CI Financial Corp (CIXX) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the CI Financial Q3 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. As a reminder, this presentation contains forward-looking statements with respect to CI and its products, including its business operations and strategy and financial performance and condition.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from expectations include, among other things, general economic and market factors, including interest rates, business competition, changes in government regulations or in tax laws and other factors discussed in materials filed with applicable securities regulatory authorities from time to time.

EBITDA -- earnings before, interest, taxes, depreciation and amortization -- operating margin, operating earnings, option adjusted EBITDA and earnings and [free cash flow, or non-GAAP], or generally accepted accounting principles, earnings measures. However, management believes that most shareholders, creditors, other stakeholders and analysts prefer to include the use of these performance measures in analyzing CI's results.

(Operator Instructions). Also, the conference call is being recorded today, Tuesday, April 11, 2006 at 4 o'clock Eastern time. I will now turn the conference over to Mr. William Holland, Chief Executive Officer. Please go ahead, sir.

Thank you very much. The third quarter worked out very well, which was pretty easy with the TSX up over 8% during the quarter. Our assets under management went up by just a little over 5%. Assets under management were up 14% year-over-year to $56 billion. Gross sales were up 12%, $2.8 billion. Net sales up 50% to $600 million while revenue on a per-share basis increased by 12% to $1.16.

During the RSP season, our net sales were pretty decent. Sales during the January to March period ranked fourth at about $1.3 billion, or fifth if you exclude a large institutional order we got into CI.

Again, I think the important point to this slide is how strong the banks continue to perform with the three banks leading the way. Asset growth for the quarter, the RSP quarter we're talking about now ending March 31, was very good. We ranked second to the Royal Bank at 7.8%.

I think interesting here on this slide is how well all of our competitors did on an asset depreciation basis during the RSP season.

Sales of CI continued to be very well spread out. Our top 10 only represented 61% of our gross sales during the RSP season. And even within the top 10, we saw a really decent balance, most of it going into Canadian equity, Canadian balance and income funds. I think the future continues to look very, very bright for us because our four- and five-star-rated funds continued to lead the pack by a wide margin as they have since August of 2004 and we have been either first or second every single month since February of 2002.

I will now move the presentation over to Steve MacPhail who will go into a little more detail on the quarter, and then we'll be available to take questions from the analysts.

Thank you, Bill. Revenue for the quarter was 330 million, up 8% from the same period last year. Reported net income was 73.1 million, or $0.26 a share, which was down 7% from the prior year. However, if you adjust for the stock-based compensation that reflected the increase in CI's share price, then the adjusted net income per share was actually $0.32, up 7% on a year-over-year basis.

EBITDA was 138.9 million, or $0.49 a share, and again, if you adjust for the stock-based compensation, it was actually $0.58 a share, up 12% from $20.52 in the prior year.

Just looking at a little more detail on some of the changes, as mentioned, the 16% increased in CI's share price [turning] the quarter from $24.10 to $28 increased stock-based compensation by 28.2 million which was equivalent to $0.06 a share after tax. That number was lesser than it might have otherwise been because we had an auction hedge in place that provided an $8.5 million benefit, or $0.02 per share after tax.

[EOC] amortization reflecting the higher level of sales was up 6.2 million, or $0.01 per share after tax. In total, that number went from 14.2 million to 20.4 million. Our asset management SG&A expenses, net of the option expense above, we're actually down 2.9 million, or 5% on a year-over-year basis. And our DOC commission, again, reflecting higher levels of sales, increased 15% or $6.7 million, moving from 43.5 million to 50.2.

Depicted on this chart is what I would call operating earnings. And what we try to do is adjust for some of the effects on income over the quarter so you get a more realistic picture of the underlying effect on earnings. Our reported net income was 73.1 million, and that compares to 75.7 in the immediately preceding quarter, which was down 3%. However, if we adjust for redemption fees, onetime gain or losses, amortization and stock-based compensation, then our operating earnings, were actually on this basis were 94.8 million, up 3% from the immediately prior quarter when there was 91.7 million, which equates to $0.33 a share. By comparison, that 33, we've earned $0.28 per share in the prior year on the same base, so the $0.33 is up about 18% on a year-over-year basis. Using a similar calculation for EBITDA, you can see that EBITDA is $0.58, or up 4% on consecutive quarters on a per-share basis.

Now turning to a discussion on the income trust. The first thing I want to present is a payout analysis based on the quarter we just went through. What we've done here is taken the last quarter that we just reported and annualized it. We start with EBITDA adjusted for the stock-based compensation. We adjust for the stock-based compensation, because as we have mentioned, stock options are no longer being issued at CI and are disappearing, and therefore won't become a factor on a go-forward basis in the eventuality that we convert to the income trust. So on an annualized basis, our EBITDA was $668 million, or roughly $2.34 a share. If you subtract from that interest expense, capital expenditures and redemption fees, and again, these are all annualized numbers, the maximum available for distribution would be 612 million, which is $2.14 per share.

Keep in mind that some of the DOC then we would finance with cash flow and some would be financed by debt. We have an objective to not have our debt ever rise above one times debt to EBITDA, and if we were to distribute and finance roughly 40% of our DOC with debt, then that would leave us with roughly 542 million, or the equivalent of about $1.90 a share.

And again, so just to be clear that we subtracted from our EBITDA the redemption fees of 37 million. So, what we do is we say our existing cash flow would go to provide new assets in the form of financing deferred sales charges. Then on a residual, a certain portion would be financed by cash flow, a certain portion would be financed by debt.

Now again, this reflects the period up to February 28. And though I'm not going to make any projection on where it's going to be on a go-forward basis, if you just look at where the run rate is today, as Bill mentioned, our assets are up over 5% from the average level of assets during the third quarter. And so that will suggest the run rate today is somewhere in the vicinity of about 5% higher than these numbers, the 190 and 214 that I've just presented to you.

I would just like to finish off with the next steps on income trust. As we announced, the Board approved us going ahead with looking to get a shareholder vote of the income trust conversion. We would expect to mail to the shareholders for approval of the conversion by May 31 of 2006. And then subject again to the shareholder approval and a positive tax ruling, then we would envision conversion being completed by September 1 of 2006.

And with that, that concludes the formal part of our presentation, and Bill and I would like to turn that over to questions at this time.

(Operator Instructions). John Reucassel, BMO.

Thank you. Just, Bill, have you guys applied for an advanced tax ruling? And if you have, when did you make that application?

We applied for advanced tax ruling the second week of January.

Okay. And how long does it usually take to get -- should you hear back from them?

You're probably not asking the right guy. We haven't had a whole bunch of luck with tax rulings, but we would expect to hear something from them sometime in the next 30 days.

Okay. Just on, Steve, on your slide, or slide 9, page 9, I guess a couple of things that people are struggling or just trying to understand (indiscernible) struggling with -- is that $1.90 -- would you pay out that whole $1.90, or would you pay out 90% of that or 80% of that?

No. Our view is that, that is the amount you would pay out. We basically have adjusted for all of our cash requirements, so any payment less than that would result in basically us building up cash or trying to deleverage the business. And since we don't envision really having much leverage in it to begin with, there's not much sense in trying to build cash to deleverage anymore. So, no, I would say that under that quarter, that's a pretty good representation as to where we would be, somewhere at that level.

And how long can you pay -- can you finance 40% of the DOC with external financing and not breech the 1-to-1 debt to EBITDA?

By our calculations, we never get there. I won't say it would never get there, but we don't see it ever getting there. It just doesn't happen.

So I guess the issue then, sustainably, you could borrow -- from your numbers, you could borrow 60% of your commission financing capacity and never get close to a net debt to EBITDA?

Yes. That's 60% of DOC after we've subtracted the amount that redemption fees finance. But remember, is actually, if you eliminate the redemption fee part of it, we are actually, we're financing less than 40% of the total DOC with debt if you look at the other way. See, of the total DOC, how much would be cash flow from redemption fees and otherwise, and it's over 60% (MULTIPLE SPEAKERS).

And, Bill, just, you have been asked on previous calls, maybe just update us, what would you think a fair, sustainable EBITDA growth estimate is for CI over a cycle?

I think we have used the number of something that looks like 10%. We think that over a cycle, we can get net sales in the range of 5%. So if you have $50 billion in assets under management, you're looking at net sales of $2.5 billion, maybe a little less. Maybe 5% is a touch aggressive, and we're looking at market appreciation in the range of 6%. So I think that kind of a 10 or 11% growth rate is probably a reasonable starting point.

I will re-queue. Thank you.

Doug Young, TD Newcrest.

Hi. I just wanted to go back in terms of the next step slide and just get an idea. I guess is it taking longer than you would initially expect it to go down the income trust path being the first question? And is that because of maybe challenges you are having with getting an advanced tax ruling? I'm just trying to understand why it's taking until September to go down this route.

We don't know. It could be much quicker than that. We are just leaving open the option that the tax ruling process takes longer than we thank. We are willing to go to a shareholder vote as conditional upon getting the appropriate tax ruling. So we're just trying to leave the timeframe somewhat open. It's really, we're almost a $10 billion market cap company, and I think you that you have to be very careful when you make such a significant corporate change like this. And it just might take awhile. I don't think that this tax ruling -- I don't think -- the tax ruling we're willing to accept is well precedented out there. So we're not expecting to have a problem on this, but it could take a while.

The tax ruling that (indiscernible) previously mentioned that you were going for a certain structure that may lead to the tax ruling taking longer. Is that still the tax ruling that you're going for, or are you just simply going for its ruling under an old structure?

This is somewhat different. I can't really go into a bunch of detail, but the structure that we're going for right now is just a slight bit different. But to be clear, we would be willing to go forward on the same basis that a GMP converted to an income trust several months ago.

Okay. When you had the discussion with the Board, was there any concerns at the Board level about you going this route?

The Board unanimously approved taking this to a shareholder vote, so I don't think there's any problem at the Board level. I think that we have shareholders that would feel compelled to get a tax ruling, and I think that that's a reasonable -- for a Company our size, I think that's a reasonable position to take.

In terms of just quickly the stock compensation claim, you mentioned that it's going away. What quarter is it going to be fully gone off of your P&L?

I don't know the answer to that. We are not going to issue new options. We're in the compensation season right now here. We're going to go to a restricted share instead, which will have far, far less volatility. And that's not the only reason we're doing it. Our compensation system here evolves all of the time and we just believe that that's a better way to compensate today. And as it -- it will phase out quite quickly and become relatively immaterial over the course of certainly the next year or so.

We should point out though that any compensation plan that we're looking at will result in no dilution to existing shareholders or ultimately income trust unitholders, and that is one of the key criteria. So when we go to -- if we go to a restricted share plan, we will actually go buy those shares in the open market as opposed to issuing them from treasury, which is what many companies do. We're not prepared to do that, and therefore, it will become fully transparent to any of our investors what we have done.

Thank you very much.

Timothy Lazaris, JMP Securities.

I have two questions. What is about your slide 9 where you talk about the payout analysis? I just want to throw something out at you and tell me whether this is logical. If this analysis is saying that this is what you would be able to pay out on a last quarter annualized basis and you converted to an income trust on the timeline that you have presented to us, so sometime in September let's say being the outside assuming everything goes well. You're into your second quarter or the beginning of your second quarter of fiscal '07 at that point?

That's correct.

Would you then, would management then, be in a position to -- would the distributable cash flow that you come out with out of the gate be sort of a 12-month look forward? Is that sort of how these things get determined in terms of what you publicly would disclose? Or, do you go and do this conservative type of approach again and take the last quarter as you annualize it?

Tim, it's a bit of a combination. In our business, you always have to start with what you know, and that's where markets are today. But then there's also seasonality to the business. We pay out more deferred sales charges during the RSP season, we have certain periods when those higher expenses are lower, maybe more redemption fees. So you have to really go on a rolling 12-month basis to see what you might -- what your expenditures might be.

So what you might discover is that in one specific month, your payout will be slightly higher (indiscernible) lower, but you just want to kind of keep it consistent with the formula that we just showed you here. So it will be on a bit of a forward-looking basis (indiscernible), but it will reflect conditions at the time. We are not ever prepared to make a bet that all of the sudden, markets are going to go up 10%. We're not in the business of making market calls. However, we will look at how we think the business will be affected over what we think is the next couple of quarters on known expenses.

Okay. So let me just clarify that. So at the time that you're going to come out with the number, should everything go well, are you going to be using any forecasting, or are you just going to be using numbers that are available to you at that time?

I think I can answer that. It's going to be a combination of [a bit], there's going to be a combination of both.

A little bit of both, okay. Two other questions. One is just the general trend on paying deferred sales commissions. One of the things I guess we have predicted as per that data that the market's indicating is that the front-end load or low-load product are the ones that are extremely popular right now. And so, therefore, is it safe to assume that what you're paying in DOC right now just inherently is going to be going down if this trend continues?

Yes. I think that -- when we look at the last quarter, our DOC business was just about 30%. There's been periods of time where that number was over 90. So I think that it's clearly starting to be used less and less. I think that's the first point. They low load is being used far less than that. The low load does not seem to be the viable option. So you're going to see -- our best guess today is that you're going to see commission expenses go down, certainly as a percentage of your revenue, earnings, EBITDA or any measurement like that.

And really, we should be treating DOC as the effective CapEx for a mutual fund company. So if that number is going down, it can have a positive impact on what you distribute. is that not a valid comment?

It is over the short-term, but if you look out over longer periods of time, we do earn approximately the same from deferred sales charge and no sales charge business.

I'm just looking at it from a cash flow perspective though, Bill.

That's right, yes.

And then the last question, just to follow up on what John asked. If you assume that your assets can grow at a conservative 10% for sake of argument, is your business not set up now to really put more than 10% to the bottom line because of the fact that you're lean and you're going to end up with economies of scale? I don't believe it to be a 1 to 1 ratio in a period where assets are growing. Is that a reasonable comment?

In might be, but I think we are allowing for the possibility that there becomes a little bit more fee pressure than there is today. And we certainly have seen, if you look at our topline as a percentage of assets, it has gone down. So you might be right but I think we're just trying to be at least consistent in saying that if assets go up 10 or 11%, we hope we can move the operating income up by the same number.

Okay, thanks guys.

Mr. Holland, there are no further never questions. Please continue.

Well if there are no more questions, we will wrap up this call. And I look forward to updating you for our fiscal year end in the middle of July, and thank you very much.

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