CI Financial Corp (CIXX) 2017 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 2017 Third 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 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 Q3 results. We also have our Executive Committee available to answer your questions about the quarter.

Before passing the discussion over to Doug, I want to provide you with a high-level update on the integration of both Sentry and BBS.

The Sentry transaction closed on October 2. Since then, we've been working to integrate the business. Our priority was to finalize the ongoing Sentry PM teams, along with the expanded CI Sentry sales teams. All of that has been completed. Sentry portfolio managers continue to oversee the majority of Sentry assets and have been positioned as a distinct investment group within CI's already broad line of investment teams. We think this team is an excellent addition to the CI family. We have also trained the Sentry sales team on CI's product lineup and the CI team on Sentry's products.

As we forecasted, Sentry funds continue to be in redemptions. We expected this when we built our models for this transaction, and we are well inside of our range. As an aside, Sentry's net redemptions are more from a reduced gross sales -- or from reduced gross sales since the transaction was announced rather than a significant increase in actual redemptions. We are the largest sales team today. We are confident that this can be reversed. We expect Sentry to remain on redemptions through the remainder of 2017 and most likely into 2018. The rest of the integration is on track, and we remain very optimistic on obtaining the synergies we modeled for this transactions. There have been no surprises since we closed Sentry. Doug will get into more detail shortly.

The BBS Securities acquisition closed last week after approval from the regulators. We have selected the leaders of the business from their existing executive team and continue to see outstanding opportunities to leverage their technology with our existing business lines, including Assante, Stonegate, First Asset and CI Investments.

This is also a strong stand-alone business with a growing share of the do-it-yourself market. We also see huge opportunities to work with the BBS team to build out their platform as a large independent online business. We will have much more details to discuss on our next quarter's call.

This is a very busy time for all us at CI. However, I'm very encouraged with our position today. We remain focused on our strategies of enhancing our Canadian business, accessing new channels of distribution in Canada and globally and adding scale to our business both organically and through strategic acquisitions.

With that, I'll hand the call over to Doug.

Thank you, Peter. Looking at Q3 compared to Q2, average AUM declined 2% to $120.3 billion from $122.7 billion. Last 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 from 2006 to 2008. Adjusting for that provision, last quarter's net income was $141.3 million or $0.54 per share. This quarter is essentially flat at $140.8 million and up $0.01 per share on a per share basis because of the share buybacks we have made. Similarly, EBITDA of $223.1 million was up marginally from $222 million last quarter and up $0.02 to $0.87 per share. Free cash flow was up 3% to $159.1 million. Dividends paid were up slightly at $0.3525 per share.

Now looking at year-over-year highlights. Average assets under management were up 7% from $112.3 billion in last year's third quarter. Net income was up 3% from $136.8 million last year and up $0.04 on a per share basis or 8% with the accretion of our share buybacks over the past year.

EBITDA was down 1%, and EBITDA per share was up $0.04 or 5%. Free cash flow was flat, and dividends paid were up 2% year-over-year.

CI's total SG&A was 35.9 basis points, down from 36.5 in the second quarter and up from 35.4 basis points in the third quarter last year. Spending in dollar terms was down $2.9 million over last quarter as discretionary spend was reduced slightly this quarter and last quarter included higher compensation costs and filing fees.

CI's quarterly free cash flow remains strong at $159 million this quarter. And with the addition of Sentry in the fourth quarter, this should grow to approximately $175 million.

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 $622 million. CI paid out all of that free cash and more in the form of dividends and share buybacks at $693 million. In the third quarter, CI increased its buybacks to $100 million, which brought the return of free cash flow to shareholders to $191 million. The issuance of stock for the Sentry and BBS deals will push the quarterly dividend payout to about $97 million, but this amount will decline as we continue to repurchase shares. We also believe increasing the dividend is less relevant with our yield at 5%, and we'll focus on increasing the share repurchase.

The acquisition of Sentry closed on October 2, as Peter mentioned. This means that CI's fourth quarter will include a full quarter of results. And we have already executed on 50% of our expected synergies. As these synergies start to impact SG&A, the spend in basis points at Sentry will approach CI's level, and ultimately, the marginal rate will be below CI's industry-leading 30 basis point spend in the asset management segment. At this point, we are expecting $25 million in EBITDA from Sentry in the fourth quarter.

As for BBS, having enclosed on November 1, the purchase price was disclosed in our subsequent event note at $34 million, 80% of it in stock. This company is profitable and growing and has tremendous potential. While it will contribute to CI's fourth quarter results, the main contribution come in the quarters ahead where we expect to save millions of dollars in our various back offices and save months of build time on several growth initiatives.

I will now turn it back to Peter.

Thanks, Doug. As I said, earlier, this has been a very busy year at CI. We have acquired 3 unique but strategic businesses in the past 12 months and 4 in the last 2 years. We also continue to reposition our existing business lines.

The wealth management industry in Canada and globally is changing at a time when status quo is the enemy. The headwinds are evident, with fee pressures, a continuing active-versus-passive dialogue, increased regulation, new competition and overcapacity in active managers. We view this as an opportunity for CI and are positioning our company to be the independent choice in a market dominated by the banks.

Now let me take you through the results of some of our businesses. At CI Investments, our retail business remains positive. As you can see in our press release and our MD&A, we've provided more clarity on our sales by breaking out the retail and institutional businesses.

To provide a clearer picture of our retail business, we also have a separate line for closed businesses, which is our segregated funds and closed-end products that are not open to new business today. In total, this block represents less than 8% of our total assets. The closed products will continue to be in redemptions because they are not open to new sales and because many of these funds make regular income payments to their investors. However, the annual redemption rates have remained relatively stable over the past few years at less than 10% of total assets in this product.

In the rest of the retail business, we have a strong rebound since 2016. We see positive momentum in all of our sales channels, including brokers, Sun Life and Assante. With the Sentry transaction, we have increased our sales team by roughly 18% and provided even greater -- to provide even greater coverage to advisers. We have also doubled the assets that we have with the broker channel and increased the number of relationships we have with advisers. We view this as extremely positive for CI.

At CI Institutional, business continues to be robust. There were over $350 million in net sales in Q3 and $600 million for the year-to-date. We have won mandates that are not funded, and we are shortlisted on more mandates than we announced on the Q2 call. This has been a very strong year for our institutional team, and 2018 also looks extremely positive.

First Asset, our active ETF business, continues to have a very strong year with solid net sales and asset growth. Assets under management have more than doubled since the acquisition 2 years ago. As I said in our last call, our buy-not-build strategy was the correct decision. We are launching products such as the First Asset enhanced short-duration bonds ETF using CI portfolio management teams as well as other active ETFs using new strategic relationships. We are seeing positive support of First Asset products throughout the broker channel. Today, we continue to run the CI and First Asset sales teams separately, but both teams are working closely together in search of new business.

GSFM, our Australian business, continues to perform above expectations. Although our institutional business is in redemptions, their retail business remains robust. As a reminder, the margins in their retail business are significantly higher than with their institutional assets. GSFM has broadened their portfolio management lineup from 4 teams at the beginning of 2017 to 7 today. Their new portfolio management relationships include Man Group of London, Munro Partners from Australia and CI's own Cambridge Global Asset Management. GSFM will launch a mandate managed by Cambridge into the Australian market in the fourth quarter of this year. This will be CI's initial launch of a CI portfolio manager outside of Canada.

Assante and Stonegate continue their excellent growth, both organically and through recruitment of experienced advisers. In every metric we review, Assante and Stonegate are exceeding their 2016 numbers, including net sales, high net worth growth and new assets from recruitment. They are an important engine of the growth for CI, and we continue to invest in this business. The acquisition of BBS and the technology available through this platform will contribute to Assante and Stonegate's ongoing success.

In summary, we're pleased with CI's position today. In particular, the integration of Sentry is going well, and we expect to reach our synergy targets well ahead of our plan. The BBS acquisition closed last week, and we believe there are a number of opportunities that move CI's IT strategy forward at a much quicker pace, including our robo platform, our millennial strategy, our unified managed account or UMA and a separate account platform. We reconfirm our current dividend policy and are prepared to increase our share buyback and increase our debt level if and when opportunities arise. And finally, we see positive results in all of our business lines, most notably at Assante and CI Institutional.

With that, we conclude our remarks, and we'll be pleased to take your questions. Operator?

We do have a first question from Geoff Kwan from RBC Capital Markets.

I apologize, I missed the first couple of minutes. I know you were talking about the Sentry. And it sounds like there has been net redemptions year-to-date, and you suspect that it's going to happen or persist, I guess, into maybe the early 2018. Was that the case? And also, did you give any numbers around what, say, like the quarterly net redemptions were in Q3 and on a year-to-date? Obviously, they wouldn't have been in when they were part of CI.

No, we didn't give any numbers out for Q3 for Sentry. It closed October 2. But yes, what you did hear is right. I mean, we expect that Sentry will continue to be in redemptions in -- for the remainder of 2017 and into 2018.

And are you able to comment in terms of the net redemptions year-to-date? Were those better year-over-year versus what was seen in 2016?

I think it's about consistent. I would say that is -- probably is a good way to put it.

Okay. And on the institutional side, you got -- picked up some nice good wins. What's the -- do you have an updated number in terms of things -- mandates that you've won but haven't funded yet?

It's Neal Kerr here. Thanks for the question. We've got hundreds of millions of mandates that are -- we've been informed we've won that haven't come in yet. Some of it will come in, in the fourth quarter, we expect, and then the rest will continue for Q4 and next year. In addition to that, the pipeline of business that we are involved in, RFPs and shortlist presentations [of a fund] is amongst the most robust we've had. So we feel good about that.

Okay. And maybe if I can ask one last question. You've been doing a few acquisitions in the past year. Maybe just thoughts on appetite of potential deals that we might see over the next year, what you're looking at. Is it particular geographies, products, that sort of thing?

I think if -- I'm just sort of looking at the faces around the table here today, I think we're kind of -- we are always looking at transactions. I mean, I think that's what's caused -- that's been the success of CI, is looking at the pieces of business that would fit into CI well. And I think we have a number of ideas that we're actively looking at, both inside of Canada and out. But right now, we're very focused on the integration of the 2 businesses right now and going from there. But we're -- like I said, we're always looking for and always interested in enhancing our business through acquisition.

Our next question is from Graham Ryding from TD Securities.

The broker channel, it looks like, with the addition of Sentry and then your own CI sales team and also First Asset, you've got a few different lines of sales, individuals going, targeting that channel. So how do you manage that so there's not too much overlap?

Let me -- I think what you're -- yes, I think the way Graham is saying it is, because we have a CI sales team, a Sentry sales team and a First Asset sales team, is there an overlap? The CI sales team and the Sentry team are going to work together. That's already been integrated. And the First Asset, although they run independently, they work very closely with the CI Group. So we don't see a lot of overlap there right now. But it's -- the one positive thing is that we have an awful lot of people. Within the broker channel and through the whole -- throughout our whole business, we have significantly more wholesalers selling to advisers in every channel that we have through -- than we did essentially 2 years or 1.5 years ago. If you remember, we increased our wholesaling team for CI by 15% in 2016, and we've increased it again by 18% this year. So we've got a very, very large team, and that excludes the First Asset group as well.

Okay, great. I appreciate the color you gave around the EBITDA contribution from Sentry, and it sounds like you had 50% of synergies realized so far. What does that EBITDA contribution look like once you get to 100% of synergies?

Graham, well, it -- I think of it more as, where can we get the spend at Sentry down to?

Yes.

You know that we've said we believe we can get it down to below CI's spend rate. So regardless of what you put in for gross SG&A at Sentry, you can put in what you think the net spend will be ultimately.

Okay. The Assante, I understand the logic behind bringing BBS, the back-end technology, into that automated advice platform that you're rolling out there. Were is that initiative at in terms of how you're progressing in timing?

It's Steve Donald. What BBS does, as Peter has mentioned in his remarks, is it accelerates that timing. So while we've got the front end, BBS provides us with that back-office clearing. So we would anticipate launching it internally to a test group before the end of the year and having it out into the broader market during 2018.

Okay. And then did you not have a back-end solution when you licensed the original technology? Or is this just a better back-end solution?

They're not owned. We would have been outsourcing, so we were investigating that, and BBS has provided us with a better solution.

I mean, our chances -- it's Peter again. But chances are we would have ended up with BBS because they are already doing a number of robo platforms. So...

Got it. Any color around the level of profitability we should expect from BBS?

It's a small contribution. We paid $34 million, and I'd say the multiple was at or below CI's multiple. So it's a small private company.

Our next question is from Tom MacKinnon from BMO Capital.

Thanks for the EBITDA contribution associated with Sentry. I was wondering if you might be able to break down the -- what the revenue contribution would be on that EBITDA, thinking more like in terms of the management fees and the trailers associated with this $25 million EBITDA. Or if you can't give the dollar amount, how do they sort of compare to your respective fees and trailers?

They are comparable because they're a full retail shop. So their retail management fees are quite similar to ours, and the trailer fees are also quite similar to ours.

Higher or lower or exactly the same?

Pretty close.

Okay. And then is there any comment on how flows are trending so far at CI, excluding Sentry in the quarter? The third quarter flows are pretty good. And just seeing how that -- if those trends are -- what they're looking like in the fourth quarter, especially with respect to retail.

Yes. And it's Roy Ratnavel. I'm the National Sales Manager. As you know, last year, we implemented an IIROC strategy, and the results are in, and it is very positive. And at this rate, we are very confident that this positive trend will continue into Q4 and beyond. And not only in the IIROC channel, the MFDA credit union, as you heard from Steve, Assante piece as well. So overall, the retail business is in a very positive momentum right now.

Our next question is from Scott Chan from Canaccord Genuity.

Peter, when you referred to Slide 5, potentially accessing new distribution channels in Canada and globally, can you maybe just provide a bit more color on that statement, specifically on the global side?

Well, I mean, I don't want to go into our -- too detailed into our strategy. But I mean, it -- there are -- in Canada, there are -- even though we're $140 billion of AUM at CI Investments and $180 billion of fee-generating assets, there are still pockets of distribution that we don't have access to. We don't -- I mean, as an -- just as an example, the BBS strategy provided us with a very large group of investors that have never -- probably never done business with CI. And so that provides us a new channel. Outside of Canada, our institutional group are always looking for ways to export our portfolio management teams. We're just beginning that. The Australia idea was -- with Cambridge is the first one, but we have certainly had contact with opportunities in Asia, in -- more on Australia and into the U.S. as well. So this is a -- the thing about our company is we're a really big company in Canada that doesn't have nearly as much exposure to outside of Canada as we should, and we need to be able to use that opportunity to grow the business. So that's kind of a roundabout way of answering your question, Scott, but I think there's lots of opportunity for us to expand distribution, not only in Canada but also abroad.

Great. And just on the robo-advisor front, is there any update to share on a potential offering?

Nothing further than I just mentioned in that we're looking to launch internally before the end of the year, and it'll be available externally during 2018. Sorry, one other thing. As Peter said, we do have an existing robo offering available through Virtual Broker, but it's in its very early stages right now.

Our next question is from Gary Ho from Desjardins Capital Markets.

Just going back to Sentry, maybe I can ask the EBITDA synergies question another way. So given what you guys have been done so far, would you guys change your pro forma 2018 numbers, the ones that you provided last quarter? I think EBITDA, $1 billion; net income, $650 million; and free cash flow $750 million. Like would you increase that given what you guys have done so far?

Well, given that we think we're at or slightly ahead of pace, I'd increase it a little bit. But -- or I kind of -- I made a very round number last quarter, and I'm not prepared to fine-tune it just yet. We'll see in the fourth quarter.

I think we always look at things very conservatively and what we are modeling. So I agree with Doug. I think we're fine where we are right now.

Okay. And then just on the Sentry outflows, so what do you think you need to do to turn that around? You mentioned it was more of a gross sales issue and not a redemption issue. So is it performance? Or is it ramping up sales teams? Can you somehow give us some targets that we should -- we can measure your execution against?

I'm not going to give you targets, but I can -- I'll give you where we are, what we're doing. I mean, the -- whenever a transaction like this happens, advisers sort of sit on their hands for a period of time, waiting to see what's going to happen. We know that advisers wanted to see who the portfolio managers they want to be. They wanted some clarity. And that's why announcing the PMs was really important. And I don't have the exact number, but I think it's about 80% of the assets are being managed by the same portfolio management team or group. So that's a positive thing. I think having a significantly larger sales team and telling advisers who their wholesaler is, is also a positive thing. So look, we're -- we anticipated all of this when we were going through the process. And we've created a very clear vision to the -- to advisers that do business with Sentry of what this -- what the business is going to look like going forward. But the reality is that, look, they had a very limited shelf space of products. They didn't have nearly as robust a lineup of products as we do. So now with this large sales team, whether they are former Sentry wholesalers or CI wholesalers, they're going to have a stable of products that are bigger and more robust than any other firm in the country. And so a Sentry wholesaler -- and they're very good. They're actually very good wholesalers -- are going to now be able to offer Cambridge and Black Creek and Signature and all those things to their -- the advisers that they have close and strong relationships with. And where most -- where a lot of -- and those advisers, a lot of them were not clients of our company -- or were smaller clients of our company, I guess, is a better way to put it.

So just one more if I can. For the closed block of business, you said 8%, so that's roughly $11 billion of AUM. How should we think about the outflows there? I guess $200 million to $300 million a quarter, is that a good run rate to use for a model? And when should -- should this peak out at one point? Or is that on a decline already?

Well, I mean, right off the bat, I want to say if we could find a way to open that block of business, we'd do it immediately, and we continually look for ways that we can find a partner that wants to help us on -- in the -- on the insurance side. But at this point, that business is closed. But I would say that in the past couple of years, that -- the percentage is about the same. It hasn't really changed. These segregated funds have benefits that are significantly better and significantly enhanced to what you can buy today. So it's not to the advantage of investors to redeem this. They are actually really good products that can be rolled over. So we -- there is going to be flow coming out of that because of redemptions due to income payments that need to be made for some of the block of business. And then we have this -- the regular redemptions for whatever reason. But I think the number is 10% is -- of the outstanding assets is about the same -- is going to be -- it's been about the same for the last few years. And I think that could be -- I don't expect it to change very much.

Our next question is from Paul Holden from CIBC.

Just a couple of questions to start to make sure I understand the numbers correctly. The closed book being roughly 8% of AUM, is that AUM including Sentry or before Sentry?

That's AUM including Sentry.

Okay. And then that $25 million of expected EBITDA in Q4 from Sentry, people talk about -- sometimes of realization of synergies in different ways. So I want to clarify if that's actually including the full benefit of the 50% realization of synergies or a partial benefit of that 50%.

That's a partial benefit. These synergies are realized over time.

Yes, that makes sense. Just wanted to clarify. And then in terms of the composition of sales, let's say, by product, want to get a better sense of -- and let's talk gross sales, what might be coming from, say, managed product today from high net worth series and from F Series?

It's Roy Ratnavel again. The sales for the flow into the funds are really coming from most of the international global equities and also global balance. And also, we are seeing a significant growth uptick in our managed money run by Alfred Lam and his team.

Okay. And any numbers on the proportion coming from the managed solutions?

Yes, we don't break that down. So...

Okay, Okay, that's fine. And then with BBS, right, to me, the real story seems to be the potential to reduce operating costs, digitalize the business in one way or another. Is there any way we can think about what that potential benefit would be, whether you express it as a improvement in EBITDA margin or operating costs relative to AUM?

Well, Paul, we're just starting on that. We have identified a couple of things right up that we know eventually will get us into the millions. Whether -- when and how much higher it goes depends as we move along what we find.

(Operator Instructions) We have no further questions registered at this time. I would like to turn the meeting back over to Mr. Chang (sic) [Mr. Anderson].

Well, with that, if there are no more questions, I want to thank you for listening into our Q3 call and look forward to chatting again in a couple of months for Q4. So thanks very much, everybody. Bye.

Thank you. The conference has now ended. Please disconnect your lines at this time, and thanks for your participation.