CI Financial Corp (CIXX) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CI Financial 2008 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 CI and its products including its business operations and strategy of financial performance and condition. Although management believes that 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. For further information regarding factors that could actual results to differ from expectations please refer to management's discussion and analysis available at www.CI.com/cix. EBITDA, earning before interest, taxes, depreciation and amortization, adjusted EBITDA, operating margin and distributable cash are not standardized earnings measured prescribed by GAAP, Generally Accepted Accounting Principals. However, management believes that most of its unit holders, creditors, other stake holders, 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 simular measures presented by other companies. EBITDA, is a measure of operating performance of facilitator for valuation of 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 on Tuesday, November 11, 2008 at 4:30 p.m. Eastern time.

I will 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. It really seems like forever since our last call, and I'm at a loss to think of a more eventful period. Global credit meltdown went into a new gear resulting in the demise of several financial Titans and the government bail out of just about every bank globally. Global markets have declined by almost 30% in the last 90 days. During the quarter our largest shareholder, Sun Life entered into an agreement to sell its approximate 37% share, to the Bank of Nova Scotia. We also announced our decision after considerable debate, to convert back to a Corporation on January 1, 2009. As difficult as this environment is, CI has had a very good period here. Sales, are actually up year-over-year. And the performance of our mutual funds has been very strong. I will briefly go through some of the highlights and I think you will agree we have done a excellent job of getting through this difficult time.

Looking at long-term sales, in the first nine months we had sales, net sales of $1.4 billion. If you add in the $500 million in linked notes that were redeemed because of the market decline, we would have had $1.9 billion. I think that we will-- it's quite possible by the end of the year we could have if you you adjust for the link notes the top sales in Canada for 2008. Looking briefly at October, primarily because it was such a difficult month it is so interesting, CI had net sales on retail basis of $10 million, the only fund company to have net sales during October. We reported net sales, net redemptions of $343 million, but that was the result of a redemption from two of our linked note programs. I should say something on the linked notes, many of the notes that have been redeemed we still get management fees on, so they are not like a mutual fund redemption necessarily.

Looking at our sales '07, over '08 over '07, first of all, our gross sales are up by about 6%. Our net sales between the third quarter of '07, and '08 have actually tripled in the first nine months, gross sales are up. Net sales are up quite a bit. In the first nine months if you exclude the linked notes, our net sales are actually up by 50%, which is an incredible accomplishment given how difficult 2008 has been. In November, which is started out not much better than October and September, our net sales so far, month-to-date are $111 million.

Some of the financial highlights when you look at the third quarter of '07 and '08, our assets, our average assets were down by 4%. Our EBITDA during this period of time dropped by 12%. It's not as bad as it looks because it was split evenly really between margin erosion but the other half was decline in profitability or losses at Blackmont and Assante. Both of those situations, I think have been addressed and we will discuss them when we talk about cost controls in a minute.

Looking sequentially, second and third of '08, our average retail assets dropped by 4.7%. Our reported EBITDA declined by 11.6%. When you account for account for some one-time costs, conversion restructuring, marketable securities, and actually having to add in $7.6 billion for equity based compensation our actual decline was 6.5%. I think you will have to agree that given the very difficult market environment, to have a decline of only 6.5% is testament to pretty good cost controls. Probable a better explanation or illustration is looking at the operating margin, sequentially. Our management fees dropped by 2 basis points to 192 basis points. Our trailer fees, on a quarter-over-quarter basis remain the same at 56 basis points. Our SG&A, expenses actually declined from 36 basis points to 34. Giving us a quarter-over-quarter operating margin flat, at 102 basis points.

Looking at cost controls, over the last month or so we have examined our cost very, very carefully and clearly we knew we had to realign our cost in line with the decrease in assets that we have experienced over the last two months. In the Q4, of '08, our SG&A should drop by approximately $9 million, and we think we taken out over $33 million in costs through 2009.

Before I take questions, I just want to make a few concluding comments. While this is the most difficult time any of us ever remembers and clearly probably because it's never been as bad as it is now, our relative positioning is very good. Our sales continue to be positive and they are up year-over-year, 80% of our assets are in the top-two cortile over the last five years. Our operating margin has stayed flat sequentially, significant expense improvements for Q4 and '09 have already been dealt with. We are on track to convert back to a Corporation in December, on December 31, 2009, I can't tell you how excited I am about leaving the trust world. I think that, and other things have put us in a very good position, for market recovery and any other opportunities that a market like this often brings. I would be glad now to take any questions people have.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from Gabriel Dechaine from Genuity Capital Markets.

How are you doing?

Wonderful thank you.

Before I get to the expense reductions in '09 and all that, it looks like -- your expenses in the asset management segment were quite lower than what I would have thought, down year-over-year and down sequentially. What is that reflecting? Any cost cuts that were done prior to the quarter that we weren't aware of?

We have the one thing I said time and time then, we will try to align our costs in line with our assets the same as with our distribution, but we started to make adjustments to our cost structure as early as March this year and I think we just take it one step at a time, we're not doing a bunch of layoffs, we are just looking at every part of our business and trying to find ways we can do it less expensively. Clearly what's happened between the end of October or -- to the end of September and today, so kind of half way through the next quarter has been extraordinary. And our assets have dropped while not anywhere in as much as the market, in the range of 17% or so, you can't not acknowledge it and look for ways to cut costs so I would say we started it in March and we are just stepping up the process as we go along. I can tell you with perfect certainty this isn't the end of it.

I guess when I see 11 million of severances is that primarily in the asset administration segment and is it even more specifically at Blackmont?

It is -- we have a approximately 1700 employees and we went across the entire spectrum and looked for places to cut costs. So it's administration, it's Assante, it's Blackmont, it's every part of our business, it's IT, commitments that's we have, out sourcing stuff we have, we have gone through the process of turning over every rock. It's not a big number when you really look at the size of the organization. It's an on going process.

Okay. Just in general terms Blackmont, I call it the asset administration segment, you -- if you adjust out the severance and the stock comp and all that, looks like it lost about 11 million, or negative 11 million of EBITDA. How does that sit with you in terms of thinking of your presence in the capital markets business over all?

Well--

Is your patience still there?

Probably not. But couple of things, first of all our severence isn't $11 million, that was really the total adjustment so our severance is probably more in the range of 5 to 6 million. That's point number one. In terms of-- where we are having the most difficulties, business difficulties are in the dealership. And that's both at Assante and at Blackmont. So when you start looking at the difference year-over-year almost all of it-- most of can be explained on the drop and profitability or loses at Assante and Blackmont. Over the last month, we've made considerable changes and right now we have Blackmont Capital Markets in a situation that we will break even in the fourth quarter. We're not willing to lose money. It's just not an option. I think that there are opportunities to improve the profitability at the Blackmont Retail Dealership, but we also got to make real improvements at Assante, over the next year or so as well.

The split on that 33 million of benefit in 2009, how much of that is head count versus discretionary type spending?

I would say of the $33 million it's probably two-thirds employment related. Remember we hire approximately 10 people a month here, if we just don't hire for a year, that's 120 positions that will be eliminated, so to speak.

Just lastly, the M&A, you've put your shelf prospectus has been filed, if anything markets have gotten worse and maybe sellers are more apt to sell, what's the discretion -- what's the latest I guess?

I think that the erosion in people's asset basis has been so significant, that I don't think any firm would say that they're not looking for ways to regain some of the scale that they lost. I think that we are in an ideal environment for M&A, and I will be quite surprised if there is not several meaningful acquisitions over the next 12 months. We are certainly getting far more kind of feeler calls today than we've ever had. I think that once we see a couple of quarters of this throughout the entire industry and start to get a sense on what happens when assets are down this much, and how much it destroys profitability at small firms, I think it will become pretty evident that there is going to be, this is going to be an acquisition period.

Okay. Thanks.

Your next question is from Doug Young from TD Newcrest.

The first question back to the Assante a minute segment if you eliminated Blackmont was that division profitable?

No. We took out Blackmont, if we took out the retail and the capital markets but like all of Blackmont of Assante, no.

And the second just on the M&A side, any aspirations to look in the US as well are your sights set in the Canadian marketplace.

For the time being it's strictly Canadian. It's remarkable how much some US companies have declined in value. I think it would be a competitive environment and those that can pay in kind and have the synergies because they have a business in the US would have an overwhelming advantage.

The third side, have you had chats now with Bank of Nova Scotia regarding distribution partnerships or types of agreements, partnerships that you could get out of a relationship with Bank of Nova Scotia at this point?

I had no conversations, I have a couple of just hi, how are you, talks. My guess is that there is probably a few outstanding issues they want to resolve before the deal closes and I think they will probably wait until the deal closes and we will sit down and have meaningful dialogue at that point.

Okay. And then, regarding the Sun Life agreement, how much in terms of detail you can go in here, but any what is the term of that agreement has there been change in that agreement since this deal has been announced and can you give us basics behind what the agreement has?.

The easiest way to explain it is what Don Stuart said on his conference call, it is just business as usual. We have a distribution agreement with them. We are -- we have kind of a home field advantage with our funds. We have Seg Fund agreement, where by they provide the wrapper for the [Sunwise] product. Both of which are important to us and both of which I think have been equally important for Sun Life as well. I would see no reason why it wouldn't continue exactly as it. As Don Stuart said, it's just business as usual I have to take him as his word on that.

Is there any term on that agreement?

It can expire if they give us a one year notice period. But there is no termination on it, no.

Okay. And then, I think that's -- that's all I had, appreciate it, thanks.

Your next question comes from Geoffrey Kwan from RBC Capital Markets.

First question I had was, I guess the cost containment measures as well as if you pulled back some of the businesses that you're in. When I'm looking at my Q4 revenue forecast, is there an approximate amount? I imagine wouldn't be much but something like $10 million in revenues?

How much we intend to cut out of the fourth quarter?

The measures that you would have been doing during the quarter.

10 million in Q4, in the present quarter.

What you had generated in revenues, the non-asset management division in Q3, all else equal I imagine that amount would come down in Q4.

Oh, I've taken 10 million from the entire organization in the fourth quarter.

Second question, I may have missed in MDA, but the write down on the securities, was there something particular, it seemed like a reasonably decent size.

Perimeter, which we invested in five years ago Doug Steiner's firm. It's a alternative exchange and had back office functions we thought might have been relevant to our business as a way of getting costs down. Didn't work out so well. I might add that we invested in his versus, his previous business, we put in 3 million took out 21, ten years ago or so. We had some reasonable luck with them. This one didn't turn out so good.

Great, that's all my questions, thanks.

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

Couple of questions. Where is your retail AUM as of yesterday? Or the day before? Do you have an update?

It's about 50, just a little under $52 billion.

Okay. The [flow] so far in November?

111. Net.

Net?

Net.

Okay. I assume the vast majority is Seg Funds?

Couple hundred percent of it.

When you convert to a Corp., are you going to change the stock based compensation or is it going to be the same plan?

I think as a Corporation we will utilize auctions to cash settled options again, which are not dilutive but still give the employee the benefit of the capital gain tax rate. That would be my guess although we haven't put that in stone yet.

Thanks. You talked about more cost cutting, to come. Is it just the prices you mentioned so far or just there is more that you think you can squeeze out or other areas.

There is more we are going to have to squeeze out. We are going to have to look at our businesses, it's just a materially different world today than it was a year ago or six months ago or honestly 60 days ago. We are going to have to look at, we are really going to have to look at businesses like Assante , we can't make money off a dealership or haven't been able to make a reasonable return on the dealership. We are going to have to look at the retail and capital markets business. We are going to have to examine all of our business. The places that stand out as being problematic are the dealership.

What about, have we made changes to our wholesale distribution capabilities or is that remained in tact?

We have actually added one wholesaler. Put it this way, CI Mutual Funds has added one wholesaler.

Okay. Then, in the past talked about penetration of Seg Funds in to kinds of traditional mutual fund purchasers or brokers, you mentioned the past, it's small like under 10%. Has that remained the case?

It is improving all the time. Anecdotal pick ups that you get, the worst the market gets the more new brokers are looking at Seg Fund products. When you look at our sales, sales percentage of our business are growing dramatically. So when you ask the wholesalers, are there new people selling to a person, they say yes.

And Bill I know it's tough for you to talk on behalf of Scotia Bank, when do you think you will have substantial discussions with this. Will you guys sit down the day after the deal closes or they not been keane to pin down a date?

I don't have any idea which is why I can comment on it. What I would say, it doesn't really matter that much to us, if they just switched from Sun owning 37, to Scotia owning 37, and we just went on our way I look at our position, we are in fantastic shape. So we are more than willing to kind of consider anything that makes sense for CI shareholders and Bank of Nova Scotia shareholders, it hasn't with all the stuff going on around us today it just hasn't gotten priority yet.

Thank you.

Our next question comes from John Aiken from Dundee Capital Markets please go ahead.

Good afternoon, Bill when we look at the decline in distributable cash for the quarter, how big of a factor was that is the consideration of converting back to a corporate early?

I think it was a consideration, I think you have to look at clearly we would have had to cut our distribution, then you have to look at the fact that we want to be able to finance what amounted to half of our new purchases by way of debt financing, which we don't think is available anymore. We think the credit freeze is so significant, that that probably would have had to finance it all through cash flow. The other thing that -- we didn't ever come up with a environment where our assets would be down at this level and sales, our DSC spend would be increasing considerably year-over-year. Considerably. And so when you put all those together that kind of made the financial case for us. But having gone through what we did over the last year, and trying to get something done as a income trust, made it real easy. I mean it was horrible trying to get someone from Ottawa to even tell you how many units you could issue. The penalties for being wrong are pretty punitive. If we issue one unit too many, then you're deemed to have converted on January 1, and owe $350 million in taxes. I don't -- it became apparent as we went through a couple of acquisition scenarios, and I think we got pretty close on two of them, that the sellers are less keane to have trust units. Ottawa has made it almost impossible to actual structure a large deal using trust units.

Carrying on with the conversion theme, the pro forma dividends payout is a lot lower than what we seen and your competitors are, that leaves the conclusion that CI's is going to continue to buy back their shares but with the acquisition that's Scotia did Sun Life's stake in that and if you do aggressively buy back shares isn't that going to give Scotia a growing creep in ownership.

Yes, I think we have to consider that, there was not much precision in striking the dividend where we did. I mean I really think it was our kind of walked over Steve's office and said to you think it should be three or five and he said four. The reality of it is, we are not going to try to guess what the world is going to look like early in 2009 when we're a Corporation, so we set it about 3%, and we thought that sometime around mid year, next year, we would look at it in the context-- is there going to be changes to the capital gains tax rate, what is the dividend tax rate going to be, what does our cash flow look like, I would say that we intend to continue to payout all of our earnings to our owners as fast as humanly possible and do it in the most tax efficient way. If it means buying back the shares, we will probably buy some back. But if it means increasing the dividend, we will do that. For the first five years we almost only bought back shares then when they dropped the dividend tax rate considerable we almost reverted paying it a all through dividends, then we paid it all back through distributions. We will try to be to try to stay flexible and try to make, make the decision sometime later next year. But I don't think you should read much in to our opening dividend of $0.48 a year as anything more than this seems like a good place to start.

Thanks, Bill.

(OPERATOR INSTRUCTIONS). Your next question comes from John Reucassel from BMO Capital Markets.

One last question. I analyze your EBITDA, relative to your debt it looks like you're running debt to EBITDA, about 1.8 times. I guess if I creep up a little bit here, assuming the fourth quarter looks like it's going to pan out. What you know-- just discussion here on debt levels as opposed to buybacks and dividends, can you give us update on what is going on. I know you got your DSC sales and all that kind of stuff.

We kind of look at the net debt. At the end of October, our net debt was running about 1.46 times EBITDA. And I look at 1.5, 1.6, 1.7 as about as high as we want to go, even as a corporation, if an opportunity comes up as a corporation would we look at a larger debt -- we would, but at this point now, I think we would be content to cap it at this and start reducing it a little bit.

So if a acquisition comes along you're happy to move that up and pay off with the synergies and whatnot?

Yes.

But you would expect through the course of next year to pay down some of the stuff is that fair?

If the market stays at low levels and our debt creeps up through 1-- our net debt gets up to 1.6, I think yes, we would really probably prefer to start paying it down.

Thank you.

There are no further questions at this time. Please continue.

Thank you very much for joining me for third quarter conference call. I look forward to meeting you again, I think it's February 16, which will be our first call, again, as a Corporation, but going over our fourth quarter results. Thank you, very much. Bye now.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating.