Power Corporation of Canada

TSX:POW

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Power Corp. Q1 2022 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd like to hand the conference over to your speaker today, Jeffrey Orr, President and Chief Executive Officer. Please go ahead, sir.

[Robert Orr, executive]

Thank you very much, operator, and welcome, everyone, to our results call for the first quarter of 2022. I will turn your attention to the forward -- caution versus forward-looking statements and non-IFRS statements on Pages 2 and Pages 3 of the presentation.

You will see that with me on Page 4 is Greg Tretiak, Executive VP and Chief Financial Officer of the Corporation.

You have on Page 6 of the presentation, various documents related to Power Corp., Great-West Life, IGM and GBL, that you can make reference to regarding recent presentations and our quarterly results.

Turning in to Page 7. I would characterize the quarter overall -- it was actually a strong quarter. We're on track in terms of our business plans. The underlying earnings of those businesses that are earnings driven were actually very solid. A fair bit of noise in the statements with GBL and with some of our assets at the power level, but underlying earnings were strong.

Markets overall, I don't need to tell anybody on this call, in a downfall at this point. That hurts us in the sense that we have a lot of our fees that are attached to market levels across our businesses. We're happy with that business model. It helps over time, but you also live through it when you go through downturns in markets, which we're going through right now and that doesn't put us off at all in terms of our strategies or what we're trying to pursue, but it does create some volatility in the earnings. It also affects some of our seed capital and some of the businesses where we do have investments in seed capital.

Other big story, of course, is interest rates that are coming up. Over time, that will help Great-West Life's business. Great-West Life is -- runs a very matched book. But as we write business on the insurance side of the business at higher rates, that will be good for returns. Obviously, we're all, like everyone else, hoping that authorities can raise interest rates without throwing the whole economy in a recession and still [indiscernible] inflation, and we'll wait to see how they do on that front.

So with that, I'll just also point out on the opening page on 7, we remained active, in the second bullet point there, with a number of announcements during the first part of the year, including some transactions at the GBL level, and we were active in our share buyback program which we announced and started with the 1.1% of the shares having been purchased year-to-date.

Now I will turn to Page 8. The numbers you all know. Our business, when you get in times like this, really underlies and underscores the need for advice and for well-constructed portfolios. And that's what we do across our business, whether it's on the individual side or it's on the group side. And so it plays into our hands. It underscores the need that people have. Now when you have markets going straight up, it's easy and people can get pretty confident about what they're doing when you get into periods of risk. The value advice becomes more important.

I'm going to turn it to Greg Tretiak to cover the next few pages. And Greg, over to you.

[Gregory Tretiak, executive]

Thank you, Jeff. And I'm going to go straight to Page 9 I guess is the first page here. And the only point there is we did -- the Board did declare a dividend yesterday of $0.495. And with that, I'm going to go to the more detailed slide on the results on Page 10. And -- looking at the right-hand panel, as you alluded too earlier on, Jeff, in your remarks, the earnings at our publicly traded operating companies were strong in the quarter. You can see Lifeco at $539 million, which were up about 9%. IGM had a record first quarter and they were up about 8% with their $135 million. You did speak of noise in the earnings. And at GBL, actually, their cash earnings were up 25%. They were about $28 million, at least our share of that was $28 million versus $22 million in the prior quarter.

And the -- there was some noise, obviously, from the fair market value of Webhelp going up in the GBL portfolio. And with the fair market value of that asset going up, there is a liability associated with the non-controlling interests who have put rights. And in the quarter, that was about $43 million negative. So there's a fair amount of noise in GBL's number there.

All in all, though, you can see from the publicly traded companies, $686 million versus $655 million. So a good strong quarter in terms of earnings.

The other area where there was a significant amount of noise was in our alternative asset management platforms. And that was principally generated by the activities in our China equity fund which is managed out of Shanghai with -- under the auspices of Power Sustainable Capital. And there you can see that there was a negative $86 million. Of that, $70 million was from losses realized in the portfolio during the first quarter. And those losses are on a realized basis. These are available for sale securities in accounting language. So only on realizations can we book anything through the P&L. You can see in the previous year, there was $255 million of such gains and earnings. And of that $225 million had come from China when the markets were performing really strong last year at this time.

So the next item, the China Asset Management. A good quarter again with China Asset Management. The $13 million is the same as prior year. However, there was a seed capital mark in the quarter of about $2 million. So their earnings were up in the quarter as well.

In the corporate operations for those of you who have dug through the MD&A, you'll find that as far as our operating expenses, they were about $36 million in the quarter, and that's spot on with where we basically got our run rate to, after our -- achieving our $50 million in cost savings last year.

So that rounds out I think the comments I'd make on this particular page. And Jeff mentioned, obviously, the buyback in the opening comments, and you can see that our average shares for the period are 675.8 million.

Go to Page 11 quickly. And after 3 weeks of AGMs and analyst calls, I don't know that there's any surprises here. You would have certainly seen most of these marks through the publicly traded companies for sure. I'll just make a couple of comments on geography here, because in the later slides, we have more color on each one of these investments and holdings.

In the Sagard portfolio, of course, is Wealthsimple. And last week at the IGM meeting, they had recorded a reduction in their evaluation of, Wealthsimple, at about 20%. And at our level, at PCC, for PCC's direct holding, that is about $0.22 on the $49.92 net asset value per share number that we have there.

Power Sustainable. The China equity fund is in that number, and it's a little over 50% of that number. And of course, it reflects the recent declines in China. And then I think the other one of note is in the standalone businesses, and we have a slide on this later, too, which is Lion. And certainly [ Mark Berdart ] last week spoke about his business constructively, especially the delivery and the supply chain.

So with that, Jeff, I'd turn it back to you.

[Robert Orr, executive]

Okay. Thank you, Greg. The next, I guess, Pages 12, 13 and 14, I will skip over. Most of you on this call will be well aware of our strategy. But just to remind you, we do keep a few pages in our quarterly earnings deck, find a lot of people, who are especially new people to the group and new investors will go to the latest quarterly result to see what's going on. And so having some of the standard pages on our strategy puts everything in context. But for those of you who follow us regularly, it's old hat, but that's why they're there.

On Page 15, just a few more comments on the earnings growth at Great-West Life and IGM. As I said, a good strong earnings growth at Great-West Life. And it was -- and the integrations are on track across the board. I'll talk more about that in a moment. Earnings were a little bit more from Europe and the insurance business in Canada and the U.S. that were -- there's nothing there of any kind of theme to that. It's just simply the way that the earnings come out in any given quarter, but we believe that we're on track with all of our strategies at Great-West Lifeco.

IGM had a strong quarter. The first quarter is one that I find the Street tends to under -- or overestimate kind of consistently. I'd like to go back and do a study on that. I'm pretty sure I'm right. Fees are collected on a daily basis. Compensation and trailers are paid on a monthly basis, about 2 less days in the first quarter. It sounds silly, but that's like several million dollars that can account for a few cents. And then there's seed capital, of course, particularly at Mackenzie. So when you get a down market, you get a mark on the seed capital, and that accounts for most of the noise.

But basically, it was -- and from our perspective, it was a strong quarter from an earnings [indiscernible]. In terms of the flows at IGM, in the whole industry now you'll see from [ IFEC ] numbers. And not surprisingly, given the volatility and the weak markets, you're getting weaker flows into investment products. But IG Wealth continues to progress. And we're really pleased with the strength of that franchise.

We sort of telegraphed it last year that we thought that there was momentum building, and we certainly saw that with continued strong flows relative to the industry overall at IG Wealth. So that's a comment on those 2 companies.

A quick comment on the brand. We launched the Canada -- I'm on Page 16 now, launched the Canada Life brand, not that long ago. And in a recent survey of the value of brands it was ranked in the top 5 brands in terms of value. And that's the first time an insurance company has ever been in that position. Really pleased with the way that we have consolidated the 3 brands into 1 and the rollout of that brand, and we look for more brand equity being built in the future on Canada Life.

On the right-hand side is a J.D. Power investor survey. And it just points out IG Wealth is doing well, and it underscores the comment I just made. This is the highest that I've seen IG Wealth in a long time from an investor survey, in this case, higher than branch or full-service investment banks, owned by the big 5 banks in the industry, average overall. So it's just another little touch point and evidence point of the progress being made.

Page 17. Obviously, we've been talking a lot about Empower. We're extremely excited about Empower. The quarter was affected by lower markets. It was also affected by a buildup of some expenses on the sales side, on the retail side. We are rolling over and integrating the tools from personal capital into Empower's DC business, but also its retail business, where they have retail clients that they bring over from the DC platform. And there was a big buildup of sales staff during the first quarter, advisers in effect, and without the corresponding revenue. So that impacted the business.

And I think the company made the point during their call, but just to repeat it. The synergies on the MassMutual transaction are going to be a little bit barbelled when you first have a transaction closed. You have a number of initial surveys relating -- excuse me, related to staff and other expenses you can save. And then you run on multiple systems. The employers and the employees of MassMutual migrate in waves. There are 8 waves, I believe, are done over time.

And it's not until you've migrated everybody that you can turn all those systems off, and you've got a lot of payments you're making to MassMutual for keeping the systems alive. So the synergies tend to be barbelled. But the $160 million that was announced by Great-West Life and Empower, the company is right on track with the progress that's being made there. And so -- and as I mentioned, the really exciting thing is we're starting to take the personal capital tools and roll them into the Empower DC platform, the Empower retail platform, and they're starting to get turned on, which is -- seems pretty excited about that.

Okay. Page -- on Page 18, about the retail business of Empower. You see that on the left-hand side of the page, is now with the acquisition of Prudential, 17 million Americans in our plans, USD 1.4 trillion in those plans. About 6% of that is eligible to roll into retail accounts every year by people who change jobs, who retire. And then you've got the ability to go out and reach into their individual savings and investing accounts that are outside of the plan. That drives a big potential retail opportunity that we are trying to take advantage of, and serve our clients in a more complete way. On the right-hand side of the page on the dark blue, you see the buildup of our efforts in that regard, going from $5.5 billion up to $25 billion at the end of Q1 2022.

And in the light blue at the top, you see the addition of the personal capital direct to the consumer business that we purchased. We now have a business which at the end of first quarter is retail advising wealth management business of $48 billion. And you'll see even in the first quarter, the markets were down and we had growth in the assets under advisement there. So you can understand there were good strong net flows through the quarter in those businesses. And we've said, and Great-West Life have said on the roll-up of the DC platforms that we've been doing. If all we do is create a bigger, more profitable DC business, those transactions will be successful strategically and financially. If we can really execute on the wealth management strategy, which will take longer to execute, and we have to prove we can do it, then those transactions will have been really terrific value creators for the company.

So with that, I will turn to Page 19. Greg mentioned the point at the top, and we just wanted to emphasize the underlying -- from GBL's point of view, they look at cash earnings and NAV. They're not particularly earnings focused with their own shareholders, but we end up reporting their earnings. But the cash earnings were up 25%. And they are involved in their own buyback program, and they are also -- their strategy in part is to pivot to more private investments in a number of high-growth sectors, including health care, and they invested $1.75 billion in 2 private health care businesses after the end of the quarter. They were both announced in April. I guess 25% of their NAV is now private as opposed to public, as a consequence of those investments and what they've been [indiscernible] good progress at GBL.

China Asset Management, I think you've seen most of this slide. The one thing I will point out is under the first bullet point. And if you're on the IGM call, they would have talked about it as well. The China announced subsequent to year-end, the rollout of their third pillar of their pension system to remind people, first pillar is government-provided pension, second pillar is employer-based pensions and those both been in existence in China. And the third pillar is tax-assisted individual savings. So think of our RSPs in Canada, I think, of investment IRAs in the United -- in the U.S. And that has not existed heretofore in China. And we think it's going to really open up the market. We think companies like China AMC are going to benefit hugely. And they announced rules to roll that out. It will take some time, but they've got a number of pilots going on. We think a billion individuals who could potentially make contribution. So this is a big deal long term to the prospects for China AMC.

Staying -- Page 21, staying on the China theme. Greg talked about the fact that we had some impairments in our China portfolio. I think the China market, the index was down first quarter -- 20% in the first quarter. I think that's the first quarter. I don't have it in front of me. It might have been the first 4 months, but down big time. You can see it on the chart. And of course, the way we account for that, if there are any realizations or any impairments, we don't fully market to market, but those flow through the P&L.

And so we had some losses, as Greg mentioned, in the first quarter. But this gives you the history of our initial $50 million investment in 2005. We've taken dividends back the portfolio with some $900 million at the end of the year. It's down from there, of course, today. But this has been a great return for the Power Corp. It's also now strategic in that we're bringing third-party investors in our record of the team. You can see it referred to above 5% and excess of its benchmark. That is both through security selection, sector selection and asset allocation. They will go to cash. They have an active asset allocation methodology. So they'll want to cash when they think that the market is overheated.

Moving forward. I won't spend any time on 22. You know all of that as they're kind of as a standard boiler plate on our strategy.

On 23, I'll just point out that, when you look at our alternative asset management businesses and you focus on the -- not on the GPs, on the business, but on the seed capital that we have invested, which we have about $1.9 billion in NAV reporting those strategies, you can break them down in terms of how the earnings get realized through kind of 2 overall groups. There's capital appreciation strategy, so that would be private equity, venture capital, and the China portfolio. And we'll tend to realize those gains as they're incurred. The overwhelming way we would recognize the gains is when there's a disposition. There can be impairments. But the ordinary course is going to be episodic when we realize gains on that.

And then you've got income strategies at the bottom of the page, private credit, royalties, energy, infrastructure and real estate, the targeted returns as well. So just a little bit more on our capital, underpinning the seed capital and our commitments and how the earnings will emerge.

We turn to the alternative asset management business as a business, i.e., the GP, the asset managers themselves, where we are looking to earn recurring fees. And you've got in that -- at the top of the table on the left, you've got Sagard in the first quarter, $34 million in management fees. Not quite at breakeven. There's a little bit of noise in the $38 million on the tax side. They're actually closer to breakeven than run rate basis in the quarter. And then you got the net carried interest. But we look at that third line, kind of how are they doing on fees, less expenses, and then the carry can go up and down depending on realizations or marks. And then you've got the same thing for Power Sustainable Capital.

On the right-hand side, I think you've seen these charts before, up to $19 billion in funded and unfunded AUM. Now the fee-paying capital is not $19 million. You've got it on the last bullet point. It's $11.4 million. As you're probably aware, in these businesses, you don't get paid on the appreciation of the asset value, you get paid on the initial commitments. And in some cases, you get paid on uncommitted, but for the most part, you get paid on committed capital, not uncommitted capital.

And on the bottom of the right-hand side, you will see the very substantial progress that we've made and the growth of these platforms has come from parties other in power. In fact, we've reduced our commitments to seed capital through various sales, which is a strategy that we explained to all of you and which we're executing.

And then just very quickly on Page 25. Second bullet point, continued with some good fundraising in the first quarter -- or year-to-date -- $763 million year-to-date, including the end of the first quarter, and you get the breakdown by strategy on the bottom of the page.

On Page 26, Lion is one of our standalone businesses. Market value on technology companies, of course, has come off for some period of time right now, companies that are in development, where they've got revenues, but no earnings for the foreseeable future. Interest rates are going up. Those get discounted back at a lower level. And so market has been turning away from those investments, and they've sold off. That's been the case with Lion in terms of its market value. The business, we think, is going really well. It's a very strong business. At some point, we will look to be realizing value. But at this point, our strategy is to make sure that the company continues to succeed and we realize the appropriate value. And they're doing great progress and really continuing to build out their business. So we're pleased with the progress at Lion.

Page 27 talks about buybacks. And like I mentioned earlier in the presentation, we bought back 280 million shares year-to-date, including 105 million subsequent to the quarter end. We've got $1.2 billion in terms of available cash above the minimum 2x fixed charges that we use as a guideline. IGM has been doing its own buyback, and GBL is also active in doing it.

And then finally, before I roll it up and follow our discount here, we're on a dogged pursuit to continue to simplify. And as we do so and continue to create value, get more people who understand what we own, we are convinced that, that discount can narrow in from where it is. It won't go in a straight line, they never do in the markets. But we think we've got lots of room to create value through narrowing in a discount.

Page 29, you've seen before. It is a placeholder for overall our strategy.

With that, operator, I will conclude my remarks and ask you to open it up to questions from people that are on the line. Operator?

[Operator]

[Operator Instructions] We have your first question from Graham Ryding with TD Securities.

[Graham Ryding, analyst]

Just maybe some color on -- given the volatility of the markets, does that sort of change your outlook at all for fundraising on your alternatives platform, is on a bit of a near-term headwind perhaps? And then maybe some color on what are you looking to -- what funds, what strategies are sort of actively fundraising this year? Do you have any targets out there or anything?

[Robert Orr, executive]

Yes. So it's a very good question, one we're asking ourselves, Graham. Generally speaking, when markets aren't as strong -- as you know, people are putting less capital to work. It will be interesting to see on the private side, whether that's true or whether we continue to see a lot of flows into private markets. Most of our strategies, with the exception of China, are in private securities. So we're asking ourselves the same question. It's a risk that we get into really weak economic conditions. I think that we want to be putting the money to work historically in some private equity type strategies when the markets are weak, but that doesn't mean investors will necessarily act that way. I do think with -- there'll be some uncertainty in the short term on what's going on in China. So that's not -- that's a bit of a headwind in terms of fundraising there, even though we've got a great track record.

So I guess you're asking me a crystal ball question, and I'm not quite sure, we are asking ourselves the same question. I don't change what we're going to do. We'll move through the -- if we end up with choppy markets for a period of time, we just navigate through them and drive on with our strategy. Fundraising is going on broadly. We've launched at Power Sustainable Capital. We launched a new Ag – sustainable Ag fund. So there's active fundraising going on right there. Sagard across its platforms is fundraising back to Power Sustainable Capital. They're looking for more assets to roll into the infrastructure fund. So it is pretty broadly based. I don't think I've got any particular comments as to where there's a focus, and we'll wait and see how it goes. Sorry, I can't be more specific, but...

[Graham Ryding, analyst]

Would you consider or are you actively looking at potential tuck-in acquisitions that were on scale or maybe product -- some further product breadth to that platform? Or should we expect more just block and tackle organic growth is the focus?

[Gregory Tretiak, executive]

Yes. I think that we did that in Sagard Holdings, of course, with EverWest. Now that was through Great-West, but there was a real synergy there. And I think we would be open to getting scale through acquisitions. But having said that, I wouldn't want to create an anticipation that we are about to announce something like that. But we are open to that. There's -- when you launch new strategies, you go through 2 years of a J curve where you've put the staff and put the people in place, and you've got losses and then you get assets and start to get the fees building and build up. And so you go through losses for 2 years.

If you buy a team with assets or an existing business, then you get P&L right off the bat. So it's more friendly from a shareholder point of view, and it gives you scale. And so we would look for those opportunities, but they've got to be the right opportunities. They have to fit culturally. They've got to fit into the product shelf. So -- but we are open to that, but we don't have anything pending that I would want to talk about.

[Graham Ryding, analyst]

Fair enough. And then have you disclosed or would you disclose what your actual ownership stake is in your alternative platform? Because I know you have, I think, some management on I think Great-West -- on the complete -- on the West [indiscernible].

[Robert Orr, executive]

Yes, flip to Greg. I have no problem disclosing it. I want to make sure I don't answer the question if we haven't disclosed it already, because I don't want to get ahead of ourselves here on a call like that. Greg, I'm going to ask you the question on our level of disclosure in terms of our ownership. The management ownership is pretty -- a general comment that is public. Management owns stake in each of Sagard Holdings and Power Sustainable Capital. Great-West through the EverWest transaction came in for -- I think it's 8%. So there's some dilution there. Greg, I am going to ask you to answer the question in terms of disclosure of our ownership positions in each of Sagard Holdings and Power Sustainable Capital.

[Gregory Tretiak, executive]

Yes. It's in the MD&A, Graham. So I don't have a page number for you, but I'm sure I can get one -- 20. There you go. So LifeCos has got [ 6.6 ] in Star right now. And of course, management has an interest as well -- 9.

[Operator]

[Operator Instructions] We have your next question from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, analyst]

Just had one question, maybe expanding a bit on Graham's question on M&A because, Jeff, you talked -- I think it was a little while ago that, you felt that the heavy lifting was complete in terms of improving the fundamentals at Great-West and IGM, and then you were being able to focus more time on M&A. And so unless you want to offer up some specific things that you're looking at, but just -- how would you describe the progress you've made on potential acquisitions? I know you talked about maybe nothing imminent, but just where you're seeing opportunities and what you've been maybe looking at? And also given what we've seen in the markets and interest rate movements, is that impacting any sort of processes you're looking at in terms of acquisition multiples and things like that?

[Gregory Tretiak, executive]

Yes. Good question. So if I start with Great-West Life, you go through phases, Jeff, when you're looking at M&A, and we spent $10 billion at Empower and CAD 10 billion over announced deals over 12.5 months between -- I think it was August of 2020 and August of 2021. And we're now in a -- so that did 2 things. The team at Empower now has 3 integrations going on simultaneously, and the leverage ratios at Great-West Life need to come down as we get the cash flows from those transactions.

So we're in a -- we went through a phase of rapid execution on getting the deals done, and now there, by necessity, needs to be a period of focus on executing on the transactions. And we're executing well, but it's a lot of work on the team. And so that -- but that would continue to be an area of high priority. We do think that the U.S. DC and adjacent wealth management opportunity is the biggest opportunity I think we have across the group.

And it's -- I do think if we execute on it over time, will really change the whole makeup of Great-West Life. And I'm looking several years out here, I'm not looking in a year or 2, but I think it really changes the profile of the company's earnings, and we end up with a -- I think it will be a branded franchise in the U.S. if we succeed at it. So that's going to be the priority at Great-West.

I think we're at a point where, as we look elsewhere across Great-West Life, where do we have capital that is either not earning adequate returns or where the market is not valuing the earnings properly, are areas that we would be looking to potentially not have as much capital in. So I have talked about this before as well. We are long-term shareholders, but we have been introducing a discipline to -- I think higher emphasis of looking through everything we do through the eyes of the capital markets. So Great-West is looking at this portfolio to say, do we have too much capital in businesses where the market is not appreciating or doesn't -- is not prepared to pay for those earnings levels.

So that's not a direct answer to your question. So that's kind of -- all I'm going to say on Great-West, we are always looking at tuck-ins across the board. We'll continue to do that whether it's Ireland or the U.K. or any market, we're in always looking for synergistic deals, but the priority is going to be around Empower.

When I turn to IGM, IGM is very interested in creating and broadening out its wealth management footprint. So it's got IG Wealth, which is the big money earner right now. It's got ambitious plans for IPC and [ Blaine Shuchak ] has taken over leadership there. And it would like to have a bigger presence in the high net worth market. That's completely aside from IG Wealth Management is doing to move upmarket with its consultants, but really in the high net worth market. There, to your question, multiples have been [ numb nuts ]. Sorry. I don't know if that's a financial term, numb nuts, but it's the one we use. I mean...

[Geoffrey Kwan, analyst]

I get it. Don't worry.

[Gregory Tretiak, executive]

They're just trading at multiples that you go. That's great, but like why bother. So we hope that maybe a down market will bring some of those things back to more realistic levels, and we can start to get active.

Your question -- this is not an answer to your question, but I did not mention in the -- in my comments, and I should have as I'm on IGM, I mentioned Blaine Shuchak in the quarter. Very significant leadership changes at IGM. With the retirement of [ McNernetLuke Gold ] taking over as head of Mackenzie, he's going to be great, and he's been around the company, he is well known to all of you. And then we've got Keith Botter moving in as CFO; and Kelly Heaford moving over from Great-West as Chief Risk Officer. So lots of good management changes at IGM, we were really pleased about. And I neglected to mention that while I was making my comments. Geoff, back over to you.

[Operator]

[Operator Instructions]

[Robert Orr, executive]

Operator, did we lose you? Or is there no further questions?

[Operator]

I'm showing no further questions at this time. Please continue.

[Robert Orr, executive]

Okay. Well, I can -- I don't have anything else to say. So we will give just another 30 seconds in case people are trying to get on the line.

[Operator]

[Operator Instructions]

[Robert Orr, executive]

Okay. I think we are good, operator. I think if there haven't been further questions at this point, we can probably terminate the call. So I would like to thank everybody for joining us today and wish you a pleasant afternoon. We'll talk soon. Operator, that would do it for the call.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

[Gregory Tretiak, executive]

Thank you.