CI Financial Corp (CIXX) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Leesie, and I will be your conference operator today. At this time, I would like to welcome everyone to the CI Financial 2012 second quarter results webcast. (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 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.cifinancial.com

This presentation includes several non-IFRS financial measures that do not have any standardized meaning pre-described 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 analysis 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 also at www.cifinancial.com

I would now like to turn the call over to Mr. Stephen McPhail, President and CEO of CI Financial. Mr. McPhail, please go ahead.

Thanks, [Lisha]. Welcome to CI's second quarter earnings, and thank you for joining us today.

We are very happy with what CI was able to achieve in Q2 despite the difficult equity market conditions. CI's EPS before the effect of the Ontario tax increase, were down only CAD0.01 from the prior quarter. Unfortunately, the Ontario tax increase reduced this quarter's earnings by 22%, or CAD0.07 per share. This is a one-time expense on the assumption that we don't experience further negative tax changes.

On the business side, however, with the extensive sales and marketing activities that occurred in the second quarter, we are still able to contain our SG&A expenses and keep them down. Our EBITDA margin was unchanged from second quarter. Excellent cash flow resulted in CI's debt declining by CAD33 million even after the payment of CI's dividend and having bought back half a million shares.

Looking specifically at some of the high level financial metrics, our average AUM was down under CAD900 million, an amount we have since made up with recent market asset increases. As mentioned earlier, EPS were almost unchanged from the prior quarter, down only CAD0.01. EBITDA was CAD173.1 million, down slightly from CAD176.5 million in the prior quarter. This equated to CAD0.61 per share for the quarter.

Dividends paid totaled CAD68.1 million, up from the CAD65.2 million in the prior quarter, which you'll recall was when we increased our dividend. CI's net debt dropped to CAD614 million during the quarter, well below the one-time annualized EBITDA level.

On the sales side, gross sales of CI's funds totaled over CAD3 billion for the quarter. Though we recorded just under CAD240 million in long-term net redemptions during the quarter, there were a lot of positives on the retail side. Retail fund sales were essentially flat for the quarter but with Sun Life, Assante, Edward Jones and the MFDA channels all having positive net sales.

The biggest impact in the quarter was a single legacy client from the KBSH institutional assets for CAD150 million and, in addition, third-party segregated funds redemptions essentially accounted for the rest of our redemptions.

The more encouraging news is that CI experienced positive net sales in July. A lot of factors impact sales, but certainly one of the big positives is performance. 81% of CI's AUM is first or second quartile year-to-date. In addition, 84% of CI's assets under management are first or second quartile over 10 years. The Signature Yield Funds, under Eric Bushell and his team, where we're seeing a lot of business, are first quartile across all time periods.

Of our increasingly popular [Mannis] Solutions, 95% are in the top two quartiles year-to-date, and an incredible 100% are top two quartiles over 10 years. CI's Cambridge Funds, under Alan Radlo and Bob Swanson, have brought in over CAD250 million of net sales year-to-date, and actually experienced higher net sales in Q2 than Q1, as momentum for this money management group continues to build.

On the alternative asset side, Lawrence Park, which we launched in the beginning of March, had an outstanding performance since this business started, and by all accounts I believe are top performers in their category. In addition, Red Sky continues to outperform the TSX since its inception, but with significantly reduced volatility, making CI very optimistic about the growth prospects for both these firms.

Given that a picture is worth 1,000 words, I thought this slide really puts the performance of some of CI's key funds in perspective. Signature, Harbour and Cambridge all are outperforming and as well positioned as we could hope for for growth.

And on that note, let me turn things over to Doug Jamieson, CI's CFO. Doug?

Thank you, Steve. Looking at page six, here we have quarterly highlights comparing the second quarter this year with the second quarter of last year. You can see average assets under management were down 4%, from CAD74.5 billion a year ago to CAD71.4 billion. EPS was CAD0.34 last year, and it's down CAD0.02 on an adjusted basis this year. And that is primarily due to the drop in average AUM and also the change in asset mix over the year toward fixed income product.

Next, we have EBITDA, and similarly, that was down 6% year-over-year. SG&A is down CAD4.4 million, or 6%, and that drop in spend is greater than the decline in average AUM. Dividends paid were up 5%, as CI paid out CAD64.9 million last year at a rate of CAD0.075 per month and CAD68.1 million this year at a rate of CAD0.08 per month, and that is our current monthly dividend rate.

And net debt, which is total debt less cash and marketable securities that are not required for regulatory working capital, declined CAD93 million over the past 12 months, from CAD707 million to CAD614 million. CI's EBITDA margin dropped slightly from the second quarter last year to 48.2% this quarter, but was flat quarter over quarter and has held between 48% and 49% over the past year.

CI's SG&A as a percentage of assets under management, and we've shown it here in basis points, has declined steadily over the past year and is now slightly below 40 basis points. And as we saw from the quarterly highlights slide, even as CI's average assets dropped by 4% from last year, the SG&A spend fell 6%, and that's what gives us the drop in basis points.

Next we have the last five quarters of free cash flow. Last year in the second quarter, CI used a CAD20 million tax loss, and that boosted free cash to CAD127 million. So we've adjusted for that down to the CAD107 million a year ago. And free cash has been in the CAD104 million to CAD107 million range for the non-RSP quarters and slightly lower during last quarter when DSE spend is higher.

And here in the top section is that detail on the free cash flow. Last quarter's operating cash flow of CAD140 million, less commissions of CAD41 million, gave us CAD99 million in free cash. And this quarter we had CAD134 million of operating cash and CAD29 million of commissions paid, for free cash flow of CAD105 million.

The next section details the amounts returned to shareholders as both share buybacks and dividends. Last quarter, CI bought back CAD6 million in stock in the first quarter and paid CAD65 million in dividends. This quarter, CI bought back CAD12 million and increased dividends paid to CAD68 million, for a total of CAD80 million, up from CAD71 million last quarter. Together, this left a surplus of CAD53 million so far this year, which was used to pay down CAD33 million balance on our credit facility at year-end. And the remainder has increased CI's cash and marketable securities balances.

CI has significant and growing cash and marketable securities on hand, and an available CAD250 million credit facility, and that provides financial flexibility to fund share buybacks when opportune, and also for the timing of issuing new debt around the maturity date of our existing debt.

I will now hand it back to Steve.

Thanks, Doug. As you can see on this chart on Assets Under Management, the dark line represents the actual level of assets under management and the shaded represents the average level of assets under management. Clearly, assets under management for CI are the driver of our earnings growth.

You can see it in Q1 that markets were increasing, and we had substantial asset growth, which for most part reversed itself out in the second quarter. But the positive news is, if we look now at the start of the third quarter to get us more current, you can see that, on balance, our assets are up. As of today, with our assets at CAD72.4 billion, we're up over 2% from the Q2 average, and we're actually now slightly above the Q1 average level of assets.

From an outlook perspective, looking at our Cambridge Funds, they posted solid net sales every month this year, and we fully expect momentum to keep growing in these funds. We have a very extensive marketing program for the fall of 2012, which will help us build on the successful conferences we held in May of 2012 where, between the two conferences, we had over 1,300 advisors attend to hear the CI and Assante story.

Also on a positive note, on the institutional side, we have won approximately CAD700 million in institutional mandates, which will fund this fall, with the prospect of actually winning some additional mandates in addition to the CAD700 million. And lastly, core to any successful investment company is obviously fund performance. And as I pointed out earlier, CI is in the fortunate position to be heading into the fall campaign season with exceptional performance.

Thank you very much. And with that, we're happy to entertain any questions.

(Operator instructions.) Scott Chan from Canaccord.

Thank you. Good afternoon, guys.

Hey, Scott.

In your press release, you mentioned that you expected a slowdown in Seg fund product sales. I'm assuming that relates to the announcement on April 30 on the third-party stuff. And you also mentioned just now on the conference call about the Seg fund maturities. Can you just comment on the Seg fund maturities? Is it still a big portion? Is it still getting better quarter over quarter, and do you expect that to kind of tail off? Because it's been kind of a headwind for I guess the last two years since the product was I think launched back in 2000.

Yes, Scott. I don't think -- I'm not going to say there are particularly headwinds at this point in time, but all products become more or less popular at different points in time. The most popular funds we have right now are income-oriented funds, and Seg funds, for a variety of reasons, aren't as available as they used to be, number one, and just aren't as popular with investors. So we're just getting natural levels of redemptions which aren't being offset by new sales into it, so I don't see anything continuing or changing on that front for the foreseeable future.

And on the Sun Life distribution channel, on Sun Life's conference call today they said they're attracting 14% of mutual fund sales versus 11% last quarter. So I'm assuming it looks like they're taking a bit more of the piece of a pie in terms of gross sales. I'm assuming 86% from 90% before. Is that kind of correct?

Well, I actually don't have insight into all the business that -- 100% their business that they would do, but I'm sure they're correct in what they're saying. We're not seeing a particularly dramatic change. I think the support for CI's products within that channel is as high as ever. In fact, our assets are at record highs with the Sun Life channels. Their assets are as high as they've ever been at this point in time.

And as I said in the last conference call, they've got some interesting products in there, and I'm not surprised that the advisor Sun Life side are adding some of those products into their channels. We still are by far the dominant provider to that channel. I don't see dramatic changes in that over the foreseeable future.

Okay, and just a last question, just on the institutional side, the CAD700 million pipeline. I'm assuming that's all Signature?

Yes, that -- well, actually through a variety of places, and so I'm not really at liberty to talk about it this point in time, but the majority of it's through Signature, correct.

Was there a certain mandate that stood out, like income equity, or was it kind of just that all around?

I'll just leave it at that. I'll be in a better position -- talk to [you] in a month or so on it.

Okay. Thanks a lot, guys.

Well, I think this is great. I can probably start my holidays in an hour. There's no more questions.

Doug Young of [CD] Securities.

I won't let you off that easy, Steve.

I already have my bag packed.

Nice. So just following up on the Sun Life relationship, as you may probably know, they've discontinued the GMWB product they were selling through their third party, and they're going to re-launch a new Seg fund lineup for third-party advisors. Is that something that you are on that platform?

We're working with them on all those types of things with it. I just don't want to get into the specifics of where we are specifically on those products with them. I think what's more important is what we're seeing in the sales trends, is that what we're seeing as what were historic Seg fund sales within those channels are being supplemented by mutual fund and other mutual fund product sales within that same channel, which is a little bit more critical from our perspective.

That's fair. And then, just on the net outflows, I mean, you kind of singled out one institutional, and then you kind of talk about the Seg fund. If you back out the Seg fund flows and the institutional mandate that you've lost, were you net positive?

Yes. If you backed those two that we -- yes, we would have been net positive.

[We would] end up positive. Okay. And then, just on the cost side, obviously you guys have done a good job keeping costs in check. Where have the cuts come on the cost side? And do you have further levers you can pull to reduce expenses if need be?

Yes. I would say cuts, cost cuts is misleading. We haven't been cost cutting here in some time. I would say most everything's coming from cost efficiency operations on our technology side. I give our technology group tremendous credit. They restructured a whole number of things and were able to come up with substantial savings for the Company. So that's a real source right there.

Again, another place where we save money is on the real estate side of the business as we renegotiated into lower price premises at places like 15 York and old leases fall off. So our costs just naturally come down. So at this stage of the game, any of the cost benefit -- any cost savings that we have aren't really from cuts. They're from efficiency measures themselves.

I would say, if anything, we've added resources in places like sales and marketing, so we've added cost into that area, but they've been more offset by savings we've gotten on the operational and technology sides.

And what else? I mean, obviously your tech guys have done a good job. Is there more levers you can pull, if need be here, that you guys see?

Well, listen, if you had to cost cut, you can always cut costs. I just don't think that's particularly good for building the business. I said that when we talked about our big advisor conference we ran early in the spring, we spent a lot of money on that. We just had to find it from other parts of the business.

Yes, we can always cut back on things. I'm just not that particularly interested in cutting back on things. We have a big training initiative going on, and it'd be pretty shortsighted to say, hey, I can save CAD1 million by cutting that out. It's just not worth our while.

Our real driver right now is to take advantage of all the good work that we've done with the Assante advisors, with the Sun advisors, with Edward Jones, and even within the IROC channel to really try to get to drive this with more sales right now. And that's why we're investing more in the business on that front.

So I know I keep saying that we can never find more cost savings, but people around CI just seem to find more cost savings whether I ask them to or not, so I've got to give them credit. I guess they want bigger bonuses or something.

And then, just lastly on the net flow side, you brought up the IROC channel. Any change in the flows through that channel? It's still pretty challenging, I would imagine.

Yes. I say it's pretty challenging, but there are some bright lights in there. When we had our conference earlier this year, we had a number of IROC advisors show up for it, so much more than the prior year. And when we've gone back and done an assessment of the sales patterns with those advisors, they've actually increased their business with us, so that's been -- from our perspective, that's been very positive.

IROC advisors within the bank channel, a lot of them have moved more of their money within the bank system, so it's a little more difficult. So I don't see that as a massive opportunity, but we certainly have made some inroads and slowed down some of the negative business there.

Okay. Thank you.

You're welcome.

John Reucassel of BMO Capital.

Thank you. Steve, just back to the Sun Life relationship, just to make sure, when Sun sold the stake in CI in 2008, you renegotiated the contract for 10 years. DO I have that detail right?

I don't think we disclose all the details, but we have a long-term contract with Sun Life.

Okay. Does anything change in the next year or so under that contract?

No.

No. Okay. Okay. On the IROC channel, just, Steve, remind me, is the issue there on the net redemptions, is it gross sales or is it redemptions?

It's a combination of both.

It's a combination of both. And is it mainly in the bank channel?

It would be mainly in the bank channel. That's correct.

Okay. And so, at what point, Steve, do you sit there and say maybe servicing these guys isn't worth our -- I'm just trying to understand how do you look at this channel now and servicing them and dealing with them. I know there are a lot of high net worth people in there, but if -- they're not doing business with you.

And John, what might be interesting at some point in time is I think I should get all the analysts to come in, and we've just instituted a whole new sales system at CI. And from everything I can see about it, it's way more efficient for us in analyzing who we're doing business with and trying to take advantage of opportunities and being more targeted in what we're presenting to them and pitching to them.

So a good example would be, within the IROC channel, we're seeing increased interest in what I'll call this new PIM product that we've put out, and so we're encouraged by that. I think just straight-up fund sales probably not the biggest thing, but on managed solutions, we're starting to find that. Maybe that's the route that we can go to get renewed interest in a number of our products, so--.

--Even in the bank channel, Steve?

Pardon me?

Even in the bank channel?

Even within the bank channel. The other place we've seen more increasing interest, and it's not translating to a lot of business but we're getting a lot more questions asked, would be in the alternative asset channel. And maybe it turns out that we have to do a closed-end fund or something of that nature, say put a Red Sky and Lawrence Park together and do a closed-end fund with that, maybe add a third manager in. There seems to be a lot of people asking us to do something along those lines, so we're detecting that there's some interest coming in this, and so we've got an obligation to look at that very seriously.

So I think we're seeing a bit of change. The other one is the Cambridge Funds really seem to have piqued the interest of more of the IROC people. And when we assess the attendance of the IROC advisors who are at our big spring conference, we kind of track where they went, who they wanted to see, seems like there was a lot of interest on the Cambridge side.

So, Derek Green was here to talk to you about it, he would say that'd be another place where they're positioning to try to get targeted sales in there. So I would never give up on that channel. You just have to be pretty selective on what you go after. And you're not going to try to work with advisor who's never going to do any business with you, but there are advisors who are interested in doing some business with us, and we just have to build on those relationships specifically.

Sure. Okay. And then, Steve, just the Seg fund, is it net redemptions of CAD50 million a month, or CAD20 million, or CAD100 million a month? How should we look at that business today?

You know what? I mean, we have a natural level of redemptions within our business, and John, to be honest with you, I think if we start looking at each little product and say what is it going to redeem every month, I'm not sure what you're going to get out of it.

Okay. Fair enough.

I would just say that we look at the level of redemptions that we get each month. Our redemptions aren't up year-over-year. I think the level we experience today aren't that far off of where they're going to be. The key thing for us on the growth side is to increase the gross sales, and that's where -- we have pretty good gross sales, but when you really want to turn the path from a flattish month to up CAD100 million or CAD200 million, it just doesn't take that much more in gross sales, because the redemption level hasn't changed that month. So I think, if I was you, my focus would be more on how are we going to get those gross sales back up, because the redemption level's just not going to change.

Okay. Last question, Steve. In the past, you've talked about the M&A environment, and how would you -- to characterize it now? I mean, is there still lots of activity out there, or has it slowed down, or how would you talk about the acquisition environment?

Well, it's interesting. I saw that McLean Budden sold its high net worth business to CIBC. I thought that was an interesting transaction. I'm actually more and more convinced now that we're going to go into this fall term.

We saw a lot of the earnings that have been coming out recently, and there's a lot of companies that are really struggling out there. I really honestly don't know how they make it on their own, and so I think that's just going to lead to more transactions.

To me, it makes all the sense in the world, but there's no sense waiting till your Company's done before you do a transaction. And I think you've -- with exception to CI, you've seen a lot of these companies really struggle in this quarter, even today. I mean, one company came out with zero earnings per share. I mean, kind of hard to do much on zero earnings per share.

Okay. Thank you.

Geoff Kwan RBC Capital Markets.

Hi. I was cut off for bits of it, so I apologize if you already answered it. But just going back to the Sun Life relationship, I would say that I think that the percentage has come down, but are you able to clarify as to, ballpark, how much of the growth in the net sales are coming from that channel for CI?

Well, I mean, we've had solid net sales from the Sun Life channel for as long as I can remember. We still do. We had it in the first six months. We had good net sales in July of this month from them. So, though we haven't disclosed what our number was for July, I can just say it's excellent business for us.

And the Sun Life advisors are highly supportive of CI, and if the number was 85%, then I'd mentioned before, I'm really pleased with the 85% number.

Sorry, 85% was in relation to?

I think we were at 85% of total sales within that channel. That was the number that Sun Life disclosed. That's not the number I'm giving you. I was just told that a few minutes ago.

Right. But would it be -- as a percentage of CI's gross or net sales, would it be less than 10% today?

Let's see, of gross sales, it would be under 20%.

Okay. And then, the other question I had was just on that institutional flows that you were expecting to fund towards the end of the year. Is the pricing on that more like traditional institutional, or is there some sort of specialized mandates that might have been able to garner higher than typical--?

--Not traditional -- traditional institutional pricing on that.

Okay, perfect. That was everything.

Okay.

And that's it. We don't have any other questions for the moment. (Operator instructions.) That's it. I think that's all the questions on the phone for now. I don't have anyone queued up for the moment.

Great. Well, I just want to say, on behalf of CI, thank you very much for attending our call. If there's any follow-up questions, I'll be here at the office all day tomorrow, but not after that, so get those questions in tomorrow. And thank you again very much. Bye now.

Ladies and gentlemen, this concludes the CI Financial 2012 second quarter results webcast. Thank you for your participation. Have a great day.