CI Financial Corp (CIXX) 2010 Q1 法說會逐字稿

Good afternoon. My name is Sarah, I will be your conference operator today. At this time, I would like to welcome everyone to the CI Financial 2010 first quarter results conference call. 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 strategies, 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. For further information regarding factors that could cause 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, pretax operating earnings and adjusted income; are not standardized earnings measures prescribed by GAAP, Generally Accepted Accounting Principles. However, management believes that most of its shareholders, creditors, other stakeholders and investment analysts, prefer to include these performance measures in analyzing CI's results. CI's method of calculating these measures may not be comparable to similar measures presented by other companies. EBITDA is a measure of operating performance, a facilitator for valuation 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 Mr. William Holland, CEO of CI Financial Corp. Sir, please go ahead.

Thank you very much, Sarah. And good afternoon. Reporting on the first quarter of 2010 is the polar opposite of the same quarter last year, which I think described as watching a car cash over and over again. We've now strung together four straight quarters in this amazing market rally. And I must admit, I'm actually really starting to get used to it. The year-over-year numbers are exceptional, any way you cut it. And I think it's very difficult to take much credit for it, given the environment that we've been in. I will quickly go through a few of the highlights and then, chat with you about anything that you like.

In the first quarter, our average assets were CAD63 billion, up 29% from the same quarter last year. But if you take the low point of last year, to the recent high, that number is actually 45%. And I can tell you, I don't remember a time when we've ever had one year growth in assets of 45%. Our EBITDA per share rose, in line, by 28%, to CAD0.55 on an adjusted basis for the quarter. Our earnings, also in line, up 29%, to CAD0.27 for the quarter. Our pretax operating earnings increased by 35% to CAD0.50. Our gross sales were up 34%, to CAD2.86 billion. Our net sales tripled to just under CAD700 million. On the costs side, where I think we can take a lot of credit, our SG&A dropped by 14%, from 49 basis points in the first quarter of 2009, to 42 basis points this quarter.

Our market share increased considerably, from 9.1% last year, to 9.5%, up just a touch over 4%. Most importantly, I would think, is our stock increased from CAD14 to CAD21.50, an increase of 54%. During this period of time, we reduced our debt considerably from CAD931 million, to CAD657 million, down 29%. In the first quarter of 2010, we paid dividends of CAD0.18 and that compares to CAD0.00 in the same quarter last year. During this quarter, we bought back CAD16 million worth of shares. Last year at this time, we bought back CAD12 million, a 33% increase.

On the sales front, our sales are starting to get back to the pre-crash levels. Over the last six months, we've had CAD5.1 billion worth of sales. We've had redemptions of CAD4 billion, net sales of CAD1.1 billion, which is pretty much in line with the last five or six years. And redemptions have started to get up towards historical levels, as well. The only thing I would say on the sales side is, given the magnitude of the rally, I would have thought that the gross sales would have been even higher. And I would have also thought, during the worst of the market, that the redemptions would have also been higher. So, I think, on balance, it's all pretty good.

If you look at the consistency of sales, we were net sales in every month again. And I'd like to update this chart because I think it's very important. Since we went public in 1994, we have had net sales in 88% of all months. And there is no competitor that is even close. And I think if you look at the average through the entire IFIC, all IFIC companies, I think the average is more like 63%, 64%. I think what drives sales and assets is, obviously, fund performance.

Our funds performance continues to be very good. Over the last year, more middle of the pack, 44% of our assets are in the top two quartiles. But when you start looking out at three, five and ten years, 54% of our assets are in the top quartile over three years and 83% in the top two quartiles over that period of time. Over five years, we have 52% of our assets in the top quartile and 83%, again, in the top two quartiles. Looking our over ten years, 77% of all of our asset are in the top quartile.

If you look at our top three fund managers, Harbour, Signature and Tetrem, over almost every single period of time, they have exceptional performance. In the top two quartiles, almost all the time. The exception being and quite notably, over the last year, most of Harbour's assets, which are really two big funds, performed way below their peer group. But his investors expect, in a huge rally, for him to underperform. His performance has always been best in very difficult markets.

Just a couple of thoughts here. If you look at our average assets in Q2, they are now up 3%, over the average of Q1. So, Q2 is setting up pretty good. So far, in the second quarter, we've bought back an additional 1.4 million shares. Our gross sales are continuing to improve towards the pre-crisis levels. The redemptions that we face, a lot of them could be -- a lot of them are just because we had a huge seg fund bubble of sales in 2000. And it was resets that were available and these were ten year seg funds and advisors kept resetting it.

And so, when the market took a huge dive after the first quarter of 2000, these guarantees were locked in. And so, these investors kept the money. After ten years, these assets were actually in the money and the insurance companies had to make good on the guarantee. So, we had, what would now be described as, a redemption bubble in kind of February, March and April. And given that the sales eased a lot in the second quarter of 2000, these redemptions will also start to moderate considerably.

We're seeing money market assets flow into long-term funds. Over the last year, money market assets have dropped from about 5.6% here, to something resembling historical averages of 2.7%. We announced, today, that we're raising our dividend rate, again, by 8.3%, to CAD0.065 a month. And that is in keeping with our philosophy of trying to get the earnings of the Company back to the owners of the Company, as quickly and as tax effectively as possible. I think that will conclude the my formal remarks. And I'd be glad to try to take any questions people have.

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

Hi, Bill, just a quick question. On the seg fund redemptions, the CAD4 billion you had in the quarter, how much of that would have been on the seg fund side?

Our seg fund redemption, I don't know what the exact number is but they're literally up 50% over the last year, the redemptions.

But would they be material within the CAD4 billion number?

Not within the CAD4 billion but of the net sales, it's very material. And you have the withdrawals from the regular monthly GBMW or whatever the acronym is and then the -- but it's really this group of assets that locked in their guarantee in the first quarter of 2000, that is now able to get out. And, of course, they're getting out and in some cases, the guarantees are really in the money. But that slowed a lot. If you remember back to 2000, the second quarter, things really slowed down and then, some of the resets, the ability to reset and all that stopped being as available. So, it's really a small period of time, a blip. And it should have kind of -- it should work its way out, probably by the third quarter. And really, most of it is already behind us.

Okay. Just when I look at the cash flow, though, it looks like you're generating, in the quarter, about CAD100 million and you paid a dividend of 53. I'm just trying to figure out, when you pay down your cash balances, it looks like to pay down debt. But what -- when you talk about paying money back to the shareholders, what -- should we say the funding of commissions, is that mainly going to be debt financed or are you done with the debt reduction? Maybe talk a bit about where the priorities are.

I think that the benefits of delevering are clearly behind us now. The forecasts that we're using internally shows us having net debt of CAD485 million at year end. If we've got a run rate of EBITDA of CAD700 million, I think we're under levered. So, I think -- and during the last four months, we bought back a considerable number of shares. I think that moving the dividend up is the preferred choice now. Obviously, that's why we did it. And I think, also, that we don't want to delever further.

And I think that we're probably entering in to a period of time where we could look at business opportunities that clearly weren't available during the stock market crisis. I think as you get into something resembling a more normal environment and I think some of the smaller firms are realizing that this is not a hospitable environment for them. I think that there will probably be some opportunity. So, we doubt that delevering will become a significant problem. And if at the end, we don't find opportunities we like, I think, at some point, we'll stop paying down debt and buy back shares again.

Okay, in a big way. Boy, my last question, you opened the box here on opportunities. This M&A in the fund business, is it related businesses or what gives you some confidence that there might be some M&A activity after, what seems to be, an awfully long drought?

Well, I just think it's common sense. I think that we had no interest in acquisitions a year ago, either, even when people -- when we got calls and got expressions of interest. And I think that when I look at the -- what I'm interested in is saying, "Okay, what about the business that fit in with ours?" Would we look at institutional business? The right kind of institutional business. We've had great success with Altrinsic in Connecticut.

We would look at the high net worth business. We would look at alternative products. We would look at high net worth. And I think that there's a lot of these businesses that exist. And I think that, when I talk to these people, they seem quite interested in some type of role in the CI paper. Right? Because it helps in succession issues that they have. And so, as we keep building out these businesses, I think there's opportunity there for us to do something. I can tell you where we're not going to be, is in the retail brokerage business, the capital markets business. After that, I think we're somewhat open.

Okay. But look for maybe more institutional, high net worth, not necessarily pure mutual fund acquisitions.

Yes, I think that a pure mutual fund acquisition would have to have some interesting component to it. Otherwise, I'm not sure that that's our first choice right now.

Okay. Thank you.

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

Good afternoon. Just to follow up on John's question I wanted to get a sense from you, not necessarily M&A related, but where you see the opportunities for growth beyond your current businesses? And also, you made a comment on the alternative space. Is this a change of view? Because I thought you had previously talked about, when you had a hedge fund business, it was a horrible business to be in because the flows were pretty choppy. And I just wanted to get an update on that.

Yes, I don't want to be only in the hedge fund business and I don't want to be a huge part of our business. But I think it's compatible with our business. But we really want to look at it and make sure it's the type of businesses that fit in with ours. I don't -- I can't say as I could exactly pinpoint what kind of opportunities we would look for. I'd just say, we're probably a little open minded, as we get bigger and bigger. And the mutual fund industry, essentially, is getting smaller and smaller. I think we've got to diversify a little bit more. And I think that there's still room to take advantage of scale and synergy and stuff with smaller businesses but they have to be something other than mutual funds.

That's why I say things like institutional business. We have great success with our ownership in Altrinsic. We've had pretty good success in our own institutional business here, that we've started to -- that started to pick up a little bit. And we've really only been in it for a couple of years. We've always had a good high net worth business with our PMA program. But I do think that, as you see this domination of the banks, that the smaller firms that are struggling are likely to look for some ways to roll into companies that allow them to compete better.

Okay. And the last question I had was just if there's update on the relationship with Scotiabank?

Well, I don't even know how qualified I am to answer that question anymore. It's been asked so many times. But I do think that, as of now, I think you should conclude that, for the foreseeable future, Bank of Nova Scotia is content on being a passive, nonpartner shareholder. I think that answers the question. Over the 20 months since they bought a 38% stake from Sun Life, we've had a series of discussions. We had talked to them constantly for 20 months, on ways that we could create a partnership that would benefit both sides.

And if you remember early on, their stated objective was something like they wanted to obtain Board seats dilution. They wanted to merge their fund business and they wanted, ultimately, to have some path to control, I think, was the word that they used. I think when you look at the bid/ask today, it would look something like this, they want effective control, meaning they want to have considerably more ownership. They want Board seats. They want dilution protection. But they still want to be able to compete with us, with their fund company. And their position is, they do not want to pay a premium to increase their stake to something resembling effective control.

Now, I kind of would like to be seven feet tall and play center for the Toronto Raptors but it's not happening. Our view is that they can either control or they can compete but they just can't do both. And If they want to get effective control, they have to pay the appropriate takeover premium. And that's really the bid/ask as it stands now. And why I think that, for the foreseeable future, they are just going to be a passive shareholder. I think what we have is almost a perfect Mexican standoff.

Great, thank you.

(Operator Instructions) Your next question comes from the line of Doug Young from TD Newcrest. Your line is open.

Hi, Bill. I think a lot of stuff has been answered already. But I wanted to confirm that the weaker net sales in April, and this is relative to what our expectations would have been, that's really around the seg fund discussion that you've already had. Is that essentially correct?

It would be -- yes, more than 100% of what we would have expected in net sales would be seg fund redemptions.

Yes, okay. And then, I wanted to go back, just big picture. You look back over the last five, six years or whatnot. And my question is, given all the structural changes that have happened, can margins get back to peak levels for CI? And if not, what are the some of the reasons why that would be?

Margins cannot get back to peak level because fees can't get back to peak. And the pressure on fees, if you look at the top line, it always goes down. And it goes down because you're selling products on a I Class basis, that have lower fees. Do they have lower margins? Yes. The margins aren't as materially different as the fees are because you're not paying trailer fees and certain other costs. But I don't think there's any chance that you get back to peak margin levels. I don't think that that's in the cards. And you've got to start looking at it and start saying, if you look at the absolute dominance of the banks' business over the last six months; How would you position it so that you'd be raising fees or coming out with product that pays more fees?

What you're seeing is the opposite. You're seeing companies increase the cost side of their business and pay out much higher compensation to get sales done. And that doesn't often effect EBITDA line, remember. That you have to go fishing into the earnings and cash flow part of the business. And so, I see that margin levels, if you're big, getting bigger and manage it well, it won't be a huge problem. Smaller companies, it's just going to be a horrible ride from here.

And regarding the money market, I know, obviously, you've absorbed costs on that side. Has that now righted itself or are you still absorbing costs around that side of your business?

Yes, we have to absorb some costs because the short-term rates are essentially zero. And so, you're certainly not making money on money market. But it's not the problem it was a year ago when we had -- I think, at the peak, we peaked out at just under 6% of money market. And now, I think we're probably going to bottom out somewhere around 2.3%, 2.4%. So, you need to see interest rates, it will probably be a year, 1.5 year out before we get to having normal margins in a money market fund because we're going to need six or seven rate hikes before it's a very profitable business. I don't think we'll lose money but it certainly won't make money.

And just lastly, how often do you have and the Board review your dividend? Is it quarterly or ever six months that you would consider potentially bumping it?

We look at the dividend every quarter and it's a conversation that kind of goes lock step with share buyback and debt. And now, we've kind of move debt to the side and say, we just don't want to reduce our debt anymore. And so now, it's really; Do you buy back shares or do you increase the dividend? In the first four months, we just kept buying shares back. And I think that we've now looked at it and said, "Okay, I think the right balance is to have a decent dividend increase." It's still gives us more free cash -- it gives us lot of free cash every quarter but we could buy shares back or the default is always to just have the debt go down.

How does the Bank of Nova Scotia ownership really impact your decision on the buyback versus the dividend?

Up until now, it hasn't. We've been content with them owning -- I think our share buyback has probably moved up their ownership 0.5%. That's okay. You have to start paying attention to it as it gets closer to 40% or something. But I would say, up until now, very little.

Thank you.

Your next question comes from the line of Stephen Boland from GMP Securities. Your line is open.

Hi, Bill. I don't want to belabor the Scotia discussion. But just from your tone, it seems a little more -- even from the last conference call, maybe that you're a little more frustrated than you have been. I just want to make sure I'm reading that correctly.

I don't know if frustrated is the right word but it's your word. So, I don't want to pick at it. But a couple of months have gone by again. And I'm pragmatic. If after 20 months, we haven't been able to find a place to land that both sides thought was a basis of a good partnership, I've got to conclude that there probably isn't the basis of a good partnership. So, as a large passive shareholder, great. I think they'll do very well. But the opportunities that we're looking at today are outside of that.

I appreciate that, Bill, thanks.

(Operator Instructions) Your next question comes from the line of Paul Holden from CIBC. Your line is open.

Good afternoon. We spent some time talking about the redemption picture for seg funds. But maybe we could talk a little bit about the gross sales outlook. I imagine it's slowed somewhat with the higher fees, both volatility and increasing the market, do you think it comes back? And also, maybe talk about how you think demographic trends may impact seg fund sales going forward, especially with the guaranteed income feature?

The gross sales are definitely off. And I would say they're off -- if you look this quarter over the same -- second quarter of 2010, over second quarter of 2009, yes, I bet the gross sales are off 25%, 30%. How much of that is the fee increase and how much of that is the fact that there's not the same papable fear out there and people want the guarantees. And the guarantees have been watered down as well. So, I think it is a combination of those. I do not think that we will see seg fund sales at the levels that we saw in 2007, 2008, early 2009, again. So, I think that that's another kind of ship that's sailed. I think that the business will be pretty good and I think the demographics are somewhat favorable towards it. But there's a lot of competing product for everything now. And I think that the seg fund business will continue to be very good. It's a very important part of our business. It's just not what it was a year and two years ago.

Okay. And maybe you can into the long-term trends, talk about what your thoughts are with respect to rolling out product that might address the needs of people that are entering the retirement age?

Well, we certainly have a lot of fixed income product and a lot of balanced fund product. Probably more than, as a percentage, than we ever thought we would have. And we'll continue to bring out more product along those lines. And we continue to look at other ways of getting guaranteed product out there. And so, I think that this will evolve a little bit. But I'm not sure that the demographics will change the asset allocation as much as conventional wisdom.

Interesting.

And I think that, in the short run, there's more money in fixed income or conservative investments than there normally would be because of the fear of just two 60% bear markets in seven years and the fear that that creates. So, of my concerns, that's not -- getting product out and getting product out that is more fixed income oriented, is probably pretty easy. I'm not sure demand is going to be as high as what conventional wisdom thinks, though.

Okay, thanks for that.

There are no further questions in queue.

Well, thank you very much. And I look forward to updating you, I think it is, August 11 on our second quarter. Bye now.

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