CI Financial Corp (CIXX) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the CI Financial 2007 Second 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 operations and strategy and financial performance 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 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 margin, pretax operating earnings, adjusted EBITDA and earnings, distributable cash and free cash flow are non-GAAP earnings measures. However, management believes that most unitholders, creditors, other shareholders 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 quarterly financial statements available at WWW.CI.COM/CIX.

I would like to remind everyone that this conference call is being recorded on Thursday, August 2, 2007 at 4 p.m. eastern time.

I will now turn the conference over to Mr. William Holland, Chief Executive Officer of CI Financial Income Fund. Please go ahead, sir.

Thank you, Yvonne. Good afternoon. I will make a few brief comments and then I will be glad to take some questions.

I'm very pleased to report another very, very good quarter as global markets just continue to march on. This streak now of very strong results is approaching five years, and I will say you can really get used to it. For the most part, the scorecard is impressive in every single important metric -- sales, performance, earnings, cost controls.

Just to look at a few highlights on a year-over-year basis. Our assets under management are up 22% as of June 30 to just under $70 billion. Total fee-earning assets $98 billion, up 33%. Our earnings per share are up 125%. Obviously, that can be explained by the fact that we no longer pay corporate income taxes. Our EBITDA was up 44% on a year-over-year basis. And maybe as good a measurement as any of these for the condition of the company is our pretax operating earnings per unit were up 19% year-over-year. As we transferred into an income trust, our distributions are now $0.54, which is up 200% from last year.

Even more impressive than the year-over-year results are the quarter-over-quarter. Sequentially, our assets under management were up 8%. Total fee-earning assets up 16%. Much of that can be explained by the Blackmont transaction. Earnings per unit on an adjusted basis, which accounts for a non-cash future tax expense, is up 10% on a quarter-over-quarter basis.

Sales continue to be very strong, especially in light of the fact that we got hurt a little bit with the income trust market really drying up and losing a very popular money manager. If you look at our sales for the quarter, they were slightly higher in '07 than they were in the second quarter of '06. On a year-to-date basis, our sales are pretty similar. We're now at $1.74 billion as of the end of July, down about $200 million from last year. I expect our sales in '07 to be about the same as they were in '06, and I think given the environment that we're in, I think that that's exceptional.

Our operating margins really continue to be consistent with our guidance. For the quarter, they were 107.4 basis points. We continue to see an environment in which margins do erode on a very slow basis but that they do erode. The real cause of this is management fees. All of the margin decrease on a quarter-over-quarter or year-over-year basis can be explained by a reduction in the management fees. We continue to believe that there is pressure on management fees and that I would expect over the next year our margins to be somewhere around 107 basis points.

I'll spend a minute just updating the Rockwater acquisition. We actually took control right at the beginning of the quarter, so we really have a full quarter. Blackmont had a record quarter in our Q2 and it added $8 million worth of EBITDA, or about $0.03 per unit. We recognized a lot of synergies really in the first quarter, and I would say that most of them without any real effort. I think that there are still some opportunities to bring the cost out of this business. But really the story here is not one of synergies. It's really one of trying to grow the revenues aggressively. I think we're in a good position here to start hiring new advisors and we have been very successful in hiring very key capital market people over the last couple of months. We've had success on the fund side. Lakeview Funds -- we brought the expense ratio on the Lakeview Funds down to the same level as CI's. Blackmont, Lakeview, KBSH are now all running as stand-alone businesses, and we expect all businesses to be profitable on a consistent basis.

Just a final thought before I take some questions. Today we did announce that we are increasing our distribution to an annualized rate of $2.28, yielding about 8.4%, and that would come out to be $0.19 a month now. On the sales front, July was actually our best July that we've had since 2000 and probably our second or third best of all times. It was incredibly strong month, and August appears -- on the retail side anyway -- to still be pretty decent, even in light of the enormous amount of volatility that we've seen in the global markets over the last ten days or so. Our performance continues to be decent. We continue to lead in both four and five-start funds as we have really now every single month for five years. We're getting some very solid traction, I would say, on our newest product, which is the SunWise Elite. It really is our newest kind of seg fund product, and the sales are now averaging about $2.5 million a day and increasing every single week. I actually see an environment that is conducive to these sales even doubling from here, so we -- our prospects for this product are very good. We are looking at some new products with some interesting pricing ideas that we would like to launch in the early fall, and we think those will probably be pretty well-received as well.

So when I just sum up -- the business environment, I think, is a little different over the last couple of weeks that it was for most of this year, given that we've had three days where the stock market's been down more than 300 points in Toronto, but it certainly hasn't affected sales in any way yet. I think it would be unlikely that, if the market continues to be volatile, that it won't affect sales. But I look at the environment that we're in as being one that still is pretty decent and I like our positioning. I think our performance continues to be good. We like our positioning with this new SunWise Elite program. So for the most part, I'm very satisfied and I think that we're very well-positioned.

I think at this point, I will open up the floor and answer any questions if there are any.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from John Aiken of Dundee Securities. Please go ahead.

Good afternoon. Is Steve hiding around somewhere?

Steve is sunning himself in the (inaudible) and he was very kind to come in and do the board meeting today, but at that point, he decided he'd bolt.

Oh, Bill, you're too kind. Anyhow, a question in regards to industry-wide MER's. Bill, looking at what you've been doing and your guidance now to 107 basis points -- sorry, in terms of operating margins -- 107 basis points is very good, particularly which what we're seeing in the marketplace. But when do you think that the shakeup in terms of what we're seeing in fixing MER's from the larger players is going to lead to dislocation within the industry in terms of -- do you think that we may be able to see some acquisition activity in the near-term, or is this still something that's probably a couple years out?

I really don't -- I don't really have a good feel for that. I look at the -- I certainly see that there's fee pressures out there, and I think that in the last -- we now have over half of the industry having fixed through ER's, and some of the comments are so bizarre. I can't remember -- it was one of the fund companies said that they're not going to do it because it's just a way for fund companies to earn more money, but the logic of that is so confusing because we're charging less than half of their ER and why dropping it in half? How could that not be a positive for the investors? So I think that there's still ways to obfuscate the whole fee issue, and I think one thing I would say is that ultimately just getting to one fee allows the consumer to know exactly what the price is, and then I think that probably puts more competitive pressures on it. I don't think that -- we're not setting the trend here by any means. I have to think that Royal Bank and the stuff that they're doing with fees is probably leading the way. They, earlier this year, moved the fees on their global funds to 185 basis points plus an ER of 20, and that's a meaningful -- so they're probably 10 basis points below us even now. But the difference between them and some of the higher fee companies now is like 80, 90 basis points. I think fees become an issue at some point, and I think that that does create an environment where there's likely to be consolidation and -- because competing with the banks is only going to get more and more difficult in that they have the most -- they have the ability to basically cut the fees for a long time if they chose to do it. I don't think that fees are the be-all and end-all of the competitive issues. It's just one of the many.

That's great, Bill. Thank you very much.

Your next question comes from Timothy Lazaris of GMP Securities.

Hey, Bill. How are you? My question is simple. The Rockwater transaction, I think, added $0.03 according to your presentation in the quarter and I'm wondering -- capital markets businesses are a little more uncertain than what your mutual fund business is like. How would you sort of guide the analysts in terms of the contribution that business should have over a period of time like a 12-month period of time? Was this just an exceptionally good quarter or is this indicative of what it can contribute on a quarterly basis?

Our forecast for the capital markets is very modest, and the actual EBITDA contribution in the entire capital markets is likely to be in the range for the year of kind of $0.01 to $0.015 a unit. So it's really negligible.

Okay. Alright. And then just on that, the topic of distributable cash, you guys raised your distributions this quarter, which was really quite nice. Right now, I think Steve used to put out a slide that talked about the payout ratio. Are you running pretty much at 100% right now in terms of your distributable cash?

Pretty close.

Pretty close?

Very close to it, yes.

Okay. And so future distributions changes are going to be a function of asset growth, and I guess what I'm asking is what's management's internal sort of view on the balance of the year? Not to say that you have a crystal ball, but I think that if you sort of annualize the first half of the year, it's probably higher than what you set out for the year. Is that safe to say?

A little bit. I don't think we know. I think we're still working out our distribution strategy. The most important thing that we're trying to accomplish is to pay out as much as we can without any tax leakage. We don't want to return capital and we don't want tax leakage. That is really the ultimate goal. And the amount of deductibility that the LP creates -- we're probably just about maxing out at right now.

Okay, Bill. And one last question. With the debt you've got on the balance sheet, is that debt fixed rate or for floating rate?

Fixed.

It's fixed? Okay. Thanks very much.

(OPERATOR INSTRUCTIONS) Your next question comes from John Reucassel of BMO Capital Markets. Please go ahead.

Thanks. And Bill, just a couple questions. Can you talk about -- between Rockwater and the [IDA] channel and Assante and the [MSD-like channel], it looks like you're trying to pick out people at Rockwater and it looks like there's some competition, at least on the [Icon] side. Can you talk about what competition's like on both sides and what the value proposition is you're trying to sell to these individuals to get them to join?

Yes. First of all, I would say this is the most intense competition for financial planners and stockbrokers that I've seen in the last 20 years, and I think you're referring on the [Icon] side to an article today in the paper in which 100 [Icon] representatives went over to IPC. I think, for the most part, that the story's accurate. And these people who left are very, very good customers of CI. They continue to have a very significant book of business with us, and so for those people, I believe that they think that they were going to a place that was more conducive for one reason or another, and I would say that if they find that the grass isn't greener, there'll always be a place at CI. So I'm disappointed that they're gone, and we continue to add new financial planners at Assante with regularity. We're continuing to grow that business. We've lost very few of the Assante brokers. Very few. On the Blackmont side, the brokerage competition is really intense, and the proposition there is really for the type of advisor that's looking for a little more entrepreneurial environment and there are some that think that their business is better practiced outside of a major bank, and while there may not be a ton of them, there's probably enough of them to grow your business at a pretty decent rate, and I would say that today, the pipeline at Blackmont, from what I'm told, is as good as it's ever been.

Okay.

And they did shut down for about five months of recruiting from about mid-November until about a month and a half ago.

And the ideal client is still someone with a large managed book -- managed program book? Is that correct?

Yes. That's the -- our targeted audience is an advisor who's probably been around 10-plus years and has a book of approximately $100 million and primarily managed money.

Okay. You talked about the success of SunWise. And I guess -- any update on thoughts on the trust offering, I guess, given your (inaudible) of Sun Life and the success of SunWise. Is the best option still like something like a Sun Life trust and has there been any developments on that side or is it still too early to say anything?

It is too early, but we have looked at a number of potential banking solutions and so we certainly haven't landed on anything yet, but one of the options that may be available is to do something with Sun Life with a Sun Life trust. So we will explore that, but I think we're probably a quarter away from having a definitive view on how we should offer the basic banking services that we want. And keep in mind that one of the banking services we don't want is the hot deposit business. That's not what we're looking for here. We're looking for the type of business that plays well with our financial planners and that is really long-term investment loans and mortgages and things like that. And so we're looking at it. We've seen a number of decent ideas. And we're not out looking to buy a big bank or something like that.

Or a small bank?

I don't think so. I think we're looking at going into this in a more modest fashion than that.

Okay. And this last question. You did an equity offering some units and to really keep your debt cap at around -- or debt to EBITDA around the one times level. Are you still comfortable with that or it's changing your views on that or is that kind of where you'd still like to be?

Well, I think that for the first time, we really did hash it out today at our board of directors meeting. And the one thing that -- with the recent kind of onslaught of private equity, the question that has come up is what is the optimal capital structure of a company like this? Is it really -- given the cash profile -- is it better to have more leverage rather than less leverage? And what we said for a long time is that we thought that leverage was good and we thought that one times EBITDA was probably where we were comfortable. And I think that conceivably we could, over the course of time, move that up, but it's still in the just-thinking stage. We're really in a grey zone. We spend a lot of time thinking about distributions as a corporation and they we started evolving our thinking on distributions as an income trust, and now we're kind of in the grey zone of halfway between an income trust and something else, and we don't know what we're going to be in 2011, and that plays into it.

Okay. Thanks, Bill.

Mr. Holland, we have no further questions at this time. Please continue.

I will. I'd like to thank everybody for joining us for our second quarter conference call and I look forward to updating you on November 2 on our third quarter. Thank you very, very much.

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