CI Financial Corp

TSX:CIX

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, all participants. Your meeting is ready to begin. Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2019 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.

[Peter William Anderson, CEO & Director]

Thanks very much, and welcome to CI Financial's Conference Call for the Second Quarter of 2019. Joining me on the call are Doug Jamieson, our Chief Financial Officer. We also have several CI executives available to answer questions on our various business lines.We have a lot to discuss on the call today. Most important is the Board's announcement earlier this week of the appointment of CI's new CEO. Kurt MacAlpine will be joining the company on September 1. Kurt is exceptionally well qualified, and we are extremely pleased to have found an individual of his caliber. His global distribution experience at Wisdom Tree will be a significant asset in today's environment, and he will bring a wealth of knowledge and strategic insight to CI thanks to his experience as a partner and leader of McKinsey's North American asset management practice.The Board developed a checklist of qualifications for the CEO role, and Kurt ticked all the boxes. I'm very pleased to transition the role to Kurt and as a shareholder, I have an extremely high level of confidence in his ability to add long-term value in this very challenging environment for our industry.Q2 was another positive quarter for equity markets with the TSX and the S&P 500 ahead 2.6% and 4.3%, respectively. For the year-to-date ending June 30, indexes have been very strong -- had very strong gains following the severe pullback in Q4 last year. Growth continues to significantly outperform value, a trend that is in place for several years. Many of our portfolio managers continue to take a conservative position in their portfolios as a result of global macroeconomic challenges and generally stressed valuations at this point in the current bull market. They believe this is the prudent investment decision, especially in today's environment.Although we see improving trends in the overall Canadian asset management business, sales remained slower year-over-year, especially for non-bank participants. Management continues to execute our strategic and operational priorities, which we'll discuss later in the call. However, our key priorities remain unchanged, including making it easier for advisers and investors to do business with our company through investment excellence and modernized product platforms and offerings, including investments in high net worth and ultra high net worth spaces. This is key to returning the overall business to positive net sales. And also, investing in and growing our integrated distribution platform including Assante, Stonegate, WealthBar, BBS and Virtual Broker.Right now, let me pass the discussion over to Doug, who will take you through our Q2 financial results. Doug?

[Douglas J. Jamieson, Executive VP & CFO]

Thank you, Peter. Looking at CI's financial highlights comparing the second quarter to the first quarter, and the second quarter of 2018. Average assets under management were up 2% quarter-over-quarter at $131.1 billion. They were down 6% from a year ago. Ending assets at $130.2 billion were down 1% from the end of March and were 6% below the level of 1 year ago. Assets under advisement grew 2% during the quarter and are up 7% from 1 year ago. Net income, as reported, was down 20% from last quarter at $111.9 million and down $0.11 per share from last quarter and $0.14 from last year. However, when we add back the provision that we've taken this quarter, adjusted net income was only down 1% and was flat on a per share basis.Year-over-year adjusted earnings were down 13%, and 5% on a per share basis thanks to the share buyback program over the past years. Free cash flow was up 2% to $146.5 million. The $35 million provision consists of severance and the write-down of software in the amount of $6.4 million. The balance of $28.6 million is severance, and we have already begun restructuring the business by rationalizing our platforms and fund lineup as well as streamlining and digitalizing processes.The initial impact of that streamlining can be seen in our SG&A for the second quarter. CI's SG&A was $124.8 million, down 2% from $127.3 million in the second quarter last year and down $1.3 million from $126.1 million last quarter. Spend in the asset management segment was $99.3 million compared to $102.9 million in the second quarter last year. And we expect to manage that number lower as we reduce the spend on operating the retail fund side of the business while we increase the investment in the distribution side of the business.SG&A in the asset administration segment was $25.5 million, up slightly from $25.1 million last quarter. We are still on track to achieve our target run rate SG&A of $480 million by the end of the year.Here we have the last 5 quarters of CI's quarterly free cash flow and the return to shareholders. The level of share buybacks increased from $61 million to $95 million as the normal course issuer bid was renewed in mid-June. In the second quarter, free cash flow exceeded dividends and share buybacks by almost $9 million. CI announced a change to its capital allocation policy 1 year ago. In the past 4 quarters, CI has repurchased $504 million in shares, buying 25.2 million shares and maximizing its issuer bid for the 12 months ending in June 2019.Gross and net debt have remained essentially flat over the past 3 quarters. And with annualized EBITDA at $841 million, CI's net debt-to-EBITDA ratio has held steady at 1.5x. CI renewed its issuer bid for 21.7 million shares over the 12 months to June of 2020, and at CI's current share price and cash flow level, we are forecasting net debt to remain steady.I will now turn it back to Peter.

[Peter William Anderson, CEO & Director]

Thanks, Doug. Let me now provide an update on our various business lines, including Canadian retail and institutional sales, GSFM, Assante, Stonegate, investment management and our digital platforms.Our Canadian retail business continues to be a main source of our net redemptions -- of the net redemptions at CI. As you know, this is not an isolated issue at CI, as we see this throughout the industry, especially in the -- with nonbank firms, who are facing fierce competition for new business.As I said, our top priority at CI is to return the firm to positive sales, and we continue to invest in products, training and investment management, among other initiatives, to meet this goal. We are seeing signs that our work is paying off. Redemptions have improved year-over-year and quarter-over-quarter as well, although short term, we saw an improvement in net sales in each of the last 3 months. Improvements can be attributed to several factors, but most notably: stronger performance by our investment management teams; strong support by advisers for our new alt product offerings including liquid alternatives, private pools and funded ETFs; and an improvement in sales at IIROC Advisors and new prospect advisers to CI. CI First Asset, our active ETF platform, continues to grow AUM as we have now surpassed $7 billion in overall assets. At acquisition, First Asset managed about $1.9 billion in ETF assets. Today, this number exceeds $6.6 billion.We recently launched a high interest savings ETF, which is gaining terrific traction in this market environment. And on August 1, we launched a mutual fund version, and we expect this will also be very well received.We've had strong and positive feedback on our current marketing campaign supporting advisers and active management. The campaign, called Seek Sound Financial Advice promotes the use of an adviser and the value they offer to investors. This campaign will continue well into the fall.We have several other initiatives to announce over the next few quarters, and I am more confident than ever that we are moving our retail business in the right direction. We have a lot of work to do, but the signs are more encouraging. CI's institutional business was also in redemptions for Q2 as a result of previous short-term underperformance and a shift in asset allocation by institutional investors, along with significant changes in the overall industry. We recently made some changes to the structure of our institutional group by aligning it with our very strong private client business. This has created synergies through sharing services, while also enhancing the overall offering.The team continues to be successful in placing CI in a significant number of searches and finals. We expect CI institutional to continue to add value to CI's overall business.At Assante and Stonegate, we continue to see solid AUA growth that outpaces our competitors. Growth in the high net worth and ultra high net worth spaces continues as we develop a robust platform and specialized offerings to meet the needs of these clients. We continue to have success in recruiting advisers, who prefer our independent and well-capitalized platform. We are ahead in our recruiting projections for 2019. Assante and Stonegate continue to be key drivers in CI's success, as increases in AUA also translate to increases in AUM growth. We are making significant investments in Assante and Stonegate to further support the growth of these businesses. Our 5-year goal remains to double AUA at Assante and Stonegate.Our investment management team saw an overall improvement in performance in the second quarter, with 76% of our assets in first and second -- in first or second quartile. 1-year and 3-year relative performance has also improved. We've seen solid improvements at some of our core teams, including Cambridge, Altrinsic and CI Multi-Asset Management. We remain very focused on the results of our investment management teams, and we continue to enhance these groups through technology and professionals. As you all know, performance is a leading indicator to sales.At GSFM, our Australian business, we returned to positive sales in Q2 after a rare quarter of redemptions in the first quarter. We had excellent retail sales results and we're in slight redemptions on the institutional side. I'm pleased to confirm GSFM has won an institutional mandate in excess of $500 million, which will be funded any day now. We believe GSFM is in an excellent position for future growth. As a result of the follow-up from the Royal Commission on Financial Services, we believe that independent firms such as GSFM should thrive. In addition, performance by their key PM teams, including Epoch, Payden & Rygel and Munro have created excellent opportunities with both retail and institutional clients.Cambridge Global Advisors is also beginning to see sales in Australia with their retail offering. I remain very encouraged by this acquisition.Our digital businesses, WealthBar, BBS and Virtual Brokers, continue to deliver results ahead of our expectations. At WealthBar, sales remain robust. The firm's client roster recently exceeded 5,000 with an average investment of almost $70,000. In Q2, we rolled out Assante Connect, a WealthBar offering designed to serve certain clients of Assante. The initial feedback from advisers of Assante has been very encouraging. We continue to see significant opportunities to leverage WealthBar technology throughout all of our traditional businesses.BBS and Virtual Brokers are also posting very positive results. We converted a number of Assante accounts that were previously outsourced off-book onto BBS's platform. This provided a cost savings to the firm and better coverage for our clients. As well BBS onboarded 15 new institutional accounts, including robo businesses, portfolio managers and advisers. This business has grown from less than $500 million in assets at acquisition to almost $3 billion today. Although our digital businesses, WealthBar, BBS and Virtual, have a relatively minor impact on overall financial results at CI, they are critical to our overall long-term strategy.Let me wrap up. To summarize, let me highlight a few key points from our second quarter. CI's new CEO, Kurt MacAlpine, will begin on September 1. Sales remain our top priority at CI. Although this [ room ] is challenging for the industry and CI, we are seeing some positive and encouraging signs, especially in our retail business.We've taken a onetime provision this quarter of $35 million for ongoing restructuring of the company. We continue to focus on our SG&A as we believe this is -- this will become a key differentiator for CI. We are investing where we see growth opportunities, but remain vigilant on expenses throughout the firm.Investment management performance has improved, but we remain focused on delivering consistent long-term results for investors. And finally, we will continue to be buyers of CI shares as we believe CI remains undervalued and at this point, is the best use of our free cash.And finally, as this is my last analyst call for CI, I want to thank all of you for your continued support of CI during an extraordinary period of disruption and opportunity. As a shareholder, I'm extremely pleased with CI's Board -- sorry, the Board's decision to hire Kurt, and I am confident in his ability to lead this company forward. As I move on to my next chapter, I look forward to keeping in touch with all of you. And with that, let me close and say thank you, and let's open the phones to questions. Operator?

[Operator]

[Operator Instructions] And the first question is from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

I know you talked about the redemptions, seeing that start to improve. And we've seen the industry flows, it looks like, hopefully stabilize, even potentially improving. Would you say from CI's perspective on the overall the net sales on the Canadian retail, do you think that it's stabilized? Do you think that you're seeing maybe it's early signs that it's getting better? I just wanted to get your characterization.

[Peter William Anderson, CEO & Director]

I would say at a minimum, it is stabilized. We've seen, as I said, improvements in our redemptions. I mean gross sales are clearly a challenge in the industry, as you've seen. But I would say our retail business is stabilized to improving.

[Geoffrey Kwan, Analyst]

Okay. And then I apologize if I missed it, but the institutional win at Grant Samuel, did you say how much that was going to fund in Q3?

[Peter William Anderson, CEO & Director]

Yes, it'll -- I have every expectation on that any day now, and it is at a minimum $500 million.

[Geoffrey Kwan, Analyst]

Okay. And then just my last question is more bigger picture and not company-specific. But just the industry is under fee pressure, the flow is going into passives from active. At the same time, the retail fund companies have lots of different funds, a lot of different series of funds. I'm just trying to understand in terms of trying to mitigate that earnings pressure. Like how much of an impact -- like, for example, if you or the industry were to like cut the number of funds in the industry by half, would that have a material impact to the bottom line? And also two, if you went from all the different series of the funds, and you went to -- I'm just going to pick a number, 2 series, like the F class and maybe the I class simplistically, would that also have an impact in terms of what that does to the cost structure?

[Peter William Anderson, CEO & Director]

Yes. I mean it would certainly have an impact. I mean we've just gone, begun -- I think we've talked about it earlier in other calls about rationalizing and modernizing our business lineup. And over the weekend, we moved our entire business off of our tier pricing platform back to a rebating platform, significantly reducing the number of funds that we have at the company. And which has a measurable cost savings to the business. I would expect that you're going to see a rationalization in the industry for sure. You're definitely going to see it at CI. We will be -- between now and the end of the year, we'll be reducing the number of funds that we have. And I would suspect the industry will do the same. And we're going to continue that into 2020 and beyond.

[Geoffrey Kwan, Analyst]

Do you think, to your point, the -- sorry, if I can just a follow-on. Do you really think that, I guess with the challenges you've seen in the last 5 years, that this -- we actually would see a material decrease in terms of the number of funds, because I'd say over the last decade plus, there's always been talk, "Oh, there's too many funds in the industry." And the number, it seems like it just goes up and not down because whatever gets merged there's always new funds that pop up to try and take advantage of a new investing strategy.

[Peter William Anderson, CEO & Director]

Well, I mean look, we're always going to roll out funds and new products where we see the industry -- where we believe the industry is going. We want to be ahead of the game. I mean that's why we launched alt products and our pooled products and our funded ETFs. But our traditional business -- and I can't speak on behalf of the industry, I can tell you that we will be materially reducing the number of funds that we have because we have a significant number of funds that certainly can be rationalized and merged together to make our business more efficient.

[Operator]

The next question is from Gary Ho of Desjardins Capital Markets.

[Gary Ho, Analyst]

I just want to dive into the restructuring charge a little bit. So that piece that excludes the software write-down. Can you kind of just go through kind of what areas this impacted and the rationale? I think you listed a couple in your prepared remarks. Maybe if you can give us a little bit more details? With this kind of investment management, back office, give us some color on that, that would be great.

[Douglas J. Jamieson, Executive VP & CFO]

Sure, Gary, it's Doug. This is primarily for senior people and some portfolio management changes. As we restructure the business, rationalize our product lineup, there's going to be changes at the top, changes throughout senior team and some portfolio management throughout the operational side of the business. That's a longer-term thing that happens. We hope that through natural attrition and not having to hire people back, that that's how we implement most of our digitalization and changing process in the back office.

[Gary Ho, Analyst]

Okay. Then maybe kind of as a related question. Maybe I missed in your prepared remarks. What does it mean to your SG&A expense looking out relative to your Q2 run rate? And any expectations for further restructuring charge if I look out next year or so?

[Douglas J. Jamieson, Executive VP & CFO]

Yes, there's no expectation for more restructuring charges. And of course, we expect to realize SG&A savings as we streamline the business. And as Peter said, we already started rationalizing our platforms and fund lineups. So we have a target, as I've said, $480 million run rate SG&A, and we think we're on track for that.

[Gary Ho, Analyst]

Okay. Perfect. And then just maybe the other side of the questions I have is just focusing on the gross sales, $2.9 billion in the quarter, and that's been trending lower. Let's kind of take a step back. So what do you think it'll take to kind of reverse this trend? Do you think it's on the distribution side, better fund performance, sales and marketing? Just would like an update on the net flows turnaround initiatives.

[Peter William Anderson, CEO & Director]

Gary, I didn't hear it completely. Could you just repeat your question, sorry?

[Gary Ho, Analyst]

Yes, just on the gross sales side, not on the net. There was -- I think it's around $2.9 billion for the quarter. And I'm just wondering if you can just highlight what do you think will turn this number around the other way? Is it better distribution? I think you highlighted some of these, but I just wanted to know kind of if you can highlight 1 or 2 points, which one would be the most important? Is it better fund performance or is it sales and marketing?

[Peter William Anderson, CEO & Director]

Well, I would say a little bit of both. I mean we're -- I think as I said earlier, is performance by our investment management teams is certainly a leading indicator for sales. And so from that point of view, that's important. I'm very confident in the strategies that our leadership on retail sales are putting -- have put together and implemented. I think the product offering that we have today is strong. I'm very confident in our portfolio management teams. Industry is obviously challenged with gross sales lower than before. So -- and I'm actually very excited about the direction that we're taking Assante and Stonegate. I mean there's no doubt in my mind that, that's going to be -- continue to be critically important to the success of our overall wealth management business. And as we see grow -- as we continue to grow that business, whether it's through recruiting, through an acquisition or through organic growth, I continue to see that the AUA that we grow from there is A1. So I think I have sort of gone a roundabout way we believe in the -- just a recap, believe in the strategy that our sales -- retail sales team has, believe in the strategy that our Assante team has, and I'm very comfortable with the -- with our investment management teams to deliver long-term performance in these crazy markets.

[Operator]

The next question is from Graham Ryding with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Can you hear me?

[Douglas J. Jamieson, Executive VP & CFO]

Yes, fine.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Great. Just first the hire of Kurt MacAlpine. He's not familiar to me. So I just wanted to maybe get some perspective, Peter, if you could speak on behalf of the Board. I don't know you could do that, but what is the Board sort of seeing here that they think Kurt can bring to CI where there's an opportunity or where -- what was not there before. What's the sort of logic and the excitement from the Board at this hire?

[Peter William Anderson, CEO & Director]

Well, I mean, I think -- I mean right off the bat, I think what the Board was -- believed is that, that outside blood might be important to bring to CI a different perspective, somebody with a long runway. He's got a lot of runway left in his career. That's exciting. I think he is a keen -- he's got a strategic vision of the industry. He's had industry experience as a consultant with McKinsey. He's sat down and met hundreds of different firms in North America and globally. And he's also got a global perspective, which I think is great. I mean -- so I think those are some of the checklists that the Board was looking for. And he -- like he ticked all the boxes. So I think as I said this earlier, but I think the Board is very excited about a young, talented, strategic, global individual joining our company.

[Graham Ryding, Research Analyst of Financial Services]

Perfect. The -- your comment about aligning your institutional business with your private client business. What's the strategy there? How should we think about that?

[Peter William Anderson, CEO & Director]

Well, I mean first of all, I think, I mean there's a lot of similarities between our private client business and institutional. I mean there -- the expectations of our private client investors aren't much different than what the expectations of consultants are asking for us on the institutional side. So it makes an awful lot of sense to start to work to align those businesses because I think from a technology point of view, from a reporting point of view and from a client expectation point of view, it's -- they're quite similar. So I'm actually really pleased with that. It's going to be -- the teams are being led by Jaime Ross. He's got very good vision for delivering what clients expect. And so I'm quite encouraged by what I've seen in a very short period of time. And I think this is a well thought out way of putting businesses together. I think you've seen -- you actually do see that in other places, not necessarily in Canada, but you do see that also in other wealth management firms.

[Graham Ryding, Research Analyst of Financial Services]

Got it. Perfect. And then my last question would just be your comment about the industry is challenged. I presume you're referring more to sort of the mutual fund space versus the ETF space, which continues to show some growth. What's it going to take for that industry pressure to subside and shift, in your view?

[Peter William Anderson, CEO & Director]

Well look, I mean I think right off the bat, I mean we've been in a bull market for 10 years. And so passive will always do very well in an environment like that. I think good active management will certainly have its day. And I think it -- we will definitely be able to show the value of active management over passive. But it's not a question of whether -- it's not active or passive, it's both. I mean we're going to be competing with passive forever, so -- which is fine. I think what you're going to have to see, though, is you're going to -- is sort of a culling of businesses. I think we're going to certainly see firms disappear through acquisition. I think that consolidation is -- in my mind is a no brainer. And I think you're going to see the firms, the good firms rise to the top. I think we're in a really good position because we're large, we're independent. I think we're strategic. And I think we're building our business accepting that the industry is going to change. And I think we're -- and you're seeing that with some of the things that we've done in the recent past. Buying an active ETF platform, buying WealthBar, buying BBS and Virtual. Those are very different than -- but I think they are incredibly strategic, and we're integrating them into the overall business. We're putting them together because we think together, it makes a better business.

[Operator]

[Operator Instructions] And the next question is from Scott Chan of Canaccord Genuity.

[Scott Chan]

You showed on one of the slides the year-to-date fixed income category is doing very well and I suspect, [ you through the ] date, it's probably accelerated. How is CI positioned in that product category in terms of the market? And are you guys capturing your kind of fair share of market share there?

[Peter William Anderson, CEO & Director]

I can't give you the answer of if we're capturing our share as you mentioned. I'll get back to you on that. But I would say to you that we're in a good position. I mean we have fixed income teams at Signature, we have fixed income teams in Cambridge, we have credit teams with Marret and Signature, Lawrence Park. So I think we're very well positioned to -- in the fixed income space.

[Scott Chan]

Okay. And I just wanted to -- you talked about recruitment being higher this year. And I think in your annual report, it's saying that $1.4 billion of AUA was incrementally added last year. What makes this year better compared to last year in terms of your recruitment process?

[Peter William Anderson, CEO & Director]

Well, I think we're just -- we're doing more of it. We're seeing an awful lot of advisers from different places who are looking for an independent home, and a home that's well capitalized. I mean we have a very good product offering. We have a commitment to the advisers of Assante and Stonegate, and we're investing in the business. A lot of firms aren't doing that today. And so the individuals that are out across the country that are meeting with advisers continue to have a significant amount of positive feedback. And I would also add that it's not just us going out and recruiting, a lot of people are knocking on the door as well.

[Scott Chan]

And just lastly, just a clarification question on your AUM breakdown. What was the divestiture of $560 million in the quarter?

[Douglas J. Jamieson, Executive VP & CFO]

Scott, it's Doug. That was just -- that was at GSFM related to the Tribeca business.

[Operator]

There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Anderson.

[Peter William Anderson, CEO & Director]

Okay. Well, if there's no other questions, thank you so very much. And I won't see you on the next call, but we'll see you in the next call at Q3. Thank you so much. Bye.