CI Financial Corp (CIXX) 2011 Q3 法說會逐字稿

Welcome to the CI Financial third-quarter results conference call. My name is Kim, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

This presentation contains forward-looking statements concerning anticipated future events, results, circumstances, performance, or expectation with respect to CI and its products and services, including its business operations, strategy, and financial performance and condition. Although Management believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements involve risks and uncertainties.

For further information regarding factors that could cause actual results to differ from expectations, please refer to Management's discussion and analysis available at www.ci.com/cix. This presentation includes several non-IFRS financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. However, Management believes that most shareholders, creditors, other stakeholders, and investment analysts prefer to include the use of these financial measures in analyzing CI's results. These non-IFRS measures and reconciliations to IFRS where necessary are included in Management's discussion and analysis available at www.ci.com/cix.

I will now turn the call over to Mr. Stephen MacPhail. Mr. MacPhail, you may begin.

Good afternoon and thank you for joining us for CI's earnings call for our Q3 2011 results. Joining me today are Derek Green, President, CI Investments, and Doug Jamison, EVP and Chief Financial Officer.

As of October 31, 2011, CI continues to be one of the top 10 performing stocks since we went public in 1994, up 7 times the level of the TSX and 2.5 times the financial services index.

That being said, there is no doubt the decline in equity markets globally during the recent months, coupled with an unprecedented level of volatility, shook investors' confidence in a significant way. CI was not immune to these market forces. What we did do, though, is deal with the controllable issues with resolve.

Our institutional business continues to gain traction, both in Canada with our Signature group and globally with Altrinsic Global Advisors. We outperformed most of our nonbank competitors in the down market, as well as the October recovery where we achieved 4.5% growth. Our investment in expanding Cambridge Advisors is working and sales to Cambridge Funds are up significantly. We reacted immediately to the market declines and not only kept our costs and basis points the same as the prior quarter, but in asset terms dropped our costs by millions of dollars.

Our alternative asset management businesses, namely Trident Global Opportunities and Red Sky Capital, have both materially outpaced their respective indexes in a year where most of their competitors have simply blown up. The most important message is that we continue to focus all our effort in positioning CI to capitalize on market recovery.

Turning to financial highlights, on a year-over-year basis we still experienced 10% growth in average assets under management. Earnings per share were up 23% from CAD0.26 per share to CAD0.32 per share. Pretax operating earnings per share were up 8% year over year to CAD0.56 per share. EBITDA per share was up 9% to CAD0.61 per share.

SG&A in basis points actually declined year over year to 40.4 basis points from 41.3 basis points. Again, let me remind you that our SG&A includes all costs of administering our funds, all money management expense, the cost of running our Assante dealership, and all corporate, sales, and marketing and other related expenses.

Finally, dividends paid per share were CAD0.225 for the quarter, up 15% from the prior year. As Doug will show you in a minute, even with our healthy dividend of CAD0.225 in the quarter, CI still generated significant excess cash flow enabling us to buy back CAD35 million in shares in the most recent quarter when we saw an opportunity to do so.

And with that, I would like to turn the call over to Derek Green, President, CI Investments.

Thanks, Steve.

Given the environment we've had to operate in, I'm very happy with our sales results. Year-to-date gross sales were basically flat versus the same time last year. Sales for the third quarter of 2011 were down 15% versus the same period in 2010. Given how dramatically the market declined, I'm actually surprised that sales were not down more. Some of our key sales relationships, specifically Assante Financial Management, sales were up double digit and Sun Life the sales were up also.

Now, if there's one bright spot when markets misbehave it's that actually that redemptions declined as well. So for consecutive quarters our redemptions were down 13% and they were basically flat year over year.

CI Institutional Asset Management continues to do exceptionally well. Our Alliance business, which is the third-party financial institution, is in positive net sales excluding seg fund maturities. We continue to have the most funds on dealer-recommended lists, which will be of big benefit when the markets stabilize.

We've had absolutely a terrific year in our peer institutional business, which focuses on pension and endowments. We've had close to CAD450 million in sales, CAD300 million which has been funded and approximately another CAD140 million that will fund over the next few months. If you'll recall, over the last two sales calls I gave a target of CAD600 million for sales this year in institutional and we're on track to meet that target. We have 14 new clients out of 17 short lists. That's an 82% success rate, which is really unheard of in this industry. We're still waiting to hear back from 3 short lists that are outstanding and we're confident that we'll win at least 1 of those.

And, finally, we're very excited to and are looking forward to adding new institutional mandates for the Cambridge Advisors team.

As you've heard me say before, having strong fund performance and the right product mix is very important. Today we're extremely positioned on a go-forward basis. We're well represented across all asset classes, specifically in diversified income, which is an area that is getting good fund flows currently.

My last slide covers current initiatives. We've had a very busy fall. Despite the market's misbehaving, we continue to communicate very effectively with our clients. This fall we conducted our first interactive digital road show which attracted over 1,700 advisors. Now this is a road show that featured 5 of our most popular portfolio management groups, and this call went on for over 5 hours.

We're currently hosting a 21-city road show that will wrap up this Wednesday. We'll see over 4,000 advisors. The road show featured both the Signature management team, Cambridge Asset management, and Black Creek, three management teams with distinctly different views and independent views on the market, and so far the feedback has been excellent.

As you know, we built out our Cambridge Advisors team this spring. Bob Swanson, after a short break this summer, rejoined the team in September and he's been on the road -- in fact, is on the road in the Prairies today visiting with our clients. And we've seen sales ramp up quite dramatically since he's joined the team.

We're in the process of just instituting a new CRM reporting system. We've gone live with that. We believe this will enhance our client relationship.

And then, finally, we've launched a new mass-affluent product called PIM. We launched it in mid-October. Currently -- it says CAD15 million on the slide; we're actually at CAD18 million and we're very excited about that.

The last thing that I would like to touch on, and it's not on the slide, we'll be launching 2 new income products this December, one with Cambridge. It's a monthly income product that fits in the diversified income space. And the second is a standalone high-yield fund managed by Signature. And just as a reminder, Signature has one of the biggest high-yield teams in Canada. We've been managing high-yield bonds for the last 10 years. And we're extremely excited and we believe we'll get significant traction there.

So with the launch of these new income products and private investment management, we think we're extremely well positioned for the markets and for sales on a go-forward basis when the markets stabilize.

So with that, I'd like to hand the call over to Doug Jamieson. Doug?

Thank you, Derek.

When we compare Q3 with Q2, we see that average assets under management fell almost CAD4 billion, or 5%, as well as CI's earnings per share fell 6%, from CAD0.34 to CAD0.32 per share.

And next is pretax operating earnings per share, where we take out nonrecurring items as well as the effects of deferred sales commission financing and redemption fee revenue. It fell from CAD0.60 last quarter to CAD0.56 this quarter, a drop of 7%. Similarly, EBITDA dropped to CAD0.61 from CAD0.65, a decrease of 6%. All of these metrics are down by approximately the change in average assets under management.

SG&A was cut by almost CAD3 million quarter over quarter, or 4%, almost matching the drop in CI's average AUM. But with the additional day in the quarter it stayed at 40 basis points as a percentage of average assets.

This next slide highlights CI's daily assets under management, which is the dark line, and the quarterly average is the shaded area. And a couple of things here to note -- first, you can see the sharp drop of CI's assets in July and the bottoming out at the end of September, which gave us an average of CAD70.8 billion during the quarter. But second, assets under management have climbed during October and early November, so that our current level of assets is slightly above the average for Q3.

CI's EBITDA margin contracted slightly over the past quarter to 48.1% as total revenues declined 4.7% and EBITDA dropped 5.5%. And this was mainly because a few small items pushed other expenses up and other income fell. Year over year, the margin is up slightly from 47.9%.

Next we have the last five quarters of free cash flow, which has grown over the year and stayed quite strong this quarter. CI's free cash flow is its operating cash flow less the amount spent on deferred sales commissions. Free cash flow was CAD104 million this quarter, up from CAD91 million last year and down only slightly from CAD107 million last quarter.

In looking in detail at the cash flows for this quarter compared to both last quarter and the year-ago quarter, CI generated operating cash flow of CAD133 million this quarter compared to CAD142 million last quarter and CAD123 million in the same quarter last year. From that, CI paid sales commissions of CAD29 million this quarter, down from CAD35 million last quarter and CAD32 million a year ago, leaving us with free cash flow of CAD104 million, CAD107 million, and CAD109 million, respectively. And those are the numbers we saw on the previous slide.

This next section details the amounts returned to shareholders via share buybacks and dividends. Last year CI bought back CAD11 million in stock during the third quarter and paid CAD56 million in dividends. Last quarter CI did not buy back any stock and paid out CAD65 million in dividends. In this quarter CI again paid out CAD65 million in dividends, but also bought back CAD35 million in stock, as Steve mentioned, for a total of CAD100 million returned to shareholders during the quarter.

We have stated that CI's long-term goal is to return its free cash to its shareholders. And while the dividends are regular in nature, the buybacks can be lumpy, and this quarter showed how we try to be opportunistic in buying back stock. CI's ratio of net debt to EBITDA is still below 1 to 1. We have over CAD120 million in excess cash and an undrawn CAD150 million credit facility. So we still have room to repurchase shares when we believe it is prudent to do so.

I will now hand it back to Steve.

Thanks, Doug.

So just to wrap up, I want to reinforce the key things happening at CI right now. We continue to focus on controllable factors right across our entire business spectrum. As Derek pointed out, we have a very strong emphasis on all elements of sales and marketing. Cambridge continues to build on its success. We have the best diversified money management capabilities in Canada, and I believe would be top ranked even on a global basis, based on all the companies that I've looked at. We continue to make opportunistic share buybacks. And lastly, we are evaluating acquisition opportunities in Canada and beyond on a regular basis.

That concludes our formal presentation and we'd be happy to answer any questions you might have.

Thank you. (Operator Instructions) Scott Chan, Canaccord Genuity.

I guess first question is just for Derek. Just on the CI Institutional Asset Management slide, can you just expand on the lines in the third-party relationships? Is that the Class I?

Well, Class I would be -- some of the insurance products would be Class I. Yes, it would be partly Class I, yes it would. But it would be for the banks and the insurance companies where we participate in some of the variable life annuity contracts or in some of the managed solutions. So, yes, it would be part of our Class I business.

Okay. And I guess on the seg fund note, with the Q2 volatility, how is the seg fund business these days? I don't know if the Transamerica gifts redemption has dissipated from the 10-year maturities or -- ?

The Transamerica business, yes, has dissipated. Last year was a significant year for that. We continue to see good flows into our product. We launched Essentials last fall. We threw CAD1 billion on that new product. So the markets misbehave people generally like guaranteed products, so we're seeing pretty good flows into our open contracts right now.

Okay, perfect. And just a last question for Steve, just on the acquisition front, it's been pretty muted industry-wide year to date, I guess mostly Q3 because of the volatile market. But then October markets kind of rebounded. What opportunities are you seeing out there? Is there more right now as the market has recovered since Q3?

Yes, I would say in the last two months we are being introduced to way more opportunities. I think the market downturn created a situation where a lot of companies really struggled through it and now see an opportunity to say -- gee, maybe this time we just better get out of the business and do something with a stronger company. So I would say that we're seeing more -- but at the same time you've got to remember, we're going to be opportunistic here. We don't want to make acquisitions for the sake of just making one. But we do believe there are some businesses that could be a good fit with CI, whether it be on the synergy front or expanding product lines or giving us access into markets that maybe we're not into right now.

So I can't make any commitments as to when something happens. As you know, you could look at 50 opportunities and maybe do one. But the good news is there's way more opportunities to look at. The bad news is a lot of the opportunities aren't that great. So I guess you'll just have to stay tuned on that front.

Okay. Thanks a lot, guys. That's it for me.

Geoff Kwan, RBC Capital Markets.

Just also had a question on the institutional business. If I remember correctly, I thought in the last conference call you mentioned that in the first half of the year you had about CAD300 million in net sales. And then this quarter you're saying it was roughly CAD300 million, but then there's some more to be funded. So did that mean for Q3, then, that there was nothing that was called net sales for --

No. Geoff, I think the mistake I made was when I said we had CAD300 million, some of that hadn't been funded yet. We'd won it, but it hadn't been funded. So right now we're at CAD300 million and we have about -- we have CAD144 million I think is the exact number to fund over the next couple of months.

Okay. And then what would that have been, I guess, the first half of 2011?

I don't have those numbers on hand right now, but I can get back to you with it.

Okay, perfect. The other question that I had was -- you mentioned that you're doing some of these road shows and stuff like that. How has advisor sentiment changed, given that the markets have rebounded a little bit over the past month and a bit?

Well, anecdotally, I think they're still pretty concerned. And I -- because there's uncertainty in the markets in Europe and we're worried about what Italian and Greek politicians are doing and until there's some resolution I think people are concerned. So I think they're a lot happier than they were in September, but they're still not really willing to allocate a ton of money.

The one thing they are looking at is -- the number that comes up is there's a 5-year GIC rate right now is 2.8%. So they're looking -- they're trying to get their clients into something that will pay more than that and the income products are what's resonating. But they're still pretty fragile I would say, in general.

Okay, great. Thank you.

Paul Holden, CIBC.

I want to focus a little bit more on the gross sales. So you said there's a couple areas of strength where you're seeing growth, such as Sun Life. But what about the areas specifically where you saw gross sales sort of come off quarter over quarter and year over year?

So I would say the one that continues to be a challenge for us is IIROC. The sales are down; the redemptions are sort of stable. But I would say the positives for us would be Assante, Sun Life. We have a preferred relationship with Edward Jones. Those are all up, in most cases double digit. But the MFDA and IIROC has been the challenge. But again I go back to what I said before. Given how quickly and violently the market sold off in August and September, I'm actually surprised it wasn't worse.

Right. But on the other hand, to be fair, if you look at long term trends for the gross sales, the percentage of AUMs [seem] coming down over time as well. So with that in mind, would you consider buying more distribution, something to tack on to Assante?

That's probably a better question for Steve.

Yes. Paul, we always look at different opportunities to get more distribution. I think what you have to do is realistically say -- what type of distribution will be available for sale out there and there really is not a lot of distribution that you can get. I think where you'll see emphasis is we're getting a renewed interest in advisors wanting to join the Assante channel. So we're hoping that we'll get some form of organic growth in that business. And there's a lot of discussions going on right now that Steve Donald, who's the President, has come and presented to me on that front. But I don't see us going out and trying to buy something directly. I just don't think there's anything of scale that's available for sale.

Okay, got it. And last quarter you provided us with an update on net sales from Castlerock, which are developing quite nicely. Any update you can bring to us this quarter?

The net sales are continuing to be strong. I think the thing that's even more impressive is what the -- and Steve can talk to this -- is just the contribution that that business brings to our free cash flow, the EBITDA. It's been a great addition and the managers, specifically Black Creek, have been a great complement to our lineup of portfolio managers. So we continue to see flows.

Okay. That's all the questions I had. Thanks.

(Operator Instructions) Doug Young, TD Securities.

On the net flow side, just wanted to dig a little deeper, get a little more clarity on it. CAD91 million of outflows, can you split that between money market and long-term funds? And can you give us the split between retail and institutional?

I actually don't have the numbers in front of me. That'd be hard to -- again, when you look at the flows, again, I'll go back to whether it's institutional or retail. To say I'm pretty happy -- I'm very happy with what we ended up doing. But I don't have the specific breakdown right now.

Okay.

But, Doug, there's no -- we don't do a lot of business in the money market area. When you look at what the banks do, they have huge flows in and out of money market. Our money market funds are particularly small. And as Derek pointed out, during the summer months when the market was down, all parts of the business just slowed down. So you can just assume in our case it's the flows into equity funds which we call long-term funds. We don't get a lot of flows into money market. It's not something we pursue.

That's fair enough. And I guess, Derek, from your comments it's fair to say that the institutional, they're getting the net flows, but the retail is where the outflow is coming from, just on a --

Yes. Well, institutional is getting good flows and the retail certainly in the last quarter was where the challenge was. But, again, I go back to when you look at the market being down in September, being down 15%, a pretty dramatic market. So I think that again I'll go back -- we run over CAD70 billion in AUM. That's really a very small percentage of our assets.

Yes. And then, Steve, I guess you, and I think Derek as well, you talked about Cambridge shift, you're seeing a significant uptick in sales. Can you quantify that in terms of what the numbers are?

So we've really started to measure and track the Cambridge sales on May 1st, because really that's when we believe the team was fully in place. That was before we found out Bob was going to have to take a short sabbatical. But we've seen a couple hundred million dollars, close to CAD200 million, go into their product so that the Cambridge Canadian Asset Allocation, the Cambridge Canadian Equity and then the Global product as well. So we've had very strong numbers.

I mentioned our new contact management, which we're now tracking the sales and we're seeing the momentum pick up since we've had Bob on the road with Brandon Snow. So this is, I think, another growth component of our business. It reminds me a lot -- I've said this before, but it reminds me a lot of when Gerry Coleman came over from Mackenzie back in '97, it took some time to grow it. We're actually way further ahead with Cambridge. But there's a lot of excitement in what Alan and Bob and Brandon are doing and we've got big plans for that group.

And you've given the capacity before, around CAD10 billion. That's kind of -- there's no change to that side, that number?

We're about CAD2.8 billion right now. I don't think there would be any problem for them to run CAD10 billion. As I mentioned earlier, we're going to be launching at least one, and maybe two, institutional mandates. One of the challenges in institutional, specifically in pension business, is the good managers, many of them are at capacity right now. So if you have a good product with good money managers, we think we've got ample room to grow. And I think we could go over CAD10 billion, but we want to be realistic.

Okay. And then, just I look at your slide 12 and your cash flow, I mean, Steve or Doug, this is basically what we should be expecting this quarter is kind of how you've described how you want to run your business. Is that essentially fair?

And I think also in Q4 there's CAD100 million of debt that's coming due. Is there plans to redeem that or keep that or roll it over?

Sure, I can answer that question. First on the cash flow, I think what we did in third quarter is a reasonable proxy for the fourth quarter. It really will depend on where the assets come out, but that should only affect it by CAD1 million here on either side of that. So that's a pretty good proxy. We're not changing anything dramatic. We'll continue to put an emphasis on buying back shares in this quarter. And if we see a good opportunity we might well buy back more than CAD35 million in shares. We kind of look at it on an annual basis and we really didn't do anything in the first half of the year. And so a lot of the focus has been on what opportunities exist now to buy back shares.

To go to the other question you asked which is the debt that comes due, well, debt comes due has to be repaid. And we're evaluating whether or not we issue new floating rate debt, new fixed rate debt at the time. We're just assessing what we think makes the most sense from a financial structure perspective. But as Doug pointed out -- a, we have cash on our balance sheet and, b, we have significant undrawn lines of credit. So there's no need for us to do anything other than take the cash we have and pay back the debt. But if we choose because there's attractive acquisitions or any other reason that we want to maintain the existing level of debt that we have today outstanding, then we'll probably just do a debt deal.

Okay. Your preference seems to be buying back stock versus increasing the dividend. Is that a fair assumption over the next few quarters?

I think it totally depends on the time. And we recognize that our shareholders have always liked a healthy dividend which is what we provide to them. But we think that when there's an opportunity to buy back stock -- I mean, we have a 4.5% yield on our stock and we're financing it at the margin with 2% debt that's tax deductible. It's a pretty compelling argument to buy back the shares to the advantage of everyone else. So it's hard to say, but I think if you ask me today where our emphasis has been, it's been buying back stock. But if we see a rebound in assets and we think it makes sense to increase the dividend, we'd evaluate it at that point in time.

Great. Thank you.

Stephen Boland, GMP Securities.

Just one question -- you recently changed your high net worth offering. Maybe you could just talk a little bit about that. And is there a chance that you go maybe head to head with, like, the Gluskins and the Sprotts, who have more of an in-house sales component to their high net worth offering?

Yes. I think really this was an evolution. So I wouldn't call it high net worth. I think it's a great product for high net worth. But we reduced the level for people to enter the program from CAD500,000 to CAD250,000. And we also allow people to aggregate household assets, simply meaning husband/wife, registered/nonregistered PFSA. So it's pretty easy for someone to come with CAD250,000 to get into this program. If you're in the program you can own as many of our funds as you want. If you only have CAD100,000 and you are willing to own one fund, you can also access the program. So when -- we like to talk about our mass affluent product as being the best in the business.

I hear all the time that high net worth people don't own mutual funds. I think in this case, when it's built on our corporate class structure, you can get liquidity at NAV at 4 o'clock every day. We are going to compete against investment counselors. We're going to compete against other high net worth solutions. We've cut our margin. At CAD500,000 we're down probably on our management fee about 8% on that product. So we're giving it up, but they're nice accounts to have. Where it really gets attractive from a pricing standpoint is when you're above CAD1 million.

So if you want to be in fixed income, we've got -- we're very excited about it. I think we'll get a lot of traction. And I think it will be of particular interest to the IDA or the IIROC advisors in their fee-based platform. And that's an area -- if they can't do it themselves, they'll outsource it. And that's where we think we'll get a lot of flow.

Okay. And then just the second part, like is there a chance that you try and develop more of these products and have like a more in-house sales team that competes directly against the Gluskins and some of the Sprott offerings?

Yes -- Steve MacPhail. I'll just answer that slightly differently than us developing an in-house sales team. We view ourselves as wealth managers. And anywhere that we see that there's an opportunity to gather more assets we're going to examine the ways to do it, whether or not we do it with kind of an abbreviated version of what we do in Assante or try to set up some other distribution mechanism to go after those. But places like Burgundy, Gluskin Sheff, they have attractive asset bases and, quite frankly, I think we can produce a better product at a more cost effective rate for those clients. So we do talk about going after it. And I'd be surprised if we don't try to capture a share of that market pretty aggressively.

Would you tend to need more speciali- -- I don't call them sales but, like you said, wealth managers, consultants, somebody that's catering to a specialized or higher net worth advisor (multiple speakers) --

Yes, but you have to remember, within our Assante business we have a fairly extensive high net worth business right now. We have private wealth managers across Canada in that business. We're developing people in house. We're actually quite sophisticated in that area, just because it's blended in with other parts of our business that you don't notice it. But just take our Stonegate business; it's a substantial high net worth business there.

Okay, that's great. Thanks.

John Aiken, Barclays Capital.

Steve, your performance on the SG&A was actually quite impressive on a relative basis considering the down draft that you experienced in the AUM. What do you see for upside leverage on operating margin in total if we actually do start to see asset center management grow increasingly? Are we going to be able to see some widening on the operating margins? Or is this something that we're still just struggling to offset the pressure on the management fees?

I think, John, if you go back to look at what our margins were like in Q2 of this year, if we see asset growth in the business, then it's quite reasonable we'll get right back to those levels. Some of our SG&A expenses are variable and if the assets perform well --good point there would be money management expense and some of them are -- [those earn] basis points. So the assets recover, they're going to see themselves paid a bit more. And that's the beauty of our cost structure, is that we're able to absorb some of these downturns.

But without a doubt, if we see growth in our asset center management market growth, then we see widening of the margins in two areas. Equity markets go up and, of course, our top-line margin goes up at a much faster rate than our costs would go up. So absolutely we see an opportunity if things recover. Our whole goal was to minimize the amount of margin squeeze on the downside, which I think we were successful at doing in this quarter. But we're certainly not trying to then go to the level where we cut expenses that will put the business at jeopardy. I think we've been pretty prudent business managers here. But if markets recover, then there's a few things that will come back on the table that maybe we put out to the side right now to try to develop the business.

Great. Thanks, Steve.

And at this time I show no further questions.

Okay, if there's no more questions I just want to say thank you to everyone for participating in the CI conference call. And we look forward to talking to you about our year-end results.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.