Canaccord Genuity Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Generity Group Inc. Fiscal 2022 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise, and following the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. If you have any difficulties hearing the conference, please press star then zero for operator assistance at any time. As a reminder, this conference call is being broadcast live online and recorded. I would now like to turn the conference call over to Mr. Dan Davio, President and CEO. Please go ahead, Mr. Davio.

Thank you, Operator, and thanks for everyone joining us for today's call. As always, I'm joined by Don McFadden, our Chief Financial Officer. Following the overview of our second quarter fiscal 2022 results, both Don and I would be pleased to answer questions from analysts and institutional investors. During today's discussion, we'll refer to our earnings release in MD&A, copies of which have been made available for download on CDAR and the investor relations section of our website at cgf.com. Our quarterly investor presentation and supplemental financials are also available on our website. I won't cover the entire presentation during this call, but I will refer to certain slides to guide our discussion. Within our update, certain reported information has been adjusted to exclude significant items in order to provide a transparent and comparative view of our operating performance. These adjustment items are non-IFRS financial measures. Please refer to our notice regarding forward-looking statements and the description of non-IFRS financial measures that appear on page 1 of our investor presentation and in our MD&A. I expect that you've all had the opportunity to review our quarterly disclosures that were made available last night. The operating environment remained healthy throughout the three-month period, and we experienced some seasonality in our new issue and trading businesses. M&A activity has picked up substantially. While new issue activity has declined from record volumes of recent quarters, it has remained comfortably above historic levels. Our wealth management businesses in all our regions perform strongly, albeit with lower contributions from new issue activity in Canada and Australia. Firm-wide revenue for the three-month period amounted to $475 million, an increase of 22% compared to the same period last year. When measured on a year-to-date basis, adjusted revenue for the first half of fiscal 2022 amounted to $231 million, an increase of 30% compared to the same period a year ago. Looking at slide six of our investor presentation, we can see that our second quarter and first half results have surpassed the prior fiscal year on every measure, revenue, net income, and adjusted earnings per share. Excluding significant items, firm-wide pre-tax net income of $96 million for the second quarter contributed to a year-over-year increase of 127% or $117 million for the first six months of fiscal 2022. This translated to just a diluted earnings per common share of 58 cents for the second quarter and $1.31 for the first half year-over-year increases of 107% and 147% respectively. While we are certainly pleased with this result, we note that it was achieved in a more challenging backdrop for risk capital, where several ECM transactions were either pulled or postponed, in addition to the seasonality that has traditionally impacted our second quarter capital raising activities. Our diversified platform has positioned us to generate stable growth regardless of the operating environment. Slides 8 and 9 show the contribution of revenue and net income from our core businesses and geographies. Excluding significant items are total expenses as a percentage of revenue for the second fiscal quarter decreased by 7.2 percentage points when compared to the same period a year ago, with non-operating compensation costs coming in at 19%, a year-over-year reduction of 4 percentage points. This result was driven by a combination of revenue growth and expense discipline, resulting in an adjusted pre-tax profit margin of 20% for the second fiscal quarter, up 7.2 percentage points from the same period last year. As evidenced on slide 10, we've maintained a strong focus on the efficiencies and cost discipline measures that we implemented prior to the pandemic. We've yet to see a meaningful increase in travel and entertainment costs, but as restrictions ease, in-person activities are increasing and related costs are moving up. We expect this trend to continue as demand for in-person or hybrid conferences return. Although this activity is returning to more normal levels, we continue to operate with a disciplined and selective approach to our spending in this area. Reflecting our focus on returning capital to shareholders, We have remained active in our NCIB program, and we expect that to continue through the second half of our fiscal year. I'm also pleased to report that our Board of Directors has approved a quarterly common share dividend of 7.5 cents for the second fiscal quarter. Total capital deployment initiatives for the first half of fiscal 2022, including common share dividends and buyback activity, amounted to $44 million. or 28.6% of our adjusted net income. With that, let's turn to the performance of our operating businesses. Activity levels in our global capital markets business remain very strong over the three-month period, reflecting the strength of our mid-market franchise and the steadfast commitment from our talented teams across the businesses and geographies. Firm-wide capital market revenue for the second fiscal quarter amounted to $305 million, up 26% compared to the same period last year. Our U.S. business was the largest revenue contributor for the three-month period, with total revenue of $179 million, up 59% compared to the same period a year ago. Revenue contributed by our U.K. and Europe capital markets business increased 130% year over year. Second quarter revenue in our Canadian and Australian businesses remained higher than historic levels, but declined 15% and 26% respectively, reflecting lower new issue and trading activity when compared to the second quarter of last year. Over the three-month period, we participated in 128 transactions to raise gross proceeds of $16 billion for growth companies. Firm-wide investment banking revenue for the quarter was a very healthy $90 million, but down 18% compared to the same period a year ago. Revenue earned from our trading activities were 28% lower on a year-over-year basis, a reflection of lower market volatility, which decreased market activity and revenue opportunities, primarily in our U.S. and Canadian operations. These declines were offset by a 279% year-over-year increase in higher margin advisory revenues, which amounted to $139 million for the three-month period. Our U.S. business delivered a 419% increase in advisory fee revenues, which amounted to $104 million, surpassing all prior full fiscal year amounts from this team. Our UK business, with a substantial contribution from its Paris office and our Canadian operation, also delivered substantial increases in this segment, with increases of 205% and 58% respectively. Our exceptional track record of delivering ECM transactions and successful outcomes for mid-market growth companies has helped to add to the growth in our advisory practice. I'm so pleased with our specialists in all regions. who can have that trusted conversation with top decision makers across sectors and regions and coordinate our delivery of innovative ideas and solutions to companies without conflict. We also made strategic investments in this segment to complement our ECM focus area, and we're seeing the benefits of that plan. Building on the successful deployment of this strategy, we continue to explore further investments to grow our advisory capabilities. Reflecting the increase in higher margin advisory activity, the second quarter adjusted pre-tax net income contribution from our capital markets business improved by 70% year over year to $73 million. An adjusted pre-tax profit margin increased by six percentage points to 24%. Across our capital markets businesses, we continue to pursue opportunities for expanding our product offerings. As we develop ancillary products to complement our mid-market capabilities, our long-term earnings potential is enhanced. Looking at the current quarter, market activity has demonstrated that new issue and advisory levels remain robust through October. If the environment remains constructive in the final two months of this calendar year, we are optimistic that our Q3 results will continue to reflect our strong market positions. Our global wealth management businesses delivered another quarter of impressive growth. Firm-wide client assets reached a new record of $98 billion, up 34% year-over-year. Total revenue for the quarter in our combined wealth management businesses amounted to $166 million, an increase of 14% compared to the same period a year ago. Excluding significant items, the second quarter pre-tax net income contribution increased by 18% year-over-year to $32 million. This brings the total contribution for the first half of this fiscal year to $80 million, up 56% from the same period last year. Client assets in our Canadian business reached a new record of $36 billion at the end of the second quarter, with the average book per advisor growing by 44% year over year to $245 million. This increase was driven by a growth in commissions and fees and interest revenue, which was partially offset by lower investment banking activity. I will also note that the proportion of fee-based revenue in this business increased to 45%, a year-over-year improvement of 13 percentage points. We continue to focus on growing contributions from this segment through our recruiting activities, as well as continuing to support our existing advisors in expanding their offering to capture a greater share of wallet. Fiscal year to date, the adjusted pre-tax net income contribution from this business amounted to $36 million, an increase of 87% when compared to the same period in the prior year. We also rank very strongly in the independent survey of Canada's top wealth advisors, with total number of CG advisors exceeding representation from all other independent firms by a wide margin. While the recruiting environment remains competitive, we continue to have strong momentum. We are also maintaining a strong focus on alternative ways to add products and services to grow and enhance our overall Canadian wealth offering. Client assets in the UK and Crown dependencies increased by 27% year-over-year to $58 billion. Revenue reached a new quarterly record of $75 million for the three-month period, up 17% year-over-year. Excluding significant items, the pre-tax net income contribution from this business amounted to $20 million for the second quarter, and $39 million fiscal year to date, increases of 40% and 30% respectively. Our organic growth strategy is beginning to produce results, and margins in this business continue to be strong. Fiscal year to date, the adjusted pre-tax profit margin in this business was 26.4%, up 3.6 percentage points from the prior year. During the quarter, we announced the completion of the $218 million investment by certain accounts and funds of HPS investment partners. On an as-converted basis, the convertible preferred share investment into our UK Wealth Management Division reduces our equity interest in this business by approximately 22%. Our partnership with HPS continues to be positive and constructive. As we continue to explore opportunities to materially add businesses to our platform in the UK in a manner which is complementary to our existing business and accretive for our shareholders. I'm also very pleased to welcome our new colleagues from Adam & Company. This transaction closed on October 1st, so the assets and revenues will begin to be reflected in our results for the second half of this fiscal year. We are excited about the strategic fit of this highly complementary business and we look forward to a seamless integration. This development will increase our client assets by roughly $3 billion and we expect it will be accretive to our adjusted earnings. Finally, managed assets in our Australian wealth business increased by 43% year over year to a record $5 billion, demonstrating our continued strong momentum in this region. Second quarter revenue increased by 31% year-over-year to $19 million. While revenue from new issue activity declined by 23% sequentially, this team delivered a new quarterly record of $16 million in commission and fee revenue of 40% year-over-year. We continue to execute against a broad range of opportunities in this business. We remain focused on advancing advisor recruitment and asset growth as we maintain momentum as the premier brand for small and mid-cap investors in Australia. Our recruiting success in this region have increased substantially because of this momentum. And finally, as our Australia franchise grows larger, we continue to assess the appropriate ownership structure of that business to align our employee base in the region and provide the business the capital it needs to grow. In conclusion, I'm very pleased with our results for the second quarter and the first half of fiscal 2022. Despite the environment for new issues returning to more normalized levels, the global macroeconomic environment continues to provide a supportive backdrop for activities in our core mid-market sectors. The M&A environment is the strongest we've seen, and we are optimally positioned to deliver on a growing pipeline of strategic activity. Our market position is stronger than ever, and we are among the league table leaders in all of our geographies. We are especially grateful for the trust that our clients and shareholders have placed in us, and we strive to always exceed their expectations as the leading independent mid-market investment banking and wealth management firm. As travel restrictions ease, we are reestablishing the personal engagement that is so important for our employees and clients. We enter the second half with a very strong balance sheet and a very healthy working capital position to support all our business activities. We continue to invest strategically to enhance our mid-market capabilities and grow our wealth management businesses. With our buyback activity, our share count continues to trend lower, supporting enhancements to our earnings per share in any market backdrop. And with our balance sheet strength, we expect to be able to continue this activity. As always, we remain firmly committed to delivering outstanding experiences and results for our clients while managing our business for profitable growth and creating sustainable long-term value for our shareholders. With that, Don and I would be pleased to take your questions. Operator, can you please open the lines?

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question, please press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. There will be a brief pause while we compile the Q&A roster. Your first question comes from Jeff Fenwick of Cormark Securities. Please go ahead.