CI Financial Corp (CIXX) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CI Financial 2008 first quarter results conference call. At this time, all participants are on 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 and strategy and financial performance and condition. Although management believes that the expectation 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 statements -- forward-looking statements. For further information regarding factors that could cause actual results to defer from those expectations, please refer to management's discussions and analysis, available at www.ci.com/cix. EBITDA, adjusted EBITDA and distributable cash are not standardized earnings measured prescribed by GAAP. However, management believes that most of its unitholders, creditors, other stakeholders and investment analysts prefer to include the use of these performance measures in analyzing CI's results. CI's method of calculating these measures may not be comparable to similar measures presented by other companies. EBITDA is a measure of operating performance, a facilitator for evaluation and a proxy for cash flow. A reconciliation of EBITDA to net income is included in management's discussion and analysis available at www.ci.com/cix.

I would like to remind everyone that this conference call is being recorded today, Tuesday, May 13th, 2008 at 3:00 P.M. Eastern time. I will now turn the conference over to Mr. William T. Holland, Chief Executive Officer of CI Financial. Please go ahead, sir.

Thank you very much, Patrick. At 2008, RSPCs, which is also our first quarter, was in many ways about as difficult as -- as one could really imagine. A historic credit crisis finally seeped its way into the equity markets and really made an an indelible imprint. I would say that even more remarkable than the drop has been the rebound from the March 16th bottom, which was marked by Bear Stearns collapse. By the end of March, our assets under management were only down by 2%, compared to the average for the quarter, which was down more than 4%. It was the first RSPCs in at least 13 years, where long-term funds were in net redemptions. The good news, though, is that this rally has continued well into our second quarter, and, as of yesterday's close, the TSX has increased 14% from its low. That asset under management now are at an all time high and up 4% for the calendar '08 year. So, we have proven to be more than just a little resilient in this market.

I will quickly go through a couple highlights and then take some questions. During the first quarter, our average assets under management -- our assets under management dropped by 3%. On a quarter-over-quarter basis, they were down by 4%. Earnings per share year-over-year were down 2%. EBITDA up slightly. But, I think a better indicator is the adjusted EBITDA, which was down 8% on a year-over-year basis. Distributions were $0.54 for the quarter, which were consistent with what was paid in the same quarter of '07. On the sales front, sales continue to be very good at CI. If you look at the first quarter, our net sales were about $476 million. We had two very large redemptions -- one was a link note and one was a large institutional client. Our gross sales remains just about the same as '07. If you roll it out to the end of April, our sales were identical to '07, and April's net sales and May's net sales are ahead of 2007. If you look at it from a competitive perspective, our relative sales are very good and really right at the top of the -- of the pack. We are fit year to date, and we would be right at the absolute top if it wasn't for the two very large redemptions, and delinquent notes, especially, are something you have absolutely no control over. I think there is a picture that describes the quarter as well as any, and, if you look at this chart, it really just shows you the black hole that Q1 was. It -- right at the beginning of the quarter it dropped. And, almost the entire quarter, it never hit the beginning of the quarter assets again and just really precipitous drop to the bottom and then a move upwards. And, if you roll that forward, and now you look at from quarter end to where we are today, our assets today are 8% above the average assets for the first quarter. So, it is really a remarkable turnaround on the distributable cash front. We have said time and time again that it is our intention to distribute essentially a 100% of the free cash that the company generates. While it is a difficult -- it is difficult to predict exactly what it will be, we do attempt to do so.

Over the last 12 months, we have generated cash flow of about $692 million After adjustments for CapEx, DSC, working capital and equity-based compensation of $79 million, we had distributable cash of $613 million. We have distributed $624, essentially paying out all of the cash flow generated by CI. If you look at where our assets are today, the run-rate of our monthly distribution would be somewhere around $0.18.

And, just a couple of thoughts on -- on the outlook. I will say this, the markets have been far too volatile to be terribly comfortable making forecasts. But, if you just take a snapshot of our assets today, I think you will find it very encouraging. Sales are improving over last year's rates. So, our year-over- year sales are running at a higher level than last year, especially on the retail side. If I were to push to guess I would say that our sales in 2008 will at least match those of 2007. Our seg fund sales, which are by far the most valuable asset that we sell, are increasing substantially here, and we are just coming off the most successful road show that we have ever had, seeing more than 5,000 advisors over a three-week period a month ago. As I said assets are up 8% today over the average for the last quarter. Allan Radlow's Cambridge Funds have gone through $260 million and have had very, very strong performance. That performance across the line-up is very good. We continue to lead in four and five star funds as we have every month for the last five plus years. 77% of our assets are in the first or second quarter over the last five years, about the same percentage as in the first quartal year to date. We have the most Morning Star Fund analysts picks at ten. And, so, the relative performance of the line-up is as good as it has been in an awful long time. And, as I pointed out earlier, we have recently moved our distribution up $0.01 to $0.17 effective the June payout. I think I will leave my remarks at these and be glad to take any questions that people have.

Ladies and gentlemen, we will now conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Your first question comes from John Reucassel of BMO Capital Markets. Please proceed.

Thanks, Bill. Just a -- could you, first, just talk about the margins. I guess -- you are looking at your operating margin, you calculate 103% -- 103 basis points versus 109 last year, and, I guess, we are down from 107 for all of 2007. So, could you talk about -- a little little bit about what drove those margins. Is this is this a new level we should get comfortable with it at CI?

I actually think because of the way the first quarter played out that it affected our margins disproportionately. If you look at some of the things that affected it, one is that our average money market assets are twice as high right now during this quarter than they were a year ago. And, that probably on a quarter-over-quarter probably added about a half a basis point and year-over-year, probably, about a full basis point. The other significant aspect of this is the I Class. The I Class is -- is large purchases of institutional high network business that we are very actively going after, and it just does have lower-margin business. But, we are intentionally going and looking after -- looking at getting more and more of that business. And, over the last year, or quarter-over-quarter, it reduced our margins by about a half a basis points -- about five basis points as well and over the year about one and a half. So, two and a half basis points of the margin erosion are just money market and I Class.

The other thing that has affected it on a year-on-year basis the amount of front-end relative to -- the front-end businesses growing -- is continuing to grow. Our deferred sales charge, which probably peaked at, definitely, plus 90% of sales -- of long-term sales eight years ago is down now to around 30%. That reduces the margins as well. It doesn't reduce the economics. It just reduces the reported margins.

And, Bill, last call you talked a bit about some of these new products out there that kind of have the higher trailer, lower management fees. Is that still a concern for you out there? Are you seeing more of these products, or is it concentrated to one or two players? Or --?

No, I think it's -- we will continue to see it in some of the smaller firms -- some of the really smaller firms automatically are taking their whole line-up to higher trailer fees as a way to try to get attention. It is clearly still in my view the single biggest issue that is affecting the business today. And, so, when you look at it, we are just not willing to go down that road. And, I think you will get ample opportunity to see the kind of margin erosion that it is causing at other companies over the next couple of quarters. I, actually, think our operating margins will go up over the next couple quarters. I think because we had so much money in money market because of this huge drop -- the huge drop in Q1. And, also the fact that we, actually, had to eat some of the fund expenses for the first time probably in an awful long time that our margins are likely to be higher in Q2 and Q3 than they were maybe more in keeping with the margins of late '07.

Okay. And, last question, Bill, just on some trusts have converted or reconverting back to corporations, or converting. Where does CI stand on its status in 2011? What are the thoughts there?

Well, I mean, it's, obviously, a big topic around here now. There is probably been five or six companies in the last few weeks that have announced that they are converting back to a corporation. Just -- a little bit of history, we attempted to convert three times. We waited seven months for a tax ruling on using exchangeable shares, even though they had been used dozens and dozens of times before. Three months after we got the tax ruling, they closed down the trust, but they also didn't include exchangeables for growth limits. And, recently, we tried to get some clarity on whether we can issue exchangeable units in a transaction, and it took us five months to get some -- any response from Ottawa. So, clearly, you have handcuffs now when it comes to -- to being an income trust. We know at most we have two and a half years left. Whether or not we wait until the end, or we value the flexibility that a corporation would give us, is something that we're going to have to start to think about.

We don't have a view, yet, at all right now as to the timing of the conversion or even a decision. But, we are eagerly awaiting the rules on converting back from Ottawa. We are told that it is going to be simple. It is, obviously, -- the one thing we do know that, even under present conditions, we can convert back without any tax consequences. We would like to be able to convert into a corporation in a simple structure and not have the very awkward structure of having a corporation on top of the existing corporate structure we have. So, we are looking at it. We -- we don't believe that -- that we get any type of pick up on the value of our stock because we are a trust anymore. And, so, we will look at it, and -- if we think that the flexibility that it will give us to go back to a corporation is more valuable than the tax advantages for a period of time, then we will go earlier But, it is still a long ways away.

Okay. Thank you.

Your next question comes from John Aiken of Dundee Capital Markets. Please proceed.

Good afternoon, Bill. Just wanted to touch upon a -- I mean I know it is not a huge contribution to the bottom line. But, wanted to see what your view of the capital market platform was in light of exactly how bad Q1 was, and whether or not you think it can get back to your expectations if we get see,e more normalization in the markets?

I would be questioned -- earnest if I said we weren't very disappointed in the results. I mean Q1 was as bad a capital markets quarter as our industry has seen in, probably, a decade, probably since third quarter of 1998. And, I think that looking at the capital markets group, today I think that Wade [Allen] has made substantial improvements over the last 12 months. And, that -- it is not being reflected in increase in market share yet. But, I think it will. I think under a more normalized scenario that we will do pretty well.

But, clearly, we are very disappointed with the results, and we are not accustomed to having a business unit losing money. And, we don't like it, but we certainly think this is about as bad a quarter as we could ever imagine having, and we don't expect to have them too frequently.

Thanks, Bill, and looking at what is happening on your mutual fund operations and the squeeze that we have seen on your margins. Now, I completely understand what you are talking about in terms of the sheer volume of money market that you have right now. But, looking -- trying to extrapolate that through -- one would assume that there is pressure on all the other asset managers out there and should likely lead to additional consolidation, if not in the near term, at least at some point down the road. But, wanted to see what some of your viewpoint is in some of the money managers in increasing some of the trailer -- trailer fees. What that does in terms of the economics for potential acquisitions on your part?

Well, you hit a point at, which we can't do it. If we do an acquisition, we have to move the management fees down to our level. So, if it is a company that has a whole bunch of high management fees, the first thing we're going to have to do is move them down to our level. It is pretty hard to say we are going to charge one -- one MER on these funds and a different one on these. And, if they are both same category, it is very difficult. So, I think that that's the first problem.

The second problem is, as you start to get more and more of the assets in a category, where we don't believe you make money, the company is of no interest to us at all. Right? I have always said that compensation in our business is like water. Right? It is all going to flow. Water goes to the lowest point and compensation goes to the highest. And, if you have disproportionate compensation on any of your products, everything goes that way. And, it has a very material impact on whether or not we would be interested in -- in making an acquisition.

That's great. Thanks, Bill. Appreciate it.

Your next question comes from Gabriel Dechaine of Genuity Capital Markets. Please proceed.

Alright, Bill. Just, on the seg funds, you are highlighting how important those are to your sales. Have you ever provided a split between which are the Sun Life products and Manual Life, which I'm assuming are the bulk of the rest?

Right. The Manual Life business, I don't think we break out, but our seg fund business in general this year is -- net sales is close to a $1 billion. And, we have just hit $1 billion in SunWise product in the new SunWwise Elite product that we have brought out just a year ago. So, we have done $1 billion dollars in sales in SunWise Elite alone. It runs -- generally runs, right now, in the vicinity of 20% of our gross sales.

And, I guess going back to the Sun Life versus another company's seg funds. I -- can you give us a sense of how much more money you make on Sun Life seg funds because your almost -- the -- you represent the whole AUM there versus if you sell somebody else's?

The -- our SunWise profitability is much greater because the underlying mutual funds are CI's, and we are getting normal retail mutual fund rates on it. And, what makes the seg fund so interesting is we think the whole period for these is going to be in the vicinity of 15 to 20 years.

Yes. Okay. That's interesting. The distribution increase, can you remind me again what the assumption is that drives that in terms of the market outlook?

Well, if you took our -- if you took the market outlook today, we would be generating just about $0.18 a month in distributable cash. We are paying out $0.17. It's with the kind of volatility that we have had, it is really difficult to try to even guess more than a few months out.

Right.

So, what we have said is that we are comfortable that we are pretty close in June, July and August, and -- or May, June, July. We have just moved it up $0.01, and we will have to relook at it again at our next board meeting. But, we are just trying to fine tune it. We don't really have a view on whether we have to move it up a couple of pennies or down a couple pennies. We are just trying to maximize the tax advantage. We are trying to give out -- give back as much as we can without returning capital and without having any corporate tax paid.

Right, and, just like on outset of the year, when you do your planning you kind of think of a 5% market performance driven AUM growth? Is that how it is?

What we would do in a year like this is I think we probably forecast it at about $2 billion worth of sales. And, so, let's say that is about 3% of assets under management. Now, let's take our assets across the board and go category-by-category and take historical average minus management fees and it works out today a little under 6%. So, we would come up with about 3% in sales and 6% in market appreciation.

Okay. Just -- switching over a bit to the -- the performance fee fund managers. I know you have got a fund out in New York that is generating some performance fees. But, have you looked at making any tuck-in acquisitions of a -- to increase your exposure to that kind of business?

I don't think we would -- we would do that. I think that more likely we would put out some products that have performance fees attached to them, but the history of performance fees in Canada has been pretty spotty. I mean -- what happens when asset -- your fund is doing really well, people ignore the performance fees. And, they -- the fund gathers a lot of assets, but they tend shrink awfully fast. It tends to attract very hot money.

Remember, in 2000, we were one of the largest 20 equity hedge fund managers in the world, and we had $2.4 billion. And, believe it or not, that put you in the top 20 in the world. That was essentially zero two years later. The money is incredibly hot.

Okay. Lastly, on the debt side, your -- you increased the limit to $1.1 billion. You are right up close to that limit now. Are you -- is that like a temporary thing? Are you looking at increasing it further?

We are considering moving our line up by a couple hundred million dollars at most, and we do have marketable securities. And, our forecast out shows that we should be fine, but we do have marketable securities, and we do have the ability to move the up a bit.

(OPERATOR INSTRUCTIONS) Your next question comes from Jeff Kwan of RBC Capital Markets. Please proceed.

Hi. Just had a couple questions. On the M&A environment, obviously, there's been a few deals been going on in the sector, maybe some that attract you more then less. Can you talk about has that changed for you? Are you seeing more potential targets?

And, secondly, just on a smaller housekeeping item. The SG&A at the asset administration side jumped up quarter-over-quarter. I was just wondering if anything in particular there that might have been driving it up. I don't know if it was the Assante pay-out stuff that you had referenced in the MD&A?

The SG&A where? At the asset management level?

Sorry, the asset administrative side.

Yes. I mean it has moved up, and it is one of the parts of the business that we are having a harder time controlling the costs than we have historically on the asset management side of the business. We are looking at it closely now, and I think we will, probably, have a better handle on it. But, it's -- for us, it is not as manageable as the asset management side of the business, but it will be -- it will be fine-tuned over the next quarter or two.

On the merger and acquisition front, I think that we are certainly getting more chatter and certainly getting more bankers come by with ideas. Most of it is pretty small stuff, and a lot of it is around the distribution component of the business. I do believe, Jeff, that we are entering into a period of time, where you would have to be incredibly naive to not think that the world hasn't changed and that the banks aren't dominating the business. And, when you start looking at the independent fund companies, the only one that has done consistently well for many years is CI. The minute your performance goes slightly soft, you see -- you see the companies just fall off. And, then they are forced to do things that -- that really harm their future profitability to get back on the shelf. You see companies come and raising trailer fees and raising the up-front commissions paid. And, so, when you look at that environment, it is hard not to see how companies don't think that they are better off as -- with a much, much bigger entity. I think we are there, and there has been a couple of deals. And, I think that this is the year that we see some stuff happen.

Okay. Great. Thanks.

Your next question comes from Stephen Boland of GMP Securities. Please proceed.

Hi, Bill.

Hi, there.

Just one question on Allan Radlow. Is -- is it too early to attempt to add him to fund-to-fund products and some of these other wrap products that you are involved with? Do you need a longer track record to do that?

I think you would if it was somebody other than him. I think, given that he has been around 18 years, that his reputation is such that we could do it. He will be getting into some of that product over the next couple of quarters. And, we just didn't want to burden him too much right off the bat. But, he's got his team in place. He's got his office up and going, everything that he think he needs. And, so, my sense is that we will be looking for lots of opportunities to put him into fund-to-fund product.

Okay. Great. Thank you.

Your next question is a follow-up question from John Reucassel of BMO Capital Markets. Please proceed.

Thanks, Bill. Just a quick follow-up. Just on the seg funds, the gross sale is a net sale. Is that right? There wouldn't be much redemption activity in this.

No, not much.

And, then -- when you say it is good business, do -- I assume you mean the fact that it sticks around so long as opposed to redeeming? Or is there some higher -- some higher margins on a SunWise product versus a traditional retail mutual fund?

The margins are approximately the same.

Okay.

If anything, they are a touch, touch above. But, the main thing is, is that, with the resets and the guarantee, our expectation is that the money stays for 15 to 20 years. If we think our normal client, especially one bought through a DSC, is -- stays about 17 years. We think this is more about 15 to 20 years. And, that makes it -- that makes it considerably more valuable to us. We are getting full retail fees on it. So, in -- if we had a choice of anything that we could sell today, the number one from a profitability point of view would be a seg fund.

Okay. Thanks, Bill.

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

Okay. Thank you very much. Well, that concludes our first quarter investor update. I look forward to getting back to you in 90 days and telling you how our second quarter fared. It is, obviously, considerably better than the first, and -- and I think that our positioning is just about fantastic. So, I look forward to seeing you in three months. By, now.

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