CI Financial Corp (CIXX) 2012 Q1 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 2012 first-quarter results conference call. All lines are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

This presentation contains forward-looking statements concerning anticipated future events, results, circumstances, performance or expectations with respect to CI and its products and services, including its business operations, strategy and financial performance and conditions. Also, 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.CIFinancial.com.

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 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 reconciliation to IFRS, where necessary, are included in the management discussion and analysis available at www.CIfinancial.com. Now I'd like to turn the call over to Mr. Stephen MacPhail, President and CEO of CI Financial. Mr. MacPhail, you may begin.

Thank you. Good afternoon. Thank you for calling in to our Q1 2012 conference call. Q1 was an excellent quarter for CI, with net income up 8% from the previous quarter. Our gross and net sales were up significantly from the prior two quarters. CI's overall SG&A remained up 40 basis points. We increased the dividend in March to CAD0.08 monthly which equates to CAD0.96 annually. We repurchased CAD6.5 million worth of shares at an average price of CAD21.51 during the quarter. And lastly, our net debt declined by CAD84 million.

Looking specifically at the changes from the prior quarter, you can see that CI's average Assets Under Management were up 4%, to CAD72.3 billion. Net income, as I mentioned, rose 8%, from CAD87.8 million to CAD94.6 million which, on a per share basis, equated to an increase from CAD0.31 per share to CAD0.33 per share. EBITDA increased from CAD173.6 million to CAD176.5 million. Operating cash flow jumped from CAD131.9 million to CAD139.8 million.

Dividends paid during the quarter increased from CAD64.1 million to CAD65.2 million, reflecting the increase that was effective March 15, 2012. And net debt declined from CAD730.7 million by 11%, to CAD646.7 million, from surplus cash generated and from freeing up of certain regulatory capital.

From a sales perspective, we saw gross sales increase substantially from the previous quarter, resulting in net sales of CAD160 million. We experienced positive sales for both retail and institutional. Retail had net sales of about CAD204 million, while institutional had net sales of CAD84 million. The only soft area was third-party classified business, where we really have no influence and it had net redemptions of CAD128 million, most of which occurred in January.

What was encouraging was that our gross sales were up from the last three quarters. In addition, when we look at year-over-year, retail redemptions are actually down. We experienced solid net sales from the Sun Life, Assante and Edwards Jones relationships during the quarter. We remain pretty cautious, however, as sales continue to be impacted by investor fatigue relating to market uncertainty and also by continuing segregated fund maturities, especially those through third parties.

Looking forward, our second Las Vegas Conference is next week, with over 800 advisors attending. This is a significant increase from last year, with strong representation from the Sun, Assante and Edward Jones relationships. But what's really encouraging is the big increase in representation from IROC Advisors. We're also hosting the annual Assante conference in Chicago at the end of May, which is also being very well attended.

We continue to get strong performance from our money managers, which has been reflected in CI's strong asset growth relative to our competitors this year. And lastly, we are encouraged by the increasing popularity of the Cambridge Funds. You recall, this asset management team was only really finalized last September And with that, I'm going to turn it over to Doug Jamieson, CI's Chief Financial Officer, to provide some more financial details. Doug?

Thank you, Steve. Steve has talked about our consecutive quarter comparison, and here is the year-over-year comparison. Looking at our first quarter this year compared to the first quarter last year, we see that average Assets Under Management were down 2%, from CAD74.1 billion a year ago. Last year's first quarter included a CAD4.9 million insurance settlement, so that we can see on an adjusted basis, earnings per share was CAD0.34 last year, just CAD0.01 higher than this year; and similarly, EBITDA was down 3% year-over-year.

Dividends paid were up 8%, as CI paid out CAD60.5 million last year, at a rate of CAD0.07 per month, and CAD65.2 million this year, at a rate of CAD0.075 cents in January and February and then CAD0.08 in March, which is, as Steve mentioned, our current monthly dividend rate. And net debt, which is total debt less cash and marketable securities not required for regulatory working capital, declined 17%, from CAD777 million to under CAD650 million.

CI's EBITDA margin grew over the year by 0.7% to 48.2%, as total revenues declined 4.1% year-over-year and EBITDA only dropped 3.9%. Meanwhile from last quarter, the margin is down slightly from 48.7%, as total revenues gained 2.7% and EBITDA grew 1.7%. But the first quarter is typically a softer quarter for this margin, as the dealership revenues are higher during RSP season and we only earn a gross margin of approximately 20% on that business.

CI's total SG&A as a percentage of Assets Under Management and expressed in basis points has stayed very steady over the past year, averaging just over 40 basis points even as our average Assets Under Management dropped by 5% in the third quarter. This 40 basis points includes the cost to administer CI's funds, pays internal and external portfolio managers, and corporate and marketing costs at both CI and Assante.

Next, we have the last five quarters of free cash flow, which has been higher during the three non-RSP quarters, as one would expect. Free cash flow for the first quarter this year is consistent with last year's flow of just under CAD100 million, as operating cash flow and the spend on deferred sales commissions were both slightly higher.

And here is the detail on the free cash flow. Last year's operating cash flow of CAD147 million less commissions of CAD49 million gave us CAD98 million in free cash, and this year we had CAD140 million of operating cash flow and CAD41 million of commissions paid for free cash flow of CAD99 million.

The next section details the amounts returned to shareholders via share buybacks and dividends. Last year, CI didn't buy any stock in the first quarter and paid out CAD61 million in dividends. This year, CI bought back CAD6 million in stock and increased dividends paid to CAD65 million, for a total of CAD71 million returned to shareholders this year.

This left a surplus of CAD28 million this past quarter, which was used to pay down the balance on our credit facility. And that line is currently not drawn and CI's total debt stands at CAD750 million, down CAD100 million from one year ago. I will now turn it back to Steve.

Thanks, Doug. If we look at Assets Under Management, you can see that we finished April, 2012 up almost CAD1 billion from the Q1 2012 average. As it stands, with the shaded area, our average assets are up over where they were for Q1; however, I'll caution after a day in the markets like today, it is hard to predict where the current quarter will end. But I can assure you, we'll continue to be cautious with our expenses, just as you would expect CI to be.

Moving forward, we continue our expansion into alternative investments. Assets in Red Sky Capital continue to build. Lawrence Park Capital Partners, which we recently partnered with, is also getting a lot of attention. Both advisory firms have been asked to be represented at our Las Vegas and Chicago conferences, and I view that as very positive when the advisors themselves are calling us and asking if these new businesses that we started up can be represented and present.

We continue to have a company-wide focus on all our relationships, and we keep building our Sales and Marketing team accordingly. To pay for it, our Operations Managers continuously are looking for additional scale efficiencies in every part of our operations. We continue to build the foundation for our institutional business for the Cambridge and Signature Funds.

Altrinsic, which is already at almost CAD12 billion in assets, has taken on a strategic partner that I believe could result in a doubling of that business. Peter Anderson, who is key to building CI's Mutual Fund business as President of CI Investments, has moved his focus to CI's institutional business, which he is running. With that, Doug and I would be happy to entertain any questions that you might have.

Thank you. (Operator Instructions) Our first question is from Scott Chan. Please go ahead.

Steve, just trying to break down the net sales. Obviously a very challenging environment for everybody, especially the independents. The Class I that you mentioned, the net redemptions, is that mostly related to the seg fund maturities?

Absolutely. That's the one I gave you. When we reported CAD160 million. The institutional I said was CAD84 million, our retail was CAD204 million, and then the Class I third party funds minus CAD128 million. But most of that is related to the seg fund maturities, from third party --

And last quarter, I know things have changed drastically in the quarter, but you mentioned the seg funds could possibly get net sales in 2012 after a challenging 2011 with the seg fund maturities. But with Sun Life's announcement to discontinue selling the Sun Wise Elite to third party advisors, how is that going to strain gross sales until -- I think in the Press Release it mentioned that a couple new guaranteed products are going to be released?

You know what? Certainly any products in that area certainly have slowed down in popularity, when you look at some of the things that -- the amount of capital to be required to be tied up with them, et cetera. This isn't anything that's new to us and we've really moved our emphasis on to looking for growth in other products. I would say I agree with you that when you see what's been announced over the last three or four months on people's de-emphasizing some of these products, we're not looking for a lot of major contribution to gross sales from these products. We'll definitely get business there. It just won't be the growth area of our business.

Historically with that product, was it about 50/50 in terms of gross sales from third party versus Sun Life advisors?

You know what? Scott, it's really dependent on the period of time you looked at. If you went back over a 10 year period of time, there were times when third party advisors put a lot of money into those areas. But in more recent years, certainly the Sun Life channel has been a much more steady and good channel for that business.

And just my last question relates to CI institutional segment. CAD84 million in net sales previous in Q1, but a lot lower than last year at this time. Can you just provide us an update some of the ramped up and the RFP activity? You just mentioned that Peter Anderson is going to help spearhead that. And as well, is the Cambridge mandates on that yet, and have they got any --?

We're only really just getting those mandates up and going, and the track records are slowly being established. And if you look at the process involved, these things just take time. And even if they are up and ready going tomorrow, if there's no mandates that are up for review at that point in time, then you can't force a mandate review. We're doing everything possible to position ourselves as mandates come up that we can go for them. And the Signature Fund certainly has a lot more traction than the Cambridge would at this point in time. And over the course of the year, we're seeing a lot of opportunities for the Signature Funds. They've got good performance there, so I wouldn't be surprised that Signature does a decent amount of business this year. When we look at the Cambridge Group, we're really trying to plan for one, two, three years down and build something to keep this thing growing for the next four or five years, as opposed to just what can we get in the first quarter of 2012.

Right. Okay. Thanks a lot, guys.

Okay.

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

Hello. Just following up on Scott's question on the institutional business. Are you able to say, if we're trying to gauge the growth in the business for the assets and let's call it the pure institution, not including the I-class, where you'd be today, ballpark?

Where we would be in total assets in that business?

Yes.

Our total institutional business is about CAD3 billion.

Okay. And then the second question I had was with some of the investments you made. Obviously, you've had Altrinsic and a few others that you've done, like Red Sky. Over a decade ago, you guys were a little bit into the alternative products and you had pulled back. I recall it was an area that wasn't necessarily high appetite. Just trying to think about how CI is looking at it going forward, are we to expect more exposure to these types of investments in companies or types of products?

I don't think you compare where we originally got into alternative investments. You remember, we inherited that with the BPI acquisition and it was a bit of a side line to that business. We didn't design that whole thing and it worked out okay for a while, but after that it didn't. I'd say our real foray into the business came with the Trident Funds and Nandu's had phenomenal performance in that area. We just haven't got as much traction as we would have liked. I think a lot of investors were chasing the Solidda type returns. What they thought they were getting on the upside. Unfortunately they got the 60% and 70% downside's on it.

Our structure today, we're taking a much longer term view. The alternative asset managers we pick today are ones that we think can get sustainable growth over the next five years. Geoff, I've raised this one before that we hope to get about five alternative asset managers under our wing, and probably put an overlay over lay on top of it, so that we can do strategies like corporate class, et cetera, with them and really create a good product in that mix for the advisors that want to use this. Most of them will really be more conservative in nature at that. We're not looking for any type of alternative asset manager that can be up 60% one year and down 50% the next, because those numbers just never add up for us.

Okay. Thank you.

Thank you. Our next question is from Doug Young. Please go ahead.

Hello. Good afternoon. Just on the retail net sales, Steve, the Sun, Assante, Edward Jones, can you give us a sense of the split? Is it pretty equal, that CAD204 million, across each of those channels? And can you maybe give us a sense of have things improved at all or have you noticed any improvements on the IROC side?

No, I would say the Sun Life and Assante channels contribute a lot more than the Jones would. But those are just bigger businesses, and our relationship is really evolving with Edward Jones right now. We've got other products that we're hoping to make more inroads with them. They are very good partners and they evaluate your products very, very thoroughly before they get submitted to their shelf. But once they're on there, then it can be positive growth. But as it stands right now, the Assante channel and Sun Life channel both very strong for us in the first quarter. Edward Jones very, very pleased with -- on it.

Can you talk about what the potential upside is, so as you get more penetration in the Edward Jones channel?

Yes, I think that's certainly possible to get more penetration within that channel. When I talked with Derek Green, he continues to increase the number of [resources] that are focused on the Edward Jones channel. We've got good representation by Edward Jones people at the Las Vegas conference, which I view as very positive for us. So I see this as a real opportunity as to where we can get increased penetration.

And then just on the seg fund maturities or the outflows on the seg fund side, was that just outflows or were you removed from any products?

No. We've never been removed from the products. These are just outflows. You have to remember, our business was so successful 10, 12 years ago in this area, that these products are just maturing. A lot of the people that bought them were probably 57, 58 years old and now they're close to 70. So, they need those funds just mature and move on to do other things. So the product definitely served its purpose over time. In a way, we're just a bit of a victim of our own success.

Okay. On the institutional side, what is Cambridge and Castle Rock up to in terms of assets? I know you've talked about CAD600 million of net sales as kind of a target in the institutional side. It's obviously a tougher environment out there. Is that still your target for 2012?

Sorry, are you asking how much institutional business Cambridge has right now, because they don't have any.

No, just assets at Cambridge and Castle Rock.

Yes, at the Cambridge funds I think there are CAD2.5 billion. I don't have the sheet right in front of me. That business has been growing steadily. If you look at the performance, or I'll say the out performance, of those funds it's been pretty spectacular. And so we only see that continue to grow from where it is. I remain committed to my view that over a five-year period of time, Cambridge funds are going to get up to CAD10 billion. So, everything is looking that's here they are right now. And Castle Rock is really just a brand within CI, so it's all one and the same.

And then the CAD600 million target?

I think it's certainly doable. You know -- and I suppose we really shouldn't even put targets for institutional. I'd like to back away from putting targets. What I really want is for us to get out there after every mandate possible, and if we have a high success rate and we get CAD400 million one year and CAD900 million the next, I'm just as happy at that as getting CAD600 million each year. So the CAD600 million certainly is doable, but it's definitely not predictable. How's that?

That's fair enough. And then, Doug, just on the tax rate, is this indicative of the tax rate that we should be expecting, or is there anything else that was in the tax rate this quarter?

As we said, like our statutory rate is 26.3%. We typically have a roll every quarter on future tax that can knock it down half a percent, maybe a touch more, and we did have a small adjustment this quarter that brought us under 25%. So going forward we should be around 26%.

Okay. Perfect. Thank you.

Thank you. Our next question is from John Reucassel. Please go ahead.

Thanks, Steve. Just, if you said it I apologize, but what are the net flows looking like in April? And I know it's early in May, but could you just give us some update on what the business looks like?

You know what? We usually don't disclose until the end of the quarter. We definitely weren't disappointed at all with what went on in our April business. And to be honest with you, May and June, if you go back for the last 20 years, are typically what I would call the slowest two months in the mutual fund business. Everyone's made it through tax time. So it's really early to tell what's going to go on during the next two months. I would say, if you come through the quarter flattish, you're probably pretty happy.

Okay. And the trend in gross sales that you've talked about, that was still evident post quarter?

That's correct. We had good gross sales business in April. We were happy with that.

And then the use of free cash flow, and you paid down debt some, did a little buyback. Assume the markets are stable, is that what you expect to do given where your stock price is, is to -- more focused on debt as opposed to share buybacks?

We actually don't have any focused strategy to reduce debt. We are happy with where we started the year. And probably our debt has gone below where we normally would keep that debt right now. My view is that we're well positioned to go back in the market and buy stock in CI when the opportunities are there. So when we see weakness in our stock, you'll see CI back in buying shares in the open market.

So you're happy to let the cash pile up without reducing debt right now, is that fair to say, Steve?

Well, we're not in a position to reduce debt, because we don't have any money drawn on our bank lines, first of all, and we have a maturity of CAD250 million in December. But we can't pay that down any earlier. So our only choice is to build up surplus cash right now.

When you talked about your new product, Steve, I was interested on the alternative side. So you'd like to have five products and wrap them together as one product? Is that what you were talking about, with one fee? Is that what you were thinking of?

No, well that's a bit like it -- what we would like to do is put an overlay on top where we can create an environment where investors can invest in the individual funds or we can create a blend. What we want to do at CI is create a product where the fees make sense. You go back to some of that old stuff where guys were getting up to 6% and 40%, and 6% and 60%, absolutely ridiculous. Our goal is to create an alternative asset management product that, from a fee perspective makes sense for our clients.

A great example would be, there's been a lot of discussion with Assante about them wanting alternative assets. I've talked to a lot of the advisors over the last year, and they ultimately could see 5% of the assets under administration into alternative assets. And you go, well, that's like CAD1.2 billion. If you spread that over five funds, you start to do the math and that's about CAD240 million into each fund. And all of a sudden, a light goes on, CAD240 million in each of these funds and you actually have a spectacular business all of a sudden.

So you could say, sure today, Red Sky is not a big money maker for us, and LP is not a money maker, but you can quickly see how it could be a very attractive product for us as a manufacturer, but also for our clients at the same time. And that's how we're going to get growth, I think.

Okay. That's helpful. And then just the last thing is acquisitions. Is there any activity going on out there, or is it pretty quiet? Should we think of CI as really an organic grower as opposed to new acquisitions?

There's always going to be opportunities out there. I just don't think there's opportunities to buy good mutual fund companies anymore. Maybe our acquisition of Hartford was the last one. But it's very problematic to buy any companies that are in heavy net redemptions. When you actually do the real math, you're buying them with dollars that aren't tax deductible and you're getting fully taxed cash flows off them in a declining environment, then you'd be shocked at how little value they're ultimately worth to you and to your shareholders. So when I go down the list of companies out there, I really can't see how it's all that attractive to us.

Our preference is to just go after those assets that are being redeemed from them, rather than own the asset and find out that our competitors are getting 75% of the assets being redeemed. I'd rather get 25% of the assets being redeemed, if you understand what I'm saying there. I think there's some smaller things that I'm not going to say are game changers, just like Hartford wasn't a game changer, but it was small but very important. We got great distribution out of it, we got good money managers out of it, and we got great economies of scale. So, I think there's more little transactions like that. We're working on a couple things right now that have a reasonable probability of success. But until they're announced, they're not done.

Okay. Thank you, Steve.

You're welcome.

Thank you. (Operator Instructions) Our next question is from Frank So. Please go ahead.

Steve, good quarter. Quick question. What's your ownership structure in Intrinsic and Bill [Priest's] Company, as well as Red Sky and this new company, Lawrence Park?

So we own 24.9% of Altrinsic. At one point in time, we were at 50%; but many years ago, we sold that down to 24.9%. It was a strategic decision to help him grow his business more. There's also another 24.9% owner in it, a major Australian bank owns it and that's the partner I referred to. So, between the two of us, we own just shy of 50%. And then the management of Altrinsic owns the other 50%, which I think that's a fantastic mix for us. With Bill Priest Company, we don't own anything of Bill Priest Company. We just have a sub advisory role with Bill Priest. It's John Hock that runs Altrinsic, just in case there was any confusion there. That being said, I could see owning some of Bill Priest Company. He has a pretty good business there. But I hear it's not for sale.

Well, the stock's done reasonably well.

With regards to Red Sky and LP Partners, we're in the 30%s on both of those companies is where we are. So, we think that's a good percentage ownership. I think the key thing to understand is that we're their major relationship, so when we develop new products, our expectation would be to kind of pick something up on the manufacturing side, but insure we have the businesses where if they're successful, if their business is successful, we want those individuals to be successful, but CI also gets paid. So, I think we've done a lot of work on these structures, and they are well positioned if the companies grow that we can make money. Was there something else you asked me?

Oh, sorry, and one other quick question. It's too bad you didn't have a piece of Bill Priest Company. The stock's done quite well. What are the assets with Red Sky and Lawrence Park that you guys -- are they managing right now?

You know, I don't know if Red Sky's disclosed their exact number. I haven't looked like in the last couple days, but I think they are around CAD60 million. And LP Partners, you know, they just launched 30 days ago. I think they are just shy of CAD40 million.

Okay. Good.

Thank you. Our next question is from Paul Holden. Please go ahead.

Want to talk a little bit about gross sales, we saw it come off 12% year-over-year, some obvious problems at the industry level in terms of increased volatility. But are there any indications maybe we can look for in terms of when gross sales might start picking up?

Paul, I really don't have the answer to that question. I think the thing you have to look for is we need some stability in the marketplace. Days like today definitely don't help. I think days like today occurred because of what's happening over in Europe and that instability, and I think that's what's causing this investor fatigue. People are just are concerned.

Once we get more stability, longer term stability in the market, then I could see gross sales coming back in limited cases. Its been a zero sum game, and I don't think gross sales are coming back for a lot of our competitors, to be perfectly honest with you. We've talked about this for many years, that sales will continue to be concentrated into smaller areas. I do think when they come back to the independents, CI is probably in one of the best positions to capture them. We certainly have evidence of that, because the last three quarters our gross sales continued to improve. When I looked across some of the non-banks, I haven't seen that trend line occurring with others.

Right. Okay. Do you think your ownership of distribution has been a major factor in that?

Oh, absolutely.

Have you given any -- sorry.

If we didn't have this relationship with distribution, then I don't think we would be any different than anyone else. You got to remember, it provides a lot of things. There's three things. We always argue that you needed economies of scale, and you needed good relationships with distribution, and you have to have really good money managers. In order to hire really good money managers, you have to have size. We couldn't have hired the Cambridge Group if we didn't run a good business and have size. They are just too expensive for a small company to hire on; but within our context, we could take advantage of it.

If we didn't have the size, we couldn't run things like this conference we're doing in Las Vegas or the size of the conference we're doing with Assante again. So, there's economies of scale, but we also have the distribution arrangement that allows us to do it. So they all go hand in hand. There's not a single factor that makes it all, but had we not got ourselves aligned with distribution, we would be in a much different position today.

Any thoughts then given to materially expanding distributions for Assante?

Well, we think about that all the time. We're doing everything possible to work with them to make them want to increase their penetration to CI products. We can't force them to do it, you've got to remember that. The only way it happens is we can provide better service and better products and we seem to be successful at that. So, the penetration is growing. I've mentioned before, I don't think it's unreasonable to set a target of 70% penetration over time with the Assante Advisors, given where our relationship is with them today and what we've been trying to accomplish. Does that come at the expense of other third parties? Obviously, it does. But we just think we can provide a lot more to them. We think about that every day.

The other thing is we are adding advisors into the Assante channel. It's not a fast thing. We aren't going out there and publicizing it, because we don't want everyone adding up every advisor every quarter that we have. But Steve Donald and Bob Dorell are doing an excellent job at bringing new advisors in. And we've seen some really good advisors come in over the last six months and the pipeline, from what I see, is pretty decent.

Okay. So with that 70% target, can you remind us where the penetration is today?

It's just a little under -- it's about 54%.

Okay. Perfect. Thanks for your answers.

You're welcome.

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

Well, I just want to say thank you very much for participating again. We do have our Annual Meeting, unfortunately, in two weeks, on May 24. So if any of you are there, hope to see you there, make sure you come up and say hello. And with that, otherwise I'll talk to you August 9, I believe, is when we report our second quarter results.

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