CI Financial Corp (CIXX) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2017 Second Quarter Results Webcast. (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 to discuss our Q2 results and the acquisition of Sentry Investments. We have our entire executive committee on the call to answer all your questions on the quarter and on today's acquisition.

Before discussing our results for the second quarter, I first want to spend a few moments on the Sentry announcement. CI Financial has reached a definitive agreement to acquire 100% of the shares of Sentry Investments for $780 million in cash and stock. We expect the transaction to close around September 30 of this year, subject to regulatory approvals. The owners of Sentry Investments intend to remain long-term shareholders of CI, which is a strong endorsement of our company and of the Asset Management industry.

For now the companies will remain independent, as we implement our plan to operate the businesses, where our teams can work together. We'll move to integrate quickly. But for the time being, it's business as usual.

This acquisition is very strategic to our business. It meets all the key metrics we consider when we look at an acquisition, including enhancing our Canadian business, increasing our access to distribution, and increasing scale. On top of this, we're combining 2 strong Canadian and independent financial services companies to create a larger and more competitive company. CI assets under management will increase to $140 billion, and our fee earning assets will increase to $180 billion.

A key advantage of this transaction is that it opens the door to a number of new retail advisers for CI, a key strategic focus for our company in 2017. We plan to significantly increase our sales team and offer a more diverse line of our portfolio managers, including Harbour, Signature, Cambridge, CI Multi-Asset Management and, of course, now Sentry. This is the best table of portfolio managers together under one roof.

We have met a number of very talented individuals at Sentry throughout their organization, and we feel many of them will strengthen and combine our businesses -- our combined businesses. And most importantly, this transaction is accretive to CI shareholders, even using our conservative models. Doug will take you through the financials in a moment.

As I said in the past, this is an industry with overcapacity of active Asset Management and where scale is definitely a competitive advantage. There are not w a lot of large transactions available in the Canadian market today. Sentry, with a strong and recognized brands with investors and advisers, will enhance our company. We are very excited about -- to be able to announce this transaction.

We're going to have a quick Q&A at the conclusion of our presentation, but for now I'm going to let Doug take you through the Q2 financials and the Sentry transaction. Doug?

Thank you, Peter. The combination of CI and Sentry will bump our total AUM to about $140 billion, and the incremental assets you see here coming from Sentry are primarily in equity funds. This will also solidify our position as the leading Canadian independent Wealth Management company. This acquisition provides CI with the opportunity to use its increased scale to create synergies. We are in identical businesses and we will look to consolidate vendors and use our size to negotiate with those vendors.

Our IT and back office functions are highly scalable, and we will be able to provide significant cost savings for Sentry fund unitholders, as well as run the Sentry business at our level of SG&A efficiency.

Our time line to achieve these synergies is by 2019. By that time, the deal will be highly accretive to both EBITDA and net income. Combining the financial result of Sentry into CI for 2018 gives us pro forma numbers. And I would note, these figures are approximate and are here to give you an idea of the size of the combined entity.

Total revenue will be approximately $2.3 billion, and we expect to generate about $1 billion of EBITDA on that revenue. Some of you will note that this EBITDA margin is very close to CI's current overall EBITDA margin. Net income is projected at about $650 million, and we expect to generate $750 million of free cash flow.

As Peter mentioned, the total purchase price is $780 million, and CI will pay $230 million in cash and issue about 20 million common shares. This evaluation is below CI's multiples once synergies are achieved, which is why it is accretive. CI's debt will be about $1 billion after close, which will put the debt-to-EBITDA ratio at 1:1.

Now looking at our quarterly results and comparing Q2 to Q1. Average assets under management grew 3% to $122.7 billion from $119.4 billion last quarter. This quarter, we recorded a provision of $45 million for the settlement of a dispute with CRA over the interest rate charged on subordinated notes within CI's income trust structure from 2006 to 2008. Recall that we outlined the original exposure at upwards of $275 million based on CRA's position. Although we were always confident in our position, we're extremely happy to have now settled this matter. We had put $173 million on deposit with CRA and expect to get the balance of that deposit, approximately $128 million, back from CRA.

Reported net income was $96.3 million or $0.37 per share, up from net income of $134.2 million or $0.51 per share last quarter. Adjusting for the provision brings income to $141.3 million or $0.54 per share, up 6% on a per share basis.

EBITDA of $222 million or $0.85 per share was up 1% and 2%, respectively. Free cash flow was up 1% to $154.8 million, and dividends paid -- as were dividends paid at $0.3475 per share.

Now looking at year-over-year highlights, average assets under management were up 13% from $109 billion in last year's second quarter. Adjusted net income was up 10% from $128.6 million last year and up $0.07 per share or 15% with the accretion from our share buybacks over the past year. EBITDA was up 4% and EBITDA per share was up $0.07 or 9%.

Free cash flow was up 5% and dividends paid were up 4% year-over-year. CI's total SG&A was 36.5 basis points, down from 36.7 in the first quarter and up from 36.2 in the second quarter of last year. Spending in dollar terms was up $3.6 million over the last quarter. Once we net out GSFM and First Asset spend, the increase was $2.4 million, primarily due to filing fees paid on the launch of CI's preferred pricing funds, while the increase at GSFM related to year-end incentive compensation.

CI's quarterly free cash flow remains strong at $155 million this quarter, and the steady cash flow you see here forms the basis for CI's ability to pay dividends and buy back shares.

Looking at that return to shareholders, the first column shows the last 12 months of operating cash flow adjusted for the after-tax provision taken in the past year, and the deferred sales commissions paid to get free cash of $622 million. CI paid out all of that free cash and more in the form of share buybacks at $684 million.

In the second quarter, CI increased its buybacks to $90 million, which brought the return to free cash flow to shareholders to $181 million. Even with the dividend increase that took effect in the second quarter, the total amount paid out has declined due to the share buybacks that are reducing our share count.

I will now turn it back to Peter.

Thanks, Doug. This was a very productive quarter at CI, and we continue to see positive results in all of our business lines. Despite the ongoing headwinds in our industry, including fee pressure, regulation, new competition, and the active-passive debate, our business continues to strengthen.

Let me take you through some of our business line results. At CI Investment for Q2, our retail business continues to have a solid rebound. The first half of this year has been much stronger and well above our plans. Where our sales team has access to advisors, we're seeing very strong results. We're seeing positive momentum year-over-year across every region and improved support in all channels, including our broker channel, Sun Life and Assante. At CI Institutional, business remains very strong. We continue to win mandates, some of which have been -- were not funded at the end of Q2. However, our large funding did occur in July, which was included in our July asset numbers. We also continue to have a very active pipeline of potential searches with over $1.25 billion in short-listed mandates. Much of the success of our retail and institutional sales teams is due to the improved performance of our portfolio management teams. Over 65% of our assets are in the first and second quartile over the past 12 months, that is up from 27% at the end of Q2 last year and 47 -- 46% at the end of 2016. The markets continue to be challenging, but I remain very confident in our portfolio management teams at CI.

With the retirement of Danny Bubis, we've ended our long relationship with his business, Tetrem Capital Management. This gave us the opportunity to strengthen the team at Harbour Advisors with the addition of a new senior portfolio manager. We have moved most of the assets that were subadvised by Tetrem over the Harbour.

GSFM, our Australian business, continues to perform very well. Although there have been some redemptions within their Institution division, their Retail business is growing extremely well. Remember, the difference in fees between retail and institutional businesses is significant. GSFM is growing in the sectors of the Australian market that are most important to CI Financial.

We have taken a 20% stake in a small investment firm, Munroe Partners, which specializes in global long-term strategies. This is a fast-growing asset class in the Australian market. GSFM has also added Munroe to their Retail and Institutional platforms. We're very excited about the growth opportunities with this team.

Finally, we'll be launching CI products on the GSFM platform in the second half of this year. Already, we have begun the process of getting a number of our funds approved by the Australian consultants.

First Asset continues to produce results confirming our buy, not build strategy. We are significantly further ahead than we would have been if we had started without a strong management and exceptional sales teams. ETF assets have almost doubled since CI purchased the company in late 2015. First Asset is also on track to have one of its best sales years ever. They continue to launch products managed by CI Investment teams, along with other new strategic partnerships. The uptake has been very strong.

First Asset's total market shares have grown in the first half of 2017, and their share of active ETFs represents about 8.3%. The wholesaling teams at CI Investments and First Asset are working very closely together, and we're seeing successes through this collaboration.

Assante and Stonegate continue to post very strong growth, well in excess of their competitors. This growth is from existing advisors and new advisors joining the firm. Net sales at Assante and Stonegate were up over 20% in Q2 compared to the same quarter last year, where the majority of this is being invested in the CI products. The pipeline for new advisors remains robust, as many are looking for strong -- a strong and independent firm to join.

In terms of initiatives, we successfully launched our CI preferred pricing platform on May 1. This is the largest IT project CI has ever completed.

To remind everyone, we have reduced the overall fees we charge for investors with over $150,000 in certain class of our funds. We already have a number of large dealers signing on to this program, with more being approved each quarter. We do not expect this to have a material impact on the financials of our company.

In summary, the first half of 2017 was much stronger for CI than the same period last year. Our gross sales have improved across all our business lines as a result of the improved performance of our portfolio management teams, and our increased sales force. This resulted in a much stronger quarter for our company. We are executing on our strategy, and we feel we're very well positioned for the second half of 2017.

Finally, the purchase of Sentry in essence continued our strategy to be acquirers of solid businesses in our industry. We see this as providing increased scale and a market where scale is important, providing access to new distribution in Canada, strengthening our Canadian business, adding new talent from across the Sentry team, including PMs, sales staff, and more. And finally, this transaction is accretive, even using our conservative assumptions.

With that, I conclude my remarks. And we're pleased to take your questions. Operator?

(Operator Instructions) The first question is from Gary Ho from Desjardins Capital Markets.

Let me kind of just start off, I want to get more details around Sentry here. Just wondering if you can share with us, maybe, the EBITDA contribution last 12 months, or 2016, or their EBITDA margin? And what would their kind of net flows be last 12 months as well, please.

Gary, it's Doug. Yes, we're not prepared to provide Sentry historical information. I know they are a private company and the numbers are -- yes, essentially private. And we've only indicated that we expect to get their margins up to where our margins are because it's a very similar business. The fees on their funds are very similar to the fees on our funds as well.

Okay. And then maybe just on the accretion number, sorry, if I missed it. Is it accretive to EPS and EBITDA per share?

Yes.

So both, okay. And then maybe I dig in deeper on the asset side, is it all retail mutual funds? Or is there institutional and high-net worth in there as well? And how should I -- and you talked about fees being similar. I thought they -- when I look at maybe the top 15, 20 funds, their fees are slightly higher than yours? Are you guys pretty comfortable with where the fees at Sentry?

Gary, it's Peter. We're comfortable with the fees where they are. And so what was the first question, sorry, I can't remember.

Yes. Just maybe the AUM split? If it's all retail or are there some institutional high-net worth in there?

The vast majority of the Sentry business is Retail. There's a small portion of Institutional, but the vast majority is Retail.

Okay. And then maybe when you guys -- maybe just talk about the models and how you guys think about modeling this out? What buffer have you guys built in, in terms of potential attrition? It sounds like these guys are not expecting any fee cuts from their end. Any color you can provide there, please.

I'd only say we have been very conservative in terms of a sales forecast for their business. But we do see there are areas where we can work with their sales team to try and improve sales in the future.

Okay. And then, maybe, just going back to your pro forma 2018 slide. Is that using the current run rate AUM? Or what are you assuming to arrive at those numbers?

Well, we're using our assumption of sales forecast plus market appreciation, so both CI and Sentry for the full year 2018.

And what would those 2 combined growth in AUM be? Like are you guys thinking like 6% growth in AUM combined market and net sales?

Yes. I don't have the rate in front of me. We model in a certain modest amount of market appreciation and then sales forecasts separately for CI and for Sentry.

Okay. And then maybe I can sneak one more in on -- just on the Q2 results. Can you help us break down the CI and First Asset piece? Specifically, the $248 million, how much of that is for First Asset's, how much is maybe CI Institutional, and maybe just the traditional CI Retail as well?

So, we don't break out our Retail and Institutional, as you know, but I would say that all 3 are in net sales.

All 3 are positive. Okay.

The next question is from Geoff Kwan from RBC Capital Markets.

Just I had one question because I think most of my other questions have been asked. The Institutional pipeline, I think, you talked about last quarter kind of -- you had a good pipeline of things that you were actually going to have funded. Just wondering what the update now that you have through the end of the year? Or at least -- in terms of the visibility that you have?

Thanks, Jeff. It's Neal here. Going into Q3, we still had a fairly healthy amount of business won and not funded in the hundreds of millions of range. And so we would expect most of that to close before the end of this year. That said, sometimes, there's delay in how these fund. And as Peter mentioned, the pipeline of opportunities we're shortlisted for is pretty robust. Probabilities on those opportunities is somewhere typically between 25% and 50%. So we're optimistic, we're also realistic. And I would say, these comments are based on what I know today. And as we've talked before, there is a lumpiness to these flows in or out, so that's obviously the caveat.

Okay. And actually, you know what -- can I ask one follow-up question. I know Peter, you mentioned you're not going to give specific break out on the Canadian business between Retail and Institutional and First Asset. Was the comment that you made was, in Q2, that was positive for all 3, and then specifically on the Retail, given the improvement and the performance that you've seen, is that trend in sales -- net sales that would be improving, I'm guessing?

Are you talking about going forward? Yes.

Yes, sorry, it was twofold. It was in Q2, like Retail, First Asset, and Institutional, each were positive in the quarter and then on the Retail, as we've got 1 month more of data, given the performance improvements, have we seen the net sales trend improve?

Yes, I think, I would -- I can safely say that we've seen -- we've definitely seen the trends improve going into the next quarter.

Okay. And sorry, on Q2, you're positive in all 3 of those buckets in the Canadian business?

Yes.

The next question is from Stephen Boland from GMP Securities.

Just a couple of questions on, I guess, the synergies. I was kind of picking on terminology, but when you say highly accretive, and I look at that net income for 2018, its probably -- I'm not sure what consensus is, probably about 620-ish, so about $30 million of net income accretion. And when I do that on a per-share basis, it may be 1%. So when you say highly accretive, is it looking out towards 2019 that you get more or higher level of accretion going into -- out a year?

Yes. We have -- as I said, we expect to get all of our synergies by 2019. So we expect mid-to-high single-digit accretion by then.

Okay. And then, can you just explain when you say vendor relationships. I mean, is that custodial? I'm just trying to get an idea? What's included in that, that first wave of, I guess, synergies that you're looking at?

Yes, it's all of our -- well, all of Sentry's back-office relationships. There's dozens of vendors that we share in common. And so we can consolidate the relationship into one company dealing with that vendor. And we have the power to negotiate better pricing going forward.

Okay. And that synergy number doesn't include fund consolidation, as you said, like for now. Their PMs, their funds are going to stay as is?

Right. We believe we can run their business at the same margin as CI's business.

Okay. And maybe we could just talk a little bit about the process and how this deal came about, if you don't mind?

Yes, Stephen, it's Sheila Murray talking. We were approached to participate in a highly confidential auction process for this acquisition. We've been in discussion with the company for a couple of months, and we were permitted access to diligent information, documentation for us to perform a review and make a decision about whether to make an offer on the company. We made an offer and happily they accepted it.

Okay. And just one final question. Just on the settlement with the CRA. I mean, if I look back, your comments and most companies will say that you're vigorously going to defend their CRA and their assumptions. I mean, was this just a case of just trying to get it behind you and taking the $45 million hit. Maybe, if you could just explain that process?

Again, Sheila Murray speaking. Yes, you've hit the nail on the head. We felt extremely confident in our case, but we were suffering litigation fatigue, frankly. This had been going on for 7 years. And we wanted to put it behind us, and we thought it was important to put behind us, and remove the uncertainty and the extremely expensive tax on our executive team and also our litigation team.

The next question is from Tom McKinnon.

It's BMO Capital. A couple of questions. One, with respect to the 20 million shares, I assume, Sentry owners taking these 20 million shares, is there any kind of lockup arrangement associated with those shares?

No. No, there is not. This has been structured as a takeover bid. So there's no securities regulatory lockup, nor did we negotiate one. We're confident that they share our vision of this industry and the combined businesses, and they have told us that they are long-term shareholders.

Okay. The second is with respect to buyback. You've been pretty aggressive with buybacks. Does this -- the Sentry acquisition change your tone towards buybacks going forward?

No. To the extent that we see our shares as undervalued and a good place to essentially invest, we will keep buying back stock.

All right. And then finally, the SG&A looked to be up -- was a little higher than anticipated, up 3% quarter-over-quarter. Why was that? Was there any noise associated with the tax settlement in there, if you can...

No. As I mentioned, there are a couple of key things. Grant Samuel has a junior and, so there was some year-end incentive compensation booked. And on the CI side, we had over $1 million of filing fees related to the launch of our preferred pricing funds.

How should we look at growth in SG&A going forward?

I expect it to moderate somewhat. I'm not looking for 3% or 4% every quarter. So you know, we do target over the longer run that our AUM grows faster than our SG&A, so look to get back on that.

The next question is from Graham Ryding from TD Securities.

Could you give us the multiple that you paid on EBITDA for Sentry? And then what -- after you sort of factor in increasing their margins to your level, then what does that multiple imply?

Well, in the first case, no. We've indicated we've paid a price that is fair and reflects the multiple lower than CI's multiple, once synergies are achieved, which is why we believe it will be accretive, come 2018 and 2019.

Okay. What sort of -- when you make assumptions about Sentry's net sales, are you assuming that they move into net sales positive territory in 2018, 2019?

Yes, I mean, we think with the combined sales force and the number will be probably the largest sales force in Canada, we think that we're quite optimistic on the sales numbers of the combined company. So, again, I can't tell you exactly where the sales are going to come from. All I can tell you is that if you go back to our -- what we did last year by increasing our sales team by 15% and the success we have from that, increasing the sales team, again, because of the 2 businesses is going to be -- in my mind is going to be probably a huge opportunity for our business. So I'm very optimistic.

Okay. You answered one of my questions, there. It looks like Sentry was in net redemptions of about $1 billion in 2016. Where have they been year-to-date?

I don't think we report that, if you don't mind. Maybe we can take that off afterwards, if you don't mind.

Okay. And then just lastly, you talk about broadening the distribution opportunities with this deal. Can you talk about exactly what you're referring to there that Sentry has that you do not have?

So -- a number of things, but the most important one is they've a very strong relationship with the broker or IIROC channel. And that's the focus for us at CI. So if -- as you look at the relationships that Sentry advisors have with key IIROC firms and advisors, a lot of those are where we want to have -- we want to -- strengthen our bench. So we are looking to that to be able to be introduced a number of new advisors and channels that we just don't have nearly as good a relationship as we should for a company our size. So that's where we see the biggest opportunity for CI.

The next question is from Geoff Kwan from RBC Capital Markets.

I just had a quick follow-up from Steve's earlier question, so the comment around the highly accretive. Is that in relation to consensus numbers out there? Or is that versus your own internal forecasts?

Our own forecasts, yes.

The next question is from Scott Chan from Canaccord Genuity.

I missed the opening remarks, but did you guys comment on the trailer fee and distribution line? It seemed like it was a lot more sequentially than anticipation. Was there anything outside trailer fees that affected that line this quarter?

Sorry, Scott, do you mean, the CI's?

Yes, the CI, the trailer fees -- from my numbers, I assume, like, it was a bit high sequentially, but is that the case or...

No. I show it tracking pretty much in line, both in basis points relative to our asset levels.

The next question is from (inaudible).

Is there any RSPs and RIIF will be available with -- for Sentry funds? Those options are not available right now. Do you have -- what's your intention about that?

Well, we will be integrating the businesses together. So whatever products and services that are on the CI side will more than likely be added to the Sentry side as well.

And the next question is from Gary Ho from Desjardins Capital Markets.

Sorry, just a quick follow-up on Graham's question here. So you expect multiples to be lower than what you guys are trading after factoring the synergies. But pre-synergies, is it safe to assume that it will be higher than what you guys are trading at?

No. I'm not prepared to say that at all. We're not disclosing what Sentry's pre-synergies numbers look like. We're just indicating where we think it will end up.

Okay. And then just going back to your 2018 slide, how much of the synergies are factored in there? Is it going to be back-end weighted? How should I think about modeling that in over '18, '19?

I'd say that the 2018 does not incorporate all of the synergies. And we expect to get the balance of them by 2019. In terms of mix, we will be at least halfway there by 2018.

The next question is from a participant. (Operator Instructions) Mr. Paul Holden from CIBC.

So increased scale and the synergies you'll achieve are, obviously, valuable, but the real question for me is, strategically, what do you do with that increased scale and synergies to be able to grow at a faster rate than the industry, or outmaneuver your competitors, or respond on price, et cetera? So just want to get a better sense of what you are thinking strategically in terms of what you're going to achieve here long term?

Well, I think if you want to take it down to the simplest view that we have is, we have is look -- we're going to have a significant larger sales force, we're going to have an additional new brand, we're going to be able to spread costs over a larger asset base. So I think all of those, in my mind, are very strategic. I think -- I go back to what I said earlier, is that when we have a -- when we added more sales people, we got more business. And I am very confident that will happen again. So I think, that's a certain value add. We're going to have a host of new Sentry wholesalers that now we're going to have more products to be able to offer their advisors. We're going to have a smaller -- a reduced sizes of regions, so that our advisors are going to be able to get more support from the CI sales team. So that's where we think is the biggest opportunity for our business.

Okay. And on the scale side, that the more we can over time as a larger asset base to lower our average cost, we're better able to compete to the extent that margins do come down.

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

Okay, well, with that, thank you very much for joining us. Please feel free to give us a call if you have any other questions. And we look forward to our next conference call in 3 months. Bye.

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