CI Financial Corp (CIXX) 2006 Q4 法說會逐字稿

Welcome to the CI Financial fourth-quarter results conference call. (OPERATOR INSTRUCTIONS).

This presentation contains forward-looking statements reflecting management's current expectations regarding the future performance of CI and its products, including its business operation and strategy and financial performances and conditions. 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 are detailed from time to time in CI's public financial filing, and 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 operating margins, operating earnings, option adjusted EBITDA and earnings and free cash flow are non-GAAP 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. A reconciliation between income and EBITDA is included in the financial statements accompanying this morning's press release regarding CI's fourth-quarter results.

I would like to remind everyone that this conference call is being recorded on Thursday, July 13, 2006 at 4 PM Eastern Time. I will now turn the conference over to Mr. William Holland, Chief Executive Officer of CI Financial.

Thank you very much, Rachel. Fiscal '06 was really a great year for us at CI, and it also marks the last year for us as a corporation, as we have now officially converted to an income trust as of June 30th. First I would just like to walk through some of the highlights for the last fiscal year.

Assets under management were up 16%. Gross sales increased by 29%. Net sales were $3.1 billion, up 79% on a year-over-year basis. EBITDA per share increased by 12%, and the total return to CI shareholders is 85%.

Looking at the fourth quarter, the momentum clearly continued. Gross sales were up 19% on a year-over-year basis and net sales were up 22%.

For the year, our relative sales position was very strong. We were fourth at $2.9 billion behind the three banks, Royal Bank, TD, and Bank of Montreal, and ahead of all of our independent competitors.

Again, looking at the fourth quarter, our position showed that we are still improving. We were third in terms of relative sales at just over $1 billion, well ahead of all of our competitors and just behind Royal Bank and TD. Looking at just mutual funds over the last year, we were third, with 19% asset growth on a year-over-year basis. Again, the fourth quarter was very good for us. CI assets were up 2.2%, ahead of all of the other competitors in our group.

Looking now at the diversity of our sales, we continue to have very good diversification. Our top 10 sales only represented 54% of our gross sales. And if you look at it, it's [separated by] managers, but the one common theme is it's still mostly Canadian equity and Canadian balance funds.

We continue to lead in both four-star rated funds, as well as five-star rated funds, as we have for the last four years. We have a huge lead now over our closest competitor, which is TD.

I will now turn the conference call over to Steve MacPhail, who will quickly go over some of the highlights for the fourth quarter.

Thanks, Bill. Starting with revenue, our revenue increased 11% year-over-year, from 310.5 million to 344. And this is just for the quarter; I'm only going to focus on quarter-over-quarter as opposed to the whole year.

Net income fell from 80.8 to 69.3, but the major contributor to that was the stock-based compensation that we had for the Company. And if we adjust for the stock-based company, then income actually went from 78.4 million to 87.9, an increase of 12% year-over-year.

At the last conference call I indicated that we actually had discontinued our stock option plan. So, for the current fiscal year, 100% of all compensation is reflected in the underlying cost net of the stock-based, and the stock-based really refers to prior years.

On a per-share basis, reflecting the stock-based compensation, we were up from $0.27 a share to $0.31, an increase of 15%. EBITDA as reported, 151.8 million, dropped 10% to 137. Again, adjusting for the stock-based compensation, it rose from 148 million to 166.2 million, an increase of 12%, or up 14% on a per-share basis to $0.58 for the quarter.

Just some of the highlights from the fourth quarter. As we mentioned, the increase in CI's share price, which was 11% during the last quarter, resulted in stock-based compensation expense of about $0.07 a share after tax. The option hedge that we had in place provided us a benefit of about $0.01 a share after tax.

DSC amortization was up 6.3 million on a year-over-year basis, reflecting really the over 3 billion in net sales that we had accomplished during the year. And that affected our results by about $0.01 a share after tax from Q4 fiscal 2005.

The asset management SG&A expenses, net of the stock-based compensation -- and we're actually quite proud of this -- were actually down in absolute terms 1.4 million, or 2% from Q4 2005. So, even though markets and the general inflation and everything went up, we actually accomplished a real decline in expenses. I think that's probably unique in the industry.

Our deferred sales commission that we paid out from a cash flow prospective increased 14%, or 6.6 million, from Q4 2005. And again, that's a result of the increased sales over the year. And lastly, about 50% of the costs of the income trust conversion were included in Q4. The remainder will be in June 2006. So, that's adding a bit of noise to the quarter, those costs reflected in this year. We're closing in on $2 million [alone].

We normally provide a bit of an earning analysis for you, and so again -- which, again, is to take out all the adjustments -- and this is for consecutive quarters as opposed to a year-over-year, so you get a bit of an idea of underlying what happened to our organization.

Again, we reported in the third quarter income of 73.1 million for the previous quarter, and this current quarter 69.3. But, if you adjust for redemption fees, which were 6.2 million in the most current quarter, any gains and losses on securities we might have had, and amortization of deferred sales, and the stock-based compensation, what we'll call operating earnings went from 94.8 million to 97.4, which is actually up 3%; so, just slightly behind the asset growth on average assets we experienced on the quarter -- or, on a per-share basis, up 3%, from $0.33 to $0.34.

We normally don't do projections in our conference calls. But I felt we actually really need to do one right now, because we're in this process where the next quarter we report will have one month with CI as a corporate entity and three months with CI as an income trust. And again, there's been a number of calls from analysts asking if I could do something to eliminate the noise of the June month, and really just focus -- give some idea on this quarter that we're going into, and give people some insight behind the 16.75 cents per month distribution that we've announced.

I'm not going to go into a lot of details in the forecast, so this summarizes a number of things. But, as it stands right now, our forecast -- and we just put this together yesterday, so it's pretty current -- is that we're forecasting EBITDA for the three-month period -- and again, this won't be what's reported, so I'm dissecting it out for you here -- the three-month period, July to September '06, we're forecasting EBITDA of 168 million. If we subtract from that CapEx, and then we finance 45% of the DSC with internal resources, interest expenses of 4 million, we come up with our estimate of distributable cash of approximately 145 million, which equates to $0.51. So, if you divided that over the three months, you would say that $0.17 a month is what comes up to 51; approximately in line, maybe just a little ahead of what we're paying out right now where we are.

The other thing I should point out, too, is that again, in forecasting out to September 30th, we see net debt to EBITDA September 30th at about 0.5%. So, net debt to EBITDA, about [half that]. So again, I believe that's probably the lowest in the industry out there, so we're not leveraging up this company at this point in time, nor do we have any immediate plans to.

And with that, I'm going to put it back to bill.

Thank you. June 30th did mark the end of our corporate existence, and it was also the 12th anniversary of our IPO. So, we really do hand in the scorecard here. And if you look at the 12 years, we've had an annual return of 31.3%, which worked out to 2550%. And when you compare it to the TSX and the financial services, it's just a huge outperformance. We were the fourth best performer on the TSX during this period of time, and well ahead of our competitors.

On this happy note, we will be glad to take any questions people have. Thank you very much.

(OPERATOR INSTRUCTIONS). Timothy Lazaris, GMP Securities.

Just a couple of number questions. The first one is just about trailers. I think trailers were up a little bit in the quarter. And I'm trying to get a gauge on what your view is on that. Is that something that we should be expecting to see as a result of the mix of business that's going on, and particularly in the mutual fund industry, and also at CI? My second question is for Steve. Actually, it's somewhat linked. Bill, maybe can you tell us what the current mix is between front-end load DSC sales and perhaps other forms of sales that are out there right now? Because I think that's going to have a material impact on how you'll be distributing cash flow, and I guess it will help us with our modeling, too.

Our front-end and deferred sales charge assets are just about 50-50, almost exactly 50-50. The reason why our trailer fees are going up, and they will continue to go up -- as the percentage of front-end business is increasing, and it's increasing at a pretty good clip here, most months our average -- our DSC of non-money market business five years ago might have been 95%, and today it runs at about a third. It's about 30% to 35% at any given time, of non-money market business. So, that's why you're seeing the trailer fees edge up. And I suspect you will continue to see trailer fees move up a little bit, and you will continue to see our deferred sales commission expense, as a percentage of our assets anyway, decrease a little bit.

35% of the current sales are being financed via DSC, they're back-end load?

A little less than that. It's usually about 32%, but it ranges between 30 and 35. If I were to take a guess on the year, I think it will be about 30%.

Just a follow-up question. In terms of long-term debt, Steve, the long-term debt, I think -- not net of cash, just the long-term debt number was up about 60, $70 million. And I know you've got this guidance about debt to EBITDA and the likes. But, can you think of any other use of long-term debt where that number could rise in a particular quarter? Because obviously that's going to have an impact slightly on how our interest expense assumptions are going to be. Would you continue to buy back stock, as an example, even though you've said that that's something that's less important of a trigger right now as an income trust?

That's probably one of the number one places that we would see an increase in our debt from. If we see a good opportunity to buy back our shares, where we think it's in the best interest of unitholders, as we've done in the past, we'll continue to do it. We're really evaluating where those triggers would be in the context of an income trust right now. But where there's a pickup, we would do it. So, I clearly see an opportunity there.

I think other places where you could see a pickup in debt is if we made an acquisition for cash as opposed to units. You could see a pickup from their. Or if we built up strategic investments in various areas. So, a whole number of things could happen. But from a net debt perspective, I really don't see it building up, other than if we did some type of acquisition and had to [restate] or bought back a lot of shares.

Is the debt floating-rate or is it fixed-rate?

Our debt is floating-rate, but we have the capacity to fix in if we so choose. And that's one of the things we're just looking at right now, is where we are happy with from a long-term perspective on fixed and floating.

John Reucassel, BMO.

I just want to build on Tim's question. You reduced the management -- sorry. You moved a lot of funds around in the last couple of years, and the net result of that is the management fee comes down from about 212 to about 200 basis points. Steve, are we at the end of that? Is that fully baked in, all those mergers of the funds and all that?

One of the things you have to remember is last year at this time, we were -- had a floating rate of expenses charged to our unitholders. You had to retroactively go back and include that in our management fees. But you will recall that we are aggressively trying to bring down the costs of our mutual funds. So, part of the reduction of the management fees is the fact that we brought down the operating costs, the funds. I really can't classify that as a margin compression, first of all. So I think your best bet is to start to look at more consecutive quarters as opposed to year-over-year.

So let's do that, then, Steve, I guess. If I'm looking at the number -- I'm just trying to get the operating margin -- you're saying here 107.7, and 112, 113 the previous quarter, 113 the quarter before that. Now, I think the operating margin excludes the stock option expense. But where are we -- like where are we -- are we at the trough here, or should we build in some pressure on that? You talked about the trailer fees and whatnot. I guess I'm just trying to get a handle on that.

I don't see any reason why margins would increase on a go-forward basis. There is business mix here that affects it, but we're getting a good percentage of our sales in equity funds right now. So if anything, over a long-term basis, we continue to see the margins come down.

I think if you go back about -- a number of years at CI, we had margins that were lower than they are today. So, if we start to see a slight compression, that doesn't surprise me, just as we go forward; more front-end loaded business that gets on the books is where we would be.

And the sales through the Clarica channel, is that all DSC or is it front-end DSC?

It's mostly DSC now.

Is it mostly DSC?

When we acquired Clarica, they were all front end. They were literally 100% front end. Now they're almost entirely deferred sales charge.

Bill -- and I guess I'm just trying to -- I don't know if I can compare these. But if Clarica is all DSC, or close to all DSC, and you're getting a third of your sales DSC, does that mean the [IDA channel] on the planner is almost all front-end load?

It wouldn't be that high. But more and more, especially in the IDA channel it's just front-end load at zero.

Let me just touch on the margin question. The margins have to go down, for a variety of reasons. More front-end business shows a lower margin, obviously. But also, you're getting more I-class business, and there's fee pressure out there. So -- and one of the things that we have to factor in when we look at our margins going down, we dropped the expense ratio on some of the Assante funds by 75 basis points over three years. And we never believed that those management fees were sustainable, and we're not surprised that we've had to react to competitive forces. So when I look at the margins, I am relatively sure that they are headed down. I have now idea how quickly.

Historically, as you add an asset, you might have expected to get some scale benefit. What you're saying, Bill, is fee pressure is still there; cost pressures are still there. So, even with the asset growth, you're still looking at some pressure in the mix of business, still looking for some pressure on the margins.

Sure, but there's still enormous scale. There's more scale advantage than there was before because of this.

Last question, Bill. You got the conversion done now, so what -- can you tell us what -- share with us what your plans are next?

I think when you -- tying to the margin question, I think you really see that scale is becoming absolutely essential, and that building a scalable business is really -- when you're trying to compete with the banks, with the success that they're having. I think we are getting closer to a period where you will see some type of transactions happening. It just doesn't make sense. Because as I've said time after time, most of the industry is struggling, and they're struggling badly. When you look at the relative performance in terms of sales, especially that I had in one of the slides, you really realize that almost all the business is going to four or five companies and a couple of boutiques.

So, I believe that we're positioned beautifully right now to do an acquisition. We haven't done one in 2.5 years. We have what I consider to be a substantial cost of capital advantage over most of our competitors, and I think that the timing is starting to look better and better for some type of acquisitions in this business. And I would think that we'd have a reasonable shot of being part of it.

John Aiken, National Bank Financial.

A couple of quick questions, I guess, for Steve. You mentioned in the press release a total return swap. Is this to eliminate the volatility of the options expense going forward?

That's correct.

Can you give us a sense of what the run rate is going to be?

I can't, because we don't disclose how much that we've hedged at this point in time. All we're saying is that we're positioned to do a total return swap, and what we're trying to do is reduce volatility. Ideally, we would like to reduce at least 50 to 60% of the volatility. So if I had a target level, it would probably be in around that. But, I just don't want to give you any assurances that we can accomplish that. But we're probably about 20% hedged on that right now.

Looking at your projections, I know you don't want to go into detail, but one quick question. The one difference in this projection that you had prior to -- sorry -- in the previous quarter was the fact that redemption fees are not -- were not being deducted against EBITDA. Is this a change in the methodology of how you're going to be calculating your registered (indiscernible) cash?

No, that's actually not correct. The impact of the redemption fees is factored into that 45% DSC number. We saw the 17 -- it's factored in there. So, absolutely we haven't changed the methodology there.

Timothy Lazaris, GMP Securities.

Just one more question I had that I forgot, Steve. There's a slide that we get which shows the average assets, and then the year-end assets. And the year-end assets showed 54.1 billion. And I'm assuming that that's CI funds plus the Assante funds, and I don't think it includes -- I don't think that it includes the -- excuse me -- the total assets, 55.8 billion. But the average assets in the month of May shows 58 billion. And I'm wondering, is there anything that's been increased in that, or was the first two months -- were the first couple of months of the quarter just so good that if it hadn't been for May, your year-end asset numbers would have looked something like 58 billion? Am I reading that right?

Yes. We lost $4 billion to the market in about three weeks.

If you just take the month-end reports that we put out, compare end of March, end of April, end of May, end of June, you can come up with a pretty good picture as to what went on.

So basically for purposes of forecasting, then, it's going to be pretty difficult, unless the markets really boom again, to have a decent comparison in the next quarter. Average assets are likely to be down next quarter. Is that reasonable to say?

I can't answer that for you, because the quarter is not over yet.

In any case, it was a very high average asset quarter; that's the point I wanted to make, and you confirmed that. Thank you very much.

Doug Young, TD Newcrest.

Just two few quick number questions. First, I know that you talked about your adjusted SG&A being down year-over-year. But I guess sequentially it was up, and I'm just wondering -- I think it's around 5 million or so. I'm wondering if there's any particular noise in there, being the first question. Second, I know that in the back of your release in one of the notes you mentioned that there's a $30 million benefit coming back to you from -- as a result of the lower federal corporate tax rate. I just wanted to maybe have you walk through a bit of the mechanics of how we should be looking in that from a modeling perspective.

I'll answer the first one first. The final quarter of this year, as I mentioned, included a lot of the costs of the income trust in it. So, you have to factor that out. Number two, you have to take into consideration that -- and I think I've mentioned this before -- we're building this data center to ensure that we're up and running 24/7, regardless of the power situation in Toronto. So, a lot of our expenses were showing up in the recent quarter on that. The most recent quarter is a little on the heavy side, so I'm not sure the 5 million increase is completely representative there, is what I'm saying, number one, even though the expenses were clearly as we reported. To answer your second question -- I'm sorry; what was your second question again?

It has to do with the taxes. And I forget which note it is, but I think it's page 40 or something, it was mentioned -- page 39 at the bottom, it's mentioned that there's about a $30 million, I guess, benefit coming through because of the reduction in the federal corporate income tax rate. And just wanted to get an idea of how the mechanics there worked.

That's against our future income taxes. The way that works is as we become taxable in the future -- and even though it's an income trust, you'd think we're not taxable; the corporation below it is a taxable entity that we're trying to shelter. So, as those taxes come into being, what they're saying is they'll be taxed at a lower rate than exists today. And because it became a legislative change, then we recognize a he reduced amount of future income taxes, and that creates the gain.

If you go back two years from when the Ontario Liberal government got in, and they increased corporate taxes, you'll recall we all took big income hits, because we had to increase that future income tax liability. Now we're just getting a small reversal of that. How is that?

I guess [it's there]. I mean, when you -- bring up another point. In terms of tax leakage as a trust, is that in the near future a potential?

No. We don't forecast today tax leakage in the foreseeable future for us.

(OPERATOR INSTRUCTIONS). [Sean Mariett], Credit Suisse.

Just a couple of follow-up questions. With respect to the management fees, the discussion -- are you contemplating more fee reductions there in the near term, or are you content where you are relative to the competition? And secondly, on acquisitions, given the income trust structure, is there a maximum leverage that you're willing to take on with an acquisition?

We don't expect any management fee reductions in the foreseeable future. I think we've made a great number of significant fees, and I believe our fees in general are at the very low end of our competitors' scale. So, I think management fees will be relatively stable. But the mix, and how much comes in an I-class and F-class at lower fees, is still rising quarter-over-quarter.

Your second question was on acquisitions. I think that we're looking at debt really as a percentage of EBITDA. And if -- we are willing to do acquisitions and issue trust units or pay with cash and take on more debt. But we still don't want to have debt. An acquisition -- in theory, we should be getting EBITDA to offset any increase in debt. I would think that -- we've said we don't want to -- we don't see any likelihood at all of ever getting our debt to one times EBITDA. We're comfortable at anywhere between half and one. And I think we'd reevaluate it over time and we'll look at it, but we're very underleveraged, say, when you look at the trust sector in general. We're willing to take it up a little bit. But an acquisition, in all likelihood, it would have to be accretive for us to do it. So, it probably wouldn't make too much of a difference to our debt to EBITDA ratio.

So, no change, whether you are just financing your DSC or whether you acquire the maximum (multiple speakers)

Ate you talking about DSC or --

No. Well, both; the combination of either just financing your DSC, or acquiring -- you're still comfortable with the one times debt to EBITDA.

We would be for sure.

Just to follow-up on Doug's question about the expenses quarter-over-quarter, the data center that you mentioned, can you quantify that and give us the timing on potential reductions?

Expense reductions from the data center? We'll be finished with that in about a month and a half. So I would say the majority of the expenses end by the end of July on that.

Can you quantify?

Not at this point in time, because some of the ones will be amortized over a period of time. The numbers are [expensed]. So actually, there's no sense in giving you the exact detail of those. But it's not in the magnitudes of millions and millions of dollars; let's put it that way.

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

Then I think we will wrap it up. I'd like to thank everybody for joining us for our fiscal '06 wrap up, and we look forward to addressing you in probably the second week of November to go through the September 30th results. Thank you very much.

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