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 Fourth Quarter Results Conference Call. All 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 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 zero for operator assistance at any time. As a reminder, this conference call is being recorded, broadcast live on the internet. I would now like to turn the conference call over to Mr. Dan Dabio, President and CEO. Please go ahead, sir.

Thank you, Operator, and thanks to everyone joining us for today's call. As always, I'm joined by Don McFadden, our Chief Financial Officer. Following the overview of our fourth quarter and fiscal 2022 results, both Don and I will be pleased to answer questions from analysts and institutional investors. Today's remarks are complementary to our earnings release, MD&A, and supplemental financials. copies of which have been made available for download on CDAR and on the investor relations section of our website at cgf.com. 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 appears in our investor presentation and also in our MD&A. Despite the abrupt broad market turndown that began in January, we delivered a solid financial performance in both our fourth quarter and fiscal year, driven by continued growth from our wealth management divisions, very strong activity levels in our advisory segments, and a strong performance from our Australian business driven by mining sector financings. With the benefit of our clear strategy and targeted investments to strengthen reoccurring revenue streams while increasing contribution from higher margin activities, we achieved our sixth consecutive year of revenue and earnings per share growth. Revenue for the three-month period amounted to $500 million, bringing our full fiscal year revenue to a new record of $2 billion. a year-over-year increase of 2%. Excluding significant items, fourth quarter diluted earnings per share was 52 cents, which contributed to a new record for our full fiscal year diluted EPS of $2.51. Looking at expenses, we continue to benefit from enhanced cost savings driven by pandemic-related restrictions on travel and entertainment. And we are maintaining a strong focus on cost discipline measures as in-person meetings and client events resume. On an adjusted basis, fourth quarter non-compensation expenses as a percentage of revenue increased by four percentage points to 21%. Despite this modest increase, our full year ratio was lower on a year-over-year basis at 18%, which is relatively consistent. Adjusted compensation expenses as a percentage of revenue amounted to 61% for the fiscal year. Turning to capital allocation, our Board of Directors has approved a quarterly common share dividend of 8.5 cents for the fourth fiscal quarter, contributing to a full-year dividend payout increase of 28%. Through our capital deployment initiatives, which include common share dividends and share buybacks, we returned $176 million to our shareholders over the fiscal year, which represents an amount equal to over 57% of our adjusted net income for the 12-month period. With that, let's turn to the performance of our operating businesses. Our combined global capital markets business earned revenue of $312 million for the fourth quarter and $1.3 billion for the fiscal year. Fiscal 2022, we helped raise $61 billion for growth companies, our second highest performance on record. The broad market decline in eSIM activity that had been anticipated for some time began in our fourth quarter, and we expect it will persist for several more months. Investment banking revenue of $95 million for the three-month period represents a 64% decrease from the unprecedented record level in the same period a year ago, driven by contraction in M&A activity. I will note that this is still a strong result when compared to historical averages and reflects our enhanced market position in our chosen focus areas. Our Australian business was an outlier in this segment. with fourth quarter revenue increasing 29% year-over-year to $62 million, driven by a 25% increase in investment banking revenue. This was the strongest quarter on record for this business. Partially offsetting the decline in investment banking revenue that impacted all the other geographies, total advisory revenue for the three- and 12-month period increased by 86% and 153% year-over-year, to $122 million and $489 million, which is a full year record for this segment. This compares favorably to industry-wide global completed advisory fees, which over the three-month period increased by 8% versus the same period a year ago. The most substantial contribution came from our U.S. business, which increased advisory revenue by 195%, for the fourth quarter and 219% for the fiscal year to a record $317 million. I will note that the adjusted pre-tax net income contribution from our US business has grown substantially, amounting to a new record of $158 million for fiscal 2022. For context, prior to our initial investment to grow our advisory business in 2019, this business was operating near break even. Looking forward, we expect further enhanced contribution from our recent acquisition of Sawaya Partners, which has been performing in accordance with our expectations. Our Canadian and UK and Europe capital markets business also increased advisory revenues for the fiscal year by 66% and 118% respectively. Finally, fourth quarter revenue from our combined trading business was down 36% year over year, but increased 24% sequentially, reflecting increased volumes in the three-month period. While new market realities point to a difficult period ahead for our industry, we see no reason to retrench from our commitment to fully supporting growth companies and investors. Regardless of the market backdrop, we are driven to identify the clients who need us most and do everything to support them. Despite difficult market conditions, client engagement continues to be very strong by historical standards. Our investment banking pipelines are healthy across sectors and regions, but the conversion from pipeline to realized will be largely dependent on market conditions. Similarly, M&A activity remains strong, but advisory completions are likely to be extended as we navigate bouts of market volatility. And finally, our trading businesses are positioned for excellence in the face of any broad market volatility. We will execute for our clients just as we did through the unprecedented volatility at the onset of the COVID-19 pandemic. Our global wealth management businesses continue to deliver an impressive financial performance. Client assets at the end of the fiscal year amounted to $96.1 billion, a year-over-year increase of 8%, but a modest decrease from the high reached in our third fiscal quarter, reflecting lower market valuations at the end of the 12-month period. Our combined wealth management operations earned revenue of $174 million for the fourth fiscal quarter, a year-over-year decrease of 13%. This was primarily due to the anticipated reduction in new issue activity which flows through our North American wealth business. Revenue for the fiscal year amounted to $720 million, an increase of 9% compared to the prior year. Notably, commission and fees increased by 12% to a new record of $587 million for the fiscal year, reflecting record contributions from all geographies. Excluding significant items, our combined global wealth management business recorded pre-tax net income of $149 million, a year-over-year increase of 10%. In the UK, in Crown Dependencies, our integration of Adam & Company is progressing nicely, and we recently completed the acquisition of Punter Southall Wealth. This supports our priority of increasing the scale of both our financial planning and investment management businesses. Revenue for this business amounted to $80 million for the fourth quarter and $310 million for the fiscal year, increases of 7% and 12% respectively, primarily due to higher commissions and fee revenue and interest income attributable to the higher interest rate environment. Following the completion of the PSW acquisition, HPS increased their investment through the purchase of a new series of convertible preferred shares of this business in the amount of $110.5 million. With this investment and with the small equity component to be issued in connection with the acquisition, the company will hold an approximate 67% equity equivalent interest in CGWM UK. Despite this modestly lower interest, we expect the benefits of increased scale in combination with organic growth initiatives will drive continued growth of the financial contributions from this business. While lower new issue activity led to softer revenue and net income contributions from our Canadian businesses, client assets have continued to strengthen, amounting to $38 billion for the end of the fiscal year, an increase of 18% from the same period last year. Over fiscal 2022, the average book per advisory team grew 17% year over year to $260 million. And this team also continued to grow discretionary assets under management by 35% compared to last year. The recruiting environment in Canada has become increasingly competitive, but we've continued to attract talented teams who see differentiated opportunities to grow their business with CG. This business was also recently recognized as a top-ranked Canadian wealth management firm in a national survey of investment advisors. And finally, our Australian wealth business continues to grow client assets and related revenues. benefiting from its alignment with a leading capital markets business in the region. This business earned revenue of $18 million in the fourth quarter and $75 million for the fiscal year. Year-over-year increases of 3% and 20% respectively. Commission and fee revenue for the fiscal year reached a new record of $58 million, an increase of 12% compared to the prior year. The number of investment advisors in this business increased by 5% year over year, reflecting strong recruiting momentum. Whether through acquisitions or recruiting, the businesses and professionals that join CG Wealth Management have been able to unlock greater value on our platform, which is driving organic growth opportunities in all our regions. Looking ahead, we will continue to explore a range of opportunities for profitable growth in this important segment. In closing, while M&A pipelines have continued to deliver and our wealth businesses continue to provide a source of stable reoccurring revenue, we do not expect fiscal 2023 to resemble 2022 or 2021. Alongside our clients, we are navigating a challenging and uncertain backdrop, which includes rising interest rates, inflation, a continuing tightening of monetary policy, and ongoing market and trade disruptions driven by the devastating war in Ukraine. Having said that, we begin fiscal 2023 with the confidence that our business has stronger downside protection than at any time in our history. Just as our recent successes were many years in the making, we've spent years shaping our business to deliver predictable performance for our shareholders in uncertain times. Our strong and properly managed balance sheet supports our ability to deliver market-leading services for our clients while maintaining ample liquidity and flexibility. Consistent with what we've done in the past, we're using this challenging period productively to further entrench our position as the leading independent wealth management and capital markets business dedicated to the needs of growth companies and investors. We see several opportunities to increase our relevance in our core focused areas and we are seizing opportunities for targeted and disciplined growth. With that, Don and I would be pleased to take your questions. Operator, could you please open the lines?

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. One moment while we compile the Q&A roster. Your first question comes from Jeff Fenwick of Cormark. Please go ahead.