CI Financial Corp (CIXX) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the CI Financial 2009 third quarter results conference call. 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 it products, including its business operations and strategy and financial performance and conditions.

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. Further information regarding factors that could cause actual results to differ from expectations is referred to in management's discussion and analysis available at ci.com/cix. EBITDA, adjusted EBITDA and adjusted earnings are not standardized earnings measures described by GAAP. However, management believes that most of its shareholder, 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 that are presented by other companies. EBITDA is a measure of operating performance, a facilitator for valuation and a proxy for cash flow. Reconciliation of EBITDA to net income is included in management's discussion and analysis available at ci.com/cix.

I'd like to remind everyone that thos conference call is being recorded today, November 10, 2009 at 4 PM Eastern Time.

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

Thank you very much, Josie. And welcome to our third quarter call. The September 30 quarter was easily the best in recent memory. In the world today is significantly better than just six short months ago. In fact, this remarkable rally has all but wiped out the damage of the worst bear market since the 20's. CI's assets today are less than 10% below its all-time highs. I will quickly go through some selective financial results and look at them on a sequential basis to show you how good the quarter was.

Looking first, at average assets under management, they were up 8% for the quarter to CAD58 billion. Our adjusted EBITDA increased by 12% to CAD153.2 million, when adjusted for discontinuing operations and stock-based compensation. Resulting in CAD0.52 per share in EBITDA. Our margin for the quarter was up 2% to 48.1%. Our earnings per share rose by 19% for the quarter, when making the same adjustments, to CAD0.25 per share. During the quarter, our debt outstanding decreased by CAD90 million or 10% to CAD781 million. Our SG&A during the quarter dropped by 7%, from 45 basis points, to 42 basis points.

On the sales front, our sales continue to be very good. Over the last year, we have done about CAD1.1 billion in long-term sales, tied for about the third spot. And sales continue to be concentrated amongst just a few of the industry players. Sales for the quarter were CAD250 million. One of the points that I have tried to stress over the years is the importance of consistency of the sales. And this chart just shows you that since we went public in 1994, CI has been in net sales for 87% of all months, far in excess of any of our competitors. And really testament to the very strong results of our performance of our mutual funds. We did very well during the bear market in terms of fund performance and we're doing pretty well during the rally. As of today, 58% of all of our assets are in the top two quartiles over the last year. 74% are at the top two quartiles over three years. And if you look on a five and 10 year basis, we have 71% in the top quartile over five years and 78% in the top quartile over 10 years. Our three largest managers are Harbour, Signature and Tetrem. And they have truly staggering numbers, when looked over the last one, three and five years, highlighted by Tetrem 100% of their assets in the top two quartiles from every period from one year to 10 years.

I'd like to spend a second and just give you a tutorial of the year. As I said, our assets today are actually higher than they were a year ago but this just segments it into four periods. When you looked at where our assets were, on an average basis, a year ago and where they are today, it's just a remarkable journey. What I want to compare it to overlaying that with our chief cost, which is personnel. And if you look at the sixth slide, you can see where the assets fell dramatically during late September, October, November and early December. During that period of time, we reduced our personnel count by about 250 people. We continued to reduce the employee count until about April and made only minor changes from then but constantly moving the number down. And this chart shows you that the head count has continued to go down, while the AUM from the bottom has increased by 37%. As a result, we have had really, what I would consider to be, exceptional financial results over the last couple of quarters, aided for sure by the bull market but also by some substantial cost containment that we did last year. When we started this year, we had almost CAD1 billion worth of debt and we made a conscious decision to start to dramatically reduce it. As of today, we have about CAD750 million worth of debt. When we sell Blackmont, which we hope to close in the next month or so, we will get another CAD110 million. And we believe that we will end the year with about CAD620 million worth of gross debt.

And now, we have to start looking at debt a little bit differently. Right? We felt we had too much debt, especially during the worst of the bear market. And when we look at debt today, we think that delevering from here may not give us any advantages and may actually be disadvantageous. If you look at EBITDA, and CAD670 million is probably a good proxy for next year's EBITDA, would be getting debt around CAD620 million. We would expect that level of EBITDA to generate CAD340 million worth of free cash. We have earmarked CAD210 million for dividends. If we keep our debt constant, that would allow us to have about CAD130 million to either buy back shares or increase the dividend. If we want to keep our debt to EBITDA at a 1-to-1 ratio, which has been our target for most of the last six or seven years, that would free up about CAD180 million next year for share buybacks or as I said, a dividend increase.

I talked about getting CAD110 million worth of proceeds for the Blackmont. I think more importantly, what it does, I think it frees up a lot of time that management has used in this business. We think that we were never going to get it to a business that was scalable. And we felt that this was just the ideal time to exit it. We were very pleased that we got a buyer with the quality of Macquarie to take them over, that the stockholders are incredibly excited about it. So, I think that all ended pretty well. We have announced that we are going to increase our dividend by 20% to CAD0.06 a month starting next month.

Between now and the end of year, we will have completed a public debt issue of about CAD500 million. We think our all-in interest costs will be something quite a bit less than 2%. Our interest charges next year are likely to be CAD11 million or CAD12 million. And if you contrast that to 2008, when we had CAD46.5 million worth of interest charges, you can see that it is a dramatic difference. The momentum during the fourth quarter is continuing at approximately the same pace as the third quarter. Today, our assets under management are up 6% from the third quarter average. Long term, net sales in October were CAD196 million. We've recently launched a new diversified yield fund that we've had very positive early interest in. So, all in all, I would say that things are going very well. It's great to report on a very strong quarter. And I will leave my formal remarks here and will be glad to take any questions people have. Operator?

(Operator Instructions). Your first question comes from Geoff Kwan with RBC Capital Markets. Please go ahead.

Good afternoon. The first question I had was, if you can provide if there's has been any update in terms of the conversations with Scotiabank? And then, secondly, in terms of the net sales environment, has really anything changed in the few past month or are you seeing any signs that things may be getting a little bit better?

Let me start with your second question. The net sales were incredibly slow, industry-wide during July, August and most of September.

Now, I think September was hurt a little bit by having as late a Labor Day, as you can have. October net sales went back to historically strong numbers, which October is generally a good month and November looks to be pretty good. I think that the question you're getting to is; Are the retail investors coming back to mutual funds and is the burden of having a big money market still around? And they're not. The retail investor is not where you would expect them be in terms of their level of enthusiasm, given the market is up almost 60% from low to high. I look at our business, it's very good. I think that our net sales for the year will be only a little bit less than they've averaged over the last four or five years. But when you look at the industry as a whole, I think that the one thing that we haven't seen is the stampede of retail investors into the market.

I kind of think that that's just the result of fear level that became palpable at the middle of spring of this year. And two bear markets of almost 60% in seven years just changes people's risk appetite. I think we're seeing a lot less leverage. I think we're seeing a lot more balanced type of approach to investing. And so, I'm not sure that that's not a relatively positive thing. But the -- I expect it to be a pretty good RRSP season. And I expect November and December to be pretty good. And on your first question, we've had no real conversations of any significance with Scotia. We have recently included another banking deal with them. Our revolving line will be with the Bank of Nova Scotia. So, I don't really have anything to report there.

Okay. The other two questions that I had was a little bit more on the housekeeping side. For stuff, when you look at the trailer fees as a percentage of AUM, it had been coming down over the past couple of quarters on a quarter-over-quarter basis. And that seemed to make sense to me, given there's less assets in the A class funds. But it did tick up a little bit this quarter. Just wondering if there was anything there? And then, the second one was, obviously, you moved the Blackmont into discontinued operations. Do you have a number of what the EPS would have looked like if you had kept it in the continuing operations but also excluded that goodwill write down?

CAD1.2 million was the loss for the quarter on Blackmont, so that would have been. And your first question was the --?

On the trailer fees.

Trailer fees were up a little because there was less money in the money market for one thing. And our I class growth was a little slower during the summer. Continue to get more business in front end, over the last few months than we have. So, when you combine them, it's -- I don't expect the number to change around much. I think that the long-term number is actually lower rather than higher.

Okay, perfect. Thank you.

Your next question comes from Gabriel Dechaine with Genuity Capital Markets. Please go ahead.

Good afternoon. Just want to ask you about the expenses, first of all here. They've been trending up since you bought them back in Q1. What's been the driver there? Is this when you're accruing higher variable comp? And what would be the outlook for 2010, in terms of SG&A, for the asset management division, specifically?

We think the SG&A will be pretty stable in the fourth quarter and throughout 2010. It's moved up a little bit because the variable compensation, one, hopefully, will be higher, given that we had a materially better year this year than last year. And we had some pretty significant reductions to variable comp last year, given the conditions that we were in.

So, when you say stable in 2010, is that flat or just the modest increases to reflect the better --?

I think on a percentage basis, it's flat.

Okay, all right. Now, the management fee, that one is dropping again, the average fee you earned. And I understand there are moving parts in there in terms of class F and class I funds and some fixed income representing a bigger portion of the AUM. But looking forward, are we -- should we kind of not focus so much on the management fee line -- or the average fee you earn, as a driver of your margins? And more so the asset growth, which should be a function of market but also, what you can do to drive growth of those class I and class F funds?

Well, the class I, one of the reasons why the SG&A goes down is because we had more class I business. I went out of my way to point out that they come with much less costs attached to them. The management fees during the quarter were pretty stable, it was CAD187.2, compared to CAD187.4 in the previous quarter. That number has to keep trending down because we continue to aggressively go after I class business. But I think that the I class business is more profitable than you think. It has far less costs associated with it. But still, the drivers of our business are always going to be the same and it's AUM. And what drives AUM, is the market.

And the class I funds, a lot of that is the seg fund business, right?

A fair bit of it is the seg fund business with Manulife.

How many billion dollars? I missed that. It's in the MD&A somewhere?

That we have with Manulife?

Or with the class-I funds in total, and how much of that is seg fund versus other stuff?

Right now we have 14% of our assets in I-class, and that would be up from 12.7% year ago. That gives you a feel for the growth. And most of it, I couldn't give you the exact percentage, but more than half of it is with seg funds.

Okay. And is there -- I know Manulife has adjusted its pricing, as has Sun Life on these seg funds. Have they adjusted your subadvisory fees? They've also been bringing in new asset managers onto the platform. I'm wondering what the competitive dynamic has done, plus their own pressures to increase profits -- how that's affected the fees you're earning from them?

Our pricing is about the same. Their pricing was pretty aggressive to begin with. The issue with seg funds today is the increase -- there's two things working against them. One is the increase in fees that all the insurance companies put on. Secondly is there's not the same level of fear. And so the principal guarantee that was cherished so much six months ago isn't seen as quite as important. And with higher fees at the same time, you're seeing a pretty significant decline in seg fund sales.

Last one, if I may, you say you sold Blackmont -- that distribution element. Should we look at that as purely a stand-alone transaction? Turning the page on it? But your general view of distribution, more is better is still holding and your thoughts on owning Assante are unchanged?

Not at all. The thing that I have said forever is we will not have any business that loses money. When we found out that we couldn't make money, because we just couldn't get this to be a scalable business, we decided it was time to pass on. A lot has changed since we attempted to become a significant player in that business, and including a 60% decline in equity markets, the banks are far more aggressive at trying to keep their brokers. We honestly didn't see there was any way that we could build into it a scalable business. And when we concluded that we couldn't make it scalable, and it was still losing money -- not very much, as I said, CAD1 million something a quarter -- then we viewed that as time for us to exit the business. We got a call from Macquarie, who seemed very eager to get distribution to take advantage of the capital markets business that they've grown in Canada over the last several years, and it just seemed like a good match. As I said, our stockbrokers at Blackmont are thrilled with the move and it frees up an awful lot of resources at CI.

Thank you very much.

Your next question comes from Doug Young with TD Newcrest.

Just a few questions. One, we've seen seg fund sales coming down at Sun Life and Manulife. I'm just curious if you are seeing a switch in the mix of where your net flows are coming from, and from a net flow perspective, which is a more important partner for you -- Manulife or Sun Life?

The most important business for us is Sun Life. That's the biggest segment of our business. So that's the easiest question you asked. Seg fund sales are coming down, as I pointed out. And you're just seeing -- there's no shift in the type of seg fund business. There's much less of it. I think what's driving net sales today is much more of the traditional business of financial planners and brokers coming into the market, albeit in a far less aggressive way than they were before. But the seg fund business, it really started to tail off once -- early September.

And from a net sales perspective, I know Sun Life is more important, but from a net flow perspective, more is still coming from Sun Life than Manulife?

Yes.

It doesn't seem like the sale through Scotia has changed much sequentially. Is that mostly DSC sales that are going through Scotia?

Sales through Scotia?

You say it in your Related Party section on your MD&A, the amount of trailer fees you're paying to Scotia.

That's just retail -- that would just be the business that we have, like trailer fees and stuff like that.

Is that mostly DSE or front end?

If it's Scotia, it depends on what part of Scotia it is. But if it's a broker, it's probably half DSE and half front-end business. If it's the institutional business that we do, as we do with all the banks, it's just trailer fee. No DSE business done out of bank branches.

Fair. Then the revolver was brought down to CAD900 million. I know it's been moved over to Scotia. Any reason for the decline in the amount?

Well, because we didn't need it, and standby charges are higher this year than they've been, so we just don't want to pay any standby charges. So our revolver goes to CAD200 million, and we're going raise CAD500 million in the public market.

Okay. Then just lastly, you talked about just the Blackmont capital market side. You put it in discontinued, and I guess the view is you are going to sell over the next year. Have there been interested partners in buying it, or what's the plans with that side of the business? Thank you.

The capital markets business, we'd like to give the employees the opportunity to form some type of partnership where they have most of the ownership of the business, and we're in discussions with them right now to do so. Have we had interest from buyers who wanted to take on the capital markets? A ton of them. But what we think makes the most sense and how those businesses are most productive if they're run as partnerships, so that's really the avenue we're trying to get to.

Okay, thanks.

Your next question comes from John Reucassel with BMO Capital Markets.

Thank you. Bill, just want to understand the view on sales a little more. So you mentioned that net flows haven't risen as much as you thought because there's still some fear out there. But you're still -- the seg fund sales are slow because there's not as much fear. Just trying to get an understanding why gross sales seem to be down so much at the independents. What's going on there? I'm at a bit of a loss to understand. Could you help me out?

Couple things. First of all, the banks perform better in the bear market than the independents did, if you're talking about independents as being the nonbank mutual fund companies. The average bank client probably lost 10%. The average mutual fund client probably lost 30%. The primary difference there is just asset allocation. Banks have far more money market -- fixed income and maybe some balance funds, whereas most of the independent fund companies are running equity portfolios.

So I would say that -- and I think I pointed out in the last two conference calls that you should expect the banks to do much better over the next couple of quarters because their performance was better in the bear market. I think that with the independents, they have a lot of clients that also use leverage. I think leverage is so out of fashion now, it's almost ridiculous. I just think what we have now is a group of investors that have had two horrible bear markets, when I think of the typical independent client, and I just think it's just a matter of time. nd do I think they come back in the market? I don't think there's any doubt that they do. But I don't think it's going to be overnight, and certainly gross sales -- last year when the market was horrible, gross sales were better than they are now, when the market is -- we've had the best rally of all time.

On the Blackmont distribution, when you talk about scale and the channel, I assume you're talking about the IDA channel, and that you are happy to pick up business in the planner channel. Is that fair?

Yes, I think that's fair.

Bill, as the world gets better here, you have the good fortune of generating all this free cash flow. Obviously you like to do acquisitions if you can find them. Doesn't look like there's a lot out there. Do you have a preference regarding the dividend or the buyback?

I don't think I do, and if I do, I think I change my mind a lot on it. We talked about that at the board today quite a bit. What leans me now towards a little bit -- back towards using more of it for share buybacks is the fact that dividend taxes are going up so significantly next year. And the last time dividend taxes were this much above capital gains taxes, all we did was buy our shares back for a long time. I don't think that we've landed on anything, and I think when we're sitting on the fence we tend to do half and half. I do believe we've come to the conclusion that de-levering is not in our best interest. We used to talk about a target rate of EBITDA of 1 to 1.3 times, and I think we, like a lot of retail investors, are scared. And I think we're targeting something more of 1 times EBITDA. If we had to pick right now, I think we'd split it between dividend and share buyback.

Any acquisition activity out there, Bill, is there anything?

Nothing.

Okay, thank you.

(Operator Instructions).

Well, if there are no more calls, I'd like to thank everybody for joining us on our third quarter investor call. And I really hope in February, which is our next release, that we have a quarter that looks something like this. Thank you very much. Good afternoon.

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