CI Financial Corp (CIXX) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the C. I. Financial 2007 third quarter 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. (OPERATOR INSTRUCTIONS)

This presentation contains forward-looking statements reflecting management's current expectations regarding the future performance of C. I. and its products including its business operations, end strategy, and financial performance end condition. Although management believes that thee 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, taxes, 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, pre-tax operating earnings, adjusted EBITDA and earnings, distributable cash and free cash flow are non-GAAP, Generally Accepted Accounting Principles, earnings measures, however, management believes that most unit holders, creditors, other stakeholders and analysts prefer to include the use of these performance measures in analyzing C. I.'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 Tuesday, November 6, 2007, at 3:00 p.m. eastern time.

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

Thank you very much, good afternoon.

I think that the third quarter of '07 was actually a pretty decent quarter especially in light of the incredible volatility in the capital markets worldwide. Our margins were stable at about 107 basis points on our assets under management. Our average assets for the quarter were only down 1.7%, our ending assets were down only 1.2%. Keep in mind that this is an environment where markets went to an all-time high, dropped 10% and then just after the end of the quarter, hit all-time highs again. All three of our operating businesses performed very well in this difficult environment.

I'll quickly walk through a few highlights and then be glad to answer any questions that people have. For the three months ended September 30, 2007, our assets under management were $65.2 billion, up 13% on a year-over-year basis. Our total fee earning assets were a little over $96 billion, up 27%, a great deal of that can be attributed to the acquisition of Blackmont. Our EBITDA per unit was up 8%, our pre-tax operating earnings up 6%, and our earnings per unit were up 2% and most of that can be explained away by an increase in amortization of DSC and $5 million higher of interest expenses.

On the sales front, in again, what is a very, very difficult market, our gross sales were $2.5 billion in the third quarter, well in excess of the $1.9 billion last year. Our net sales reported are $149 million, that was affected by $102 million redemption from a closed end fund that had reached its 10 year anniversary and for all practical purposes was folded up. That was a DDJ High Yield Fund.

On a year-to-date basis, our gross sales are over $9.7 billion, far ahead of last years, and our net sales are about 10% below last years. Sales have started to trend up starting the beginning of September, September and October were both very good months for gross and net sales. Our net sales in October were $179 million as compared to $ 44 million in 2006. This should easily be a record year of gross sales for C. I. 's Mutual Funds.

Our distributable cash on a year-to-date basis for nine months is almost exactly in line with where we thought it would be. If you look at our cash flow from operating activities of $491 million, adjust out CapEx, DSC, working capital and equity-based compensation of a little over $20 billion, you get distributable cash of $470million on a per unit basis that's $1.67. We have paid out $1.63 for a payout ratio of 98%.

I think we've made this point time and time again but our intention is to essentially pay out all of the distributable income we can during the period of time that we earn income trust and we're hitting the target just about right on. Our intention is to have no corporate income tax paid and to have no return of capital to investors.

Just a quick update on the Blackmont or Rockwater acquisition. After six months, I can only say that I think the results are very, very good. We started out the second quarter which was the first quarter of the acquisition. They had--Blackmont had a record quarter and then the third quarter that we're reporting now was actually a pretty lousy quarter for the brokerage business in general worldwide given the enormous swings in the equity markets around the world.

If you look at it on a six-month basis though, it's done very, very well. It's contributed more than we would have thought and I think if you look at the quarter that we're in right now, it looks to be a very strong one for them, they've improved the Company considerably. They've attracted three or four very highly regarded investment banking professionals and if you look at the acquisition in all of its components, in the first six months, we have gotten approximately $17 million of EBITDA out of the three components, and the run rate today is about $40 million, just under $40 million, and that equates to about seven times multiple to what we paid in a fully baked purchase price.

As we look at the world today, clearly in light of what are difficult markets, our sales are very strong. They've been good really since the first week of September. We expect November to be in the 130 to 150 range. Sales appear to be--continue to be very strong. Assets under management are up a little bit over the third quarter average.

We continue, and I think generally, if the performance of your funds is good and you've had pretty good momentum, that's a good sign and we continue to either lead, or be second in four or five star rated funds. Our asset management operating margins have continued to be relatively stable here at about 107 basis points and I would think that's approximately what we would look forward to in the final quarter of the year.

We like the way that Blackmont is positioned today. We think that not only will they have a good quarter but we think that they've done a lot to position themselves to have a very strong 2008. We're in the final stages in conjunction with Sun Life of introducing a guaranteed income for life product that would compete with the one that Manual Life has come out in the last six weeks or so and a compliment to our existing Seg Fund products and a guaranteed income product that we brought out in March of this year, which is continuing to sell very, very, very, very well.

I think on this point here, I think I will leave it and open up the call up to any questions that people have.

Thank you. (OPERATOR INSTRUCTIONS)

The first question comes from Geoff Kwan from RBC Capital Markets. Please go ahead.

Good afternoon. Just had a couple of questions. The first one was I believe last quarter you were mentioning you may have some sort of update regarding the investment loan and mortgage initiative you had indicated previously, and then the second question is in terms of on the acquisition front, has that obviously there's been the conditional bid for Dundee Wealth, in terms of other stuff that you're seeing in the market, is it stuff that you're looking to go after or is stuff being brought to you?

Let me start out on the banking front. I have said for the last three quarters or so that we continue to have an interest in providing some banking services for our financial planners and brokers, and the third party financial planners and brokers that we deal with. I must admit that looking at the credit issues that the occurred this summer, it certainly makes us think very carefully about what our banking strategy and in terms of offering banking services should be, and I think that it probably slowed down the process and we continue to look at a variety of things, as for example, maybe doing something with Sun Life, with a trust company, but where we stand today, I would say that we're no further along than we were three months ago and watching so many banks become insolvent in such a short period of time this summer certainly makes us quite guarded in how we go about this, and so I would say in the near term, we're probably just in a thinking mode.

In terms of acquisitions, I think it still seems to me to be pretty quiet out there. Clearly, during this quarter, we made our intentions known that we would be interested in acquiring all shares of Dundee, if they had an interest in selling. Obviously, it's not something you can do on a truly unsolicited basis, because there is a single shareholder that represents 50% of the votes in the Company.

I would say that that we look at Dundee as being a very good fit for C. I., they're in all of the businesses we are. They are very complimentary in terms of how similar they all are, and clearly, we made our intentions known on September 26th and they have not gotten back to us and said that they think that it's a great idea, but it is one that we would have interest in under the right circumstances.

Are we seeing anything else out there? I don't think so. I mean, nothing really--it still seems pretty quiet on the M&A front, which is very surprising to me given how competitive the market has become and how very few companies are truly dominating the business.

Okay, great. Thanks.

Your next question comes from Doug Young from TD Newcrest. Please go ahead.

Hi, good afternoon, Bill.

Just wanted to pick your brain in terms of how things are going with KBSH and I know it's a very small part of the business but I just noticed the sequential revenue line coming from KBSH dropped off quite significantly and just wondering what's happening on that front?

I think KBSH has done a very good job of reassessing their position in the businesses that they want to be in. I think that they were a pretty heavy company in terms of employees and the seven or eight key professionals there are still all there and they seem to be incredibly engaged, their performance has improved considerably over the last two years or so and they're starting to get the attention of consultants again, and so it unfortunately is a very small part of our business and--but I look at them as easily being profitable from here on forward, and they haven't been for the past several years, so I think they've made a lot of progress and when I look at the business today, I think it's considerably better than when we first announced our intentions to acquire the entire Rockwater business nine months ago.

Okay, and then just on--when I look at your different line items in your income statement, really there's not too much that you can control outside of your expenses. You've done a great job controlling expenses, but trailer fees continue to increase and just a broad question, have you seen any further attempts by your competitors to further increase the commission rates? Do you see that being a big competitive advantage for some of your competitors who potentially is going to put margin pressure on you and some of your independent competitors over the next few years?

I think that's a wonderful question, I'm not sure I know the answer. I think we're managing our controllable costs as well as we can. Our trailer fees go up because more--larger and larger percentage of our business now is coming in on a front end load basis at 1% whereas seven years ago 90% of the equity business was on a deferred sales charge basis only getting a 50 basis point trailer. I would say this, that if trailer fees go up from here, then the non-bank fund companies will likely suffer dramatically.

I mean it is inconceivable in my view that we can charge higher management fees. I think the market is really capped here at 2%, plus modest expenses and if you start looking at funds in different companies when their performance isn't good if they have high management fees they stop selling way quicker than ones that have more competitive management fees so I don't think that there's even an option to increase the management fees charged to investors any more and I think that it would be very difficult to increase the trailer fees from where they are and if we did, I think we would basically be handing the entire industry to the banks.

Okay, and then just lastly on your assets, and again a number question, but your assets administration segment, you sequentially went down quite a bit in terms of your earnings pre-tax. I guess is there any unusual costs that went through or is this something, at this type of level is what we should be expecting?

Oh, I think that this was an unusually big swing. I think that the capital markets business at Blackmont stopped dramatically in the middle of July when the credit market started to freeze up. It was a little more expensive operationally at Asante. I think that swing is much larger than what we'll see on a normal basis. I think there's marginally more volatility, but I don't think it's going to be much more.

I think this is a pretty unusual quarter and it was followed by a highly unusual quarter before where everything was so great. I mean, it was a record quarter in capital markets almost everywhere worldwide, and Blackmont which was our first quarter with them, had extraordinary results. I think that I'd prefer to look at a six-month basis and say it's done just better than we expected and the run rate expectations are higher than we expected, and I don't expect to see that kind of volatility too often.

Okay, thanks for the color, Bill.

Your next question comes from Stephen Boland from CIBC World Markets. Please go ahead.

Hi, Bill. Two questions.

There was sort of a--I'm not sure if I'm reading into this too much but there was a subtle change in your target debt-to-capital ratio saying that you would be comfortable going up to two times, previously it was always a target of one. Am I reading too much into that or is there an expectation that you may continue to ratchet up that ratio?

I don't think that we're comfortable today in an environment like this being anywhere near two times EBITDA, that I think is probably not accurate. I do think, Steve, the closer we get to going back to being a corporation, the more comfortable we will be on increasing our debt level to EBITDA, because once we're a corporation, we're no longer obligated economically anyway to paying out all the earnings to the unit holders. We could then--as you get closer to a corporation you could have a policy where you start retiring debt instead, so as we get closer to the January 1, 2011, I think it's more likely we'll feel more comfortable.

I would say today in the business environment we're in, right now, I'd say that in and around one-times EBITDA is our comfort point. If we did an acquisition and we could move our EBITDA up considerably and we needed to put a cash component into it and the cash ended up moving that EBITDA number up to 1.5, 1.6, I think we would be open minded to it but I'm not sure that we're ready to say that that's where we would want to have our long term debt to EBITDA ratio and--but as we get closer to being a corporation, it will make it a lot easier for us to do.

Okay. Second question and don't shoot the messenger here, Bill, but the one question we get is why on the Dundee situation there is a--why haven't you put out the circular irregardless of Dundee--the Dundee Wealth Board not commenting on your bid? That's the question we get regular--a fair amount so just wondering how you address that?

I guess that there's no--the circular has been sent out to one person. I mean, we sent out a bid and a press release out to Dundee, and the person at Dundee who receives it has the ability to say yes or no. It doesn't matter what the other shareholders say, we cannot do a deal without the endorsement of a single shareholder. That being the case, it would just be a waste of paper to send out the circular to the rest, and I think that it would be--sending out a circular I think may even be seen as offensive to the single shareholder, given that a deal can't go on without his endorsement.

Okay, I appreciate that, Bill. Thanks.

Your next question comes from John Reucassel from BMO Capital Markets. Please go ahead.

Thank you. Bill, just a couple of questions. You talk about new products you're coming out with Sun Life to compete with Manu. Is there anyway to get ahead of the curve here, like is there an advantage to being ahead of the curve here or is there not or what's your experience so far been, is it just as easy to copy or how do you do that?

It's not. Being ahead of the curve has been a winning strategy, I would say, in the asset management business from the beginning of time. I think back to us having the first Asian Fund or Emerging Markets Fund or Latin American Fund, we got enormous amounts of in flows in a short period of time. I think that these are different, more tricky products, they require capital allocated against them and they aren't as simple, so I think it's hard.

We have to do it in conjunction with a partner and they may have a corporate agenda that's busy with other things. I think that what we are very good at is taking the product, getting it to the market in a way that works for us and our advisors and we've done exceedingly well with the product that we brought out--guaranteed income product that we brought out in April and while I would be less than sincere if I said there wasn't a first move or advantage in being first, I think we've been very good at being able to overcome that and get in the game and get a very, very competitive position quite quickly.

Okay, okay, and just back to Dundee. Should we--is there a next step for you at CI, like what--or is it just are we waiting to hear from the other shareholder?

I don't think that there's a step that we think that makes any sense for us right now. I mean, I think we consider, we continue to monitor the situation closely. We think we have a good relationship with the large shareholders and the management of Dundee Wealth. I think that they know that if they would like to sit down and have a conversation with us, that we would be more than inclined to do that, and we just look at Dundee and of all of the businesses, we've done 10 acquisitions in the past eight years and I would say this is the one--the reason why it attracted us, it just fits so well, and it would be incredibly insincere for us to say that we have no interest in it, but it is not in our hands in any respects at all.

Okay, and your sales have been good and the industry has been pretty good. Has that--has the strength of the sales surprised you both internally and externally given what's been going on in the markets and what's happened to the Canadian Dollar?

I am shocked at the sales. I'm shocked at the level of the equity market in general. When it hit an all-time high three or four weeks ago, that shocked me. It seems like there's a real difference of views between the equity market and the debt market, and the fact that this is seasonally--October and November are seasonally very, very strong months for mutual fund business, I wouldn't have thought so at all in this environment, and I continue to, like I notice that the banks were very strong or a couple of them again last quarter and I think that if the market just stays flat in November, November is likely to be an exceptional month.

And you mentioned, did you mention where you were so far in November?

I think that firm wide we're about $50 million already.

Okay, that's on a net sales basis?

Yes, and we're starting to--Asante is doing better and better all the time. Our assets--our managed assets at Blackmont continue to be very strong. It's actually a pretty good--it's a pretty good--the sales are very good in an environment that's not and that's what's surprising.

Okay, thanks, Bill.

Your next question comes from Timothy Lazaris from GMP Securities. Please go ahead.

Thanks, I've got two questions, Bill. Just to talk about debt in general, you have had higher debt than many of your peers and you're not adverse to debt and we appreciate that that's a great way to put leverage into your business. Could you comment on since the debt markets have widened spreads, is your cost of debt increasing, just in terms of the coupon if you will and when does your debt facility--what's the availability of your debt facility and when does it come for renewal and are you expecting that the cost of your debt will increase at renewal? That's my first question.

Well we're just--we're BA's plus, right, and so there was a period of time in August where BA's really blew out the spread on BA's over treasuries, I think got up to 110-120 basis points, and a lot of that was treasuries going down, but the cost of our funding went up a bit but not materially. We have a facility for up to a $1 billion and we're probably in the range of 800 now and I think that we will relook at this probably some time after the RSP season.

The other thing, Tim, as we get closer to going back to a corporation, one of the things that we could consider is to terming out some of our loan requirements, and so while I don't see us really--absent an acquisition, I don't see our debt going meaningfully higher than the ratio it's at today. We have not found it to be difficult in this environment. The banks are still looking to do business with very good credits like us so we're in pretty good shape there, but as time goes on we may look to term out some of our own requirements.

Okay, Bill thanks, and then just you're usually a very good indicator of the future and I'm wondering, you've seen RSP seasons, we've had four at least terrific RSP seasons. Can you give us any kind of prediction from what you're seeing for this year and what do you think is going to be, if there is any kind of RSP season, what do you think the hot product is going to be this year?

If the RSP season started today it would be exceptional, and if rates continue to come down in the U.S, It's likely to be a very good RSP season. Lower rates will do a lot for mutual fund sales. Clearly, the market is shying away from non-Canadian Dollar denominated, the Canadian Dollar is up 7.5% this quarter already from September 30th. It was up 7.5% last quarter, and Canadians made pretty significant migration into non-Canadian assets a year ago just in time to get creamed, and if I were to bet today, I'd bet on Canadian Balance funds or something similar to that.

And I think that Canadian equity manager, there was the Canadian Equity fund is morphing a bit into really something that's a little more global and I don't think that people are going to buy Canadian Equity funds that are 100% Canadian equity but I think those funds that have 40%--30% or 40% in non-Canadian and I think the ones that are probably with less U.S. is going to be seen as more desirable, although that's probably looking in the rear view mirror, but I think it's going to be--if the market stays in its present condition it's going to be a very, very strong RSP season and it's going to favor Canadian Dollar assets and given that there's been enough volatility out there to scare people a bit, I'd go back to what was big in '06 and that was balance, Canadian equities, conservative Canadian equity and balance.

Okay, Bill, one last thing. I guess in the press, pre-the quarter end think was some press about high profile manager from Boston looking to make a move to the Toronto market somehow or working for a Canadian Company. I'm wondering, was there any truth to that and if so can you comment on it at all?

That's the one thing I can make no comment on.

Okay, thanks, Bill.

(OPERATOR INSTRUCTIONS)

Well, then I guess we'll wrap it up here. I'd like to thank everybody for joining me this afternoon and reviewing our third quarter results. I look forward in early February to doing a year end wrap up and telling you where I think the RSP season is at that point, I'll certainly have a lot more color by then. Thank you very much. Good-bye.

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