CI Financial Corp (CIXX) 2013 Q2 法說會逐字稿

All participants, thank you for standing by. The conference is ready to begin. Good afternoon, my name is Patrick, I'll be your conference operator today. At this time, I would like to welcome everyone to the CI Financial 2013 Second-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 and/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 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 our earnings call for the second quarter. I'll start out with some of the highlights. Earnings per share of CAD0.37 were up 15.6% from the prior year. On a consecutive quarter basis, our earnings were up 5.7%.

Gross sales were CAD3.4 billion, up 68% from the prior year. Our net sales to June 30 were CAD2.1 billion. CI's average assets under management are up 14.4% year-over-year and up 3.7% from Q1 2013. And capping off, it was one of our best quarters ever was that our net debt was down 27% from a year ago, reflecting the increase in free cash flow CI is generating.

Looking at the quarter compared to Q1 in a bit more detail. Again, CI's average AUM was up almost CAD3 billion or 4%. Net income totaled CAD104 million, up CAD5.5 million or 6% from the previous quarter in 2013. Similarly, earnings per share rose 6% from CAD0.35 [per] quarter in Q1 2013 to CAD0.37 in Q2 2013.

EBITDA came in just shy of CAD190 million, up over CAD8 million or 5% from Q1 2013. As a result of the two dividend increases CI announced in the first six months of this year, our dividends paid in Q2 were CAD73.7 million, up 6% from CAD69.3 million in Q1 2013. And net debt, reflecting strong surplus cash flow, declined to CAD448 million at June 30, 2013, almost half our run rate EBITDA.

Focusing on sales for a moment. I would consider this the best sales quarter CI has ever experienced. Gross sales of CAD3.4 billion set a second quarter record for us. Net sales of almost CAD1 billion was 85% retail. This is our highest level since 2000, but the broad diversification of sales was particularly rewarding. This was evident in our retail sales increasing in all channels on a year-over-year basis.

Looking beyond June 30, I'm happy to report that sales momentum has continued. Our net sales on a year-to-date basis are now through CAD2.5 billion, again, predominantly retail. Performance of CI's money managers continues to be very good and core to our good quarter. 85% of our long-term AUM is in first or second quartile.

We launched a new innovative product called the G520 recently that we have seen great interest in within its first month. We broadened our product mix with the Lawrence Park Strategic Income Fund and the Cambridge Global Dividend Fund.

All in all, all aspects of the business are performing well for CI and we're working hard to carry the momentum through into the fall. I mentioned performance remains very good but I should point out it's also very well diversified amongst our many money managers and products as you can see from the slide that is up.

And with that, I'll turn it over to Doug Jamieson, Executive Vice President, Chief Financial Officer of CI Financial. Doug?

Thank you, Steve. Our next slide shows financial highlights comparing the second quarter of this year with the second quarter of last year. Average assets under management were up over 14% from CAD71.4 billion a year ago to CAD81.7 billion. And net income at CAD104 million was up 15% from an adjusted CAD90.1 million last year.

And recall that last year in the second quarter CI recorded CAD19.8 million non-cash deferred tax hit when the Ontario government canceled previously enacted tax rate cuts. So earnings per share was up to CAD0.37 from CAD0.32 last year, an increase of 16%.

EBITDA per share up CAD0.06 to CAD0.67, a 10% increase. And dividends paid were up 8% as CI paid out CAD68.1 million last year at a rate of CAD0.24 during the quarter and CAD73.7 million this year at a rate of CAD0.26 during the quarter.

And as Steve pointed out, net debt at CAD448 million, total debt less cash and marketable securities, has declined by over CAD166 million over the past year and at the end of June was a public debt outstanding of CAD500 million plus CAD28 million drawn on our facility, less CAD80 million of excess cash and marketable securities, and this gives CI a net debt-to-EBITDA ratio of under 0.6 to 1 and continues to gives CI financial flexibility.

CI's EBITDA margin rose to 47.7% this quarter which reflects the fact that even as CI's average management fee rate declined due to the mix of business, we continued to generate [about] 48% EBITDA profitability on each revenue dollar.

Looking at SG&A. CI's SG&A, as a percentage of assets under management and shown here in basis points, has declined significantly from last year's 39.8 basis points and as we saw from the quarterly highlights slide, CI's average AUM grew by more than 14% from last year and SG&A spend grew by less than 10. At 38 basis points, the rate of spend relative to asset growth is also down from last quarter as SG&A spending in dollar terms increased less than 2% while average assets were up 4%.

We have continued to make investments in staff training, portfolio management and developing new products as well as increasing discretionary spend on advertising, conferences and road shows and this is, as we take advantage of the momentum in financial markets and our fund performance.

Next, we have five quarters of free cash flow. Free cash jumped to CAD114 million in the second quarter this year compared to CAD105 million last year, as operating cash flow grew CAD12 million and we spent CAD3 million more on deferred sales commissions this year. Compared to last quarter, free cash flow was up CAD15 million.

And here on the return to shareholders slide at the top is the detail on that change in the free cash flow from last quarter. Last quarter CAD143 million less commissions of CAD44 million gave us CAD99 million in free cash, and this quarter we had CAD146 million of operating cash flow and CAD32 million in commissions paid.

And while that level of commissions paid at CAD32 million is up 11% from last year's second quarter, as Steve mentioned, CI's second quarter gross sales were up 68% over the second quarter of last year. This indicates that a growing proportion of sales are being done on a front-end load basis.

The next section details the amounts returned to shareholders. We have not repurchased any stock so far this year, but have increased the dividend twice from CAD0.08 per share per month at the beginning of the year to CAD0.085 announced in February and then as announced in May to the current rate of CAD0.09 per share per month. We paid out CAD74 million in dividends, up from CAD69 million last quarter. The dividend increase announced last quarter started to take effect in June.

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 as you see there at the bottom, the surplus of CAD40 million in cash along with a reduction in working capital required within the business was used to reduce net debt by CAD56 million.

And with our debt levels so low and our cash flow so strong, we feel there is still significant room for further returns of cash to shareholders through buybacks if opportunities arise and when it is prudent to increase the dividend.

I'll now turn it back to Steve.

Thank you, Doug. Just to a wrap things up, If we look at our current assets under management where they've gone since June 30, it's evident by this chart that CI has hit all time highs with assets under management. We're currently up 4% from the Q2 2013 average, which at this stage, bodes well for our Q3 results if markets continue at these levels.

Just turning to our outlook. As mentioned, with our AUM at all-time high, it's leading to a positive outlook for the second half of the year. As I mentioned earlier, our new G520 product is attracting widespread interests. We're not resting on our laurels here. We've got an intense focus on service to all sales channels going throughout the summer and scheduled for the fall period.

We currently have in the works one of our largest sales conference ever scheduled for the end of September with over a thousand advisors signed up to attend. We continue to add to investment management teams where it is prudent to ensure that we grow the management teams to reflect the increasing assets under management. And training, technology, service and value-add to advisors continue to be top priorities and key initiatives for the remainder of 2013 and going into 2014.

And with that, that concludes the formal part of our presentation and I'd like to open it up to any questions you might have. Thank you.

(Operator Instructions) John Aiken, Barclays.

Good afternoon, Steve. I know, Doug kind of alluded to it in his prepared commentary, but I mean, you've got this very good problem to have in terms of your free cash flow. AUM is rising, free cash flow metrics are increasing based on the fact that there is greater sales of front-end load funds and in terms of your debt, you've only got so far to go before you bottom out and hit the debentures. What can you be doing with all of this cash? Realistically, is there any large acquisitions potentially out there? I understand the reticence of doing share repurchases when you're trading north of five times book and also you've got the minority interest out there from Scotia, but how do you ultimately resolve this problem that may hit you either next quarter or in Q4?

I love it when you call too much cash a problem. I really like that problem. It's interesting that there are many opportunities that we're being shown right now and I think as a result it's put us in a position that we can be really picky on strategic opportunities. And what we like is that we're easily in a position to do a CAD500 million deal if we wanted to and pay for it with cash and it really wouldn't affect our metrics. In fact it would move us closer to what some might consider to be a more appropriate amount of leverage within our business.

So first of all, I would say that, but we're not in any hurry to do a transaction just to spend the money. It's got to be right, it's got to be a good fit for us and we've been very active looking for the whole year, we just haven't found something that that we think is an appropriate fit, but that could change within the next two months, three months, who does knows. I would suspect over the next year that we'll find some interesting alternative.

And if we don't, we'll find other ways to get the money back to our shareholders. We've consistently done that my entire 19-year history at CI, so I don't think we're about to change on that front.

Is there any -- has there any thought been given or is there any, I guess, institutional unwillingness to consider a special dividend?

I'm not a big fan of special dividends to be perfectly honest with you. I'm not saying they're not appropriate for certain businesses. But we like to sit down every quarter and evaluate where we're at and when it makes sense to increase the dividend then -- that reflects long-term confidence in the business.

I think just to pump the cash up on a short-term basis is sometimes can be viewed as short-term thinking and that's just not the way I like to run the business.

Great. I appreciate the comments. Thanks, Steve.

Geoff Kwan, RBC Capital Markets.

Hi, good afternoon. First question I had was just clarifying, Steve you're mentioning that the CAD2.5 billion was, is that net sales through the end of July or kind of a year-to-date number?

There has only been a couple of days since the end of July, so yes, that's at the end of July.

Okay, so the end of July. And then the comments on --.

(multiple speakers). So it's still above that level.

Right, okay. And then the comment on the AUM on the last slide, saying this was up 4%. Does that kind of imply AUM would be roughly about CAD85 billion, if I'm understanding that right, is that --?

Yes, very, very close to that, give or take a little bit. And essentially if assets didn't move at all from today until the end of the quarter, then you have a pretty good idea of what our average assets would be.

Okay. The retail net sales side, when you're taking a look at where the money is going, has that changed much, are you guys seeing better flows into equity funds and away from the bond funds?

We've never been a big bond household (inaudible) flowing a lot into bond funds. Where we're seeing more and more interest is on the global side of our funds and that certainly has been a pickup and I think that's in conjunction with global markets performing very well and the fact that our money managers have performed very well within the context of those marketplaces. We're definitely seeing a pickup in that area, Geoff.

Are there other areas or are they just more or so on the global side?

Well, we're seeing good flows into all the Cambridge products, but -- the Brandon Snow and his funds are the top performing funds in the country from what I can see. And so it's no wonder that he is getting a lot of fund flows. If we just look at the team of Alan Radlo, Brandon, Bob Swanson and just look at the assets in the Cambridge funds now, they are almost at CAD8 billion and that wasn't long ago when you and I were talking about this and it was only CAD3 billion.

This is clearly the fastest growing fund complex, [the race was going on] and they have very strong Canadian products and we definitely are seeing fund flows into that the area but also their non-Canadian products. So that's where we're also seeing good business going in there.

Okay and one last question, just a minor one, just the Assante, the [EBT] loss in the quarter, it looked like it was just essentially other expenses was up and it might have been sales and marketing, and was it just more of a one quarter issue type of thing?

Yes. That business, for most part, we managed that not to really make much money. Where we have the opportunity to spend more money, we will. And so that's pretty fine-tuning being up or down a couple hundred of thousand. When you look at -- that's on a spend of CAD14 million.

But you will recall that there was more advertising for Assante going on in that quarter. We have a lot of events that go on in the April, May, June period with respect to Assante. So I'm not going to commit to it, but I wouldn't be surprised to see that back in the other side of the ledger come this quarter, not dramatically but probably the other, other direction by CAD400,000 or CAD500,000.

Sure, okay. Thank you.

John Reucassel, BMO Capital Markets.

Thanks, Steve. Just the follow-up on John Aiken's question, just -- you're seeing many opportunities. I guess are those domestic, international, the distribution or the asset management, could you give us a flavor of what it is that you are --?

Not as many domestically. Though there are a lot of small, what I'll call, money management teams that really want to get hooked up onto CI's distribution, so these could be small groups with maybe CAD600 million or CAD700 million in assets under management or money management groups that are starting -- trying to make a goal of things and want CI to have an association like we did with Red Sky or Lawrence Park. But those are, for most part, small transactions.

Where we're seeing the greatest indicators are on the US side, but I've actively promoted that at the same time. So I've spoken to a lot of people and indicated that if there was something that was attractive to CI in kind of the price range that we want to play where it would be useful for us to get more money management expertise so we can take business to them and conversely it can give us a bit of a toehold to expand in the USA without betting the farm. I'm not that type of person.

And so there's a lot of things available, but I would say, five out of six of them don't really fit with what we're looking for. But one out of six looks pretty interesting and it takes a lot of work to decide if those types of transactions are going to work because often there's personalities and things like this involved. But that's where we're seeing the most opportunities and I would have to honestly say probably had 10 situations presented to me in the last four months.

So I know you don't bet the farm or anything but this would be taking some minority stake or majority stake and letting the people that are there continue to have an interest in the franchise?

Yes, we're pretty flexible. I look at the success we've had with Altrinsic. I know I brought this up many, many times. But our 25% interest, it started out as 50% and then we moved it down to 25% and that made sense because they brought another great partner in.

Those assets, I think, were up to CAD16 billion right now. That's a fabulous firm. It pays great dividends to CI. So that's a great example of a good investment for us where I'm not having to run that business. John Hawk who runs that business is an excellent partner. He does everything that I think I would do if I was down there. So we say, are there other opportunities like that, so in that case, we are happy to be below 50%, but we could easily be at 75% or 80% or even 100% and give people phantom equity.

We're just not interested in deals where people are cashing out and going to the beach. We're looking for people who maybe have a business with CAD10 billion or CAD20 billion in assets under management, whatever the number is, and want to double and triple that and use a lot of CI's expertise to help them get there.

Okay, great. And just on sales, you say they are well balanced. So are they up everywhere in every channel year-over-year on a gross and net basis or are you seeing particular strength in like the newer channels like Edward Jones or --?

I'll just say [collectively] they are -- as I mentioned earlier, they are up in every channel on both a gross sale and a net sale basis. Some have higher percentage increases than others, but even -- some were net redemptions and obviously now some are in positive sales, so it's hard to do a percentage increase on that.

But in every place they are up across the board. But also encouraging is they're up significantly with people who didn't do business with us before, maybe did a little business and they might have increased their business with CI four or five fold over the course of the year. So that's very rewarding for us.

Okay. You remain net flow positive in kind of the big broker IIROC channel.

Yes.

Okay, thanks Steve.

You're most welcome.

Scott Chan, Canaccord Genuity.

Hey, guys.

Hi, Scott.

Just following up on John's question, it's on distribution channels, (inaudible) nice chart after Q1, I just wanted to -- maybe you can just comment on the MFDA channel because it looked like that one was up year-over-year in Q2 and then how it did and also the Sun Life channel, are you seeing any pushback in that channel in Q2 or post Q2?

Both those channels are up year-over-year. It's hard to be up Q1 to Q2 because Q1s are a species and so that's not a relevant comparison even though I would say the relative amount of sales in Q2 compared to Q1 is unprecedented.

Usually, you can count on Q2 sales to be a fraction of Q1 because of the RSP season and ours were hardly down. And again, all the channels we dealt with, there really were not significant changes from Q1 into Q2. So again that covers all the channels, Edward Jones, Assante, Sun Life, MFDA, IIROC.

Okay. Just -- second question just on the G520 launch. It seems like a pretty exciting product and I'm assuming you're catering to the same investment clientele as the seg funds in terms of guarantees and resets are locking in gains and with the seg fund market kind of in lower demand because of the insurance requirements, do you guys have like an internal target of what this product could be in 12 to 18 months? I know you guys had very -- success in the high net worth triumph product. Have you guys set anything internal towards that?

You know you would think that we would sit down say okay, we've got to get a billion in sales in this or 500 million in sales in this. The trouble with targets is if people meet them, they just slowdown. So we just say let's do as great a job as we can on this and the cards will fall where they do.

This isn't a direct -- isn't intended as a direct competitor to the seg fund market. It's really aimed at people that are approaching, you know are five years away from retirement and experienced 2008, experienced 2009 some of the volatility in the marketplace and go, wow, this is a great product, I get security of payments over a long period of time, I've the ability to take my money out when I want. If the markets go up, I get to keep that for myself.

So I'm expressing that in a very simplistic term, but it's really designed at a different demographic and what we like about it is the people that have most of the savings today, a lot of them are in the, we'll call the 55 to 65 year age group and this isn't a product targeted at a 30-year-old. This is -- but they don't have money.

It targets people who are thinking about retirement and want to have some security of payment but like the idea of liquidity and upside. So I think that's where it is. So like anything we launch, we have high hopes for everything, but the reception so far for this product has been exceptional. We have invested a huge amount in training on this.

I've never seen our inside sales, clients, service people and wholesalers trained as they are on this product, even our money managers know it. And so I think that's a real tribute. And I look at the number of meetings that have been held in typically a pretty slow period, that's July and August. It's often hard to find anyone who is not in holidays, but our people are working five days a week and often on weekends now doing meetings on the G520.

Steve, this is going to be (inaudible) distribution channels, this product?

Yes, we've been approved for distribution in many channels already. The material channels are all there for us, and it just takes time because it's different and we only launched this if you remember in July. And it's slowly getting approved across the board and we see no reason it won't be approved across the board.

Okay. And just going back to the seg funds, and we haven't talked about in a while, is it a still a net redemption business year-to-date?

(multiple speakers) It is and I mentioned to this before, if you go back many years when you looked at what the advisors were doing, a lot of them had a high percentage of seg funds and a low percentage of mutual funds and managed assets. And now it's changed and now they are clients are buying something else.

So, it's not that people are not doing business, it's just that they've changed their focus. So there is seg fund business going on, there is no doubt about that. But it's just not as robust as it would have been in the past. And when you get those situations in there's more outflows than inflows going in.

And just the last question maybe for Doug, just on the redemption fees in the quarter, it was down 22% year-over-year and redemptions I think were flat. I know there is a higher proportion of front-end, but that just seems like a large variance. Is there something missing this quarter kind of looking at --?

No. It's just a greater proportion of our redemptions are front-end now.

Okay, thanks a lot guys.

(Operator Instructions) Paul Holden, CIBC.

Thanks, good afternoon.

Hey, Paul.

First question. So you didn't have a lot of institutional AUM funded in Q2. Does that imply that we should expect more to fund in Q3?

I don't think this is an overwhelming amount. We've never said that this is going to be a short-term multi-billion dollar category for us, but I definitely expect it to be positive in Q3 and depending on where they are in some of the shortlists Q4, Q4 is [a while to look out] but I'm pretty optimistic on Q3 right now that it will be a positive contribution for us.

Okay, positive, but a small positive.

I think the key thing there Paul is we're really laying the ground work and Neil Kerr, President of our Institutional Business has spent a tremendous amount of time really getting other types of products reviewed by the consultants to get on the shelf and that's a two, three-year process, but that is all happening, and so when I look out two years from now, I think we're going to be really well positioned in two years, but today our predominant product is a balanced product out of the Signature area, which has done very well, but we definitely have to broaden that product line if we're going to go anywhere and both Cambridge and Signature are now providing products into that area. So I'm optimistic on that as we go forward. We really should revisit that probably in detail six months from now and say okay, how does it look.

Got it. And then change in asset mix that you referred to, that's kind of impacted the average fee. Does that just mean more products sold through like the Class I and Class S?

Actually it was interesting. In the last quarter we saw an uptick in products sold through Class A. So from a, I guess, from a margin perspective, our topline was pretty good in the last quarter, but we continue to be successful in doing things in the Class I area just because we do a bunch of high net worth products, so we can get it into that area. But the big adjustment we had before was last year when we landed a big institutional account that all funded fairly rapidly near the end of last year and the first part of this year.

Okay. So as we look forward quarter over quarters, we should expect the average management fee to expand from here?

I think expand is a tough one because [that was] depending on the what the markets do, right? If equity markets continue to outperform that has a positive impact, but I can't predict that for you.

Okay, fair enough. And then in terms of marketing spend and SG&A, just in general, I guess is this quarter a good one in terms of the go-forward run-rate, we are going to continue to expect you to spend more on marketing through the remainder of the year?

Last time I answered this question everyone panicked and thought we're going to blow our brains out on spending. We have a busy fall from a sales and marketing perspective. We've got advertising campaigns that will continue to do, but we have done those in the summer, got our big conference that I mentioned.

So my guess would be in absolute dollars, our overall spend will be up but in basis points I suspect it -- it'd be hard for us to believe that maybe it goes up 0.5 basis point from 38, but we're not talking material change here at all.

I mean, we're benefiting from increased assets under management and we're trying to use that to the best of our advantage right now. So I'm not trying to skimp on anything right now. We think we've got a competitive advantage. And we're going to do it, we can do to build our business right now but all within kind of the CI framework if I could put it that way that we watch things pretty closely.

Okay. Thanks Steve.

You're welcome.

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

Just want to say thank you for attending our conference call. Thursday in the first week of August is always a tough time, I know people are in holiday. So, enjoy the rest of the summer. I look forward to speaking to you in November. Thank you very much.

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