CI Financial Corp (CIXX) 2009 Q4 法說會逐字稿

Good afternoon, my name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to CI Financial 2009 fourth quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be 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 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 these 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 the management's discussion and analysis available at www.cI.com/cix.

EBITDA earnings before interest, taxes, depreciation amortization, adjusted EBITDA and adjusted income are not standardized earnings measures prescribed in GAAP, generally accepted accounting principles, however, management believes most of its shareholders, creditors and other stakeholders and investment analysts prefer to include the performance measures in analyzing CI's results. CI's methods 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 now like to turn the call over to William Holland, CEO of CI Financial. Please go ahead.

Thank you very much, Krista. Good afternoon and welcome to our fourth quarter conference call. It is really hard to believe the ride that we took in 2009. In my view, the year-end results are nothing short of shocking and I certainly feel better, I think I'm off suicide watch now and if you just look at 2009 and some of the activities, we actually converted back to a corporation on January 1 of 2009 ending about a five-year corporate nightmare. During the year we cut our SG&A, which was already the lowest in the industry by a considerable margin by CAD34 million over the prior year. We reduced our employee count by 400 people from late 2008. We now have approximately 1,200 employees down from a high of 1,750.

During the most difficult year I could imagine, we increased our dividend rate by 50% to CAD0.06 a month. Late in the year when the corporate public bond market opened up, we issued CAD550 million worth of debentures. Our cost of debt today is about 1.75%, this has saved us approximately CAD8 million. Late in the year, we sold Blackmont to McQuarrie for a little over CAD100 million, which was very helpful to us, it frees up a lot of our time and gives us a much more focused business. During the year we generated enough income to buy back 2.1 million shares at a cost of CAD34 million. That market value today would be about CAD44.5 million. During the year we paid down CAD320 million of our debt ending the year with CAD600 million worth of net debt, considerably less than one times our forecasted EBITDA for this year.

Some of the financial highlights, we ended the year with CAD63 billion in assets under management. That was up 24% over 2008. Testament to the ride that we took, our average assets for the year were actually down 8%. Our EBITDA was only off by 7%. Our pretax income was off by 8%. We dropped our SG&A by 12% during the year.

During the most difficult year, we increased our market share by 6% to 9.5%. Because of the extreme activity, it's probably better to look at it on a quarter-over-quarter basis. Looking at the fourth quarter over the third quarter, our average assets under management rose by 6%. Our EBITDA was up 3% but if you adjust for the fact that we had a gain of around CAD3.5 million for the sale of some Dundee shares that we had held for a prolonged period of time in the third quarter, our EBITDA would have been up 6%. Our pretax income was also up 6%. Our net sales for the quarter were up 47% to CAD363 million.

Performance clearly is a determining factor of success in this business. We had great performance during the bare market. We had very good performance last year as well, 61% of our assets were in the top two quartiles, over three years, 84% of our assets are in the top two quartiles, over five years, 81% of all assets are in the top two quartiles and over a decade 85% of our assets are in the top two quartiles and 73% are in the top quartile. Our top three money managers, Harbour, Signature and Tetrum, average over 90% in the top two quartiles over all periods, one, three, five and ten years. Late in the year at the investment awards CI won the investment company of the year for the third time in the last four years. Eric Bushell, head of the Signature Group was the Equity Fund Manager of the Year. Jerry Coleman, who runs our Harbour Fund, was Money Manager of the Decade. We also had the American Fund won an award, the Technology Fund, Canadian Balance Fund, Signature Dividend Fund and Signature Resource Fund.

The performance and the accolades are only good if they turn into sales and last year, sales were actually pretty good given the environment. While our gross sales were off, our redemptions were also at the lowest rate they have ever been and we ended the year with CAD8.5 billion worth of gross sales and CAD1.5 billion in net sales. We are the only company that has had net sales of over CAD1 billion in each of the last six years.

The good performance has also led to very consistent net sales. We now have net sales in 88% of the months since we went public in 1994. Last year we had positive net sales in 11 of the 12 months. And I will point out that there is no other company even close to this level of consistency.

You know, as we end the first decade of this century, I think it's really helpful to just look back. One of the things we said in 2000 that we were really at a changing point in this business and we made some dramatic changes to our business, including aligning ourselves with distribution, believing that growing and being large was the competitive advantage and most important thing was to control the controllable costs and the controllable part of your business. And one of the things that we identified earlier was that the banks were going to be the dominant competitor and certainly it wasn't the consensus in our business but if you look at the last decade, the banks' market share, the Big 5 banks have gone from 18% to 36% and they are actually gaining market share today faster than they were at any other time during the decade.

I think that the decisions that we made and the way we positioned our company has allowed us to continue to do exceptionally well. If you look at the long-term net sales over the last decade, we are third behind two banks, Royal Bank and TD, and a long way above the fourth and fifth player. The top five represented 55% of all net sales during the last decade. The top ten were 80% of all sales and the top 20 were 104% of all sales. If you missed the positioning of the last decade, you ended up with incredible decreases in market share.

In this very complicated chart, you'll look at the top ten companies by market share in 1999 and then look at them today. Five of the top six companies were independents in 1999, whereas today three of the top six are banks. Every single independent lost market share and a considerable amount of market share during the first decade of this century except for CI. CI's market share went from 5% to 10% and some of the smaller companies have become all but worthless and market share has declined to almost nothing. In 1999 the top ten represented 71% of all assets. Today that number is 79% and growing very, very quickly.

If you look at CI today, in late February here, our assets under management are up approximately on an average basis retail average assets are up about 2% over the fourth quarter, so the first quarter looks to be very good. Year-to-date sales are well ahead of the same period in 2009. Our corporate debt is well below our annual run rate of EBITDA. We are benefiting from, as we go back to being a taxable entity here, we are in a period where corporate tax rates are declining considerably.

We will generate a ton of free cash flow again this year and the decision is really do we raise the dividend? Do we buy back shares? And I guess the default button today is just to continue to pay down debt. I would say, though, that that's not our first choice just because we think that any benefits from delevering are clearly behind us and so it's really just a decision, and our view is still the same, we would like to return 100% of the economics that we earned to the shareholders and I'll remind you that over time we have paid back approximately CAD3.2 billion to the shareholders by way of share repurchases, dividends and distributions. I think today our inclination is slightly to repurchase shares, but it's certainly a topical agenda item at the board level right now. That is the extent of my remarks. I would be glad to take any questions people have. Krista?

(Operator Instructions) Our first question comes from the line of John Reucassel from BMO Capital Markets. Your line is open.

Thanks. Bill, just trying to get a sense of your costs and you say you've taken out 500 employees. Have you cut to the bone or is this a sustainable level, or how is it that CI would proceed as a low cost (inaudible) found more? If you can help us understand that or should we expect that you need a rise or what?

It you look at our investment management SG&A in the fourth quarter, it was 32.6 basis points. That is less than most companies are charging in just a recovery expenses that they get in their fund. That is everything, that's our fund operating as well. And so do I think it goes down from here, no? Do I think it's sustainable? Yes, I do.

I think as the industry becomes so competitive that it's going to be more and more difficult for the small competitors to say we are charging 2% plus 30 or 40 basis points of ER when we are running our entire business, money management, corporate overhead, SG&A and operating costs at 32. So I think it's a competitive advantage. I don't think it gets much better. I think that we probably cut a little more than we normally would have in late 2008, early 2009 and I think that was just out of fear and, look, we could have made mistakes on that. It turned out that we didn't. We didn't have any accidents that were caused by cutting costs too much. But we certainly could have. I think that we had some good fortune there. But this is becoming a very competitive business and I think that for us, this is a real competitive advantage to be able to run our business at a way lower cost than companies that are much, much, much bigger than us.

I would agree. Just when you come in and you go see brokers or your customers, your clients about the lower fees, does it translate into sales or does it not or how -- ?

That's a good question. I don't think that they say that that's -- but the business seems to go to companies that seem to be a little more efficient, that aren't pushing the envelope in terms of having 3% MERs on Canadian and American funds and three and a quarter on emerging market and global. If you look at the last decade, is it an accident that the companies that run their business the best got all the sales? I don't think it is. And I think to just say that fees don't matter, my clients don't care about fees or the executives at fund companies saying that, I think is just inaccurate.

Okay. Last two questions. First, could you update us on what the flows are looking like in February? And maybe if you could just give us an update on the Scotia relationship? What's the impediment to this not coming along further than it has or are things looking better there or what should shareholders expect?

Okay. I think that our net sales in February will be CAD350 million. The RSPCs as a general rule isn't what it was. There's more contributions made throughout the year, and when I look at our sales over the last five or six years, we kind of average two-point some billion dollars and I think that's probably where we will be again this year. And so I look at February as being kind of okay. I think it will be exceptional for the banks, and I think it will be really bad for most of these independents, midsized and below.

On the Bank of Nova Scotia front, we have spent an enormous amount of time with them over the last four or five months and I'm very confident that we will come to some type of arrangement where we can both be helpful to each other. I'll just say that never having worked at a bank, they are a little slower than companies like CI and they tend to think these things out a little more. Maybe that's a good thing. But we don't have any differences of opinion and they certainly are adamant that they are going to be very helpful to us, so I would expect in the near future that we will start to be able to roll out what we can do to help each other and I would say I'm pretty optimistic about it.

Great. Thank you.

Your next question comes from the line of Gabriel Dechaine from Genuity Capital. Your line is open.

Good afternoon. Just want to talk first about the dividend and you looked like you're generating a dividend pay of ratio of around 46% on free cash flow, and that's probably a level you'll hit over the next couple of quarters, but if you strip out the noncash taxes, you're somewhere around 60ish percent, ballpark figure there, but what are you comfortable with in terms of a payout ratio if you exclude you're noncash taxes?

Well, I think we are going to just wait around a little bit here and see what the tax rates on dividends is going to be. If you think back to the way we acted when the tax on dividends was much higher than capital gains. For years we just bought our shares back. We bought back almost CAD1 billion worth of shares during that period of time. I think that if the dividend tax rates are where they are now, then I think that we would be comfortable paying out 75%, 80%. We don't want to keep retained earnings here. I think we have said it a million times. Retained earnings in the hands of management are evil things. It doesn't matter. They will find a way to make it theirs, even people who own shares. Our whole objective is to get all the earnings, we have a business that has very low capital requirements and so I look at it this year and say will we raise a dividend this year? Probably at some point. I don't know how much. Will we buy sorry shares back? I think certainly we will buy our shares back like we did last year. And as I said, the default is just to keep paying down the debt if we can't land on one of the other two. But I would suspect that we would raise our dividend at some point this year and buy back a few million shares.

I'm surprised, I guess, about the buy backs given the Scotia ownership that you're not that concerned with pushing up their ownership.

I'm not even remotely concerned about it. In fact I think it may be better to have them own more but everything they can do, I think they own 34.8%. Whether they own 35.8% or 38.5% doesn't really matter because they have got the ability to block anything. They have negative control already. So today I don't have any reservations at all about buying back shares and moving their ownership up. It has to be the right thing to do for all shareholders and if we think that that's the best use right now we are borrowing money at 1.75% yet we are paying a dividend rate of three-point something. You could make a case for buying back share as being a pretty intelligent way to distribute earnings to the owners of the business.

I guess if you're in the camp where you think a vend in of Scotia's mutual fund business is something that you're both entertaining that might handcuff you a bit, I guess, because depending on the valuation you put on that business, you want to have some wiggle room.

Sure, but there's a lot of ways around that. If that ever became an issue, you could pay a portion of it in cash or something. Realistically if we buy 5% of our company back over the next year and a half or something like that, they are only moving up their ownership 2.5%.

Okay.

(inaudible) just under 2%.

Okay. You were touching upon the long-term outlook you had back in the 2000 era and emphasizing scale, distribution and those are all things you managed to accomplish in the last ten years. Now, what's your crystal ball telling you these days? If you look ahead, acquisitions (inaudible) scale, that's still going to be an important thing. I don't think there's any getting around that. But nobody seems to be willing to sell. What's your --?

Well, certainly there's been firms for sale over the last couple years, there been no interest in buyers in some cases. The the banks will push the competitiveness of this business for sure and I look at this and think that the top five companies at the end of this decade will have 80%, market share and the distribution is more and more coming out of banks. The financial planners today work in banks. There's far more financial planners that come into the business today, probably nine out of ten financial planners today that show up in the business today new at the business are going to a bank rather than an independent financial planning dealership. So, things are changing. I think that if there's a sweet spot, it's the very large companies that have great scale and low operating costs and lots and lots of product. I think to be competitive with the banks we always felt that's what we had to do. Today if you say where do I not want to be, I don't want to be under the fifth place in this business because then I think that you're just at a cost disadvantage that's overwhelming. And remember, when you look at our sales over the last decade, every one of those sales were made at real profit margins. We don't have any loss leaders. We would rather not get business than get business where we don't make money.

Fair enough. Last one sneak in there. Assante, I get about CAD3 million of negative EBITDA. That's probably some Blackmont residual in there. Is it a breakeven business, Assante?

Yes, today Assante is a break even business, it's a fabulous business for CI. The business that we do with them is great, it's a very well run business. Our objective is to run it as lean as possible so that we can break even and we will. The mantra that we have had said we will not be in any business that loses money.

Great. Thank you.

Your next question comes from the line of Geoff Kwan from RBC Capital Markets. Your line is open.

Good afternoon. Just had a couple of questions, just the first one was what are your thoughts in terms of when retail investors are going to come back into equity funds? It looks like this has been something investors in the market have been waiting for for quite a long time. Just wanted to get your thoughts on that. Second question I had was around segregated funds, what your thoughts are there in terms of net sales heading into 2010 and as well whether or not you would consider branching out if any other product such as ETFs?

I think that the retail investor is very cautious here. We have had two of the worst bare markets since the 1930s in the last seven years and I think that the sales that are coming in this business today are not at all in keeping with what you would think after a 65% rise in the market. I think that this is going to be a very incremental thing and I think that we have to acknowledge that there's more competition for retail assets than there's ever been, if you think about ETFs and various forms in passive investing as well, so this is going to be a much tougher environment than to just put out your shingle and say the market is rallying, buy our funds and so I think it's a slow process, I think that 2009 is likely to look in sales, or 2010, something like 2008 before the first half of 2008. I think we have been of the view that the fund industry would average around CAD20 billion worth of sales a year of long term sales over a cycle and I still think that's the number but if the (inaudible) get bigger that's a smaller percentage so I think that you're going to see (inaudible) sales on a long-term basis represent about 3% of assets where they peaked in 1997 at 26% of assets and so I see the retail investor, it's going to improve but it's not going to come back like what we saw in 1997, the first half of 2000, or even in early 2007. In all likelihood to won't come back to those levels on a percentage basis but it's going to improve from here. On the Seg fund side, our Seg fund sales are running, give or take, if you take across the whole organizations, about 60% of what they were last year. I think that's perfect. Last year the fear was palpable and people were buying things because it had guarantees and today, I think it just shows that the industry is in a little better shape knowing that, like last year at this time, probably 200% of our net sales were Seg funds and that number is, as I said, around 60%. I think it continues to slowly decline and I think it's two things. One, the increased cost and the secondly, there's less fear. It's great business, love it, but I'd sure like to see more mutual fund business and less Seg fund business over time because that just indicates better health.

I'm sorry. On the ETF side, it's obviously a small part of the retail wealth market but it is a growing part. Is that something that at all interests you?

Yes, it does, and I think we vacillate back and forth on whether we should do something there. The busiest ETFs, the most liquid ones, when you actually look at the size of them, they are so small and it's really just trading. What you really want to be is the market maker on these things but we continue to look at it, don't have any strong view one way or the other today.

Great. Thank you.

(Operator Instructions) Your next question comes from the line of Graham Writing from TD Newscrest, your line is now open.

Hi, Bill, how are you doing?

Well, thank you.

I guess my first question, there was a comment on a conference call recently by one of your competitors comparing the margins of a traditional institutional business compared to sort of operating on the Seg fund platforms and saying that these margins were at the end of the day pretty comparable. Is that something you would agree with?

I never heard this comment and I hope you misheard it. That makes no sense. We tried to sell a traditional asset manager last year and it was CAD2.4 billion and the best offer we got was something less than zero. That business has been so absurdly commoditized that I don't even know how to respond to that. If the business you get on a Seg fund platform, because there's no costs associated with it, are just fine. Look at the cash flow, the actual cash that's generated out of a company like CI, it has lots of it. Go check some of the asset managers that are traditional pension fund managers, not even close. Not even close. I'd say our margins are five times that.

Okay. That's great. My other question is just with this (inaudible) sales tax coming in later this year. Just wanted to get your view on how material you think that could be to your business and whether you had any plans to just simply incorporate that into higher MERs or -- ?

You have no choice. Nothing else you can do. It's a tax applied to the MER.

I guess you could consider sharing the extra costs but it would obviously impact your margins, but --

I don't think there's any business where the business pays the GST for their customers and I'm not even sure why that would -- that doesn't even make sense to me. I think it's a headwind. To be clear, to me it's inconceivable that they find this to be logical. We are in a period of time where investors are clearly showing reluctance to invest money and to and to increase the tax on savings and investing is absurd. And it makes a huge difference and the higher your fees, the bigger the tax on it, and do I think it affects the business? Yes, I do. And, if I was looking at this today, I would say geez, we should be taking the dividend tax down and the capital gain tax down and really encourage investment in savings given the problems that we have and their solution is well let's just tax them more and will it affect the business? It will. I don't see it as being a huge effect out of the gate but over time you're marginalizing the product and you're going to make other products appear more competitive. Do we factor much into hurting our business in 2010? No.

And is it something that you would sort of keep your eye on if it was material enough, would you even consider moving your operations to Alberta or Provence (overlapping speakers).

If you look at some of the things that they've put out in the last week or so, it's clear that they want to tax all commissions now so brokerage commissions, front end commissions, redemption fees. It appears that they want to apply the tax quite broadly. Now, I think that they will probably make sure that they have shut down any type of way around this. I think they probably thought it out pretty well. It's just such an attractive tax grab when you think about t there's several million Canadians that invest in mutual funds and if you just go in there very quietly and take out a few basis points and it adds up to like CAD1.5 billion in taxes, it's pretty hard to pass on. And I suspect it will go through. It certainly it was not unchallenged. I remember a couple years ago when we tried to get EFIC to really stand up and take a position on the GST being applied to it because remember originally the GST was not going to apply to savings and for the first few years it didn't apply to mutual funds and then they just stuck it in there and Steve MacPhail said if you do this you're going to end up with a harmonized tax and it's going to double and you know it was funny we couldn't get EFIC to even remotely take a position on this and today I think it's too late. I think this is a done deal and it's unfortunate and I think it's horrible policy.

Okay. That's great. Thanks.

(Operator Instructions) There are no further questions at this time.

Well, thank you very much. I look forward to updating you. I think it is on May 11 for the first quarter of 2010. Thank you very much and goodbye.

This concludes today's conference call. You may now disconnect.