Canaccord Genuity Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group Inc. Fiscal 2022 Third Quarter Results Conference Call. Our lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press star, then the number 2. If you have any difficulties during 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 conference call over to Mr. Dan Davio, President and CEO.

Thank you, operator, and thanks to everyone for joining us for today's call. As always, I'm joined by Don McFadden, our Chief Financial Officer. Following the overview of our third fiscal 2022 results, both Don and I will be pleased to answer questions from analysts and institutional investors. During today's discussion, we'll refer to our earnings release and MD&A, copies of which have been made available for download on CDAR and on 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 adjusted 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 one of our investor presentation and in our MD&A. All our businesses continue to perform at strong levels during the third fiscal quarter, and our nine-month fiscal year-to-date results showed that we are comfortably on track for a strong year. During this period, assets in our wealth management businesses remain strong, and increased advisory activity in our capital markets business helped offset the reduction in new issue activity. Our quarterly and year-to-date financial highlights can be viewed in the context of our historical performance on page 9 of our investor presentation. Firm-wide revenue for the three-month period amounted to $551 million, our second highest quarterly production on record. This brings our total revenue for the first nine months of this fiscal year to $1.5 billion, an increase of 19% when compared to the first nine months of our last fiscal year, excluding significant items Firm-wide pre-tax net income amounted to $113 million for our third quarter, which translates to diluted earnings per share of 69 cents. This brings our fiscal year-to-date EPS to $2, an increase of 74% year-over-year. As highlighted on slide 10, we continue to generate meaningful margin improvement, a testament to our focus on operating our business more efficiently. without compromising the employee and client experience. Excluding significant items, our total expense ratio for the nine-month period was 5.3 percentage points lower year over year, while non-compensation expenses as a percentage of revenue were 2.8 percentage points lower. As expected, third quarter general and administrative expenses increased by $6 million, or 26% year over year. due to higher promotion and travel expense, reflecting increased activity levels following the easing of pandemic restrictions. Communication and technology expense also increased by $2 million, or 13%, to support increased headcount and business growth. Despite these modest increases, our agile platform continues to support higher activity levels over a relatively fixed cost base. Our third quarter was also a very productive period for strategic activities, including acquisitions to increase the long-term value and market position of our UK wealth business and our US capital markets business, and $100 million share buyback. Slide 11 summarizes our capital deployment initiatives to date. Reflecting the robust earnings from our capital markets businesses, we completed a substantial issuer bid for $100 million after the end of the quarter, further reducing our common share count outstanding by 6%, our lowest level in over 10 years. I'm also pleased to report that our board of directors has approved a quarterly common share dividend increase to 8.5 cents, reflecting the growing earnings of our wealth management business. Year-to-date, our total dividend payout is up 31% from this time last year. We are delivering on our commitment to provide enhanced returns to our shareholders while maintaining sufficient capital for investment in our strategic priorities. Moving to the performance of our capital markets business. Our combined global capital markets businesses earned third quarter revenue of $362 million, the second highest quarterly results on record for this segment. Excluding significant items, capital markets third quarter pre-tax net income was $94 million, bringing the fiscal year-to-date contribution to $251 million, a year-over-year increase of 48%. The pre-tax profit margin in this segment remains comfortably above historic levels at 25.3% for the fiscal year-to-date, an improvement of 4.8 percentage points compared to the same period last year. We continue to experience a constructive backdrop for capital raising activities in our core sectors and geographies, despite market-wide declines from the previous record levels. Third quarter investment banking revenue amounted to $127 million, a decrease of 26% year-over-year, but an increase of 42% sequentially. Technology, life science, and mining sectors were the most active globally. all geographies performed very strongly. The U.S. had its second highest revenue on record with significant breadth in the number of material transactions. Canada revenue grew by over 60% from last quarter, concluding a very active calendar year where our franchise was the top or second most active underwriter in the country, depending on how we measure it. Our Australian business delivered its strongest quarter in history, with revenue of $46 million, an increase of 59% sequentially. Finally, our UK capital markets team has experienced solid year-over-year growth in investment banking and advisory revenue, which were up 33% and 113% respectively. Also of note, this team ranked first for number and volume of transactions on AIM for calendar 2021. Revenue from trading activities were lower in all regions, reflecting reduced volatility during the three-month period. Across our regions, the most substantial contributions were from our advisory segment, which set a new quarterly record revenue of $152 million, representing 42% of our firm-wide capital markets revenue for the three-month period. This brings the fiscal year-to-date advisory contribution to $367 million, up 187% year-over-year and surpassing all prior full-year contributions by a wide margin. These results reflected strong completions in North America and UK and Europe, with an important contribution from our Paris team, which is operating at record levels. We continue to see a constructive pipeline of M&A opportunities into our fourth quarter. In December, we announced our acquisition of Sawaya Partners, a premier U.S.-based advisory firm focused in the consumer sector. This acquisition builds on our track record of increasing contributions from higher-margin advisory activity while materially enhancing our consumer and health and wellness vertical. Integration efforts have been positive and productive, and we're looking forward to expanding our client offering and reach with this team. Let's turn to the performance of our wealth management businesses. At the end of the third quarter, client assets surpassed $100 billion for the first time, reaching a new record of $102 billion and up 20% compared to a year ago. Our combined wealth management businesses earned revenue of $185 million for the third quarter and $546 million fiscal year-to-date, increases of 2% and 18% respectively. When measured on a fiscal year-to-date basis, this segment contributed adjusted pre-tax net income of $119 million, an increase of 32% year-over-year. Our UK and Crown Dependencies business delivered its strongest quarterly net income contribution on record of 22 million dollars, an increase of 39 percent year over year. This business also continues to achieve steady margin growth with its adjusted pre-tax profit margin improving 4.4 percentage points year over year to 27.1 percent. This was achieved on revenue of 82 million dollars. also a quarterly record, and an increase of 17% compared to the same period a year ago. Client assets in this business at the end of the quarter amounted to a record $59 billion. In December, we announced the acquisition of Punter Southall Wealth, a leading vertically integrated wealth manager. This further expands our footprint in the UK and increases the scale of our financial planning capabilities. Upon completion, this development will add another $8.5 billion in client assets. HBS has agreed to provide funding of £65 million upon closing through the purchase of convertible preferred shares to be issued by UK Wealth. The underlying value of our interest has been enhanced with the expansion of the business, its growth prospects, and the underlying value proposition associated with the investment. Looking ahead, we expect further enhancements to the results of this business as we integrate our acquisitions of Adam & Company and PSW while pursuing our organic growth initiatives. Our North American wealth business demonstrated resilience during the third fiscal quarter, with client assets hitting a new record of $37.5 billion. Total revenue amounted to $83 million for the third quarter, bringing its year-to-date contribution to $259 million, an increase of 19% year-over-year. While the anticipated reduction in new issue activity in this business led to an 11% year-over-year decrease in third quarter revenue, I will note that commission and fee revenue was the strongest on record for this business at $59 million. This 25% year-over-year increase reflects the growth in our client assets. Additionally, fee-related revenue accounted for 43% of third quarter revenue for this business. Our average book per advisor has grown to $257 million, representing a very impressive year-over-year growth of 26%. We continue to evaluate a range of options for profitable growth in this business, and our recruiting pipeline remains strong. Finally, third quarter revenue for our Australian business exceeded $20 million for the first time, an increase of 17% year over year. For context, when we expanded this business two years ago, the annual revenue of the acquired business was in the range of $50 million. Excluding significant items, this business contributed pre-tax net income of $7 million fiscal year to date, a year over year increase of 37%. Just like our Canadian wealth business, our Australian business is clearly benefiting from the synergies of its alignment with our leading capital markets business in the region. In all, the investments we've made to increase the scale of our wealth management businesses will continue to enhance our earnings foundation and long-term resilience as we navigate shifting market dynamics. Alongside our investments in talent and acquisitions, we are actively building our specialist network in technology, sustainability, and other growth areas to keep pace as investors continue to reshape their investment needs. And of course, underpinning all of this is our continued emphasis on cybersecurity to protect the firm and our clients. Obviously, we saw a broad market downturn and bouts of volatility in January. which have contributed to a challenging environment for new issue activities in all our geographies. We've intentionally invested in our wealth and advisory platforms over several years to protect our ability to produce reasonable results during uncertain times. While we expect increased headwinds, our franchise has never been stronger. Our future earnings will be fueled by the continued expansion of our wealth management businesses and the increased breadth and depth of capabilities across our integrated capital markets businesses as we continue to innovate and strengthen our franchise for the long term. With that, Dawn 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 the question and answer session. If you would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Jeff Fenwick with Cormac Securities. Please go ahead. Hi.