Canaccord Genuity Group Inc.

Ladies and gentlemen, thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group Inc. fiscal 2023 first 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 star, then 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 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 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 first quarter fiscal 2023 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 supplementary financials, copies of which have been made available for download on CDAR, or on the investor relations section of our website at cgf.com. Within our updates, 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 in our investor presentation and also in our MD&A. As widely reported and known to anyone following our industry, financial conditions in our first fiscal quarter have been challenging, driven by geopolitical and macroeconomic factors that have impacted asset prices, market activity, and confidence amongst investors and corporates. Despite this, we continue to help our clients achieve their business and financial goals and manage risk. In addition to the more challenging backdrop, another headwind for this quarter's results was the impact of sharp declines in the market value of certain inventory and warrant positions earned in respect of our investment banking activities, which primarily impacted our Australian capital markets business and, to a lesser degree, our Canadian business. In our Australian business, the rapid deterioration in market values during the quarter translated into a significant decline in our fee-based share and warrant inventory values. On a net basis, this market downturn had a negative impact on revenue of about $20 million in our Australian capital markets business. The impact of market declines also had a negative impact on revenue in Canada as we recorded facilitation losses of about $11 million, offsetting our commission revenue and fee share inventory adjustments of about $7 million. All our inventories are actively managed and, as such, many positions were monetized during the quarter. So we believe that any downside risk associated with these types of holdings in future reporting periods has been reduced. While the market value of these positions moves on a quarter-to-quarter basis, I will note that the quarterly net P&L impact of these positions has historically been positive on average over our holding period. and the impact of these holdings on our overall revenue has not previously been material. Despite this, our platform performed well over the three-month period, giving us confidence in our ability to deliver solid financial results while exceeding our clients' expectations through the remainder of this downturn. Our ongoing efforts to increase reoccurring revenue contributions from our expanded wealth management business and growth contributions from capital markets advisory activities are helping to offset the impact of the abrupt decline in new issue activity. With that, I will turn to the financial highlights of our first fiscal quarter. Firmwind revenue for the three-month period was $328 million on an adjusted basis, down 37% when compared to the same period a year ago. Excluding significant items, pre-tax net income was $27.5 million, which translated to diluting earnings per share of 11 cents. Turning to expenses, firm-wide non-compensation expenses as a percentage of revenue were elevated at 31% for the fiscal quarter on an adjusted basis, primarily reflecting higher general and administrative expenses in connection with increased travel and promotional activities. These activities were targeted investments in our business development and talent retention efforts, which were concentrated in a short period of time following two years of COVID restrictions. We anticipate more normalized levels going forward. Adjusted compensation ratio for the quarter was slightly elevated at 60.4%, generally in line with historical rate. As we've said before, although our compensation ratio is prone to quarterly fluctuations, we expect it to remain within our targeted range for the full fiscal year, noting that compensation expense will align with revenue levels. Our business continues to be well capitalized, giving us financial flexibility to be opportunistic in this period of dislocation, while upholding our commitment to shareholder returns. Reflecting this confidence, our board of directors has approved a quarterly common share dividend of 8.5 cents. Turning to the performance of our operating businesses, I'll start with wealth management. Although below recent all-time highs, assets in our global wealth management business have remained resilient in light of this significant reversal in global markets. Our investment professionals in all geographies have maintained an unwavering focus on helping our clients navigate uncertainty and achieve their long-term goals. During the quarter, we experienced net inflows in all our business, bolstered by our acquisition of Hunter Southall Wealth, which closed at the end of May. At the end of the fiscal quarter, firm-wide client assets were $91 billion, down 4% year over year and 6% sequentially. primarily reflecting broad market declines in both equities and fixed income, which offset these net inflows. On a consolidated basis, this division earned revenue of $162 million and contributed adjusted pre-tax net income of $25 million for the three-month period. Revenue from our UK and Crown Dependencies business was flat year over year at $73 million, but increased by 7% when measured in local currency. We're having a great experience integrating our recent acquisition of Adam & Co. and PSW, and we are focused on creating additional value through synergies and our organic growth initiatives, which should contribute to margin strength. With the PSW closing midway through the quarter, revenue and net income associated with PSW also will be more wholly reflected in our next fiscal quarter. Revenue in our Canadian and Australian wealth businesses decreased by 30% and 8% respectively, largely due to the abrupt decline in new issue activity. Increase in interest rates in both Canada and the UK have positively impacted interest revenue. which increased by 140% year over year and will continue to contribute to margin strength going forward. Our focus on supporting investment advisors and their clients, especially through volatile markets, has supported our recruiting and retention efforts. In the last 18 months, we've added over $1.6 billion in recruited assets to our Canadian franchise. The number of advisors in our Australian business has also increased by 5% year over year. We are actively considering a range of opportunities to support long-term profitable growth in our wealth management businesses globally through new products and capabilities, as well as continued support for technology enhancements to keep up with the increasingly complex needs of our valued clients. Turn it to the performance of our capital markets business. Revenue in our global capital markets division was $164 million for the three-month period. down 49% year over year, largely due to the abrupt decline in new issue activity and losses in our inventory positions, which offset this revenue. Given the industry slowdown and the diversification away from higher risk growth assets, I am pleased with the performance of our teams who delivered for our clients and protected our strong market position amongst the league table leaders in each of our geographies. During the three-month period, we participated in 80 transactions to raise over $6 billion for corporate issuers. Investment banking revenue for our combined global capital markets business was down 91% year over year and 87% sequentially to $12 million. While we earned more in cash fees for our underwriting activities, These amounts reflect a markdown in connection with the impact of previously mentioned inventory positions. I will note that our Australian capital markets business had an active quarter, completing 29 deals to raise over a billion dollars for issuers. While we are disappointed that gains were offset by inventory markdowns, Supporting our clients through equity investment is an important part of doing business in this region. I'm very pleased to report that advisory revenue increased 9% year-over-year to $83 million. Our U.S. and U.K. businesses recorded year-over-year increases of 36% and 59% respectively. In the U.S., our mid-market TMT advisory team has ranked first for deal volume in both the fiscal quarter and calendar year to date. Earlier this week, we announced our acquisition of UK advisory firm Results International, which complements our previous investments to expand our advisory segment and will add domain expertise in the European healthcare and technology sectors, where we already have strong global capability in both advisory and ECM. We continue to be active globally and we feel good about the size and quality of our pipeline relative to the market. In advisory, although market-wide announcements and completions have slowed, we have good visibility into the next six months and we expect this segment to perform well throughout the fiscal year. Recently, we have seen some green shoots in ECM activity. but our expectation is that we will not see a meaningful recovery in new issue volumes until at least the third quarter of this fiscal year. Our trading businesses remain well positioned to respond to changes in the market backdrop, and we will continue to provide market-leading execution capabilities for our clients in all businesses and geographies. We expect that economic conditions will continue to tighten before they improve. and we will navigate more volatility and uncertainty alongside our clients. Historically, periods of market dislocation have created opportunities for us to differentiate ourselves and capture new market share. Heading into our second quarter, activity levels have been similar to Q1, although we will end this quarter with lower expenses and less exposure to market-driven declines in our inventories. In light of the current environment, we are managing our capital and expenses prudently to ensure the best use of our resources for continued balance sheet strength. Having said that, our long-term strategy does not change. We're committed to investing in our core capabilities, which have been proven to provide differentiated value for our clients through economic cycles. We will be opportunistic yet thoughtful in our deployment of capital as we position our business to emerge from this downturn in a stronger competitive position and accelerate long-term value creation for our shareholders. With that, Don and I will be pleased to take questions. Operator, can you please open the lines?

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session.