CI Financial Corp

TSX:CIX

Earnings Call Analysis

Company Reports Strong Q3 Performance

In Q3, the company saw a 7% increase in adjusted EPS to $0.81, buoyed by growth in U.S. and Canadian Wealth businesses and capital deployment following a minority stake sale in the U.S. Adjusted EBITDA per share climbed to a record $1.47, up 7%, and free cash flow per share soared 37% to $1.10. Active capital deployment included $145 million for share repurchases, concluding the issuer bid, and $72 million in M&A. The company welcomed the acquisitions of Coriel and Intercontinental Advisers, followed by Windsor Wealth Advisors in Q4. Total assets grew 3% to $421 billion, with Asset Management margins nearing 60%. The company's net debt stood at $3.3 billion, with net leverage at approximately 2.4x. For Q4, interest expense is expected between $40 million to $42 million.

Profitability and Shareholder Returns in Focus

Adjusted EPS and EBITDA per share have increased, reflecting the growth and resilience of the wealth management business, alongside effective capital deployment. The company achieved a 7% sequential increase in adjusted EPS to $0.81, and a 7% rise in EBITDA per share to a notable $1.47. Free cash flow per share soared 37% to $1.10, a testament to the robust underlying financial health.

Expansion Through Strategic Initiatives

The firm is seeing strong demand for various savings and investment strategies and has launched unique private market funds to cater to this demand. Successful custody conversions and the acquisition of a high-net-worth focused RIA have further bolstered its offerings, demonstrating an ongoing commitment to expanding and modernizing its wealth management services.

Asset Growth Amidst Market Headwinds

Despite negative market pressures, the company's global assets increased by 3% quarterly and a remarkable 25% year-over-year. This growth is attributed to both organic inflows across wealth management segments and strategic acquisitions.

Revenue and Margin Performance

Revenues edged up slightly to $660 million, with contributions from asset management remaining stable, and wealth management benefiting from higher asset levels and strategic acquisitions, adding $10 million to the revenue stream.

Cost Discipline and Debt Management

Costs were tightly controlled, rising less than 1%, while the company managed its debt prudently. Net debt stood at $3.3 billion, with the anticipation of fourth-quarter interest expenses to be between $40 million to $42 million.

Strategic Capital Allocation

The company has grown adjusted EBITDA by nearly 32% on an annualized basis for the past two quarters and completed its buyback program. Looking ahead, they will leverage the Canadian cash flow for debt reduction and opportunistic share repurchases, while U.S. cash flow is earmarked for growth through acquisitions.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. Thank you for attending today's CI Financial Third Quarter 2023 Earnings Call. My name is Megan, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Kurt MacAlpine, CEO of CI Financial.

[Kurt MacAlpine, executive]

Good morning, everyone, and welcome to CI Financial's Third Quarter Earnings Call. Joining me is our CFO, Amit Muni. Together, we will cover the following: an overview of the highlights of the quarter, a review of our financial performance during the quarter, a discussion on some of the key fundamental drivers of our business, then we'll take your questions.

Our adjusted EPS of $0.81 is up 7% sequentially, reflecting the growth of our U.S. Wealth Business, growing contributions from our Canadian Wealth Management business and the benefits from the capital, we deployed following the sale of a minority stake in our U.S. business. This growth was partially offset by a higher noncontrolling interest.

Adjusted EBITDA per share attributable to shareholders, increased 7% from Q2 to a record of $1.47 per share. While free cash flow per share increased 37% from Q2 to a record of $1.10 per share, which reflects the seasonality in our lower share count. Capital deployment remained active during the quarter. We spent $145 million to repurchase 8.8 million shares, essentially completing our normal course issuer bid.

We deployed $72 million towards M&A, including deferred and earn-out payments. And we returned $31 million to our shareholders through our dividend. The Board also declared a dividend of $0.20 per share, payable in April, reflecting the normal cadence of declaring dividends 1 quarter ahead. While there are several bright spots, the uncertain economic environments and risk-averse investor mentality, dampened the flow momentum in our Asset Management segment.

We continue to see strong demand for our high interest savings and other short-duration strategies as well as for our liquid and illiquid alternatives, which we will discuss more later in the presentation. Our Wealth businesses in both Canada and the U.S., continued to generate positive inflows in the third quarter, highlighting the resiliency of those businesses. We also continue to execute against our 3 strategic priorities to modernize Asset Management, expand Wealth Management and globalize the company.

We launched 2 unique private market strategies for our credit and investors, the CI Private Market Growth Fund and the CI Private Market income Fund. The July custody conversion of Align Capital's assets to CI Investment Services went very well. This had an immediate and meaningful contribution to our bottom line, in addition to providing advisers and clients with enhanced services and a better go-forward experience. We continue to work towards onboarding the majority of our internal Wealth Assets in addition to growing our asset base from external clients.

In July, we also rebranded our U.S. business to Corient, which we discussed in detail last quarter. Feedback to date has been extremely positive. We completed the previously announced acquisitions of Coriel in Canada and Intercontinental Advisers in the U.S. Early in the fourth quarter, we completed the acquisition of Windsor Wealth Advisors, into Indianapolis-based high net worth focused RIA. I'll now turn the call over to Amit to discuss our financial results.

[Amit Muni, executive]

Thank you, Kurt, and good morning, everyone. Turning to Slide 4. Our global assets ended the quarter up 3% to $421 billion, due to the conversion of custody assets from Aligned Capital, positive flows in our Canadian and U.S. Wealth Management segment, as well as acquisitions in our U.S. segment, during the quarter.

Partly offsetting these increases was negative market movement. Compared to this time last year, our AUM is up 25%. Turning to our financial results on the next slide, I'll focus my comments on our adjusted results. Adjusted net income was $133 million or $0.81 per share for the quarter. Net revenues increased to $670 million and adjusted EBITDA was $238 million for the quarter.

Prior to noncontrolling interests, both adjusted net income and EBITDA increased this quarter. However, this period reflected the full quarter effect of noncontrolling interest from the partial sale of our U.S. business in May.

Turning to the next slide, I'll highlight the EBITDA and margins for our 3 segments. Asset Management EBITDA was down slightly to $156 million. However, margins expanded to nearly 60%. Canada Wealth EBITDA increased 24% to $230 million and margins expanded to nearly 10%, primarily due to the conversion of aligned custody assets. In the U.S., we experienced strong EBITDA growth of 55% compared to the third quarter of last year and 5% growth compared to the second quarter.

U.S. margins were 42%. For purposes of modeling noncontrolling interest for our U.S. segment for future quarters, we estimate noncontrolling interest of 38% of U.S. adjusted EBITDA, when calculating our U.S. segment's adjusted EBITDA. For purposes of modeling noncontrolling interest for our U.S. segment's contribution EPS, we estimate noncontrolling interest of 32% of U.S. segment adjusted EBITDA.

Turning to the next slide, I'll walk through the changes in revenue. Revenues on a comparable basis increased slightly to $660 million. Asset Management revenues were essentially unchanged, as lower revenue from mix shift due to flows into lower fee short-duration products were offset by an additional revenue day in the quarter. Canada and U.S. Wealth revenues were up, due to higher asset levels from growth and the Aligned custody conversion. Our U.S. acquisitions added $10 million in additional revenues in the quarter.

Turning to expenses on the next slide. On a comparable basis, total expenses increased less than 1%. SG&A increased primarily due to the full quarter effect of stock-based compensation, due to the annual granting of restricted stock awards to our employees, which were done in the middle of the second quarter as well as other higher headcount-related costs. Adviser and dealer fees increased due to higher revenue earned in our Canada Wealth segment.

Interest expense declined due to lower debt levels from the tender offer for our bonds last quarter. Acquisitions added $3 million in expenses in the quarter.

Turning to Slide 9. At the end of the quarter, our net debt was $3.3 billion. We had an outstanding balance on our credit facility of $95 million at the end of the quarter due to our buyback related activity. In addition, debt increased from noncash foreign exchange translation of our U.S. debt. Our net leverage was 3.3x. Using the current market value of our debt, our net leverage would be approximately 2.4x. As you can see from the chart on the bottom of this slide, we have an attractive debt profile for our remaining debt, with an average maturity of 14 years at a 4% fixed rate. We anticipate interest expense to be in the range of $40 million to $42 million in the fourth quarter. Thank you. Let me turn the call back to Kurt.

[Kurt MacAlpine, executive]

Thanks, Amit. I'll now spend a few minutes discussing some of the fundamental drivers of our business performance. I'll start with our Asset Management fee rate. While we've seen pressure on the consolidated fee rate, that pressure has been driven almost entirely by mix shift as investors have gravitated towards lower fee, higher interest savings in short-duration products.

As you can see in the chart, since the fourth quarter of 2021, Cash and money market fund assets have grown from 2% of total AUM to over 8%. During that same 8-quarter period, the effective fee rate on our long-term assets has only declined by 1 basis point. While higher interest rates might lead to a slightly higher natural level of short-duration assets in investor portfolios, we believe a lot of the growth is reflective of the current risk averse sentiment.

As we'll discuss on the next slide, our performance track record strongly positions CI for when risk appetites improve. But we've also taken steps to drive the conversion of short-term assets to longer-term assets with a specific dollar cost averaging plan, where clients can systematically transition assets from our high interest savings and money market funds to 155 other funds.

Additionally, as we've discussed previously, we focused our product development efforts on alternatives, specialty and thematic strategies that generally carry higher fee rates. We believe much of the fee pressure recently endured was cyclical, and CI is among the best positioned to combat secular fee pressure.

Turning to the next slide. One of the reasons we are so well positioned for when the risk environment improves is our investment performance track record. CI currently has the best relative performance in nearly 7 years with 75% of our AUM beating their peers on a 3-year basis and 80% on a 5-year basis. Over both time periods, the majority of the funds are ranked in the top quartile.

Digging a little deeper, we're extremely well positioned in important risk asset classes such as balanced, where we're an industry leader as well as subsegments of equities where we also have very strong performance. I've touched on this a few times before, but I wanted to again highlight the significant structural changes that we've made to our Asset Management business that have resulted in these better performance outcomes for our clients.

Only 3 years ago, we had a multi-boutique model that experienced years of challenges in investment performance in redemptions. Redundancies caused by our legacy boutique model have been replaced by true scale in all critical functions: research, asset allocation, portfolio construction, trading and implementation and risk and analytics, creating an institutional-grade platform reflective of our size.

We believe CI is the best position it has been in years to garner long-term product flows given the performance, drastically improved investment process and team and the expanded product offering. One of the areas we've been very focused on in product development is alternatives. When the market opened for liquid alternatives, CI was prepared and quickly became a leader. We are now looking to further expand that leadership position by building the leading illiquid alternatives offering for the retail market.

Sophisticated institutional investors may allocate 40% or more of their portfolios to alternative investments. However, Canadian retail investors, through their advisers, typically allocate 0%. The disconnect is not driven by demand or need, but by the lack of education on the asset class, lack of access to the underlying managers and the inability to onboard service and administer the products.

To address this opportunity, we launched the industry's first private markets multi-manager strategy to provide Canadian retail investors a single-ticket solution for their illiquid alternatives exposure. CI takes responsibility for the asset allocation, manager selection, onboarding and ongoing service and administration. We're providing Canadians with access to world-class alternatives managers such as Adams Street, Apollo, Avenue Capital, CBRE, HarbourVest, White House, Whitehorse and more through our open architecture approach.

What we've created addresses all the barriers to investing in private markets products. Over time, we believe this and other strategies we launch will help increase allocations from current levels to those more reflective of an institutional investor's portfolio. We are actively educating advisers on the product and working through the approval processes on various platforms and dealers. In addition to solving a sizable client need, the growth of our alts platform will also be important to the economics of our Asset Management business.

Turning to our U.S. Wealth business. We continue to generate strong growth, which is a metric that is top of mind for the market, following the minority investment into the business in May. Over the last 2 quarters, we have grown adjusted EBITDA, before noncontrolling interest, by nearly 32% on an annualized basis. This is more than double the Investor Group's embedded preferred return.

And to remind everyone on the call, the 14.5% implied return reflects the fact that we are not required to distribute any cash to the investor group despite them purchasing a 20% interest in the business where the owner would normally be entitled to their pro rata share of the cash flows. Any distributions we make to the investor group reduces the preferred return, which would magnify our outperformance. With the integration well underway, which is driving synergies and stronger margins as well as an expanding client services offering, we feel confident about our organic EBITDA growth outlook.

In addition, our pipeline for inorganic growth remains robust with a number of attractive opportunities that can further accelerate growth. As we've consistently said, we take a dynamic approach to capital management. With that mindset, after deleveraging through the U.S. minority sale, we leaned heavily into buybacks in Q2 and Q3 to essentially complete our 2022 and 2023 normal course issuer bids given the disconnect we continue to see in our stock price from the underlying value of the businesses we've built.

Since the deleveraging, our shareholders have expressed a preference to lean into buybacks with our excess cap. With these factors in mind, the Board has decided to initiate a $100 million substantial issuer bid that we announced this morning.

To put it in context, the $100 million substantial issuer bid is less than the cash flow generated this quarter by our Canadian businesses or would be approximately 0.1 turns of additional leverage. As we think about capital allocation on a go-forward basis, we will continue to be dynamic but increasingly think about the businesses independently.

Cash flows generated by the Canadian businesses will primarily be deployed towards deleveraging and buybacks with the mix driven by the operating environment and the trading dynamics of CIX shares. In the U.S., cash flow will be used to pursue inorganic growth opportunities augmented by access to credit. We will continue to update the market on our capital priorities and allocation plans in the future as our business and market dynamics evolve. We thank you for your interest in CI, and we'd be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Graham Ryding with TD Securities.

[Graham Ryding, analyst]

Maybe I could just follow on from your commentary about cash flow and debt leverage. So given the plan that substantial issue bid here in Q4, assuming you're successfully complete that. And then I think you've got some 2 Wealth tuck-ins that you're closing in the quarter and then perhaps any contingent liabilities payments. Can you give us an idea of where you see net debt to EBITDA moving to in Q4? And then more broadly, how about looking into 2024, what range of leverage should we expect you to be operating in on an overall company-wide basis?

[Amit Muni, executive]

Sure, Graham. So you're right, we do have M&A obligation payments that we have in Q4, we had the issuer bid. If you look at the guidance that we gave on interest expense, we do expect that going higher in Q4. So yes, leverage -- net leverage will be higher in Q4 compared to Q3. As far -- further guidance than that, we're not ready to give any further guidance. I mean, Kurt talked about our dynamic approach to capital, where we're leaning into right now over the short term is on stock buybacks. So that will sort of define how we think about leverage going forward. But again, we take a dynamic approach to that.

[Kurt MacAlpine, executive]

And Graham, just to pile on quickly to Amit. As you saw probably in the slide in the presentation, a little over 50% of our capital this year had gone to prioritizing deleveraging. Subsequent to that event, we did take advantage of the disconnect in our shares. And I mentioned, I believe, on the previous call, if not the one before, as the businesses continue down different trajectories, cash flow generated from Canada will be used to delever and to take advantage of buybacks where the U.S. cash flow will be discretely earmarked to continue to grow inorganically. So if you do see a, call it, a shorter-term lift as some of those obligations get fleshed out as you think on a more normalized level, you should see that trending back down.

[Graham Ryding, analyst]

Okay. Maybe I could touch on your custody platform in Canadian Wealth. So you've added Aligned Capital. What -- I guess, what pieces are next or what's the timing there? And can you give us some indication of the EBITDA lift that would be associated with moving the remaining Canadian Wealth AUA over to that custody platform?

[Kurt MacAlpine, executive]

Yes. So we have outlined a time line to continue to migrate our own assets while also continuing to migrate third-party assets as well. So as I mentioned, the conversion went very well. When you do a conversion of that scale successfully, it starts to spark more demand. So the pipeline from third parties is bigger than we've ever seen, but we also intend to move custody for our remaining wealth businesses onto the platform as well.

We anticipate that will ramp up over the course of next year and as we start to formalize those milestones, just like the Aligned Capital. I think we announced it a quarter or 2 in advance. We'll give some clarity on when we expect those assets to migrate at that time and then what the associated impact of those assets will be then.

[Graham Ryding, analyst]

Okay. Understood. And then one last, if I could. Just obviously, has made some changes, I guess, to the capital treatment for these high interest savings issuer that sort of source funds through third-party ETFs such as yours. Would you expect any impact here on your flows or perhaps the yields of these vehicles pay out? Maybe just any color on implications on your end.

[Kurt MacAlpine, executive]

Yes. I won't get into the specific, but what I will mention is, if you look at -- we've made in anticipation of this potentially happening. You would have noticed that we made some changes in some fee cuts to our associated money market product over the course of the last quarter. I believe we have the lowest, if not, one of the lowest priced strategies in the market.

In addition to that, I touched on it in my prepared remarks, the dollar cost averaging program, where we do see the increase in the cash balances being obviously driven by rates, but more driven by the risk averse sentiment. So our dollar cost averaging program, which we launched in the quarter, has started flows as well.

So I think it's really a combination of continued commitment to the high interest saving strategy, a more compelling and better priced money market offering than we've had historically. And then also a dollar cost averaging program that allows people to systematically move from to a more kind of risk on environment, which we've seen good uptake on. So hopefully, we're -- we feel we're well prepared on all fronts with that.

[Operator]

Our next question comes from the line of Nick Priebe with CIBC.

[Nikolaus Priebe, analyst]

I just wanted to circle back on the discussion around liquidity and the balance sheet. I'm just thinking about some of the various moving pieces there. There are about $550 million of acquisition liabilities classified as current. How should we think about the settlement of that? Would most of that be cash based?

[Amit Muni, executive]

Yes. Most of those are -- yes, they are all cash based.

[Nikolaus Priebe, analyst]

Okay. Okay. That's good. And then just on the Asset Management segment. I think you had pointed out that the strong demand you're seeing for cash products has been offset by redemptions in long-term funds. that's a trend we see across the industry. Are you able to break out what your long-term fund sales would have been in the quarter ex the high interest savings or money market products?

[Kurt MacAlpine, executive]

No, we don't have that specific break-up provided. But I think you'll see, if you look at, obviously, the increase in our cash positions, our overall flow rate of being $100 million net out for the quarter in retail, you can draw a pretty tight conclusion.

[Operator]

Our next question comes from the line of Kyle Voigt with KBW.

[Unknown Analyst]

This is [ Gerard ] filling in for Kyle. Just wanted to ask on the competitive environment you've seen since the recent ownership change in one of your U.S. peers earlier this year? And what's the marketplace for RAs then and just M&A commentary, if you can provide any?

[Kurt MacAlpine, executive]

Sure. We continue to see a very active market. I believe there's, give or take, 15,000 individual RAs. It seems like as one acquisition gets completed a new RIA gets formed typically from scratch or from a transition from another Wealth Management business model. So we continue to see a very active pipeline.

As I mentioned before, 2021 was an unusually busy year just given low interest rate environments, strong markets, potential tax changes. So I wouldn't consider that to be the norm. But I do see a very active and robust market. And I would say, it does feel like things are picking up a little bit more in the second half of the year after a little bit of a quieter period of targets early in the year, late last year.

[Operator]

Our next question comes from the line of Tom MacKinnon with BMO Capital.

[Tom MacKinnon, analyst]

I was wondering if you'd be able to split your free cash flow into what comes from Canada and what comes from the U.S. Wealth Management business?

[Amit Muni, executive]

Yes, Tom, if you look at the EBITDA, that will probably give you a good rough estimate of the general direction of cash flows coming in from each segment. Obviously, still, the Asset Management part of the business is a large driver. I think going forward, we will start to disclose more information about how we think about the businesses separately, given our comments around how the cash flows of each business are going to be generating growth going forward. So you'll see that starting sometime in Q4.

[Kurt MacAlpine, executive]

Yes. And Tom, the way to think about, I guess, the place, so all contingent considerations are the obligation of the U.S. business, all the go-forward acquisitions and the obligation of the U.S. business. So Canada's, call it, obligation to contribute for kind of deals that had closed prior that have future payments runs off pretty soon. And then, Tom, at this point, we'll have very clear guidance on Canadian cash flows, what they are and what they're ultimately being used for. And as we mentioned, the U.S. cash flows will be used to continue to grow the business As long as we see good inorganic growth opportunities that exist.

[Tom MacKinnon, analyst]

So to summarize, the bulk of the cash flow -- sorry, if I adjust them by the adjusted EBITDA are probably from the Canadian business, but still the U.S. free cash flow, the first thing is to extinguish the $550 million in current liabilities and then to use the rest for some acquisitions. And then in Canada, I think you said the objectives are to deleverage and buy back some stock. Question about deleveraging, though. Like you still have some attractive debt and it's along out there. Is the plan there to use the Canadian free cash flow to buy back stock? Or -- why do you say you want to deleverage with respect to that debt?

[Kurt MacAlpine, executive]

Yes. So just -- perfect. So just one point of clarification, Tom. So think of the cash flow, to Amit's point, as proportional to the EBITDA contribution. And then as you think about the payments, there's -- all contingent considerations are the obligation of the U.S.

All new acquisitions are the obligation of the U.S. There's a little bit of tail of guaranteed payments from acquisitions that were completed through the second quarter. That will remain the obligation of Canada, but those will be settled up in the coming months, and then you'll have the clarity, I guess you're asking about, as it relates to Canadian cash flow and those uses.

So the way that we think about Canadian cash flow, to specifically answer your question, is we're going to pursue on a go-forward basis, a combination of continued deleveraging of that business while opportunistically buying back shares when that opportunity presents itself.

So as I touched on, we showed a slide in the presentation that 50-plus percent of our cash flow that we received this year was going towards deleveraging. The rest was going through a combination of buybacks, dividends and M&A obligations. As we look forward, you're going to continue to see that. So we do anticipate continued deleveraging of the business. But opportunistically, like we saw this quarter, an opportunity to either use our Canadian cash flow or the equivalent of 0.1 turns of leverage to acquire up to $100 million our shares back. So that approach, dynamic approach we'll take. You'll see more of it deleveraging, obviously, as the share count continues to reduce.

[Operator]

[Operator Instructions] There are no additional questions waiting at this time, so I'll pass the conference back over to the management team for any additional closing remarks.

[Kurt MacAlpine, executive]

I just want to thank everyone for participating in today's call, and we appreciate the interest in CI, and we look forward to speaking to you next quarter.

[Operator]

That concludes the CI Financial Third Quarter 2023 Earnings Call. Thank you for your participation. I hope you have a wonderful rest of your day.