CI Financial Corp. (OTCPK:CIFAF) Q4 2016 Earnings Conference Call February 16, 2017 4:00 PM ET
Peter Anderson - CEO
Doug Jamieson - CFO
Steve Donald - President, Assante
Neal Kerr - President, CI Institutional
Barry Gordon - CEO, First Asset
Roy Ratnavel - Head, Retail Sales, CI Investment
Gary Ho - Desjardins Capital Markets
Geoff Kwan - RBC Capital Markets
Graham Ryding - TD Securities
Tom MacKinnon - BMO Capital
Scott Chan - Canaccord Genuity
Mark Kearns - GMP Securities
All participants please standby, your conference is ready to begin. Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2016 Fourth 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 fourth 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 your questions. Also available are Steve Donald, President of Assante; Neal Kerr, President of CI Institutional, Barry Gordon, CEO of First Asset and Roy Ratnavel, Head of Retail Sales for CI Investment.
2016 was a unique year for CI and the industry. However our Q4 results show that our strategy is working. The performance of our portfolio management team, and in 2016, in very good position, sales from both our retail and institutional groups are trending more favorably and we will be announcing a number of new initiatives later in this call. We finished the year in much better position than we started.
But before that Doug is going to take you through to CI Financial results. Doug?
Thank you, Peter. Looking at 2016 results versus 2015, the average AUM grew 2% over the year. Reported net income was $503 million or $1.86 per share and adjusted net income was $532.1 million or $1.96 per share, down 6% and 3% respectively.
Adjusted EBITDA at $3.24 per share was down 4%. Dividends paid were $1.355, up 5% from $1.295 last year.
Long-term debt ended the year at almost $760 million, up from $560 million last year and net debt was up about $140 million during the year at just over $570 million. Increase in debt was due to the cash acquisition of Grant Samuel at $74 million net of cash required and $55 million that was paid out to shareholders by way of dividends and buybacks over and above free cash flow for the year.
Looking now at the fourth quarter compared to the third quarter, average assets under management were up 2% from the third quarter from $112.3 billion to $114.8 billion. Reported net income was $121 million or $0.45 per share and adjusted net income was up 3% to $140.6 million, and on a per share basis it was up $0.02 to $0.53.
Adjusted EBITDA was up 1% to $226.9 million and EBITDA per share was up $0.02 from last quarter.
Free cash flow at $154 million was down 4% while dividends paid remained at $0.345 in the quarter.
Now looking at year-over-year highlights. Average assets under management were up 6% from $108.7 billion in last year's fourth quarter. Adjusted net income was up 3% from $137 million last year [Audio Gap] to our asset class fees only one-third of their assets are retail. And on the institutional side I would call that average fee low. So, we've seen our fees decline in the past was moving to high net worth product and now the acquisition of First Assets, ETF business, and Grant Samuel.
The lower trended margin is largely a function of scale which our recent acquisitions do not yet have and this shows up in our SG&A numbers. CI's total SG&A measured in basis points was 35.5, up slightly from 35.4 in both the fourth quarter last year and this year's third quarter.
Spending in dollar terms was up $2.5 million over last quarter. But once we net out GSFM and First Asset spend, we actually see a decline from $95.7 million to $95.3 million. We've continued to find efficiencies in the business even as we expanded spending on sales and technology initiatives.
The SG&A efficiency margins 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 has retained 69% of that available pool. The inclusion of First Asset and Grant Samuel is the largest factor in the decline given their higher proportion of SG&A to management fee revenue. And so their SG&A efficiency margins are less than half of CI's level. Our goal is to increase scale and efficiencies and move them to our margin level.
CI's quarterly free cash flow remains strong at a $154 million this quarter and a steady cash flow that you see here forms basis for CI's ability to pay dividend and buyback shares. And looking at that return to shareholders the first column shows the last 12 month of operating cash flow adjusted for the after-tax provisions taken in the past year and the deferred sales commission paid to get to free cash flow of $605 million.
CI paid all of that free cash in more in the form of dividends and buybacks at $660 million. In the fourth quarter, CI reduced its buybacks from the level of the previous quarter as the share price went up but still returned all free cash to shareholders.
I'll now turn it back to Peter.
Thanks, Doug. As I said earlier in CI we are seeing signs of our hard work being paid off in 2016. For that I want to thank everybody at the company for the contribution over the last 12 months. However, as everyone knows, the industry is facing challenging headwinds including regulatory changes, slower sales, competition from other distribution channels, fee pressures, and the ongoing discussion of passive versus active.
It is clear that scale remains critical in our business and industry consolidation is inevitable both in Canada and globally.
For now though let's review our business line. In our Q3 call, we said to expect two large redemptions from CI Institutional in this quarter. As it happens, total net redemptions were in line with our forecast. Other than these two redemptions in the quarter, it was quite -- it was actually quite good. And for the year the total redemptions from our Institutional Group were the results of three larger accounts moving their assets to in-house portfolio management.
However because the low fees associated with these account, the redemptions did not have a material impact on the financial results of our company. As I said last quarter, we continue to be very pleased with the pipeline of our Institutional Group. A number of very good opportunities have been presented to us and the number of searches in which we are involved with continues to grow.
In 2015, and in early 2016, we had short-term performance issues with a few of our core portfolio management team. As I mentioned at the time this was the result of these teams taking a very defensive position within the portfolio? This had an impact in 2016 for both retail and institutional sales. We are pleased to report our teams have significantly improved their performance and in Q4 all portfolio management teams were well positioned to take advantage of the rally the fall of the U.S. Election.
By year-end according to MorningStar 57% of CI's assets were in first and second quartiles compared to 32% 2015. After a decade of very good results long-term performance of our AUM remains very strong. This should help to drive our retail and institutional sales going into 2017.
At CI Investments, retail sales remained in redemptions for Q4, but the trend is positive. Moving back to net sales is narrowing overnight process, but the changes we have made last year have already produced important results. The changes include the addition of a new national sales manager, a new Head of our IROC channel, an increase in the number of wholesalers and support staff, and as I mentioned previously the performance improvement by our PM teams. We're very confident with our retail strategy.
Assante and Stonegate continue to show very strong results in a challenging environment. They continue to outpace their key competitors in net sales for 2016 and their overall assets surpassed $38 billion by year-end.
Recruiting new advisors to Assante as a key focus for the company in 2017, we expect Assante to be the beneficiary of the disruption we see within distribution platforms in Canada today. Importantly our presence in the mass outflow and high net worth markets continues to grow representing 65% of our assets. The growth of Assante, Stonegate, and our private client business continues to be a strategic priority for CI Financial.
First Asset, CI's Active ETF business continues to perform extremely well and demonstrates the value of owning multiple distribution platforms. Overall ETF growth in First Asset AUM in 2016 was 33% well above the industry average. First Asset and CI's Retail business are now working closely together to strengthen our overall relationship with advisors especially in the IROC channel. The active ETF space is getting very crowded in Canada with our traditional competitors launching new products. We continue to believe our buy versus build decision was correct for CI. We see significant opportunities for growth at First Asset in 2017.
Finally, our latest acquisition Grant Samuel Fund Management disclosed in November last year. We sent a number of people to visit Australia and believe there are exciting opportunities for growth despite the crowded market. We plan to launch a number of CI managed and other global products within Grant Samuel in 2017. Although we are in the early days, we are very positive about this acquisition.
As I said earlier, this is an industry that is very competitive and faces significant headwinds. At CI, we have always believed the status quo is not an option and change presents opportunities. Over the next several quarters, we are planning to rollout a number of new initiatives to enhance our business. Let me speak about just two of them.
First, we are announcing a new tier pricing model for certain classes of our funds that will provide reduced fees for retail investors who holds higher levels of assets with our company. This project has been underway for well over six months and we plan to launch it in the second quarter of this year. For shareholders of CI Financial, we do not expect to have a material impact on our company.
Secondly, I'm excited to announce that we have signed an agreement with a U.S. Global Advisor platform to utilize their technology in Canada. Our strategy is not to compete with our advisor clients, but to enhance our technology with this new platform. I'm not in a position to provide much more detail right now, but I will say we expected to provide exceptional benefit to CI, our clients, and our investors. We expect more information on our next call.
So to summarize, I feel the hard work of 2016 is paying off. We continue to have strong relationships with our traditional retail advisors including the Sun Life Advisor channel while developing new ones with channels such as IROC.
The increased size of our sales team and the integration with First Asset has definitely helped. CI's Institutional is starting 2017 in much strong position with a new and unique opportunities being presented. The decision to acquire First Asset and Grant Samuel continues to provide very positive results. The performance of our key PM teams continues to improve and we just start 2017 in a significantly more positive position.
And in 2017 with the launch of new products and services including tier pricing and a new technology platform just to name two.
With that, I conclude my remarks and we will now open it up for questions.
Thank you. [Operator Instructions].
The first question is from Gary Ho from Desjardins Capital Markets. Please go ahead.
Thank you and good afternoon. Maybe just to start off on the net redemptions. I know most of that is from the Institutional side. If I exclude that and may be First Asset net creation, I get to roughly $400 million to $500 million in retail net mutual fund redemptions for the quarter. Is that still mostly from the IROC channel or that some -- or is there something to Sun Life as well? Any color on that will be helpful.
No, I mean. I would say that we still face redemptions in IROC channel but we are seeing trends actually looking quite positive. So the answer is yes, but it's improving very much right now.
And then maybe that's a good segway into my next question. So I know any update you can provide on sales as we are heading into the RSP season?
Yes, Peter again, yes I think we're -- I think we don't really talk about that obviously but I can certainly say it's trending in the right direction and so we're quite encouraged.
Okay. And then may be just moving on may be a question for Doug, just on the $26.76 million provision for compensation legal and tax? Can you give us a breakdown and may be elaborate on the bigger components?
Hey, Gary. No, we are not prepared to give a breakdown. It's several times none of which were greater than $10 million. So they are all not material items and we just lumped that line together to bring in their provision that we made earlier in the year as well into one-line item compensation legal and tax.
Because that is bigger than kind of last couple of quarters like anything you can highlight from, I guess all of these are more or less one-time, there is nothing that you think it might be recurring?
No, these are just happened that we had several of these items come up in the fourth quarter and they are all based on storage issues and all ready to move forward.
Okay. And moving just lastly on the Tiered pricing initiatives, what would be I know you said it's immaterial but any insight into the impact on average management fee post launch?
Gary, it's Steve Donald. I think overall as Doug has -- or as Peter mentioned, we don't see that it's going to have a material impact on earnings. We do see continuing pressure on fees across the industry and we think that this is actually going to be very beneficial for us particularly after having such strong performance recovery of our managers to help advisors consolidate assets from their clients. And then also have advisors consolidate assets with us. So we think that will help us as we continue to see momentum in the sales area.
Maybe if I can ask you another way like how much of your AUM may be impacted from this? Is that the 65% I think Peter you alluded to?
65% sorry, Gary.
Yes, I think you said math after in your high net worth is kind of 65% of the asset.
Within the Assante channel. In terms of the overall CI block of business that hearing starts with family groups in and around the $150,000 so that represents and I don't have it seriously. I have to get back to you with the exact proportion of assets for family groups over $150,000, Gary.
Thank you. The following question is from Geoff Kwan from RBC Capital Markets. Please go ahead.
Hi, good afternoon. My first question was you talked about the improvement that you're seeing in the fund performance and obviously last year you had some lumpy redemptions on the institutional side. I just wanted to get a sense of the level of confidence you have in achieving positive net sales in 2017 and then how soon do you see that happening obviously Q1 is RSP season but as we kind of head into Q2 and Q3?
You know, as I said before it's Peter again, we're not -- we don't -- we're always dependent on the market obviously. I think though that we're, without getting in a awful lot of details, we're very encouraged with what we see and it's a -- they were seeing gross sales improving quarter-over-quarter. We're seeing outsource and redemptions are fine, we're not on the Institutional side, we don't see anything significant down the line like we did in Q3. We're quite encouraged with that. In fact we see as I said earlier we're seeing some really interesting opportunities presenting themselves on the retail side that we didn't have not seen a year ago. So and there are bunch of multiple channels. So we're -- I think we're -- I'm quite encouraged.
Geoff, its Neal here. Just further to Peter's point, the institutional pipeline some of the opportunities are -- as I've said before can be quite lumpy and the prospects of closing the business range, so it's very hard to kind of throw specific numbers. But there are a number of large opportunities that could have a material impact on the net flows, it's just a question of whether we get them across the finish line and if we do is it this year or even sometimes the sales cycle is a couple of years long. So that just might do sense on that.
Okay. And then -- sorry go ahead.
Sorry Geoff, its Barry Gordon. So and just to add from an ETF perspective, Q4 was trended above Q3 and Q1 of this year is trending higher again. So I would say that the ETF sales are also moving in the right direction as well.
And I think I'll add its Roy Ratnavel, by the way, National Sales Manager. In terms of the IROC sales we have increased our focus on that area and added more resources and as Peter mentioned earlier with the strong performance and increased resources, we're starting to see a positive momentum in gross sales which is month over month and looking very positive. So that's a good news going forward.
And I think with Peter you had mentioned that up year-over-year comment and I want to take a look at the way you guys at least the way you guys you report your sales, I think the gross sales was down 3% year-over-year but obviously there is a bunch of different moving parts within that. Just was wondering if to help us better gauge the expected improvement in the sales, would you guys reconsider providing a little bit more of a segmentation between retail versus institutional and obviously you can define that may be a little bit differently fund company to fund company but also to going back to reporting monthly net sales rather than having us wait every few quarter or few months to kind of get these data points?
I will take that back to think about it. But at this point we report it this way because it's for a host of reasons but it's -- we'll certainly we will take it back and think about it.
Okay. And if I can sneak in one last question, I know you mentioned you will give us some more color on the next quarterly comments. Are you able to say with respect of global advisory arrangement that you have is this something along the lines of which you are talking about on the wealth management side to help deal with for example the children of some of your clients where they may not have that affluent that you would normally have or is this something potentially different from that?
Yes, I mean and Steve Donald can jump in as well but yes, the answer is yes to that but it's also -- I mean this is an opportunity for other parts of our business as well. So First Asset as well there is a whole different bunch of different ways that this can be utilized within the CI platform and again not to compete but to actually do comp.
Thank you. The following question is from Graham Ryding from TD Securities. Please go ahead.
Hi good afternoon. May be I could just follow-on on that theme. There is sort of there is a couple of different types of automated platforms out there, some are designed to sort of help advisors manage our existing clients and services and some are designed to go after smaller account sizes in efficient manner. How should we be thinking about your global advisory platform?
I think you could say that it's flexible and it could be used both ways. So it's a functioning technology today in the United States that's flexible enough for you -- for us to use it in a multiple fashion. And we will -- we expect over the next few years to actually use it in multiple ways.
Okay, great. And I think originally you thought that you might build something you saw often, it sounds like you pivot a little bit towards using existing platform, what was the train of thought there?
Well, we actually had most of the components of our robo technology already with our back office. But we felt that this was further along and would take significant less resources to do with the direction that we took it. And I just think that we could get the market quicker and I just again I just think it was the buy versus build idea again I think it allows us to use the resources and the capabilities and the knowledge from people outside of our company to make this a better platform.
The other thing I would add -- the other thing I would add to that Graham is what comes with this also is the intellectual property around mobile capability which we see as a definite trend and we will be able to port that mobile capability not only within this robo or automated platform but also into other aspects of our business advisor portals, client portals that sort of functionality. So as Peter said it gets us to market much, much faster.
Okay, it makes sense. The tier pricing is that focused at Assante or is it across CI overall?
That's for CI right across the board.
Okay. And you say not material to earnings is CI within that or you assuming there is a certain amount of improvement in sales and market share on the back of this automated tiered pricing model?
No, even just the straight reduction in fees is not material to CI.
Okay. SG&A you added some sales individuals and you added to your portfolio management team in 2016, the expense sort of in Q4 is this realistic run rate and what's your outlook for SG&A in 2017?
Yes, that's right, we added sales team in 2016 we actually started adding PM capability in 2015. So I would say the fourth quarter number, always prone in a Q1 to little bit of cost inflation with contracts and employee compensation. But we certainly look to hold it to the extent we can. And if we get a normal type of market year, if we can keep our spend to 3% or 4% over the course of the year and certainly if we get a disruption and we have to have the ability to cover what we can.
Okay, great. And then how do you actually get GSFM you mentioned you want to get their margins higher, how do you do that?
Yes, it's all about skill potentially. On the First Asset side they moved into our building and we have ways of looking for efficiencies there but GSFM it's entirely growing that business.
Got it, okay. And then my last question would just be --
We have one more thing under that on Grant Samuel is that, if you look at the breakdown of assets it's significantly weighted on the institutional side but the fastest growing part of it -- of that business is retail. And so when we budget and we forecast for growth in 2017 we're assuming that significantly a high percentage of the growth is going to come from retail which is very good margin very close to the margin we see here in Canada.
Okay, perfect. And then you talked about the growth of First Asset, I think it's 33% for the year, is that an organic number that excludes any First Asset assets that have gone into CI Funds?
I will take that Graham. It's our overall growth and consistent with the broader CI fund, of course we don't break it down. So I mean there is -- there is some fund on fund assets in there but it all comes out to wash, so you're not going to see duplicated CI. I think the most important thing to note is overall I guess if I look back a year ago, year-over-year from right now our assets are up over $1 billion. So we're really trending in the right direction getting we have got great performance in our core ETFs our core factory line up our core active ETFs and we're seeing real broad traction in the sales as a result.
Thank you. The next question is from Tom MacKinnon from BMO Capital. Please go ahead.
Yes thanks, good afternoon. Follow-up on the SG&A in the SG&A number that you reported I think there was about $2 million related to GSFM and I think I heard you said, is that just related to one half of a quarter. So should we be looking at GSFM being somewhere around $4 million going forward is that a quarter, is that correct?
Yes, that's correct.
And so and the 3% to 4% growth that Doug was talking about that's -- here you got 4% growth just by bringing in Grant Samuel here. So I assume that's you're going to be 3% to 4% growth over and above of -- over and above somewhere in the area above $12 million in CapEx?
On CIs core call it $95 million, $96 million a quarter we are at right now. I can see that growing 3% to 4%, and then on top of that First Asset and Grant Samuel.
Okay. A question as well about the adjunct fees little higher in the quarter to what extent were they helped by sort of the higher insurance related revenue?
Yes, we did see a bit of that similar to the IGM situation where insurance tax rules are changing and so there's probably a bit of a push ahead to December of 2016 to get some contracts written. But not a huge amount certainly nothing like IGM so.
Okay. And then finally just with respect to the tax rate, I think 26.5% seems to be around the stat rate and you just talk about being higher than stat rate. So was there anything how should we be thinking about taxes?
Yes, to the extent we have non-deductable items news and entertainment type of things one-off items that aren't deductable can push our tax rate up to 27% or higher but this quarter was pretty good.
All right. So we should think of just being modestly above this quarter going forward.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Hi, good afternoon. I just have, just one question for Neal just on a follow-up on the Q3 call, you talked about Institutional pipeline with 20 mandate on the shortlist and also a potential launch from SunWise real estate funds from CBRE Global, is there an update on those two funds as of right now?
Sure, yes, so well in 2016 we picked up 20 new, it's called 20 new institutional client mandates in 2016 so, that might been the number you're referring to. In the pipeline itself is, would have over a hundred opportunities in it currently.
So and when it comes to the new product we did launch the CI Global Private Real Estate Fund at end of December basically the last couple days of the month and got some initial client money committed to that before the year ended. That has not been drawn on so has not been included into our flow yet. But there is broad -- broad interest in that -- the pipeline on that, as it is a bit of a unique product for Canadian Institutional and higher network investors. The interest in that is reasonably strong and we hope to have a decent asset gathering year with that product, Scott. Although I would also sort of council that it's -- it's a bit of a niche product being private real estate so it's not the type of product that will do billions of dollars of gross for us in a particular year.
And when you talk about the pipeline of hundred opportunities, how much of that gets down to kind of the RFP or the late stages. Are these kind of just really opportunities or how should we think about that in terms of a perfect number?
We break it down into sort of three different categories but more than half of that is in the top two categories where we are in the process of closing the business or we have some are between one and three and one and four chance of closing the business. So those are tangible, very tangible opportunities the others are what we call long list and they're less, they're either less developed or the prospects are not as strong.
Thank you. The following question is from Mark Kearns from GMP Securities. Please go ahead.
Afternoon guys. Had a question for you guys on the regulatory situation obviously embedded compensation is something that it's being actively discussed right now, I'm wondering how you guys feel about that and also how you look at CI's position with respect to the Series F sales and how you're looking at that going forward?
So Mark its Steve Donald. Well I will sort of give you an assessment of where we are at. Regulatory reform really the two main trust right now are the implementation of CRM 2 is kind of away. Now that has been for Assante anyway is largely a non-event, I think we've been blessed, if you will, with tremendous tailwind of strong performance in the market. So it's made it less of an issue.
As it relates to fees, one of the things we're working with our colleagues down in Australia are quite closely to understand what's happening down there. I would say that Australia is probably about five years ahead of Canada in terms of the impact that regulatory reform has had on the retail market. Overall, we believe that and we will be submitting a comment letter, we are in the process right now of putting together focus groups across five different distribution channels within CI Investments and overall we believe that this is something that will likely happen. We are planning for it to happen but we also feel strongly that the regulator should slowdown and learn from what's happened in the UK, what's happened in Australia.
One of the things that we think is very positive out of the paper that has been issued is they have clearly articulated that the manufacturer can collect fees on behalf of dealers and CI has that infrastructure in place with some of our managed products in our private investment management portfolios. So we think that will be a relative advantage for us over the overall asset management space.
And then the last thing that I would say is I say that we think that we will get a lot more guidance of course and we would anticipate that a conclusion in this uncertainty will be taken out of the market likely by the end of the year and again a positive thing in the paper is that they are giving in fairly lengthy runway, yet it does go to banning of embedded comp, a three-year runway to deal with this.
So I think from a CI perspective, we are very well positioned but we will advocate on behalf of our clients to slowdown and understand the unintended consequences that may arise on this.
Okay, great. Thanks for that. My second question would be corporate class obviously the tax changes there, just wondering if you guys have any color on sales to corporate class and how that's evolving?
I would say its Steve again from a corporate class perspective, over the past number of years that the Feds have been continuing to chip away whether it's utilization of IV funds certainly the most recent being the elimination of tax deferred switching. But we still do believe that there are some advantages to corporate class and we haven't seen a softening of relative sales if you will within corporate class. So there is still opportunities there. Having said that, we are continuing to develop our capabilities in the SMA space as an example. Part of our IROC strategy but also part of our strategy to provide more personalized tax implications, if you will, to individual investors.
So we continue to see interest in corporate class but we're also planning on flexibility as we see in our robot strategy, flexibility or optionality for our clients and how they want to deal with that for the clients for their investors.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Anderson.
Well thank you very much for joining us. We look forward to our Q2 -- Q1 call sorry, Q1 call in a couple of months. Thanks everybody bye.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.
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