CI Financial Corp (CIXX) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the C. I. Financial second quarter conference call. [OPERATOR INSTRUCTIONS]

I would like to remind everyone that this conference call is being recorded on Tuesday, January 10, 2006, at 4:00 p.m. Eastern Time. I will now turn the conference over to Mr. William Holland, Chief Executive Officer of C. I. Financial. Please go ahead, sir.

Thank you, Matt. Good afternoon, and welcome to our second quarter investor call. Before we get started, I would just like to ask you to pay attention to this disclaimer, because we do make forward-looking statements and we do use some non-GAAP measurements. Our second quarter was really just a continuation of a string of very, very positive quarters that we've put together. We had a combination of strong markets, net sales, fund performance, with continued cost improvements. As we go through the highlights, I think you will see why we believe that we are very well positioned to continue to do very well.

Our assets under management ended the quarter at $53.1 billion, up 16%. Our fee earning assets were $70.5 billion, up 6%. Our gross sales for the quarter were $2.5 billion, up 32%. Our net sales were $500 million, up 67% from the same quarter last year. Our revenue per share was $1.10, up 13%. Our earnings per share were $0.26, up 86% over the same period last year. And our EBITDA per share was $0.50, up 72%.

To bring you up-to-date, our assets under management today are $55.7 billion, up 5% already from the end of the quarter. On the sales front, our sales continued to be exceptionally strong. We had a record for gross sales in the calendar year 2005. We had $10.5 billion. Our net sales for the year were $2.7 billion, which was the second-best year that C. I. has ever had. On a relative position, we finished fourth in terms of net sales, behind the three banks and we're number one among the non-banks, and well ahead of most of our non-bank competitors. In terms of asset growth for the calendar year, our assets increased by 17%. Again, placing us fourth behind three banks and well ahead of any of our non-bank competitors. Just quickly, looking at the top 10 selling funds for the last calendar year, you can see that we still have a balance of funds towards income, Canadian equity, and balanced funds. And we now at least have one global fund in our top 10 selling funds.

The other point about looking at this group of funds, is that almost all of them had very strong performance for the calendar year 2005. And one of the reasons why I think we continue to be very, very well-positioned is that we continue to have the most number of 5-star funds. We continue to have the most 4-star funds. We continue to obviously have the most 4 and 5-star rated funds. We've had the most 5-star funds every month since August of 2004. And we have had the most -- we've either been first or second in 5-star funds every single month since February of 2002. Clearly in this business, good performance is what is required to get decent sales. And because our performance and because our rankings have been so good, it gives us a great deal of confidence that our strong sales will continue. What I will do now is move the presentation over to Steve MacPhail, who will very quickly go through some financial highlights for the last quarter. And then we will open the meeting up to some questions. Steve?

Thanks, Bill. So I'll start by going over the financial highlights just for the quarter itself. Revenue was up 10% to $316 million. Our net income rose 82% to $75.7 million, which equated to $0.26 on a per-share basis. Now, we should adjust that net income for two things that I'll talk about, the stock-based compensation and the unit holder compensation we paid last year, which reduced net income in the prior year. If you adjust for both of those, then a bit more of a comparable number would be $0.30 for this quarter per share versus $0.26 last year, which is up 15%. Basic EBITDA for the quarter was $142 million, or $0.50 a share. And we paid $0.18 per share out in dividends which equated to $0.06 per month.

Looking at some of the details, for the items affecting the second quarter, I mentioned the stock-based compensation. And that was $17 million accrual we took, and that arose from the increase in C. I.'s share price from $20.31 at the end of August, to $24.10 at the end of November, which is about $0.04 per share after tax. We also had the benefit, which is incorporated into the $17.9 million above of an option hedge that we put in place earlier this year, and that saved us $8.2 million during the quarter from our compensation expense, which is about $0.02 per share after tax. And since we put this hedge in place, the hedge has benefited us to the extent of about $15.7 million. And that's based on the $24.10 share price. So it obviously is up higher than that today.

Also affecting the quarter was our amortization of deferred sales commission which was up $5.8 million from the prior year, which represents about $0.01 per share after tax. Our total SG&A expenses, net of the option expense I talked about above and the unit holder compensation from last year, was actually down $3.5 million or 5% for the year. And that compares to 17% asset growth. So in real terms, those numbers I just referred to are $65.4 million dropping to $61.9 million. And lastly, the DSE commission we paid during the quarter increased 34% or $9.8 million, and that reflects the higher sales that Bill just spoke about earlier.

This chart depicts an earnings analysis just to help you understand what I'll call the operating earnings, which is clearly a non-GAAP measure. But it takes out certain things that affect our earnings and helps you get a better view of what's happening to the underlying business. So what I've shown here on the far right hand column is Q2 of the prior fiscal year, and then Q1 of this fiscal year is the middle column. Then on the left is Q2, the one we've just reported. And you can look across the top, you see we reported income of $41.5 million, $91 million, and $75.7 million. If you adjust each of those for the redemption fees, and the gains and losses on marketable securities, recall in the first quarter of this year we reported a -- close to a $17 million gain from our investment in Amvescap shares. Again adjust for the amortization of DSC to take that factor out of effect. And the last one was the unit holder compensation. And the last line you see there is the stock-based compensation, which I talked about. And the stock-based compensation is based on the price of the shares, and doesn't necessarily reflect the underlying operations of the business.

So having done that, what we like to compare are operating earnings of what I'll call $77 million last year, which was about $0.26 a share, $87.9 million or $0.31 a share in the first quarter of this year, and then $91.8 million or $0.32 per share. So that gives you a bit of a better idea of the trend of the underlying business. EBITDA, on the same basis, would be roughly $0.45 a share last year, $0.49 a share first quarter of this year, and $0.52 per share for the most recent quarter.

Turning now to some of the operating highlights for C. I. Financial over the last quarter, the first one we really have to talk about is Clarington. I think it is pretty well known that we abandoned our bid there. We just felt at the end the price was too high for the return risk that we were going to face, even after cutting expenses out of that business. The second big item that has come up, and more in the latter half and, like I say, of the calendar year, was our GST campaign. I will say that our GST campaign has been very, very successful. Actually, exceeded our expectations on the amount of profile we're able to get from that, and the number of comments we've got back from our clients, the advisors and the brokers who sell our funds, and the actual investors in our funds, has been pretty tremendous and we've gotten a lot of support on this issue.

On the Assante side, the new products that we launched in the summertime have certainly been very attractive, and we've now raised approximately $100 million into their new portfolio products that were launched. We're now in the final stages of the complete revision of the Assante platform. So over this year-end with some of our private-client business, we're doing the final stages of reformatting, thus really positioning us to be able to take that whole dealership forward quite extensively over the next few years. And lastly, the announced changes to dividend taxation and the income trust clarity that came out in November has been very beneficial to the C. I. unit holders, because remember that we have a large exposure in dividend-type funds and income-type funds. So that's been very positive for our constituents and also for our shareholders alike.

So just to wrap up, I just want to give a bit of an outlook for the rest of 2006. As of today, our assets are up 4.9% from the end of the second quarter. So it's been a very good start to this year. Can't predict where marks will be at the end of the year, but at this point in time, it has been very positive for us. From a cash flow perspective, our cash flow clearly supports a higher payout from C. I., something that we've talked about in the past. However, we're sitting here now, awaiting for tax certainty, both federally, with the federal election going on so we want to know what's actually going to happen in two weeks. But more importantly, also on the Provincial side, that we haven't had any statement from the Provincial Government on what their position is on the dividend taxes and the rates there. So we're awaiting some certainty on that.

I think in the next issue that we've talked a lot about, is that the high level of the Ontario corporate taxes are becoming a competitive issue. And if you look at those closely, you will realize that corporate taxes are currently 22% higher than Alberta. And the gap here is expected to go to 75%. Now that might be a gap you'd expect if you were comparing maybe Canada to South America. But it seems totally illogical that within the same country, you could have a 75 -- potential 75% tax gap within the next few years. On the income trust structure, we've had a good chance to evaluate all the tax changes that are proposed. And it would appear that the income trust tax structure is still advantageous over dividends, unless there's changes by the Ontario government to equalize those, too. And lastly I would say for the rest of 2006, as we've always done, we continue to look at expansion opportunities. And with that point, we'll open the meeting up to any questions. Thank you.

John Reucassel, of BMO Nesbitt Burns.

Just a quick question before we get into the good stuff. Steve, the CapEx of 11 million in the quarter, I guess I was going back. I haven't seen 11 million out of C. I., well, at least for 6 years as I look back. Can you just explain to us what's going on? Is there a little change in business? Or what that is?

Yes, I guess, John, you haven't come to visit us in a long time. Because you might recall that we consolidated all the Assante operations into C.I. And then we had to expand our money manager operations and open up the 2 complete floors. So there was a lot of one-time CapEx, but I would say we're set for about the next 10 years here.

Okay. So there's still an one-event issue.

That's just an one-event issue.

Okay. And just on this whole -- there is a lot of moving pieces here on that dividend, tax dividends, and trusts and Bill or Steve, could you just -- you're looking for clarity out of the Provincial government. But I guess you never know whose going to be in Ottawa, so we don't know what the rules are going to be for the trusts, ultimately. But can -- so what exactly is it you are looking for from the Ontario government?

Well, I mean, first of all I think we've got to get through this election. What I have said since November 23rd, is that our intention is to significantly increase the distribution ratio of our earnings. But we have to wait and see what the tax rate on dividends will be. We actually really don't have any idea. The Ontario government has said nothing. They're not saying whether they are going to match, whether they will do the step-up that was illustrated in Ralph Goodale's 's example, where corporate tax rates are likely to be. I think that our intention is to distribute almost all of the earnings of C. I. Whether we should distribute it as dividends or through a trust structure and have our owners receive it as income, really depends on what the dividend tax rate is. And so all we're looking for is some certainty.

And so I think getting the election out of the way, and maybe what we need is a budget. I think at that point we'll probably understand whether a company like C. I. is better positioned to pay out its earnings to its owners in the way of dividends, or to have it directly flow through in the form of an income trust. And we just don't know the answer to that. It seemed right out of the gate, it seemed that the -- that the dividend decrease was enough to make the income trust not necessary. I don't -- we do not have enough information today to make that assessment.

Okay. So just --

We really have to look at -- we really have to look at managing our taxes, really. We are one of the few companies in Canada -- we don't have the benefit that the banks and insurance companies have of having materially lower tax rates than we do, I mean, we're paying 36% tax and so managing our taxes is a very important part of managing the growth of C. I. from here on in.

Okay. So -- so, Bill, you -- I guess I'm just trying to understand. What is the fallback position if you don't get clarity on any of the levels, just because politicians are loathe to commit themselves irrevocably to anything.

Yes. We're not asking for anything irrevocable. We're really not. But we don't know anything more than the Minister of Finance has recommended that there be a cut in dividends. And so even if we take that at face value, it is really only the federal cut that is somewhat guaranteed. I just think that before you do anything, you really want to know what are the taxes that are going to be paid on dividends. And, then you have to add the dividend tax rate and the corporate tax rate, and come up with what is the most intelligent way to pay the owners of the Company the earnings that they're owed. And so I don't think that this is like a 6 month option. I think it is probably over the next couple of months. And I think we'll -- in a round-about way, you're saying why didn't we raise our dividends now? Well, we just don't have enough information to raise them now.

Okay. All right. But one way or another, dividends are going up, whether they're as a corporation or as a trust?

Oh, the distribution?

The distribution.

The distribution ratio is going up. There is no doubt about that. We've been very, very clear about that. It really is a bit of a timing issue, because we would feel more comfortable -- we attempted several times to go down the road of converting our corporation into an income trust. And each time we ran into a significant obstacle. And so I just think before we did anything, even in the way of just raising the dividends because, we are talking about a significant dividend policy change here. We'd really like to know what type of taxes are going to be applied to those dividends.

Okay. Thank you. Oh, Bill, sorry, and what -- when would you expect to hear from the Province?

Well, I -- I think that the first thing that you've got to get out of the way is the federal election.

Yes.

And at some point, I believe, the Ontario government has to say something on it. They have said nothing.

Okay. Thank you.

Doug Young, TD Newcrest.

Just back on the income trusts, can you confirm. Have you gone for an advanced tax ruling at this point in time, or applied for one?

No.

No? Okay. And just in terms of maybe moving over to the M&A environment, Bill or Steve, has the environment changed over the past few months? And I guess, number 1, are you -- are potential candidates a little more willing to talk? And I guess the second point there, obviously there's been a lot of talk that there's not a lot of obvious acquisition candidates in Canada. What is your position on making acquisitions outside of Canada, such as in the U.S.?

Well, let me deal with the first part of your -- I don't see anything that has changed in any manner over the last couple of months. I mean, there was a small acquisition completed in Clarington. And that was done at a pretty good price, I which I think is -- but I don't think any of that is really terribly newsworthy. I don't -- I see -- the problem that I see in Canada, is that there's way too many fund companies. The top 3 banks account for over 50% of the net sales. And so you're looking at the rest of the business really fighting over a very small part of the business. And so, I've said for a long time, I think you're going to see 6 big players, maybe 7, and the rest are going to be boutiques. And I've seen nothing that leads me to believe that some of the smaller players are -- have any interest in selling their business. And so I don't see it as a robust environment for M&A in Canada.

That being said, I do think there will be deals. I just think they're going to be very -- they're going to be more surprising, and they might be more imaginative than in the past. I don't think we have a whole bunch of interest right now in doing anything in the U.S. I think that certainly the prices have gotten back to very healthy levels there. But I don't think that's really the issue. I don't think that we offer any competitive advantage there. And, we attempted to do an acquisition last year of Amvescap, which I thought was interesting because really the fact that it was such a big component out of it was Canadian, that it my view it didn't have a lot of risk to it. But I think in general, just going in and buying -- trying to buy a U.S. asset manager, I think would be very risky, and I think it would probably -- it would be ill-advised for us to do. That being said, we'll always look at something. But I think that's a real long shot.

Just on the first part, what is going to drive it to 6 to 7 competitors, and what do you -- can you just elaborate on what you mean by surprising or imaginative?

Well, first of all, how do you get to 6 to 7? There are only 6 or 7 companies that get the business right now. Take the top 6 or 7, and they probably already -- I think they're already 65% of the business of the -- all you need is a couple of acquisitions in that group, or buying one of the larger second and third tier companies and you're going to get there easily. But the banks are -- have become so dominant. The TD Bank, The Royal Bank, Bank of Montreal is very strong. And you can rest assured, that CIBC is going to be very strong in the mutual fund business again. I mean, I don't think there's any doubt about that. So, by imaginative, I just mean, I think it's likely a bank will buy a small fund company, or something like that. Or it will be a combinations that -- where the true benefit is seen as somehow improving the distribution of the money manager.

If you look at the companies that are doing well in terms of sales, they almost all have some type of preferred distribution in their business. And so I look at distribution almost driving the M&A. And I would expect to see -- I would expect to see the banks looking at some of the funds companies that are struggling to become relevant. And I think also the fact that the companies that have distribution, have been shown to have such a strong advantage, I think that will get some of the other companies thinking about it. But, again, it's -- this industry peaked in 1997 in terms of sales. Here we are, almost 9 years later, and I would have thought there would have been a lot more deals. Several companies are worth less today than there were then.

Timothy Lazaris, GMP Securities.

Hey, guys. I hope you can hear me.

Perfectly.

Okay. Coming at the ability to pay your earnings and/or other income the most tax effectively, Bill, is it safe to say that -- or maybe I shouldn't say that. But there's at a least 3 constituencies of people who own your shares. And one would be people who are in a tax-free environment. Second would be Americans or other foreigners. And then the third might be people who pay full tax. And there might even be those who pay lower taxes. I'm thinking corporations, like Sun Life as an example. Could you tell us, all of this sort of posturing - and I don't mean that in a negative way - this is all predicated on your analysis of the highest tax paid individual in Canada. Is that correct? Or do you -- do you look at the other constituencies and consider them in your decision?

We very much consider all of the constituents. And so, we look at it and we say, okay, we have a shareholder in Sun Life that owns 34% of the Company. And they probably, and I don't want to speak on their behalf, have a much lower tax rate than we do. And so they would have a view on income trusts one way or the other, that would be the result of the fact that they pay lower Canadian taxes than we do. We have a constituency that is tax-exempt, which would be obviously the pensions people in their RRSP, and that's a fair bit of our float as well. And of course, what they would prefer is to be free of any corporate tax because they're not taxable. We have very high-paid -- high-tax paid, which are people in Ontario, me, for example. And so we look at how it impacts the -- those that are in the highest tax bracket in Ontario. And then you have to look at those that are just in lower taxes. Not all retail investors are at the 46% tax rate.

When you look at it, you can see why income trusts still command a higher multiple, because a fair number of your shareholders are at significantly lower tax rates, or are paying no taxes. So that if you can get them the income free of any corporate taxes, there's a big pickup for them. You know, a dollar worth of earnings from a -- from an income trust is worth 50% more than a dollar's worth of earnings from a corporation to Ontario teachers. So in theory they should be indifferent whether they pay 50% more for that asset. So we look at it all. And we talk to all of our shareholders. And at the end, I mean, we don't make these decisions. These decisions are made by trying to get a temperature of what the shareholders want. We believe that if indeed, when we get all of the information on what the tax rate on dividends will be, if it's close to a -- if you're close to indifferent between that and an income trust -- I mean, if it appears to be relatively close, I don't think you would convert to an income trust. But I think if you start seeing that even for the investor in the top tax bracket, there's still a meaningful pickup, then I think that you have no choice but to look at that as a reasonable alternative, if indeed you go back to what we're trying to do, which is to pay out a significant portion of our earnings to the owners of the Company in the most tax efficient way.

Okay. Because that was really the back end of my question, and that is, if in fact the analysis turned out that you were reasonably indifferent between the 2 structures, I still, as you stated, would think that those in low tax rates and/or no tax would prefer to see you as an income trust. And I just don't know what percentage of your shareholders are in that position.

Well, I -- .

But clearly the market -- excuse me. But the market has endorsed you converting into an income trust the last time you announced it, because the stock moved quite aggressively on that. So I guess that's my point.

I don't know -- when I talk to investors of C. I. - and Steve talks to them as much as I do - we -- I mean, clearly those that are tax exempt think we should be an income trust. They make no bones about it. Those that are non-Canadian think you should income trust. Right? Those mutual funds in general think you should income trust. I don't know what Sun Life's position is. I do not know what all the taxable institutional investors that we have are. So I think that trying to make a decision until you understand what the tax rate is, is just very difficult. But clearly, we're going to look at our full constituency and try to -- and do what is best. And we just don't have the information today to be able to make that decision. That being said, and I'll repeat it again, we are going to increase our distribution significantly in the short run. And it's just a matter of time.

Okay, Bill. Last question, and not to drag this point to death. But if you did convert hypothetically, does that have any negative impact at all in your acquisition strategy? Do you see that currency as being less attractive for instance, to someone who wants shares versus cash? I'm thinking more foreign acquisitions or US acquisitions.

I think -- let's just say we had concluded that being a -- that converting our Company to an income trust was advantageous, significantly so. I don't think we would look at that. That wouldn't matter to us so much. And if indeed the market will value the Company higher, that can only be positive for acquisitions any way you cut it, because it cuts our cost of capital down. And so if converting to an income trust got you a higher price, that can't be negative for acquisitions. I think it can only be very positive.

Okay. Thanks very much for answering those questions.

Drew McReynolds, RBC Capital Markets.

Thanks very much, and good afternoon. Going to sound boring here, shifting the topic of conversation to a P&L question. But I guess a question for Stephen. Just in terms of your SG&A in the quarter, if you exclude stock option expense, by my calculations you had a nice drop sequentially from Q1 to Q2. And that's despite, I guess presumably absorbing some fund expenses along the way and some higher AUM. Can you help us kind of understand how we got from last quarter to this quarter, and if this is somewhat sustainable here on in?

Thank you, Drew. Well, what we saw in the most recent quarter is basically a lot of some lingering integration expenses coming off as we got rid of more and more real estate from the Assante side. We had some leases that were rolling off on the system side. Things of an operating nature like that. So I would suggest that we had a very good quarter on the cost control side in bringing things down. But I think this is probably about as good as it is going to get for the time being, that we've gotten all the advantages that we can get out of our most recent acquisitions. And any savings that we get on a going-forward basis, we'll probably just reinvest more back into kind of developing our next evolution of a dealer back office, and things like that.

Okay. And just as a quick follow-up to that, in terms of your fixed fee regime in place, then presumably you're pretty happy with your level of costs under that proposal -- or under that implementation that went into effect this quarter?

Yes. I mean, we had worked hard to bring down the costs. And so we're not unhappy with that whole regime. It has made it -- our business much simpler to deal with, to be quite frankly, be truthful with you that we just used all our SG&A expenses as a whole now. So we actually don't separate out to the same extent what the fund cost would be. So I think we might have absorbed a little in the last quarter, but nothing material by any stretch. The market certainly helped us out.

Okay. Thanks, Stephen. That's great.

Mr. Holland, there are no further questions at this time. Please continue.

Thank you, Matt. If there are no more questions, then I think we'll conclude our second quarter investor call. I thank you all very much for joining us today. And I look forward to meeting with you again on April the 10th or 11th, for our third quarter results. Thank you very much, and good bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.