Q3 2024 CI Financial Corp Earnings Call
Hello, everyone and welcome to D. C. I find out Q3, 'twenty 'twenty four earnings call.
My name is not yet be coordinating the call today.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
I will now I know that you had host catchment Alpine C O which began catch please go ahead.
Okay.
Speaker Change: Good morning, everyone and welcome to <unk> Financial's third quarter earnings call.
Speaker Change: Joining me is our CFO Amit Muni.
Speaker Change: Together, we will cover the following.
Speaker Change: An overview of the highlights of the quarter, a review of our financial performance during the quarter.
Speaker Change: A discussion of strategic progress across our operating segments and then we will take your questions.
Speaker Change: Ci financial reported strong third quarter results with records across several key metrics.
Speaker Change: Adjusted EPS grew 8% sequentially to a record 97 cents.
Reflecting topline growth well controlled SG&A.
Speaker Change: And a lower share count, partially offset by higher interest costs.
Speaker Change: Adjusted EBITDA per share attributable to shareholders increased 10% from Q2 to a record of $1 85 per share while free cash flow of $1 32 per share also represented a record.
Capital allocation remains balanced and active during the quarter we.
Speaker Change: We deployed $164 million towards M&A, including new deals and the settlement of existing acquisition obligations.
Speaker Change: We remained active with share repurchases completing a 5 million share substantial issuer bid in July and.
Speaker Change: And buying back 680000 shares with the restart of our CIB.
Speaker Change: We continue to Opportunistically reduce our debt with open market repurchases of $16 million of our 2051 notes at a sizable discount to par.
Speaker Change: And we returned $30 million to shareholders through our dividend.
Speaker Change: Investor sentiment and risk appetite appears to be gradually improving.
Speaker Change: Our Canadian retail channel net flows turned positive as we saw the benefit of reduced redemption activity across balance and equity funds.
Speaker Change: Our wealth businesses in both Canada, and the U S continued to generate positive flows highlighting their quality and resiliency.
Speaker Change: We also continued to execute against our three strategic priorities to modernize asset management expand wealth management and globalize the company.
Speaker Change: Okay.
The significant improvements in investment performance since integrating our platform continues.
Speaker Change: Just last week, we were recognized with 16 Lipper Awards.
Speaker Change: This marks the second consecutive year that <unk> has been the most awarded fund manager in Canada.
Speaker Change: Yeah.
Speaker Change: We completed the previously announced acquisitions of buyer and financial and Emerald multifamily office at the end of July adding over $8 billion of client assets to court.
Speaker Change: In October we added an additional $2 4 billion through the acquisition of ensemble capital, a San Francisco based high and Ultra high net worth wealth manager.
Speaker Change: The combination of M&A underlying organic growth and Marc <unk> and margin expansion drove an 8% sequential increase in adjusted EBITDA for this segment.
I'll now turn the call over to Amit to discuss our financial results in more detail.
Okay.
Amit Muni: Thank you Kurt and good morning, everyone.
Amit Muni: Turning to slide four.
Amit Muni: Our global assets ended the quarter up 6% to 518 billion driven by positive market flows across all three of our business segments and acquisitions in our U S segment.
Amit Muni: Turning to our financial results on the next slide I'll focus my comments on our adjusted results.
Amit Muni: Adjusted net income was $141 million or <unk> 97 per share for the quarter.
Amit Muni: Adjusted EBITDA increased to $271 million for the quarter and our adjusted EBITDA margin expanded to 42%.
Included in the quarter was a performance fee for $7 million or <unk> 10 per share, which was generated by our asset management segment.
Amit Muni: Turning to the next slide I'll highlight the segment results and key drivers of EBITDA and margins.
Asset management, EBITDA increased to $172 million for the quarter and margins expanded to 62, 3%, partly due to the performance fee as well as controlled spending in the business.
Amit Muni: Canada wealth EBITDA increased to $19 million and margins expanded to eight 4% due to higher revenues.
In the U S pre NCI EBITDA increased to $123 million to $7 million and margins expanded to 44%, reflecting operating leverage in the business.
Compared to the third quarter of last year U S. EBITDA increased 24%, which is greater than the investor groups preferred return.
Amit Muni: For purposes of modeling Noncontrolling interest of our U S segment for future quarters, we estimate noncontrolling interest of 37% of U S. Adjusted EBITDA when calculating our U S segment adjusted EBITDA.
Amit Muni: For purposes of modeling Noncontrolling interest for our U S segment's contribution to EPS we.
Amit Muni: We estimate noncontrolling interest of 30% of U S segment adjusted EBITDA.
Amit Muni: Turning to the next slide I'll walk through the changes in revenue.
Amit Muni: Revenues increased to $755 million in the quarter.
Amit Muni: Asset management revenues were a net $6 million due to positive markets and the performance fee, partly offset by fluctuations in other gains and losses.
Amit Muni: Canada and U S wealth management fees increased due to higher asset levels from positive flows and positive markets.
Amit Muni: Acquisitions in the U S added $8 million in revenue in the quarter.
Turning to the next slide we can review major changes and expenses.
Amit Muni: On a comparable basis total expenses increased less than 1%.
Amit Muni: SG&A decreased due to lower discretionary spending discretionary related spending reflecting operating discipline, partly offset by higher marketing to support our new business segments revenue growth.
Amit Muni: Advisor and dealer fees increased due to higher revenue earned in our Canada wealth segment.
Amit Muni: Interest expense increased due to the new bond offering as well as borrowings to fund our acquisition related obligations payments and stock buybacks.
Amit Muni: Looking forward to the next quarter, we anticipate interest and lease finance expenses to be in the range of $59 million to $60 million in Q4.
Amit Muni: Also a reminder from last quarter, we expect depreciation higher depreciation and amortization of $19 million to $20 million in Q4, reflecting the impact from integration capital expenditures.
Amit Muni: Turning to slide nine we can review our debt and leverage.
Net debt increased to $3 6 billion, reflecting the new bonds, we issued in the quarter, partly offset by bond buybacks maturities lower borrowings on our credit facility and positive FX movements on our U S denominated bonds.
Amit Muni: Our net leverage declined to three three times on a reported basis.
Amit Muni: Turning to slide 10, I'll review our segments obligations.
As we have previously discussed Canada, and the U S have different capital priorities.
The table on the right of the slide reflects the cash debt.
Amit Muni: Net and M&A obligations for Canada, and the U S. At the end of the third quarter.
Amit Muni: The U S has borrowed $175 million from Canada to primarily fund the acquisition related payments.
Amit Muni: The U S also has $154 million in contingent consideration obligations.
Amit Muni: Canada has $66 million remaining to pay off for U S acquisitions.
Amit Muni: These will be fully paid off early next year.
Amit Muni: Canada also had $74 million in other acquisition obligations of which about half of that was already settled in October.
Speaker Change: Thank you and let me turn the call back to Kurt.
Thanks, Amit.
Kurt: We continue to rapidly scale, our U S wealth management business.
Kurt: The minority investment in <unk> in May 2023, the business has grown EBITDA at a 27% compound annual growth rates.
Kurt: EBITDA growth has been driven by a combination of organic growth our integration efforts driving synergy capture a favorable market backdrop in consecutive quarters of strong M&A.
Kurt: As we discussed in recent quarters, we are nearing the completion of major real estate integrations.
Kurt: Following the consolidation of our New York City offices last quarter, we moved into new space in Boston and Chicago This quarter.
Kurt: <unk> of office space is important for elevating the client experience, while driving collaboration culture and unity across clients.
Kurt: M&A has picked up in the last several months, we have now closed five transactions since April including the previously announced additions a buyer in financial and Emerald multifamily office as well as ensemble capital, which we closed at the end of October.
Kurt: As a result of the integration progress we've made all of these deals were rebranded and fully integrated into core net close.
Kurt: Driving benefits for clients and synergies for our business.
Kurt: Our investment team is generating consistently strong performance.
Kurt: This performance outcome as a result of the hard work, we undertook to dismantle the multi boutique structure and build a fully integrated at scale institutional grade investment platform.
Kurt: For the fifth quarter in a row more than 70% of assets are outperforming peers on a three year basis.
Kurt: Importantly, this strong performance was spread across numerous funds and several asset classes.
Kurt: Over 90% of our balanced funds are outperforming peers with a significant portion ranked in the top quartile.
Kurt: With redemption pressure easing, we are well positioned to grow disproportionately in that asset class.
Kurt: While <unk> has not been historically known for our Standalone fixed income funds performance has been excellent with over 80% of assets, beating peers over the three and five year periods.
Kurt: Including 80% in the top quartile over five years.
Kurt: Yeah.
Kurt: This strong performance is beginning to drive inflows, particularly into our unconstrained and global investment grade bond funds.
The transformation of our investment business and the consistent results. We are delivering are getting recognized.
Kurt: As I mentioned in my opening remarks Ci was the most awarded fund manager in Canada for the second consecutive year.
Kurt: Okay.
Kurt: We continue to make progress executing against our stated 2024 strategic priorities.
Kurt: In asset management, we have been active on the product front, while streamlining our existing lineup and launching innovative new strategies, including the global AI ETF, which has quickly scaled to nearly $900 million in assets since it launched in May.
Kurt: During the quarter, we made enhancements to our innovative private market solution to further broaden its appeal.
Kurt: As we continue to educate advisers on the merits of the asset class and garner platform approvals.
Kurt: In Canadian wealth, we continue to have success recruiting advisors to both our Santana line capital businesses.
Kurt: We also continue to scale, our custody business and leverage technology to provide a better client experience.
Kurt: We are working towards Onboarding, the remainder of our wealth assets and are having conversations with a number of third parties.
Kurt: Yes.
At <unk>, we're making progress against our strategic plan and the investments we've made to scale and fully integrate our business are reflected in our financial results.
Kurt: Our EBIT grew 8% quarter over quarter, our net flows remained strong and our solutions and alternatives offerings are growing rapidly.
Margins in the business are also showing the benefit of our integration efforts with adjusted EBIT margins up 158 basis points from the first three quarters of the year.
Kurt: We're proud of the recent progress we've made in each of our business segments and very excited about what the future holds.
Kurt: We thank you for your interest in <unk> and we'd be happy to take your questions.
Speaker Change: Thank you Miss you would like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: If you would like to raise a question. Please press star followed by Kate.
Speaker Change: On the <unk> I'll ask your question Stephen Shield partisan muted lately.
Speaker Change: And the first question go to Kyle Voigt of Kb Debbie Kyle. Please go ahead.
Speaker Change: Hi, good morning, everyone.
Speaker Change: First question on the U S wealth segment, you've done a really nice job expanding EBITDA margins, there I think margins at 44% this quarter, which is a record.
Speaker Change: I know you've been active over the past couple of years integrating platform consolidating vendor relationships I guess in terms of what is left to do it looks like there are some where you're doing the real estate consolidation side on this.
Speaker Change: Assuming maybe some more to do in terms of technology integration can you just go over whats left to complete the full integration of the business and I guess the heart of the question here is how much more margin expansion still left and outside of that how do you think organic incremental EBITDA margins in the segment on a normal course basis.
Great. Thanks for the question Kyle So so your assumption around two major areas of what's left from an integrating the platform standpoint are spot on so.
Speaker Change: Real estate integrations as Youre seeing were working through those and getting to the backend of and it goes in relatively short order.
And we have.
Speaker Change: We're in the final stages of our technology integration.
Speaker Change: Primarily the unification of our portfolio.
Speaker Change: Accounting solution.
Speaker Change: That will take place over the course of 2020 product.
Speaker Change: From there I mean, theres always opportunities as we continue to grow and scale. The business. We've set up the operating platform in a way that that has a lot of possible positive operating leverage so we do anticipate.
Speaker Change: To continue to see margin expansion, even after the completion.
Speaker Change: Or the Finalization of our integration efforts.
Speaker Change: Okay.
Speaker Change: Okay great.
Speaker Change: And then second question.
Speaker Change: We're sitting here equity markets are near all time highs seems like were.
Speaker Change: Prime to start seeing the ECM markets open back up in 2025 can you just remind us of the structure of the preferred equity instrument do you have the ability to repay that prior to 2026 and would you be willing to head down the IPO path as soon as next year, if the markets were to cooperate.
Speaker Change: Sure. So I mean, there's a lot of flexibility in terms of.
Speaker Change: The structure itself as it relates to the timing for the IPO markets kind of the opportune time to look at the separation of the business and pursue the Korean IPO.
It would probably be sometime in early to mid 2026. So as you mentioned, we've been we've been laser focused heads down on driving maximum integration maximum gross really setting up the business.
Speaker Change: To continue to scale, which we've done but we'll continue to keep an eye on markets see how the IPO market unfolds, and then look at the timing as it relates to all of those factors.
Speaker Change: Okay.
Speaker Change: Okay. Thank you Kurt.
Speaker Change: Thank you. The next question goes to <unk> <unk> of Jefferies. Please go ahead.
Speaker Change: Thank you and good morning, everyone.
Speaker Change: With the recent creative planning transaction being reported at 23 times EBITDA can you talk a little bit.
Speaker Change: How you think about this transaction and how you believe Korean compares in terms of margin profile high net worth mix or geographic reach is there any reason that you can justify a premium or a discount for orient versus the recent creative planning transaction.
Yes.
Speaker Change: Thanks for the question, Larry I would rather kind of not compare and contrast, our business to others, but when I look at the business that we felt so so five years ago today, the Korean business didn't exist.
Speaker Change: Outlined an ambitious strategy to enter the U S market and really scale that business up.
Speaker Change: In a span of five years.
Speaker Change: Im confident to say, we have the fastest growing kind of wealth platform by far I believe we have the leading integrated ultra high and high net worth.
Speaker Change: As you've seen our operating margins and our growth I think they are.
We're both very attractive so if you look at our fully integrated at scale.
Ara high and high net worth wealth management business I think there's a lot of desirability.
Speaker Change: For our business with those.
Speaker Change: Those characteristics and I would.
Speaker Change: That would be kind of my high level take on the businesses, we feel very very good with what we've built to tie it to Kyle's question, we're continuing to finalize the integration.
Speaker Change: The combination of our organic growth or M&A remains remains very strong. So we're very pleased.
Speaker Change: With where we're at right now and continuing to progress the business going forward.
Okay. Thank you and then the second question I have is youre operating at a pro forma dividend payout ratio that is much lower than when you last increased your dividend and then thanks to the aggressive share repurchases a nice increase can be sustained without.
Speaker Change: Increasing your dividend obligation.
Speaker Change: With your yield now lagging peers, how should we think about dividend growth and the factors that management is weighing before making an increased decision.
Speaker Change: Yes, it's a great question I mean, we're at the board level, we're constantly looking at our capital allocation strategy and we're really trying to strike the balance between obviously continuing to pay our dividend and look at flexibility to increase that over time, we're looking at winning share buybacks against deleveraging with the Canadian business.
Speaker Change: Cash flow and as everyone saw inherent in <unk> remarks.
Speaker Change: We've made great strides at reducing candidates obligations to the U S to the U S business and also fully run off within the next little less than two months.
Speaker Change: And then the U S business. The focus there is continuing to reinvest that cash flow to grow the core and acquiring platform overall, so we're looking at it.
Speaker Change: Dynamically.
Speaker Change: We're constantly evaluating the appropriate tradeoffs across all of those different capital allocation priorities.
Speaker Change: Okay. Thank you for taking my questions.
Speaker Change: Thanks Sarah.
Speaker Change: Thank you. The next question Nik Priebe of CIBC, Nick Please go ahead.
Nik Priebe: Okay. Thanks.
So adjusted SG&A was flat sequentially, but the share price was up pretty sharply in the quarter can you just remind me.
Nik Priebe: Do you fully hedge your exposure to any unvested share based comp it doesn't look like you've adjusted for any associated compensation true up in the quarter, but I just wanted to clarify that.
Speaker Change: And then Nick is dominant take us we do hedge that.
Speaker Change: Yes, Nick we do hedge that we go out and buy the shares that do cover.
Speaker Change: The stock grants that we do.
Speaker Change: Got it okay. So that's why we don't see the variability there and then there is also a performance fee I think that was called out in the quarter can you just give us a bit of color on.
Speaker Change: Which strategy that came from.
Yes, so thats and Thats that came from an investment that we have from one of our Australian our Australian business that we have in Monroe.
Generated a performance fee this quarter is variable it had been.
Speaker Change: Sort of one time of year. So I would just caution don't put that into your into your run rate models.
Yes, the other thing I'd just add on that is obviously as we continue to expand our offering away from traditional asset classes into more alternatives.
Speaker Change: The opportunity for these to become more recurring across the range of strategies, we've launched does increase.
Speaker Change: And maybe just staying in that same vein I mean, you've got the liquid all suite I don't think it is it's a large component of our AUM today, but.
Speaker Change: Is there a performance fee component that you would expect to recognize in the fourth quarter from a seasonality standpoint like is that something that we should expect.
Speaker Change: Nothing at this time no.
Speaker Change: Okay, Alright, thats it for me I'll pass the line. Thank you.
Speaker Change: Thanks.
Thank you as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: And the next question Gucci Graham Ryding of TD Securities. Please go ahead.
Hi, good morning.
I'm on the call a bit late so apologize if you talked about this but anything on the expense front that you would call out that helped your margins this quarter or.
Speaker Change: Would you say this is a reasonable margin to build from and sort of more focused on the U S business, but I don't take any any commentary overall.
Speaker Change: Okay.
Speaker Change: So specifically as it relates to the U S business I think it's a reasonable quarter for comparison, there is nothing kind of unusual that drove.
Speaker Change: Lower expenses that you'd have to to make adjustments there.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: On your <unk>.
Speaker Change: Canadian wealth side with Onboarding.
Gaining Canadian wealth assets into your custody business.
Speaker Change: What's the sort of timing that youre expecting there and will we see a noticeable EBITDA or margin impact.
Speaker Change: In your Canadian wealth business when that plays out.
Speaker Change: Yes, so first on timing and then Amit you can cover the the.
Speaker Change: A margin piece, we anticipate onboarding the remainder of our own wealth assets sometime within the next 12 months probably in the next 10 months. So we're targeting conversion date kind of late in the third quarter early in the fourth quarter for the remainder.
Speaker Change: And Graham on the margin expansion.
Speaker Change: Once we do get those custody assets onto the platform. That's correct. We do expect to see slight margin expansion not as much as we saw on the line conversion.
Speaker Change: But we do expect to see margin expansion. Once these assets come onto the platform and then we also have obviously third other third parties that we can bring on as well.
Speaker Change: Yeah.
Okay understood and my last question would just be.
Speaker Change: Organic growth from.
Speaker Change: From flows at Korea any update there are you seeing clients get more.
Speaker Change: More constructive and start to move away from cash into a into investor here.
Yes, I would say.
Speaker Change: Organic growth of core it remains consistently strong.
Speaker Change: In terms of rebalancing and repositioning portfolios, we're starting to see some of that.
Speaker Change: Across the board as well as people repositioning into equity markets driving more interest in alternative strategies and things like that so it will come in a little more.
Speaker Change: A little more opportunistic.
Speaker Change: Yeah.
Speaker Change: Okay, and you used to give us an organic sort of flows right is that something that.
Speaker Change: We will get in the future.
Speaker Change: Are you moving away from yes, we do think that's done at <unk>. So on the wealth side.
Speaker Change: But yes, it is something we will.
Speaker Change: We'll continue to provide.
Speaker Change: Periodic guidance.
Speaker Change: For updates on.
Yeah.
Speaker Change: Okay. That's it for me thank you.
Speaker Change: Okay.
Speaker Change: Thank you and the final question guys, Hey, Tom Mackinnon of BMO capital. Please go ahead.
Tom Mackinnon: Yes, thanks very much.
Tom Mackinnon: Question really with respect as you move towards.
Tom Mackinnon: A potential IPO of Korean tier.
Tom Mackinnon: And then you have sort of thing.
Tom Mackinnon: Korean IPO kinase.
Tom Mackinnon: Canadian business what have you.
Tom Mackinnon: And the end of the day, where do you think the Australian business Lance do you I mean, it's a long ways away and it's not that huge so.
Speaker Change: Any thoughts with respect to what that adds in.
Speaker Change: Hum.
Speaker Change: Is there any opportunity.
Speaker Change: How are you thinking about that business going forward. Thanks.
Speaker Change: Yes.
So as it relates to Australian business, it's a business we've had for a number of years now as you mentioned it.
Speaker Change: Very small.
Speaker Change: In scale in a very small contributor to two 500 plus billion asset base the way we think about.
Speaker Change: I was kind of addressing that specifically the way, we think about deployment of capital on effectively.
Growing our businesses.
Speaker Change: We're looking for local scale. So we're huge proponents of building scale in local markets. So you saw when we entered the U S. It wasn't entry.
Speaker Change: Entry into the U S to dip our toe in the water. We wanted to really build that critical scale in that market. We've done that received phenomenal opportunities to continue to grow.
Speaker Change: We've also have obviously tremendous scale and Canadian asset management.
Speaker Change: Our Canadian wealth business last few years is more than double than assets as well. So we think about the deployment of our capital across our business segments. The priorities would certainly be the Canadian and U S businesses as the primary means.
Of investment for us.
Speaker Change: So if it's not if you're not investing in it is it sufficient enough to.
Speaker Change: To grow right.
Speaker Change: Is it core or is an enabler.
Speaker Change: Yes, I mean, it would be.
Speaker Change: It depends on how you define core noncore the noncore is because it's a fraction.
Speaker Change: The size of our of our business right, we're talking approximately 1% to little more than 1% of our total asset base so in that sense.
Speaker Change: It would be non core but it is a self sufficient business that contributes contributes to our earnings My point was just as we think about the next new dollar of capital to deploy we see greater opportunities.
To generate a return continuing to add scale into the U S and Canadian business lines.
Speaker Change: Yeah.
Speaker Change: Okay. Thanks.
Speaker Change: Thank you we have no further questions I'll hand, the call back over to catch for any closing comments.
catch: Just wanted to thank everyone for participating and we look forward to the call next quarter.
Speaker Change: Okay.
Speaker Change: Thank you. This now concludes today's call. Thank you for joining you may now disconnect your lines.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yeah.