CI Financial Corp (CIXX) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2015 First Quarter Results webcast. All lines are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Please take note of the cautionary language regarding forward-looking statements and non-IFRS measures on the second page of the presentation. I would now like to turn the meeting over to Mr. Steve MacPhail, President and CEO of CI Financial. Mr. MacPhail, please go ahead.

Thank you. Welcome to CI's earnings call for the quarter ended March 31, 2015. With me today are my colleagues Doug Jamieson, Executive Vice President and Chief Financial Officer; Derek Green, President, CI Investments; Stephen Donald, President, Assante Wealth Management.

CI share price continues to perform well, especially year-to-date, reflecting the continued growth in our business. We've maintained our position as one of the best performing stocks since 1994 and have been in the Top 10 for the past 16 years now. Looking at some of the highlights from the first quarter. I'm pleased to report that CI earned CAD0.51 per share, up 19% on a year-over-year basis. Our average assets under management for the first quarter were up 14% from the prior year and up 5% from the immediately prior quarter. Assets at Assante and Stonegate Private Counsel are now CAD34 billion.

Our net sales for Q1 were CAD1.2 billion, behind we did in 2014, but I will mention that we had a great April, and we currently have year-to-date net sales in line with 2014 at CAD2 billion. Our net debt was down 37% from the prior year. Putting CI in a very low debt position and most importantly, we increased our dividend to CAD0.11 per share per month representing the sixth dividend increase since the first quarter of 2013.

And with that let me turn it over to Derek Green, President of CI Investments. Derek?

Thanks, Steve. As Steve mentioned, we have had a very good start to this year. First quarter's gross sales were CAD4.5 billion, up 2% versus the same period in 2014. Net sales came in at CAD1.2 billion, down from 2014 and year-to-date net sales, are CAD2 billion, which is right in line with where they were in 2014. Since 1994, CI's chief positive net sales in 88% of all quarters. Now, this is an unrivaled statistics in the industry and it's something we are very, very proud of. We continue to deliver strong performance, 70% of our assets are in first or second quartile over 10 years, 73% of our managed solutions, are first or second quartile over 10 years and we continue to build on our brand awareness and to deliver premier advisor education events. Following slide is a slide that Steve showed you before and it's been recently update. This is what I would consider one of our biggest competitive advantages.

In 2014, we held three major conferences, we had over 1,000 advisor events and road shows and training sessions. And if you look at the number of one-on-one meetings, branch meetings and group meetings, conference calls, that number comes in at over 30,000. So there's a really a huge opportunity of touch points with our the clients. And then finally regulatory reform is something that we spend a ton of time and a ton of money on. We've done 109 events. So this time, I'd like to pass the conference call over to my colleague, Steve Donald.

Thanks, Derek. I will take a few minutes to update you on our advisory business, Assante Wealth Management and Stonegate Private Counsel. The success of 2014 continued through the first quarter, our assets have reached CAD34 billion, up 13% from Q1 of 2014 and up 6% over this current quarter. We have also had strong inflows through the quarter, both on an absolute basis and on a relative basis. According IFIC, industry mutual fund flows for the first quarter, the RSP season, were up 10% to CAD26.3 billion. We use industry fund flows as a proxy for the flows managed by the distribution companies. And at is Assante, our sales have increased 17% on a year-over-year basis. So we're happy with our absolute sales and our growth rate relative to the broader industry. I attribute this growing sales trend to an increasing proportion of our business coming from the high net worth market. We've seen a significant increase in the very large accounts moving to Assante and to Stonegate. These clients are looking for a more robust or complete wealth management offering.

Our scale has allowed us to continue to invest in our business to further set us apart in terms of execution on the service promise. Three primary areas where we're investing in our business right now are wealth planning support, key to dealing with the increasingly complex needs of our clients, technology, significant investments are required here to deal with the continually evolving regulatory demands of our business. But technology also drives efficiency gains into our advisors practices and probably most importantly enhances the security of our clients' information. And thirdly branding, changes in our profession are going to put a lot of money into motion. And we feel that it's critical that our clients and potential clients have an awareness of Assante and of Stonegate, who we are and what we stand for, to make it as easy as possible for clients and for advisors to join Assante.

The last thing I'll touch on is the status of regulatory change. There really aren't a lot of developments to report since our last call. We're waiting on the CSA report on best interest in mutual fund fees anticipated sometime this year, and that will give us a stronger sense of the direction regulation is going to take. We believe that we've been successful in positioning our advisors for potential change and even if a broader change is delayed, their practices will be stronger and they will grow at an accelerated pace as the outcomes of CRM-2 are absorbed into the market over the next few years. Bottom line, we're neutral to positive, probably more leaning to positive on the impact of current and potential regulatory change.

So in summary, we've had a great start to the year at Stonegate and Assante. And we feel that we're very well positioned to continue our momentum as the landscape unfolds moving forward.

With that, I'll now hand the call over to Doug to review our financial results.

Thank you, Steve. This slide of financial highlights compares the first quarter of this year with the first quarter of last year. The average assets were up 14% from CAD93.5 billion a year ago, to CAD106.5 billion. Next, net income was CAD144.5 million, and that was up 19% from CAD121.7 million last year, and on a per share basis was CAD0.51, up from CAD0.43 and that's an increase of 19%. These numbers include CAD7.5 million fair value adjustment to the contingent consideration related to the purchase of merit. We had initially provided for CAD12.5 million at the time of purchase, and that balance has now been written down to zero. We also accelerated the amortization of certain merit management contracts by CAD3 million and took CAD4 million legal provision in the quarter. Adjusting for these three items, net income was CAD141.4 million or CAD0.50 per share and that is up 16% from last year's first quarter. EBITDA per share was up CAD0.09 to CAD0.84, 12% increase. Dividends paid were up 9%. CI paid CAD81.3 million last year at a rate of CAD0.285 for that quarter and CAD88.9 million in the first quarter this year at a rate of CAD0.315.

As Steve mentioned, long-term debt declined from approximately CAD500 million last year to CAD312 million this year and net debt has declined CAD123 million from CAD334 million to less than CAD211 million. That's calculated as the gross public debt outstanding of CAD300 million plus CAD12 million drawn on a credit facility, less just over CAD100 million of excess cash and marketable securities. This gives CI a net debt-to-EBITDA ratio of 0.2:1, and that continues to provide CI with substantial financial flexibility.

Now, we can take a quick look at quarter-over-quarter highlights. Average AUM was up 5% to CAD106.5 billion and net income was up 3% from CAD140.4 million to CAD144.5 million and the CAD0.51 of earnings per share was up 2%. Now adjusting for the three items mentioned earlier brings net income this quarter to CAD141.4 million or CAD0.50 versus CAD135.4 million in the prior quarter and that's an increase of 4%. And if the first quarter contained two more days to match the fourth quarter, then earnings growth would have been higher than the change in average AUM. EBITDA grew from CAD230 million to CAD235.4 million, an increase from CAD0.83 per share to CAD0.84. And the dividends paid of CAD88.9 million was an increase of 3% from CAD86.3 million last quarter.

CI's EBITDA margin has held steady at above 40% over the past several quarters, which reflects that even as CI's average management fee rate has declined with the mix of business, we generate approximately CAD0.48 of EBITDA on each revenue dollar. CI's asset management margin measures how much we retain out of management fees after paying trailers SG&A in DSE on a trailing 12-month basis. And this is within the asset management segment. This year we are left with over CAD42 of every CAD100 in management fees earned, up from about CAD40 one year ago. This measured eliminates the financing impact of front-end versus back-end funds, since we have already deducted trailers and DSE, and it also eliminates the distortion of equity and fixed income mix changes. And retail and institutional mix changes because it is measured as a percentage of management fees and not AUM.

CI's SG&A calculated as a percentage of assets under management, and we are showing it here in annualized basis points, has declined from the first quarter of last year. We saw on the quarterly highlights slide that CI's average AUM grew by 14% from last year. While at the same time, SG&A spend grew by less than 9%. So we see the drop from 36.3 basis points to 34.6 basis points year-over-year. The basis point increase from last quarter, primarily relates to there being two fewer days this quarter as average assets increased more than the increase in spending at 5%, whereas SG&A spend increased 4%. Spending can be a little front-end loaded for the year, so we expect SG&A to increase by much smaller amounts, if at all over the remaining quarters of this year.

The SG&A efficiency margin measured on a trailing 12-month basis within the asset management segment looks at an available pool of management fees, less trailer fees and DSC and how much of that pool remains after deducting SG&A spend. In past 12 months, CI has retained 71.8% of that available pool, up from 69.6% one year earlier. Put another way, CI spends less than 30% of the amount available after paying trailer fees and DSC out of management fees. Next, we have five quarters of free cash flow and we see a slight drop in free cash flow to CAD143 million from last quarter and an increase of CAD20 million from the first quarter last year. Note that the first quarter is typically a low point, because of the increased spend on DSC during RSP season. So the better comparison is the year-over-year growth of 16% or CAD20 million. This year-over-year increase is a result of operating cash flow growing by more than CAD10 million and we spent CAD10 million less on deferred sales commissions this year as the trend away from deferred load sales is continuing. And here in the first part of the table, we have some details on the level of free cash flow for last quarter and this quarter. Operating cash flow growing from CAD172 million to CAD175 million, less commissions of CAD24 million and CAD32 million provides CAD148 million of free cash flow last quarter and CAD143 million this quarter.

The next section details the amounts returned to shareholders. We repurchased CAD38 million in stock in the fourth quarter and another CAD47 million this quarter and increased the dividends paid CAD89 million, up from CAD86 million last quarter. And now, CI's run rate quarterly dividend payout is CAD93 million with increase announced today. CI is returning the majority of its free cash to shareholders and we are very comfortable with this level of dividend payout and targeting buying back at least a million shares each quarter at this valuation level.

CI's return on equity hit 29% this quarter and is another indicator of the strong performance of CI. This return has grown over the past year from 25% as CI leverages the growth in its AUM to earnings growth and eliminate need for additional capital to support that growth. In this chart, CI's annual dividends paid since 2009 shows a compounded annual growth rate of 14% to our forecast for this year.

I'll now turn it back to Steve.

Thank you, Doug. Just starting out with -- looking at our dividend chart, moving on to the assets under management. What you can see is, we finished Q1 with our assets under management up almost 3% from the Q1 average. And our average AUM in the second quarter is now also up 3% which sets the stage for our dividend increase but will also makes us optimistic about Q2 at this point in time.

I'll now address the notice of assessment we reported, having recently received. First, the period to which it applies is based on the two and half years when CI was an income trust, in 2006 to 2008. CI and our expert advisors, which includes our external auditors, legal counsel and valuators, all agree that CRA position is without merit. We've already filed our notice of objection, and we'll vigorously defend this matter. We've not taken a provision in respect to this matter, other than for legal expenses should we need to improve them. Again, this is based on our view that the CRA position is without merit. Here's a bit of the background. As I mentioned, the reassessment applies to a period when CI was an income trust. You might recall that CI was one of the largest and last companies to convert to be an income trust. CI adopted exactly the same structure as over 100 other public entities before it. There was nothing unique to what we did. As you know, CI is not a company to take rest. And as such, we obtained an advance tax ruling from CRA with respect to our structure.

Furthermore, Bill Holland had a meeting specifically on income trusts with then Deputy Minister of Finance, Mark Carney, to gain assurances that they were happy with the income trust structures in Canada. When creating our income structure, we used expert evaluator, one of the most reputable law firms in Canada, and others experienced in income trust conversions to guide us.

Needless to say, we and everyone involved was stunned that CRA has reassessed CI. We are not aware of any of the other hundreds of income trusts being reassessed in this matter, including ones almost exactly like CI. In fact, we know some of them have been reviewed, or most of them have been reviewed without any reassessment and are actually now statute barred from further review. We are hopeful that the entire issue gets vacated at appeals, but to be clear, we're 100% committed to resolving this issue in tax court, if required. And lastly, although the whole issue is, as one analyst put it to me earlier today, an annoyance, it will not impact CI's dividend or share buyback policies.

So to wrap up on a positive note, CI's AUM in Q2, is up 3% from our Q1 average, giving CI a positive start to the quarter and facilitating our dividend increase. Strategically, we continue focusing on growing CI's AUM to CAD150 billion and our Assante business to CAD50 billion. As I mentioned, we are confident we will successfully resolve the CRA issue. Market performance has been good year-to-date for our existing in clients and it creates a positive environment for future sales. I can assure you that every department in CI is focused on doing what is necessary to maintain our competitive advantages. And finally, we have continued to have a positive outlook for long-term profitability and dividend growth, and continuing stock buybacks.

With that, that finishes the formal part of our presentation. And I'd like to open up to any questions you might have for myself or my colleagues. Thank you.

(Operator Instructions) John Aiken.

Good afternoon. Steve, I think that characterizing the CRA issues and annoyances actually given the CRA, a little bit too much credit, but in your commentary, you talked about this issue not having any impact in terms of your dividend growth or your share buybacks, but does this give you any pause in terms of other deployment opportunities such as acquisitions or growing the business?

No, not at all. We don't see any case where there is any material amount that CI would have to worry about paying out here. So we do long-term capital planning. This just does not even come into our consideration.

And I guess this question is for Derek. I was hoping you might be able to square the circle for me, implying that year-to-date sales are in line with 2014 does imply very strong sales in April. But yet if I recall properly that you actually had flat AUM in the quarter and I believe the equity markets for both sides of the border were up. Is there something that I'm missing? Was there something dragging down performance in April?

I think the biggest thing, our AUM was slightly down in April. It was a strong month both for retail and institutional. I think the biggest impact on AUM would be the rally in the Canadian dollar. I think that's the single biggest impact.

Darryl Ho.

Thanks. A quick question on the CRA and they notice of reassessment. I know the timing is very much up in the air, but any indication from your lawyers or accounts when this might get result?

Well, we can only -- it's Steve MacPhail here. We just filed within the last week the notice of appeal. And basically, if you look at how these are dealt with, they can be dealt with in any time up to 24 months, typically somewhere between 18 and 24 months, when the CRA deals with them. We're hoping in this case, because of the significance of the case that it would be dealt with earlier. So that part is outside of our control. However, we certainly any time after 90 days or after July 31, can elect to go directly to tax court on that. That's just a decision we haven't made at this point in time, but that's the only thing that we can control the timing on. And then once you go to tax court, it could be any time after that. If we have to go to court, this won't be resolved in the near term, but we certainly hope if the decision is made to vacate this issue, then that could occur any time within the next six to eight months.

Okay, perfect. And then second question. Want to get your thoughts on recent changes to this Sun Life seg fund products and the relationship there. I think this was really already in the net redemptions note last year. Correct me if I'm wrong, but what could be the incremental impact going forward? How should we think about this and any color on the duration of these products?

The one thing -- I don't think it's going to be a huge impact. Seg funds for the last few years, I'd say, last three or four years have really not been nearly as big a seller for us. But we're committed to being in the guaranteed space, we already have a guaranteed mutual fund and we're exploring some other opportunities to have a seg partner. So our intention -- markets don't go up forever and seg funds become more popular, or guaranteed products are more popular when markets misbehave. So we want to be in that space. So I don't think it's going to be a big impact over the long term.

And any color on the duration of the seg fund block?

No, I'd don't think so.

Okay. And then lastly for Steven Donald, there were talks Assante may launch a robo-advisor platform selling mutual fund products, that kind of makes sense to me. But can you give us some color in terms of pricing or a potential launch date or just generally strategy behind that?

Sure. The article that was put in the paper was very premature. We're in the very, very early stages of looking at the potential of having an automated platform for our advisors to help them and delivering service. Our thinking around the process is that we'd like to create a platform to help our advisors deal with smaller but high potential accounts. Our objective is definitely not to go out and try to scoop up as many small accounts as we possibly can. It's about our advisors, about creating an efficient platform for our advisors to use with their high potential accounts. We also think that there might be opportunity as we look at our existing tools to leverage some of the development into the platforms that we use for our core clients mass affluent and high net worth as well.

Geoff Kwan.

Hi, good afternoon. Just wondering if you can talk about within net sales that you had to start the quarter being good. If there is anything specific that that might be driving it? And also similarly, has there been much in the way of changes of the types of funds that clients are buying also, types of funds that clients are redeeming?

I would say the biggest impact from my perspective, and January was the month that was quite a slow start. I would say Q4 was fairly volatile, there was lots of noise in the market and I think people were just sort of sitting on cash waiting to deploy it. I would also say that the value funds, they haven't been attracting the flows that they have in the past, more of the growth or [GARPE] funds we're getting. January was disappointing, February was behind the previous February, March was good and April was actually excellent and ahead of 2014. So there was no one particular thing. We had a large institutional account that rebalanced, and so it wasn't one big factor, it was a number of little things.

Graham Ryding.

Hi gentlemen, maybe I can start with an announced recently. The Canadian Association ETF association announced that they were going to do a deal with the Mutual Fund Dealer Association to provide increased access of ETFs. I'm just wondering if you think this is a pretty notable development. It looks to me like it could be over the longer term. I'm just interested in your view on this and perhaps there's any structural issues within the MFD channel given it's going to be a relatively low percentage of fee-based platforms within the dealers, if that's an issue that could may be limited penetration of ETFs within this channel?

I'll take a crack it and then Steve Donald can ring in on this as well. I don't think it's a huge development. ETFs have been around for a long time and what the MFD dealers are going to be required to do is find correspondent network that really facilitate the trades and the clearing. ETFs are relatively small, about half the market share that they are in the United States right now, I think it's about 6% in Canada. So I don't think it's a huge issue. But do you have any comments on that, Steve?

No, I would just tackle your comments that the most significant barrier at this point, it is a short-term barrier, as you say, Graham, but is access to clearing. So NBCN is trying to figure that out. From a longer term perspective, as you point out, dealers will have to have a fee-based platform in place. And I think broadly, speaking on our Iraq practice, we don't have a great deal of adoption into the ETF space, even though we have the fee-based platform available to our Iraq advisors. So well, I could see some migration over the longer term. I don't think it's going to be significant, as Derek says.

Maybe I could just throw one more in. I notice fund performance in particular on some of your larger signature funds seems to have lagged somewhat in 2014 and year-to-date just relative to its track record in the past five years. Just any color on, maybe what's driving that? Is there any concern that that could -- if that persist, that could overhang on net sales?

As you said, it's really the short-term numbers year-to-date, the one-year numbers. I would say it's specific to them being a little more defensive than they've been in the past. We just passed the sixth anniversary of the start to a great bull market. So I think it's the second-longest or maybe it's the third longest-running bull market in history. So it makes sense for our money managers to become -- we're not forecasting a crash or even the significant pullback, but they're being a little more defensive. And historically when Eric Bushell and his team raised cash, they've done a good job at managing the risks.

So the risk adjusted returns are there. So I'm not -- it's nothing untold. In fact, the team has never been stronger or had more personnel. We're up to 42 investment professionals on the team now. So they've got the right people and I think it's just from being a little more defensive.

(Operator Instructions) Scott Chan.

Well, good afternoon guys. Hey Derek, just on the sales and advisors event slide, and it's good that you guys tracking it. Now, looking into 2015, is this something that is going to be kind of a bit higher in terms of conferences and touch points as advisors or how does that compare our year-to-date versus last year at this point?

We would be ahead so far this year. Something that we've done a lot of are these workshops on regulatory reform and helping advisors transition how they do business, but we're also conscious of managing the cost. If the market were to pull back, significantly we can dial back our spend easily. Last year, we did an event for 1,250 advisors in Vegas, this year, we are going to Dallas. I don't think there will be 1,250 people signing up to. So we have a sales plan and we have a budget that we have to adhere to, and if the markets remain strong and our assets remain where they are and continue to grow, we'll continue to build with our money managers talking to clients and doing events and trying to be good resources to our distribution partners. But if the market were to pull back, Steve and Doug ensure that we keep a very close eye on our spend and we'll dial back if we have to.

Just for Steve, just on -- you guys used to report your distribution channels, like Assante, Sun Life, Iraq, MSDA, Edward Jones, and if it was up year-over-year or sequentially. Is there any big variances that you've seen in any of those channels in the last couple of quarters?

I think you directed that at me, Steven MacPhail. No impact in our two key channels, Assante and Sun Life. Our business is up year-over-year. So we've been very positive in those two areas. We're pretty happy with that. And as other channels where we continue to make more and more in-roads, which has been reflected in our sales.

Tom MacKinnon.

Sorry, I got on the call late and you may have already talked about this, but just with respect to the CRA notice. I think it's asking already for a minimum payment of CAD130 million and how's that been paid? And why do you think that this is not going to change your view towards any kind of dividend increase or share repurchases? Thanks.

Well, I'll answer the second one first. In the context of our annual cash flow, CAD130 million is not a lot of money, first of all. And secondly, we have a very unlevered capital structure and our view is this is just money we're putting on deposit with the CRA on a temporary basis. So you wouldn't adjust any of your plans for that. I think Doug has told me we get 1% interest or some other amazing return on it to do it. So again, that's inconsequential to us from that perspective. It sounds like a big number, but not to CI. I wanted to make that perfectly clear on that front.

Stephen Boland.

Sorry about this. Similar to Tom's question. He asked about the CAD130 million, has it been paid. I didn't hear whether that was answered. Just what's the accounting for that? Is it just put it into a separate account or why isn't it provisioned for?

Hey Steve, it's Doug. We have not paid the CAD130 million yet. We will be paying it over the next six months, and we will see it booked on the balance sheet in other assets. It's more of a long-term receivable since we don't know when we will get it back. So it is going to show up over the next six months.

Okay, but there will not be an income statement impacting in your view?

Yes. Right, no income statement impact.

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

With that, I'd like to say thank you very much. I'm happy to have presided over what's now known as another record quarter for CI, and thank everyone for attending and we will talk to you in August. And just to remind, our annual meeting is in early June. Hope to see a number you analysts there. Thank you very much.

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