CI Financial Corp (CIXX) 2016 Q3 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 third 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 call over to Mr. Peter Anderson, CEO of CI Financial. Mr. Anderson, you may begin.

Thanks very much, and welcome to the CI Financial conference call for the third quarter of 2016. Joining me on the call is Doug Jamieson, our CFO. He will be providing a financial review of the quarter and will answer any questions you might have. Also Steve Donald, President of Assante; Neal Kerr, President of CI Institutional, and Barry Gordon, CEO of First Asset are available to provide more detail on the respective businesses.

At CI, we continue to work extremely hard to build our business where we are seeing opportunities. Our goal is to enhance shareholder value by strengthening every part of our business. Over the past several months, we have said CI was interested in looking at acquisitions outside of Canada. Last night, we announced an agreement to purchase 80% of Grant Samuel Funds Management, an independent manager and distributor of investment products in Australia and New Zealand. GSFM manages approximately AUD6 billion, both retail and institutional, and represents four asset management firms, two from the United States and two from the Australian market. All have very distinct mandates. In addition through the purchase, we acquired 47% interest in Tribeca Investment Partners, an independent boutique lending traditional asset management with quantitative analysis. Australia is a fast-growing, but competitive market. We are pleased the existing management will continue to run the business and maintain a meaningful equity position in the Company. We are fully aligned with our strategy. We believe this transaction allows us to enter a new market outside of Canada with a very talented and experienced management team. We're very excited about this new opportunity.

But now, I'm going to turn it over to Doug, who is going to give you a recap of CI's Financial position for Q3. Doug?

Thank you, Peter. Looking first at consecutive quarters, average assets under management were up 3% from the second quarter from CAD109 billion to CAD112.3 billion. Reported net income was up 6% to CAD136.8 million, and on a per-share basis was up CAD0.04 to CAD0.51. EBITDA was up 5% to CAD225.2 million and EBITDA per share was up CAD0.05 from last quarter. Free cash flow at CAD159.6 million, was up 8%, and dividends paid were CAD0.345 in the quarter. Now, looking at year-over-year highlights. Average assets under management were up 3% from [CAD108.5 billion] in the last year's third quarter. And reported net income [fell] 4% from CAD142.8 million last year, however on a per-share basis was flat at CAD0.51 due to the share buybacks over the past year. EBITDA was down 5% and EBITDA per share down CAD0.02. And free cash flow was down only slightly, as the amount spent on deferred sales commissions continues to decline.

Dividends paid were up 5% year-over-year, as the dividend was increased earlier this year. We continue to see the change in earnings flag the change in average assets under management over the past year, primarily because of the change in CI's average management fee rate. With the inclusion of First Asset results over the past 10 months and a higher percentage of assets migrating to high net worth programs. This change in mix of product lowered our gross management fee line over the past year from 164 basis points to 158 basis points in this quarter. Note that with the significant institutional redemptions, the average fee dropped more slowly over the past quarter. For the net fee, we take the trailing fees paid and amortization of deferred sales commissions from gross fees. And here the impact of more high net worth assets and First Asset is muted; and we saw a two basis point decline over the past year and in fact, a slight increase from last quarter.

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. Trends here have been lower over the past three quarters, although it is still up significantly from the third quarter of two and three years ago. On a non-trailing 12-month basis, Q3 alone was 42.1% up more than 1% from the low 41% in the first quarter.

CI's total SG&A measured in basis points was 35.4, down from 36.2 in the second quarter, as spending in dollar terms was up 1.8 %, while average assets were up 3%. We continue to spend on increasing the size of the sales team and on technology, with a focus on innovation in every area of our business. Dollars spent on SG&A excluding First Asset were CAD95.7 million, up 3% from CAD92.9 million in the third quarter last year.

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 last 12 months, CI retained 69.2% of that pool and 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 in the asset management margin, the margin for the third quarter alone at 69.5% was almost 1% higher than that of the first quarter this year.

CI's quarterly free cash flow moved up to CAD160 million this quarter, almost matching the record level of one year ago. And looking at the return to shareholders, the first column shows the last 12 months of operating cash flow adjusted for the after-tax provisions taken in the past year. And the deferred sales commissions paid to get to free cash flow of CAD602 million. CI paid all of that free cash and more in the form of dividends and share buybacks of CAD650 million. CI's outstanding debt sits at CAD676 million, however; net of excess cash and marketable securities is about CAD520 million and net of the CRA deposit, it is only CAD348 million. I'll now turn it back to Peter.

Thanks, Doug. As I said earlier, at CI we are seeing positive signs our hard work is paying off. We believe we are focusing on the right areas of our business to achieve success. However, we acknowledge our industry is facing serious headwinds, including regulatory changes, slower industry sales, the rise of passive investing and fee pressures.

We have seen some firms react to these headwinds with an example being the recent Janus Henderson deal. I expect there will be more transactions like this over the next 24 months. But for now, let's do a quick review of our businesses. At CI institutional, Q3 saw both positive results and some unexpected losses. On the last call, I said we were not aware of any significant pending institutional redemptions, shortly after that, we were advised by Scotia that they plan to move approximately CAD3 billion of assets managed by CI to their in-house managers.

Until we received the call, we were not given any notice that this is under consideration by the bank and we understand it was not related to performance, these assets originally came to CI, when Scotia was our largest shareholder and as a result had very low fees associated with them. In addition to the Scotia news, towards the end of Q3 we are also given notice by another financial institution that approximately CAD1.4 billion of institutional assets would be redeemed in November.

These assets are held in a separate account with two of our external PMs, where CI receives a small business development fee. Although these are big redemption numbers, the actual financial impact on CI Financial is minimal. We estimate the impact to 2017 earnings to be less than $0.01 per share. The balance of the redemptions from both Scotia and the other institutional will come out in Q4.

On a positive note, the institutional pipeline is extremely full. We are in a significant number of early stage searches or RFPs and are short listed in over 20 searches more than ever before. We also have several unfunded commitments arriving over the next couple of quarters and I'm optimistic about the growth of this business despite the recent redemptions.

This is a core priority for CI Financial, the performance of our portfolio managers continues to improve after a slow start to the year. In our last call, I mentioned that a few of our teams had a cautious outlook on Global Markets, and as a result had built more defensive portfolios, [dismal] performance in the earlier part of the year. As of September 30, more than 50% of our assets are in the top two quartiles for the year-to-date and 75% of our assets are in the top two quartiles over 10 years.

We continue to work to improve these numbers and I'm extremely pleased with the direction. At First Asset, CI's ETF platform, we continue to see the results that confirm our decision to purchase the Company.

We are aligning the businesses to maximize the opportunities for growth. First Asset's management team is establishing partnerships to maximize distribution relationships. An example would be with CIBC where they launched a number of ETFs based on CIBC's proprietary rules-based methodology. Also in Q3, First Asset launched a suite of ETFs managed by CI's Cambridge Global Asset Management. Although the mandates are slightly different than the ones that Cambridge Manages for CI Investments, the interest through IROC has been high and we expect to launch more ETFs with CI managers in the future. As well, First Asset continues to expand their sales team across Canada.

At CI Investments, with the recent retirement of Derek Green, we've made a number of changes. We have decided not to appoint a new President of that business rather we have split the role. we have a new National Sales Manager Roy Ratnavel, who began the job in Toronto on July 1. Previously, Roy was our Western Canada Regional Manager, because of the importance to the Company, the sales team as well as the wholesaling group at Assante and Stonegate now reports directly to me. Those departments had support of CI Investments, and Assante will now report to Steve Donald and these include marketing, product development, national accounts, business consulting and client service.

We said in the last call, we will be increasing the number of wholesalers particularly in the IROC channel. In the last quarter, we increased the number of wholesalers by 7 and we continue to look for experienced sales people in certain areas of the country. We are already seeing success with our IROC strategy, although CI Investments remains in redemptions for Q3, the trend is definitely improving and moving in the right direction, with us has continued into Q4.

Assante and Stonegate are performing well by all measures. They continue to outpace our competitors in net sales growth during 2016 and finished the quarter with record assets under management of CAD37 billion. The focus on delivering integrated advice to mass affluent and high net worth investors has produced stellar results. Families with more than CAD500,000 invested with Assante and Stonegate account for 64% or CAD24 billion of the firm's assets. Assante is also seeing continued momentum in recruiting with a significant and growing number of advisors continuing to move to a Assante.

In this rapidly changing environment, Assante is an attractive destination because of a strong star leadership, focus on integrated advice and the advanced tools and technology provided to advisors and clients. We are also one of the only few independent options for advisors today. In summary, many of the changes we discussed on the Q2 call have taken place. We have more wholesalers in the field and developed new product at CI Investments, CI Institutional and First Asset. Our enhanced IROC strategy is also showing positive results. We hosted 750 advisors at our Annual Conference in late September, giving them the opportunity to learn more about CI, our portfolio managers and our products. We continue to have strong and valued partnerships with Sun Life and its advisors.

As I said earlier, this industry is facing tremendous headwinds. However, CI is in a solid position to take advantage of every opportunity. We have scale, exceptional and broad portfolio management bench strength, a diverse product lineup, and strong ties to distribution. Where we see gaps we are filling them, we are currently conducting a review of all of our client focus procedures and operations with the goal of making it significantly easier for advisors and investors to do business for us. Finally, if you're looking for a few takeaways from Doug and my presentations, I think they should be that Q3 saw the highest quarter-end AUM, we saw continued return of record free cash flow, we saw improving fund performance, our institutional pipeline is strong, Q3 and Q4 institutional redemptions will have a minimal financial impact, and finally we're interested in acquisitions and are looking both inside and outside of Canada.

With that, I'll conclude my remarks and we'll now take your questions.

(Operator Instructions) Gary Ho, Desjardins Capital Markets.

Maybe if I can start off with the net flows side, the CAD1.5 billion this quarter, how should we break that down between institutional versus retail? Is it going to half-half and you kind of gave this some numbers, but I couldn't connect the dots here.

Hi, Gary. Neal Kerr here, it is certainly safe to say the majority of the money flows have been from our institutional business, as Peter alluded to. It's not been our practice to split the sales flows specifically between the two channels, retail and institutional, and I'd be hesitant to do that, certainly part way through the year before the year is done.

So, the [2.3] that you guys alluded to, that's all institutional though?

Yes, the pending money owed between now and the end of the year is coming from a couple financial institutions that I would refer to as, sub advisory clients of ours, one in particular has been legacy in nature, that we acquired when the institutions had an ownership stake in CI, they were essentially using CI to [enhance its] investment team while owning the equity in the business and that's why the economics as we've alluded to are our low fee, as time has gone on, they've decided to repatriate the majority of these assets to enhance teams, on extremely short notice as it turned out.

And, is there anything left with that financial institution?

Yes. We continue to run a some small amount of money for them, but the relationship is changed dramatically in size.

Okay and then just maybe can you give us an update on where you've seen the biggest headwind on the retail side and how do you see that play out over the near term?

It's Peter, I mean, I think for us the headwind is in the IROC channel. We certainly are working towards making a lot of changes to improve that. I mean here we talked about the increase in the wholesalers dedicating a wholesaler as the Head of wholesaling. We also are getting a lot of success when we work collaboratively with First Asset and the CI - we had CI investments and that's actually working really quite well.

So we're actually seeing a bit of a change in that and it's not nearly as challenging as it was in the past and I think our strategy is actually starting to payout.

Perfect. And then maybe just a second question. Some might find Derek Green departure a surprise given that he appeared in a few conferences recently. Is there a reason why he didn't stay on longer for the transition and any changes we should - any charges that we should expect with this in Q4?

Well, I'll take the second one first. No, there's no charges, but no, I mean, Derek indicated quite some time ago that he was planning to - he wanted to retire and between him and I, we started to decide when was this optimal time for us to make the change and it was now, so we could go into Q1 of 2017 with a team that's going to take the company into the future, I mean personally I think everybody on the executive committee would have loved Derek to stay on a lot longer, but it was his decision that he wanted to exit at some time in the near future. So this time worked perfectly for both of us.

And sorry I don't think I caught all the changes in the management structure, can you go through that again?

Sure. When I came on to - at CI earlier this year, we built an executive committee of eight people and that executive team runs the entire Company. So they represent every level of the firm. If you're talking about the changes because of Derek's retirement, the sales team - CI Investments' wholesaling team that's overseen by Roy Ratnavel, now reports up to me as well as the wholesaling group from Stonegate and Assante, everything else that was part of CI Investments under Derek now moves over to Steve Donald, and that's all of the, for lack of a better word, the shared services between Assante and CI Investments.

And then just I think to sneak one more, just on the acquisition was surprised that it wasn't in Canada or the US, is your strategy to make bolt-on acquisitions with this platform acquisition and what's the game plan there? And then maybe for Doug, can you provide any financial metrics of Grant Samuel, whether it's EBITDA, EBITDA margin or what not?

I'll start right now and then Doug can jump in afterwards, but I think we have said quite a few times in the past, we've grown our Company in the past as a result of acquisitions, mostly or nearly all of them in Canada, but I think all of us here felt that we needed to explore opportunities outside of Canada and this one it was interesting because of the circumstances. As you can see, the one commonality between Grant Samuel and CI is Epoch and Epoch manages money for both of our companies and there is an introduction that was made, and as a result of that and that was quite some timing as a result of our conversations happening the management of GSM decided that this might be the right time for them to look for a large partner. So it wasn't that we were going out and looking into Australia, but I think because of the fact that we have a relationship there with management and it fit exactly what we are looking for, where management runs the business and they wanted to maintain a large equity stake, it really fit quite well for us and so I think there is a - I think it works really well for us, it's a really good but growing market, it's very competitive as we know but we have excellent management and it's a fragmented market as well and there may be opportunities for us to grow going down in the future, but right now we're just going to work with this. And I think as some people have said, their distance will be a bit of a challenge, but you know what it was too good an opportunity to pass up. And I think it just gives us the potential to distribute products the way that Grant Samuel does today both institutionally and on retail, but as well there's a lot of other things that we could do with that platform. So there is a possible - just thinking about a possible springboarding to Asia. There's other parts of our business that we could bring into Australia as a result of that. So I think it creates a really interesting opportunity for us. And in my mind and in our mind, the challenges of distance are far outweighed by the opportunity.

Okay. And then, Doug, anything on the financial side you can share with us?

Other than as we've indicated, the assets part just over [AUD6 billion], no, we're providing any guidance on what the EBITDA is expected to be or the size of the purchase, not a cash deal, so expected to be mildly accretive.

Geoff Kwan, RBC Capital Markets.

I'm just wondering if you could just help me clarify with the numbers that you had. So you have announced CAD2.3 billion in redemptions for this quarter. And then on the last conference call, I seem to recall you were mentioning that the institutional pipeline you had about CAD1 billion that was going to fund through the end of the year. So I'm just wondering like in terms of your line of sight today through the end of the year for Q4, like what is that net number that you'd be looking at right now?

So, Geoff, it's Neal here. In the institutional business, the net number based on what we know today for the fourth quarter will be negative. The money flows out from the two financial institutions are certainly going to outweigh the inflows through the pipeline, some of which came in in the third quarter and some of which will come in in the fourth quarter as well, but the net result will begin outflow there.

Okay, but the CAD2.3 billion has not come out as of October 31 from the AUM you reported?

That's correct.

Okay. And then like when you talk about looking at acquisitions and this one is kind of more of a smaller acquisition that have some growth potential there. But if you found something of a much more significant size, that you're comfortable doing, from a financing standpoint like, what kind of leverage are you comfortable going up to on a potential more sizable acquisition?

Hi Geoff, it's Doug. We're certainly conservative compared to other companies setting up a little one time debt to equity and we would be comfortable getting up, and we said in the past above one-time debt to equity as long as we had a past to get back down to that range. The credit rating agencies don't get nervous till about 1.5 times and our covenants are 2.5 times. But we certainly don't expect to like I say get very high in terms of debt-to-EBITDA (inaudible).

Okay. So kind of factoring the credit crisis when you guys were selling a lot of your seg funds. I believe your leverage caught up to a little north of 2 times net debt-EBITDA. But that just gives a lot of the DSC commissions and then you brought that back down to the small equity offering, at that level of leverage in an acquisition that you guys would be comfortable with, like is that a reasonable thought process around where you could potentially go?

Yes, I'd like to point out when we hit that high level of leverage, we were an income trust and paying all of our earnings, and we were financing a lot of sales commission as well. Yes, we would consider going up that. We can always do an equity offering if we had a good story to tell in the midst of an acquisition. So we've certainly managed our debt levels in that way as well. But getting up north of 1.5 times, it would certainly have to be a good deal.

I would just add one more thing, we still are very conservative in the way we manage the Company from a financial point of you. So we are very careful with where our debt is and so on.

Graham Ryding, TD Securities.

Good afternoon. Could you give us a little more color perhaps on the AUM mix between retail and institutional, I noticed a few of the funds in this acquisition have performance fee component. So it looks like they are long-short hedge funds?

So Graham it's Neal here, referring to Grant Samuel, the current mix is about two-thirds institutional, one-third retail in terms of assets. There is a variety of strategies available from the company, some are available strictly as institutional mandates and others are available as institutional and retail strategies and growth profile on the retail side has been quite strong for the company.

Could you give us any sort of CAGR on that or what does the net flow profile look like?

I don't have that at my fingertips. I apologize for that. We can follow up though.

Okay, helpful. The terms were not disclosed, should we interpret that as this deal is not overly material to your earnings or your balance sheet?

Yes, that's right, it's not material to us, some of the details will be in our notes at year-end.

Yes. Okay, we'll wait for them. Any update on your initiative towards looking at an automated tiered pricing model?

Yes, it's Peter again, we're certainly looking at it and we would expect that we would have something launched probably in Q2 of next year. And we'll have more specifics on it probably in early Q1, but we're well along the way. And we can give you more detail at that time, but we are going to certainly have a tier pricing model for investors that have large assets with CI.

Okay, great. And then there's been a lot of fee activity in the industry. Are you seeing or feeling any impact maybe at the wholesaler level around fees and is an issue that advisors are talking about?

Graham, it's Steve. In terms of fees, as we look across CI Financial, I think as Doug had mentioned, while the gross fees are coming down, net fees seem to be pretty stable. From an advisor perspective, something that we've been talking about for a long time, moving towards fee disclosed or fee-based platforms continues to be an emphasis.

And as I've said a number of times, I actually believe this is a tremendous opportunity for those advisors that are embracing that, because there will be a migration of assets towards advisors that provide the articulation of value and have open and transparent billing.

Great. Appreciate that. Maybe just one last one on the Cambridge ETFs that you launched, any concern there that because they are similar mandates of some of your existing Cambridge mutual funds that are reaching a position down in the market, so you don't cannibalize your Cambridge mutual funds?

Hi, it's Barry Gordon. So I'd say that there's a couple key differences to note, it's not an exact clone of the mutual fund. It was carefully constructed to essentially be the core building blocks of their Canadian and equity mandates. So essentially it's a core portfolio, if you think of the way the Cambridge manages their portfolios in a core and explore concept, it is just focused on the core. There is less turnover, there is less cash management, less currency hedging, overall. With that being said, I don't want to portray them as the (inaudible) the mutual fund is just there used in the different way. So the IROC Advisors that we're dealing with tend to want more pure focus mandates that they can use as building blocks in their portfolio of construction. So they're different, they're less labor intensive and so they're priced accordingly.

Scott Chan, Canaccord Genuity.

Neal, just on the institutional side, you talked about a bit of pipeline for over 20 short list. Can you comment is that concentrated on a certain investment team or teams and is there specific asset classes in high-demand on that list?

Hi Scott, thanks for the question. So we are seeing demand in Canadian equity, in fixed income and in multi-asset, multi-manager, what I would call target risk and target date products today. So that's where the shortlist and the long list is primarily focused. That said, we are also working on some new things and we will be launching a new product - we are launching a new product this quarter that we expect to open up new opportunities for us in 2017. There will be a CI Global Private Real Estate Investment Fund for institutions and high-net worth investors coming to the market. That space is attractive to mid-sized and smaller Canadian pensions foundations and endowments. Since they don't have internal capability to run that type of asset class themselves, and it has a history of generating strong absolute results with lower volatility. So we anticipate that we will see some opportunities with this product as we move through 2017 that will come into the pipeline as well.

So you would manage that product with your signature?

That's actually going to be a partnership between CI and CBRE.

Sorry?

CBRE Global Investors, global real estate company, they run a global real estate portfolio for the last six years or so that we are going to be partnering with them in Canada on and in the [CIO]. We'll have a structure here that accessed that capability.

Okay, thanks. And just one question for Peter. Just on the GSFM, what is the opportunity to add more investment management teams to the platform? Or is that something to help kind of looking at the growth prospects of that division?

I would say there's definitely opportunities to add new product from CI in the future. I mean we're going to definitely go on the lead of our partners down in Australia, but I would suspect, there is definitely an interest in a number of the products that CI offer. So we're working with those. And there's a lot of other areas that the guys at GSFM are looking at as well, that we can help them with. So I don't want to get in too much detail, but I mean there is a - if you sort of just thinking here, we can help them with ETFs, we can help with closed-end products, there's a lot of different way and things that we have some pretty good capabilities, here that could help them out. And as well, I mean again going on their lead, I mean, they look at the opportunity at some of our portfolio managers, and they think they'll be quite attractive to both retail and institutional investors in Australia and New Zealand. So I think there's a pretty good opportunity there.

Our next question is from Graham Ryding.

It sounds like you actually has answered my question but it sounds like you're more focused on growing in GSFM in Australia and New Zealand as opposed to you bringing GSFM and trying to cross sell and grow here in North America?

I would think there are some opportunities there. I mean if you as an example, Tribeca, which is - we own 47% of it, they do have some capabilities that we might be able to lever off in Canada as well. I mean, let's say over the next few months, we're going to be focusing on looking how we can help them there and how they can help us up here institutionally and other jurisdictions as well. So, I'm glad you brought that up because I do think there's opportunities both ways.

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

Thanks, everybody, I really appreciate you spending some time, we got a lot of exciting things happening at CI and I look forward to - along with the rest of us at the table, look forward to having A discussion again for Q4. Thanks very much.

Thank you. This concludes our meeting for today. Please disconnect your line at this time and we thank you for your participation.