CI Financial Corp (CIXX) 2005 Q1 法說會逐字稿

Good afternoon. Welcome to the CI Fund's first quarter results conference call for October 7, 2004. Your host for today will be Bill Holland. Mr. Holland, please go ahead, sir.

Thank you very much Philip, and welcome everybody to our first-quarter investor call. I ask you to pay a little attention to the disclaimer on slide 2 because we will be making some forward-looking statements as well as using non-GAAP measurements. The quarter clearly demonstrated the benefit of last year's acquisitions. Net income increased by 87 percent to $81.3 million on a per-share basis that amounted to 28 cents, up 47 percent on a year-over-year basis. Probably a better relative measurement is EBITDA, which increased 79 percent to 145 million, but on a per-share basis it was 49 cents, up 40 percent over the previous year.

Other highlights our free cash flow was up by 69 percent to $73.7 million or 25 cents a share, again up 32 percent on a per-share basis year-over-year. Our operating margin was 115 basis points, up 6 percent from the same period last year. And maybe even more importantly we've reduced our fund operating expenses now to 26.3 percent, down 18 percent from last year.

Our assets under management were down 2 percent for the quarter to $48.3 billion, but are up about 1 percent in September. Our total fee earning assets are now $64.4 billion. On the sales front it was a relatively slow quarter. Sales came in at a very modest 105 million, all of which came from Assante. Our net sales for September were $72 million.

I will now move the conference call over to Steve MacPhail who will go over some of the operational and financial highlights for the quarter.

Thanks, Bill. Revenues for the quarter totaled 263.7 million; the largest component is management fees from assets under administration, which totaled 214.5 million, up 58 percent from the prior year. The increase was attributable to the additional assets from the Assante synergy and Skylon acquisitions last fall, and a combination of positive net sales and market appreciation over the year.

Administration fees totaled 28.8 million, and predominately fees from the dealer business. It is important to note that in the income statement fees earned on the Assante proprietary funds and on CI funds are eliminated on consolidation, so we've detailed the nonconsolidated or segmented information in the quarterly. On a segmented basis, administrative fees totaled 52.5 million.

Redemption fees rose 16 percent year-over-year to 11.3 million, again due to the additional assets from the Assante and synergy acquisitions. Redemption fees represent less than 5 percent of total revenues.

Other income was 9.1 million for the quarter, up from 5.4 million in the prior year. The majority of other income relates to revenue from CI's U.S. subsidiary and non-administrative fee income revenue at Assante.

On the expense side overall expenses were up 72 percent. This compared to the 73 percent increase in overall revenues. Net SG&A expenses rose from 13.3 million to 20.1 million due to the additional costs associated with the Assante IQON business. If we adjust for the option expense accrual you get a clearer picture of the change in net SG&A., which rose from 4.2 million to 20.9.

However, of the 20.1 million reported, 11.1 million was attributed to the asset management business and 9 million attributed to the dealership segment, which I'll talk about further later on. Investment adviser fees, which capture all of CI's costs related to third party sub advisers and internal money management like Jerry Coleman (ph) or Eric Bushel (ph) were 16.9 million for the quarter, up in absolute terms due to the significant increase in assets but down slightly in basis points from 16 to 15 basis points.

Investment dealer fees, which are commissions paid to our financial advisers at Assante and IQON were 20.3 million. On a segmented basis these commissions were 39.3 million, again I will discuss those in more detail later on. Trailer fees were 57.9 million, up consistent with the asset increase. Amortization of DFC rose from 6.7 million to 12.8 million as a result of the Assante synergy assets and higher gross sales.

The earnings analysis chart is useful for getting a better comparison of operating earnings even though it is a non-GAAP measure. Our reported earnings per share were 27.5 cents for the quarter, up 49 percent from 18.5 cents last year. However, once we adjust to eliminate the effects of redemption fees, amortization of DFC and fund contracts, the costs associated with the termination of the Web contract and the option expense, you can see that underlying earnings rose 37 percent from 20.3 cents per share to 27.9 cents per share.

Fund operating expenses continued their downward trend. Last year average expenses were 32 basis points. This year is 26.3 basis points, a decline of 18 percent. We expect us to continue to decline as we complete the integration of the Assante asset management back office into CI. To put the saving into context, each basis point saving is worth 4.4 million per annum to our unitholders so the decline from 32 to 26.3 basis points represents 25.1 million per year in savings to our unitholders, a material benefit that I would say is somewhat overlooked today.

While I am on the subject of operating expenses I should emphasize that these are CI expenses. Added to our operating expenses is GST, which cost unitholders over $60 million per annum, representing over a 60 percent increase in our operating expenses. We should point out that we've opposed this unfair tax on people's savings in the past but intend to increase our efforts and unitholders' awareness of this issue going forward in our quest to reduce operating expenses to the funds.

CI's operating margin on our asset management business was 115 basis points, up from 109 basis points last year. This was represented by higher management fees, offset by partly by higher SG&A expenses related to the Assante business and improvement in investor adviser expense and a slight decline in trailer fees.

The dealership segment slide is to present the dealership on a stand-alone basis. As mentioned earlier, total revenues were 53.8 million, less commissions of 39.3 million and net SG&A attributed to the business of 9.4 million, leaving earnings on the asset administration segment at 5.1 million. Out of which we net administrative revenue not related to the dealership of 1.2 million for a net dealership earnings of Assante and IQON of $3.9 million.

From a margin perspective this equates to the assets under administration at Assante and IQON, generating 92 basis points, less 69 basis points in commission and 16 basis points in the dealership SG&A as discussed earlier for net dealership margin before tax of 7 basis points or 4.5 basis points after tax. It is fair to say that we will continue to focus on the dealership net SG&A of 16 basis points as a means to improve this business.

Operating cash flow for the quarter was 104.5 million, up 61 percent from the prior year. Out of that we paid commissions of 29.5 million and minority interests of 1.3 million leaving free cash flow of 73.7 million net after the payment of the dividend of 36.9 million, CI generated 36.8 million of surplus cash. I will now turn it back to Bill.

Steve, I get the idea you don't like the GST. As we near the halfway point of Q2 our assets are just a little higher than the average for last quarter. Our sales are likely to be just a touch better this quarter, but we are clearly still in a very challenging environment. As Steve pointed out we are making a lot of progress with unitholder costs now at the lowest level ever by a considerable margin.

We continue to be very impressed with how things are going at Assante with sales very strong, costs being cut and service being improved dramatically. And finally our dividend now at 15 cents per quarter, just under a 4 percent yield, represents only 50 percent of our expected cash flow so we continue to reduce our net debt.

I will be glad now to take some questions from analysts if there is any.

(OPERATOR INSTRUCTIONS) Mario Mendonca.

Quick question about you made reference on a few occasions now the unitholders expenses and how you have aggressively managed those down. How does that play out in terms of improved sales going forward? Have you observed a connection there before?

I can't say as we've observed a connection between lower MERs and sales or lower ERs, but clearly it is a demonstration of efficiency and management costs are continuing to be more of an issue than they've been in the past. So it is very important as a way to keep costs going down to manage those costs. It sounds like only a couple of basis points, but it is really a very good measure of efficiency as well as our obligation to keep costs as low as possible.

And it couldn't do any harm in terms of sales. That's for sure.

Clearly not.

More touchy question and I will understand if it is something you can't discuss right here right now relates to the investigation, the OC investigation, more of a side question. Are there -- is there any class of asset or groupings of assets that you would say would be vulnerable to removal in the event that the -- let's say once the investigation's findings are released?

I am not sure what you mean by removals.

People actually -- I am not talking retail, essentially I am referring more to institutions, institutions pulling funds out of CI.

I don't think we have a lot of concerns about that, I mean the point that we are at right now, and we’re having a very constructive dialogue with the OSC. And we don't know exactly where it is going to lead although I think we will have something to report in the next 30 days or so. But our initial take on this is that it is not been one that has hurt our business. And that we would not expect to see a loss of business as a result of some type of payment because of the concerns that the OSC has.

Thanks very much.

John Aiken.

Two quick questions. First off the 1.2 million termination deal with sub-advisory deal with Web Capital, I'm assuming that (indiscernible) you don't expect any further payments going forward.

That's correct.

Okay, so this could be essentially characterized as a onetime item?

It could be.

Okay. Second of all, you talk about the reduction of expenses that you have for unitholders, as well as trying to reduce the dealership SG&A. Do you have any initiatives under way to reduce the SG&A on your, the mutual fund operations?

The mutual fund operations of CI have quite a low SG&A. And I don't think that we have any aspirations of getting that SG&A lower. I think the SG&A at Assante, though, could come down over the next year or two.

You talk about Assante, the entire organization, not the dealership, not the mutual fund?

We talked about the whole organization.

That's great. Thank you very much.

Brad Smith.

Thanks very much. Bill, I was just curious I believe there was a change as well during the month with respect to the Assante, one of the Assante fund of funds.

Correct.

And I missed the first part of the call. I take it that you had discussed the termination payment relating to Web. Was there any termination payment relating to the change in Assante's fund to fund mandates, and how would you -- did you account for those sales or for that change? Because I believe that was you replacing AGF, if I remember correctly.

There was no payment involved. There was a total rebalancing of the Artisan program, and the assets went to several companies. There were several companies added that weren't there and several taken out. So some went to CI but some also went to Fidelity and Mackenzie.

Fidelity and Mackenzie, can you quantify all the components? Because I guess you reported some pretty strong net sales for September on a preliminary basis, 72 million.

Right.

Can you give us a sense for how much of that had to do with that rebalancing effect?

I would say pretty much all that.

Okay, great.

I don't have the exact number at my fingertips, but it was, the month was pretty flat.

Okay, terrific. Thank you.

(OPERATOR INSTRUCTIONS) Brad Smith.

Since there's no questions, Bill, I wanted to ask you, you made the comment at the beginning here the very challenging environment that we are in. I was wondering do you think that, do you get a sense that if that continues that there's going to be more opportunity to consolidate the space up here? And I guess that would help you with your expense reduction objectives as well.

Well, I think there's clearly going to be more consolidation. It is just very hard to identify what it might look like. I think it will almost always be surprising from here on in. I don't see a lot that is terribly interesting for us right now. But I still see a business that has an industry that has far too much capacity and that for the most part companies are worth less today than they were seven years ago even, at the peak of the mutual fund business. So I think that business will continue to be challenging.

I think net sales will continue to be very difficult to come by. I think that a lot of firms will not make it through in their present state. And I think it does offer opportunities. But as businesses like ours mature, economies of scale become so vitally important. And even after all the acquisitions we've done we still have excess capacity. We consider ourselves to be efficient but we could put a lot more assets under management and not move out costs much at all.

Right. And also I have seen a lot of merging of funds in the last couple of years. Could you give me some sense for how that economics works in terms of, I guess one of the question that I would have is if there is an economic benefit why hasn't there been more merging of funds, and what are the economic benefits that flow out of those mergers?

For the most part there is not an economic benefit. We actually have to pay for the mailing and all of the costs of a fund merger. And the fund mergers that have taken place over the last couple years are really the results of all the consolidation. We, over the last five years, we've acquired seven companies, I think. And what you end up with is all of the funds that they had and so much overlap, we have reduced the management fees of our funds probably a dozen times in the last year.

When we do a merger of two funds we merge into the lower MER fund. So for the most part the economics of mergers are very bad. But you do them because there is no use having so many duplicate offerings. And we probably have gotten through most of the fund mergers that we need to do. But I would say in almost half of them they have resulted in a lower M as well as the ER, we've actually taken a management fee cut as well as reduced the expense ratio because we are putting into a bigger fund and there is some scale to that.

Are you saying that the future savings, for example, from the accounting side and things like that is an offsetting, and you have a net loss of margin on these mergers? Is that what you're suggesting?

Pretty much.

Great. Not great, but anyway, that's good to understand. Thanks very much.

Mario Mendonca.

I found your discussion with Brad sort of, it was interesting to me. The whole notion that merging two funds may not be advantageous, does that not impact your view on acquisitions, period?

No. Because if you are merging two funds, let's say we merged, we recently merged two funds that Kim Shannon was running. It's just easier to market one fund. It doesn't -- we are paying Kim Shannon the same amount to run the two funds that she is paid to run one fund. So there are cases where it does but for the most part you're improving your marketing. You're improving the packaging, so to speak of your offering. If we just left all of the funds that we had purchased over the last five years, we would have a group of product that there is no way we could reasonably market.

But if you are looking at a deal and the MERs happen to be materially higher than CI's, doesn't that necessarily -- don't you have to reconsider?

In fact we can't do them. There are certain cases where if you look at -- let's say that we wanted to buy a fund company that picks a $5 billion fund company and if their average -- they have let's say a completely duplicate line into ours, if their average management fee is 2 and 1/4 and ours is 2, and we know we can't really market their product on top of our product, we already have a very, very full range of products, then we would look at that and say okay, we know we are going to roll them into our funds.

And so we would look at that and let's say that that would cost us on a $5 billion fund, let's say that that would cost us -- let's just pick a number of $10 million that we would have to reduce the fees by. Then we would look at it and say what are the synergies? And if the synergies that we could get on the money management administration, sales and marketing all that, came to $10 million, all we've done is net the two off and we couldn't pay a multiple larger than ours. We would have to pay a multiple something less than ours to have it accretive. So I think that for the most part it makes it almost impossible.

But then that also suggests that in the deals you have done, the seven you have done up till now that wasn't an issue.

In some cases it was, but we factored into it. And some of the deals we've done, we had to look at it and there has been the realization that some of the fund mergers that would be done would require the management fee to go down by 25 basis points or something like that. And we have done that. If you look at over the last couple of years and you look at our fund mergers, you will see how many times we have lowered the management fee as we've done it.

The logic being that the cost savings are sufficient to justify that?

Right, but going into the deal when we say a deal is accretive in year one, and that we way put a general forecast out on how we think these assets will integrate with CI, we take into account what the management fee we expect to get from them is once we merge them, because generally we do the mergers pretty quickly. Does that make sense to you?

It does now. Thank you.

(OPERATOR INSTRUCTIONS) Sir, there are no further questions.

If there is no further questions, I would like to thank everybody for joining us on our first quarter investor call. And I look forward to talking to you next quarter. Thank you very much. By now.