CI Financial Corp (CIXX) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CI Financial second-quarter results conference call. (Operator Instructions).

This presentation contains forward-looking statements reflecting management's current expectations regarding the future performance of CI Financial and its products, including its business operation and strategy and financial performance and conditions.

Although management believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risk and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements.

For further information regarding factors that could cause actual results to differ from expectations, please refer to management's discussion and analysis available at www.CI.com/CIX.

EBITDA, earnings before interest, taxes, depreciation, and amortization, adjusted EBITDA, operating margins, and pre-tax operating earnings are not standardized earnings measures prescribed by GAAP, generally accepted accounting principles. However, management believes that most of its shareholders, competitors, other stakeholders, and investment analysts prefer to include the use of these performance measures in analyzing CI's results.

CI's methods about 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 also like to remind everyone that this conference call is being recorded today, Tuesday, August 11, 2009, at 4 PM Eastern time. I will now turn the conference over to Mr. William Holland, Chief Executive Officer of CI Financial Corporation. Please go ahead, sir.

Thank you, [Jannick]. Good afternoon, everybody, and welcome to our second-quarter conference call.

I will tell you that it is with a great deal of relief that I review our second-quarter results. From the world-is-ending bottom in about mid-March, our assets have actually increased by almost CAD14 billion, or 31%.

I am reasonably sure that we've never seen a period of time in CI where we have seen this type of asset increase.

While I do believe that we will continue to see retail investors remain pretty cautious, after the second global bear market of over 50% in a seven-year period, it is, for sure, night and day difference today -- between today and the market lows.

During the second quarter, our assets under management increased by 13% to CAD56 billion. Our average assets under management increased by 10% to CAD53.7 billion. Our EBITDA, when adjusted for equity-based compensation, was up 9% to CAD135.8 million.

Probably our best indicator of financial performance is the pre-tax operating earnings. They were up 12% during the quarter, to CAD120 million. Very encouraging, our gross sales were up 9% over the first quarter, which is seasonally a much stronger period of time because of the RSP season.

On the redemption front, redemptions were down 15% over the first quarter and remained at historical low levels. Our net sales were up almost three times, to CAD663 million.

Looking at our operating margin for the second quarter, it came in at 98.3 basis points, down very slightly over the first quarter, but down 3.5 basis points on a year-over-year basis. In fact, almost all of the decline is the result of the rapid increase in the size of the money market funds at CI, which have almost tripled over the last 20 months or so, as investors have flocked to the safety of money market funds.

In a zero interest rate environment, which is essentially where we are, we have also had to greatly reduce the management fees that we charge to our money markets. We are aware that this will, of course, reverse over time. The money market funds will become smaller and we will be able to charge normal management fees again.

But in the meantime, it does put a fair bit of pressure on the margins. If you look at the rest of our retail business, our margins were essentially flat year over year.

On the sales front, our long-term sales have continued to be very consistent and very strong in a difficult market. Over the last 12 months, our net sales of CAD1.1 billion ranks third among all our competitors. And on a year-to-date basis, our net sales of CAD886 million ranks us number two amongst our peers.

And you start to see that very few companies are getting business, and several -- and most companies are suffering quite dramatically.

Going hand-in-hand with sales is, obviously, fund performance. Our fund performance during the bear market was truly exceptional. But we are more than holding our own now on the run-up.

If you look at our assets, 76% of our assets are in the top two quartiles year to date, 75% over three years, 82% over five years, and 85% over 10 years. And if you look in the top quartile, we've had 71% over five years and 78% over 10 years.

The biggest three money management groups that we have are Harbour, Signature, and Tetra. All three continue to have exceptional performance over all periods.

I think it's helpful, given the enormous changes to our asset levels over the last few months, to show you a run rate of what we think we are earning today based on our current assets and based on our current cost levels. Today we have CAD58 billion in assets under management. At current cost levels, we have an operating margin of 99 basis points.

That works out to CAD144 million a quarter, with about CAD6 million in other income, for for a total of CAD150 million annualizing at CAD600 million, or CAD2.05 of EBITDA per share.

We now have current debt of about CAD800 million, so our run rate of debt to EBITDA is now down to 1.3 times, and at current trends, by year end, would be just a touch over our expected run rate for -- over one times our expected run rate for 2010, which I would say is probably underlevered in a decent credit market.

We are now hitting the mid-point of the third quarter, and it's been incredibly strong. Net sales in July were CAD159 million of long-term assets. Redemption levels continue to remain at all-time lows. And gross sales are starting move up a little bit.

Current assets are up 8% over the average of Q2. Our performance remains very good, with 76% of our assets today rated four or five star by MorningStar.

Our business really is benefiting considerably from the realignment of our cost structure that we did late last year, which, I might add, was incredibly painful. And I think you'll start seeing more of the fruit of it as time goes on.

We are very aggressively retiring our debt, and will continue to do so over the next few quarters while we pay very little in the way of cash taxes. We believe that our net debt should be down to about CAD700 million by year end.

At this point, I think I will take questions from analysts, if they have any.

(Operator Instructions). Geoff Kwan, RBC Capital Markets.

I had two questions. First off is, with respect to the Scotia relationship, is there any sort of update?

And then, secondly, with respect to the Blackmont Capital markets division, can you say whether or not it was at least EBITDA positive or negative for Q2?

I can probably do both. It's closing in at almost a year since Bank of Nova Scotia became our largest shareholder.

But I would say that we're just not in a huge hurry to get any kind of deal done. We've discussed many different ideas with them. Some interesting, others not so much. But the reality of it is our business is working so well on all fronts, in my view it's just smart to take our time.

I don't think we've come up with a formula that is -- that works for both sides. I think that what -- they've been very clear that their intention is to bring us important business opportunities.

So I continue to be very confident that they will -- that this will be a beneficial association for CI shareholders. But I think, one, dealing with a big bank and, b, just the sensitivity around the very difficult markets has probably made negotiations far more drawn out than they would likely be.

But I continue -- that all the talks we have, I continue to view as very positive, and I think we are moving this in the right direction. I just think it's at a slower pace than most people would want.

On the Blackmont front, the Blackmont Capital markets was EBITDA positive in both the first quarter and the second quarter. I think that I will -- I made a point of, a couple of calls ago, of saying that we would not lose money in Blackmont or the Assante distribution channel. We would work to at least break even, and we have done at least that for the last two quarters.

But Blackmont is a much smaller -- the capital markets group is a much smaller firm than when we bought it 2.5 years ago. It's down to approximately 48 professionals. It has no guarantees anymore. So the cost side of the business is under control. I think this works a lot better if we start now working on the topline in the business.

Gabriel Dechaine, Genuity Capital Markets.

Just on the -- just a follow-up on this Blackmont and Assante division, your comments seem to be focused more on the capital markets in terms of being EBITDA positive. But by my account here, it looks like the whole division is EBITDA negative, so -- . Capital markets can make money, but distribution is still losing money, is that the takeaway there?

I think that's a fair assessment. I mean, it's pretty minor, as you will see.

I don't think there is any model that has a retail brokerage business making money when the overnight float is zero. I can tell you that at CAD6.5 billion, which we have, with very tight cost controls, we can break even, but we can't make money. That I'm sure of.

Now, one thing that has jumped out at me is the decline in the average management fee, and I was kind of expecting a bit of stability, given the equity markets having rebounded since the end of last quarter.

And I guess one thing I am wanting to focus on now is the Class I and Class F funds, and I believe you've mentioned that they are net neutral to your margins overall, but it looks like if -- maybe I'm looking at the math the wrong way, but the fee reduction that they engender is not compensated enough by whatever you're saving on the trailer fee side.

The F class, the F class doesn't make any difference. The F class is just the management fee minus trailer fee.

The I class is definitely discounted. The more I class business we do, the lower our margins. I've said many times we should have margins for the I class and margins for the retail business, and you have to look at them.

If we -- we can not do -- we could increase our margins considerably. All we have to do is not take I class business. But we reduce our earnings per share, and I've said, year after year, I am insensitive to what our margins are. What I want to do is maximize the earnings per share.

The other thing is is when you start looking at our -- if you go back approximately 20 months from now, we had just over CAD1 billion in money market, charging approximately 1%. We peaked out a few months back at CAD2.8 billion, charging next to nothing.

And so, I don't think that anybody has -- all of a sudden, everybody is flocking to an asset class that is returning zero, and so, the impact that that has on your margins is substantial.

The good news is it peaked in -- probably four months back and it is starting to decline. The bad news is there is no increase in short-term interest rates in sight. So, I think that, for a while, these will have real impact.

They'll be reversed. Clearly, we will go back to a normal interest rate policy. And at that time, obviously the economic conditions will improve and people will not want to be in money market as desperately.

But as it stands now, they're still a fair bit of caution. There is an awful lot of money on the sidelines. I would say that our money market fund is still -- over two times what we expect it to be like in a normal market, and if you think of it in terms of -- just after the market had appreciated by 50% and we still have this much money in money market, we are clearly in a new frontier.

The money that's on the sidelines, is there a -- do you expect to recapture that, or is that just stuff that flows around, chasing yield? (multiple speakers)

Most of it is money that was in the equity funds. I think our run rate of money market would likely be in the range of CAD1 billion only. We peaked at CAD2.8 billion.

Just to go back to the I class funds, I get your point that it helps your EPS and forget the margins, but is this truly a situation where these are funds that you wouldn't otherwise have gotten, anyway, so it's -- ?

It's 100%. It's a near -- a certainty. Someone comes with you, they are not -- there is no chance that you can get them into mutual funds.

If we had any chance of getting into mutual funds, we would do it. This I class business is a completely separate business.

Maybe next quarter what I have to do is find a way to completely segment it and show you that here are the margins that you get in I class business and here is the other. It's just complicated.

But what we are doing is making a conscious decision to take business at much lower rates. For large retail clients. We also do a substantial high net worth business, which isn't done at mutual fund rates. It's a very profitable business, but it has the impact of lowering our margins.

Doing more front-end load has the same impact on the margin basis. So things are changing. I think you've got to keep your eye on the economics.

Last one, with the capital, paying down debt, the deleveraging is a good thing. Now, when do you start looking at your dividend again? Because your comments in the MD&A are that you are generating enough excess cash to pay down the debt to get to your targets and -- I imagine there's going to be a bump up in CapEx because you pulled back during the crisis, but when is the dividend going to start getting another look?

And what is a payout ratio you are comfortable with? Because if I adjust for non-cash taxes and some other items, like the stock-based comp, I think I get to around a 60% payout ratio, and with assets climbing, that's going to be dropping, I guess, on a sustainable level. What's your comfort with increasing the dividend and target payout ratio?

I think we should start with why we are paying down the debt. And late last year, when the credit crisis was in full, we looked at our debt and said, okay, what made us comfortable 90 days ago doesn't make us comfortable today.

And during the market -- the bottoms in March, some of the non-financial covenants that we were close to hitting bothered us. And it bothered us the way the banks acted on them.

And then, when we renewed our line of credit at levels that were in a completely different league from what we expected and what we had been paying last year -- obviously, we were expecting to pay a higher loan rate, we started re-thinking the debt. And until the credit market improves substantially, we don't want to be beholden to a bank and an annual change in interest rates, like we faced last year.

I would say that the market -- the credit conditions have improved considerably. And that our -- by the first quarter of next year, our debt will probably be at a run rate of less than one, and we will really have to review it, because then I do think we are underlevered, but it's so close to a period of time when we saw banks acting in a way that we weren't sure you could renew lines of credit.

We would have no problem having a payout ratio of dividends in a more normal environment or with much lower debt in the 75% range. That wouldn't a problem for us at all.

I mean, we went years essentially paying out 100%, either by way of dividend distribution or share buyback. We're just a little more cautious, given what we've gone through over the last 18 months.

John Reucassel, BMO Capital Markets.

Bill, just to be clear on the margins, if you took the money markets to a similar level or the lower level you would expect, are you seeing your margins probably would've been closer to the 102 or 101.8? Is that what you were meaning?

I think that if we hadn't had both the move into money market and the, obviously, the huge decline in the management fees, it would have been closer to about -- if you're looking at 100 and -- I would say like it would've been more like 101.

And the safe funds are still a good sticky business. You haven't seen much other behavior than what you would expect out of that business?

No, none at all. The business has an incredibly low redemption rate, and it's all at full margin. So, that business continues to be truly exceptional.

You know, you offset -- that's the best business and the I class is the worst business, and other things fall in between.

Just on Gabriel's question on your payout, you will -- you are benefiting from some tax advantages this year and next year, or part of next year. Is that -- should we expect cash taxes to rise sort of toward the end of next year?

I think you can expect cash taxes to rise and become more normalized in the second quarter of next year.

And then, just two final questions, more industry focused. Could you maybe give us your views on why industry gross sales are so low? Why redemptions are so low? And then, I guess we have some new regulations coming in from the MFDA, and any view on what that impact is going to be on the sales front?

I think the gross sales -- I think that the clients are pretty scared. The fact that our money market fund is so large, the fact that segregated fund sales were so strong, I really do believe that the retail investors are incredibly cautious.

And I think that they are cautious to invest, but they are also cautious to redeem, and I think they're almost just frozen right now. And we're all benefiting from a very, very low redemption rate, and gross sales are actually moving up a bit.

And so, this is not the environment, John, you would expect, though, after a 50% increase in the market. In a normal market increase, you would probably think that that a company like CI would be doing CAD75 million or CAD80 million -- after a 50% run-up, CAD75 million or CAD80 million of gross sales today, not CAD28 million or CAD30 million.

And so, this is real different. Look, I think there's going to be changes to the regulatory environment in point-of-sale material and things like that that will definitely affect sales. I just think it's too early to know what it will be. So, I just don't know.

Doug Young, TD Newcrest/Waterhouse Securities.

Bill, first question, what is the discount on the I class relative to your retail margins? Is it 10%, 15%, 20%?

It's all over the map. In high net worth, it may be 25%. On a huge client, it may be as much as 50%.

So we have an I class rate that is for clients, really it's -- there is no formula and it just depends on how much they have. But it's a considerable discount. Like I don't think I've ever wanted to leave people the impression that these are small discounts.

What it is is business that comes in that is -- that should, hopefully, have very little cost associated with it. And it's incremental to business that we would get. But it's a substantial discount.

So 25% to 50% is kind of a range to think about.

Yes.

And I think, also, the other question is -- how big do you think this business gets over the next two to three years, relative to your overall business? And how comfortable -- like, what's the maximum you'd want to see this business as a percent of your total business?

I want more of everything. It doesn't matter. So I don't care if this is 90% of our business, as long as our business is 10 times bigger.

It's hard for me to forecast out what our retail business will be like, and institutional business or I class business is a little -- is even more unpredictable, but I don't care. We will continue to actively go after I class business, F class business, regular class business, [seg] fund business as aggressively as we can.

The objective is to earn more per share. That's just it.

And what I'm trying to get at is -- in two years' time, what do you think your operating margin is? Is it north of one basis point, or is it south of one basis point?

South. But you've got to remember that the other thing that's changing this is our deferred sales charge.

We don't -- our deferred sales charge business -- we actually had -- I think we had more in amortization this quarter than we had in DSC spend. That's a first. Our DSC spend continues to go down, and less and less of the business goes -- comes to the fund companies on a regular-load DSC basis, and if it comes into the fund company on a low load DSC basis, with some of the ones that are out there today, they are extraordinary money-losing propositions for the fund company.

Every single product that we sell earns a decent return, whether it's I class, F class, low load, full load, and I think we, very carefully, manage the margins of our business based on the product that we are offering.

So for you, I mean, how important is operating margin going forward? Should we be looking more at pre-tax operating earnings or (multiple speakers)

I think so. What happens if, next quarter, if the trend towards going lower and lower on the amount of sales that are coming in on a deferred sales charge basis, that's going to reduce the operating margin, but it doesn't decrease the economics.

It just means that because you're paying 1% trailer fee on the front end and half -- and only half of the DSC business. If you think about it from a 2% fee, if you charge -- 50 basis points is for amortization and 50 basis points are for trailers, it's no different than just paying a 1% trailer. And so, but the operating margins look different.

Yes. I guess this is just happening, I guess, a little bit faster than most would expect?

I think that the change from -- 95% of our long-term sales in less than 10 years ago, probably early 2000, were DSC. The run rate today, outside of [seg] funds, is more like 20%.

On the expense side, would you expect as the asset levels continue to go up, that you're going to spend a little bit more?

No. I don't think so. I think that, because we have fixed our fund expenses at what's now seen as a very, very low level, we've had to be much more aggressive on the cost cutting than others. And we started from the lowest level.

But we can't afford to move our costs up. Do I think bonuses will be higher this year? Sure, they will. But I don't foresee the expenses moving up much at all. I think we're probably more careful with expenses today than we've ever been.

Just lastly, the [embankment] -- I was looking at the credit line that you had. I guess you've brought it down and your asset covenant level is brought down. Does that go with your view that you'd like to bring your debt levels down, or is there anything else to think about around that?

I don't think we want to bring our debt levels down any more. If six months from now, we are looking at a world where the credit markets seem more comforting to us, we may look at something like raising some longer-term debt. Some public debt or something like that.

I just think that we have concerns about annual renewals of very important big lines, and I think that we saw last year that the banks are going to be in a period of less accommodating, I would say.

Stephen Boland, GMP Securities/Griffiths McBurney.

Sorry, I thought there was a pause there. Bill, I just want to be clear here about margin versus sales and EPS growth, because in the past you've always said you could generate as much sales as you want, depending on what trailer you wanted to pay, but you didn't really want to sacrifice the margin.

I mean, if you increased your trailers by 10 basis points, you still have a profitable product and probably generate a ton of sales, if that's true. Maybe you can confirm that, how sensitive that is.

So, where is the balance here? It seems to be a little bit of a shift. Or am I just reading that wrong?

You are completely wrong. If we increased our trailer fees by 10 basis points on all of our business, it would take us 100 years of extra new business to make up for that.

The reality of it is I'm saying if we paid 125 basis points in trailer fee, or if we did a low load that gave people 3% and paid 2% in trailers, we could sell several times what we're selling, but we'll lose money on it. We'll lose money. It's not a matter of sacrificing margins.

I'm saying that if we look at every single product or category and try to maximize our margins within it, I think it would be suicidal for us to raise trailer fees at this point.

Okay, yes, that's what -- I didn't mean across the board. I just meant generally, if you chose some of your long-term funds and tried to get 75 basis trailer or 50 basis to 60 or 80, you still earn a margin on that, but (multiple speakers)

But you are losing a ton of money on all of the assets that you've had for the last 20 years. Remember that in this business, that wherever the trailer fee is the highest, ultimately that's where the assets flow to.

That's good. I just wanted to make sure there wasn't a shift going on here. Thanks.

Richard McCormick, Blackmont Capital.

I just had a question on SG&A. I'm looking here at the net SG&A for asset management. The asset management sector was up just over 6% sequentially, and the asset administration was down 6%. Can you give us some color on the moving parts that led to this?

The -- you know, our asset management -- are you talking about the money management component of it?

Yes.

Most of it is just basis points, right? So we pay most of the money management in terms of basis points and it often is -- it goes up or down with the level of assets.

Okay. So it's just a similar [SMPM] payout. What about the decline that you saw on the other side of things? On the -- asset administration, I think, was down a couple of million. Was it just -- ?

Again, it's just a cost-cutting that we undertook late last year. We don't have -- the asset under administration business is proving to be a somewhat declining business. And so, we've had to change our cost structure, so it will probably decline from here as well.

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

Thank you very much for joining me for our second-quarter conference call. And I will look forward to reviewing our third quarter with you in 90 days. Bye now.

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