CI Financial Corp (OTCPK:CIFAF) Q3 2019 Earnings Conference Call November 7, 2019 9:00 AM ET
Kurt MacAlpine – Chief Executive Officer
Doug Jamieson – Chief Financial Officer
Conference Call Participants
Gary Ho – Desjardins Capital
Graham Ryding – TD Securities
Scott Chan – Canaccord Genuity
Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2019 Third Quarter Results Webcast. All lines are in 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. Kurt MacAlpine, CEO of CI Financial. Mr. MacAlpine, you may begin.
Good morning and welcome to CI Financial’s third quarter earnings call. I’ll be joined on today’s call by Doug Jamieson, our Chief Financial Officer. As this is my first earnings call at CI, I want to let everyone know how excited and honored I am to be leading this iconic Canadian company. I believe CI has the brand, the people, the scale and the cash flow to be a market leader in asset and wealth management.
Turning to slide 3. So this is our planned agenda for the call. I will review the highlights and challenges for the quarter followed by Doug who will discuss our financial results. After that, I will review the events of the quarter-to-date then discuss our strategic priorities before taking your questions.
Sales for these — remain challenging for the industry with most non-deposit taking firms experiencing redemptions. While we experienced net redemptions for the quarter, we saw a $900 million reduction in redemptions compared to the last quarter and from Q3 2018. We did achieve strong results in several important segments of our business.
Our assets under management and ETFs grew to $7.4 billion, a new high. And we announced in September that assets under management and Liquid Alternatives funds have exceeded $1 billion only 10 months after regulatory changes created this new category. This makes CI one of the top two providers of Liquid Alternatives strategies in Canada.
We’ve continued to grow our wealth management business and assets under advisement reached an all-time high of $47.4 billion. In the quarter, we also launched Assante Connect, a unique offering in the market that combines financial planning and advice with the digital delivery platform powered by WealthBar.
On the financial front, we continue to produce high levels of free cash flow which we are allocating in a prudent manner. This quarter we repurchased $150 million worth of stock, 7.7 million shares in total and paid $42 million in dividends $0.18 per share. We are also on track to capture the SG&A savings that we have previously identified.
Finally, we outlined a new strategic direction for the company, which I will share with you later this call.
I’d now like to turn the call over to Doug who will discuss our financial results.
Thank you, Kurt. CI’s third quarter average assets under management were down 1% from the second quarter at $129.8 billion and were down 6% from the third quarter last year. Ending assets at $130 billion were essentially flat from the end of June and were 5% below the level of one year ago. Assets under advisement at a record $47.4 billion grew 2% during the quarter and were up 7% from one year ago.
Net income of $139 million was up slightly from last quarter’s adjusted $138.5 million and up $0.02 per share from last quarter. Year-over-year earnings were down 12%, but earnings per share were only down 3% due to the share buyback program over the past year.
Free cash flow was down 1% to $144.7 million from $146.5 million last quarter and down 14% from $169.2 million in the third quarter last year. Generally quarter-over-quarter results were in line as the drop in average AUM and a slight decline in net management fees were offset by the extra day this quarter.
CI’s SG&A in the third quarter was $124.6 million down 3% from $128.9 million in the third quarter last year and down a couple of hundred thousand from $124.8 million last quarter. This quarter included $1.5 million of additional RSU amortization expense related to the accelerated vesting for retiring employees. So net of that SG&A was at $123.1 million.
Spend in the asset management segment was $98.6 million down from $105 million in the third quarter last year as we continue to manage that number lower to operate the retail fund side of the business while increasing the investment in the distribution side of the business.
SG&A in the asset management segment was $26 million up slightly from $25.5 million last quarter and up 9% from $23.9 million last year. We believe we will still — we believe we will get SG&A to where we committed. We have identified the savings and are on track to our target.
Looking at the last five quarters of CI’s quarterly free cash flow and the return to shareholders. The level of share buybacks increased to $150 million as we front-loaded the 21.7 million share normal course issuer bid that was renewed in mid-June. Absent a significant change in CI’s valuation, we are targeting $120 million for the fourth quarter.
In the third quarter, dividends and share buybacks exceeded free cash flow by $47 million. And this moved CI’s gross debt up during the quarter to $1.57 billion. With annualized EBITDA at $832 million, CI’s net debt-to-EBITDA ratio edged up to 1.6 times. At these levels of free cash flow and at CI’s current valuation completing the share repurchase plan by next June would not increase net debt from these levels.
I will now hand it back over to Kurt.
Thanks, Doug. Before turning to our strategic priorities, I want to take a moment to provide you with an update on our flows by business line in October. We continue to see an improvement in our sales across channels and markets. Net flows across business lines in October were a negative $189 million.
In Q1 of this year, we were notified of two institutional mandates that we’ll be redeeming in the fourth quarter. Both are a result of the institution [Technical Difficulty] These mandates are not high-margin and will not have a meaningful economic impact.
During this quarter, we made three acquisitions and announced a strategic investment. This morning, we announced that we will be acquiring WisdomTree Canada’s ETF business. This business will add to our scale in ETFs and will give us additional investment capabilities through WisdomTree’s fundamentally-weighted approach to investing.
We acquired Snap Projections, which is a simplified financial planning tool. Acquiring this capability will allow us to provide financial planning to a new segment of investors that have not received financial plans historically.
Through GSFM, we acquired a 49% stake in an Australian asset manager Redpoint and we made a strategic investment in d1g1t, who is in the process of building us in SMA and the UMA platform for our wealth management businesses.
I now want to transition and share with you CI’s strategic priorities going forward. These strategic priorities were developed with input from a series of critical sources: our employees, our clients, our shareholders and through observing market dynamics and industry trends.
Going forward there will be three things that CI will be focused on. We will be modernizing our asset management business, expanding our wealth management platform and globalizing our company. I also wanted to provide you with the rationale for why we made it on these priorities.
On modernizing our asset management business, the rate and pace of change in the industry is at an all-time high. This is a result of evolving demographics, shifts in investor preferences, changing client expectations for service and support and ongoing regulatory change.
On expanding our wealth management platform, as a result of structural changes in our industry the role of the adviser is more important than ever. The breadth and depth of the capabilities that we have at our disposal today uniquely positions us to be a market leader and consumers’ lives are becoming increasingly more complex and more digital.
On globalizing our company scale is becoming increasingly important and difficult to achieve in Canada alone. Investors want to be serviced and supported globally. And expanding beyond Canada allows us to acquire global talent to complement our domestic talents.
To help make these strategic priorities more tangible, I wanted to share with you a sample of the initiatives we currently have underway. This is not an exhaustive list, and is not intended to be our full strategy. That will be developed in the coming weeks and months.
On modernizing our Asset Management business, we are looking to build on our fast start in liquid alternatives and are in the process of partnering with a leading global private equity manager to help us develop products in less liquid segments of the market.
As I mentioned earlier, we’re acquiring WisdomTree Canada’s ETF business, which post-close will increase our scale in ETFs to $9 billion. And we currently have an engagement underway to add more science to our sales and marketing process. The outcome of this will be a predictive analytics engine that will help us enhance our client experience and best position us to take advantage of the highest potential opportunities.
On expanding our wealth management platform, as I mentioned earlier, we are acquiring Snap Projections to help us provide financial plans to a segment of the market that has been historically underserved. And we are working with d1g1t to build an SMA and a UMA platform that will position us to compete for a new segment of financial advisers.
On globalizing our company, we’re going to be entering the U.S. registered investment adviser or the RIA market. For those that are not too familiar, RIAs our wealth management firms that uphold a fiduciary standard with their clients. They account for 23% of the U.S. wealth management market today and are growing at a rate of 18% per year. The market is also highly fragmented with 90% of all firms being independently owned. I believe we’re a natural owner of these businesses for a few reasons.
In addition to having extensive experience operating wealth management businesses, we have a unique value proposition compared to others that are currently in the market. We have scale across many of the key functions; we can provide financial planning asset allocation and investment management capabilities; we’re well-capitalized and offer a permanent capital solution for these owners.
Our existing $47 billion wealth management businesses will also be a great source of cross-border referrals. I’m pleased to announce today that we’ve signed two letters of intent to acquire two U.S. RIA firms that we’ll be providing more detail on in the coming weeks. While neither of these are material financially, they are incredibly important strategically. I look forward to providing you with more detail on our go-forward strategy in the coming weeks and months.
I’d now like to open up the call to your questions.
Thank you. [Operator Instructions] The first question is from Gary Ho of Desjardins Capital. Please go ahead.
Thanks. Good morning. Kurt, thanks for laying out the strategic plan for us. I want to first focus on the third pillar, which is your intention to enter the U.S. RIA market. Can you elaborate a bit on that kind of maybe the intentions to acquire the two RIAs? I’m assuming your ambitions are much bigger than that, but the U.S. market is quite competitive, and if it’s a strategy to push those advisers to sell CI funds? And what are the rules for selling proprietary products there?
So if you think about the U.S. RIA market, it is a competitive marketplace but it’s also a very accessible marketplace. If you think about the capabilities we have in place today, we have — today we have $48 billion and we serve several hundred thousand Canadian families.
So our aspirations for the RIA market are really twofold. One it allows us to provide a true cross-border experience for clients that are doing business with CI today. And second it allows us to participate in this fast-growing segment of the market overall. So as you think about our synergy profile, there’s really synergies on the operational side, and then some strategic synergies, which would include over time the ability for some of our strategies to be present in those portfolios.
But as you may be aware RIAs as a business are great standalone businesses, and one of the unique things that we bring to the table is this additional synergy profile relative to other firms.
Okay. And then just second maybe just high level. I know it’s good to lay out the plan, but it sounds like there could be some SG&A spend and acquisitions to execute this. Either Doug or Kurt, can you comment on the $480 million run rate by year-end? And should we expect a spike in 2020 and beyond to kind of execute the strategy?
Yes, Gary. It’s Doug. We’ll have to, I guess, elaborate a bit on our SG&A as we move into these different — into the U.S. market in particular. But the mix of SG&A, it’s more important to us that on the legacy retail business that’s where we are controlling our costs. With the size of that business shrinking, we’ll need to manage how much we spend. And so that’s the number that we will focus on going forward perhaps less so hitting $480 million if in fact we have other businesses with SG&A that we’re now combining into ours.
So how — can you help us modeling maybe — modeling question for 2020, is that number going to increase materially? Flat? Or how should we look at that?
It’s Kurt here. I think we’re in the process of working through the strategies. As soon as we get a chance to finalize all of that we will share with you both the strategy and then the associated investment costs. The way I would think of it is the SG&A savings that we are committed to we are on track and we’ll realize those savings either in this quarter or early in the first quarter. And then on a go-forward basis as we develop the strategy, we will outline a specific plan against it.
Great. Okay. And then just — maybe just lastly. Kurt you’ve been busy the last two months since you took over Redpoint, WisdomTree. As we think about these acquisitions together with the aggressive buyback in October, I’m assuming your leverage at a 1.6 times is maybe leveling off or maybe increasing from today. Where would kind of leverage increase to as you execute this strategy? And maybe talk about your commitment to buybacks as well.
Well, we’ll have to assess each acquisition as we go forward. Certainly, if something makes sense we’re going to do it. To-date what we’ve announced has not been material. It’s incremental amounts of debt, and we’re certainly very comfortable doing that.
And as you think about our capital management strategy, I think we have a prudent plan in place currently, we believe that our share price in our stock is currently undervalued today and we’ll continue to pursue a relatively aggressive buyback strategy as long as we see opportunities in the market there as well.
Okay. And then if I can sneak one more in. Sorry, my line got cut off there when you’re making your prepared remarks on the institutional outflows in the quarter. Did you quantify that by any chance?
I didn’t quantify it and I apologize. There were some audio issues earlier in the call. For all there listening, we will be posting the entire webcast for replay on cifinancial.com. So I do apologize for that. Regarding the institutional mandates, I did not share a specific number, but just to recap for those that might have missed it, we do have two institutional mandates that we were notified in Q1 of this year that we’ll be redeeming in the fourth quarter.
Both of those are mandates that the institution has chosen to internal. So there was – internalize, so there’s no opportunity for us to compete for the mandates going forward. They will not have a meaningful impact on our economics just given the pricing of those mandates.
Okay. Great. That’s it for me. Thank you.
Thank you. [Operator Instructions] And the following question is from Graham Ryding of TD Securities. Please go ahead.
Just, maybe I’ll start with the push into the U.S. market. Big picture is the idea to sort of leverage the success that you had with Assante, take some of the best practices and approach there into the U.S. market? Or is there anything unique and different about the U.S. market that you’ll have to maybe have a different strategy?
It’s a great question. I think the — there’s a lot of similarities between how we run the Assante and Stonegate businesses today and what you see from the U.S. RIA business. Very heavy focus on client service, very heavy focus on financial planning and then a consistent and diligent approach for the investment management and the asset allocation. So, we do see a lot of synergies across the businesses. We do think, both North and South will be able to provide leading cross-border services, but we do see opportunities that exist within the U.S. marketplace on a stand-alone basis as well. But there will absolutely be some strategic synergies having a $48 billion franchise here in Canada as a starting point.
Okay. Got it. And my understanding was the U.S. market is slightly different in Canada in terms of proprietary product within the distribution channel. Does that change the sort of economics or sort of how it could complement your asset management business here in Canada?
So it is slightly different, but also the economic profile of the wealth management businesses, are quite different. So if you look at a stand-alone RIA just given that the business model that they pursue and the employee model for the advisers that work as part of those RIAs just the economic profile is different. We will over time definitely have opportunities for our leading investment capabilities to be present in portfolios in the U.S. and then we’ll monitor that over time where it makes the most sense for investors.
Got it. Okay. And then my last question just the improvement inflows that you’re seeing. Could you just provide some color on either, what products are driving that? If there’s any that you wanted to call out? And — or perhaps, is there a channel in particular that you’re seeing those for improvement?
It’s actually pretty diversified. One of the things that — and I have only been here for a couple of months, one of the things, I’ve been most impressed with is the breadth and depth of the investment capabilities that we have. So, as you look across what’s driving flows, it’s pretty balanced. It’s a combination of shorter duration fixed income, all the way through to active equity strategy. So, it’s a very diversified mix of products that’s driving that flow.
That’s it from me. Thank you.
Thank you. The following question is from Scott Chan. Please state your company and proceed with your question.
Good morning. Canaccord Genuity. Kurt, just on the WisdomTree acquisition this morning $0.14 EPS about $1 billion, could you maybe just provide us an update on kind of the historical traction of the assets in that platform? And any kind of intention to kind of launch new products over time?
Sure. So, thanks Scott. So if you think about the platform, I don’t have the numbers in front of me. The WisdomTree business has been in the market for I believe about three years, a little over three years now, so essentially launched from a standstill to approximately $1 billion of assets. It’s appealing to us for a couple of reasons. One, it is a complementary set of capabilities to what we have today. It does add to our scale in the ETF structure and it also allows us to deepen our relationships and strengthen them with the advisers in the IIROC channel.
In terms of go-forward product development, we will continue to launch products. A lot of those products will be launched at CI specifically, but there is the potential over time for us to do future products leveraging WisdomTree’s indexes.
Okay. And on one of your initiatives, on the expansion of alternative capabilities, you mentioned the leading private equity manager. I don’t know if I kind of heard you correctly, but does that suggest like it’s a private equity capability? Or could there be other capabilities on the alternative side with the exclusive partnership that you mentioned?
Yes. It’s going to start as primarily a private equity capability. We’re thinking about the relationship holistically and there will be an opportunity for us to do future products from there. The main objective was to complement the fast start that we have in the Liquid Alternatives space with an illiquid capability, so we can serve investors across the spectrum of alternatives, but the first product we bring to market will be predominantly private equity-focused.
Okay. Great. Thank you, very much.
Thank you. [Operator Instructions] There are no further questions registered at this time. We’ll turn the meeting back over to Mr. MacAlpine.
We’re now going to conclude today’s webcast. I do want to apologize again for the audio issues that occurred at the beginning. As I mentioned, we will be posting the entire webcast for a replay on our website at cifinancial.com. I want to thank you all for your interest in CI and we look forward to speaking with you on the next call in February.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.