CI Financial Corp (CIXX) 2016 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 2016 second 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 precautionary 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. Peter Anderson, Chief Executive Officer of CI Financial. Mr. Anderson, you may begin.

Thanks very much, and welcome to the CI Financial conference call for the second quarter of 2016. With me is Doug Jamieson, our CFO. He will be providing a financial review of the quarter. I will conclude with a brief discussion of our business lines and thoughts on the industry.

After our comments, members of CI's executive team will be available to answer your questions. In the room are Steve Donald, President of Assante, Derek Green, President of CI Investments, Neal Kerr, President of CI Institutional, and Barry Gordon, CEO of First Asset.

There continued to be dramatic volatility in most markets during the second quarter. The United Kingdom's surprise vote to leave the European Union caused significant swings in global equity and fixed income markets. Interest rates paid all-time lows, and gold and oil prices surged in Q2.

Despite the volatility, the TSX increased 5% for the quarter, and the S&P 500 in Canadian dollars was ahead by 2.8%. However the share prices of asset managers globally did not fare as well with many continuing to decline during the quarter.

Before Doug speaks, I do want to address CI sales in Q2. Although we announced an increase of 2% in average assets under management to CAD109 billion, we reported an almost CAD1.5 billion in net redemptions in our funds. As a backdrop, the industry has seen a year-over-year decline in net sales into funds of roughly 60%. Almost half of CI's redemptions came from two institutional accounts where the clients decided to move assets to in-house managers. I will say that Q3 is beginning stronger, both for our retail and our institutional businesses. You may have seen a press release from National Bank announcing that CI will manage more assets for their fund complex later this quarter. This is very important -- or this is a very important endorsement for some of CI's portfolio management teams.

At this point, I'm going to ask Doug to give you a recap of CI's financial position for Q2. Doug?

Thank you, Peter. Looking at consecutive quarters, average assets under management were up 2% from the first quarter, from CAD107.3 billion to CAD109 billion. As an aside, CI reported that its July month end assets under management were up to CAD113 billion, and the average for the third quarter so far is CAD111.6 billion, or 2.4% above the level for the second quarter.

Reported net income was up 10% from CAD116.6 million last quarter. And on a per share basis, was up CAD0.05 from CAD0.42. Last quarter included a charge for severance and transition costs, and so the adjusted earnings were up 2% from CAD126.1 million and CAD0.46 per share. EBITDA per share was up CAD0.02.

Free cash flow, at CAD147.5 million, was up 3%, and dividends paid were CAD0.335 in the quarter, and that includes one month of the increased payout that was announced last quarter.

Now looking at year-over-year highlights. Average assets under management were down 1% from CAD109.8 billion in last year's second quarter. Reported net income was down 7% from CAD138.9 million, and on a per share basis was down from CAD0.50 last year.

Last year's second quarter included a provision for a legal settlement, and so adjusted for that earnings were down 10% from CAD142.4 million, and down 8% on a per share basis. EBITDA per share was down CAD0.07. and free cash flow was down 2%, and this is less of a decline than what we saw for the earnings measures above as the amount spent on deferred sales commissions continues to decline. Dividends paid were up 5% year-over-year, and the dividend was also increased after the first quarter last year. And so this change represents a full CAD0.005 per month increase.

The drop in earnings was greater than the drop in average AUM over the past year, primarily because of the change in CI's average management fee rate as we continue to see a higher percentage of assets in high net worth programs, and with the inclusion of First Asset in our results over the past seven months.

This change in mix of product lowered our gross management fee line over the past year from 166 basis points to 158 basis points in this quarter. The net fee line, we take the trailer fees paid and the amortization of deferred sales commissions from gross fees, and that has held much more stable over the years. And here the impact of more high net worth assets and First Asset is muted, but we still saw a 3 basis point decline over the past year.

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. And the trend here has been lower over the past three quarters, although it's still up significantly from the second quarter of two and three years ago. On a non-trailing 12-month basis, Q2 alone did see a 0.3 increase in this ratio from Q1.

CI's total SG&A measured in basis points was 36.2, up slightly from 36.1 in the first quarter, as spending in dollar terms was up 1.8%, and average assets were up 1.6%. While we continue to hold spending steady in many areas, the spend on technology and the sales team has increased, and this will be a focus going forward. Dollars spent on SG&A excluding First Asset were CAD94 million, up 2.4% from CAD91.8 million in the second quarter last year, and up 1.2% from CAD92.9 million last quarter.

The SG&A efficiency margin 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 the past 12 months, CI has retained 69.8% of that available pool. The inclusion of First Asset is the largest factor in the decline given their higher proportion of SG&A to management fee revenue. However, similar to what we see with the asset management margin, the margin for the second quarter alone was slightly higher than that of the first quarter.

CI's quarterly free cash flow moved up to CAD147 million this quarter, and is slightly below the level of a year ago, but is also well above the level of the second quarter of two and three years ago. And looking at the return to shareholders, we start with that operating cash flow and adjust for the after tax provisions taken in the past year, and the deferred sales commission paid, to get to free cash flow.

In the last 12 months, CI has generated CAD603 million free cash, and paid out all of that free cash in the form of dividends and share buybacks at CAD629 million. We are very comfortable with returning all free cash flow given our relatively low debt level. And I'd like to note that if we kept the dollar amount of dividends paid at CAD366 million per year, the current rate of share buybacks would permit an annual increase in the monthly dividend of CAD0.005.

I will now turn it back to Peter.

Thanks, Doug. As I said in my comments during the Q1 call, at CI we have a lot of work ahead of us. We face industry headwinds, including lower or slower net sales, regulatory changes, and the changes to the tax treatment of corporate class funds. There are also some concerns about the relative short-term performance of certain of our CI portfolio management teams. We have already made significant changes at CI over the last few months and are confident they will yield positive results.

Here's a quick review of CI's business lines. At CI Institutional, as I said before, we saw two large redemptions in Q2. Today, however, our pipeline is fuller than ever. We currently have commitments of approximately CAD1 billion in new mandates over the next several quarters. We're also candidates in a number of new Institutional searches, significantly more than in the past 18 months. As of today, we are not aware of any significant Institutional redemptions. I strongly believe the strategy we have implemented in this area, including the hiring of a new head of the Institutional team, is paying off.

On the portfolio management side, we have gained ground against our peers in Q2 after a challenging Q1. I point out that much of our short-term underperformance with a few of our portfolio management teams is due to them taking a cautious outlook on the markets and adopting conservative positions.

The changes in our Harbour advisory team are working and I am very confident they are heading in the right direction. Cambridge Global Asset Management continues to outperform and are winning business from both retail and institutional clients. I believe that our lineup of portfolio management teams remains one the industry's best, and I am confident of their ability to produce strong results over the long term. Our portfolio management model, in which we offer a diverse selection of independent investment teams, continues to provide benefit for our clients and for CI.

Assante and Stonegate continue to make gains in all aspects of their business. They are generating positive net sales, significantly outpacing their competitors. Our mass affluent and high net worth businesses continue to grow, and today we manage over CAD22 billion on behalf of families who have invested over CAD500,000 with us. Assante's recruitment drive continues to attract successful and established advisors to the company. These advisors are attracted to the Assante platform by success and our well-defined approach to wealth management. We continue to make investments in technology, products and services, to grow the Assante business. We strive to make it easier for advisors and their clients to do business with Assante. Every metric we measure shows that our strategy continues to be successful.

After a little more than six months, we're even more convinced the First Asset acquisition was an excellent business decision. We are working to add new products to their platform, using both CI portfolio managers and others. Building on the successful launch of three First Asset ETFs managed by CI's Signature Global Asset management, we'll be launching a new CI family of ETFs later this year. Cambridge will be the next portfolio management team to be included in the ETF lineup. As well, First Asset has partnered with CIBC to launch a rules based ETF based on their quantitative research.

There's the also the potential to use First Asset ETFs within CI Investment and Assante. We are exploring a number of excellent opportunities within the space and plan to continue building out our First Asset business. In our view, ETFs are another form of product distribution, one that can complement our existing platforms at CI Investments and Assante.

Finally, at CI Investments, we are committed to maintaining our competitive position in this challenging environment. As I said earlier, the headwinds for the industry are strong. We have a number of advantages, including scale, exceptional portfolio management, brand, a strong diversity of products and distribution. We are moving quickly to fill gaps and exploit opportunities. This includes hiring additional wholesalers, expanding our IROC presence, and rolling out new products. Our association with Sun Life advisors remain strong, and we value this relationship.

At the end of September we'll be hosting about 900 advisors from the IROC, MFDA, Assante and Sun Life channels at our annual CI conference. At that conference we'll be announcing a number of new initiatives, and at the next quarter's call we'll summarize these for you.

With that, I will conclude my remarks and now open it up for questions. Operator?

Certainly, sir. Ladies and gentlemen, we will now take questions from the telephone lines. (Operator instructions) And the first question is from Gary Ho at Desjardins Capital Markets. Please go ahead. Your line is now open.

Thanks, good afternoon. I just wanted to get a bit more color on the redemptions, especially within retail, kind of which channel you're seeing the most pressure at IROC, but I think you mentioned Sun Life was pretty solid still. What are some of the initiatives you've got planned to turn this around? I think you've also mentioned adding staff and wholesalers. Just want to get more color on that, please.

Sure, Gary. It's Derek Green. You're right, if you look year-to-date, the two biggest contributors to redemptions would be IROC and Institutional. In fact if you look at those two channels they would be in excess of 100% of our net redemption number.

If you look at some of the initiatives that we're working on, we've just promoted Roy Ratnavel, who is a long-term veteran at our company, to national sales manager. So we have a new dedicated national sales manager. A ton of experience dealing with IROC. We've got approval from our financial team [to hire 5], between 5 and 10 new wholesales. We've also moved to a dedicated IROC sales team where historically we've had a dedicated sales team for Assante and for Sun Life, we have not had that with IROC and the MFDA, so we've moved to a dedicated channel there, so we're expecting better results.

So when you look at those three initiatives, plus we're adding some new products that we think will be quite appealing to IROC advisors, we think that will help us from a traction standpoint. I would also say, and Peter touched on it in his opening comments, and the performance has picked up in Q2 versus -- or in Q3 versus Q2.

And Gary, it's Barry Gordon. If I could just add that one of the things that we are heavily focused on is building solutions for IROC, particularly around core competencies that CI has so that we can leverage off the distribution capabilities of CI to improve that position.

Great. And then the second question perhaps for Neal, a modeling question on the Institutional pipeline. It sounds like it's pretty strong, but I also heard pricing is very competitive, [steep mandates that's] coming in next few quarters. Should we think about fees kind of in 15 bps, 20 bps range, or can you help me out with that, please?

What I would say about the fees in the Institutional market, from our experience over the past 15 years, is they moved lower quite a few years ago and they kind of stabilized, which is a different dynamic perhaps than the retail business. So I would say we're not really seeing much in the way of changes on that. And other than that, I'm not going to disclose our fee schedule here in this call.

Okay. Fair. And then just lastly perhaps for Doug. Your net to adjusted EBITDA stands roughly at 0.6 to 1, I think versus your target of 0.5 to 0.75. Would you consider increasing that ratio considering cost of debt and buyback opportunities?

Yes, we're not tied to the 0.5 to 0.75. We're very comfortable where we are. You'll see in the last 12 months we actually returned, it was CAD26 million or so more to shareholders than we brought in in free cash. That's fine with us and so if our debt creeps up a little bit, you know we're not constrained by 0.75 debt to EBITDA.

Okay. Great, that's it for me.

Thank you. The next question is from Geoff Kwan at RBC Capital Markets. Please go ahead. Your line is now open.

Hi, good afternoon. I just wanted to clarify, when you were talking about the [Fiera] mandate, that I'm assuming is getting included in the Institutional side of your business as opposed to the retail?

It's Neal Kerr here. So the mandate that we were referring to is a National Bank mandate that CI Is managing, or will be managing assuming the assets, likely in the third quarter. And that is part of our Institutional business. We would consider that a sub-advisory account.

Okay. And would that be included in the CAD1 billion kind of pipeline that Peter was referring to earlier or would that be excluding it?

No, that's included in there. The pipeline that he's referring to is mandates that we have been awarded that have not yet funded. And that National Bank mandate is in that number.

Okay. And then just on the Q3 side, the way you're kind of talking about it, it sounds like where you stand right now that the Institutional side might post a positive quarter. Can you talk about what you're seeing so far? Granted, it's only one month on the retail side. I mean do you think you can be in the black this quarter, or is kind of the industry pressures likely to persist when we take a look at the Q3 so far?

What I would say is that Q3 has started out better than Q2. I can't really elaborate much more than that. But when we look at things, it's improved over Q2.

Okay. And maybe if I can sneak in one last question. You talked about the redemptions on the retail side kind of within the IROC channel and whatnot. Was there anything from the fund perspective that was maybe driving it, in other words were there certain fund, fund families, asset classes, that were seeing more redemptions than others?

Well oddly enough, one of the bigger redeemed areas, Canada -- it's odd, Canada has been the second best performing developed market in the world year-to-date, and there's been heavier redemptions coming out of Canadian mandates and things have started to stabilize. But IROC has been the big channel where the redemption has come out. Canadian equities, Canadian balanced has also been fairly significant as well.

Okay. Perfect. Thank you.

Thank you. The next question is from Paul Holden at CIBC. Please go ahead. Your line is now open.

Thank you. Good afternoon. Just wondering if you can provide us with an update on how net sales, or net redemptions, are progressing for the Harbour family of funds.

Neal, do you want to take that or do you want me to take it? Actually, if you look at -- we're really quite happy with the changes that we've made with the Harbour team from a money management perspective. Roger Mortimer has been with us now I think coming up on three years. The funds that he runs, the Global Increment Growth fund is now a five star Morningstar fund. If you look at it year-over-year, the redemption rate is down about CAD250 million this year versus last year. It's on a slightly lower asset base, so I would consider that good. I would also consider the fact that they have a value bent and value has been out of vogue for quite some time, you know people are starting to revisit the Harbour brand and they're liking what they're seeing.

It's Peter again. But I would say as well on Harbour that we're actually seeing new investors coming in too, that haven't used Harbour for a long time, actually start to take a look at -- especially on the growth and income side. The new advisors are starting to use them as well, which I think is very positive.

Okay. And given the sales investments you plan on making towards the IROC channel, can you talk a little bit about product strategy there? I mean you know, and I know that selling product into IROC has become increasingly challenging with the way business is changing in the IROC channel. So just wondering what your product strategy is.

Sure. They tend to like to have more narrow focused mandates. So a couple of mandates that are resonating well with IROC is the new Signature Tactical Bond Fund. We're also seeing this preferred share classes is also attracting flows. And then Barry Gordon touched on the suite of products from Signature and from Cambridge that we're going to be launching as well. So our objective is not just to provide mutual funds, but also mutual funds, ETFs, and different platforms for delivering in our investment products.

And Paul, if I could add to that. It's Barry Gordon. I'd say we're focused on producing solutions that the IROC advisors are asking for. And those are focused in a few areas, including income and what I refer as building blocks for them to use in portfolio construction and asset allocation. So the product strategy is going to focus around trying to fill those advisor needs.

Okay. And then moving on to a discussion on future direction of operating costs. So last quarter the message was there was roughly CAD3 million worth of operating cost savings that would be realized per quarter, as well as other initiatives underway that would benefit the remainder of 2016. I get the impression that that conversation is going to change now to you're going to be investing in technology and sales and so expenses are going to be going up and now down. Is that the correct read? And maybe you can just elaborate on that.

Yes, that's generally correct. If we see markets the way they are now, we expect the sales for the SG&A growth to continue, given these initiatives on the sales side and technology. Recognizing that if markets did correct, we would certainly react to that pretty quickly.

Okay. That's all the questions I had. Thanks.

Thank you. The next question is from Graham Ryding at TD Securities. Please go ahead. Your line is now open.

Thank you. Just wanted to wrap up on the Institutional pipeline. Did you quantify, or are you willing to quantify, the size of the National Bank mandate? And then just the timing for that and the other, the CAD1 billion pipeline, what is the expected timing for those mandates to fund?

It's Neal Kerr here. So we would expect most of the funding to take place this year, although that is not with certainty. Sometimes the accounts take a while to transfer over, but we would expect most of them funding this year. The National Bank is a big mandate. It's in the hundreds of millions, so we're pleased with that. It's certainly an endorsement of our Canadian equity capability at our Cambridge investment team. And then beyond that the opportunities we have are at earlier stages where we are on short lists and RFPs and whatnot, and there's an extensive amount of that, but it's very much too soon to handicap the closing rate on those opportunities.

Okay. But the CAD1 billion you flagged, you have won that already it's just you're not sure exactly when that's going to close? Is that correct?

Correct. It's going to come in, most of it in Q3, Q4. Some might actually end up Q1 2017.

Okay. Thanks for that. And then just I wanted to talk on the pricing side. We've seen a lot of activity in the industry over the last call it year and a half on the pricing side. I'm just wondering how you're feeling about your fees overall or perhaps any areas in particular where you feel you may need to adjust pricing to keep up with the industry trends.

Graham, it's Derek Green. The most recent Investor Economics insight article said that 22 companies had taken steps to lower the cost of ownership over the last, I think from January 1st, 2015. So we were one of the 22. There's a repricing of the entire marketplace. There's five companies that have moved to an automatic (inaudible). We're evaluating that right now. I brought that up on the last call. It's a big initiative. It's going to take some time to implement, but we believe it's necessary. So our clients that qualify for lower fees, we want to do that automatically, and we're working through that exercise right now. So it's something that we're committed to and you'll hear more about that in future calls.

Okay. That's helpful. That's it for me. Thank you.

Thank you. The next question is from Tom MacKinnon at BMO Capital. Please go ahead. Your line is now open.

Thanks very much. Good afternoon. It's a question really on the SG&A. I know the expenses are up kind of year-over-year just because of the inclusion of First Asset, and you did talk about ramping up some technology and expense spends. How should we look at this going forward? What sort of growth rate should we see at that? Because (inaudible) historical in this chart one of the things you guys have been able to do fairly well is keep that SG&A under control despite the fee pressures. So how should we think of that going forward?

And again, it does depend on AUM growth. But in our base forecasts, you know if we have assets that grow say 6% to 8% a year, I can see SG&A growing at half that rate.

And that's even with these additional spends on technology?

Right.

And sales enhancements? Even with these additional projects that you're looking at undertaking, is that (multiple speakers)?

Yes, because we spend almost CAD100 million a quarter, so every percent is an extra CAD1 million to throw at something, so.

Okay. Thanks. Thanks for that.

Thank you.

Sorry, this is Peter again. I mean the one thing I would say about the spending is it's spending that we all truly believe is adding long-term value of the company. You know, by adding a number of new wholesalers dedicated to IROC, and to other channels, we know that we -- it will add value. It will add value quite quickly. And on technology, we all know that spending on technology will pay back down the road. We're not doing anything but spending any -- or any increases will be done with an awful lot of consideration on the markets, but also on what value it's going to add to the company.

Thank you. (Operator instructions) And the next question is from Scott Chan at Canaccord Genuity. Please go ahead. Your line is now open.

Good afternoon. Just on the ETF side, I see a lot of initiatives to grow that platform. Just on your last one in terms of using the products within CI Investments and Assante, what type of products are you thinking of putting that into, and how much cannibalization in terms of looking into overall future fees should we -- or how to think about that going forward?

It's Neal here. I think we'll probably give you a two-person answer, myself and Barry Gordon on this. So, the First Asset product lineup contains certain styles, if you will, of money management that we don't employ currently in our shelf at CI and in some of the products that we manufacture for Assante. So we are looking at those products as potential style -- further style diversifiers for primarily our managed solutions business, which is our multi-asset, multi-manager portfolio programs. So we're looking at the CI products first, then we'll be looking at the Assante products throughout really 2017, and looking to introduce some additional factors to the portfolios. So that's how we're thinking about it.

And then beyond that, your second part of your question was with respect to cannibalization, and Barry might want to --

Sure. I mean I think I can say, Scott, that our research shows that the majority of the business that we're winning from advisors and ETFs are people who are -- advisors who are moving from being single security selectors to ETF users, as opposed to transitioning from mutual funds to ETF. So we're actually -- you know if you think of as (inaudible) there's not a huge degree of overlap. So I think it's actually accretive as opposed to cannibalizing, and we're focusing in terms of our product development on the types of solutions that are well suited for IROC advisors. So they don't necessarily line up perfectly with what's currently available in the CI lineup. So I really don't think that there's a lot of cannibalization that we're expecting.

And Scott, it's Steve Donald. I would just add one more thing and sort of reflect further on Barry's thought. And that's, as Neal had said, First Asset offers some diversification across investment mandates. And we have a number of companies within the Assante shelf, or on the Assante shelf, that offer factor based type investment strategies. So we actually see this as an opportunity where First Asset can deliver a better risk adjusted experience to investors that we could in fact convert some AUA to AUM within the CI financial family. So contrary to the concept of cannibalization, we actually think this could help us.

Okay. And just a follow on question. Is there an update on the robo advisor platform at Assante?

Again it's Steve. We continue to work on that platform. We have just launched some enhancements to our client reporting tool. So I think as I've said in the past, we see that robo initiative as a complement to our advisors' ability to service their clients. We are working on automated onboarding. We have enhanced our fee-based platform, our operations of an account. And now with this launch of more mobile access to accounts, we're putting together all of the pieces that can deliver that, and we'll continue to enhance the functionality of that over the coming quarters.

Okay. Perfect. Thanks, guys.

Thank you. The next question is from Graham Ryding at TD Securities. Please go ahead. Your line is now open.

My questions were actually answered. Thank you.

Thank you. (Operator instructions) There are no further questions, Mr. Anderson. I would like to turn the conference back over to you.

Well thanks, everybody. And very much appreciate spending some time with us and getting an understanding of Q2. We look forward to chatting with you again at the end of Q3 in November. Thanks so much.

Thank you. Ladies and gentlemen, your conference is now ended. All callers are asked to hang up the lines at this time. And thank you for joining today's call.