CI Financial Corp (CIXX) 2011 Q4 法說會逐字稿

Good afternoon. My name is Audrey and I'll be your conference operator today. At this time, I would like to welcome everyone to the CI Financial 2011 fourth quarter results conference call. (Operator Instructions).

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

For further information regarding factors that could cause actual results to differ from expectations, please refer to Management 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 and stakeholders, and investment analysts prefer to include the use of these financial measures in analyzing CI's results. These non-IFRS and reconciliation to IFRS, where necessary, are included in Management Discussion and Analysis available at www.ci.com/cix.

I would now like to turn the call over to Mr. Stephen MacPhail, President and CEO of CI Financial. Mr. MacPhail, you may begin.

Right. Thank you and good afternoon. I'm sorry that Derek Green isn't with us today, but he's got a personal matter that he, unfortunately, had to attend to. But I can assure he'll be back on the next call that we have in May.

I'd just like to start out by saying, if you look at the volatility of the equity markets during the latter half of 2011 and the consistent and persistent problems in Europe, I can just say I'm very pleased to report that CI's net income was up 15% versus fiscal 2010.

Our Q4 earnings per share were up 4% from the same period in 2010. Equally important, our pretax operating earnings per share were unchanged consecutive quarters, Q3 to Q4 during this year, even though our average assets were down slightly during that period.

The dividends we paid in 2011 were up 16% from 2010. On top of that, we repurchased 4.7 million shares in 2011 and still managed to pay down our debt by CAD58 million.

From an operating perspective, the Hartford acquisition was successfully integrated in 2011, beating our initial targets when we made the acquisitions. We made significant enhancements to the Cambridge Investment Management team. We achieved preferred status with Edward Jones, a very important partner of CI's.

Our Las Vegas advisor conference was very successful, attracting 600 advisors and what I would consider the top advisor conference of the year. We launched our new private investment management mass affluent investment program during the year, which to date has been very, very received.

Our Assante business is doing very well and expanding. Red Sky, the alternative asset business that we own a significant interest in, had excellent first-year performance, outperforming the TSX by over 10 percentage points in 2011 and positioning it for growth.

Overall, our fund performance was very strong during what was a very volatile year, as was shown in our asset growth throughout the year.

Looking more specifically at the annual highlights, our average assets under management in 2011 were CAD72 billion, up 10% from CAD65.7 billion in 2010. And I should note that our actual assets today are higher than the average of 2011 already.

Our net income of CAD377 million was up 15% from CAD328 million in the prior year. On a per share basis, that was CAD1.31 this year compared to CAD1.14 in 2010.

EBITDA rose 8% from CAD669.7 million to CAD726.2 million and on a per share basis, up 9% from CAD2.32 per share to CAD2.53 per share.

Free cash flow rose 26% from CAD343.7 million to CAD433.5 million, setting the stage for dividends paid out rising 16% from CAD220 million to CAD254.2 million, but still representing just 67% of our net income for the year.

When we compare our performance to the TSX, this is where I'm particularly proud. This chart depicts all four quarters and how our earnings changed relative to the average level of the TSX during the same period. Three out of four quarters, we handily beat the TSX and over the course of the year, well outperformed the TSX from an earnings perspective. This is clearly a reflection of the performance of CI's funds and our focus on expense control throughout the year.

This whole situation led to a dividend increase that we announced today to increase our dividend from CAD0.90 annually to CAD0.96 annually. It reflects a strong earnings growth and cash flow growth in 2011 and our outlook for 2012.

As I mentioned, our assets under management today are up over 4% from the Q4 2011 average and also above the 2011 year average. This will represent about a 65% to 70% payout throughout the year and we estimate that we will still have somewhere in the vicinity of CAD175 million to CAD190 million of free cash flow available for buy-backs or debt repayment in 2012.

From a sales perspective in 2011, we had gross sales of CAD9.1 billion and net sales of CAD323 million.

There's no question that the second half of the year was significantly impacted by the market volatility that went on and that was the number one effect on sales.

We also had a number of segregated fund maturities and also what we'll call alliance class, which are where we have fund-of-fund products with other companies, including third-party seg fund maturities that took place during the year that resulted in a reduction of sales. But I think what's really important throughout the year is six out of eight of our channels remained positive for net sales. So, those are channels like Edward Jones, Assante, Sun Life, et cetera. In addition, we are positive net sales of our mutual funds during 2011.

And with that, I'm going to turn it over to you, Doug.

Thank you, Steve. First, I'll highlight our fourth quarter this year compared to the fourth quarter last year.

Average assets under management were essentially flat at CAD69.3 billion and so was net income at CAD87.8 million. On a per share basis, we picked up CAD0.01 as we had 3 million fewer shares outstanding, on average, in the fourth quarter this year, giving us CAD0.31 per share.

EBITDA was down 2% to CAD173.6 million and also down 2% on a per share basis to CAD0.61 per share. And the main reason for the disparity between net income staying flat and EBITDA falling slightly is that CI's effective tax rate was about 3% lower this year.

CI's free cash flow, which is its operating cash flow, less the amount spent on deferred sales commissions, increased to CAD103.9 million from CAD98.7 million, up 5% as operating cash flow was relatively flat, but we paid out less in deferred sales commissions.

Dividends paid were CAD64.1 million during the quarter or CAD0.225 per share, up from CAD57.6 million or CAD0.20 per share in last year's fourth quarter.

And net debt, which is total debt less available cash, declined from CAD789.1 million to CAD730.7 million, as free cash that was not used for share buybacks or dividends was primarily used to reduce debt.

In mid December, CI repaid CAD100 million of floating rate debentures through a combination of cash on hand and a drawdown on its credit facility for CAD33 million at year end.

When we compare Q4 with Q3, we see that average AUM fell almost CAD1.5 billion or 2%. CI's net income dropped CAD3 million or 3% to CAD87.8 million and earnings per share fell CAD0.01 to CAD0.31 per share.

EBITDA fell CAD3.2 million to CAD173.6 million, a drop of 2%, while it was steady at CAD0.61 per share due to the effect of share buybacks.

While these metrics are down by approximately the change in average AUM, there are slight differences on the per share numbers due to rounding and the share buybacks.

CI's EBITDA margin grew over the year by 1.5% to 48.7% as total revenues declined 3.2% and EBITDA only dropped 2.2%. From last quarter, the margin is up from 48.1%, again as total revenues only dropped 2.9% or, sorry, as total revenues dropped 2.9% and EBITDA only fell 1.8%. This is a good measure of CI's efficiency on its revenue numbers.

CI's total SG&A, as a percentage of assets under management and expressed in basis points, has declined over the past two years, averaging 40 basis points last year and only 39.3 basis points this year. As average AUM increased 10% year over year, CI's spend on SG&A items only increased 8%.

What's more telling, however, is that during the latter half of 2011, when our average assets fell 7% over the third and fourth quarters, SG&A was also cut by 7%.

And I'd also like to point out that these numbers include everything -- what it costs CI to administer its funds, pay its internal and external portfolio managers, sales and marketing costs and corporate costs at both CI and Assante. So, it's everything, all lumped in.

Next we have the last five quarters of free cash flow, which has grown over the year and stayed quite strong these past two quarters, even as markets declined. Free cash flow at CAD104 million this quarter, up from CAD99 million last year, and unchanged from last quarter.

If we look at the cash flows for all of 2011 compared to 2010, CI generated operating cash flow of CAD575 million this year compared to CAD501 million last year. From that, CI paid sales commissions of CAD141 million this year, down from CAD158 million last year, leaving free cash flow of CAD434 million and CAD343 million, respectively.

And the next section details the amounts returned to shareholders via share buybacks and dividends. Last year, CI bought back CAD97 million in stock and paid CAD220 million in dividends. This year, CI bought back a similar amount at CAD95 million in stock and increased dividends paid to CAD254 million for a total of CAD349 million returned to shareholders this year, up from CAD317 million last year and, as indicated earlier, the surplus of CAD85 million was used to pay down CI's outstanding debt.

And, as Steve mentioned, with the announcement of the dividend increase today, CI has continued a trend of steady dividend increases. This chart shows the total dollar amounts paid out each year with our forecast of CAD270 million for 2012, including the monthly dividend of CAD0.08 per share, starting in March. And this represents 17% annual growth from three years ago.

And I will now hand it back to Steve.

Thank you, Doug. As I wrap up, I really want to start with talking about our sales outlook. Though you can't predict the absolute level of sales at any point in time, I can tell you a number of things.

First of all, on every level that we look at, we see an improving sales trend over the last two and a half months. And I think that's very important when we look at it.

But another good indicator for us is we're running our second big advisor conference in Las Vegas and at this point in time we have a 50% increase in people that want to attend this year over last year, which is a strong testimony, not to how well CI can entertain people, but the testimony is to how much value add we get from letting them be exposed to our money managers, like Eric Bushell, Gerry Coleman, the new Cambridge team under Alan Radlo and Bill Kanko, because the conference is all about them spending time with those money managers. And so I'm very excited about that and what that is.

From a fund perspective, we continue to have very strong fund performance. We are ranked number one in four or five star funds as a percentage of AUM. And that actually came from an analyst's report, so it was separately validated for us, even though we knew it. 84% of our assets under management are in the top two quartiles over 10 years, which is very, very positive.

We've talked about building out the Cambridge team under Alan Radlo. The assets continue to build in those portfolios and they've had excellent performance which is (inaudible). And as we mentioned, there's an improving sales trend, all of which leads me to believe, certainly, that 2012 should be a better year than 2011.

When we look at assets under management, this is a chart I've shown you many times. Again, the shaded levels showing the average level of assets. If you look, you really see, since mid-November, that we've had a steady upward trend in our assets under management and, as I mentioned, our assets as of today will be up above the average level for the fourth quarter by over 4%, but they're also up above the average level for 2011, leading me to believe at this point in time that 2012 will be an excellent year for us.

Turning to the outlook, our -- we continue our expansion into alternate investments. You would have seen our press release eerier this week that we announced that we now had a partnership with LP Capital Partners, which is an excellent fixed-income opportunity and, we think, a very good complementary fund to what we have with our Red Sky alternative investment program and we continue to look to do more. We're evaluating other opportunities in that area, as we speak.

For 2012, we continue to have an intense focus on our distribution relationships and that would be primarily Sun, the Assante, through the MFDA and a whole portfolio of relationships we have as one of our number one things that we're doing.

We continue to have emphasis on scale efficiencies. You might wonder how we continue to reduce costs. It's because every day we say how can we save money in here to reinvest in other parts of the business. 2012 will be no different than 2011. In 2011, we spent considerably more money on sales and marketing and building out some of our money management firms, but at the same time, still managed to make our business more efficient.

We continue to emphasize a focus on our institutional business. I think it's very well positioned to grow in 2012 and build on the strength that it had in 2011.

And lastly, you might have noticed that we've started to focus somewhat on our branding as Canada's Investment Company. You see the CI name and Assante name out considerably more into the marketplace.

And with that, I'd like to turn it over to questions and thank you very much for listening so far.

Thank you. (Operator Instructions). Our first question is from John Aiken. Please go ahead.

Doug and Steve, I just wanted to interject, if you're looking for guest speakers for Vegas, I'd love to throw my hat into the ring.

With the acquisition of Lawrence Park or, sorry, the investment in Lawrence Park, coupled on with the investment in Red Sky, what's the ultimate goal here? And how, outside of just the direct investment, how are you going to eke value? Because I saw some of your commentary in the media about trying to put a wrap program around these alternative managers. Can you let me know what you think, ultimately, margins or revenues would look like, coming out of this?

Well, I think it's a little premature to talk about how margins and revenues would work out. Clearly, as those businesses grow, our intention is to participate in the profitability of those businesses.

When we started with Altrinsic many years ago, who would have guessed it would grow to CAD11 billion and our investment there is now worth north of CAD90 million and it's contributing close to CAD10 million a year to CI now. I'm not suggesting these other businesses are guaranteed to go to CAD11 billion, but we certainly have teamed up with them because we see the possibility of strong growth.

But the second part of your question is how are they going to fit with CI. If you look through the channels where we have big exposure to, Sun Life, Assante, we have a lot of high-net-worth clients within those channels and what we're trying to do is constantly evolve our products to appeal, more and more, to the high-net-worth investor.

And there is a demand to have parts of your portfolios in some of these alternative investments, but they really want CI's Good Housekeeping seal of approval on these funds and knowing that we have a significant influence -- not within the money management mandates themselves -- but overseeing to make sure they follow best practices, et cetera. And because of the relationship, we know what we can do is deliver what we think are cost-effective products and well-priced products for the client, which will ultimately benefit everyone.

So, when we talk about a wrapper, we saw, if we add another two or three funds into here, then we basically just put like a shell above it and would allow you to invest in that company, maybe in a corporate class structure or something to that, but it would allow high-net-worth clients, if they want to diversify 10% of their portfolio into it, they could do it.

And we're hearing this type of demand from Assante. So I'm really responding to the feedback that I get from the Assante advisors.

That's great, Steve. Thank you.

Thank you. Our next question is from Scott Chan. Please go ahead.

Hi, Steve. Just wondering if I can get an update just on, I guess, the pension side. I think last quarter or at the beginning of the year in 2011 you stated a target of CAD600 million. I know it's very lumpy, but I think last quarter you mentioned a pipeline of CAD144 million. How did that play out towards the end of the year? Just based on your net redemptions in the quarter, it just didn't seem like any new business was booked. Is that fair to say?

Yes. That's fair to say that. We didn't book as much institutional business as we might have hoped last year. When we set our target, that was before kind of all the turmoil in the marketplace.

I don't mean to suggest that business still isn't poised for growth, but we did about CAD300 million in business last year. We're now starting to see some of the business we would have hoped for last year funding this year and if I -- if I look forward to where this could go this year, I would hope that we'd meet and exceed that CAD600 million target this year, in addition to where we were from before.

We've got a well-built-out team. We're adding some Cambridge assets into it, into the equation, so I think there's a real opportunity to get this moving forward.

Perfect. And just a last question, just on the seg fund side, you mentioned that most of the, I guess, redemptions for the year occurred in the Class I and seg fund maturities. When does -- can you just remind me when does it start to fall off significantly? Is it some time this year, early this year?

Well, I think we mentioned before, we had some significant seg fund maturities in the past two years. So, it does taper off a bit. I'd just temper it by saying that though you might not have as many maturities in the seg fund business, I just don't think you're going to have as many gross sales in the seg fund business.

So, it's not going to be as dominant a part of our business as it would have been through one period of time. It's still a substantial amount of the business and we still do -- do very good business in the area. It's just not going to dominate it. So I think what you see as some of the redemption profiles as those big lumps drop off is kind of offset by just lower sales into that business.

In 2012 with your new 55 product with SunWise, do you expect net sales in 2012 or net redemptions, including the maturities that are going to -- some of the maturities that are going to fall off in 2012?

I would think we'd be net sales in that business.

Net sales? Okay, perfect. Thank you.

Thank you. Our next question is from a participant. Please state your name and proceed with your question.

Hi. Maybe it's myself. Steve, can you hear me?

Yes.

I'm sorry. It's Doug Young from TD. Apparently my name didn't get registered.

So, a question just on the net flow side, Steve. How much of the net outflows was institutional and how much was retail? I guess I'm just curious. Or was it all retail?

No. In the fourth -- you're talking about the fourth quarter?

Yes.

Yes, so we had net outflows of -- I mean, you can do the calculation of CAD360 million but half of that was on the institutional basis is where it came out. And then on top of that, we had another CAD50 million from an annual retraction on some old structured product and then just adding to that, in some of the cases I mentioned where we had the fund-of-fund products.

So, that constituted the majority of it. So, I think the CAD360 from a gross perspective, a little misleading as to the state of our business. It was much better than that would suggest.

And when you say institutional is that traditional institutional or is that the Class I-type?

That's what we call the Class I.

Okay. And you also say that you've been positive in six out of eight. What are the two channels where you were net outflows? I'm going to guess IIROC. What's the other channel that you're net outflows?

Yes, it would be part of the MFDA.

MFDA?

Yes. So, but if the MFDA where you're taking out Assante and others like that, which actually are part of the MFDA, but if we subtract out the places where we have different relationships so we're just saying that the MFDA where we have no relationship.

And so you see that changing at all, near term? Or is that just going to be an ongoing headwind?

Oh, I think -- I mean, there's been sales headwinds since I joined in 1994, to be perfectly honest with you. And I think all you can do is start the year with a lot of good products and go out there and do the best you can.

Do I think this is going to be an overwhelming contributor to sales? No. Do I think it's going to be a big drain on us? I would say the answer is no to that, also.

Okay. And then on Sun, because we get a lot of questions on the relationship with Sun. I know we've chatted about this in the past.

But Sun, in their quarterly call, just came out and said their Canadian mutual fund business is starting to capture 10% of sales from the Sun Life advisors. How have gross and net flows through that relationship trended? Have you seen some deterioration there?

No, we haven't at all. You've got to remember, if they said they got 10%, then we got 90%, because we're the only other ones there. So, when you're in school any time you got 90%, I bet your mom and dad were pretty happy, right?

I don't think I got 90% much, Steve. The -- I guess the -- I know we've talked, again, about this in the past. Where do you see that kind of leveling out? What's the natural rate between yourself and Sun, if you care to guess?

Yes, I -- and I've always said I'd like to see Sun successful in this channel. That's a big channel for us and as we grow forward, I wouldn't be surprised to see them up at the 15% to 20% level and with us at 80%, because we're such -- have such a dominant position in that channel.

But we haven't seen any weakening in that channel at all. We have an outstanding relationship with Sun advisors. I've probably personally met with 150 of them over the last three or four months and I can tell you, we've got a strong relationship and they like the products and they really like the money managers we've brought to the table. And I just think they're augmenting with some of the other Sun products, which probably offer some things that we don't have right now.

Okay, just two last quick questions. I guess so far this RSP season, I mean, I guess what's your view and are you net flow positive so far this year?

Our sales have turned around and we're pretty well even into the year. You've got to remember January is always a big redemption month with some of the things. But, certainly, our sales trends are much more positive on it and I would say we'll be positive sales for Q1 of this year.

And then just lastly, you talk about a payout ratio of 65% to 70%. That's on earnings, I assume?

That's correct.

And if I kind of simply do the math, I guess you're implying, I guess, CAD400 million to CAD450 million of earnings, is that --?

Yes, you can do the division yourself and I can't tell you exactly what we're going to earn, because I don't know what markets will do. But I try to come up with what I think is a reasonable range, based on what I know today. And I view that as a pretty reasonable range.

And, I guess, that's where I was going is what's the assumptions that you've built in there? Is it average assets going up by 2% or 3% or 5% or 6% through the year? Like, what's the assumption baked in there?

Yes, our assumption is always that way. We look at overall asset growth on average of about 6% over the course of the year. So, we take that into consideration. We add into that things we know where we've got some cost efficiency strategies that we think we can bring into play in this year.

So, you put it all together and we're pretty confident we'll get into that band.

Perfect. Thank you very much.

You're welcome.

Thank you. Our next question is from Geoffrey Kwan. Please go ahead.

Hi. Just to maybe follow up on Doug's question on the sales, so, given what we've seen in the past couple quarters, once we get through RSP season and heading into Q2, do you think from what you see right now that you'll be able to put everything back into the positive net sales side?

I certainly would hope so, Geoff, and I think that's a bit market dependent for us right now on the sales. So, if we're going to get stability for the next three months, then I'm pretty confident we'll see more and more flows going not just into the income product, which everyone's getting flows into the income product, but the key thing is flows into the equity products and I could see the world changing that way.

If we run into a situation that we did in September last year and Europe falls apart again, I just don't know what that type of volatility will do to investor appetite, but if you ask me where we sit today and the progress that we've seen today, I'm feeling much more confident about the outlook, especially given the performance of our fund managers and the perceived interest in our products.

Okay and then just the other question I had was if you have any sort of update on what's been going on with Scotia, whether or not it's business development or other?

With Scotia, fine, the relationship there is fine. I talk to Chris Hodgson reasonably regularly and so I think everything is positive going forward on that.

And I'm not going to guarantee you that you'll see us do a lot of things together in 2012, but we do have business on our books with them already and in certain areas they're trying to be supportive. So, I would say the relationship, under any measure, is positive and any of the friction that might have existed last year up to June is clearly gone and by the wayside.

Okay, thank you.

Thank you. (Operator Instructions). Our next question is from Stephen Boland. Please go ahead.

Thanks. Just to beat the sales question to death, I guess, Steve, you mentioned the Vegas conference, great performance on all the funds, great product lineup, but the gross sales trending down. I mean, what is the mood? You said you've met a lot of advisors over the last several months. Is it they're just sitting on the sidelines and purchasing nothing and then at some point there's going to be a massive purchase equation coming into the industry?

Yes, first of all, I wouldn't say, necessarily, our gross sales are trending down. I think if you -- Steve, if you look specifically at 2011, then you're looking at a period from August through to December where it was one of the worst periods we've ever experienced. And definitely gross sales were down to a much more significant extent to much of our competitors. I mean, our numbers are pretty -- are extremely light compared to what had gone on there.

But what I'm looking at is saying in the period since things seem to have settled down, what's happened on the gross sales side. And this is where we're starting to see them come back. And, again, I say it's contingent upon what happens going forward here.

But the mood is more positive and I would also say, from my discussions with the advisors that in the last three weeks the mood has been much, much more positive for them.

Okay. That's great. Thanks.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back to Mr. MacPhail.

I'd like to say, again, thank you very much for participating in the conference call. If there's any questions that weren't asked, feel free to call myself or Doug afterwards. You know how to get a hold of us and look forward to speaking to you again in May.

'Bye now.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.