CI Financial Corp (CIXX) 2005 Q2 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon and welcome to the CI Fund Management, Inc. second quarter results conference call for January 11, 2005. Your host for today will be Bill Holland and Stephen MacPhail. Mr. Holland, please go ahead.

Welcome to our second quarter conference call. I would like to ask you to please observe the disclaimer as we will, of course, be making some forward-looking statements as well as using some non-GAAP measurements.

You know, for the most part this was a pretty good quarter. We saw sales improve a bit. The markets were a little better. Unfortunately most of the year-over-year comparisons are pretty meaningless because of some one time charges. But I would like to just quickly run through them. Net income was 41.5 million, 14 cents a share. EBITDA, 87 million, 29 cents a share. Free cash flow was $42.4 million, or 14 cents a share. If we adjust that for the unitholder compensation that we paid during the quarter of approximately $52 million, that free cash flow would be $76.3 million, or 21 6 -- or 26 cents per share. Our operating margins increased to 114 basis points, up 6 percent on a year-over-year basis. Very importantly, our fund operating expenses, those are the funds that the unitholders of our mutual funds pay, was down by 23 percent to 24 basis points during the quarter.

CI's assets in the second quarter were up considerably. Our managed retail assets were up by 4.4 percent to $45.6 billion. In December they were up a further 3.3 percent to $47 billion. Our total fee earning assets were $66.4 billion at the end of November, up 3.8 percent on a quarter over quarter basis. And at the end of December they were $67.8 billion.

The sales front showed some improvement during the quarter. For the quarter CI had total net sales of $298 million, pretty evenly spread between CI, Assante and Skylon. Sales were, again, okay in December with about $81 million. And that was broken down by $66 million in CI Funds and approximately 15 in Assante.

If we look at the year in total it was a pretty substantial rebound from the previous year. Our total sales for the year were $1,416,000,000, and that was broken down pretty evenly between our three components, about $490 million for CI Funds in net sales. Assante was 538, and Skylon was 388.

I should say that the year was encouraging from one aspect for sure is that our growth sales increased considerably. And I think that is a very important point because as many of the analysts have pointed out a lot of our assets are aging because of the strong sales cycle that we had in the late '90s and early 2000's. And to understand at the cycles you realize we have replaced all of the assets that we lost over the last couple of years. So our average age of our assets is not increasing in a meaningful way.

I'm going to now turn the meeting over to Steve MacPhail. And what he will do is provide some further detail on the financial results and also update you on some of the operational highlights of CI for the quarter and a little bit on a year to date basis.

Thanks, Bill. Starting with the slide Revenue, total revenue rose 49 percent for the quarter from 173 million to 259 million. The largest component of revenue was management fees which rose 41 percent from 152 million to 213 million. The increase reflected increased assets from sales, market appreciations, and the acquisitions completed in 2003. Administrative fee income rose 429 percent to 25.9 million. And represents income on assets under administration at Assante, IQON and CI. Redemption fees were up slightly from 10.2 million to 11.9 million. Other income, which is primarily income from CI's BPI subsidiary and non-administrative income at Assante was 8 million.

On the expense side, net SG&A expenses rose from 26 million in 2003 to 76 million for the quarter ended November 30, 2004. The largest contributor to the increase was an accrual for 53 million taken in conjunction with unitholder compensation. Excluding this, net SG&A was 23 million. The increase from the prior year is from expenses from the Assante, Skylon and IQON businesses.

Portfolio management expenses were 15.4 million, up only 18 percent from the prior year compared to the 36 percent growth in average assets under management. Investment dealer fees, which are primarily commissions or pay outs to financial advisors at Assante and IQON, were 18.5 million. Trailer fees were 62.2 million, up from 45.3 million in the prior year and consistent with the growth in assets. Amortization of DSE and fund contracts was 13.7 million. And other expenses were 6.6 million, which are primarily expenses at our BPI subsidiary. Overall expenses totaled 191 million for the quarter.

Turning to the chart, Earning Analysis, I had made a quarter over quarter analysis of what I define as operating earnings. Please note that this is clearly a non-GAAP measure, but I think it makes things a little clearer. Reported net income for the quarter was 41.5 million, up 173 percent from the prior year. On a per-share basis income was 14 cents per share, up 133 percent from the prior year.

If we adjust for redemption fees, DSE, onetime expenses auctioned and taxed, you can see that our underlying earnings rose 51 percent from 53.3 million to 80.3 million, or from 21.6 cents per share to 27.2 cents per share.

The next chart addresses fund operating expenses. Fund operating expenses do not affect the earnings of CI, but do directly benefit our unitholders. As you can see, we have been able to drop these expenses by 22 percent to 24 basis points. Our current run rate for the CI, Assante funds is 21 basis points, 10 basis points below a year ago. This reduction has been directly reflected in lowered MERs, which we lowered in late September, and saved our unitholders about $45 million per annum had we not been able to bring those expenses down.

Turning back to CI's results, our operating margin was 114 basis points for the quarter, up from 108 basis points in the prior year. Improved management fees and lower effective portfolio management expenses were the reasons for the increase. Net SG&A expense was in line with expectations, as were trailer fees.

The dealership segment had total revenues of 52 million against total expenses of 46.5 million for the quarter. Expenses rose slightly reflecting CI's current emphasis on the Assante dealership back office and operations, though it should not be interpreted as a change to our longer-term expectations of reduced expenses. As a result, Asset Administration earnings were down slightly for the quarter. This business has a seasonal effect with the first calendar quarter typically being the busiest, so this business it is best to evaluate over a 12-month period. For the quarter net dealership earnings were 1.6 million. The dealership margin for the quarter as a percentage of assets under administration was 3 basis points.

Lastly, operating cash flow for the quarter was 72.6 million after taking into account the accrual for unitholder compensation. Free cash flow was 42.4 million, approximately equal to the dividend paid by CI. Had we adjust cash flow for the unitholder compensation, free cash flow would have exceeded by a considerable margin the dividend payment. With that, I will turn it back to Bill.

Thank you very much, Steve. I must say that I am much more encouraged about the business conditions in general than I have been in the last couple of years. I think the sales environment continues to improve considerably. I expect that this RSP season and will be considerably better than the last few.

The performance of our core funds, especially the ones that are popular with the branch planners and brokers today, are exceptional. If you look at our 5 Canadian money management firms that we use, Dave Picton and Jerry Coleman, Kim Shannon, Danny Bobus (ph) all were top quartile last year. Eric Bushell was second quartile. We are one of the few firms, maybe the only firm, that is getting net sales in their Canadian equity product.

All of our U.S. funds, with the exception of Bill Miller's, was top quartile last year. And Bill Miller for the fourteenth year in a row in his value trust beat the S&P. Truly a remarkable accomplishment.

If you look at the assets, our managed assets today, they are currently up about 5 percent from the average that we had during our second quarter. I can't stress the importance enough. I think it is a real competitive advantage to have our fund operating the expenses continue to drop, and they are dropping at a very substantial pace.

I'm happy to report that later this week our first monthly dividend of 5 cents per share will be paid. We believe that our cash flow profile still positions us and gives us ample room to increase the dividend and/or continue to buy back our shares. With that as a brief business wrap up, I will be glad to take calls from the analysts.

(OPERATOR INSTRUCTIONS). Doug Young with TD Newcrest.

Just in terms of your lowering of unit costs for your funds to 21 basis points, I was just hoping that you could go through just some of the key drivers for that?

The back office costs are predominantly personnel and technology costs, telecommunications, the things that you associate with back office costs. There really is an opportunity for large companies to take advantage of their size and become increasingly more efficient. And at some point, and I think I mentioned in the last conference call, we expect that there will be some pressure on fees over time, that for the most part fees management expense ratios went up for the last decade as it was constantly predicted that they would be going the other way. Our feeling is now that fees do matter. And that the difference between a Company like CI who we believe we will be able to break the kind of 20 basis point ER component of the MER, and companies that -- and some of the smaller companies that are 50, 60 and 70 basis points I think will be seen as a considerable competitive advantage.

And we purchased a lot of companies here, and we have been able to look at the costs that they had on a back office basis, ER component, and we really believe that as companies get to be bigger, if they don't take advantage of that competitive advantage they are being foolish.

And I think that more and more as people start focusing on costs the people will look at the ER component and say if one company is doing it at 20, why is another company doing it at 40, 50 or 60? And smaller companies I think will have to start eating the costs because they won't be able to continue to have the ER component at very high levels, and that will make it even more difficult for them to compete.

Are you merging any systems from the different companies that you have purchased?

We don't generally merge systems, but we have integrated all of the businesses on the asset management that we've acquired. There is none that has not been integrated yet. And on the dealership, which is really the most important operational issue we have today, we are in the process of consolidating the 6 or 7 systems that Assante used. Hopefully get it down to 1 or 2 and then select 1 strong dealership back office system that we will use from here on end.

We again think in the dealership that being the largest dealer or second-largest dealer and having the highest assets per advisor is a strong competitive advantage, and should allow us to run the dealership at lower costs, but also turn the dealership into a competitive advantage in recruiting financial planners because it will be an easier place for them to do business.

John Reucassel of BMO.

Just a question for Steve. Steve, I noticed the dealership, I guess at least I'm just struggling with the dealership here. The earnings were 5 million -- sorry -- 5 million in Q1 and they are 2.5 million this quarter. You alluded to the seasonality. I guess I'm just -- and is the seasonality accentuated here by these systems integrations that are going on? Maybe you can just help us out in understanding what you would expect to be -- how would we triangle about modeling this and looking at it?

What I would do is, John, when you're trying to go about modeling it is what we mentioned you want to look at this over a 12-month period. So go back to all the reporting we've done on the segments results and start to look a bit more what you think you normalized level of expense would be. So if we're putting a lot of time and attention right now on that dealership expenses, you can assume that on a short-term basis we're spending more time. We just did a major conversion in the middle of the last quarter. So you can anticipate the number of people and costs are involved in that. So I would suggest to you that these levels that you're seeing today are kind of the high watermarks of to where they would be.

Okay. So are we towards the end of this process, Steve, or do we still have a little bit more?

No, we're in the middle of the process. I would say -- I won't be satisfied with the dealer back office until it clearly is superior to everything else that is out there.

A couple of questions for Bill. First, Bill, you know there were this talk about income trusting and the income trust option. Is that still a viable option out there? If so, what are you waiting for. If not, what are your performed alternatives to that?

You know, I personally believe that it is a more efficient structure for a business such as CI's. That would be my personal opinion. But I can speak on behalf of all of CI when I say say we're not going to even look at this until finance is crystal clear on what their position regarding business trusts. And I think that we've done enough work to have a very good understanding of it, but we're not going to put any more thought into it even until such time that the Minister of Finance sets out their position on business trusts.

So then I guess that brings up the issue of the free cash flow, and if Sun Life comes up, the standstill. Can you talk to us about lots of free cash flow. What are your priorities? You mentioned divis (ph) and share buy backs. You're worried about Sun Life pro forma ownership or are you going to put in some sort of poison pill? What is the strategy there?

I think that we have to deal with this from a business perspective first. This is the best business relationship we have entered into. And they have been fabulous partners. And for the most part it works so well because we both look at it from a business perspective and understand the benefits of working closely together in some aspects of business.

I think that the -- when the standstill expires I don't think -- I don't see it as terribly meaningful time. I think that we would not obviously be comfortable with Sun Life buying a bunch of shares in the market. But I would not be comfortable putting in a poison pill, because I think that that sends a message that is just not accurate, that somehow we don't agree on things. We agreed pretty much on everything.

That being said, I don't think -- I think I'm relatively indifferent. And I think speaking with the Board recently and management here, between them putting 34 percent and let's say 37 percent, I don't think that I would have a problem with that. And I don't think that CI should have a problem. Especially if it is in connection with somehow strengthening the business opportunities that we get from Sun Life.

And so I would think that over the next year or two that the -- let's say we maxed our our issuer bid over the next two years. They would get up to approximately 37 percent. And I would think that that is -- that might be seen as a reasonable use of our cash.

And secondly, you know I think that we've decided that we very firmly believe that this is not a cash intensive business anymore that that we want to get the money back to the owners of the Company, hopefully in the most efficient way possible. But also there is a big component of our shareholders that are quite keen on the dividend. I would expect that we continue to raise the dividend. We're going to look at it on an annual basis. And I would expect that we will buy some shares back in the foreseeable future.

Thank you.

Did I answer the question, all of it for the you?

You did. Thank you, Bill.

John Aiken.

Just a quick softball question, I guess, since most of my questions have been asked and answered. In regards to the accrual that was taken for the reimbursement of the unitholders, the amount was about 53 million versus the 49 settlement with the OSC. I'm assuming that the incremental is just expenses related to trying to find and assess the amount to unitholders?

Right. It's our best guess, what it would cost. I don't think we could be terribly wrong. And we've started the process of going down the road of doing that. And you know we believe that we could have this completed in a few months. We're not sure that all of our constituents would be ready to receive it that soon, because there is a lot of fund to fund business. And so I think we have a reasonable sense of the cost. We have a reasonable sense of the timing, and we're pretty comfortable with those estimates.

Just to paraphase that at this point you don't foresee any additional charges coming down the pipeline of everything works out as you expect?

That's correct.

Drew McReynolds.

4 questions, 2 of them quick modeling questions. Just your effective tax rate of 38 percent, is that something we could use in our models going forward?

No, it's Steve. I would move closer to 37 percent.

Okay. Thank you. And just on a run rate basis, what percentage of your gross sales are on a back end basis approximately?

50 percent.

50 percent?

Yes, that's gross sales that exclude our institutional fund to fund business, and excludes money market. If you just take our gross sales like our full gross number it is about 34 percent.

That's great. That's helpful. And just 2 other questions here. First in terms of the structured products or outlook for the structure product, obviously 2000 -- calendar 2004 was quite successful with about 400 million in sales. Do you get a sense of the appetite heading into '05 and kind of what we should be expecting on the sales front?

Yes. I think that it is going to be tough for us to figure out -- to estimate the sales for this. We lost a lot of structure product in December. These products have an annual redemption future. The redemption rate was shockingly high in December. We have a product out now. In my estimation it's the most popular product that we've had in a long time. We've gotten levels of interest that are really quite remarkable. So we expect it to sell very, very well.

But it is hard to look much beyond that because the business is starting to get pretty cluttered. There is 20 structured products out this month give or take. And they are starting to look remarkably similar. I don't know what the -- to look after the first quarter or so. I think it is pretty tough to forecast. We're looking at various products -- things like hedge funds in various forms of link notes that we think will be pretty effective as well. We have a link note out there right now that is being sold -- even our friends at Clarica are offering the note to their client. It is a first time that they've gotten behind a link note. And they're doing a ton of business in it. So I expect that component of it to be very strong in the next couple of months.

Okay. That's helpful. And then just my final question here. When you indicated that you lowered your MERs back in September. And obviously it -- you have been doing that for quite some time now. When you lower your MERs what do you see in terms of the response in the gross sales effectively?

And then how would you balance price or MERs versus performance of the fund in terms of investor appetite or adviser appetite for selling those funds?

When we announced that our MERs -- a lot of it is the expense ratio is lowering -- it is only reported officially at year-end when you file your annual information. And I don't -- I see very little, because what I see is being an issue is that if there is funds out there that are charging management fees for an ER 225 or 250, I see a lot of pressure on those. If you have expense ratios 30, 35 or 40 before GST, I see a lot of pressure on those. If you're running at 2 percent plus 20, 25 or 30, i see very little impact on a 5 basis point move one way or the other.

And because we have done so many of funds and consolidated so many businesses we have a very good sense of how people react to this stuff. In general I will tell you that every time we merge a fund we are merging of -- we have to merge into the lower management fee fund. So we probably over the last two years lowered the management fee, not even the ER portion, you know 12, 15 times.

And generally our business model is for equity funds is 2 percent plus 20 basis points worth of ER. And so if we are at 220 ER, MER all in for GST, and our competitors are running at 270 or 280, whether it is because we have 2.25 management fee, or they are charging 40 or 50 basis points in ER, or accommodation or both of them, I do believe that competitively that is facing an uphill fight right now for sure.

That's helpful. Thank you very much.

(OPERATOR INSTRUCTIONS). Mr. Holland, there are no further questions at this time, sir.

Okay. Well, I would like to thank everybody for joining us for our second quarter investor call. As I have said, we're looking forward to a good RSP season, and I'm looking forward to addressing you at the end of our third quarter and updating you on our results.

Thanks again. Bye now.

This concludes today's conference call. Please disconnect your lines, and thank you for your participation.