CI Financial Corp (CIXX) 2015 Q2 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 second-quarter results webcast. (Operator Instructions) Please take note that 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 call over to Mr. Stephen MacPhail, President and CEO of CI Financial. Mr. MacPhail, you may begin.

Thank you and welcome to our second-quarter conference call. With me today is Doug Jamieson, CI's CFO, who you all know, and Steve Donald, President of Assante Wealth Management and Stonegate Private Counsel. Missing today is Derek Green, President of CI Investments, who fortunately for him is away in Hawaii at a family wedding.

CI's business continued its growth. At July 31, our fee earning assets reached a new high of CAD143.8 billion, of which CAD111 billion is in assets under management, reflecting strong and continued growth of our organization. Our year-to-date net sales continue to be robust and we are now at the CAD3 billion mark year-to-date, right in line with 2014, which you will recall was an outstanding year for CI.

Our core earnings were CAD0.51 per share, up 13% year-over-year and 2% on a consecutive-quarter basis. EBITDA is up 10% year-over-year. Pre-tax operating earnings were up 11% year-over-year.

Our Q2 average assets under management were up 12% year-over-year and up 3% from the Q1 2015 average. Assets under advisement at Assante Wealth Management and Stonegate Private Counsel totaled CAD34 billion, up 10% year-over-year. And lastly, net sales for the quarter totaled CAD1.5 billion, up from CAD1 billion in the prior year.

Focusing a bit more on sales, gross sales of our products, where we really look to to see what our core strength in sales is about, were very strong at CAD4.2 billion and that's up 20% from the prior year. As mentioned, net sales for the quarter and year-to-date are in line with the prior year. And lastly, our sales record continues and CI has now achieved positive net sales in 88% of all quarters since 1994, a remarkable 21-year record.

Fund performance continues to be solid with the majority of our AUM in first or second quartile over 10 years. Managed solutions, our strongest sales category with over CAD30 billion in AUM, has 73% of its solutions in first or second quartile over 10 years.

We continue to build brand with our money managers amongst advisors. CI continues its long-term track record of the most four- and five-star rated funds by Morningstar. And lastly, CI was selected as the number one investment brand in the 2014 Brendan Wood International Canadian investment rankings.

And with that, I will turn it over to Steve Donald, President of Assante Wealth Management and Stonegate Private Counsel. Steve?

Thank you, Steve. I'm told that it would appear that one of the slides isn't loading on the presentation. But what I thought I would do is just briefly touch on the results of Assante and Stonegate.

As Steve said, we have about CAD34 billion in assets across the platform right now, which is up on a year-over-year basis by about 10% as a result of both strong investment performance on a year-over-year basis, but also strong inflows that have continued. On a year-to-date basis, our net sales are up 44% over net sales year-to-date of 2014. That compares very well to industry net flows, if you use IFIC as a proxy, being up 13% on a year-over-year basis. Over 60% of our net sales are coming from our affluent and high net worth clients.

We see continuing opportunity in the high net worth space as demographics drive demand for a broader array of services, and what we're able to do is leverage off of the success in our Stonegate Private Counsel Group and adopt best practices across both Stonegate and Assante Wealth Management. Continuing to invest in the area with expertise in the field is supporting our advisors and delivering that broader array of services, and we're turning our attention to broadening awareness that we have a significant business in the high net worth market.

As you can see from this slide, over CAD20 billion of our assets are in that affluent and high net worth part of the market; almost CAD13.5 billion in the high net worth market where our relationships with households are in excess of CAD1 million. As I said, we see a lot of continuing opportunity here. Demographics are driving demand and this part of the market tends to be fee-disclosed already. So we have limited regulatory risk in this area and we have the tools to service the market and continue to grow our high net worth business.

So, with that quick overview, I will hand the phone to Doug Jamieson.

Thank you, Steve. This slide of financial highlights compares the second quarter of this year with the second quarter of last year. Some of these numbers Steve MacPhail has gone over, but I'll quickly summarize them here.

Average assets under management were up 12% from CAD97.9 billion a year ago to CAD109.8 billion. Next, net income was CAD138.9 million and that was up 9% from CAD127.8 million last year and on a per share basis CAD0.50, up from CAD0.45 last year, an increase of 11%.

The results for Q2 include a CAD4.8 million provision for a voluntary settlement with clients of a former advisor and adjusting for this item, net income was CAD142.4 million, or CAD0.51 per share, and that is up 13% from last year's second quarter. EBITDA per share up CAD0.08 to CAD0.86, a 10% increase. Dividends paid were up 9% as CI paid out CAD82.6 million last year and CAD90 million in the second quarter this year at a rate of CAD0.32 per share.

Long-term debt declined from approximately CAD500 million last year to CAD384 million this year and net debt has increased CAD13 million, from CAD253 million to CAD266 million; calculated as the gross public debt outstanding now of CAD300 million, plus CAD84 million drawn on our facility, less CAD118 million of excess cash and marketable securities. CI's net debt to EBITDA ratio increased slightly to 0.3 to 1 and I will comment further on our expectations for that ratio in a few minutes.

Now we can take a quick look at quarter-over-quarter highlights. Average AUM up 3% to CAD109.8 billion. Net income was down 4% on an as-reported basis, but after adjusting for the legal settlement this quarter and the write-down of contingent consideration, accelerated amortization of contracts, and legal provision last quarter, net income is up 1% and 2% on earnings per share.

EBITDA grew from CAD235.4 million to CAD239.8 million, an increase from CAD0.84 per share to CAD0.86 per share and those are both 2% increases. And dividends paid of CAD90 million was an increase of 1% from CAD88.9 million last quarter. CI's EBITDA margin has held steady at about 48% over the past several quarters, which reflects that we continue to generate approximately CAD0.48 of EBITDA on each revenue dollar regardless of changes to product mix.

These next two slides provide a little more insight into our management fees. The changing mix of product has pushed our gross management fee lying down from 184 basis points in 2009 to 166 basis points in this quarter. However, if we take the view that the trailer fee is paid from the management fee and the deferred sales commissions incurred on back-end sales of funds can both be subtracted from this fee in order to standardize our management fees to look as if all our business was in fee-based or institutional accounts, we would be left with the net management fee that you see here, and that has held fairly steady near 100 basis points. And this is important because we continue to do less Class A business, particularly back-end load, and do more fee-based business, particularly in high net worth.

The asset management margin measures how much we retain out of management fees, after paying trailers, SG&A and DSC on a trailing 12-month basis in the asset management segment. And we see that we are left with CAD42.60 out of every CAD100 in management fees earned, up from about CAD41 a year ago. And this measure eliminates the financing impact of front-end versus back-end funds, since we've already deducted trailers in DSC. 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 here as a percentage of average assets under management and shown in annualized basis points, has declined from the second quarter of last year. We saw on the quarterly highlights slide that CI's average AUM grew by 12% from last year, and at the same time, SG&A spend grew by only 8%. So we see the drop from 34.8 basis points to 33.6 basis points year-over-year.

The SG&A efficiency margin, measured again on a 12-month trailing basis within the asset management segment, looks at an available pool of management fees, less trailer and DSC, and how much of that pool remains after deducting SG&A spend. And in the past 12 months CI has retained 71.9% of that pool, up from 70.3% one year earlier. Put another way, CI spends less than 30% of the amount available after paying trailer and DSC out-of-management fees.

Next we have five quarters of free cash flow and we see here an increase over the quarter of CAD8 million of free cash to CAD151 million and an increase of CAD13 million from the second quarter of last year. This year-over-year increase is a result of operating cash flow growing by CAD7 million and we spent CAD6 million less on deferred sales commissions this year.

And here in the table we have some detail on the level of quarter-over-quarter free cash flow. Operating cash flow held steady at CAD175 million. Less commissions of CAD24 million and CAD32 million provides CAD151 million in free cash this quarter compared to CAD143 million last quarter.

The next section details the amount returned to shareholders. We repurchased CAD47 million in stock in the first quarter and another CAD71 million this quarter and with the dividends paid, as discussed earlier, we see a total return of free cash to shareholders of CAD161 million and CAD136 million.

CI has been returning the majority of its free cash to shareholders, typically with a consistent dividend payout and opportunistic buybacks. We're very comfortable with this level of dividend payout that has averaged 60% of free cash.

And as we move into the next slide, we see that the amount of dividends paid is growing in line with free cash flow and we see that a large component of free cash was used to reduce net debt over the past few years. Our plan for 2015 is to stop paying down net debt and to increase the level of buybacks so that, at a minimum, all free cash is returned to shareholders.

CI's net debt has declined from CAD700 million to under CAD300 million, and at the same time, EBITDA has grown from CAD700 million to almost CAD1 billion. And we have indicated here our target leverage ratio of 50% to 75% of EBITDA to be achieved over time with increased buybacks and by looking for acquisitions.

I will now turn it back to Steve MacPhail.

Thank you, Steve Donald, and thank you, Doug Jamieson. As you can see in the slide, which now reflects our most recent growth in assets, the volatility in the markets in Q2 kept our asset growth pretty well flat from the beginning to the end of the quarter. But since then we've seen a rebound, pushing CI's AUM up to new highs and giving us a more optimistic outlook for markets over the foreseeable future.

This next slide just reinforces what Steve Donald talked about and that is the growth in the high net worth area of our business. This chart really focuses on CI itself and you can see that our high net worth business at CI, so this comes from all the channels, has grown 230% since 2010. Accounts exceeding CAD500,000 now represent CAD23 billion of the assets at CI, up from only CAD7 billion just five years ago. This is clear evidence of our value proposition in this segment of the market and where we see great opportunity for future growth.

So to wrap up before questions, let me summarize where we are today. With our strong cash flow and focus on profitability running our business, the outlook is positive for long-term profitability of this firm, dividend growth and continued share buybacks. We will look for growth opportunities outside our borders, but in a cautious manner you would expect from CI.

Our sales are strong and the environment remains positive for our business. Our strategy to provide value to the higher net worth client is working and we will continue invest in all aspects of our comprehensive wealth management services. And lastly, we will continue to focus on maintaining the competitive advantages we now have in our core business to ensure continued growth in that area.

Thank you. And with that, we're happy to take any questions.

(Operator Instructions) Gary Ho, Desjardins Capital Markets.

My first question, I just want to talk about the high net worth segment. You guys had a couple of slides on that and the growth that you've seen. What is the growth potential there? And I guess the second part to that question is: would you contemplate acquiring to kind of bulk up in that segment?

Maybe I can take the first part of the question in terms of the potential for growth. According to Investor Economics, as we look across the Canadian landscape, they're suggesting that 77% of the investable assets in Canada are held by households with more than CAD500,000 of investable assets. So, we see significant runway here in terms of continuing to develop our spot in this market.

In terms of an acquisition, maybe I can hand it over to Steve.

Yes, if I look at it from the CI perspective, certainly on the Assante side, we see tremendous growth potential in the area. I'll just reiterate what Steve Donald says. The value proposition that we have within Assante and then our ultra high net worth area, Stonegate Private Counsel, we've never experienced growth like we are now in the high net worth area in that area. So, I can easily see a tripling of their business in that category based on what we're doing today.

Looking at the CI side of the business, we see tremendous opportunity, especially when you look around and see the number of small private investment councils where a one- or two-man shop has CAD400 million or CAD500 million in assets under management and might have 15% of a client's value. We believe that our value proposition is significantly better than what they have to offer because of other services that we can afford to do with our scale.

And we believe this is really a continuing opportunity for us to get more business and we are seeing a lot of business coming over in that category. Every day, we seem to be getting business from some of the, what I'll call, better known high net worth shops in the business. I think people actually were quite surprised to see that the amount of business we have in high net worth actually dwarfs a lot of the companies that you might commonly think are the leaders in this business.

So, if I can paraphrase, you guys can probably steal the market share rather than buy something externally?

I think we certainly would always look at opportunities to do things and -- so maybe I should be more clear on acquisitions. I think a good opportunity will be some of these smaller investment councils who will say, jeez, how do I deal with the long-term continuity of my business and how do I come up with a better solution for my client? And that would be to roll into CI.

That was very evident in our acquisition of Marret Asset Management. Barry Allan looked at it and he had a private counsel business and said, jeez, I can do a way better job for my clients if I'm associated with CI and the services that they have. So we think there are tremendous number of opportunities in that area to garner more assets.

And then maybe just more broadly on acquisitions, given the pullback in valuation, I guess, overall for the sector, has the activity level or discussions changed in the last, let's call it, three to six months, whether it's in Canada or US? And can you remind us the size of the deal or AUM you'll be potentially going after?

I think I said before that, up to CAD1 billion, we certainly would look at something. Closer we get to CAD1 billion, the more serious -- we are going to have to really, really take that seriously and have to provide a very compelling argument. If we get down in the CAD50 million to CAD100 million range, then that's a little easier to digest.

I've seen a lot of things shown to me over the last three or four months. Well, we, as a team, have seen a lot of things shown -- it's not just me who sees it here at CI -- and there is really two categories. There are companies where they kind of want to exit the business, and that's not always attractive to us because we're looking at opportunities to continue to build, so we're not looking at places where people want to exit. Those typically don't work out as well, but there seems to be a number of those available.

There seems to be fewer growth opportunities available today, but I do think maybe this pull back in valuations might just create more opportunity. People will -- we're hoping, will say: hey, this is a good time to really evaluate how we want to grow our businesses going forward and is there an opportunity to do something with some like CI who --. If we just focus on the United States, for example, whereas we can bring a lot of Canadian investor assets to a company in US which they otherwise wouldn't have access to. So it can be quite a win-win situation.

And your comments there, is that specifically in the Canadian landscape or is that both Canada and US?

Both Canada and US, my prior comments were on that.

Geoff Kwan, RBC Capital Markets.

First question I had was just with the market volatility that we've been seeing in the past couple of months has that changed kind of the tone with advisers and their clients, or is it -- we've obviously seen this sort of thing beforehand and maybe too early to gauge directionally how this is impacting the industry?

Perhaps I can give you a distribution perspective on that. I think one of the things that we have done across our advisory channel is make sure that they have positioned the potential for volatility in their practices, putting a little bit of a longer-term perspective on market fluctuations. So, I know from the sales flows, both on the manufacturing and distribution side, we continue to see strength there. So, I think this short-term volatility isn't having as big an impact as we make sure that our funds and our portfolios are positioned for longer-term success as opposed to short-term wins.

I'll just add to that. The fact that our assets under management are at all-time highs mean that -- and only CAD3 billion of that is accounted for by net sales year-to-date, it means our clients have actually fared well. Because if our assets go up, it means the client's assets are going up at the same time.

And what I've been impressed with, especially in some of our major channels, is the, what I'll call, the conservative nature of the products that the advisors have been putting their clients into. So the clients have been experiencing steady growth here, whereas maybe we are -- as a group, we are worrying about what was going on in Greece and China and the whole bit, that wasn't the client experience at all. And so I think that's put us in pretty good stead. Hence my comment earlier today about why we feel we are positioned pretty well on sales for the rest of the year.

And just the other question I had was maybe more for Doug. The other income in the revenue line was CAD7.7 million in the quarter. It's been a bit I guess lower than what we've seen in the last number of quarters. Just was wondering if you have any color on it. Was it Marret, was it FX or something else, and how to think about that maybe over the next couple of quarters?

It was some foreign exchange fluctuation with the Canadian dollar a little bit stronger in the second quarter. We'll see that reverse in the third quarter to date. Marret year-over-year; they lost some closed-end funds last year and so year-over-year comparison is down a bit. And we also had more gains on sales of seed capital in the first quarter versus the second quarter.

Paul Holden, CIBC.

Want to go back to the discussion a bit on potential acquisitions, particularly in the US. Steve, you mentioned that valuation multiples have come down, which we certainly see in the publicly-traded names, but what about FX? Canadian dollar is obviously worth a lot less versus the US dollar, so if you are going to buy US dollar-based asset managers and give them Canadian dollar AUM to manage, how does that play into your thinking?

Well, we don't need me to get into M&A strategy, but really from our perspective, what matters is what happens to the foreign exchange after you buy it, not on the day you buy it because that's just an absolute amount that we're paying. I agree the change in the FX, or the weakening of the Canadian dollar, would suggest you that what was in the billion-dollar category six months ago might be over the billion-dollar category today. And that I acknowledge, you're absolutely correct.

So, we get less bang for our money, but if there is a good growth opportunity for us there the FX wouldn't change that. We have to take a long-term perspective on these types of things and that's what we would do.

And then, with respect to your existing business, how should we think about foreign exchange exposure? And I guess I'm particularly thinking about Cambridge share where I imagine it's mostly US dollar costs and Canadian dollar revenue.

No, that's actually not the case. We do have some US dollar costs because we have offices in the US, but our relationship with Cambridge is on a Canadian dollar basis, first of all. And in fact, because of our 25% investment in Altrinsic Global Advisors, we're actually more weighted towards benefiting from the US dollar.

So if you think about it in simplified form, we have ongoing operating costs, but not compensation costs with Cambridge in the US. We have our big conference that we hold in the US, so that's a US dollar expense, but all those are more than offset by the payout that we get from Altrinsic on an annual basis. So when you look at net overall, we're not particularly exposed.

Then on the other side, if you look at why CI's assets have outperformed the Canadian market so well this year, is because our money managers have diversified well away from the Canadian market and our clients, in turn, have benefited from that diversification into US and other currencies.

Okay, that's useful information. And then wanted to ask you on the shift in net sales from Q1, which is typically the strong seasonal quarter, to Q2; what explains that shift in timing there?

Sure, the retail business continued to be strong in both quarters and we had more institutional business. We had successful institutional business in the second quarter and that's what brought us in line, whereas, remember in 2014, we had institutional business in the first quarter, not the second.

So on a year-to-date basis, we're pretty close to being where we were on a year-over-year basis, but that would suggest the shift. And that also explains -- a number of people thought our topline went down in the second quarter. Well, it was because we put more -- a predominant amount of institutional money in there. As you know, it would obviously be at lower fees and no trailer fees on it, so that would have that little impact in there also.

Graham Ryding, TD Securities.

Just wanted to be clear, you make reference to -- I can't remember, I think it's around 30% -- the percentage of AUM that's fee disclosed. Is that a reference to AUM that is well positioned for the CRM2 environment?

From a distribution perspective, our number is about 50%. I think we mentioned last quarter that on the CI side it's around 30%. And, yes, I think that is in direct positioning to our readiness for regulatory change.

But just to be clear, that's not a reference to the percentage of your assets that are fee based; it's fee disclosed which is slightly different?

Fee disclosed or fee negotiated, yes. So, there is an element of those assets where we as a manufacturer collect and negotiated a trail on behalf of our distribution partners.

Just on the ongoing regulatory issues, the Brondesbury report that was released in June, I'm just wondering if I could get your thoughts on the recommendations from that report.

I think from an international perspective, I don't think there was a lot new. It was really a reiteration of what we saw in the UK's post-implementation review that we talked about last quarter. There are other studies going on. I think, as you know, the York University professor looking at Canadian specific data, which I think will be more telling.

But in terms of new information coming out of the Brondesbury report, from my reading of it, most of the findings were consistent with the UK RDR report. Selfishly, I was a little disappointed with the lack of coverage in the executive report about the value of advice. They had a full chapter on their interpretation of the value of advice, but didn't have enough evidence as to the impact of value of advice on commission versus fee based. But again, that's sort of a personal bias.

So, bottom line, Graham, I really don't think there was anything new that came out of that report. We're still waiting for the other reports that the CSA have going on right now.

Great. And my interpretation to some extent was -- I thought it was telling they said fee-based likely better, but probably need to do further research on the potential impacts of fee-based. Does that suggest that there may be -- any decision making could be pushed further out if the regulators do follow the recommendation in this report?

I think that's hard to say at this point. Certainly, what we've heard is that there is going to be some reports issued by the CSA, by the Ontario Securities Commission this fall. But you're absolutely right. Brondesbury Group, they're consultants; of course it's in their interest to suggest that there is more study required.

Tom MacKinnon, BMO Capital.

Maybe you can elaborate a little bit on the voluntary settlement you did with clients of a former advisor, if there could be any more potential cost associated with that. And then as well, just an update on the CRA notice that -- I think you filed an appeal to it, but have you actually paid the CAD130 million yet? Are you going to go to tax court on it? Just any update with respect to that.

Perhaps I'll take the advisor issue and hand the tax issue to Doug. From the advisor situation, it was an unfortunate situation we had with a former advisor. We've ring-fenced that issue and we're happy to have that behind us. The settlement was a negotiated all-in. No further costs.

On the CRA matter, we have filed our notice of objection. We've been required to start depositing money with them. We've put CAD38 million on account with them, and as we said in our disclosure, we expected that would be at least 50% of the balance owing of CAD260 million. So we need to put at least CAD130 million on deposit and we expect that will happen primarily over the next three to six months and the full balance within a year. But this will take quite some time to work its way through. We haven't gone to court yet, but we expect that will happen. But like I said, that could be, and likely will be, years from now.

Stephen Boland, GMP Securities.

Just one question on slide 18 on your leverage. I guess the timeline there, Steve, to even get to the bottom of that target leverage implies a pretty active buyback. Where is the balance between getting to the top of that leverage range and keeping some money around for acquisitions if it comes?

The beauty is, because we generate a lot of cash flow every year, we can modify how much we want to buy and not buy kind of on the fly and within six months to eight months have a lot of cash. But I would say we just look at opportunities to buy. We compare -- we look at today. We look at our profitability is up significantly year-over-year.

Our assets are up year-over-year, yet our stock price is down, and so it's no surprise that we have been buying a lot of shares when we do that. I would see us continuing to buy shares and it wouldn't surprise me that within a year and a half we start to get into that band. But we don't have a definitive end for it; we try to buy where there is an opportunity to add value to our shareholders on it.

When it comes to acquisitions then, we wouldn't turn down an opportune acquisition because we thought for six months it might put us outside the band. I have always made the statement: if there is an attractive acquisition, then financing it won't be an issue. And if we happen to be above that target, then just like we are below the target today, just like we've done in the past, over time we would move back to that target range again.

So I think it's -- you don't want to take the view that, jeez, if we get up to debt at 50% EBITDA that we have such a narrow band to make an acquisition. That would not be the case at all.

(Operator Instructions) Scott Chan, Canaccord Genuity.

I just have one question for you, Steve. Just with the increased volatility in the market, has there been a pick up in the G5|20 product or in your Seg funds at all?

No, it's been pretty steady is what I would say. It's been kind of steady sales in that product, which is what it's designed to do. Again, as I mentioned, we have felt a lot of volatility here because we watch markets day to day, but our clients aren't experiencing the same thing and so it's not transcending that way.

But I would say if we had a period of flat markets or very volatile markets, then I would think that over a six- to eight-month period of time that would create a stronger environment for sales of the G5|20. But we're just staying kind of steady state as we are right now.

Graham Ryding, TD Securities.

I just thought I'd get greedy and throw in one more. Fund performance; your signature funds have very strong longer-term track records, but it's fallen off a bit over the last -- the one- and three-year timeframe. Is that having an impact at all on the net sales of that product or the gross sales, and any color around that situation?

I don't have Eric Bushell on the line here to defend himself, and he certainly can, but I can say with confidence that, as the Chief Investment Officer of Signature Funds, Eric Bushell intentionally moved to de-risk a lot of those funds. And in a growth environment where if you weren't over -- if you didn't own market-weight [valiant] or something like this, then you're likely to view yourself as having underperformance.

We're quite happy with where the absolute performance of those funds are as they were. They're not trying to chase the top of those charts and what was going to take place, and that will always happen with us when we are in a very growthy period that you could see some lagging of performance, which is why we don't tend to focus on the short term as much.

Okay, and is that message -- is it easy enough to get through to the advisors and is it having any impact on sales, or are sales of the Signature products continuing to come through?

I think we actually might just lead all independents in net sales year-to-date, so that should be your answer right there.

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

Just want to say thank you very much for so many of you attending our Q2 conference call and we look forward to speaking to you again 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.