CI Financial Corp (CIXX) 2012 Q3 法說會逐字稿

Good afternoon. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the CI Financial 2012 third-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 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 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 also at www.cifinancial.com. I would now like to turn the call over to Mr. Stephen MacPhail, President and CEO of CI Financial. Mr. MacPhail, you may begin.

Thank you and good afternoon. Thank you for joining our third-quarter earnings call. I'll start with some of the highlights. Earnings per share rose back to CAD0.32 per share from CAD0.25 in the second quarter. Gross sales and net sales were up significantly from both the prior quarter and on a year-over-year basis. Equally important, we experienced positive retail sales in each month in the third quarter. Our SG&A expense declined during the third quarter and CI's EBITDA margin rose in the third quarter and lastly, our net debt was down 10% from Q2.

Looking at the results in a bit more detail, you can see that our average assets under management rose about 1.4% from Q2. Net income, adjusted for the one-time tax charge in Q2, similarly rose 1.3% from Q2 in line with our expectations. Earnings per share, again adjusted for the taxes in the last quarter, were actually flat at CAD0.32 per share and flat is a bit misleading here because if we take out the rounding, the increase in earnings per share was consistent with asset growth. EBITDA for the quarter was CAD175.2 million, up over one point -- over 1% from the prior quarter. Dividends paid in the quarter were flat at CAD68 million. As mentioned, net debt declined from CAD614 million by about 10% to CAD552 million. And this puts our debt to EBITDA below 0.8 to 1, considerably lower than the 1 to 1 range we have considered to be the right level of debt to EBITDA for a company like CI.

CI experienced a 21% increase in gross sales from our prior quarter, posting gross sales of CAD2.4 billion. On the net sales side, we recorded net long-term sales of CAD375 million, an increase of over CAD600 million from the prior quarter and an increase of over CAD460 million on a year-over-year basis. We saw the benefits of a lot of hard work combined with exceptional fund performance as CI experienced positive retail fund sales every month in the quarter. Equally important, though, is that we experienced improvement in all channels on a quarter-over-quarter basis and year-over-year basis. Lastly, our institutional I-class segments were significant contributors in the third quarter as we partially funded a large institutional mandate. As we still have a large portion of that mandate funding in Q4, we anticipate pretty good net sales in this sector for the next quarter.

From a sales outlook perspective, we can report that we posted positive sales in October with the biggest improvement coming on the retail side. Fund performance continues to be outstanding with three quarters of CI's assets under management either first or second quartile on a both year-to-date and over-10-year basis. Our three core money management teams, Signature, Cambridge, and Harbour, are all performing exceptionally well. Lawrence Park Capital, the alternative asset manager we helped form earlier this year, has exceeded our return expectations and we consider this an excellent long-term growth opportunity and an excellent match to our Red Sky alternative asset manager that we started two years ago. Highlighting some of our specific fund performance, apart from the abundance of first-quartile ratings you see, the equally important observation is that an excellent performance is diversified across many of our money management teams. With that, I'll turn it over to Doug Jamieson, CI's Chief Financial Officer, to discuss some of the retail results in more detail.

Thank you, Steve. Our next slide has the quarterly highlights comparing the third quarter of this year with the third quarter of last year. Average assets under management were up 2% from CAD70.8 billion a year ago to CAD72.4 billion this year. Net income at CAD91.3 million was up 1% from CAD90.8 million last year and earnings per share was flat at CAD0.32. Similar to what Steve pointed out, if we actually went to another decimal point on the per share calculation, we would see earnings per share went from CAD0.316 to CAD0.322, an increase of 2% and that's in line with the change in average assets. Similarly, EBITDA per share was up a penny to CAD0.62 and that's also a 2% increase. SG&A is down CAD2.3 million from last year or 3%, and as we will see in a couple of slides, that translates into a drop as a percentage of average assets under management. Dividends paid were up 5% as CI paid out CAD64.7 million last year at a rate of CAD0.075 per month and CAD68 million this year at a rate of CAD0.08 per month and that is still our current monthly dividend rate.

At net debt, which is total debt less cash and marketable securities that are not required for regulatory working capital, dropped 20% over the past year and in dollar terms declined over CAD140 million. It now stands at approximately CAD553 million, which is the gross debt outstanding of CAD750 million less almost CAD200 million in excess cash and marketable securities. CI's EBITDA margin climbed to 48.5% this quarter and has held between 48% and 49% over the past year.

CI's selling, general, and administrative costs, as a percentage of assets under management and shown here in basis points, has declined steadily over the last year. As we saw from the quarterly highlights slide, CI's average AUM grew by 2% from last year and SG&A spend fell 3% said that gives us a 5% overall drop or two basis points from last year.

Next, we have the last five quarters of free cash flow. Free cash grew to CAD110 million as operating cash flow moved higher by CAD2 million and the spend on sales commissions dropped a few million compared to last quarter. And typically the first quarter has the highest DSE spend and you can see that quarter has the dip in free cash in the middle of the chart. Here in the first part of the table is that detail on the free cash flow. Last quarter's operating cash flow of CAD134 million less commissions of CAD29 million gave us CAD105 million in free cash. In this quarter, we had CAD136 million of operating cash and CAD26 million of commissions paid for free cash of CAD110 million.

The next section details the amounts returned to shareholders as share buybacks and dividends. Last quarter, CI bought back CAD12 million in stock, paid CAD68 million in dividends. And this quarter we bought back CAD6 million in shares and again paid out dividends of CAD68 million for a total of CAD74 million returned to shareholders this quarter, down slightly from CAD80 million last quarter. And this left a surplus of CAD36 million this quarter. When you couple that with the reduction of over CAD20 million in the amount of cash tied up in working capital on the balance sheet means that net debt was reduced by CAD61 million this quarter. And this level of quarterly surplus, along with the almost CAD200 million in excess cash and marketable securities on hand at the end of September plus an undrawn CAD250 million credit facility, provides significant financial flexibility as we head toward the CAD250 million debenture maturity in December. I will now hand it back to Steve.

Thank you, Doug. It never ceases to amaze me how Doug and the rest of the management team seem to continually find ways to run our business more efficiently when at the same time we keep investing more in critical parts of our businesses so I have to say thank you to you guys for that.

Turning to our assets under management chart, the positive news is that you can see we finished the quarter with assets well above the average for the third quarter. We experienced net asset growth again in October so at this point in time, we've had a very positive start to Q4. The yellow bar depicts the average assets for October so far which are 2% above the average for Q3 where we are. To conclude, our assets under management today are currently up over 3% from the Q3 average reflecting a combination of net sales and market growth. Our strategy is to continue what has been producing results and that is an intense focus on all sales channels by all aspects of our business whether it be in operations, sales and marketing, or client services.

As you know, I've been at CI since 1994 and I will say this is one of the busiest times we've ever experienced as a company. We continue to invest extensively in training, sales, support and technology, and funding these initiatives with efficiencies we continue to find throughout parts of our business. And lastly and equally important, we continue to add to all our investment teams to ensure they are well-positioned to help us grow the business in the future. Thank you. I would now like to address any questions you might have.

(Operator Instructions)

Scott Chan, Canaccord.

Steve, just on the comment on the institutional where you're expecting for Q4 which should be positive, can you help quantify the pipeline? I know last quarter you mentioned there was CAD700 million coming in then you got the Transamerican pops, which was the majority of that. Is some of the balance left over or there something else that might be in the pipeline that is other than that?

There is definitely more business in the Transamerican business, but I would say just a little under half the Transamerica business would have funded in the third quarter and the residual would fund in the fourth quarter. I know you're going to ask me for an approximate breakdown of the institutional versus retail. And probably about 30% of our net sales in the third quarter were on the retail side, and the rest was on a combination of a I-class and then straight institutional.

Okay.

So to answer the other part of your question, yes, you can expect to see more in the fourth quarter.

Okay. And then there's also talk I guess B&S commented that there might be talks about doing some more business with you. Did any of that hit in Q3 or is that kind of in the works?

None of that business has hit in Q3, and we definitely are hoping to see some of that in Q4. We've been having very positive conversations on some of the CI products that the Bank of Nova Scotia would like to use, so we do expect to see some business there.

Okay. Great. Thanks, guys.

John Reucassel.

Thank you Steve or Doug. Just on the expenses. So you guys continue to distinguish yourself there. Just, you said you are funding initiatives through greater efficiencies. So can you elaborate on that a little bit?

Now you are asking me for my secrets, John.

Well I don't want state secrets. Just -- is it that the lower rent district exactly what -- what's going on?

Nothing. You know, there is nothing secret going on. John, it's a lot of little things that add up. And I would be lying if I said it wasn't CAD100,000 here or CAD200,000 here. The people and technology, Larry Rowe and his team, seem to come up with little things here and there and renegotiating contracts, new servers at 25% lower cost, phone services at lower cost.

On the operations side, we renegotiated some contracts. You know one of them is going to save us CAD600,000 a year. We started to feel the effect of that. So it's not one single thing. We just continually find different opportunities.

Doug did talk about it in detail at the board meeting today and he was explaining it for 20 minutes. It was that many items that get involved in it. So I think the key thing for us is day-in and day-out we just look for ways to do things you know less expensively and that will help in the Business.

Okay and then just on the net debt to EBITDA of 0.8%, and you mentioned you made a point of mentioning you're more comfortable at 1%. You know are you saying that in just over time you would like to get there, or are there plans to get there through buybacks in the near term?

You know the reason I mentioned that, John, is because we always felt 1% was probably the appropriate level of leverage but we were going to go out of our way to be strictly at 1% so we tend to be more conservative in that and we've just pay down more debt than we anticipated. It could've been a case where we could of bought back more stock in this quarter. We just didn't happen to and maybe debt wouldn't have dropped as fast.

The point I wanted to make was 1 to 1 we've concluded was a pretty good level for us given the stability of our business and we're about CAD150 million, CAD160 million below that. So, that should give shareholders a lot of comfort that we have a lot of financial flexibility in whatever we want to do in our Business. That was really the point that I was trying to make.

Okay. And then the CAD250 million that is due in December, presumably you'll turn that out -- I guess you could use your facility but I guess with what the rates are, why wouldn't you just do a new facility of five years or something. Would that be a fair statement that you are going to do?

You know, we are in no immediate rush to get anything done. The reality is we are going to pay back one facility and we will instantly have significant interest savings and you know so the day after we pay this back our interest costs are going to drop because, a, we are going to pay for some of that with low yielding cash because cash doesn't pay you much these days. And we can finance under a bank lines lower than what the fixed rate was costing us you know under this term financing.

So we will actually see a benefit for a while. So to rush into a five-year financing unless you have a strong conviction that rates are going to go up is really just going to increase our costs on the day we do it. And since we really don't -- aren't going to be forced into doing anything until the following year where we have another debt maturity, we have got pretty well 12 months to make that decision.

Okay, last question. So you are still positive sales through Edward Jones. What about the IROC? Is that still a tough channel and maybe you could just talk a little bit about the trends amongst the channels.

Well I mentioned that -- the one thing I did say -- I'm not going to give you specific sales in every channel but every channel we had on a year-over-year basis and a quarter-over-quarter basis went through significant improvement. A number of our channels obviously are in strong positive net sales. The IROC channel before we have said has been a difficult channel but I saw more improvement in the IROC channel quarter-over-quarter, year-over-year than any other channel that we had.

And a lot of the business, John, has come out of the benefit of when we ran the big Vegas conference and we had a lot of IROC advisors show up for two years, and we are seeing the benefits of that. We're seeing business going into places like the Cambridge funds have been very, very popular with them and the signature funds. So I'm not gong to say that we're hitting the ball out of the park yet but the improvement is absolutely material in those two channels, and I'm really happy with that. And the IROC would be the only channel for us that was in net redemptions. Every other channel was positive sales.

Okay, thank you.

Geoff Kwan, RBC Capital Markets.

Thanks. Just maybe to add on to John's last question just on the quarter-over-quarter change on the retail side. You know was it particular -- without giving specific numbers I can appreciate that, but was there specific channels that really drove it? Was it much less redemption activity or are you seeing things in the industry that might be getting a little bit better or encouraging?

Geoff, are you asking me on a year-over-year quarter or consecutive quarters?

Sorry. Just consecutive, so Q2 versus Q3 2012.

Sure. I can look at it -- I say two things. Gross sales in the -- since you're asking about the IROC channel specifically. Is that correct?

Well I mean just broadly speaking, like what drove the sequential on Q2 over Q3 on the retail side?

It was much of a move on the redemption side. In fact, redemptions were actually down a bit quarter-over-quarter but the real benefit came on the gross sales side. That's always the real driver. We have a natural level of redemptions because our assets are so big and our Company has been around for so long. So, we saw a slight decrease in redemptions. And we saw a good increase in gross sales, and so when you look at what changed it by that amount on a consecutive quarter basis, then that was the big change.

And are you able to say like was it coming through stuff like Assante or Edward Jones, again without necessarily giving the numbers behind it?

Every channel. Every channel was up, as I think -- so what I'm going to say is Sunwise's channel was up. Assante's channel was up. Edward Jones' channel was up. IROC channel significant improvement. MFDA up. So, every channel had positive improvement. It feels very encouraging when we saw it. I'm not going to lie about that.

Okay. On the institutional side -- (multiple speakers) Okay. On institutional side, aside from the Transamerica mandate that you guys won, how is the outlook there on RFPs and that sort of thing?

I would say it's pretty good given the limited number of products that we actually have on our shelf. You know we're really looking to try to expand this institutional side. Neal Kerr, who I don't think you've met yet, but with CI working closely with Derek Green a long time has been closely involved with a lot of -- many aspects of the business now in charge of the institutional business at CI. And you know he's really putting together what I would say a comprehensive plan on how to grow that, including getting a lot more funds added into our institutional basis.

To date, we've really only been offering a balanced fund product through Eric Bushell's group. But as it stands now we have five more funds types that are being launched into the process, and so we think that will help. Notwithstanding, we are short-listed, I think right now on about six mandates. So, what are the kit percentages on those is at 20%, 25%, who knows, but at least we've been short-listed on those.

So I think the outlook for the fourth quarter and the first quarter right now is pretty decent. We're not talking billions of dollars here. But we certainly are seeing growth and I do believe strategically we have really -- we are really laying the groundwork here to get some growth in this one to two years out.

Okay and if I could sneak in one last question. Just your thoughts on the dividend, where you are right now and prospects for dividend increases.

Oh boy, Geoff. We've certainly debated that dividend long and hard, I will say that, at the Board meeting. One of the observations is if you go back to that asset under management chart that I put up and you know if you look that we raised the dividend back in February, and at that point in time, our assets were CAD2 billion below where we are today. And so, certainly the stage has been set for a dividend increase. I think we're just being probably erring on the side of caution right now.

We've got the US election that we are right in the middle of. They still have to address that fiscal cliff at the end of the year. And we said well let's just be patient on that, but we are definitely on the cusp of where we could have increased the dividend or not, given where our assets are today. It's certainly not a cash issue. We certainly -- as Doug pointed out from a cash flow earnings perspective, we're in a good position to do it. So I don't want to put the cart before the horse here but I think if we are continue to see positive growth in our assets, then the stage is certainly set that we should be able to reward investors with a dividend increase come February.

Okay. Great, thank you.

Stephen Boland, GMP Securities.

Thanks. A couple just quick questions. I guess the first one, on the new mandates, is this in the ERPs, is this really traditional institutional business, you know, pension consultant-type driven business or is this more direct?

No, Steve. It's correct. This is expanding into the traditional Institutional business itself.

Okay. Great. And second, just on the retail flows, balanced obviously still very -- the dominant seller, have you seen any shift between balanced and pure equity funds or is balanced euro looks still going to be the main solace for the next --.

No. Stephen, the balanced income type funds are still taking the majority of the flows. Certainly we are seeing a lot more interest in the equity funds. But a lot of sales are still going into the other -- the other areas. And fortunately the equity funds have been terrific performers, especially the funds outside of Canada, if you look at the performance on some of those funds, that it would have been nice to see investors participate in the equity growth that we've seen in those funds.

But I will say a lot of the money still goes into the income-type product. And that's fine. We are participating significantly. We've got some great fund offerings in that area. So it's been good for CI. Outstanding.

Okay, thanks Steve.

(Operator Instructions)

Paul Holden, CIBC.

Just want to ask a question on the lowered health commissions at Assante. Is it really just a function of lower volumes or is there some kind of reduction in commission rates?

No. There has been no change in the commission rates, or I think you're referring to the grid, right? That's what you are referring to.

Right.

No, no change in certainly in the grid with Assante. No plans on that front. For sure. And that's just some lower volumes that we're -- we are seeing right now.

Okay. Fair enough. And in terms of us trying to keep track of potential with your assets at Scotia, is you know looking at your DSE and trailers from quarter-to-quarter a fair way to do that?

I don't think -- I will speak to it. Our asset position with Scotia is very good right now. They've been good partners and trying to be better partners. And so I can only say positive things. But if you looked at the total exposure that we would have with the Bank of Nova Scotia, it would be over CAD1 billion just to be clear. This is not a minor relationship at all. And we do business with them on a lot of fronts.

Right. I guess the point I am trying to make is you disclosed EDSE and trailers you pay directly to Scotia, so out of that CAD1 billion grows over time you would expect the DSE and trailers to grow in a fairly a similar manner.

Absolutely. But it depends on the type of mandate also. Right? Remember if we're doing a sub advisory mandates for example participating in one of their managed solutions programs, then that would come in I-class basis, and so we wouldn't be paying trailer fees. They would simply be paying sub advisory fees to us. So, that's why think it's very hard to break it out. But I certainly can tell you that the business there is positive and growing.

Okay. That's all the questions I had.

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

Thank you again. Appreciate everyone participating on it and look forward to speaking to you in the middle of February. Thank you.

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