CI Financial Corp (CIXX) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the C.I. Financial 2007 fourth 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 CI and its products including its business operations, its 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 immaterial filed with applicable securities regulatory authorities from time to time. EBITDA, adjusted EBITDA, operating margin, and distributable cash are non-GAAP earnings measures. However management believes that the most unit holders, creditors, other stake holders, and analysts prefer to include the use of these performance measures in analyzing CIs results. A reconciliation between income and EBITDA is included in management's discussion and analysis at www.ci.com/cix. I would like to remind everyone that this conference call is being recorded on Wednesday, February 20, 2008, at 3:00 p.m. Eastern time. We'll now turn the call over to Mr. William Holland, Chief Executive Officer of CI Financial Income Fund, please go ahead, sir.

Thank you very much. Good afternoon. First of all, I'd like to apologize for having to reschedule this meeting. It was obviously scheduled for 2:00 p.m. I'm sure we have a very good reason for rescheduling it. I just don't know what it is. What I'll do is I'll quickly give you a brief summary on the fourth quarter and fiscal '07 and then I'll be available to take any questions you have.

I think an obvious observation on '07 is that the year end snapshot that you're looking at here looks a lot better than 2007 felt. The reality is we really had two distinctly different halves of the year. The first half was fabulous, exceptional markets and the second half was really quite nasty. On a year-over-year basis, average assets under management were up 12%. Net income per unit was up 33%. EBITDA per unit up 18%. But if you adjust it for stock based compensation it was up 12% which is really very much in line with the average assets under management. Our net sales for the year were relatively flat at around $2.1 billion.

If you just quickly look at the fourth quarter, our average assets under management were up 6% over the same quarter of '06. And our adjusted EBITDA was up about 5% per unit, very much in line with the average assets under management. On a positive note, the net sales for the quarter were $422 million, which was about 2.5 times the same quarter of '06. If you look at the sales for the year, a couple things are worthy of pointing out. One is that '07 was still a record year for us in terms of gross sales. And I believe that gross sales is really the best way of determining the health of your business. At just over $11 billion and net sales of $2 billion I would say that these numbers were very encouraging when you -- you have to remember that just prior to the beginning of '07 we really got a double hit. We lost Kim Shannon, who was a very popular manager, running our largest fund and then we had the income trust announcement. And we were -- our income trust fund was the largest or second large nest the country. And so with that as a backdrop to have this kind of results in '07 I would say is very, very encouraging.

And this may be stating the obvious now. But those net sales numbers -- and I've pointed this out. We could double or triple or net sales if we're willing to change to some of the competition schemes that some of the other fund companies are using. We have avoided doing that at all costs. But we have made a conscious decision to not make -- enter into these type of compensation schemes.

On the distributable cash front, we did approximately what we thought we were going to have in distributable income. We distributed $2.23 per unit, that amounted to just about $624 million and it was 99% of our distributable income. And that's very much in keeping with what our strategy is of paying out 100% of our distributable income. We've said time and time again we want to pay out enough so that we have no corporate taxes and not so much that there's a return of capital.

Just a couple of highlights for 2007. First of all, I think the -- we had a very successful integration of the Rockwater acquisition. There was three business components to that. I think that it worked remarkably well. And we had some really decent product launches. Our T-class funds that came out late in the year had sales pretty close to $70 million and earlier in the year in June we had incredibly successful launch of a Seg fund lineup as a SunWise Elite and sales of our Seg funds have been incredibly strong from the middle of last year and are even stronger today. Seg fund business is a materially better business than anything we have. It's very long term business. It's very sticky business. And today, between our participation in the Manual Life, the very successful Manual Life seg fund business and the SunWise Elite, our Seg fund business is such a meaningful part of our business.

If you look at '08, I think there's a couple of things. I would say this. That our relative position today at CI is as good as it's been in an awfully long time. We have real good performance. We haven't had any real serious accidents of any kind. And so I think our positioning is very, very good. We launched a new set of funds in January in a pretty tough market. The second week of January, if you remember back, was horrible. And we have about $50 million in sales already. And we have assets in the fund of around $75 million. A lot of this business is people we were not dealing with. So this was an incredibly encouraging launch.

In about a month or so we'll put out a new version of our SunWise Elite. It's called SunWise Elite Plus and it's really an income for life product. And I think it's one of those things that can't fail. There's a big demand for it out there. And so I look at this as being very encouraging. And as I said, the Seg fund assets are just the best -- they probably have a life expectancy two or three times that of regular funds.

I pointed out that our performance is still very strong across the board. And generally speaking, that's as good as indicator for future net sales as you're going to get. That being said, this is a completely less hospitable environment than what we were in last year at this time. This is much more difficult. But our business is doing very good. Our net sales in February are about $200 million right now. All just straight retail business. Our gross sales are extremely strong. Our gross sales are running a little bit ahead of last year's February sales. So when I look at our business today, I very much like our positioning. I think that our business will be very strong. If you force me to guess what our net sales will be for '08, I think they'll look something like '07, '06, and '05, a little over $2 billion. And really that's nothing more than a guess and so much of it will be based on how the equity markets pan out. We expect to see very little pressure on margins this year. I think we've cut our costs in some of the places that more discretionary that we could. I expect that margin erosion will be pretty minimal this year.

I think at this point -- I guess I want to make one point about the distribution. We moved our distribution from $0.19 to $0.16 very much in keeping with what we said we'll do. We'll take a look at any given time at what we're distributing and what we think our distributable cash is and if there's much of a difference, we'll adjust it. And we'll look at it again in July at our next Board meeting for sure and see where we are. As you get closer to the end of the year you have more confidence in moving the distribution up if -- and right now our run rate is probably just about $0.17 a month and we're paying out $0.16 so there's a reasonable cushion in there as well. I think I'll leave my remarks at this point here and I'll be glad to take any questions people have.

Ladies and gentlemen we will now conduct the question and answer session. (OPERATOR INSTRUCTIONS) Your first question comes from John Aiken from Dundee Securities.

Bill, just wanted to get you sense and this is of course, being framed around the distribution cut, you're looking at the $1.92 that you're running at is about 14% or 13% below what you actually made last year. If I'm listening to your commentary profitably that you're talking about margins seem to have leveled off and you're expecting not too much pressure there. It does look like the dealer area including Blackmont did have some good contribution and you are expecting net sales level in the same level as 2007. The one thing that I can think of or point to that may have a moderating impact on your outlook is just negative investment performance. Is this what you're seeing for 2008 or am I missing something?

You have to understand that our assets today are probably about 8% below the asset high that we hit in later October of '07.

Yes.

Right. And the first quarter the average assets are lower. Our assets year to date are only down 2%. That's it. But our average assets for the quarter are down more than that. Right? So we use the same forecast that we always do in terms of market appreciation. We actually look at our assets and we take the historical returns of that category, subtract management fees, and that's what we get to. We actually could distribute it, as I said, our distributable run rate today is more like a little over $0.17. And then so we very well may at year end pay the same as we did last year. But clearly our average assets are lower today than they were. Our assets today are lower than our average assets for last year.

Thanks, Bill, and just one other question. One other question on -- you talked about not following your competitors down the path in terms of compensation for products being sold. Are you happy with the level of sales that you're able to get? Or do you think that the risk is at some point down the road, if this is where your competitors are getting all the sales from that you may have to begin to increase your trailers?

I'll retire first. We don't even need a calculator to look at some of the compensation schemes and realize that you can't make money. The unit holders of CI would be incredibly disappointed if they thought that we were putting out products that you can't make money at. We know -- we understand, and people have now, have been able to look at several companies that have compensation schemes that don't make sense. In some ways, that's really, highlights the difficulties of small to mid-size firms to get any traction. Fidelity doesn't do it. Mackenzie doesn't do it. You start looking at it and you start saying, well, if that's the cost of being a smaller player, then it's a prohibitive cost. So what we're trying to do is there's no doubt in our minds that we could have doubled our sales last year. None. But we're trying to have a prudent expectation for profits and we're trying to keep our management fees low. In the straight mutual fund business we're trying to keep our MERs at the very low end of the competitive range.

That's great. That's definitely what I wanted to hear. Thank you very much.

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

Good afternoon, Bill. First question on the cost side. I always thought of CI as being fairly lean on the cost side. But you indicated that you were able to scale back and I'm just curious as to where were you able to scale back? And have you eaten into some of the more important areas such as sales, marketing, and so forth.

We've done nothing in the sales side. I think that we've lightened up on advertising and we were pretty light on advertising to begin with. Right? But I think that, Doug, there's a very important point that I'd like to make here. This feels like a lot worse bear market than it is. And the reason is is that assets or the stock market went up for five years and everything to do with financial services has inflated beyond belief. Because there hasn't been a market setback to kind of cool the party down. And when we look at our costs which is mostly compensation and we see how much it's increased over the last five years, you realize that you've needed market appreciation in excess of historical average in order to make things work. All of a sudden instead of getting 10% market appreciation you lose 10%. That has the impact or the feel, and I can tell you, and a lot of companies out there will tell you this feels like a very bad bear market.

And just maybe sticking with that theme, Bill, you look out over the last six months, it's not looking all that fun out there. What's your gut feeling what it looks like in six months? Can net sales rebound coming out of--?

I think it's impossible to guess. I can tell you when I look at our business today, it looks very much like last year. Our sales for February will be -- I don't know -- 350 million or whatever. It looks to me at CI a lot like last year. Our performance is decent. I don't see any reason why our business won't be good. We get an awful lot of Seg fund business though. So much of our business comes through Seg funds. And that business actually can sometimes improve when market conditions scare people. So speaking for -- I think the RSP season in total will look very disappointing. I don't think ours will be. I think ours will look exactly like last years.

Bill, how much of your net flows is coming through the Seg fund side and how much of your assets is now in that side of your business?

We have $9 billion now in just our SunWise product and that doesn't include the couple billion we have in the Manual Life gift. This Manual Life product has been exceptional. They've really hit the ball out of the park with that product. That's a big part of our business as well. And that's just really good solid business. Most months, if you look at our what we kind of define here as our old retail business which is third party financial planners and brokers, it's essentially zero and has been. Our business comes from institutional sales, from Seg fund business, from managed solutions at Asante or Blackmont. It's just a completely different business. And so it doesn't -- I don't think it has the same swings. Our business has been relatively consistent over the last four years or it's just a lot more consistent business now. But I don't expect to have a year when we can turn around and do 6 billion, $7 billion in sales like we did in 2000. The world is so dramatically changed. In 2000 our market share was about 46%, 47% for the year of every single Company -- in 2000, that's right. And the banks were under 20. In 2006 the banks were like 65%. It's just a completely different competitive landscape out there. But I think for very large well positioned companies, you can keep your -- you shouldn't have these massive swings in sales.

Just lastly on your $0.17 run rate distribution. Everyone talks obviously about your debt to EBITDA it's at I think 1 or 1.15 the end of this last quarter. Is that really going up to 1.5 times? Where should we be looking for that on a let's say $0.17 run rate distribution?

Our debt would go up marginally. First of all, to answer your question, no, it doesn't fuss us at all. The reality of it is is we want to do everything we can to maximize the benefits that we have as an income trust. I don't even think of us as an income trust, we're just a corporation in transition. We know this status is for a limited time only. So I'm not at all concerned to have our debt. I think debt to EBITDA at 1.5 to 2 even is probably in a business where you get paid every single day and it's such a prolific cash business, I have no problem with that. The cost of debt is very, very low. And so we don't have an issue with that. Our debt peaks out based on normal market conditions in about a year and a half or so. And we don't get it above 1.5 times EBITDA. It doesn't get there.

Your next question comes from [Gabriel Dascheng] with Genuity Capital Markets.

Hi, Bill, how are you doing?

I'm wonderful, thank you.

Just want to ask you about these trailer fees that -- to follow John's question on. That the smaller competitors are starting to pay now. Do you qualify them as being irrational? And if so, do you think the mutual fund industry is kind of similar to other industries in that when there's irrational pricing there's pressure on big players such as yourself to take out the smaller ones to improve the balance?

I don't think I said irrational.

I'm asking if you think it is.

I think it's insane. If someone wants to kill themselves, that's okay. But if they become suicide bombers and take out the rest, it's not. It's not just trailer fees. If you look at some of the low load you start looking at it and you start going geez, you start adding up what the low load commissions plus the trailer fees are and you go wow. That comes to less than zero and to me that causes a problem. I think it plays into the bank's hands beautifully. But I think it's problematic. And so do I think it -- and you look at all the other companies. You know what companies are -- what kind of margins they're generating on their business. But even at some point you have to just look at it and say that we have to put out products that are commercially intelligent and if you don't do that, then I'm not sure what the purpose of having a lost leader is in this business. It doesn't make sense to me. And you look at some of the companies that have horrendous redemptions right now. And it's like awful. Some of the worst in the history. They've made changes to their compensation and for them it's actually, probably, not even remotely helpful.

Okay. Then the Sun Life/Clerica Distribution Network. I know comments you've made in the past, that you're happy with the sales that have gone through there, but would like to still see that grow obviously. Have you undertaken any specific initiatives recently to continue boosting that or driving it more? Because in this kind of market environment that's obviously a valuable channel.

Well, first of all, I always want more of a good thing and less of a bad thing. No matter what sales come out of there we're always going to try and get more. It's been a fabulous partnership for us. Absolutely fabulous. It's a very, very meaningful part of our business. And coming up with this new Income for Life product that -- in our -- in the next month of so, that will help improve business again. These financial planners are just becoming better and better. And they are becoming more financial planners. This is really a very improved salesforce and getting better all the time. And so I'm thrilled with what contributions that they've made and I think there's ample opportunity to be a successful next five years as we've been in the last five years.

You commented on the AUM that's represented by Seg funds. How about the net sales? Or gross sales? However you want to put it.

Well, the net sales it's probably most months between the Manual Life and the Sun Life product is probably 60, 70%. During most months. Over the year it's likely -- in terms of net sales, in gross sales it's much lower. First of all, they don't get redemptions, they don't redeem. And first and foremostthey're just very long term sticky assets. So the net sales are always a prominent part of our net sales for the month. But you got to have the gross sales at the end. Our natural level of redemptions I think is probably in the range of $8 billion a year. And so we've got to put out gross sales in the range of $1 billion every single month.

Okay. And lastly, just touch upon the cost issue. I know the business you acquired through Rockwater, what's the kind of flexibility you've got there to cut costs?

I don't think much. I think that there's not much of a cost cutting story from today forward at Blackmont, at Asante, at CI Investments. Maybe a little bit around the edges, but probably not enough to be terribly relevant. I would say this, that we still have capacity though. One of the reasons why, in theory we'd like to do an acquisition that's -- we clearly had in trust in Dundee for example. We have a lot of capacity both at the dealer base, the financial planning business, and the asset management business. And that's with any mature business. It's about scale, distribution, and brand. And we still have, it's still a very scalable business and one that has tons of synergies when you can put a company together. We could grow our business a long way from here without adding costs. Probably not much we could take out realistically at this point.

That comment may be not so applicable in you were to entertain a U.S. transaction?

It doesn't help much.

Thanks, Bill.

Thanks, Gabriel.

Your next question comes from [Geoff Kwan] from RBC Capital Markets.

Good afternoon. Just had a couple of questions. Just going back on the cost side and I don't want to belabor anything here. Would you say that the cost containment issues that you were looking at or have done would have been in Q4 and also into Q1 or would have these been largely things that have happened in the new year? And then secondly, if you can comment on the acquisition environment, how that might compare to six months ago or a year ago?

The cost a little bit in the fourth quarter a little bit. A little bit in this quarter. And so it's -- it's the time of year where you look at compensation. The biggest inflation month of the year for businesses like ours is January because that's when the raises kick in. I think the raises would have been smaller and the bonuses smaller than they would have been had the year started with higher level of assets than where they did. There's been a bit of cost cutting and we do what's smart. But we are not going to -- we actually believe we're in an environment where very strong companies can actually pick up market share nd maybe the strong get stronger and the weak get weaker. We're not going to do anything to impair our competitive positioning. What was your second question??

Just on acquisitions. If the environment for you guys has changed much in the past--?

I don't think so. I think that the case for deals has never been more obvious. When you start to look at some of the companies out there, you see how quickly a company can go from net sales to net redemptions. You'd see how -- would anybody have predicted a couple years ago tha AIM could lose $834 million in a month. And the banks have become so powerful, especially the Royal Bank. They just run a fantastic mutual fund business, fantastic. I don't think -- you can't not believe that this is a good environment for deals. That being said, we're certainly not getting pitches or anything like that.

Okay. Thanks.

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

Thank you. Just to -- Bill, just talk about the operating ratio again. You've mentioned here you think it's 104, 105 basis points. So how does that work when you're still seeing your up front -- your front end loads, sorry, funds still the biggest chunk of an increasing portion of your AUM? Does that mean you're just getting costs out elsewhere?

I think that -- I guess you have to compare apples to apples a little bit. You have to look at it and say our deferred sales commission business should be relatively stable. The business that we get on the front end will be stable but the 104 number has to go down. In that we're taking business. We have a very, very, very robust high net worth business. That it's done at considerably discounted rates we want that business. We're actually going out of our way to move the overall margins down. There's other parts of the business that we want to be in and we want to get. I'm just saying that when you look at the DSC business or the front end business that that business -- that those businesses are likely to generate approximately the same margins this year as they did last year.

Okay, okay. That's helpful. The -- in the past you talked about 25% of your gross sales going through the SLF/Clerica channel. Is that still about right? I guess that would be mixed in with some of the SunWise product. Is that still what's happening?

It's a little less the gross sales -- I think in a year like this if we can do gross sales in line with what we did last year, I'm thinking it's likely to be more in the range of 20% of the gross sales. And last, just two clean-up questions. On the Cambridge funds, who's buying that stuff and you mentioned their new--? Predominantly his following the IDA members. And we've seen business from people that we haven't done business with in several years. He's got an incredibly strong following. And Derek Green who is the President of CI Investments took him around for a week or so in January and he just was raving at the following that Allen has. And Allen is one of these guys that lives and breathes the business. I've never seen a money manager so dedicated to its unit holders. Every penny of performance is such a big deal to him. He's really found himself a real following. And I'm surprised at how good the business has been in a difficult market. To have $75 million in these funds is really quite an accomplishment. The performance has been great.

That includes into February?

Yes.

Last, just want to clarify the debt to EBITDA you mentioned 1.5 to 2 times you're comfortable with?

I certainly could get there. You'd want to know -- you'd want to have a good reason. Right now I think our debt to EBITDA, our net debt to EBITDA goes a little over 1. Maybe we get as high as about 1.2 of net debt to EBITDA. But a lot of it depends on whether or not we want to aggressively buy back shares. And so I would say that I don't have -- there's no area that worries me at 1.3 or 1.5. I can't see an environment right now where we'd be above 1.5. Maybe in the right acquisition environment, we would get there for a while.

Are your still buying back units?

I think we bought back about 5 million units between October and the end of January. There's a unique feature to income trust. You can actually buy them back for reissuing. And as an income trust, now, we have a growth limit. And our growth limit is actually pretty modest. Because about 55% of our float is in LP units and LP units don't count in the float for growth purposes of an income trust. In theory, issuing trusts could become a bit of a scarce resource for us. I know there's been in an acquisition environment, large acquisitions we could have to put on more debt than we normally would have.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Mr. Holland, there are no further questions at this time. Please continue.

Thank you very much. Again, I apologize for having to reschedule the call. I look forward to a good start to '08 and look forward to going through it with you in it, with our results in May. Thank you very much. And goodbye.

Ladies and gentlemen, this concludes our conference call for today. Thanks for participating. Please disconnect your lines.