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spk00: 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.
spk05: 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?
spk00: 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.
spk02: Good morning, everyone. Good morning, Jeff. So good to see continued strong progress in the UK wealth management business and your latest acquisition there. So what's your feeling in terms of your market position? Are there more deals like this to be done? This included selling a little incrementally more of the interest to HPS. Maybe just a comment there around your target ownership level for the UK business.
spk05: Yeah, I don't think there's a formal target ownership level, Jeff. You'll note when you do the math Um, the incremental ownership interest that HPS picked up would be reflective of the fact that the value was higher as well. Um, you know, the, the value, the convertible value effectively that convertible craft. So, you know, the premise of creating value through doing incremental deals with HPS is capital makes sense, continues to make sense. So our interest is probably, you know, from a value perspective, 20% from where it was before. when we first did our first deal with them. So we continue to look at incremental transactions. And that being said, this was a big deal. It's going to take time to integrate. We don't close it until April 30th, probably. That's kind of when we're targeting towards that. So, you know, one thing at a time. But, you know, scale continues to make sense in that business. And you can see it from the record profitability numbers and, you know, the record margin numbers. So, you know, the premise of growing the business through acquisitions is good. I'd also add that it was a really good quarter organically. We put organic growth initiatives in place in that business that seemed to be working. You know, it's early stage. We've only been at it for probably, you know, a couple of quarters now, but we've had good organic growth in that business as well.
spk02: Okay, thanks for that. And I wanted to touch on advisory and the acquisitions you've been doing at these boutiques that you're rolling in and I look back over the last decade, the story has been mostly about these professionals starting up their own shops and leaving larger ones, and now we're seeing a bit of a reversal here. So maybe just comment, why come and work with you? Why are they looking to sell? Is it just that there's obviously great economics behind these businesses, standalone, and what are they getting when they come to Canaccord?
spk05: Yeah, good questions, and I've started the business myself over time. You know, let me take a step back, and then I will answer your question. I guess the first, from our perspective, it was very important to transition our business, as you know. We are material shareholders. We want our long-term value, long-term stability. That involved investing in our wealth businesses because we saw a great opportunity. And also increasing our M&A presence. That's, you know, okay, M&A is busy right now. You know, we've been growing our M&A business for years. So, and obviously see that playing out in the numbers right now. So this was our strategy and is our strategy. I think we've been pretty public saying we will grow in our core sectors of expertise, you know, going deeper in existing sectors. So that's kind of what we've been doing. So why would somebody transact? And again, I know this from my days at Genuity, you know, why would you transact with a bigger firm? Because you think you'll make more revenue per person. In other words, you think you'll get paid more. That's generally why you would transact on a transaction. And what's happened is we've built such, you know, when you're talking about in our core expertise and our core verticals. So if you were, you know, in digital advertising, as the folks at Pepsi were, and felt that we could add international revenue to their relatively domestic pipeline, that's a big increase. Then add on the fact that you think we can do equity for their, you know, basically their advisory pipeline. That's another huge increase. And, you know, you've got and you can afford to grow the firm and expand them even domestically. So you add all that up. And all of a sudden, if you're sitting there and you're making $1 and you think if you can join us that you can produce $3 of revenue, you end up making a lot more money and you see the benefits of that. We've got a very entrepreneurial franchise, as you know, a very collegial environment. I'm sure a lot of people say that. But I'm telling you, if you talk to the people who joined our franchise, they would attest to that. They're delighted to be here, and the premise is working out well for them personally, as well as obviously for us corporately. Hopefully that answers your question.
spk02: Sure, and I guess in terms of the way you're structuring these agreements, you're giving them some upfront dollars, obviously, but it looks like this one has quite a substantial earn out over time as well. So you're making sure the economics are working for everybody.
spk05: Yeah, I'm overgeneralizing intentionally, Jeff, and it's a good question, but it's basically a dollar up front and then a dollar over a long period of time, you know, if you hit your targets. And, you know, we're delighted to pay that second dollar because it's a good new scenario for us. And, in fact, in Petski, they've earned their other dollar. That's been earned. It hasn't been paid yet, but it's certainly been earned. You know, four years of targets realized, you know, early. And quite frankly, with Sawaya, we hope that that'll pan out the same way.
spk02: And maybe on a somewhat related topic then, I would like to talk about your Australian capital markets business. It's obviously booming down there. And I guess it's a bit of a question around talent retention, maybe a little more broadly speaking, but noted that you effectively sold back part of that equity interest in that local business to the team there. So let me just discuss a little bit around why do that, how that works. I mean, they're just anxious to get more of the equity in a business that's booming, obviously. Maybe any color you could offer there. Yeah.
spk05: No, no. I could see how you could think that on the face of what we've announced, but the practical reality is we've taken that business between the wealth and the capital markets business, or just the capital markets business, from a $30, $40 million a year business to last quarter, $50 million. It's a much, much, much bigger business than it was two years ago. Yeah. As a result, that business requires additional capital. It requires underwriting margin. It requires the things that you'd expect, Jeff, in a business that's over quadrupled in size, let alone the growth of the wealth platform over there. I'm just talking about the capital markets business, the wealth business. When we did our acquisition over there, I mean, it was doing, I don't know, 50-ish million in revenue. We did 20 million in revenue last quarter in that business. So our wealth business has grown a lot. The net of it is it requires a lot more capital. So, you know, you had a choice to make. Either we wrote the capital check, which we were obviously prepared to do, but the employees had a preference to write the check as well. And, again, that supports alignment from our perspective. So, you know, our interest kind of went down a little because they wrote a check for some of the additional capital required in the business. But, Don, please jump in if you – I have a different answer on that.
spk03: No, I think that sums it up. I mean, and as we've talked about before, you know, Australia being, it is a fair distance away, so having the employees with a key ownership stake in the business is just a prudent way to manage and run that business by having significant or meaningful local ownership and a stake in the game, so to speak.
spk05: And, Jeff, I'd just add one last thing. Unlike our U.K. wealth business where our shareholdings have been coming down, our relative ownership has been coming down, we don't see this as a long-term trend for our Australia business. In other words, it will get increasingly diluted over time. I think this is just kind of a one-time-ish event.
spk02: Okay, great. That's helpful, Culler. That's all I had. Thank you.
spk05: Great questions. Thanks very much.
spk00: Thank you. Your next question comes from Graham Riding with TD Securities. Please go ahead.
spk04: Hi, good morning. Morning, Graham. Maybe I could stick with the Salad Partners acquisition. Can you give us any color on what sort of revenue this company has delivered over the recent years and what sort of contribution you're expecting here?
spk03: Well, we don't disclose those numbers publicly, but I think... A good proxy for it is obviously the addition of Petsky Prunier three years ago had a meaningful impact on our advisory revenue and our run rate in the U.S. And I think Soi is a similar kind of a transaction. You can kind of draw some parallels there if you look at it that way.
spk04: Okay. You know, I appreciate the recent acquisition in the U.K. You know, I guess larger than some of your other ones so there's going to be a bit of time to focus on integration here but looking further out what is the sort of longer term plan in terms of your ownership stake in the UK wealth business and partnering with HBS should we expect that ownership your ownership position in that platform to continue to trend down over time or do you have any, do you have any targets for that? Yeah.
spk05: I think as long as acquisitions over there, um, you know, cost 10 times EBITDA or nine times EBITDA adjusted EBITDA and we trade at, you know, seven times earnings. You can imagine how we think about funding acquisitions in that business. Um, we'll use the higher value currency as opposed to the lower value currency, which means a reduction in our ownership as we do additional acquisitions. Um, That being said, if we pull this off the way we seem to be doing it today, every deal has to be negotiated, but I'd like to think that our share of the enhanced net income from acquisitive growth will result in bigger net income to our shareholders, so to speak, without the commitment of capital. On the last transaction, as you're more than aware, we didn't write a check. We funded it with incremental debt and with an incremental significant investment from HBS. So it's working out perfectly the way we'd expect it to.
spk04: Okay, understood. Can you talk about just the organic growth in the UK wealth platform? I think if I sort of adjust for the Adam and Co. acquisition, it looks like UK assets under admin actually contracted slightly quarter over quarter. Am I looking at that properly? And then is there any color behind that?
spk05: Yeah, I mean, it's, you know, you're looking at it perfectly correctly. The assets did slightly contract, believe it or not, but it was a very large, very low margin execution only type client in that business. And the problem with some of these clients is when they get big enough, they do it themselves. And that's, we knew that this was going to happen. We weren't exactly sure when it was going to happen, but it offset what otherwise would have been pretty impressive organic growth. You'll notice that our profitability went up in the business, so it wasn't a very profitable customer, but notwithstanding that, it did result in assets, incremental assets on the balance sheet, so you were dead on there.
spk04: Okay. My last question, if I could, just – thinking of the balance sheet and capital, it still looks like post the substantial issue bid that you're probably sitting on a decent amount of working capital. You know, are you, should we expect going forward, you know, a combination of you're going to fund some organic growth yourself, but you're also going to look to return capital through share buybacks, assuming decent profitability over the, over the medium term.
spk05: Yeah, I mean, our balance sheet continues to be robust, notwithstanding the $100 million we just spent. The dividend increases twice this year. Our dividend is 30% higher than where it was last year. So, you know, we just increased our dividend again. That's a pretty good reflection of our view on our cash generative capabilities. And... Yeah, I mean, we did what we thought was prudent. Remember, we only had 13 million shares tendered to our substantial issuer bid. It's going to be hard to keep on doing substantial issuer bids. Our shareholders are pretty supportive of their positions. That being said, there'll be no change to our progress that we're making on our normal course issuer bid. We'll continue to do what we've been doing there and returning capital in that way. So, The premise has always been we will grow our dividend as our wealth earnings grow because it's relatively predictable. And if we make excess cash in our capital markets business, which we've been doing, we'll figure out a way to get that back to shareholders too through stock repurchases. So nothing's really changed, Jeff, there.
spk04: Okay, that's it for me. Thanks.
spk05: Sorry, Graham, not Jeff. I forgot to ask him a question. My apologies. Christine is giving me a dirty look right now. Sorry about that, guys.
spk00: Thank you. Your next question comes from Rob Gough with Echelon. Please go ahead.
spk05: Okay, Rob, I'm not going to get this wrong. I promise.
spk01: Well done. Thanks, Dan. You were talking about if you were to do further acquisitions in the UK, you are sensitive to the valuations over there, and you said you may look or may allow your shareholding to be reduced. Do you then look to this prospective substantial issuer bid as a way of maintaining your de facto leverage to that asset?
spk05: I never thought of it that way. I don't, I mean, that's, I guess, yeah, I guess it could work that way. I'm not quite, and I don't really look at it that way, Rob. What we're, you know, again, it's just a matter of how do we create incremental earnings And the best way to do that is to fund acquisitions at 15, 16, 17 times earnings, which is, you know, where we sell equity to HPS at and, you know, use that, you know, save that money effectively that we would have spent doing UK acquisitions and buy back our stock at seven times earnings or eight times earnings or wherever we happen to be trading. So, It's just a way better way to use capital. I'd rather use the capital to buy back the stock than do incremental acquisitions in the UK if I'm able to. I don't think I answered your question, but that's the way we look at it.
spk01: You addressed it. Can I ask, in terms of acquisitions, your thoughts with respect to Australia and perhaps on further bulking up on the advisory side?
spk05: As you can see in our financials, we don't do a lot of advisory activity in Australia, if that's your question. It tends to be an equity-centric market. We tend to start in equity and grow it into other services, create moats around our business, Canada being the most prolific where we do a lot of other things other than equity. us where we've grown from our equity practice into an m a practice so i would think over time australia would probably directionally go the same way um you know there's no there's nothing immediate to announce there's nothing you know imminent to announce on that side but our business in australia is a much bigger business than it used to be um as i kind of alluded to before you know when we used to do 40 million in revenue we're now doing you know 300. It's a much, much bigger business overall. We're going to continue to think about how we expand that profitably. So far, it's working, but I think we take our time with it and be pretty prudent on how we elect to grow it.
spk01: With respect to the transactional accounts in Australia, any update with respect to the migration there?
spk05: Again, we've got We report $5 billion in assets in Australia. The number is substantially higher than that, as you're aware, on assets that don't pay significant fees is probably the best way to define that. We continue to try and migrate those assets over. That is a long process. We also continue to recruit advisors in that business. That's going very successfully. The probably only thing that doesn't, when you look at a graph or when you look at numbers, that kind of looks a little off is notwithstanding our revenue has materially increased in our Australia wealth business. We've got a very profitable business there, but you don't see the profit kind of going up on the same line. And that's simply the investments we're making to hire people. So whether it's recruiting expenses or other associated hiring expenses, So we would expect the profitability in our Australia wealth business to increase along the lines of revenues increasing, albeit slightly delayed. So the business is, again, performing according to plan, or better than plan, I guess.
spk01: So exclusive of growth investments in Australia, would the Australian wealth management economics be similar to the Canadian economics? Yes.
spk05: Yeah, I think arguably a little better, just because recruiting is cheaper in Australia than it is in Canada. You know, I'd say arguably better over time. From a long-term perspective, it certainly wouldn't be worse.
spk01: Okay. Thank you very much.
spk05: Thank you. Good questions.
spk00: Thank you. There are no further questions at this time. Mr. Davio, you may proceed.
spk05: Okay, well, thanks everyone again for getting on. We really appreciate it. And that concludes our third quarter conference call. Our next update is June. That's our year-end results. And as always, Don and I are both available to take questions. So thanks very much, operator, and you can close the lines.
spk00: Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
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