CI Financial Q4 2023 Earnings Report

CI Financial EPS Results

• Actual EPS: C$0.81
• Consensus EPS: C$0.73
• Beat/Miss: Beat by +C$0.08
• One Year Ago EPS: N/A

CI Financial Revenue Results

• Actual Revenue: $715.60 million
• Expected Revenue: $656.72 million
• Beat/Miss: Beat by +$58.88 million
• YoY Revenue Growth: N/A

CI Financial Announcement Details

• Quarter: Q4 2023
• Date: 2/23/2024
• Time: N/A
• Conference Call Date: Friday, February 23, 2024
• Conference Call Time: 10:00AM ET

CI Financial (TSE:CIX) is a diversified provider of wealth management products and services, primarily in the Canadian market. The company had CAD 129.2 billion in fund assets under management, and another CAD 221.5 billion in assets under advisement, at the end of April 2022, making it one of the largest nonbank affiliated asset managers in Canada. The company operates primarily through CI Global Asset Management, which offers a broad selection of investment funds. On the wealth management side, the company operates through CI Assante Wealth Management, Aligned Capital Partners, CI Private Wealth, as well as a growing group of acquired U.S.-based advisors, providing financial advice primarily to high-net-worth individuals and families.

CI Financial Q4 2023 Earnings Call Transcript

Key Takeaways

• CI Financial delivered a record Adjusted EBITDA per share of $1.51 in Q4 and produced free cash flow of $1.08 per share, highlighting strong operational performance.
• The company executed a $100 million substantial issuer bid, announced an additional up to $85 million SIB at $17.50 per share, and declared a $0.20 quarterly dividend, underscoring aggressive capital returns.
• Global assets under management rose 5% sequentially to $445 billion (16% year‐over‐year), driven by net inflows of $340 million amid record industry outflows and with 77% of AUM outperforming peers over three years.
• Net leverage was 3.5x (2.7x on a fair‐value basis), supported by a $750 million unrealized bond gain and an expanded $800 million credit facility, setting the stage for accelerated deleveraging.
• Coriant, the US wealth arm, achieved an A- stable rating from Kroll and leverages a private partnership model, enhancing its capital flexibility for future growth.

Presentation

[Operator]

Hello and welcome to today's CI Financial Q4 2023 earnings call. My name is Jordan and I'll be coordinating your call today. If you'd like to register any audio questions, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Kurt MacAlpine, CEO of CI Financial. Kurt, please go ahead.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Good morning everyone and welcome to CI Financial's fourth quarter earnings call. Joining me is our CFO Amit Muni. Together we will cover the following: an overview of the highlights of the quarter, a review of our financial performance during the quarter, a discussion on our near-term obligations and go-forward capital management priorities, a recap of our 2023 accomplishments, business positioning, and 2024 priorities. Then we will take your questions. Our adjusted earnings of CAD 0.81 per share is unchanged sequentially, reflecting top-line pressure on our business and increased depreciation and amortization offset by the benefit of recent share repurchases. Adjusted EBITDA per share attributable to shareholders increased 2% from Q3 to a record of CAD 1.51 per share, while free cash flow of CAD 1.08 per share was down just CAD 0.02 from the record level of Q3. Capital allocation remained active during the quarter.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

We deployed CAD 223 million towards M&A, including deferred and earned-out payments. In December, we completed a CAD 100 million substantial issuer bid repurchasing 6.5 million shares. Today, we announced another substantial issuer bid of up to CAD 85 million at a fixed purchase price of CAD 17.50 per share, and we returned CAD 31 million to shareholders through our dividend. The board also declared a dividend of CAD 0.20 per share payable in July, reflecting our normal cadence of declaring dividends one quarter ahead. Over 2023, our capital deployment was nearly perfectly balanced between debt reduction, M&A, and returning capital to shareholders through buybacks and dividends. Risk-averse sentiment continued during the quarter, which was consistent with 2023 overall. While our retail channel endured outflows for the quarter, we managed to generate CAD 340 million of inflows for the full year.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

This is against a backdrop of nearly CAD 20 billion of combined industry mutual fund and ETF outflows, the worst year on record for the Canadian mutual fund industry. Our wealth businesses in both Canada and the U.S. generated positive inflows throughout the year, which continued through the final quarter, again highlighting the strength of those businesses. We also continued to execute against our three strategic priorities to modernize asset management, expand wealth management, and globalize the company. The significant improvement in investment performance since integrating our investment platform was recognized with an industry-leading number of FundGrade and Lipper awards. We completed the previously announced acquisitions of Coriel Capital in Canada and Indianapolis-based Windsor Wealth Advisors, which was rebranded as Corient at closing. Later in the presentation, we will review in more detail some of our 2023 strategic accomplishments and discuss our 2024 priorities.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

I'll now turn the call over to Amit to discuss our financial results.

[Amit Muni, Chief Financial Officer at CI Financial]

Thank you, Kurt, and good morning everyone. Turning to slide four, our global assets ended the quarter up 5% to CAD 445 billion, driven by positive markets, net inflows into our Canadian and U.S. wealth management businesses, and two acquisitions in the quarter. But for the full year, our AUM was up CAD 61 million or 16% due to a combination of flows, markets, our custody conversion, partly offset by the sale of one of our minority U.S. wealth management investments. Turning to our financial results on the next slide, I'll focus my comments on our adjusted results. Adjusted net income for the quarter was CAD 128 million or CAD 0.81 per share. Adjusted EBITDA was CAD 239 million for the quarter, and our Adjusted EBITDA margin was 41.7%. Turning to the next slide, I'll highlight the segment results. Asset management EBITDA stayed roughly flat at CAD 156 million, and margins increased to 61.6%.

[Amit Muni, Chief Financial Officer at CI Financial]

The increase in margins was primarily due to a year-end true-up to full-year incentive compensation for the segment. Canada wealth EBITDA was also roughly flat at CAD 20 million, and margins were 9.7%. In the U.S., pre-NCI EBITDA increased to CAD 100 million, and margins expanded slightly to 42.3%. We experienced strong EBITDA growth of 33% for the year, more than double the investor group's preferred return. For purposes of modeling non-controlling interest for our U.S. segment for future quarters, we estimate non-controlling interest of 38% of U.S. Adjusted EBITDA when calculating our U.S. segment Adjusted EBITDA. For purposes of modeling non-controlling interest for our U.S. segment's contribution to EPS, we estimate non-controlling interest of 32% of U.S. segment Adjusted EBITDA. Turning to the next slide, I'll walk through the changes in revenue. Revenues, on a comparable basis, decreased slightly to CAD 664 million. Asset management revenues declined by CAD 10 million.

[Amit Muni, Chief Financial Officer at CI Financial]

This decrease was due to two factors: continued mixed shift to flows into lower-fee short-duration products. Second was due to fee adjustments we made to enhance our managed account program. The fee adjustments we made will be mostly offset during the year through cost reductions in running the program. Canada wealth management fees increased due to higher asset levels. US wealth revenues decreased slightly due to negative markets and our method of billing. Approximately 50% of these revenues are based on asset levels at the beginning of the quarter. Given asset levels at the beginning of the fourth quarter, revenues were lower and didn't benefit from the market recovery. However, as we enter Q1 of this year, we started with higher asset levels and will now benefit from the market tailwinds. Acquisitions added $3 million in additional revenues in the quarter.

[Amit Muni, Chief Financial Officer at CI Financial]

Turning to expenses on the next slide, on a comparable basis, total expenses increased less than 1%. SG&A decreased primarily due to year-end true-ups in incentive compensation in our asset management segment. Advisor and dealer fees increased due to higher revenue earned in our Canada wealth segment. Interest expense increased due to additional borrowings to fund acquisition-related obligation and our substantial issuer bid. Depreciation and amortization increased due to higher depreciation of hardware and computer equipment as part of integration and new leased office space at Corient. Acquisitions added CAD 2 million in expenses in the quarter. We anticipate interest expense to be in the range of CAD 42 million-CAD 44 million in the first quarter of 2024. Turning to the next slide, we can review our debt levels.

[Amit Muni, Chief Financial Officer at CI Financial]

During the quarter, we reduced our acquisition-related liabilities by over CAD 200 million and closed on a CAD 100 million Substantial Issuer Bid repurchasing 4% of our outstanding shares. We also renegotiated our credit facility and increased its capacity from CAD 450 million to CAD 800 million and extended its maturity to May 2025. The face value of net debt was CAD 3.4 billion at the end of the year, and our net leverage ratio increased modestly to 3.5x on a reported basis. The fair value of our debt at the end of the year was CAD 2.6 billion, which results in a net debt leverage ratio of 2.7x. Turning to the next slide, I'd like to dig a little deeper on our bonds. As we have discussed previously, we have a very attractive 4.4% average rate on our debt as compared to today's rates.

[Amit Muni, Chief Financial Officer at CI Financial]

The timely issuances of long-term bonds in 2020 and 2021 have generated a CAD 750 million unrealized gain for our shareholders. We could crystallize this significant gain if we decided to repurchase these long-dated bonds, which would reduce the face value of our debt without deploying an incremental dollar, which would lead to accelerated deleveraging. On the next few slides, I'll review our acquisition-related obligations by segment and our plans for funding these payments. In May of last year, we separated the U.S. acquisition obligations between Canada and the U.S. Canada was obligated to pay any guaranteed-related payments, which totaled CAD 281 million in 2024. The U.S. assumed acquisition-related contingent obligations, which currently total CAD 116 million in 2024. Going forward, the U.S. will be responsible for paying for its own future acquisitions.

[Amit Muni, Chief Financial Officer at CI Financial]

We anticipate that by the end of 2024, CI will have fully repaid its U.S. obligations, as reflected on the next slide. This chart reflects the uses of CI's cash flows. As reflected on the previous slide, CI has $281 million in U.S. acquisition-related obligations, $118 million in projected dividend payments, and, as announced this morning, a substantial issuer bid of up to $85 million. This generates 2024 obligations of $400 million-$485 million, which we believe CI can fund these obligations with its free cash flows. The expanded capacity of our credit facility can fill any temporary gaps. Once we get past 2024, CI will have completed its U.S. acquisition obligations and will have considerable capital flexibility to rapidly deleverage, especially if the bonds with the greatest embedded gain for our shareholders are targeted first. On the next slide, I'd like to review Corient's capital plans.

[Amit Muni, Chief Financial Officer at CI Financial]

Corient has experienced strong growth and generated $1.5 billion for our shareholders from the sale of a minority stake and the sale of a minority-owned wealth manager, as well as strong and growing EBITDA generation. On the back of the minority stake sale last year, we announced our intentions to fully separate the Canadian and U.S. business, which has largely been completed with the exception of the separation of our debt. To complete the next step, we announced this morning that Corient has obtained its own independent credit rating. Kroll has rated Corient A- stable, which we believe is reflective of the growth and profitability profile of the business. We believe this significant rating advantage versus peers best positions Corient to access capital to fund their future inorganic growth. Thank you, and let me turn the call back to Kurt.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Thank you, Amit. Prior to discussing the positioning of each of our businesses and their 2024 priorities, I want to touch on some of our 2023 milestones and the strategic progress we've made transforming our business over the past four years. I won't talk through all the bullets, but I do want to highlight a few key points. At the corporate level, we completed the sale of a minority stake in Corient, which created capital separation between the businesses. We accretively used the capital we received to reduce our debt and buyback stock. Our asset management business continued to exhibit the benefits of operating as an integrated platform, generating strong investment performance, driving industry-leading product innovation, and increasing scale in key areas. I will discuss this in more detail in a few minutes.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Our Canadian wealth business significantly improved its profitability, driven by the midyear custody conversion of Aligned Capital's assets to CI Investment Services. In the U.S., we made considerable strategic operational and financial progress. Financially, it was a successful year with a combination of organic growth, inorganic growth, and synergy realization, which drove 42% year-over-year growth in Adjusted EBITDA and margin expansion of 4.4 percentage points. This slide highlights how far we've come as an organization in a very short period of time. We've made remarkable progress in diversifying the business in the four years since we implemented the strategic transformation of CI. As shown in the chart on the left, we've transitioned from having essentially 100% of our economics being generated by our asset management business to a diversified firm generating over a third of our economics in U.S. and Canadian wealth management.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

As shown in the table on the right, our AUM composition has completely reversed. In 2019, we were a CAD 172 billion business with 72% of our assets in asset management, and today, we're a CAD 450 billion business with 72% of our assets in wealth management. I've spoken several times before about the transformation we've made to our investment management platform, where we shifted from a series of boutiques that operated in silos into a fully integrated institutional-grade investment platform. The impact has been undeniable. CI currently has delivered its best relative performance in over seven years, with 77% of our AUM beating our peers on a three-year basis, and 48% are in the top quartile. 89% of our balanced assets rank in the top quartile, and 67% of our equity assets are beating their peers.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

This strong investment performance was recognized by us receiving an industry-leading number of fund awards in 2023. Our products received 35 FundGrade A+ awards and 19 Lipper awards, in both cases the most of any asset manager in Canada. This is a stark contrast to our position before we embarked on the transformation, where we had the worst investment performance of any of our Canadian peers. We believe our strong results position CI extremely well for when the sizable cash that is sitting on the sidelines moves back into long-term products. In addition to the changes in investment management, we've completely revamped our approach to product development and have launched a number of first-to-market strategies for Canadian investors, including the first retail private markets fund-of-funds, which brings the world's leading alternative managers to Canadian investors.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

In 2024, CI Global Asset Management is well-positioned to leverage our new foundation and strong performance to drive long-term product inflows when retail risk aversion abates. We are very focused on growing our private markets products by continuing to obtain platform approvals and driving advisor adoption. We will maintain our operating discipline to combat secular pressures. Canadian wealth has emerged as a real contributor to our earnings, with significant potential to continue to grow. To date, we've grown from CAD 15 million of EBITDA in 2019 to over CAD 70 million in 2023. This EBITDA growth is attributable to improving efficiencies in our existing businesses, expanding our presence in the ultra-high and high-net-worth segments, recruiting advisor teams, and growing organically. We also invested in building an industry-leading technology backbone for our custody platform to disrupt the wealth custody market. We have already begun rapidly scaling that business.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

In 2023, our assets grew to $26 billion from just over $1 billion in 2019. In 2024, we seek to continue to achieve strong organic growth across the business and accelerate our recruiting efforts in our core wealth management businesses. We also look to continue to scale our custody platform by executing on our robust internal and external pipeline. Less than four years into our expansion into U.S. wealth management, Corient has grown into a truly unique wealth management business with a highly differentiated operating model. We are now the largest fee-only ultra-high and high-net-worth-focused RIA in the U.S., with nearly $160 billion in client assets. We've acquired the leading RIAs in the industry and collectively have built an integrated, world-class business for our clients and employees.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Nearly all wealth management businesses are providers of real estate, operations and technology, and other back-office services to independent advisors and/or teams, where the expertise delivered to the client is limited to the expertise of the individual or the small team of advisors that serve them. In addition to competing with other internal advisors for clients, advisors at other firms are typically only compensated by receiving a portion of the personal revenue they generate. The lack of alignment to the overall success and profitability of the business often creates cultural divides across advisor teams and with the individuals responsible for the operating platform. Advisors rarely have equity participation in the firm. By contrast, Corient could not be more different. We, to our knowledge, are the only true national private partnership in wealth management where 252 of our colleagues are equity owners of the firm.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Our clients have access to the full expertise of Corient at all times, and we are incented to work together to deliver an unrivaled client experience. We are confident that our private partnership improves Corient's culture, aligns everyone in our organization, creates better career trajectories for our employees, significantly improves wealth creation, and allows us to invest more strategically in our business. Our results support our belief. We have exceptional organic and inorganic growth. We've delivered the leading operating margins of all wealth managers that disclose publicly, have unified our middle and back office, and have built a full suite of exceptional products and services for our clients that we didn't have before. The scale, growth trajectory, strong cash flows, and clean balance sheet has helped Corient achieve an A- stable bond rating by Kroll. This rating will enable standalone capital flexibility for Corient going forward.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

In 2024, our priorities are to build on the strong foundation that we have worked so hard to develop. We expect to continue to generate strong organic growth, strengthen our middle and back office platform, recruit exceptional talent, and increase adoption of our new capabilities. Finally, we will take advantage of our capital flexibility to selectively pursue M&A opportunities of the highest quality RIAs in the industry. We are very excited about what 2024 holds for all three of our business lines. By executing on our three stated strategic priorities, we've been able to transform each segment of the business. We expect to continue to see the benefits of that transformation in 2024 and beyond. We thank you for your interest in CI, and we'd be happy to take your questions.

[Operator]

As a reminder, if you'd like to register any audio questions, that's "Star," followed by one on your telephone keypad. If you change your mind, please press "Star," followed by "Two," and please ensure you're unmuted when speaking. Our first question comes from Kyle Voigt of KBW. Kyle, the line is yours.

[Kyle Voigt, Managing Director, Equity Research at KBW]

Hi, good morning. First question just on the U.S. wealth business. You noted the 440 basis points improvement in margins for that segment in 2023, and margins are now hovering near this 42% level for the last few quarters. You also highlighted the integration work that was completed in 2023. I guess, how should we think about the remaining 2024 integration priorities and opportunities that are left, and how much margin expansion potential is still remaining from those integration efforts?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Sure. So we've done, as I mentioned in the prepared remarks, considerable lifting to take a series of businesses that we had acquired that operated independently and created a fully unified operating platform, which you see in the margin expansion that we've delivered to date. I'd say the vast majority of the components that need to be integrated have been fully integrated, and there's a couple of other areas that we will continue to integrate through the course of 2024. As it relates to margin expansion, I won't give specific guidance, but if you think about the platform that we've put in place, the structure that we've built for our wealth management business, the operating leverage accrues to the business. So as we continue to scale up, we do anticipate seeing margin expansion continue going forward.

[Kyle Voigt, Managing Director, Equity Research at KBW]

Understood. And then if I could just ask a follow-up on capital deployment. Just given the rapid deleveraging comments in the slides for 2025, it seems like there may be a preference for debt repayment once you get to 2025 and deploying cash flows from the asset management segment towards buying back your debt, given where it's trading on a fair value basis. Just wondering if you could comment on that and how you're thinking about the balance between that and a buyback in 2025 when deploying capital from that asset management segment? Thank you.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Sure. So as Amit had mentioned, our obligations, the Canadian business's financial obligations for the U.S. business, run off in the next few months, and that's going to open up a significant amount of free cash flow for us to deploy. I anticipate we'll continue to take a dynamic approach. We've highlighted today the $750 million in unrealized gains that we've generated for shareholders through the bond issuances that we've done in the past, which creates a unique opportunity to disproportionately deleverage as we target those bonds. But at the same time, we'll also opportunistically take advantage of disconnects that we believe exist in our share price. And if you kind of look at the free cash flow generated by the business as these liabilities run off, we have plenty of capital to pursue those two things in parallel.

[Kyle Voigt, Managing Director, Equity Research at KBW]

Thanks, Kirk.

[Operator]

Our next question comes from Graham Ryding of TD Securities. Graham, please go ahead.

[Graham Ryding, Senior Equity Research Analyst at TD Securities]

Hi, good morning. Just on that deleveraging in 2025 theme, you have some existing debentures that mature in 2025 and 2027, but you're also clearly flagging here that you've got these 2030 and 2051 bonds that are trading at a large discount. So where should we think you're going to focus your efforts on deleveraging, or does it matter?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

No, it certainly matters. We're going to monitor how the trading of those bonds evolve, and we're going to target the tranches that allow us to deliver the most accretion for our shareholders at that point in time. So we'll be looking across the different tranches of bonds, looking for the greatest opportunity for value creation for our shareholders.

[Graham Ryding, Senior Equity Research Analyst at TD Securities]

And then in terms of raising debt at that U.S. subsidiary, if you still have those outstanding 25, 27 debentures, do you just raise money in Canada in the interim and then pay that back over time? How do you?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Yeah, we have a.

[Graham Ryding, Senior Equity Research Analyst at TD Securities]

How do you navigate that?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Yeah, it's a great question. We have a lot of flexibility. I mean, one scenario could be, as you mentioned, to raise debt at Canada in the interim, and then as those liabilities run off, appropriately transition the debt to the U.S. business. Another one could be to take efforts to clean up some of those covenants as well. So really, the first step for us was going and getting an independent rating for Corient, continuing the next step of the journey for the capital separation. But yes, we have either kind of one of two options: borrow at the parent and assign it to Corient, or free ourselves of those modest covenants that exist on a couple of tranches of bonds.

[Graham Ryding, Senior Equity Research Analyst at TD Securities]

Okay, understood. The Canadian wealth business, the custody side, has been contributing to your EBITDA growth there. Are there any targets, or what are you planning for 2024 in terms of moving further wealth assets onto that custody platform, and then what could that potentially add to your run rate EBITDA?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Sure. As we discussed, the business sat at a little north or right around CAD 1 billion of custody assets in 2019 through a combination of third-party demand and internal conversions. That business is north of CAD 25 billion today. As you know, CAD 25 billion represents a fraction of the custody potential of CI's wealth management businesses, and we do have a priority to continue to transition assets internally in addition to growing demand from third-party as well. I expect you'll continue to see strong growth of both internal and external clients' custody business through 2024. We haven't given and don't intend to give any guidance, but we will keep you updated on integration and transition plans across the business and provide more visibility into what that looks like as those start to onboard.

[Graham Ryding, Senior Equity Research Analyst at TD Securities]

Okay, understood. One last quick one, if I could. You mentioned organic growth in the U.S., like your organic flows. Is there a number that you could give us in terms of what you're adding, like a flows rate or an absolute amount?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Yeah, we hadn't shared the specific number, but it was several billion CAD in 2023, but we haven't given the exact number.

[Graham Ryding, Senior Equity Research Analyst at TD Securities]

That's it for me. Thank you.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Sure. Thanks, Graham.

[Operator]

Our next question comes from Nik Priebe of CIBC Capital Markets. Nick, please go ahead.

[Nik Priebe, Equity Research Analyst at CIBC Capital Markets]

Okay, thanks for the question. Just on the asset management side of the business, are you able to give us a general sense of what you're seeing in terms of long-term fund flows just on a quarter-to-date basis and through peak RSP season here in February?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Nick, we haven't given any interquarter guidance on fund flows.

[Nik Priebe, Equity Research Analyst at CIBC Capital Markets]

Okay. I guess just moving to the U.S. then, I mean, now that you've secured a debt rating for the U.S. entity, you've got that additional flexibility to continue scaling that platform inorganically. Can you just update us on the M&A pipeline for the U.S. business and how active you might expect to be this year?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Sure. I mean, our approach to M&A has been consistent since the onset. The goal is to acquire the highest quality RIAs in the industry that align with our strategy and vision for the business, the culture that we've created at Corient, and the unique, call it, financial opportunity through our private partnership model. I spent a few minutes in the prepared remarks just talking about the stark differences between how we've built this business relative to how the majority of wealth management businesses have been built, and that's created a lot of demand for people joining our platform, which is very exciting for us. Our M&A efforts to date had been focused on acquiring RIAs, obviously building the integrated operating platform, which we've now done, and really focused on scaling that up.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

In addition to M&A, we've started to become a very attractive destination for advisors that are just looking for a new home. So call it unlocking a recruiting angle for us that didn't exist before we had fully integrated and unified the platform as well. So I feel we have solid prospects in front of us. The standards or the bar for a firm joining us remains extremely high, and we'll be very disciplined in that process. But I'd say that the market is certainly slower than it was when it peaked in 2021, but there are a series of high-quality conversations we're having out there.

[Nik Priebe, Equity Research Analyst at CIBC Capital Markets]

Yeah. Okay, thanks. That's it for me. I'll pass the line.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Thanks, Nick.

[Operator]

Our next question comes from Geoff Kwan of RBC Capital Markets. Geoff, please go ahead.

[Geoff Kwan, Managing Director at RBC Capital Markets]

Hi, good morning. My first question is just following up on the price of your debt and how you're kind of thinking about it. I get that this is more, I guess, a bit of a theoretical question, but if you didn't have the cash obligations that you have for 2024, given where the current share price is, where the prices of the debt are, I know you talked about being able to do share buybacks and buyback debt, but is there one of them that you would have a bit more of a preference for or maybe more clear preference for at the current time?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

So if you're saying in the hypothetical scenario, if we didn't have the $280 million of final obligations to Corient, I would say we would be doing both. In that theoretical scenario, we'd be taking advantage of and crystallizing that embedded gain that I had mentioned to rapidly delever while at the same time pursuing the SIB that we have in place today. I think as people have noticed, this is the second SIB that we've done. We've been very thoughtful with the sizing of the SIBs, and each of them has fit well within the free cash flow generated by each of the businesses. And I expect that discipline to continue. So I'd say that to answer your question, I guess specifically, all things equal, in the conceptual scenario, we'd be doing both.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

If you asked me today, we'd be targeting the long-dated bonds, crystallizing that massive gain, and getting the disproportionate deleveraging per dollar that we buy back.

[Geoff Kwan, Managing Director at RBC Capital Markets]

Okay. And just my second question is just with the growth and expansion of your business over the last several years, also from a financial reporting standpoint, it's kind of more clear in terms of your U.S. business and your Canadian business. When you think about the long-term future of CI and maximizing shareholder value, do you see it as having this joint asset and wealth management strategy, or do you think maybe it's also just kind of continue to shift that kind of business mix to be more balanced?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Yeah, it's a great question. I mean, when I think about CI, I mean, if you look at the slide that I showed earlier, I mean, effectively, in 2019, we were a CAD 172 billion business that was economically entirely a Canadian mutual fund company. And if you look at the business today, we're CAD 450 billion. 70% of our assets sit in wealth management in a large and rapidly growing portion of our earnings. So we've fundamentally changed the profile of the business in the past four years. When I think about our company, we really operate four distinct businesses. We run a Canadian asset management business, and to your question, that comes obviously with a certain valuation or multiple as it relates to its peers.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

We run a Canadian wealth management business that is as scaled as they get in the independent space in Canada with very large and very fast-growing operating margins that would certainly trade at a different multiple to the asset management business. We have a nascent custody platform with very unique licensing, a digitized platform with scale for hundreds of billions CAD of extra capacity, which would trade also at a differentiated and likely significantly more attractive multiple. And then I think everybody's familiar with Corient, the EBITDA that that business has generated and the multiples by which those businesses traded over time. So when we're doing our analysis, we look at those four different pieces and say, "This is a fundamentally different business than what it was four years ago." We have four incredibly valuable assets that all have slightly different sources of differentiation, growth prospects, and value.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

That's why we're so confident in buying our shares back because we see that value differential that exists that we believe exists, and we're happy to continue to buy shares as long as it takes place. As you think about the strategic kind of mix shift of our business, I would anticipate seeing a continued shift of both of our earnings growing and the proportion growing that comes from wealth management. I would expect us to continue to increase our scale, and you'll see an even greater portion of our overall assets in wealth management. At some point, we're hopeful that the trading multiple will not reflect that of the multiple of a mutual fund business, but the multiple of a wealth management business that more closely resembles our asset mix and our growth.

[Geoff Kwan, Managing Director at RBC Capital Markets]

Okay, thank you.

[Operator]

As a reminder, that's star followed by one to register any questions. The next question comes from Stephen Boland of Raymond James. Stephen, please go ahead.

[Stephen Boland, Managing Director at Raymond James]

Thanks. Maybe I could just run through those two scenarios, Kurt, that you talked about with the shorter-term ventures and possibly raising debt. I guess the first scenario is raising money at the Canada level and then loaning it down to the U.S. I presume then that debt would be backstopped by the Canadian balance sheet, which would entail a more favorable interest rate. Is that the way to look at it?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

No, look, Stephen, let me add a little bit more color to what Kurt said. There's various ways for we have these covenant we're trying to separate the debt between U.S. and Canada, and we're well on our way to do that. We have some covenants that prevent us from taking on debt at the U.S. level. There's various paths that we can take to eliminate that hurdle, and we're currently going through that, and we'll provide more updates to that as maybe next quarter or the quarter after that. Getting the credit rating was step one going down that process. So the way we think about it going forward, think about it as two separate debt stacks, one for Canada and one for the U.S. And we think we have a path that we can properly separate it.

[Stephen Boland, Managing Director at Raymond James]

Okay. So I guess the second part of that question I was going to ask is the removing of the covenants. What does that entail? If I'm a holder of the 2025 debt or 2027 debt, I've got protection, I presume, built in the indenture that would prevent you going down to the U.S. and racking up more debt. Would I have to be compensated to give up that right? Is that a voting type of scenario, or do you just go out individually to all the indenture holders and get that covenant removed? What's the process there?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Yeah, sure. I mean, so to Amit's point, we really have two choices, right? One, so to answer your question specifically, we have a very small portion of our overall debt. So the tranches of bonds you're referencing are less than $300 million of total value. One path would be to go get consent to have the covenant pattern of those bonds match the covenant pattern of the majority of our bonds, which do permit subcompany borrowing. And we could obtain that through a consent process. If for some reason the consent process doesn't play out, that doesn't prevent us from borrowing. We would just borrow at the parent company level, assign the debt to the U.S., and then formally transfer the debt as those covenants run off in the future. So to us, we're totally agnostic.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

At the end of the day, the debt's going to be the obligation of Corient in either scenario. One would be the full obligation of Corient today. The other one would be transferred to Corient as those covenants run off if we don't achieve consents. So it's not limiting to us in any capacity. It's just a matter of the positioning in the path that we ultimately choose to take.

[Stephen Boland, Managing Director at Raymond James]

Okay. And then I guess my second question is when I look at your 2030 debt and your 2051, it's 4% roughly paper. It's been termed out, which is a great move. And so basically, I always think there's a it's part of your leverage, but really not part of your leverage, even though it does count. But it's such cheap paper. So I guess how do you balance the accretion that you mentioned of buying back some of that paper versus the comfort of maybe buying back the shorter term or the maturing debt, the 2025 or the 2027, and giving up some of that accretion but maybe providing more comfort to shareholders that you're not going to have cash flow requirements within the next 12 to 36 months? So how does that balance out in your mind?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Yeah, we're just going to look at it dynamically. I mean, the way that we look at our debt, we're not viewing it from operators of the business as the face value that gets realized in 27 years. We're looking at it as what the debt currently trades at today. Amit shared the numbers, and that puts our leverage at 2.7x. We could effectively, without deploying $1 of capital theoretically at these prices, swap that entire debt, and our face value of our debt would be 2.7x. So we're going to look at that. I mean, we're running the business for the long-term success of the business to maximize shareholder value. So we're going to look and closely monitor that and determine which of those tranches of bonds makes the most sense for us to target at the specific time that we ultimately go to execute.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

I do think it's important when people look at the debt. I think you've positioned it appropriately. I mean, this is a real asset where we're sitting on a CAD 750 million gain given the thoughtful issuance of those bonds, the size, the market, and the time at which we did it, which gives us a lot of flexibility in terms of how we choose to delever, which we intend to do rapidly once these obligations run off.

[Stephen Boland, Managing Director at Raymond James]

Okay. I appreciate it. Thanks for taking my questions.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Sure.

[Operator]

Our final question comes from Tom MacKinnon of BMO Capital. Tom, please go ahead.

[Tom MacKinnon, Managing Director at BMO Capital Markets]

Yeah, thanks. Good morning. You mentioned the capital separation between the Canadian and the U.S. businesses or the U.S. wealth management business and the rest of the business. Can you share with us any way we can look at separating the CAD 170.9 and free cash flow that's generated between the U.S. wealth management business and the rest of the business?

[Amit Muni, Chief Financial Officer at CI Financial]

Hi, Tom. We haven't disclosed the free cash flows of the US business separately from Canada. But if you look at the EBITDA, you look at the conversion of EBITDA to cash just at the CIX level, it's not so different than the various segments. Call it 65%-70% conversion rate. So you can use that as a guide. Something we'll think about going forward as we think about as we continue to execute the capital separation, the debt separation of the businesses, of potentially disclosing the free cash flows of the segments separately.

[Tom MacKinnon, Managing Director at BMO Capital Markets]

Yeah. If I look at the non-controlling interest in that free cash flow table, it's just CAD 0.8 million of the CAD 171 million in total free cash flow. Assuming all this non-controlling interest is related to in the U.S., you mentioned, I think, the NCI is like 38% of the Adjusted EBITDA in the U.S. How should I read that if this 0.8 is supposed to be from that, it would suggest that the free cash flow that gets generated in the U.S. isn't very big?

[Amit Muni, Chief Financial Officer at CI Financial]

I would look at it on a pre-NCI if you look at it on a pre-NCI basis, I think it'll be much easier to go through. But maybe why don't we take that offline, and we can kind of go through the financial tables with you and help you with that conversion?

[Tom MacKinnon, Managing Director at BMO Capital Markets]

Okay, thanks. Then just with respect to the U.S. wealth management business, you had some good positive operating leverage. The third quarter, it was flat. The fourth quarter, it was negative. Do you think you need to do anything organic here to spur this growth, or was just noise we're seeing here just due to this fee billing issue that you talk about, maybe just the appetite to hit your target here for growth in U.S. wealth management? Do you need to do something organic?

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

No, no. So I think, Tom, what you're referring to is the revenue kind of quarter-over-quarter. So we have a large portion of our assets for clients that can build on the first day of the quarter. And if you look at the market pricing on October 1st relative to the average or the market pricing at the end of the quarter, that just kind of call it for that period of timing in the market, call it an unfortunate cycle from a pricing standpoint. But if we step back, I mean, we did 42% Adjusted EBITDA growth on a year-over-year basis. And that's triple the expectations of the return. Once again, the 14.5% return assumes we never pay out a dollar of the cash flow that the 20% owners are entitled to. So if you factor that into the equation, I mean, we're well ahead.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

And then the margin expansion and operating leverage. So now, look, we'll do M&A to the extent that it makes sense to strategically advance our business. But we feel very, very, very good about the performance of Corient, which I think is fully backed up in the financial results that we've delivered. So I'd say Q4 was just a one-off kind of timing piece as it relates to markets on October 1st when a large chunk of our assets were built.

[Tom MacKinnon, Managing Director at BMO Capital Markets]

Okay, thanks for that. Yeah, and just look forward to some improved disclosure of free cash flow, both pre and post-NCI, with respect to the two businesses. I think that would be helpful. Thanks so much.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Thanks, Tom.

[Operator]

With that, we have no further questions on the line. I'll hand back to the team for any closing remarks.

[Kurt MacAlpine, Chief Executive Officer at CI Financial]

Just wanted to thank everyone for your participation in today's call. We look forward to chatting with you next quarter.

[Operator]

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

Participants

Executives

• Amit Muni, Chief Financial Officer
• Kurt MacAlpine, Chief Executive Officer

Analysts

• Geoff Kwan, Managing Director at RBC Capital Markets
• Graham Ryding, Senior Equity Research Analyst at TD Securities
• Kyle Voigt, Managing Director, Equity Research at KBW
• Nik Priebe, Equity Research Analyst at CIBC Capital Markets
• Stephen Boland, Managing Director at Raymond James
• Tom MacKinnon, Managing Director at BMO Capital Markets