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Macellum Issues Letter to Stockholders of Citi Trends

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Macellum SPV III, LP, Macellum Advisors GP, LLC, and certain of their affiliates (collectively, “Macellum”), which own approximately 3.8% of the Common Stock of Citi Trends, Inc. (NASDAQ: CTRN) (the “Company” or “Citi Trends”), issued a letter to its fellow stockholders highlighting the urgent need for immediate and significant change to the composition of the board of directors of the Company (the “Board”) and addressing recent statements made by certain members of Citi Trends’ management and Board in the Company’s March 28th letter.

The full text of the letter can be found below:

Dear Fellow Stockholders,

Macellum Advisors GP, LLC, together with its affiliates (collectively, “Macellum” or “we”), is a large, long-term stockholder of Citi Trends, Inc. (“Citi Trends” or the “Company”), having initially acquired shares in 2016, and currently beneficially owning approximately 3.8% of the outstanding common stock of the Company.  We were disappointed but not surprised to read the Company’s March 28, 2019 letter to stockholders, which we believe materially misrepresented our ongoing efforts to work constructively with the Company to reconstitute the Company’s Board of Directors (the “Board”).  We believe the letter provides a window into the dysfunction and lack of urgency of the existing Board and provides clues as to why an existing director would be forced to formally nominate highly qualified individuals to the Board in the first place.  To be clear, our motivation in putting forth four highly qualified nominees has been to try to improve a Board that is not functioning well in order to address the Company’s prolonged underperformance and poor corporate governance and preserve and maximize value for all stockholders.

As you may know, we previously undertook a successful proxy contest at the 2017 annual meeting of stockholders, resulting in the appointment of Jonathan Duskin to the Board.  Since joining the Board, Mr. Duskin has made considerable efforts to mobilize his fellow directors to implement the changes necessary to deliver stockholder value and create a culture of accountability on the Board.  Unfortunately, despite these persistent efforts, as a single voice on a seven (7) person Board, and a single voice on the six (6) person Nominating and Corporate Governance Committee, the Board has not adopted the meaningful changes we believe are desperately needed at Citi Trends.  Even though the Board agreed it needed to refresh itself not a single director was willing to step down from the Board this year and there is no evaluation process in place to ensure the Board is properly refreshed.

Our many attempts to avoid a public battle were rejected

Over the past several weeks, Mr. Duskin has reached out to the Board and expressed his belief that the Company needs to undertake a Board refreshment.  While the Board agreed a refresh was necessary, the Board has only been willing to increase the size of the Board to add new directors rather than hold itself accountable and replace incumbent long-tenured directors with new highly-qualified, independent directors who would bring much needed fresh perspectives and more relevant experience and skill sets to the Board.

Most recently, we proposed what we believed was an incredibly reasonable compromise to avoid the expense and distraction of a proxy fight.  We proposed that the Board add two new independent directors to the Board for election at the 2019 annual meeting of stockholders (the “2019 Annual Meeting”) – one of Macellum’s nominees and one director candidate that would be mutually agreed upon, which could include one of Macellum’s other nominees.  In addition, in the spirit of moving forward constructively, our proposal suggested that just one incumbent director resign at the 2019 Annual Meeting and an additional incumbent director step down at the 2020 annual meeting of stockholders (the “2020 Annual Meeting”).  This was in response to the Company’s proposal that one of Macellum’s nominees be added to the Company’s slate for the 2019 Annual Meeting and the Board undertake a search for a second independent director to be added by December 31, 2019 without stockholder approval.  The Company’s proposal did not contemplate any incumbent director stepping down from the Board until the 2020 Annual Meeting.

Our most recent proposal was merely an acceleration of the process the Board allegedly wished to undertake, with a further effort to right-size the Board by the 2020 Annual Meeting.  However, much to our disappointment, the offer was summarily rejected, despite the Company’s own acknowledgement that they found Macellum’s nominee, Peter Sachse, qualified to join the Board despite never asking to interview him.  Given the urgent need to address the Company’s underperformance, we cannot find any rational explanation for why the Board would want to delay effecting meaningful changes to unlock stockholder value, which the Board has itself agreed are in the best interest of stockholders.  Instead, the Board seems ready to spend another $2.5 million of stockholder money, to protect incumbent seats on the Board, after it spent approximately $2.5 million during the 2017 proxy fight.  Is spending upwards of $5 million worth it to stockholders to keep the status quo?  We do not think so.   

Macellum formally nominated four highly qualified director candidates for the Board’s consideration because theBoard demonstrated no sense of urgency in refreshment

Macellum’s motivation for nominating four director candidates has been to refresh the Board with the most highly qualified directors.  Because Mr. Duskin is only one of six directors on the Nominating and Corporate Governance Committee, his voice was continually marginalized forcing us to nominate to preserve our rights as stockholders.  Mr. Duskin’s extensive consumer and retail experience enabled Macellum to present a selection of four exceptional candidates for the Board’s consideration to which the Company may not have otherwise had access and which we hoped would save the Company both the time and expense of hiring a search firm.  Nevertheless, in the interest of working with the Board, Mr. Duskin was still initially willing to go through a search firm to identify other candidates, to the extent that it was done in a timely and cost-effective manner.  Unfortunately, the discussions quickly devolved into the Macellum proposed candidate versus the candidates the legacy directors hoped to identify in the future.

Not about expense reimbursement

The Board would like stockholders to believe that Macellum is holding out to have our expenses reimbursed.  We assure you that this is not the case.  We believe the Board actually offered us reimbursement as part of their last settlement proposal, however, Macellum rejected this offer because it did not offer the material change that Macellum believes the Company must have if stockholder value is to be created.

Macellum has a substantial amount of capital invested in Citi Trends.  The only way for Macellum to make money is for the value of the stock to rise significantly.  In our view, the only way for the value of the stock to rise significantly is for there to be material change to the status quo on the Board.

Mr. Duskin is an agent of change to create long term value for the stockholders

The legacy directors would also have you believe Mr. Duskin is only focused on short term value.  Mr. Duskin will certainly take credit for aggressively pushing for additional share repurchases and still believes the $80 million cash balance the Company needs is overstated and erroneously derived.  If he was not on the Board, we doubt that any further repurchases would have occurred beyond what the Company was forced to do in 2017 during the last proxy fight.

Mr. Duskin’s role as a director makes it impossible for us to detail the inner workings of the boardroom, however, we ask you to consider the following questions when you assess Mr. Duskin’s contributions as a director:

Prior to Mr. Duskin joining the Board, did the Company

  • issue any guidance, either annual or quarterly?
  • have a long-term, annual growth algorithm?
  • have a long-term earnings per share (EPS) target of $4?
  • initiate a Hispanic focused test store, despite having 200 stores with bilingual signage?
  • have a store growth rate commensurate with the long-term goal to have 800 stores?
  • initiate a cost cutting program?
  • more meaningfully engage with its stockholders and provide any vision about the future of the Company?

Despite Mr. Duskin’s considerable efforts and the progress made during his tenure, it is still not nearly enough change.  Additional operational changes urgently need to occur, but the Board’s willingness to maintain the status quo has been an obstacle to continued progress and meaningful change.

Manipulating facts and misleading statements

The legacy directors would like stockholders to believe that business has been great and their strategic plan is working.  In reality, last year, earnings before interest and taxes (EBIT) has decreased by 1% despite increasing the number of stores by 3.5% (19 additional stores) and relocating or expanding eight stores. Furthermore, the greater part of EPS growth has been the result of a lower share count and lower tax rate rather than an improvement in the Company’s performance.  Therefore, we think the Company’s claim that EPS has grown by 59% is particularly misleading especially given that it includes $2.5 million of one-time expenses incurred in connection with the prior proxy contest in 2017.  Even though the EPS metric is largely irrelevant because the EBIT is still disappointing, we believe it is still a material misrepresentation.  Perhaps running another contest this year is a way to inflate earnings growth next year.

Disappointing and deteriorating results

Since Mr. Lupo was appointed Chairman of the Board in June of 2018 the total stockholder value has fallen 31%.  Mr. Lupo has been on the Board since the IPO in 2003, is the longest serving director, and has overseen this disastrous underperformance every step of the way.

Most concerning of all are the recent deterioration of results.  Since Bruce Smith was appointed CEO in March of 2018, sales and operating profit have begun a startling slide which appears to be accelerating.  Same store sales have fallen from +3.3% in Q2 2018 to 0.6% in Q3 2018, to 0.2% in Q4 2018, and quarter to date Q1 2019 are down a shocking 8% with management guidance of negative 3% for the quarter.  If management achieves this same store sales guidance it would be the worst quarter since Q4 2015.  Operating profit declines are equally disturbing with Q4 2018 down 9% and Q1 2019 down 10% based on EPS guidance.  There is a clear trend that since former Chairman Ed Anderson left and Mr. Smith assumed the CEO position, the Company’s results are steadily declining.  Clearly, it appears the Board is failing to provide the proper oversight, support and guidance for Mr. Smith to be effective.

Significantly, one year into the Company’s long term growth goal of achieving $4 per share, they are materially behind the annual trajectory.  The Company will fall short of its annual same store sales and earnings growth goal of 3% and 12-15%, respectively, with guidance calling for same store sales to increase 1-2% and earnings to increase 4.5% (as inferred from the Company’s 2019 EPS guidance).  As these results show, the Company struggles to achieve success under the current Board and management configuration.

Perhaps that’s why the Company’s valuation at 3.7x trailing twelve month EBITDA is one of the lowest in the sector.  Largely due to what we believe is lack of confidence that any stockholder or potential investor could have in the Company’s ability to deliver long-term, sustainable growth.

Let’s not lose sight of the long term underperformance

While most of this letter is focused on performance since the Board lost a contested election in 2017, let’s not forget what caused us to engage with the Company in the first place.  Since FY 2009, EBIT has declined from $29.3mm to $25.1mm in FY 2018, or 14%.  Also, the Company has spent $222 million on capital expenditures through Q3 of 2018 which resulted in EBIT dollars per store falling 41% to $45K in FY 2018 from $77K in FY 2009.  Similarly disappointing, same store sales have been flat since FY 2009 and EBITDA margins have declined by 290 bp in FY 2018.  All of this against a back drop of the largest employment gains the core customer has ever experienced.

Macellum owns 18x more stock than Chairman Lupo and 6x more than all the non-executive directors

In the letter, the Company noted that we sold 38,000 shares, or 7% of our entire position, since May 2018.  While this is true, we think it is important to also note that Macellum has purchased every share it owns, and as a manager of outside investor money, Macellum cannot control when investors redeem their investment.  By contrast, no one on the Board has made an open market purchase for years.  Worse, Mr. Lupo has sold over $300K or 30% of his holdings of Citi Trends stock and based on public filings, only owns 27,480 shares despite having served on the Board since 2003.  Additionally, unlike Macellum, Mr. Lupo has total control over his decisions to transact in the securities.  Given Mr. Lupo’s insignificant ownership in the Company, we have concerns that his interests do not fully align with those of the stockholders.

The path forward

Mr. Duskin has gone to great lengths to work constructively with Citi Trends directors since he joined the Board, as evidenced by our decision to avoid a proxy contest last year and to delay our public announcement of our nomination so we could continue to work with the Company toward an agreement without any distractions or unnecessary attention.  Despite our good faith efforts to come to an agreement and achieve meaningful change on the Board, our settlement offers have been repeatedly rejected, seemingly in an effort to project the jobs of the directors rather than the interests of all stockholders.  In our view, the failure of the settlement conversations boil down to one point: no legacy director is willing to step down from the Board at the 2019 Annual Meeting.  Instead, the Board is only willing to increase the number of directors serving on the Board.  We believe this is simply not sufficient and will not result in the urgently needed change in the boardroom or in the Company’s performance.  Stockholders need change immediately so we can address the Company’s stagnant performance and put the Company on the track to achieve long-term, sustainable, consistent growth.  Mr. Duskin, as a single voice of transformation, cannot create value on his own with the status quo and inertia being so strong on the Board.  The Board must be reconstituted now.

Our preference has always been to work privately and constructively with the Board and we are still hopeful that we can reach a settlement that will create meaningful change.  However, as a significant stockholder with interests that are truly aligned with those of the other stockholders, we are committed to doing what is in the best interest of the stockholders of the Company and will take all actions that we deem necessary to deliver value to all stockholders.

Sincerely,

Jonathan Duskin
Macellum Advisors GP, LLC

CERTAIN INFORMATION CONCERNING THE PARTICIPANTS

Macellum SPV III, LP, a Delaware limited partnership, together with the other participants named herein (collectively, “Macellum”), intends to file a preliminary proxy statement and accompanying White proxy card with the Securities and Exchange Commission (“SEC”) to be used to solicit votes for the election of its slate of highly qualified director nominees at the 2019 annual meeting of stockholders of Citi Trends, Inc., a Delaware corporation (the “Company”).

MACELLUM STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’ PROXY SOLICITOR.

The “Participants” in the proxy solicitation are Macellum SPV III, LP, a Delaware limited partnership (“Macellum SPV”), Macellum Management, LP, a Delaware limited partnership (“Macellum Management”), Macellum Advisors GP, LLC, a Delaware limited liability company (“Macellum GP”), Jonathan DuskinTheresa R. BackesPaul MetcalfPeter R. Sachse, and Kenneth D. Seipel. As of the date hereof, Macellum GP and its affiliates beneficially own, in the aggregate, 494,019 shares of common stock, $0.01 par value per share, of the Company (the “Common Stock”), including 2,397 shares of restricted stock awarded to Mr. Duskin in his capacity as a director of the Company, which will vest on June 6, 2019, provided Mr. Duskin is a director of the Company at such time, representing approximately 3.8% of the outstanding shares of Common Stock. As of the date hereof, Macellum SPV directly owns 489,010 shares of Common Stock. As of the date hereof, Macellum GP, as the general partner of Macellum SPV, may be deemed to beneficially own the 489,010 shares of Common Stock beneficially owned directly by Macellum SPV. As of the date hereof, Macellum Management, as the investment manager of Macellum SPV, may be deemed to beneficially own the 489,010 shares of Common Stock beneficially owned directly by Macellum SPV. As of the date hereof, Mr. Duskin beneficially owns directly 5,009 shares of Common Stock, including 2,397 shares of restricted stock awarded to him in his capacity as a director of the Company, which will vest on June 6, 2019, provided Mr. Duskin is a director of the Company at such time, and, as the sole member of Macellum GP, may be deemed to beneficially own the 489,010 shares of Common Stock beneficially owned directly by Macellum SPV. As of the date hereof, neither Ms. Backes nor Messrs. Metcalf, Sachse or Seipel beneficially own any shares of the Common Stock.

 

SOURCE Macellum Advisors GP, LLC

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Artificial Solutions Wipes the Board with Four Podium Positions in Stevie 2019 International Business Awards Including Most Innovative Tech Company of the Year

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Artificial Solutions® (www.artificial-solutions.com), the leading specialist in enterprise-strength Conversational AI, announced today it has won awards in four Stevie® 2019 International Business Awards that were announced earlier today. The company was a Silver Stevie Winner in the prestigious Most Innovative Tech Company of the Year, Software Development Solution of the Year, and Artificial Intelligence/Machine Learning Solution of the Year. It was also a Bronze Stevie Winner in the IoT Analytics Solution category of the Awards.

The Stevie Awards are the world’s premier business awards. They were created in 2002 to honor and generate public recognition of the achievements and positive contributions of organizations and working professionals worldwide. In short order the Stevie has become one of the world’s most coveted prizes. The International Business Awards® (IBA) are open to all organizations worldwide: large and small, public and private, for-profit and non profit and attracted over 4000 entries.

“Recognition in any award is an honor. To win four International Stevies in four key tech-categories, including the highly contested Most Innovative Tech Company of the Year is amazing and a massive endorsement of the whole team at Artificial Solutions who have worked so hard to make Teneo an industry-leading solution,” comments Andy Peart, CMSO of Artificial Solutions.

Stevie Award winners were determined by the average scores of more than 250 executives worldwide who participated in the judging process from May through early August.

Most Innovative Tech Company of the Year recognizes overall achievement in product innovation. Artificial Solutions entry included the wide range of advanced enhancements made to Teneo in the last 12 months that has raised the bar for other conversational AI platforms. Judges commented that Teneo’s hybrid approach and broad support linguistic and lexical factors is truly impressive and that the company really streamlines the digital transformation journey using the sophisticated AI platform.

Teneo Developers, launched earlier this year, was honored for the best tool or resources for designing, creating or testing software applications. Judges for the Software Development Solution category commented that Visual UI platform to solve the problem of conversational UI is interesting. The problem being solved here could have very high returns.

Teneo’s revolutionary hybrid approach was awarded in the Artificial Intelligence/ Machine Learning category that recognizes solutions that enable computer-based systems to exhibit intelligent behavior in complex situations to solve problems, communicate with people, and perceive and interact with the physical world. Judges commented: Very impressed with how they combined classical ML with advanced NLP. Their use cases are great, and they managed to solve real and practical problems for companies.

The IoT Analytics Solution category recognized Teneo as one of the best applications for measuring and transforming Internet of Things (IoT) data into business intelligence. Judges commented that it showed Innovative use of cutting-edge technology and was a feature rich analytics solution while adhering data privacy laws.

The International Business Awards are the world’s premier business awards program. All individuals and organizations worldwide – public and private, for-profit and non-profit, large and small – are eligible to submit nominations. The 2019 IBAs received entries from organizations in 74 nations and territories.

Nicknamed the Stevies for the Greek word for “crowned,” the awards will be presented to winners at a gala awards banquet at the ANDAZ Hotel am Belvedere, Vienna, Austria on 19 October.

 

SOURCE Artificial Solutions International AB

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Aquaculture technology provider UMITRON launches Fish Appetite Index (FAI), the world’s first real-time ocean-based fish appetite detection system.

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UMITRON PTE. LTD. (Singapore, Co-founder/ Managing Director Masahiko Yamada) launches Fish Appetite Index (FAI), the world’s first real-time ocean-based fish appetite detection system. UMITRON FAI uses efficient machine learning and image analysis techniques to extract relevant data from video streams that can then be used to accurately quantify fish appetite. FAI software has already been rolled out to existing customers to optimize their feeding operations.

Over the past twenty years the aquaculture industry has been expanding at an exponential rate with annual production tripling during this brief time span. At the same time, however, aquaculture feed prices have also risen dramatically. This presents an ever-growing challenge for farmers since feed costs account for a majority of their operational overhead. Farmers must walk a tight line: underfeeding their fish risks lower growth rates and slower time to market, while overfeeding increases costs and potentially harms the environment. New data analytics technologies such as IoT devices and machine learning offer farmers a solution to improve their feeding operations.

The FAI algorithm takes in the same visual information that humans would and then scores fish appetite and presents it in an easy to understand chart. When used in tandem with a smart feeder such as UMITRON CELL, the feed time intervals and amounts can be automatically adjusted with minimal human interference. Farm operators can utilize FAI to fine-tune their feeding schedules, ensuring fish are always satiated. This is easily done via their smartphones with the UMITRON app, where they can check and remotely adjust feed settings based on the FAI feedback.

FAI benefits farmers by reducing wasted feed, improving profitability as well as environmental sustainability. FAI in combination with technology such as CELL allows farmers to stay onshore during dangerous weather conditions or holidays while still keeping a close eye on their fish stocks. Furthermore, it reduces the need for every employee to be an expert at feeding and instead frees workers to focus on other tasks that improve fish welfare.

Existing UMITRON customers have already begun using FAI alongside CELL. “Today, there are many companies developing machine-learning algorithms for a variety of industries but only testing them under ideal conditions. The UMITRON Fish Appetite Index on the other hand is already being embraced by our existing customers at their ocean-based farm sites where it operates under real world conditions. It might be difficult for some of our potential customers to completely trust artificial intelligence at first, but FAI is an important tool that can be used to increase productivity and reduce waste,” said Masahiko Yamada, managing director of UMITRON.  “Our appetite analysis approach is being developed with customer feedback in mind. UMITRON will continue to develop similar value-added software services that can be automatically rolled out to our existing customer base. Also, we are open to developing other practical applications after discussions with potential customers or equipment partners,”  added Takuma Okamoto, CTO of UMITRON.

UMITRON is looking for partners interested in using FAI for species such as Atlantic salmon, rainbow trout, European sea bass, and gilthead sea bream. Similarly, UMITRON is looking for feeding system manufacturing partners who wish to utilize data analysis software such as FAI to improve their current products.

UMITRON will participate in AquaNor, which will be held in Trondheim, Norway from August 20-23, and The Japan International Seafood & Technology Expo from August 21-23 in Tokyo, Japan. Interested parties should contact UMITRON in advance to set up an informational meeting.

 

SOURCE Umitron

 

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Results for the second quarter of 2019 – Desjardins Group records surplus earnings of $692 million for the second quarter

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At the end of the second quarter ended June 30, 2019Desjardins GroupCanada’s leading financial cooperative group, recorded surplus earnings before member dividends of $692 million, up $15 million from the same quarter of 2018. Adjusted surplus earnings(1) were up $144 million or 26.3 % for the specific item related to the creation of Aviso Wealth, i.e. the gain from the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. recognized in 2018. These results were due to strong performance in caisse network activities and the operations of the Property and Casualty Insurance segment, which posted higher premium income and a favourable claims experience compared to the same quarter of 2018. The higher surplus earnings were also due to a smaller provision for credit losses as a result of the parameter update for non-credit impaired loans and economic factors. As for the privacy breach, a total of $70 million in expenses and provisions for the implementation of protections for our members (i.e. the credit monitoring plan and the identity theft solution for Desjardins caisse members) were recognized in the second quarter of 2019.

The amount returned to members and the community was $112 million (Q2 2018: $106 million), including an $80 million provision for member dividends (Q2 2018: $71 million), $20 million in sponsorships, donations and scholarships (Q2 2018: $25 million), and $12 million in Desjardins Member Advantages (Q2 2018: $10 million). There was also another $8 million(Q2 2018: $6 million) in commitments related to the $100 million regional development fund.

“Our second quarter results are fully in line with our expectations, in particular due to the growth in caisse network operations,” said President and CEO Guy Cormier. “They demonstrate Desjardins Group’s financial strength and its ability to deal with the unexpected. Members who are worried about the privacy breach can rest assured that their cooperative protects them by providing automatic protection against identity theft to all its members. Our employees are working very hard to address our members’ concerns and needs.

It should be remembered that the identity theft solution for Desjardins caisse members includes the following:

Protection of assets and transactions

The assets and transactions of Desjardins members are protected. If the breach results in unauthorized transactions in members’ accounts, they will be reimbursed.

Individual support during the identity recovery process

In the event of identity theft, Desjardins offers its members individual support throughout the identity recovery process.

Reimbursement of $50,000

In relation to the identity recovery process, Desjardins members will be reimbursed up to $50,000 for certain expenses incurred, such as notary and legal fees and other expenses.

This offer, when combined with the Equifax credit monitoring plan and our Credit Score feature from TransUnion, will help members better protect themselves against identity theft and its consequences.

Giving back to the community

In addition to the sustained commitment of the caisses in the communities they serve, here are some of the other ways that Desjardins is making a positive difference in people’s lives.

  • Desjardins joined the Ready When the Time Comes program of the Canadian Red Cross. Through this initiative, Desjardins employees were trained to help the Red Cross with its activities during the recent floods.
  • Desjardins has strengthened its partnership with the Citadelle Cooperative, the flagship Quebec organization for maple syrup producers, beekeepers and cranberry producers, providing $1 million to modernize its plants inPlessisville, Château-Richer and Aston-Jonction.
  • Desjardins won L’actualité magazine’s social impact award in the Environment category.
  • The appointment of a new Desjardins Youth Advisory Board. This committee gives the young people in our cooperative group a voice.
  • Donation of $655,000 to support four community development projects in Abitibi-Témiscamingue, with a special focus on young people, mobility in the region and the agrifood sector.

Innovating

Desjardins is constantly innovating to meet the needs of its members and clients. Here are just a few examples of recent initiatives and the recognition received by Desjardins for its expertise.

  • Creation of a $45 million strategic fintech investment pool for Desjardins Group that will benefit members and clients and be managed by Desjardins Capital.
  • The Desjardins Group Pension Plan acquired a portion of EDF Renewables Canada Inc.’s stake in the Cypress Wind Project in Alberta as a contribution to the energy transition.
  • Desjardins Group has modernized its governance with new rules on how members are elected to its Board of Directors and its Board of Ethics and Professional Conduct, including to achieve greater diversity.
  • Responsible investment survey carried out on behalf of Desjardins to know Canadians’ perceptions and opinions of this concept in order to better serve our members and clients.
  • Launch of UX Lab, a new user experience laboratory.

Q2 financial results

  • Surplus earnings of $692 million, up $15 million from 2018.
  • Adjusted surplus earnings(1) up $144 million or 26.3% from 2018.
  • Increase in operating income(1) of $71 million or 1.7%.
  • Provision for member dividends of $80 million, up $9 million or 12.6%.
  • Outstanding residential mortgages up $3.3 billion since December 31, 2018.
  • Total capital ratio of 17.8% as at June 30, 2019.
  • Total assets of $310.9 billion as at June 30, 2019.

Net interest income was $1,299 million, up $124 million from the same period in 2018. This increase was due to growth in the entire average portfolio of loans and acceptances outstanding, and to higher interest rates.

Net premiums were $2,242 million (Q2 2018: $2,200 million), up 1.9%. This increase stemmed primarily from growth in activities and in the average premium in property and casualty insurance, offset by lower premiums from life and health insurance.

Other operating income(1) totalled $686 million, down $95 million from the corresponding period in 2018. Excluding the gain, before income taxes, of $132 million related to the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. recognized in 2018, other operating income would have been up $37 million or 5.7% compared to the same period of 2018. This increase came essentially from higher business volumes in payment and financing activities.

The recovery of the provision for credit losses totalled $11 million for the second quarter of 2019, compared to a provision for credit losses of $80 million for the same period in 2018. This decrease in the credit loss provision was primarily due to a refinement made to the risk measurement methodology for non-credit impaired loans concerning the estimated life of revolving exposures, such as credit cards and lines of credit, and an update of economic factors on the credit portfolios. The gross credit-impaired loans ratio, expressed as a percentage of the total gross loans and acceptances portfolio, was 0.56% as at June 30, 2019, relatively unchanged from what was recorded in 2018. Desjardins Group has continued to present a quality loan portfolio in 2019.

Non-interest expense was $2,053 million (Q2 2018: $1,853 million). This increase was mainly due to $70 million in expenses and provisions for the implementation of protections for our members, i.e. the credit monitoring plan and the identity theft solution for Desjardins caisse members, to higher salaries due to indexing and growth in operations and payment activities, including reward program expenses, as well as growth in financing activities.

Assets of $310.9 billion, an increase of $15.4 billion

As at June 30, 2019, Desjardins Group had $310.9 billion in assets, up $15.4 billion or 5.2% since December 31, 2018. This growth stemmed partly from a $6.2 billion increase in loans and acceptances. In addition, the growth was due to an increase in securities, including securities borrowed or purchased under reverse repurchase agreements, and net segregated fund assets, amounts receivable from clients, brokers and financial institutions included in other assets.

Strong capital base

Desjardins Group maintains very good capitalization levels in compliance with Basel III rules. Its Tier 1A and total capital ratios were 17.7% and 17.8%, respectively, as at June 30, 2019, compared to 17.3% and 17.6%, respectively, as at December 31, 2018.

Results for the first six months of 2019

At the end of the first six months of the year, surplus earnings before member dividends was $1,093 million (2018: $1,178 million), down 7.2%. Adjusted surplus earnings(1) for the specific item during the creation of Aviso Wealth, i.e. the gain related to the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. recognized in 2018, were up $44 million or 4.2%. In addition to the reasons given for the second-quarter results, this increase was offset by lower gains on the disposal of investments than in 2018 in the insurance segments and by the profit related to the restructuring of Interac Corp. recognized in the first quarter of 2018.

Segment results for the second quarter of 2019

Personal and Business Services

For the second quarter of fiscal 2019, the Personal and Business Services segment reported surplus earnings before member dividends of $461 million (Q2 2018: $299 million). This increase was largely due to solid results posted by the caisse network, especially related to the growth in net interest income, a decline in credit loss provisioning, and growth in payment and financing activities.

For the first six months of 2019, surplus earnings were $796 million (2018: $574 million).

Wealth Management and Life and Health Insurance

Net surplus earnings generated by the Wealth Management and Life and Health Insurance segment were $183 million at the end of the quarter (Q2 2018: $331 million). Results for the second quarter of 2018 benefited from the gain related to the transaction involving Qtrade Canada Inc. and the interest in Northwest & Ethical Investments L.P. Adjusted surplus earnings([4]) were down $19 million or 9.4%. This decline was primarily due to less favourable interest margins.

For the first six months of 2019, adjusted surplus earnings(1) were $322 million (2018: $408 million). In addition to the reasons given for the second-quarter results, this decline was primarily due to lower gains on the sale of securities and real estate investments than in 2018.

Property and Casualty Insurance

The Property and Casualty Insurance segment recorded net surplus earnings of $123 million in the second quarter of 2019 (Q2 2018: $52 million). This $71 million increase in surplus earnings was the result of higher net premiums, a smaller impact by catastrophe and major event claims and a lower claims experience for the current year in property and business insurance.

For the first six months of 2019, surplus earnings were $42 million (2018: $78 million). This decrease was primarily due to an unfavourable claims experience and lower gains on investments than in the same period of 2018.

Privacy breach

On June 20, 2019, Desjardins Group announced that some personal information of 2.9 million members had been shared with individuals outside the organization. This situation was caused by an ill-intentioned employee who has since been fired. Desjardins Group was not the victim of a cyberattack and its computer systems were in no way breached. In light of the situation, additional measures were put in place to protect the personal and financial information of all members and clients. Desjardins Group sent a letter to all members affected by the incident. It offers affected members, at its own cost, a credit monitoring plan and identity theft insurance with Equifax for five years.

In addition, on July 15, 2019, Desjardins Group announced to all its members that they are now automatically protected against identity theft. This protection is available not only to personal members, but also to business members, who are currently not served by any similar industry protection. This protection includes the following:

  • Protection of assets and transactions: The assets and transactions of Desjardins members are protected. Should unauthorized transactions be made in members’ accounts, they will be reimbursed.
  • Individual support in the identity recovery process: In the event of identity theft, Desjardins will offer its members individual support. It will be there for members throughout the identity recovery process.
  • Reimbursement of $50,000: Desjardins members may be reimbursed up to $50,000 for certain expenses related to identity theft, such as notary and legal fees and other expenses.

The expenses related to costs incurred and the establishment of a provision with respect to the implementation of these protections for our members, totalling $70 million, have been recognized in profit or loss in the second quarter of 2019. Desjardins Group could periodically reassess this provision based on the circumstances.

Following the announcement on June 20, 2019, the credit ratings assigned by the ratings agencies Standard & Poor’s, DBRS, Moody’s and Fitch to Desjardins Group’s senior securities were affirmed and remained unchanged.

_______________________________

(1) See “Basis of presentation of financial information”.

Key financial data

FINANCIAL POSITION AND INDICATORS

(in millions of dollars and as a percentage)

As at June 30, 2019(1)

As at December 31, 2018

Balance Sheet

Assets

$

310,906

$

295,465

Residential mortgage loans

$

123,457

$

120,113

Consumer, credit card and other personal loans

$

26,577

$

26,210

Business and government loans(2)

$

47,499

$

45,066

Total gross loans(2)

$

197,533

$

191,389

Equity

$

26,530

$

25,649

Indicators

Assets under administration

$

411,515

$

373,558

Assets under management(3)

$

63,740

$

57,448

Tier 1A capital ratio

17.7%

17.3%

Tier 1 capital ratio

17.7%

17.3%

Total capital ratio

17.8%

17.6%

Leverage ratio

8.4%

8.3%

Liquidity coverage ratio(4)

122.4%

122.1%

Gross credit-impaired loans/gross loans and acceptances ratio(5)

0.56%

0.54%

(1)

The information presented as at June 30, 2019 takes into account IFRS 16, “Leases”, adopted on January 1, 2019. The comparative data have not been restated. For more information, see Note 2, “Basis of presentation and significant accounting policies”, to the Interim Combined Financial Statements.

(2)

Includes acceptances.

(3)

Assets under management may also be administered by Desjardins Group. When this is the case, they are included in assets under administration.

(4)

The ratio result is presented based on the average of daily data for the quarter.

(5)

See “Basis of presentation of financial information.”

COMBINED INCOME

For the three-month periods

For the six-month periods

ended

ended

(in millions of dollars and as a percentage)

June 30,

2019(1)

March 31,

2019(1)

June 30,

2018

June 30,

2019(1)

June 30,

2018

Operating income(2)

$

4,227

$

4,312

$

4,156

$

8,539

$

8,188

Surplus earnings before member dividends

$

692

$

401

$

677

$

1,093

$

1,178

Adjusted surplus earnings before member dividends(2)

$

692

$

401

$

548

$

1,093

$

1,049

Return on equity(2)

10.6%

6.5%

11.0%

8.6%

9.7%

Adjusted return on equity(2)

10.6%

6.6%

8.9%

8.6%

8.6%

Credit loss provisioning rate(2)

(0.02)%

0.23%

0.18%

0.10%

0.22%

(1)

The information presented for the three-month and six-month periods ended June 30, 2019 and the three-month period ended March 31, 2019 takes into account IFRS 16, “Leases”, adopted on January 1, 2019. The comparative data have not been restated. For more information, see Note 2, “Basis of presentation and significant accounting policies”, to the Interim Combined Financial Statements.

(2)

See “Basis of presentation of financial information”.

CONTRIBUTION TO COMBINED SURPLUS EARNINGS BY BUSINESS SEGMENT

For the three-month periods

For the six-month periods

ended

ended

(in millions of dollars)

June 30,

2019(1)

March 31,

2019(1)

June 30,

2018

June 30,

2019(1)

June 30,

2018

Personal and Business Services

$

461

$

335

$

299

$

796

$

574

Wealth Management and Life and Health Insurance

183

139

331

322

537

Property and Casualty Insurance

123

(81)

52

42

78

Other

(75)

8

(5)

(67)

(11)

Desjardins Group

$

692

$

401

$

677

$

1,093

$

1,178

(1)

The information presented for the three-month and six-month periods ended June 30, 2019 and the three-month period ended March 31, 2019 takes into account IFRS 16, “Leases”, adopted on January 1, 2019. The comparative data have not been restated. For more information, see Note 2, “Basis of presentation and significant accounting policies”, to the Interim Combined Financial Statements.

CREDIT RATINGS OF SECURITIES ISSUED AND OUTSTANDING

DBRS

STANDARD & 
POOR’S

MOODY’S

FITCH

Fédération des caisses Desjardins du Québec

Short-term

R-1 (high)

A-1

P-1

F1+

Existing senior medium and long-term(1)

AA

A+

Aa2

AA-

Senior medium and long-term(2)

AA (low)

A-

A2

AA-

Desjardins Capital Inc. 

Senior medium and long-term

A (high)

A

A2

A+

(1)

Includes the senior medium and long-term debt issued before March 31, 2019, as well as that which was issued from this date and has been excluded from the recapitalization regime applicable to Desjardins Group.

(2)

Includes the senior medium and long-term debt issued from March 31, 2019, which may be converted under the terms and conditions of the recapitalization (bail-in) regime applicable to Desjardins Group.

More detailed financial information can be found in Desjardins Group’s interim Management’s Discussion and Analysis (MD&A), which is available on the SEDAR website, under the Desjardins Capital Inc. profile.

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