CI Financial Corp (CIXX) 2013 Q1 法說會逐字稿

Good afternoon. My name is Marcus, and I will be the agent assisting you on the conference today. At this time, I would like to welcome everyone to the CI Financial 2013 First Quarter Results Conference Call and webcast. (Operator Instructions.) This presentation contains forward-looking statements concerning anticipated future events, results, circumstances, performance, or expectations with respects to CI and its product 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 the expectations, please refer to management's discussions 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's belief that most shareholders, creditors, or 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 discussions and analysis available 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.

Good afternoon, and thank you for joining Doug and me for CI's conference call for our Q1 2013 results.

It was a very good quarter, and it set the stage for an equally good second quarter, given our strong sales and asset growth. Looking first at a few of the highlights, EPS for the quarter were CAD0.35 per share, up 6.1% in 2012. Gross sales were CAD3.8 billion for the quarter, up 44% year-over-year. Net sales were CAD1.1 billion, up 615% year-over-year. And I'll add that sales strength continues to be strong on the retail side of the business.

CI's average assets under management were up 6% from Q4 and 9.1% on a year-over-year basis. And net debt was down 22% from Q1 2012, and is now [about] two-thirds of our run rate EBITDA.

Looking specifically to the quarter, CI's average assets under management were CAD78.8 billion, up CAD4.4 billion from the Q4 2012 average. Our AUM today is CAD82 billion, up another CAD3.2 billion from the Q1 average. Net income just about hit the CAD100 million mark at CAD98.5 million.

EPS, as I mentioned, were CAD0.35, up 3% on consecutive quarters. EBITDA was CAD181.4 million, or CAD0.64 per share. CI paid dividends of CAD69.3 million, up from the prior quarter as a result of the dividend increase we declared at our February Board meeting. And lastly, net debt was CAD504 million, down CAD23 million from the prior quarter.

As I mentioned earlier, our gross sales were CAD3.8 billion for the quarter, up 44% from the prior year. This represents our highest first quarter gross sales since the year 2000. Net sales for the quarter were CAD1.1 billion, 100% of which was retail, as we had a small institutional redemption during the quarter. Net sales were up 615% from the prior year. This is our best net sales quarter in seven years, but, most importantly, we had net sales improvement, including positive net sales, in every retail channel CI participates in.

The positive sales continued into April and May. We had our best April net sales since the year 2000. We currently have exceeded CAD1.6 billion in retail net sales on a year-to-date basis. I won't attribute our sales success to any one specific reason other than to say all aspects of CI's business are performing well and reflect many years of hard work and good fund performance to get these results.

Turning to fund performance, you can see that CI continues to perform very well across many fund families and fund types. Equally important, as investors begin to look more closely at global equities, you can see CI is well positioned through a number of our money management teams to participate actively in that area.

I'll now turn it over to Doug Jamieson, CI's CFO. Doug?

Thank you, Steve. Our next slide has financial highlights comparing the first quarter this year with the first quarter of last year. Average assets under management were up over 9% from CAD72.3 billion a year ago to CAD78.8 billion this quarter. net income at CAD98.5 million was up 4% from CAD94.6 million last year, and EPS was up to CAD0.35 from CAD0.33 last year, an increase of 6%.

EBITDA per share was up CAD0.02 to CAD0.64, a 3% increase, and dividends paid were up 6%. And CI paid out CAD65.2 million last year at a rate of CAD0.23 during the quarter, and CAD69.3 million this year at a rate of CAD0.245.

As Steve mentioned, net debt down to CAD504 million is total debt less cash and marketable securities not required for regulatory working capital. And this has declined by CAD140 million over the past year. The CAD504 million represents gross public debt of CAD500 million plus CAD92 million drawn on our CAD250 million facility. That's CAD88 million of excess cash and marketable securities. This gives CI a debt to EBITDA ratio of under .7 to one, which continues to provide significant financial flexibility.

CI's EBITDA margin dipped below 48% this quarter, and this is a fairly small decline, which reflects the fact that even as top line management fees as a percentage of AUM declined due to the mix of business, we are generally holding the line on the overall profitability of each revenue dollar. But, it also highlights one of the flaws of relying entirely on EBITDA as an earnings measure. As our business continues to shift towards more front-end business, this margin will decline, all else being equal, because we pay a higher trailer fee on front-end products.

However, looking at net income, front-end business is actually more profitable to CI because we don't pay the 5% commission at the time of purchase that then gets amortized over seven years.

CI's SG&A as a percentage of assets under management and shown here in basis points, has declined from last year. As we saw from the quarterly highlight slides, CI's average AUM grew by more than 9% from last year, and SG&A spend grew by 5.5%.

At 39.2 basis points, the rate of spend is flat versus the fourth quarter, even though assets increased 6% and spending only increased 4% in dollar terms. However, this quarter has two fewer days, and that is 2.2% hit to this ratio.

The 4% increase in SG&A in dollar terms is a big one-quarter increase for CI, but we have increased discretionary spend on advertising, conferences and road shows as we take advantage of the momentum in financial markets and our fund performance. And we don't foresee any significant increases in SG&A spend for the balance of the year.

Next, we have the last five quarters of free cash flow. Free cash was down from CAD110 million last quarter as operating cash flow grew, but we spent more on deferred sales commissions. Compared to last year's first quarter, free cash flow was fairly flat as both operating cash flow and the spend on DSC were up CAD3 million. And typically, the first quarter has the highest DSC spend, and we can see that those quarters are the low points at each end of the chart.

And here in the first part of the table is the detail on the free cash flow. Last quarter's operating cash flow of CAD139 million, less commissions of CAD29 million, gave us free cash of CAD110 million, and this quarter we had CAD143 million of operating cash flow but paid out CAD44 million of commissions. And while that level of commission spend is up 7% from last year's [RFP] season, as Steve mentioned, CI's first quarter gross sales were up 44% over the first quarter last year, indicating that a growing proportion of sales are being done front-end load.

The next section details the amounts returned to shareholders as share buyback and dividends. Little surprise here, with our share price up over CAD3 during the first quarter that we did not repurchase any stock, whereas last quarter we bought back CAD6 million worth. We paid CAD69 million in dividends, up from CAD68 million last quarter as the dividend increase announced last quarter started to take effect in March. And you see there at the bottom the CAD30 million of net surplus was used to reduce net debt by CAD23 million.

The growth in our income and cash flow, as supported by the growth in our AUM, allowed us to increase CI's monthly dividend once again to CAD0.09 per share per month, up from CAD0.085 per share per month. Our forecast payout ratios are well within historical levels as we look at our up-to-date forecast for the remainder of the year for net income and cash flow. And with our net debt levels so low and our cash flow so strong, we feel that there is still significant flexibility for further returns to our shareholders.

And here on slide 12 we have the annual dividends paid over the last five years, growing from CAD167 million in CI's first year after converting back to a corporate structure to an estimated CAD296 million in 2013 based on the new monthly dividend rate. And this is an annual average growth rate of 15%.

I will now turn it back to Steve.

Thank you, Doug, sure everyone appreciates that dividend increase you gave us.

Our current assets under management, as I mentioned, are now CAD82 billion, up 4% from the Q1 average. What's interesting is, if we go back a year, our assets were actually just under CAD70 billion, which is CAD12 billion below today's level. The increase in assets, and in turn profitability, has led to CI's increasing cash flows and our increased dividend.

As we look out to the foreseeable future, the positives I see are the increases in equity-oriented investments that are occurring, especially on the global side. Though we invested a lot in our people, service to our clients, and branding in the first quarter, we did so keeping our expenses in line. And I anticipate a slight decline in expenses and basis points in Q2 as we take advantage of higher assets levels and some of the expenses, as Doug pointed out, were not one-time in nature but naturally just bumped us up to a slightly higher level on a one-time basis.

Notwithstanding the fact that basis point expenses might come down slightly, we are continuing our intense focus on all aspects of service to all our distribution channels to see where we can value-add. We will continue to add to all our investment management teams to keep our competitive advantages that we have. And lastly, training, technology and service will continue to be key initiatives in 2013.

That concludes my formal presentation. But, before I take questions, I just want to remind you that our annual meeting will be held on the afternoon of Thursday, June 13, at our offices at 15 York Street. That's right about Real Sports Bar for those of you who are more familiar with that institution. It will be followed by a reception on our ninth floor patio, similar to last year, where I will have CI's Management team and Board of Directors present to be able to answer questions you might have about our business at that time.

And with that, I'd like to say thank you once again and open it to any questions you might have.

John Aiken.

Good afternoon, start off with a question for Doug. Doug, we're taking a look at the strong cash flow that you pointed out, and with the expectations that Q2 through Q4 are going to be a little bit stronger because it doesn't have the RFP season, but also the dynamics that we're seeing, greater front-end load sales. With your debt ratio, EBITDA to debt now well below .7 and continuing to grind down, do we see an end to this, or is this just you're going to continue to repay debt with the cash flow and lower your leverage?

Well, absent being able to repurchase any significant amount of stock, we're generating so much cash that that's what we see, going forward, is net debt coming down. But, we'd like to see a chance to buy back more stock, otherwise, like I said, CAD100 million plus of free cash every quarter, and we pay out dividend of around CAD70 million, it leaves CAD30 million to either pay down debt or buy back stock.

Well, Doug, if you want a cheaper share price, you should stop increasing your dividend. And Steve, I guess more of a philosophical question for you. I mean, I understand the benefit of the asset administration business for CI, but is there any level of assets under admin where that facet of the operations actually gets materially above break-even, or is this something that is just going to trundle along at break-even for the foreseeable future?

I'd say our philosophy with the Assante business is that we look to reinvest as much into that business as we can. And yes, we could make that more profitable if we wanted to, but I think it'd be at the detriment of long-term growth to that business. So, if you take the first quarter, for example, and you would have noticed that expenses jumped up in that business, it's because we spent a lot on branding on the Assante side of the business. And through a lot of the meetings that I personally have with the Assante Advisors, national councils, et cetera, the whole branding side's very important to them. And we take a long-term approach in this, that we want to see this business continue to grow and flourish. And if you're just trying to maximize every penny out of that channel, then you certainly can't do that.

So, I'd like to say that we could see it being more, but my goal right now is to reinvest as much in the Assante business as we can, so I don't ever see that contributing a lot. Now, notwithstanding, where we are rewarded is the fact that a lot of the Assante Advisors are very supportive of CI, and this whole home field advantage that we've talked about is where you hope to participate on that side. And we've been very successful in that area of kind of increasing that partnership with the Assante Advisors, and part of that partnership means that we take the money that we'd make on that business and reinvest it into the business for them and technology, branding, things like that.

Great. Thanks, guys.

Geoff Kwan.

Hi, good afternoon. First question I had was just the management fee as a percentage of average assets. I think you guys kind of touched on it before. Just in the quarter, I think it was down about a basis point and a half, and I know that there's been recent quarters that you've had that happen. But, was the decline quarter-over-quarter because of the mix, whether or not it's retail versus institutional, or just bonds versus equity?

There's primarily retail versus institutional. In the fourth quarter, we had some institutional money come in partway through the quarter, and so that was fully weighted in the first quarter and dropped the average fee down a little.

Okay. And then, in terms of on the institutional pipeline, can you kind of talk about where it stands today in terms of RFPs, or just broadly speaking?

Yes, Geoff, I can. We're, I think, in about six finals right now we're looking at. We have some business that we've won that we'll fund in the second quarter, so that'll be positive for us from a business perspective. So, I don't see this as being a year we're going to knock the ball out of the park, but I certainly see net positive sales on the institutional side for this business.

I would say, more positively, and at some point in time I should introduce you to [Neil Kirk], who heads up that whole business for us, is that we're getting a lot more products on the shelf between the Cambridge team and the Signature team, and we ultimately think that's what will lead to a lot of growth in that business for us.

Okay. And then, last question I had is, obviously on the retail side, you've been doing quite well in the net sales. Where do you see the opportunities to further improve your net sales momentum from where you are right now? Maybe just talk about specific distribution channels or products that you think might resonate with investors.

Well, we're working on some interesting products right now that I'm really not at liberty to talk about, but hopefully they'll come to fruition in the next five or six months, and I think will be a very interesting product for the marketplace if we're able to bring that out.

But, I would say where we are, Geoff, is we look at every distribution channel. And the advantage that we bring is that, unlike our competitors that don't have any relationship to distribution, because we do, I feel, at the end of the day, we have a much better understanding of how you value-add to advisors, what are the things they're looking for. And I can go through five or six different channels and say where those opportunities are appropriate. So, I think you can just go down a list of every place that managed money is distributed, and we're probably trying to improve our access into those areas.

Okay, thank you.

(Operator Instructions.) Paul Holden.

Thanks, good afternoon. First question I want to ask was on the shift in mix in terms of the load structure on the fund, so, as Doug pointed out, much more front-end loaded funds being sold versus DSC, wondering what's kind of driving that.

Well, I can answer that question for you. It's just the advisors' businesses have changed. They're less inclined to do DSC business. If you go back into the '90s, the vast majority of the business was done on a DSC basis. But now, advisors are much more inclined to go basically no-load, which it is. I mean, there was a term called low-load, but they're going in no-load and just having kind of a recurring fee after the fact. And that seems to be increasingly popular in a lot of the channels we're dealing with so that the percentage of DSC business we do is significantly declining.

And if I looked out two or three years from now, I suspect it'll be a small fraction of our business at that point in time.

Okay, so it's really -- it's a matter of shifting from DSC to really low-load versus front-load?

Yes. I mean, we don't see a lot going into low load, to be perfectly honest with you. Even the low load business doesn't see -- it's a small percentage of what we would do. And the trend's been going on like this for 12 years now. It's just people are noticing it much more because the predominant amount of our business is not on a DSC basis anymore, whereas, back in the '90s, we had a time when 85% of our business was on a deferred low basis.

Right. All right. Well, like I said, looking kind of shorter-term, because the gross sales were up 44% year-over-year while DSC commissions were only up 8%, seems like even within the last year there's been a significant shift.

Next question would be on the new on the character conversion transactions, so I see you've stopped net new sales into some of those funds. Wondering what your ability is to replace that as a -- those products as a source of net sales.

Well, if you want more insight into what we do, we could spend 20 minutes on the whole plan we had when we launched it. You might recall, Paul, that we weren't the first to come out of the gate and respond to what was going on, because there was not a very clear picture coming out of revenue Canada on this whole thing. We took our time. And by the time we announced what we were doing, I'd say what differentiated us from our competitors, that we had a very clear picture and understanding of what our advisors could do.

So, whether you called into Client Service, Inside Sales or the Wholesalers, you immediately knew what your other alternatives were. And we also ensured that we had similar products, just not character conversion products, available right there and then. And to be perfectly honest with you, we didn't even see a change in sales, so we haven't experienced any change. And the alternative funds that we've offered are just as popular as the other ones were. So, that was unfortunate that that change occurred, because I think it hurts a lot of the retirees and people like this that -- we're just trying to squeeze a few more basis points out of their retirements -- funds.

But, that's a separate issue. The bottom line is we had alternative products. And at the end of the day, when you take the cost of the forward out and add into the yield, probably the net effect isn't as big as most people might think it was going to be. So, we took what was potentially a negative and I think turned it into a positive through our channels.

All right. And then, final question is with respect to the disclosure on trailer fees, seems like that's going to have a bigger impact on Assante versus your fund manufacturing platform. So, maybe you can talk a little bit about that from Assante's perspective, particularly with respect to the potential for increased costs if you have to start providing clients with additional information.

Well, first, I'll -- [just to] deal with the last one, it's not going to be an additional cost to us to change the reporting. That's just annual reporting, and it's programming. We're changing forms all the time. So, I wouldn't worry about that aspect of it.

The other one, what you're referring to is the trailer piece. And probably recall from any of the meetings that I've had with you, I've always talked about the key thing at Assante is all the services we provide in addition to asset management, whether it be estate planning, wealth planning, legal advice, tax advice. So, a client of Assante gets a very holistic approach to their wealth management, so we've never had issues on the Assante side about fees, because the whole premise of the Assante business is that it's not out there flogging funds. They're trying to provide a whole level of service.

I do think it'll lead to consolidation in the industry. I think a lot of the smaller business that don't have the resources like we would at Assante to provide all these other wealth planning activities will suffer accordingly. And if you go back to the question that was asked just a while ago, do we anticipate the Assante business all of a sudden making lots of money as the assets grow on the distribution side, I would say no. And that's because we're taking that money and reinvesting it to pay for lawyers, accountants, people like that, so that we provide -- [better off].

So, we're not worried about it at all. Steve Donald heads up our Assante business. It's clearly, I would say, the industry leader in educating people right now on preparing for the changes in the fee disclosures. And we've spent a lot of time with the Assante channel, starting last year on how to prepare for that. So, I'm 100% comfortable, and the net result that it actually could lead to a strengthening of the Assante position at the end of the day as this is introduced over the next three years.

So, as some of these smaller financial planning firms struggle with the increase requirement for disclosure, would you be interested in buying those smaller financial planning networks?

I'm always interested in buying things. You know me. But, it has to be at a reasonable price. But, what we are seeing is a lot more advisors wanting to join Assante. And it's not a flood of advisors going into Assante, but I would say, over the last three years, we're continuing now to see a pickup of people interested in joining the Assante business. And Steve Donald's team are pretty picky who they want to come into that business, but we are getting -- we are doing net adds into that business all the time now. And I think that's just really a reflection of what's going on as people want to go forward. But, absolutely, I would look at, where it makes sense, to pick up smaller firms.

Okay, that's great. Thanks, Steve.

You're welcome.

Scott Chan.

Oh, good afternoon, guys. Just on the retail flows, the CAD1.6 billion net year-to-date, can you just give us kind of a breakdown of which asset classes are people buying? Have you seen any different trend? I think you mentioned global before. And is there any specific [PM] groups that are just chiming? I'm assuming Cambridge and Signature are getting the majority of the net sales year-to-date. Is that a fair assumption?

That's a fair assumption, yes, that they would be. I mean, the Signature group continues to be very strong perspective of some of the balanced product and things like this that they have. But also, we're seeing increased interest with Black Creek, so we're seeing pickups. Their assets are over CAD1 billion now. But, Cambridge certainly has done very well. They're at about CAD6.2 billion in assets right now, so that's double from a year ago.

But, on the margin, we're starting to see a big shift in what products are being bought across the board, and a lot more equity-type products.

Thanks. And can you give us an update just on the class (inaudible) class (inaudible) business? I know in Q4 the class-side business was pretty strong -- oh, I'm sorry, was that Q3? Has there been any traction there in any of those segments?

Well, that was what -- I think what Geoff Kwan was asking me about, that we're starting to see slow improvements in the institutional area, that, like, we call the true institutional business. We're going to fund a mandate in Q2. Last year was a good year. Don't forget that we brought a huge mandate in, and that's what Doug talked a little bit, came in in Q4, which is why I pushed [down on] that top line margin in Q1.

But, we're starting to see -- I don't suspect we'll get big mandates like that again because those are few and far between, but we are starting to see a lot more finals that we're getting into. So, if we can walk away from this year with [three or four CAD100 million] in institutional businesses, I'm going to call that a win.

Okay. Just my final question, just going back to Geoff's question on average fees, general trend's been down quarter over quarter. But, just based on current trends with equity markets higher, more than net sales going to the higher margin retail product, are we going to start to see maybe a stabilization in average fees, or should we expect still a slight downward based on the asset mixed with fixed income and potentially the institutional stuff, too?

I'm going to go out on a limb here, based on what Doug told me earlier today, and -- but we think Q1 to Q2 should be flat.

Flat? Okay.

Because we don't have new institutional business coming in, and so then we have the benefit of more investments into equity funds that have gone in, and rising equity markets. So, when you go through the whole mechanics of how that whole thing is calculated, then we suspect this could be flat, maybe even potentially slightly positive increase this quarter. It takes a lot to move the needle when you have CAD82 billion in assets. If we went through that sensitivity today, and for the sake of the Board so they understood it better, it's not something that's going to swing five basis points on you in one quarter. That's pretty well impossible to achieve. But, we do see a slight improvement on it.

Okay, that's what I figured. Thanks a lot, guys.

You're welcome.

John Reucassel.

Steve?

Yes, John?

Just with -- it doesn't look like there's a lot of acquisitions out there, and not buying back stock, so you've been raising the [divvy]. Is there a payout ratio that you have a hard stop on or that you're not comfortable with, or have you ever had that discussion with the Board?

No, I don't think we -- we look at the circumstances surrounding the business every time we evaluate the dividend, and I think where we are today is at the higher end of where we probably might be. But, it's not as high as I concern myself with. I mean, I could easily see us being two or three percentage points higher than where we are today. I wouldn't bat an eye at it.

And I look at the dividend increase today. There was just no sense in saying, well, let's wait another three months to do it. It wasn't going to accomplish anything. We'd already reached our asset targets with respect to -- and profitability targets with respect to a dividend increase. So, now we'll just see how things play out.

And a lot of it ties back to what -- as Doug mentioned, what do we do with the capital? And you're right, there are not a lot of acquisitions out there, and maybe that changes. The one thing about our business is, whatever we think it is today, it's going to change within three months. And maybe there's some good opportunities. Maybe we end up seeing a small investment manager in the US that we want to pick up, similar to when we helped John Hock start the Altrinsic business, and maybe that cost us CAD25 million or CAD30 million. I'm just pulling a number out of the air.

So, I think a lot of things can change. The only thing I don't like from the dividend, I don't like it to get too high, because then you don't want to be restricted by having too high a dividend policy with the Company, because you never want to be in a position that you want to reduce it, so you just want to slowly increase it, consistent with profitability growth. I think that's where we are right now.

Thank you. We have no further question registered on the telephone lines at this time. Please go ahead, Mr. MacPhail.

With that, I'd like to say thank you very much for coming to our -- or listening in on our Q1 conference call, and I look forward to either seeing you at the Annual Meeting or, in early August, we'll be releasing our second quarter results. Thank you very much, and have a good night.

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