CI Financial Corp (CIXX) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2018 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 now like to turn the call over to Mr. Peter Anderson, CEO of CI Financial. Mr. Anderson, you may begin.

Thank you, and welcome to the CI Financial conference call for the third quarter of 2018. Joining me on the call is Doug Jamieson, CI's Chief Financial Officer. In a few moments, he will provide you with a detailed financial update on our third quarter. Also, we have members of our executive team here to answer your questions on our various businesses. To start, I'm extremely pleased to say that CI is continuing to operate very well in the face of volatile markets and an increasingly competitive environment. Our highlights for the quarter include earnings per share of $0.62, a record for CI Financial; average assets under management, $138 billion; record assets under administration, Assante and Stonegate; total CI assets of $180 billion; free cash flow reached $169 million, an increase of 4% over Q2; fund performance have significantly improved in Q3, a trend that is continuing into the third quarter -- the current quarter; and sales also improved in Q3, and it is heading in the right direction.

What makes this important is that it has been delivered in a challenging year for all global asset managers. In addition to the increased volatility across markets, investors and asset management companies remain focused on the direction of our industry. You're familiar with the issues, fee levels, the regulatory burden, passive versus active, an aging bull market among others.

At CI, we believe these concerns are overblown and that well-run businesses will continue to thrive in this evolving environment. We're focused on the long-term growth of our business, positioning the company to compete in a very different future. However, we firmly believe there are 2 key themes that remain important as our industry continues to change. They are the value of active portfolio management and the value of advice.

As CI continues to grow and evolve, we remain steadfastly committed to these principles.

Before I pass the meeting over to Doug, I would like to take a few minutes to comment on the changes in our capital allocation policy that we announced in August. As you know, last quarter, we announced our intention to repurchase as much as $1 billion of CI shares over the next 12 to 18 months using our free cash and at the same time, changed our dividend from approximately 60% of free cash to less than 30%. Since then, we have repurchased 8.8 million shares with a marginal increase to the company's debt. At the current price, our attention remains the same -- to continue to buy back shares. There is no question that the strategic policy change -- or this strategic policy change is a bold decision, but we remain confident that it's the right strategy for CI Financial at this point in time. When we made this announcement back in August, we didn't have a crystal ball to predict the recent global market volatility. The new policy has provided us with optionality and flexibility both today and in the future, while at the same time has reduced risk at the company. If the environment changes or we see other strategic opportunities, we'll be in better position to benefit from these developments. Right now -- in a few minutes, I will discuss our business operation. But first, I will hand the discussion over to Doug to go over our financials.

Thank you, Peter. Here we have CI's highlights on a quarter-over-quarter basis comparing Q3 to Q2. Average AUM decreased $1.2 billion or 1% to $138.3 billion from $139.5 billion. Assets under advisement grew 1% to $44.4 billion. Net income was $158.2 million compared to $159.9 million, a drop of 1%. Earnings per share of $0.62 was up from $0.61 per share last quarter due to the accretion on the shares repurchased during the quarter.

Free cash flow grew to $169.2 million from $163 million last quarter, and the year-to-date total of almost $500 million is a cash flow record for CI. The main reasons for the strength of earnings and cash flow are the impact to revenue of 1 additional day in the quarter and a slight increase in gross management fees during the quarter as the Sentry funds were converted to fixed administration fees at the beginning of September. And so those fees are now included in management fees and the cost to administer the funds is now also included in our SG&A.

Previously, both of those amounts were not recorded in CI's results.

Now looking at Q3 year-over-year highlights, average assets under management were up 15% from $120.3 billion in last year's third quarter. Assets under advisement are up 9% from $40.8 billion last year. Net income was up 3% from $153.6 million and $0.60 per share last year. Free cash flow grew 6% from $159.1 million. The increase over the prior year is primarily due to the acquisition of Sentry boosting CI's AUM, offset by a decline in margins as net management fees in basis points were down about 2% year-over-year and SG&A in basis points was up about 5%.

CI's SG&A was $131.4 million in the third quarter, up from $129.7 million in the second. While CI is still investing in technology and innovation and spending on marketing, we generally held a line on spend in the back office.

In Q4, all discretionary spend is under review given the weakness in markets in October, but we will still spend on new initiatives and innovation.

Here we have the last 5 quarters with CI's quarterly free cash flow and the return to shareholders. With the new capital allocation policy, larger amounts were directed to buyback in Q3, as we continue to maximize the normal course issuer bid, with CI trading below 8x free cash flow. Dividend payments declined to $61 million in the third quarter and will be approximately $45 million in Q4 as the dividend rate announced last quarter takes effect. Gross debt remained relatively flat this quarter at $1.44 billion. And with annualized EBITDA at $930 million, CI debt-to-EBITDA ratio is up marginally from 1.53x to 1.55x. Net debt was $1.21 billion and the net debt-to-EBITDA ratio was 1.3x, up from 1.21x. If we annualize $169 million of free cash flow per quarter, CI could repurchase its full NCIB amounts of 25 million shares at $20 per share, pay out $180 million in dividends and still not have its debt increase.

And as Peter said, the new capital allocation policy has greatly improved the risk profile of CI's free cash flow. And it is more fully available for buybacks as we have indicated is our current intention, but also available for other investments or acquisitions or to pay down debts. I will now turn it back to Peter.

Thanks, Doug. Now I want to take you through our various business lines and our current plans and strategies. There's a lot going on at CI in every department and every business. First, sales. We've seen an improvement in our overall sales at CI, but we still have a long way to go. Returning to positive sales as quickly as possible is the top priority. Although (inaudible), we have a number of initiatives underway throughout our company to enhance our business and ultimately support our sales effort. I'll go through those in a moment. In our Canadian retail business, as I've said in our recent calls, our challenge is redemptions, not gross sales. We have a significant amount of assets in categories that have been out of favor, including anything with the word Canadian attached to it. Retail redemptions improved quarter-over-quarter, which improved our overall net sales. Sales activity across the country remains high, and our sales team is having no issues meeting out with advisers. We have successfully held a number of key events over the past several months with significant interest and support from all of our key channels, including IIROC, MFDA, Sun Life and Assante. With our larger sales staff and our enhancements to the team, we are confident our sales strategy will have positive results.

Our Canadian Institutional business, in Q3, is flat compared to the previous quarter. As you know, this business is always a bit lumpy and the majority of the redemptions came from some advisory alliance business, which has seen slower gross sales and higher redemptions due to the overall slowdown of the industry. In addition, there are outflows from the legacy third-party segregated fund business. However, our pipeline continues to be strong. We have 1 business that has not yet been funded, and we have been shortlisted on about $1 billion in searches. When we talk about retail and institutional, sales will be impacted by the volatility of global markets. We continue to focus, however, on the factors that we can control: Activity and quality. We're seeing significant improved performance from our core portfolio management teams in Q3 and continuing on into this quarter. For example, over 70% of our stand-alone equity assets and 60% of our stand-alone balanced and fixed income asset are in first and second quartile year-to-date. Over 90% of Sentry, Cambridge and Altrinsic assets are in first and second quartile in the third quarter. Many of our large multibillion dollar funds at Signature, Cambridge and Sentry are also having solid performance in the last quarter. Over 60% of our highest redeemed funds are now at first or second quartile year-to-date. And our top-selling funds this year continue to maintain solid performance. Although some of these results are short term, they are what we expected in market conditions where the importance of good stock picking becomes essential like now. Despite extremely volatile markets in October, our portfolio management teams continue to perform very well relative to the benchmarks and their peers. As you know, portfolio managers' performance is one of the key drivers and a leading indicator of sales.

Assante and Stonegate continue to see strong growth both organically and through recruitment. As of the end of Q3, our assets under administration were at a record level of $44.5 billion. Recruitment has been very successful as advisers see the benefit of partnering with a well-capitalized independent firm. Gross and net sales also continue to trend well -- or continue to trend well ahead of the industry. We expect to continue this pace in Q4 and into 2019 as we enhance these brand-new brands through marketing, new technology, new products and new platforms. As I have said in previous calls, the growth of Assante and Stonegate in high net worth and ultra high net worth space is a key long-term priority for CI Financial. We are investing significantly in the growth of these businesses.

With product initiatives, the third quarter was very busy as we prepared the launch of 2 major product platforms, which became available this month. Last week, we introduced CI Private Pools. These are competitive in price and meant for affluent investors as there is a minimum investment of $100,000 per pool. We designed these pools for the broker channel, but have seen significant interest from all channels as we rolled them out. We also launched our Liquid Alternative platform beginning with 3 new funds, managed by portfolio management teams at CI that have experience in this more complex investment style. 2 of the 3 funds are income products, managed by Lawrence Park and Marret. The third is a new portfolio management relationship to Canada, Munro Partners of Australia. Munro is managing our global launch for its fund. Munro had exceptional long-term performance, and we are excited to introduce the team to Canada. As an aside, we also hold a minority equity position in Munro through our business in Australia at Grant Samuel. There will be another important product launch earlier in the new year, a series of ETF and mutual fund. This will be followed by other initiatives throughout the firm with new solutions involving CI retail, Institutional, Assante, Stonegate, Grant Samuel in Australia and BBS. We are enhancing our lineup through products that are designed to meet the needs of various types of investors and to fit the different business models of advisers.

At the same time, we're also considering ways to reduce the complexity and duplication with our product lineup. By simplifying our lineup while also launching new relevant products, we're strengthening our offering and making it easier for clients to do business with us.

You may have seen an increased advertising presence for CI in late Q3, which is continuing into Q4 and 2019. After some branding research, we recently introduced a new tagline for CI Investments, trusted partner in wealth. This perfectly describes the philosophy of CI Investments and indeed all the businesses of CI Financial. We are pursuing both traditional and nontraditional marketing strategies to increase awareness of all of our businesses and position CI as a valued partner. So before we open to questions, let me make some concluding remarks. Obviously, the global asset management industry is going through significant change. 2019 has been very -- a very challenging year and no firm around the world has been immune. I won't forecast what 2019 will look like for the industry, but I am confident that consolidation will continue as firms realize they can't compete in this rapidly changing environment. This year, 3 large Canadian management firms with $100 billion of assets were acquired by the banks. This consolidation creates opportunities for a large independent company like CI. I expect we will see -- I expect we will continue to see uncertainty around fees, increased regulation and competition from passive and alternative investments and so on. In the face of all this uncertainty, I can tell you that CI will continue to adapt. We're not afraid of change. This company has continued to change -- continuously changed and adapted over the past 25 years. We have already significantly repositioned our business, and we will continue to improve and enhance our operations and our products. We're building this company for long-term success. We will do the best while maintaining and enhancing our strong independent position in Canada, increasing our scale here and abroad and increasing our assets and distribution channels in Canada and international. Whether it's the acquisition of new businesses such as First Asset, GSFM or BBS or modernizing our product lineup or the change to our capital allocation policy, we are implementing what we believe is the right strategy for our business today and for the future. This is how shareholder value is created and we intend to continue CI's long track record of creating significant value for clients and shareholders in the market -- in any market environment. And with that, we can now open for questions.

First, we'd like to apologize. We understand there were some technical difficulties and there was no volume on the webcast for the first 5 or 10 minutes. We will make a replay immediately available following the completion of this webcast.

(Operator Instructions) Our first question is from Gary Ho from Desjardins.

Peter, in the preferred market, noticed kind of more commentary around M&A. Maybe can you tell us are you seeing more inbounds from your end and what would be of interest to you? Is it more on the institutional side that you guys want to bulk up? Any comments there would be helpful.

You know what, I don't want you -- I mean, we did talk about -- a little bit about the M&A and we're always looking at things. And yes, there's -- I can tell you with certainty there's a lot of inbound calls that come in to us, I'm sure to a lot of other firms. Right now, I mean, the benchmark that we always use is, will a transaction add more value to CI or is buying back our stock is a better option at this point in time? We continue to believe that buying back our stock is a better thing to do today. But I would say that we see things that kind of stay around the edges, things that we think will -- could add value to Assante or Stonegate or our digital business or anything else, we certainly would take a look. But I will say to you, for sure, there are -- there's a lot of calls coming in, and I think, it's just the environment.

Okay, that's helpful. And then Doug, maybe just on SG&A on Slide 6. I think last quarter, you guided to plus 3% versus the Q4 '17 run rate for the full year 2018. Year-to-date, I think you guys are tracking around 1%. Are you expecting a ramp-up in Q4, maybe you can update us on your SG&A guidance?

Yes, not expecting a ramp-up. We've managed to find far more savings than I had anticipated. We're doing a very good job of controlling our costs, like I said, in the back office, while still investing in new initiatives and technology. And then as I said, for Q4, we are taking a close look at all discretionary spend given the volatility of markets in October. So I'm hesitant to forecast where Q4 will come out because while we still do want to invest in the company, we're being mindful of margins given what's happening to our AUM.

Okay. And maybe can you comment on maybe 2019, how -- any big project that you guys are planning for the upcoming year?

Well, we have numerous technology initiatives, besides product launches, various ways of streamlining our business and adding on to, particularly, in our digital side of the business, both websites and the BBS security side of the business.

Okay. And then maybe just lastly, just going back to the gross management fees comment, sounds like the adjustment from Sentry admin fees caused the uptick this quarter. But generally we should continue to see slight fee pressure looking out 12 to 18 months. Is that how we should think about that?

Yes. In Q3, we had 1 month of the Sentry fixed fee. In Q4, we will have a full quarter. So a bit more impact from Sentry. But generally, the structural change in the industry will show us with -- as we said, steady decline in fees, which was estimated at a basis point or so per quarter.

And what was the impact in Q3 from that change?

As far as the Sentry?

Yes.

I mean, their admin fees are similar to ours until a few -- put an average admin fee on their assets, anyone can do the math and get $1 million and plus in a month.

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

Just wanted to follow up on Gary's question on the SG&A. I think it was last quarter you mentioned that you may look to spend up to $10 million on kind of sales, marketing those sort of things to help with the net sales performance, I guess. How much of that would have been expenditure spent in Q3?

I don't know that I said $10 million per se on marketing. But we have, as Peter pointed out, launched a marketing campaign. And we continue to invest in the sales and marketing team, but we're not prepared to say exactly how much we spent.

Okay. And just the other question I had was just with the volatility in the market, can you talk about on the Canadian retail side of your business? What impact that's had in terms of the trends on flows, was it -- and have you seen it or have people behaved a little bit differently this time around than what you would have seen in prior instances?

I don't think we've seen anything different from the past. I think you've seen the -- you've seen an industry slowdown in the business. I mean, that's come out from all the reports that you've seen. So I don't -- no I don't think there was anything significantly different.

The next question is from Stephen Boland from INFOR Financial.

Couple of quick questions. Peter, I guess, last quarter you mentioned that you thought you would not get back to net sales in 2018. I guess, with this quarter's elevated redemptions, again, has that -- has that view stretched out a little bit to that it won't be in the first half of '19? Or can you comment on what your expectation is there?

No. I'm not going to comment on when I think we're going to get to positive sales. Yes, I would say it's a priority for us. I think a lot of the initiatives that we are launching today have certainly caught some interest with advisers. I think it's hard to predict with the volatility in the market and the -- and all of that. I mean, the only thing I can say is just reiterate what Doug said before is, we're very focused on, obviously, on the sales, but we're also very focused on ensuring that we're managing our business effectively. And so we think that we have a solid road map regardless of where the -- what the markets do and so on and so forth. I'm quite encouraged by the response that we've had on the launch of our pools. Very early stages, but we have a -- we had a roadshow recently -- or this week on Liquid Alt, there seems to be quite a bit of interested in that and on Munro. So I'm kind of being long-winded here. I'm not going to give you a day or a period when we get ready to do redemptions, but it's a big priority for us.

Okay. And just the second question on the Alt product that you launched. I know you mentioned this in Q2, but was this something that was driven by demand from advisers or certain channels that wanted you to sort of get into this type of product?

No. We were quite excited to get into this. I mean, my understanding is the regulators provided us the opportunity to change the rules around the A115 funds, and so we certainly took advantage of it, and we were very selective on the teams that we started with, and so we brought a very small and limited group of 3 because all 3 of them have actually had significant experience managing money exactly like that. Munro out of Australia has been doing this for over 10 years and Marret, First Asset do that and they're often [memorandums]. So I think this is a trend that's going to continue, I mean, as we're moving the business forward. It allows us to use these also within our multi-manager products as well. So we think this is a great opportunity to be perfectly honest.

Okay. And I'll just sneak in one more for Doug, the change in the pricing for -- I think, it was 33 funds. Is there an impact to the financials going forward? Or is it nonmaterial?

Yes, nonmaterial. I think at the time we said it was a very small impact of a basis point or so.

Next question is from Graham Ryding from TD Securities.

Could you maybe elaborate on -- you touched on your -- Peter, this is for you, you talked about reducing the complexity and streamlining your product line. Can you maybe just elaborate on that a little bit and what you are planning or looking at there?

Yes, I mean we're just starting this. I would expect this would be a 5-year project to be perfectly honest. But we -- I mean, there's an awful lot of value to doing acquisitions as you can all imagine. But it also creates significant duplication across our fund lineup. So we have multiple platforms. We have multiple funds, and so we're going to begin an exercise of just looking at our entire business from our mutual fund business to multi-manager business to everything and making sure that it all makes sense. So it's not a necessary reduction in our portfolio management teams. It'll be, in fact, not that. What it is, is just using the teams that have expertise in certain areas to be able to -- and focusing on them rather than focusing on a significant number of the same products. So we just need to do it. It's confusing and it's complex and advisers are -- the last question is about, we just -- we just think it's time to be able to streamline and modernize our business.

Okay, that's helpful. The private pools, I get that the pricing is going to be lower. Is the pricing sort of consistent with what you have on your high net worth, or your S class funds today? Or is it even lower than that level? And then secondly, what is different about these funds that's going to be appealing to advisers?

Right, I'll answer the second question first. I mean, the difference is my -- these pools have been designed for clients with in excess of $100,000 per pool and -- so they're priced accordingly. So they're priced in the context of the market, so they're competitive. I would look at these pools as almost a fund company within a fund company. I mean, we're building this product so that if an investor comes into our private pools, typically, if they're going to switch, they will switch to something else within this -- these pools. They wouldn't go from private pools back into CI, I don't think. So we think it's a robust offering, lots of choice intended for the investors -- for high net worth affluent investors. And I think it's -- it's just again a simpler way for people to invest. As for pricing, I mean, yes, they're very competitively priced.

Okay, that's it for me -- actually sorry one more. Gross sales. Looks like it's down a fair bit from this time last year. Should we assume that it's sort of Canadian equity, Canadian balance got out of favor -- that's part of the reason why your gross sales number is down year-over-year?

I would say mostly it's the industry. I mean, it's a -- I would say the -- I talked earlier about redemptions. I would say gross sales are -- as a result of what's going on in the market. We all know what that is, that sales are lower in 2018 than they were in the past.

(Operator Instructions) The following question is from Scott Chan from Canaccord Genuity.

Just on the trailer fees, I know this is up sequentially and the trend has obviously been down based on the product mix. Can you just provide some color on the sequential increase?

We've -- it fluctuates from quarter-to-quarter. You're right, the trend has been down, as we have had movement towards -- whether it's movement to F-class and it could just be that it's less back end and more front end now.

Okay. And that -- and Peter you talked about in the opening remarks about top-selling funds. Can you just elaborate on that? Is your top-selling funds consistent with the industry, meaning probably not domestic funds?

Yes. I would certainly say that our top-selling funds are global today. They have been global balance, global income, that sort of stuff. And we continue to see good sales and good flows into them. And for the most part, the funds that are selling well right now are also performing really quite well as well. So, I mean, that's a good sign.

And just lastly, on the wealth performance, you provided some good data points. I don't think I wrote them all down correctly, but it's obvious that the near-term performance has improved significantly at CI. Is there an inflection point where you get that 3-year number, that key 3-year number to be on average in the top 2 quartiles?

Well, I mean, as quarters drop off, you'll see that -- I can't -- I'd have to go back and take a look more carefully. But I mean, it's -- I'm probably not going answering your question the way that -- I'd have to go back and take a look more closely, but I mean -- I'm very, very encouraged by the sales of all of our major teams at CI right now with -- it's exactly what we were expecting when stock picking became more relevant, when the market was not being run or seeing performance from the 6 companies. Today, it's broader and you have to be a stock picker today in my mind going forward with this all -- it's in my mind, it's what we're looking for and our managers have done exactly what we wanted them to do at that time -- at this time.

The next question is from Tom MacKinnon from BMO Capital.

Sorry I got on the call late. Just got two questions, not sure if they were asked, but what is the expected impact from reducing the investment minimum for the preferred pricing program that you started in October 1? And can you update us when you might be turning the retail Canadian fund flows around?

I'll go first on the impact of reducing the minimum. We kind of bundled that in with all the other new products we've launched and the trend we're seeing in fees that it's within that 1 basis point give or take each quarter that we expect our average fee to decline. And Tommy, on sales, what I would say to you is, I'm not going to give you any kind of a prediction or line when I think we're going to reduce -- or we're going to go back to positive sales. What I will is say that I think our strategy is -- will pay off -- it really is a very large sales team, access to every retail distribution channel, it's a -- it's new products, competitively priced products and then sort of the bogey is going to be -- the challenge is going to be the volatility in the market. We can't predict that. But it's -- as I said earlier, it's our top priority.

The performance has been improving and you've got some new product launches. Can you talk maybe about the penetration into IIROC channels and how that's trended?

Well, I mean, I would say that we see significant growth in sales in the IIROC channel. I mean, that was a priority for us. It was -- IIROC was the challenge -- one of our challenges for redemptions And -- but we're also seeing significant growth in our gross sales there. So, I mean, that's positive, obviously. So yes, we're quite encouraged by that. And I think with our new product line launches that we're bringing out, the pools were specifically designed for advisers at IIROC because they wanted a flat fee as opposed to a tiered fee. But we've seen significant interest from across every channel now, which was a big surprise for us, but very encouraging. So I think we're going in the right direction.

The last question for today is from Gary Ho from Desjardins.

Sorry just to -- sorry to belabor to this point, just want to go back to the SG&A. One of your peers last week mentioned they will continue to spend on technology initiatives for the long-term benefit of the firm, where it sounds like you're taking a different approach to curtail cost near term. So just wondering -- how do you balance that and not kind of understand where your competitors might be going the other way. Doug, maybe you can give us some examples where you can -- where you see some benefits from cost cutting?

Yes. I don't think I said we wouldn't spend on initiatives in technology. I think that's definitely where we will continue to spend. When we look for ways to curtail spend, it's other discretionary items, things that are nice to have, that can be delayed or canceled. But we do have a lot of priorities, the initiatives that will go ahead certainly in the areas of spending on technology and innovation.

Yes, I'm just going to reiterate that because I don't want the -- any of you to think that we're pulling reins in terms of our cost. We're investing in this business. We see lots of areas that we can invest in that we think will provide long-term benefits to this company. And where we see those, we will do that. And technology, innovation, digital, Assante, Stonegate and other areas as well. What we did say though was we -- I mean, this is what CI has always been known for is that we will adapt to our trading environment and with the volatility in the market, what we said is we're just going to take a look at anything in the business that, as Doug said, nice to have, but don't need to have right now. So we're looking at that, but not at the expense of the growth of our company.

Got it, that's very helpful. And then maybe just as well you called out 90% of Sentry and Cambridge funds in first and second quartile. I think Sentry is roughly 12%, 13% of AUM. What would Cambridge be as total CI AUM?

About 20% and then the other was Altrinsic, which is about 4%, I would say -- 3% to 4%.

Okay, I think we will call it there. We are available if there's any other questions, but thank you very much. And again, I apologize for the technology glitch. I kept reading not knowing that you guys couldn't hear me. I was really good, just so you know. Anyway, thank you so very much. And like I said, if you have any questions, don't hesitate to call Doug or myself or the CI team. Thank you so much.

Thank you. The conference has now ended. Please disconnect your line at this time. Thank you for your participation.