CI Financial Corp (CIXX) 2010 Q2 法說會逐字稿

(Conference in progress) -- average retail assets under management for the quarter were CAD63.5 billion, up 18% year over year. More impressively, net income was CAD89 million, up from CAD53 million (sic - see press release) the previous year, 68%. Earnings per share were CAD0.31, up 72%. EBITDA per share was CAD0.60 for the quarter, up 40% year over year. And our pretax operating earnings were CAD0.52 per share and that was up 24% year over year.

We obviously benefited from the rising tide of a stock market that was on quite a tear, but we also had tremendous accomplishments on the cost-containment side. Our SG&A as a percentage of retail assets under management was 40%, down 11% from the same quarter in 2009. For the year we increased our market share to 9.4%. Our gross debt declined from CAD872 million last year to CAD670 million at the end of the second quarter, down 23%. Our gross sales for the first half of the year were CAD5.4 billion, up 21%, and our net sales for the first half of the year were CAD1 billion, which was up 19% from the previous year.

If you look at our sales until the end of July and put them into historical perspective, our CAD6.2 billion in gross sales puts us just about in line to the best gross sales year that we have had. Our net sales of CAD1.2 billion for the first seven months puts us just about in line for the average net sales over the last six years.

Looking briefly at margins our EBITDA margin for the second quarter was 48.6%, a historic high for us and up from 47.3% during the second quarter of 2009. Our pretax income margin also at or very close to all-time highs of 33.9% was up from 30.6% last year.

During the second quarter, CI generated cash flow from operations of CAD152 million. Of that, CAD37 million was spent on new commissions, CAD63 million was spent to buy back our shares, and we paid dividends out of CAD54 million. This is in keeping with what we have said over the last decade, that we would get the earnings of the Company out to the owners as quickly and as most tax efficiently as we can.

A few final thoughts before I take questions. First of all, I would say in the last quarter we have made considerable progress identifying and being offered business opportunities with our largest shareholder, the Bank of Nova Scotia and, in fact, have had some business with them in the last week.

Secondly, later this month we will be launching our new family of segregated funds called Essentials with Sun Life, ensuring that we maintain our leadership in this very important part of our business. Our assets today are up 5% from the second quarter, the second quarter's ending assets. We had net sales in July of CAD194 million.

Also, on the good news front, our corporate tax rate will decline from 30.9% in 2010 to 28.2% in 2011, obviously very positive for our free cash, and we intend to use that to continue to aggressively buy back our shares.

At this point I think I will stop and take any questions people have. Operator?

(Operator Instructions). John Reucassel, BMO Capital Markets.

Just a question on the new Sun Life seg fund, is the nature of this relationship any different than the one that you have with the current seg fund lineup, SunWise?

If the question is, do we get paid less than we did in the last series that we launched, the answer is yes.

So is it sub-advisor relationship?

No.

Okay.

But it is our margin is like all products that we do are lower this time around than last time.

Okay. Two final questions. First, can the SG&A relative to AUM -- you have done a good --- great job on costs -- can that ratio, can you really go much below 40 basis points or not? And then maybe could you talk broader about what are realistic growth expectations for the industry and CI within that context on AUM and EBITDA?

Well, let me start off by pointing out that the 40 basis points that we identify as our SG&A actually includes the whole dealership of Assante as well. So to put that -- I would say that over half of the Companies that we compete with charge more than that just for the ER and their MER. And so when you think about this, this is our ER, our money management, our corporate overhead, our SG&A. I would say that it is unlikely that that number can be improved upon, unless we had considerably more assets.

I think the other question you say is, what is a reasonable growth rate? I think that --.

Sorry, Bill. I'm just trying -- a non-bank mutual fund company or a non-bank operator, what are the realistic growth expectations for the business? Is it a growth business, and where does CI fit into that -- the industry there?

I think it is a growth business for the top three or four companies. Whether it's -- if you are just talking about growth from an earnings --- on an earnings basis or a free cash flow basis, which is all we would ever look at, I would say that it's clearly more strained than it has been. But I think there is an opportunity for three or four of the largest fund companies that are not banks to do very well.

And so when I look at our sales -- and the reason why I showed that third or fourth slide where it just shows the historical sales, from 2005 on, our sales have averaged around CAD2 billion, and I actually think that is what we average during a reasonable cycle. And so can you -- if that works out to being just a little under 3% and the market gives you 5%, are you looking at an 8% growing business? I think that is not unreasonable. But every product that you offer has to be profitable in order for growing your assets or growing your business by 8%. Your asset level to also mean you are growing your earnings by 8%. As you can see, there has been a ton of pressure on the top line of fund companies over the last three or four years.

Okay. Last question I will ask, is the IIROC and MFDA channels, kind of planner channel and broker channel, are they still growing or are they contracting, or how should we look at those channels going forward? Are you getting all of that growth from Essentials and BNS?

I think that you have to look at the IIROC channel. If you look at just the traditional brokers, it is clearly a business that we don't depend on for net sales. We have not had net sales in the IIROC channel since 2000.

The financial planning business, while very much a declining business, we do very, very well. So we get a lot of business still in the financial planning business. But most of our business overwhelmingly comes from Assante.

Geoff Kwan, RBC Capital Markets.

I just had one question. I mean it seems like we have been talking for several quarters now waiting for investors to come back and buy some of the longer-term equity funds. Given the way that the markets are right now or maybe how are you looking at it? Do you think that means there may be a semipermanent shift in terms of what investors are willing to buy, and is that something that you are willing to consider in terms of tweaking the product lineup?

Well, we would not have to tweak the product lineup because we have every product you could possibly could fathom. Do I think that there is a permanent shift in the way that investors think about investing? I think permanent is probably too strong a word, but I think that there is still a reluctance. I think that any market, any investor that has seen the stock market drop by almost 70% twice in seven years is going to be scared.

And you are seeing a lot more fixed income type and balanced type fund sales than you would ever expect after a rally like this. I think that the tone of the sales was improving up until the middle of June when the market started to really kind of fall off a cliff for a while. And I would say that if the market stayed at and above these levels that we would probably see a pretty decent improvement of July/August sales in September/October/November.

So it would be more of trying to sell existing the products you have rather than finding other complementary niche products to launch into the fund categories that are selling? Is that a fair way to think about it?

Yes, I mean in order -- if you really want to meaningfully change your sales, you change your compensation. Every fund company has every type of fund. I don't think that there is any room for a category killer to come into the market and get business. It just does not exist anymore.

Stephen Boland, GMP Securities.

A couple of questions. Just following on John's question about the new segregated fund family, considering I guess some of your comments in Q1 and I guess your -- not frustration, I think you used a different word at the time -- but it seems that just this new seg fund family, do you think this should downplay some concerns that people have with -- that the relationship has changed or in jeopardy?

I don't know. I mean I don't share the same fears as I told you at the end of the first quarter. Our relationship with Sun Life, as Dave said and I have said, continues to be the same as it was. There is a difference, though, today I mean given that the insurance companies have had a less than positive experience with the guarantees associated with seg funds. They have made meaningful changes to them. And they are not as attractive to investors as they were a year and two years ago. There is no doubt about that. So we would not expect our seg fund business to be anywhere near the percentage of our gross sales that it was two years ago.

And do I think that it is good for our relationship with Sun Life to continue with their latest product, yes, I think it is great. And they are always, in my view, for the foreseeable future they will be our most important or second most important customer, and we treat them accordingly.

Just on the new management mandates with Scotia Bank, can you discuss some of those or?

Well, they have a whole menu of products that everything from institutional, traditional institutional to ideas about pension plans that they are involved with and regular retail business, and they have been, I would say, very accommodating over the last couple of months in sitting down and going through areas where we could do business with them and in a very, what I would consider to be, optimistic timeframe of when we would do it. So I think we are fortunate to have a relationship where our largest shareholder can take a look down the list and say, here is where we can do business together.

Just lastly on launching a set of duplicate funds, is that -- what cost is that -- meaning are we -- is that going to be -- how material (multiple speakers)?

Are you talking about --?

Yes, the non-HST funds, is it just -- there is really no additional cost to you, or were the basis points up by 1 or 2 basis points?

I think this is, I believe, that the implementation on short notice of the HST was beyond reckless. There is no way that any company could get their systems in place to administer this new tax, and the fact that half the country does not have the tax is really problematic. I mean I think this has all the intelligence of bicycle lanes all over Toronto. There is nothing in the short run. We cannot just create duplicate fund classes because it is expensive. But we have to consider that.

And so there are two or three ideas that we want to go through and see what is the most practical to make sure we are not applying a tax to the provinces that are not part of the HST. And we will obviously have to get there. Is there a cost to it? It is. It probably will not be borne by the Company. It is more likely to be paid for by the funds. But it is a big cost and an enormous amount of work.

Doug Young, TD Newcrest.

Just on the seg fund, the Essentials, you mentioned that the margins are lower. How much lower?

I actually don't know, and I'm not sure that Sun Life has disclosed it. But its business -- when we looked at the business and the prospects of what we would get, we found it to be reasonable, and we are fine with it. Almost all businesses comes in through another institution is being charged out at lower rates. So we are not naive to think that nothing has happened between five years ago when we launched the previous seg fund class and this one. But it is still very, very good business for us.

I mean I guess maybe to think of it another way, is it -- I mean should we be surprised if the margins are 40% less, or are we talking 10% to 15% less in terms of magnitude?

Less than what? See people -- we have never identified what the margins that we were -- what our margins were on the other business at the end, and I'm not sure that I know the answer to that right off the bat. But it will not be meaningfully -- it will not be meaningful to our financial statements, I can tell you that. Because the amount of business we are doing is about a fifth or about a quarter of what we were doing at the peak. If I had to put a number in it, I would say that it is probably -- we are probably earning somewhere around 30% less than we were, but I'm not positive with that number. And it also depends on what products are sold, and it is only on the new Essential product. It is not on the other business or just the traditional regular seg fund business.

And then just on obviously Sun Life launching their own fund family, I mean you have obviously gone out and had discussions with some of these Sun Life advisors. I mean can you give us examples of feedback that you have gotten that gives you comfort that this is not really going to be an issue over the near-term?

I would say to you if TD put out a new mutual fund and you went out and thought that all your stockbrokers were going to sell it, people would think you were nuts. And I am not saying that Sun Life will not get business from their sales force. They should get business; I hope they get business. But financial planners sell what they consider to be the easiest thing to sell. So I don't think that a brand-new fund company will shut out the business that we have with them. Of the things that I'm concerned about in our business today -- and it's easy to find headwinds; you just have to look at the HST for an example -- this is not one that I worry about at all.

Okay. Fair enough. And just when you talk about the Bank of Nova Scotia business, is this going to be traditional retail business, do you think? Is that where the opportunity is, or is it really going to be a fund to fund partner on the platforms?

Well, I think it is likely to be both. I think it will likely be institutional business. The stuff that we have looked at is retail business, institutional business, right. The fund to fund business, we are very keen on fund to fund business, I might add. So we're not so concerned about what the business is. We just want to be a major manufacturer for the Bank of Nova Scotia.

(Operator Instructions). Paul Holden, CIBC.

Speaking of fund to fund business, a large proportion of your sales to date seem to be coming from Class I shares. I mean I'm estimating that approximately 2/3 are coming from Class I. Is that roughly correct? Can you also remind us what the approximate difference is on your profitability between the Class I and Class A funds?

Yes, the Class I share -- sales of our gross sales are a fraction of that. I believe that they were about 13%.

What about -- sorry -- on a net basis?

Well, I don't know. I can only look at it on a gross sale basis because if we have no net sales or minimal net sales, it makes it look like all your business is going Class I when it is not.

The Class I business is probably you look at it as being from regular front-end business probably about 20% less profitable if you took kind of as a -- if you looked at the entire group. We want to grow our Class I business considerably. We believe that you have to in order to stay competitive, and there will continue to be pressure on the fees of that as well.

Is this all basically the pressure on the fees because it is becoming more competitive or because the customers are becoming more price-sensitive?

Our customers, who are the institutions that are buying them, are becoming more price-sensitive because their clients are becoming more price-sensitive, I would gather.

Okay. Fair enough. And then one question specific to the Harbour Funds, obviously two of your largest funds have been selling very well in the past, but the last couple of months we have seen net redemptions in those funds. Any particular color you can provide regarding that change in trend?

There are a couple of things there. They were for a long time one of the biggest sellers of the -- in our seg fund category whether it was Manulife or Sun Life. And obviously the seg fund sales have declined considerably.

And secondly, they have a lot of business that has come up for the 10-year period that even if there was no guaranteed paid, people tend to re-look at it. So we have seen quite a bit of redemptions of money that came in in the first four or five months of 2000, which came to the seg funds that is now going out. But I would say that the biggest difference between the business that we would expect Harbour to get is that they are just not getting as much seg fund business because the seg fund business has slowed down so considerably.

And also, I think that just equity funds in general, Canadian equity funds, sales have slowed down so considerably. If you actually look at the sales and you can break it down bank and non-bank if you want, you look at it almost all of the business that is being done is being done in some type of fixed income type product in net sales.

Okay. Great. And on an asset class basis, obviously we have seen more of a demand for fixed income products or at least a demand showing in your net sales, is that more the result of just end consumer demand changing, or has there been any kind of shift in your sales focus?

Our sales focus probably does not matter much. I think we have very little moral suasion over what advisors recommend and what clients invest in. Especially at times of high fear and high greed, we have almost no moral suasion. I do think, though, that investors have shown a pretty significant reluctance to get back into equity funds in anything resembling what they did at market peaks of 2000 and 2007. And is that just a timing issue? Is it cyclical or secular? I just don't know.

But I think that the fear amongst retail investors is so high considering that the market is 65% above its low, and I don't think there is a lot of precedent for that. So I'm just guessing, and my guess is it will slowly improve, but I mean slowly.

(Operator Instructions). There are no further questions at this time. I turn the call back over to Mr. Holland for any closing remarks.

Well, thank you very much for joining us today for our second-quarter results, and I look forward to updating you on November 9th on the results of the third quarter. Bye now.

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