39 million, came from Assante.

I'm now going to ask Steve MacPhail to put a little color around some of the financials for the quarter. Steve?

Thanks, Bill. Starting with the slide titled "Revenues," management fees were up 70 percent to 217.3 million, and include the effects of market appreciation, the acquisitions we made during the year, and new business like the Skylon closed-end products. Administrative fees rose to 225.5 (ph) million, as they now include fees earned by the Assante dealership, which comprises the majority of administrative fees. Redemption fees increased only slightly to 11.9 million, and other income items rose to 9.2 million, and was primarily income from BPI's institutional business of 5.1 million and 3.5 million of administrative income earned by Assante.

On the expense side, net SG&A fell from 45 million to 34.3 million. If we adjust for the option expense, we get a clearer picture, with net SG&A rising from 3.3 million to 23.1 million. The increase was primarily attributable to the Assante operations, which accounted for 15.1 million of net SG&A.

Investment adviser fees were 17.5 million, up about 38 percent due to increased assets under management, and were about 16 basis points of assets under management. Investment dealer fees, which are commissions or payouts to the Assante financial advisers, were 18.1 million. Trailer fees were 57.4 million, about 51 basis points of assets under management. Amortization of deferred sales charge was 11 million, compared to 26.3 million in the prior year. The decrease reflects CI's change in accounting estimate for the DSC commission amortizations from three to seven years. Other expenses were 7.5 million comprised primarily of interest expense and expenses related to CI's institutional business.

The chart I put up called "Earnings Analysis" is very important to look at, because it shows the growth in CI's profitability from the most recent quarter. In Q3 of fiscal '04, we reported 87 million in earnings, and in Q4 of fiscal '04, we reported 75.4 million. If we adjust the income to take out the effect of performance fees, which are once a year, redemption fees, amortization of DSC, and fund contracts and the option expense, we will get to what I call operating earnings, which is a non-GAAP earnings measure. However, I believe it's good for comparability purposes on a quarter over quarter. As you can see for the consecutive quarters, CI's operating income rose 4.7 percent, or 3.7 million. Again, that's from third quarter this year to the fourth quarter, where on a per-share basis, earnings went from 26.8 cents to 28 cents using this measure.

Equally important to CI is our success with our fund operating expenses, even though these are the costs borne by the unitholders of our funds. As you can see, fund operating expenses in basis points dropped 20 percent year-over-year to 27.6 basis points. If we exclude the Assante funds, where we have not yet realized the cost reductions from operating synergies, then the CI funds operated at 25.4 basis points, our lowest level ever.

Turning to the operating margin, you can see that our operating margin increased by 7 basis points to 116 basis points, aided primarily by improved management fees.

The Assante dealership segment posted a negligible amount of income during the quarter on gross revenues of 25.8 million. It's important to point out that CI continues to invest a lot of money in the dealership as part of our overall strategy to significantly enhance the dealership operation.

Lastly, operating cash flow was about 109 million during the quarter, out of which we paid 44 million in commissions, leaving free cash flow of almost 64 million. Out of this, we paid 37 million in dividends which represented about 58 percent of free cash flow and less surplus cash after dividends of about 27 million. I will now turn it back to Bill.

Thank you, Steve. We're just about at the halfway point of our latest quarter, and our assets now are just about exactly flat with the average for the fourth quarter. We continue to see a reduction in our fund operating expenses, which is very important, down to a run rate now of 25 basis points, which Steve pointed out was our lowest ever. And we think that that number can continually drop from here. Our Assante business continues to be very encouraging, easily exceeding our expectations, both in terms of sales and in terms of profitability.

And on a final note, and I think a fabulous way to wrap up what has been a very, very good year, we are once again raising our dividend by exactly 20 percent to 60 cents a share, which represents about 60 percent of our best guess for free cash flow in the coming year.

At this point, I would like to just conclude the formal part of the presentation, and we'd be glad to take some questions from analysts.

(Operator Instructions). Timothy Lazaris, Griffiths, McBurney & Partners.

Congratulations on your year -- obviously a very busy one. Steve, I've got a couple of questions for you. The first question has to do with the quarter-over-quarter net SG&A. I'm looking at the details that were sent to us, and you can notice that SG&A on a net basis was about 34 million this quarter versus 15 million last quarter. And I completely appreciate that the stock-based compensation flows through that line. But does that explain the entire variance difference, or is the Assante distribution business costing you more this quarter?

You're referring to this quarter or were they both -- on a quarter-over-quarter basis?

The May quarter over the February quarter -- so Q4 over Q3.

No. The difference really is made up, Tim -- is really just the option part of business. There is a slight increase in cost as we continue to spend money, but it's not significant. We would be happy to take you through the details on this after the call, if you want, just to lay that out for you clearly.

Okay. And, also in terms of the balance sheet, marketable securities seems to be going up. I think you spent -- I don't remember the number offhand, but somewhere between 40 and $50 million for the year and about 29 million in the quarter. Is that just seeding funds, or is there something more than that in that number?

Tim, this is Bill. It is -- we have made two investments during the quarter.

Okay. And just lastly, I guess, again for Steve -- in the segmented earnings, Steve, you show assets admin contributing about $5 million, I think it is, in the year -- or in the quarter. Is that Assante's distribution? I think last quarter, you disclosed that the Assante distribution business contributed about $1 million. I'm just trying to draw a comparison quarter over quarter.

Again, the segment information as opposed to the summary I produced -- the summary I produced probably gives a bit of a clearer picture of the dealership itself when you add in all the other -- because there are intercompany eliminations that you have to take into consideration. So, no, it did (ph) make 5 million for the quarter. It was basically marginally profitable, Tim.

The basis points were the same, however (ph). (inaudible)

John Reucassel, BMO Nesbitt Burns.

Just a few questions. What is the mix on the front- and back-end load in the quarter or the year? And what, Steve, should we be looking at going forward when we're trying to model this thing?

John, we --

One million (ph).

John, we stopped producing that number and laying it out only because -- our business mix has changed dramatically, so it's not as relevant a number anymore. The reason is if you combine in the business we do with Skylon, the business we did with VentureLink, the business we do with Assante, and then the institutional business, all I would be reporting on is the specific component of the business. And so if unless I gave you a lot of detail, it would not help. But I would say on balance, we tend to do more front-end load business than DSC business. We are seeing a greater amount of front-end or no-commission business feed dock (ph).

So roughly, Steve, would the mix be -- you know, is it 55-45, 60-40, or --?

It's generally pretty close to 50-50 now of new business. You have to take into account -- it's the trend that I think is probably more important here. A couple of years ago, we were at 90 to 95 percent. And it has come down. And clearly, the trend is now such that we expect to get more business front-end than on a deferred sales charge basis (multiple speakers) why we've increased our dividend so aggressively over the last couple of years, because we just don't have the same cash requirements.

So, I guess that leads to my next question -- does that kind of limit the -- any more upside on your operating margin, or is there still room there to go?

I think that the operating margin is -- you could see some improvements. I think that to be fair, though, we are probably not likely to see revenue figures as high as they are. I think that at the margin we are reducing the management fees of funds. So I think in order to keep our margins intact, we're going to have to continue to cut costs.

Also, I would just like to add a little bit to the previous question. There was a $1 million increase in SG&A on a quarter-over-quarter basis. A basis point was the same (ph), if you net out the option-related expense. So that gives you -- the increase was minimal.

And final question, Bill -- you know, I guess sort of the same question. If you look at this business over the next two or three years, it's amazing how much cash is going to pile up. Can you give us insight on how you're going to deal with that, or anything new from last quarter?

Well, we're paying a dividend out that represents 60 percent of the free cash. It will leave us probably 110 to $120 million. We have not bought back stock very aggressively over the last ten months or so, and we still have the same options available to us. And I don't know -- I don't see a lot of acquisition opportunities available to us today. We continue to look, and we explore deals, both on the asset management side as well as the distribution side. But I can't say that the environment is terribly appealing today. So, I don't see the free cash flow -- I can't see it, anyway, going towards acquisitions. So, it's still kind of a work in progress, but I think as you once described, it is a rich man's dilemma. I would much prefer to have that than the other side of it. But we are cognizant of the fact that the business requires less cash to operate on a continuing basis, and that our objective is to one way or the other get the money back to the shareholders.

Drew McReynolds, RBC Capital Markets.

Congratulations on the quarter. Two questions, and then I will circle back if I need to. I guess you mentioned last quarter Assante contributed about 31 million to EBITDA. Do you have a comparable figure for Q4?

Yes. It's slightly up from that -- about just shy of 32 million.

Okay, thank you. And in terms of upgrading the back office at Assante, if I look at the segmented disclosure and look at the asset administration segment, it looks like EBIT margins were around 11.4 percent going into fiscal '05. With the upgrades at Assante and all the work you're doing there, do you expect to see significant margin expansion in that the business going forward?

Drew, let me correctly on one thing. And I think this is what confused Tim a little. We have asset administration within CI already, and some of those revenues are included. So you should not assume that 100 percent of administrative fees were earned by the Assante business. That's why when I showed you the slide that the specified out the Assante dealership, it showed negligible. We do our own administrative business with labor-sponsored funds, etc., that are quite profitable for CI at the end of the day.

Notwithstanding that question, do we see the ability to make more money in the dealership? I will say we can make the dealership more efficient with what we're doing. And we will continue to invest in it. But I don't think you should look to that as been a business that necessarily is going to create huge margins. That's just not the way the business works. We would hope that by creating a very good operating platform that we can attract a lot of business, and that is how we will grow it -- as opposed to growing the margin, growing the absolute amount by having greater levels of assets in there is, I think, a more appropriate way to evaluate that.

Shaq Madian (ph).

I don't know if Joe is on the line, but just looking at Assante here and on the AUM, AUA penetration, it's roughly 42 percent of the total. And looking back to the end of '03, it pretty much hasn't changed since then. Should we be assuming that conversion is pretty much done here, or is this a stable mix, or what are you guys thinking about?

I actually am opposed to the word "conversion," because we have said from the beginning that there is no objective for these people to put money into Assante products. They actually truly like the product. They love the -- a lot of them were behind the whole creation of this product. And so I look at it as being kind of 40 to 50 percent of their business will likely be in some form of Assante product. I don't think it will be higher. So if it's 42 or 43 percent, I think that's a reasonable guess as to where it's likely to be.

I see the opportunity -- and I think it's a significant opportunity -- if we can put some business systems in place that create a much better business environment for these people, I think we can recruit other successful financial planners. And I think that will be helpful in also growing the asset under management part of the business.

So I would say that our biggest -- our real objective here is to -- we look at buying Assante now -- we've got approximately 900 to 1,000 exceptional financial planners. We have got a very successful asset management business. But there were no business systems behind it. I think that if we put a good back-office platform in and make business easier for these people to do business, we will be able to recruit more successful financial planners. And I think that that is the way to grow this business. I think that if we recruit more financial planners at the Assante, assets under management will also continue to improve.

I look at -- I think we've made great strides. Our expectations were never to have sales as good as they have been at Assante right off the bat. And I think that Joe Canavan and the group that he has working with him have done a truly phenomenal job of going out and making the financial planners who are partners understand that we're very serious about putting a business together that's going to make it very easy, and for them to do business. And that, of course, will make it easy to recruit other financial planners.

Since we're on the topic of financial planners, you mentioned when you bought Assante, it was roughly 900 to 1,000. You quoted, I think, 847 in the press release. Has that changed since last quarter?

From the closing of the deal, we have lost approximately 40 financial planners. Now, a lot of these financial planners just merged their book with another financial planners. And there was a grid (ph) change that came into effect on January 1, and it really encouraged the amalgamation of smaller books. And it actually is what we want. We would prefer to have fewer financial -- registered representatives, so to speak, and much larger books. And so a lot of it has really just been small books consolidating. And there is a market for it at Assante. They can sell their books.

Fair enough. Just a couple of nitpicky number questions for Steve. In the consolidated revenue that you guys provide, in other income, there is roughly 8.9 million. I know that 5.1 of that relates to BPI. Can you, if possible, provide me how the rest of that breaks out per division by management, administration, and other?

Just hold on; let me look at what we provided in the MD&A on that. Of the 8.9 million, 5.1 was from BGAM. And 3.5 was from administrative fees earned by Assante, and the rest is miscellaneous -- a negligible amount.

Right, but in that 3.5, is that situated -- that spread across, I presume, right?

It's a whole variety of things in Assante. I'm not going to get into that level of detail.

Okay. And just to make sure I'm right on some -- on slide 12, you show the SG&A of the dealer -- it's running of 7.6 million. And I think in the Texas, it was 7.9. Is that --?

Just bear with me -- I'll look at that. It's the same number. There were just some minor adjustments when they did the dealership.

John Reucassel, BMO Nesbitt Burns.

Just a -- Bill, maybe you could let us know just what -- I know it's early in July, but what July is looking like on the sales front. And then, Steve, I assume the financial impact of IQON is minimal. If you could confirm that, that would be great.

William Holland We're at the halfway point of July. I guess -- and July is historically a very slow month. We're seeing a slowdown of both sales and redemptions. At the kind of halfway point, it looks like it's a month that's slightly better than June. But, if I were to peg at a number, I would put it right around the same as June. So I would say around $50 million of net sales throughout the organization. (technical difficulty)

And Steve, the IQON?

The contribution of the IQON will not be significant to the business.

John (ph), can I just go back and verify one thing for you? The number of 7.9 million you quoted for me -- that was attributable to the assets administration segment. You have to read this closely -- segmented information and Assante dealership are two different things. So we have business expenses associated with our administration of the business. So it's the same answer. That's why there is a $300,000 difference.

Are there any more questions?

Timothy Lazaris, Griffiths, McBurney & Partners.

Okay. Just two follow-ups. Steve, in terms of modeling, in the past, you guys could have bought as many as 10 million plus shares. And this year, you bought less than 2 million shares. Should we be using the fully diluted number as it sort of stands right now and be pleasantly surprised if you did buy stock for purposes of shares outstanding next year? I guess that is the question for you.

And the question for Bill is -- you know, Bill, you probably have the best lineup you've ever had in terms of portfolio managers and products. And now you've got distribution, and you've got obviously a brand and scale. And I'm just wondering why is it not translating into sales?

I will answer the question first. Tim, just a reminder -- we don't have fully diluted numbers anymore because the way our option program is, it's a cash option program, so it's fully expensed into our income statement. So that 295.2 million shares is the number. So you don't dilute from there. That would be double counting. I just wanted to make that one (multiple speakers)

Understood.

-- on it.

Tim, I think that the question you asked is really the $64,000 question, because the industry just clearly isn't what it was. And you are right; this is as good as it gets for companies like ours. And you look at sales, and we really see that the competing products are taking up a bigger piece of the pie. It's not just proprietary mutual funds. It's rap (ph) account and high net worth products, ETFs. And clearly, as written in the paper this morning, investors are starting to buy more stocks directly.

And I think that part of this is cyclical. But I think that a great part of it is also secular (ph). I do believe that we are in a business that has plateaued. And I have said that for the last couple of years. And I think that a big part of success here is for us to use up any excess capacity we can find. And I think that sales will continue to be a modest part of our asset growth.

And if you look over the last five years, or if you want to go back 10 years, I think we've been second in terms of net sales over the last 10 years and we still had to do eight acquisitions. I think looking out here, I think that net sales are going to be very hard to come by in the industry. I don't think that it's something that people should depend on turning around. I think that it's going to help consolidate the business, even if the number of players are the same, I think that the number of participants that are doing any serious business will continue to be greatly reduced. And I think it's still a very challenging environment, which I would expect over time to improve a little bit. But I don't expect to ever see the kind of mutual fund flows that we saw between '96 and 2001.

Is there any place, Bill, in your product line that you see a hole in? I don't like to bring other people's names up. But there are some companies that are smaller than you that are doing better net sales numbers. Is there something they've got a product of that you don't have? That would be the only explanation I could think of.

Net sales become less meaningful as companies get bigger. Really, smaller companies just don't have redemptions. We're redeeming $400 million a month or so, so we've got to do $400 million of net sales to break even. And I don't think that the small companies -- even the few that are doing well, I believe that they generally have a hot product that is good for a period of time.

But when you actually look through it, they are not profitable, these businesses. And over time, when the product is no longer hot, they disappear. And I think that when I look down the lineup, do we have a hole in our lineup? No, I don't think so. We've got some great global funds, great American, and unbelievable Canadian lineups.

So I don't see much that we could do to improve the lineup. I just think that the reality of it is we're in a business that's continually becoming more challenging. And companies like ours have to sell huge amounts of business to offset the natural rate of redemption, because we've been successful for the last 15 years, and that some of the newer smaller companies just don't face the same redemption profile at this point. So, that's probably the best I could do at addressing that.

And just lastly, since I've got the phone here, I'm wondering -- you note in your subsequent events or at the end of your notes the discussion about the OSC's investigation, and they sort of come back a third time. Do you anticipate any resolution from this or any type of findings? And if so, industrywide, specifically, I guess, what do you think will the outcome be as a result of it?

The OSC has come in and spoken with us. This is probably about a month ago. And to the best of my understanding, they were moving on to have on-site visits with between 15 and 20 companies. I'm going to guess and say that they represent between 90 and 95 percent of the assets under management in Canada. I think that the meetings appeared to be very constructive. And I would expect that we will hear back from them sometime in the next year or so. I don't expect it to be that they will have come up with any conclusions in the next month or two.

Drew McReynolds, RBC Capital Markets.

Just a follow-up on fund flows. And it's always nice to listen to you talk on that, Bill. With what AIC and AGF are doing to their sales and marketing departments. Is this any concern for the likes of you guys in terms of them hiring Randy (ph), in AGF's case, or David White (ph), in AIC's case?

No.

Okay. I take that's a no, then. The other follow-up, I guess, on just your outlook on in terms of fund flows in the industry. Can you talk a little bit about the impact on pricing going out into the medium-term in terms of an acceleration in pricing pressure, whether that's a reality out there?

You know, that really is a great question, because it is. At the margin, our fees are going down, whether they're coming in institutional fund-to-fund type programs, or whether they're -- there's just -- we have merged funds. Every time we merge funds, we generally merge into the lower -- this is actually a cost of all of the deals that we've done. When we merge funds, we generally merge them in -- we always merge them into the lower management fee fund.

And when I look at the industry in general, the fees are coming down. I think the 2 percent plus expenses, and we're at 25 basis points, 2.25 all in, is really kind of going to be the point. We're still seeing some big companies that have funds with 2.5 percent management fees, plus ERs of 40, 50, 60 basis points. I believe that that game is over. And I believe that that is a huge advantage for very large companies that have a low cost of operating. And I think that there is pressure on the fees.

And I think that our fees will be slightly lower a year from today than they are. And they will be much lower five years and 10 years. I don't think we're going to come out and cut our fees on existing product. But I think we'll be bringing more new product in with lower fees. And we have said from the beginning that one of our objectives is to reduce the fees and make the product at Assante even more appealing to the financial planners there, who very much like the product today.

So, I look at it as -- yes, fees are an issue. Yes, fees are going down, in that these products that have 2.5 or 2.25 management fees, and don't have some incredible reason for it -- I think that they are going to face a very hostile environment.

(Operator Instructions). There are no further questions.

Well, then, we will conclude this investor call. And I would like to thank everybody for joining us here this afternoon. And good afternoon. Bye, now.

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