IGM Financial Inc. (IGM) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the IGM Financial Disclosure Enhancement Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Keith Potter, Senior Vice President and Treasurer. Please go ahead.

Thank you, and good morning, everyone, and welcome to the call where Luke Gould, Executive Vice President and CFO of IGM Financial, will review enhancement to our segment disclosures. Without wasting any more time, I'll turn it over to Luke, and you can take us away.

Great. Thanks, Keith. Good morning, everybody, and welcome. As you saw in our press release, we've seen and heard increasingly that many of you are focused on earnings. And we thought it made good sense to expand our segment disclosures to go beyond EBITDA and EBIT and take [indiscernible] net earnings line. I'm going to walk pretty quickly through a few slides outlining the changes, and then I'll open up to questions. First, stopping on Page 4, our documents incorporated by reference. I'd like to point out point 2A that we published our press release with February sales results last Wednesday. As part of this, some of you may have seen we introduced new disclosure in the form of a trended monthly history PDF and Excel document that was posted to our website. Please take note, we made 2 enhancements as part of this. First, we started to provide detail monthly on net sales into Mackenzie's mutual funds that are on IG Wealth approved list. This is net sales through IG of Mackenzie products, where we earn full manufacturing net profit margin, and we thought important that this gets called out as net sales to our AUM. And as a reminder, over the last 12 months, this has represented over $0.5 billion of net sales through IG. Second, we provided detail on Mackenzie's retail mutual fund and retail ETF mutual fund net sales. We started disclosing this quarterly about 2 years ago, and we started now to produce it monthly as well. Turning to Page 5. This is just a reminder that segment disclosure changes that we introduced in October 2020, which broke our segments into Wealth Management, Asset Management and Strategic Investments and Other. Today's enhancements completely changes, which were designed to help people understand the character and the performance of the underlying businesses. If you move to Page 6, it outlines the objectives we had in moving our segment disclosures to net earnings line and the approach we've taken in doing so. I just have a few quick comments here. First, under objectives, I'd highlight points 2 and 3. We recognized that number of our operating companies have significant capacity for financial leverage, and they actually have the financial leverage. So it made good sense to report the business performance after interest expense. Likewise, these businesses also have tax as well. So it's suitable to include this in the business performance. Under point 3, we'd like to encourage the assessment of value of our underlying businesses against appropriate peer groups, and we want to make sure we simplify this work for those who use earnings as a key metric. If you go to the right column, you can see under approach that the debt is going to be allocated and has been allocated based upon management's assessment of each business' capacity to service the debt as well as our assessment of where the debt is being serviced from. And I'm going to give a bit more color on this in the next slide. I would point to -- I'd highlight for you that we'd expect any changes to this allocation of debt between segments to be very infrequent, and it would typically relate to a retirement or an issuance. In point 3, you'll see our determination is that we've allocated the entirety of our $2.1 billion in long-term debt to our 2 core operating companies, IG Wealth and Mackenzie Investments. Turning to Page 7, you can see our 2020 segmented statement of earnings detailed by reporting segment and underlying business. You can see at the bottom that we've blue shaded the expanded disclosures that previously weren't reported. A few comments I make on the long-term debt and associated interest expense and how it's been allocated. First, you can see that none of the debt has been allocated to strategic investments. It doesn't mean that there's no capacity to support debt here. What it does mean is we think it would be [indiscernible] free and clear. When we look at something like our 4% ownership of Great-West Lifeco, it is best to think this is free and clear or surplus capital. For China Asset Management, we're getting a healthy and growing dividend, but at this time, we didn't feel a need to burden this investment with debt. And for more frequent, more simple, these are developing investments with high-growth profiles and are not noticeably contributing to the servicing of the debt this time. So there's been no allocation there. When you look at the allocation of debt between IG and Mackenzie, you'll see there's a slightly higher debt-to-EBIT ratio at IG. This reflects higher credit support from IG for a few reasons. First, IG has less offering leverage than Mackenzie. So it has the capacity for more financial leverage. Second, IG is a retail financial planning business, and there's consequently less variability in net flows; and third, IG has more diversified sources of revenue than Mackenzie. On this slide, I also commented on the income taxes associated with the different businesses. You'll see if you look at the proportion of share of earnings in Great-West Lifeco, China AMC and Northleaf, these were already after tax, even when included in our EBIT line. So there's no tax entry for this. The one thing I would highlight is in the China Asset Management column, you'll see $4 million and a 10% rate. I would let you know, there's 10% withholding tax on repatriation of dividends and capital gains from China, and we accrue for this regularly against our proportionate share of earnings, and you can expect this to continue. Going to Page 8, this is just an illustrative example, reminding how the businesses worked and just to show the operating leverage have in regard to our expense guidance for 2021 as well as the financial levers that we start disclosing today. You can see in this hypothetical example, with 8% growth in net revenue, EBIT growth by 12.5%, and with the introduction of today's disclosure enhancements, you can see the impact of our financial leverage on net earnings, which brings the increase in this example to 14%, and we've clearly tried to call out the operating leverage, which we expect to be a character of our business model as well as a financial leverage, which will now be part of the operating businesses. If you go to Page 9, I've just got a quick reminder of the growth in business during 2020, that's providing significant earnings momentum heading into 2021. While financial markets did a significant V during the year as a result of pandemic with significant declines in the first half and significant improvements in the second half. We generated record high net sales of $7 billion for 4% of assets. We had investment returns for our clients of $12.5 billion or 6% of assets. So we had 10% growth organically with one that coming on during the fourth quarter, and we also completed the acquisitions of GLC and Greenchip, which provided another $30 billion worth of net revenues that we got coming on or supporting the revenues coming on. Also I'd highlight not included in these numbers, we also acquired a 56% participating stake in Northleaf, which has $15 billion of [indiscernible] assets. And I'd also remind that we sold Personal Capital that was not contributing to our earnings. Page 10 gives context for the earnings momentum that we have heading into 2021. At the left, you can see that we have highlighted consensus analyst estimates of $3.78, which is an increase of 18%. I'd highlight for the audience, at this same time in 2020, we had similar momentum in net flows and similar momentum in the business. This was stalled by the impact of the pandemic on financial markets, which you can see clearly in the chart in the middle. And we're actually getting to do-over this year that we're quite excited about. In the middle, you can see our daily balanced assets under management and advisement, which is a key driver of our revenues. We've put 2 dots at the December 31, 2020, point. The first is meant to highlight the meaningful growth in AUM&A of around 12% relative to the 2020 average balance as a result of our net sales and investment returns. And so this is the driver of the momentum we have going into 2021. You can also see the impact of the acquisition of GLC and Greenchip, which closed on -- these transactions closed on New Year's Eve. And on the right, you can see our expense growth including guidance for 2021. I'd remind that, overall, we've guided to about 3% growth in our expenses in 2021, and this is being mostly driven by Mackenzie, where we have sales-related expenses and some discretionary promotional and project expenses that we permissioned to make sure we're leaning into the exceptional growth opportunity Mackenzie has right now. Going to Page 11. We've highlighted our year-to-date February sales results on the left, and our last 12 months trailing results on the right. In the top left, I'd highlight that IG's net flows of $795 million is an all-time record high and is driven by gross inflows, up 20%. You can see in that yellow stack, we've also had shown the net flows to our AUM, the net sales to our AUM. And you can see that this is a very -- at a very respectful level relative to past years and is trending up. On the bottom left, you can see Mackenzie is having a breakaway year with $1.7 billion in net sales year-to-date, which you'll see in the appendix has driven -- is driven substantially by retail. I'd remind that March is a seasonally high sales month for Mackenzie as well, not just that February, where all the money contributed RFP season gets put to work in the coming weeks and months after the season closes. On the right, you can see the last 12-month trailing net sales rates. The orange is Mackenzie. This is happening, and this is just awesome. The top thin line is retail. If you extrapolate, you can see that we would expect to close 2021 over 10% should this momentum continue. The thick blue is IG net flows, and you can see this is improving at a healthy rate and the thin blue right below is IG net sales to AUM, which, again, is improving and is now positive on a 12-month trailing basis as well. I'd remind you on our call a few weeks ago, a lot of our net flows to IG is money that's contributed to accounts in kind in the form of third-party mutual funds and securities. We earn advisory fees on all these assets, and we earn product fees over time as these assets convert to our mass solutions. And then lastly, turning to Page 12. I really apologize. I recognize this is a really busy slide, but I want to make a few points. On the left, you can see our 2020 EBIT, net earnings and EPS by underlying business. And you can see now the earnings by business based upon these expanded disclosures. In the set of columns in the middle and anchored to the bottom right, you can see analyst consensus earnings for 2021 of $3.78, and that's what was presented 3 slides ago. What we've done is we've taken all of the published estimates and P&Ls, and we've simple averaged them to create this allocation by segment that you can see above. In the right column called earnings growth, I just highlight 3 of the rows. The first, IG Wealth net earnings are expected to grow at 14% according to consensus analyst estimates. And Mackenzie's net earnings are expected to grow at 39%. You can see we've put in there the 39% just to indicate that when you exclude the impact of the GLC and Greenchip acquisition, Mackenzie's net earnings are still expected to grow by 35%. I'd also highlight China Asset Management earnings are expected to grow at 23% from analyst estimates. And this is actually a bit lower than the growth in AUM and earnings that they've been running at, which has been running at over 30% for the last 5 quarters. In the right, you can see a set of columns under enterprise value. And here, we've done an allocation of our market cap of $8.9 billion at the close of business on Tuesday at a share price at close of $37.32. I'm going to go from the bottom to the top in this equity column and highlight what we believe are a number of conservative assumptions on each of our investments, excluding IG and Mackenzie, and then we've deducted all those investments from the market cap to arrive at the implied P/E multiple on IG and Mackenzie. Starting at the bottom, in unallocated capital, you can see $241 million. And I'd remind that that's invested in liquid high-quality securities. Going right up from there, you'll see $593 million of carrying value in our investment in Wealthsimple and Portag. We report this as fair value through other comprehensive income. And I'd remind that this valuation is based on Wealthsimple's equity issuance in October. That issuance valued the company at $1.5 billion, and this is our proportionate share of that. And I noticed at that time Wealthsimple's business has obviously continued to experience meaningful growth. And I'd also suggest that valuations have expanded since -- since that last valuation date, if anything. $200 million for Northleaf was the (00:13:14) purchase price. And I'd remind, we just closed that deal a few months ago. $720 million in China Asset Management is our book value. You can see this implies a P/E multiple of 15.7x, and that's after the withholding tax we have to account in China. And I'd just remind this audience, our multiple at entry was 17.5x. And I'd also remind that, that business is growing their earnings at a very high rate. Right above this, you can see $1.2 billion is the value for 4% holding in Great-West Lifeco. And this reflects the closing price of their shares on Tuesday. We've also highlighted that there's capital gains tax payable where we dispose this investment. And you'll see in the footnote that this taxation would be quite trivial. And as well deducting the investments from market cap for IGM in total to [indiscernible] IG Mackenzie in spite of P/E multiple on these businesses of about same point in time. You can see if you go to the right column that we've indicated the current average P/E multiples for peer companies, and this is on the basis of the next 12-month expected earnings. In the case of IG, we've used global wealth managers with a market cap of over $5 billion, and we footnoted the specifics. You can see that the average is 15.4x in relation to an implied P/E of IG of 7 point. In the case of Mackenzie, we've used North American asset managers with a market cap of about $5 billion as our peers, and we footnoted the specific peers. You can see the average of this peer group is 13.2x multiple. And I'd also remark, this is the average. For peers that are growing at a healthy rate, the multiple is obviously higher than the 13.2x. That actually concludes my comments. I'm happy to take question.

[Operator Instructions] The first question comes from Tom MacKinnon with BMO Capital.

Just -- maybe just stepping back in terms of the rationale for the strategic investments that you have here, and why they're held at the IGM level versus the Power Corporation level? Power is an NAV stock, and I wouldn't think that IGM is an NAV stock. And presumably, any benefits in terms of knowledge gained or whatever from these strategic investments? Is you can garner those benefits even if these investments are held up at the Power Corporation level, i.e., then they still just be part of the whole Power family. So maybe you can elaborate a little bit on that?

Great question, Tom. So I'm going to go through each of them, there's only 4, and give color. Starting with Great-West Lifeco, I highlight -- this is really resulting history. It started with Great-West Lifeco's acquisition of London Life back in 1997. And at the time, it was identified that IGM -- IG at that time was going to be a recipient of a lot of synergy of the deal. And so as a consequence of that, we participated in financing through subscribing to shares and they used the proceeds to fund the London Life acquisition, and we indeed did benefit from the synergies of that transaction. That was followed up by IGM buying Mackenzie and Great-West Lifeco made an investment in us to support that deal. And again, they purchased seeing the synergies of us buying Mackenzie. And then the last investment would have happened with Canada Life purchasing -- or sorry, Canada Life being purchased by Great-West Lifeco, and we, again, supported that deal and enjoyed the synergies. As we're seeing right now, it's been great investing for us over time, and we've been clear we viewed excessive capital. But this is our sister company. We appreciate that there's a public marker of what it's worth because it's publicly traded. And it's been a great investment and contributor of earnings to pay the healthy dividend, but it is not core to us and is really available to us. China Asset Management reviewed very differently. This has been a long journey for us, going to have this exposure to asset management in China. This is called strategic investment because it obviously is. It supports our businesses here in North America, and it gives us access to distribution opportunities in Asia that we believe are important. And really good shares that is part of IGM. We think it actually has the best chance of being recognized from a valuation standpoint within the IGM Financial because it's a meaningful and growing part of it. And we're interested in actually keeping, cultivating and even increasing this investment over time given the importance of it to our businesses. Northleaf is obviously new to us, having private within a roster as an asset manager and as a wealth manager, we view it's so strategic, and we're so pleased with the deal. When you look at IG Wealth, we believe that Northleaf allows us to bring product to our clients in a very profitable way. And it's a really unique opportunity for us to offer something special to our clients, and we think that IG is so uniquely positioned to capitalize the opportunity because of over 4 years of in corporate privately designed portfolios separately. It really is a key strategic anchor for Mackenzie to have private equity, private debt/credit and infrastructure within its roster of capabilities. So this one, we hate for it to be at Power. This is a core part of who Mackenzie is and who IGM is. And Wealthsimple, it's part of our fintech investment. We obviously had Personal Capital as well, which we sold to our sister company early in the year. And the thesis here is these investments and [indiscernible] in particular, it is a wealth manager. It provides unique opportunities between the companies to work together. And it is part of our ecosystem right now and an investment we're proud of. We don't know what the future holds for Wealthsimple. And as you can see here, the company is growing at a really healthy rate, and we're really cheerleading it and pushing with all we got on their success as well. And I don't know what the future for Wealthsimple is. Right now, we've got a very sizable investment in IGM. We're the largest shareholder, and there is a clear synergy within group of companies.

And when we look at Power Corporation, there's a move there to make more investments in the financial services company. And then when I look at your strategic and other investments, those are investments in financial companies. Is there -- isn't there a way of making this -- of this whole organization a little more simplified by having those strategic investments in other financial institutions all just at 1 level? Or how should we be thinking about that going forward?

I think you probably should expect from us to continue to have our foot on the gas on that theme of simplifying the Power group and simplifying and clarifying IGM. We were pleased to bring to life in 2020 the acquisition of GLC, where we consolidated Canada Life -- Canadian Investment Management Operations at Mackenzie. And you can expect us to continue with that theme of simplifying the group, and that will continue. And we will ultimately end up with each individual on these strategic investments. I don't know, but I would commit to you we're working on it. And I would declare we view China is very strategic to us. It is in 2 places now as a result of history, and we're working on figuring that out. And on Wealthsimple, that's another one that we're working on. And right now, we're all just pushing behind the success of that firm. And we think it's obviously been a very good investment for us. And we will work [indiscernible] where it properly belongs with the wealth and asset management businesses at IGM or somewhere else in the group.

Okay. And if I could just squeeze 1 last one on Wealthsimple. You mentioned Personal Capital was a drag on earnings. What about Wealthsimple? I mean all you show on Slide 12 here is the adjusted EPS is 0 and same for 2021, like how should we be thinking about the earnings at Wealthsimple?

Yes. So right now, Tom, we account for that investment as fair value through other comprehensive income and so we mark-to-market the investment on an ongoing basis. As a consequence, it doesn't flow through our earnings. Right now, you should think of Wealthsimple as being a developing company, that really is coming to its own. So we've seen extremely healthy increases in revenue. And we've seen, obviously, a lot of growth in that -- in what served as losses, obviously, but as it developed and is really improving. So at this time, we do not disclose Wealthsimple's earnings, but you can see the metrics that we publish on an ongoing basis to understand the growth of its experienced clientele and assets under management.

The next question comes from Rasib Bhanji with TD Securities.

Thanks for the enhanced disclosure by the way, it really helps, especially the monthly flows trends. I had a question on the peers for IG Wealth and Mackenzie. In your view, would you be able to point out any 1 or 2 peers both on the wealth and asset management side, which would be a good -- or which would be like the most appropriate comparable for IG Wealth and Mackenzie right now?

Good question, Rasib. I'll say 2 things, one on Mackenzie. We've been focusing mostly on [indiscernible] price. When you look at the publicly traded asset managers, we'll be looking for those peers that have the same growth profile and character. And so you'll see the peers that we've chosen. And we look for asset managers that kind of had the same trajectory [indiscernible]. There's a whole bunch of other ones that may not have the same growth as Mackenzie at this time. But it is actually not at that peer group when you look at the U.S. asset managers and the global asset managers. On IG is where we've been more challenged over time to find public peers in Canada. We don't believe there is any clear peer for wealth manager like IG that is pure-play and is publicly traded. So that's why we've been looking abroad. We have 2 examples that we believe are kind of as good as we're going to get. The first is Ameriprise. I'd highlight that Ameriprise -- IG was founded as the Canadian arm of Ameriprise. To this day, the characteristics of the companies is quite similar. The one difference we have is that insurance is a much larger part in Ameriprise's business. But as far as the character of what the business is, Ameriprise is quite close. The other company we point to is St. James's Place, which is U.K. based, and they really have the same business model as IG within the U.K. market. And so we've been looking at them quite closely for quite some time. They've already been very successful and are growing at quite a high rate, but [indiscernible] character of their business, they're very similar to IG, and we're pleased that we do have a publicly traded [indiscernible] because there aren't many.

That's helpful. And just my last question. I know this is a bit forward-looking, but hypothetically in the process of simplifying the holding structure of the Power group of companies. If as a result, IGM, that's a lot of capital, if any of the strategic investments are divested or its value is realized or the -- would you have taken in terms of priority like where your capital allocation would be more focused towards?

I can't give guidance on that right now, Rasib. If we were to do something, that's post the investments, where will we reinvest the proceeds? I'd say right now, there's a [indiscernible] we have to figure out. I'll let the audience know. Share buyback is obviously something that's clearly on our mind right now, but when you look at what our valuation is, and you look at the confidence we have on the future of this business. But there are more things we have to figure out strategically within the group of companies. And we've talked about China Asset Management on this call. And there's other things that they're out there, where there's opportunities to simplify the group of companies and really provide clarity to what IGM is and where it's going to grow.

The next question comes from Scott Chan with Canaccord Genuity.

Luke, just a follow-up, quick follow-up on the last question in terms of capital deployment. Like just I guess in the recent past, you've talked about perhaps raising your dividend, if your payout ratio kind of is lower to the 60%, 65% level. And kind of looking at the earnings growth trajectory on consensus, you're probably going to get there. So what is the priority on dividend growth? Cognizant of the fact that you haven't raised one in, I think, 5 years and your yield is pretty attractive right now.

Yes, great question, Scott. Right now our focus is tripling our earnings. And that's -- you'll hear from James, you'll hear from me, we're leaning in growing the earnings, and it does bring to that point of when is the next dividend increase. We've been really clear we're focused on maintaining and growing our dividends over time. As you point out, we've got a higher dividend payout rate than any other Canadian financial service company. And so any condition on the dividend, we makes the board -- will be based upon our outlook of what the best use of capital is at the time. But that'd be our commitment is we're certainly focused on maintaining the dividend, and we will be assessing growing it as we grow earning.

And just on China AMC, you're obviously carrying it at book or carrying cost. And the franchise is growing. I think last quarter, you said 30% on an asset earnings basis. Is there an event where you could get that marked up like Wealthsimple, like is there a catalyst to kind of mark that up over time? I just can't think of anything in my head, so I just thought I would ask.

Yes. Great question, Scott. The accounting conclusion we made on this investment is we have significant influence of it. And as a consequence, we acquired the account. So the way our share value is going to travel over time, it will be taking a proportion of their earnings, and that will increase the churn value and the dividends that they pay us comes off of it. So that's the mechanics of it. And that's the way [indiscernible] Great-West Lifeco as well. So it's not a fair value investment like Wealthsimple. And what I would expect to happen is that we're going to continue to enhance our disclosures on China Asset Management as it grows. And we're going to work with all of you to ensure you understand it properly to assess its value. And I think this is actually a very unique one. It's a interesting valuation challenge for us. Look, IGM is the only place you get exposures in the domestic asset management in China in a publicly traded vehicle. When you look at our company, the consistent top should clear in that market, and it's running very locally. We can see to enhance the disclosures. And we would -- we are going to be leaving it to, let's say, to you and the market to make an assessment of what it's worth.

And just lastly, you kind of talked about -- talking about the flows and year-to-date, it's been very solid. You also talked about March being seasonally strong. Is that seasonally strong for IGM in particular? Maybe just kind of talking about some of the facets that you went through? I just kind of missed, I think, a few of them.

Great question, Scott. Yes. On the chart, where we talked about [indiscernible] net flows for January and February. But for a wealth manager like IG, RFP season has had 10 days -- 60 days into the year. And so the money comes into the accounts in those period. We did see March is a strong month, but most of the push is in January and February. Mackenzie is very different. And that's what we want to highlight, we're the distributors, the wealth managers have the push to get money in the account before the deadline. The money gets put to work in the coming weeks. So I want to highlight that unlike IG where February is the peak month, for Mackenzie, March is a very, very strong month as money gets put to work. And that's not unique for Mackenzie. That's the same for Mackenzie and all other peers.

[Operator Instructions] The next question comes from Gary Ho with Desjardins Capital Markets.

Thanks for the enhanced disclosure. Just 1 question for me, which is more of a kind of what's next question. So you guys provided enhanced disclosure 2, 3 months ago that breaks down the asset management and wealth management businesses. And now you're taking next steps, providing all the way down to the earnings line. Like what else are you guys working on? Is this -- are you guys planning to kind of separate the 2 businesses? Just wondering kind of what's ahead of us here?

Yes. Thanks, Gary. Right now, the focus is -- this actually completes the journey on the disclosures as far as the change that we want to make. We needed to finish the GLC acquisition to bring to life the segments of wealth management versus asset management. And you'll remember having clarity around wealth management was so important to us. IG [indiscernible] are different businesses than Mackenzie. And traditionally, we've been in this -- in the public asset managers [indiscernible] that really doesn't convey a good comparison to the wealth businesses. Moving ahead or it's kind of finishes it. And so right now, we think we've done -- the important changes people need to understand the businesses. We've also enhanced the expense disclosure. So people get a sense of what the drivers are, and what expenses are more fixed versus those that during those volumes. As far as the business decisions, right now, we're just pushing behind all of our businesses. We've got no plans to do anything as it relates to IG vis-à-vis Mackenzie. We're very pleased that we now have Canada Life as another anchor client of Mackenzie with a $50 billion relationship. And we're just leaning into organic growth, and that's what you can expect for us over the coming quarters. Is that to continue to help, first engage with you to understand what you want to see from us in terms of disclosure and in terms of the business. And being us is presenting the results and keeping you abreast of how the business perform.

Got it. This concludes the question-and-answer session. I would like to turn the conference back over to Keith Potter for any closing remarks.

Yes. Thank you, everyone, for joining us today, and all the great questions. Please feel free to reach out to myself if you have any additional questions you'd like to answer. And with that, I'll close out the call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.