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 2023 second 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 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 Daviau, President and CEO. Please go ahead, Mr. Daviau.

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 second 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 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 appear in our investor presentation and also in our MD&A. And with that, let's discuss our second fiscal quarter. For several months, markets have been worried about economic growth, aggressive central bank policy actions, soaring inflation, political instabilities, and the war in Ukraine. both public and private markets have suffered a significant reduction in deal volumes, particularly in our core sectors in our capital markets businesses. With fewer investors in the market, asset valuations and wealth management have also come under pressure. Markets showed signs of stabilizing in late summer, but uncertainty and volatility returned in September, and equity markets in all of our core geographies posted negative returns. While this cycle has been markedly more difficult for almost all market participants, and we expect continued uncertainty for several more quarters, our business has performed well. Steps we've taken to reduce our reliance on underwriting activities and increase contributions from our wealth management and M&A advisory businesses have contributed to our resilience during the worst new issue environment that I can recall. Adjusted firm-wide revenue for the three-month period was $382 million, a decrease of 20% from the second quarter of last year. When measured on a year-to-date basis, revenue for the first six months of this fiscal year amounted to $711 million, down 29% from the same period a year ago. Expectedly, the declines in revenue can primarily be attributed to the significant market-wide reduction in new issue activity. I will also note the fluctuations in foreign exchange contributed to certain changes in our second quarter revenue and expense items from our international operations, as reported in Canadian dollars, as well as the value of client assets in our UK and Australian wealth businesses. Excluding significant items, we earned pre-tax net income of $51 million, up 84% sequentially, but down 47% when compared to the same period last year. This translated to diluted earnings per share of 25 cents for the three-month period, bringing our fiscal year-to-date adjusted EPS to 36 cents. Turning to expenses, adjusted non-compensation expenses as a percentage of revenue declined 2.7 percentage points compared to the most recent fiscal quarter to 28.6% as we continue to carefully manage expenses in a difficult market environment. This percentage is obviously up from a year ago, primarily reflective of a concentration of higher promotion and travel expenses following the easing of pandemic restrictions, in addition to development costs to support the growth of the company. Interest expense also increased in connection with bank loans obtained for our wealth management acquisitions in the UK and Crown dependencies. In difficult markets like this, we are carefully monitoring our costs, but importantly, not at the expense of harming our culture or compromising the client experience. including significant items, our compensation ratio for the three-month period was lower than our target range at 58.2%, due in part to the reduction in the fair value of stock-based compensation granted in previous periods. With the exception of our wealth businesses and new partners in some of the M&A boutiques we have acquired, we have not materially increased our headcount. and we expect to be able to manage within our historical comp ratios. Our business continues to be well capitalized, giving us the financial flexibility to be opportunistic in this period of dislocation while upholding our commitment to shareholder returns. While we returned less capital in this quarter, our board of directors has approved a quarterly common share dividend of eight and a half cents. putting us on track for our third consecutive year of dividend growth. Looking forward, we expect to continue to be opportunistic with our balance sheet on strategic growth initiatives or share buybacks, while maintaining a strong balance sheet. Turning to the performance of our operating businesses, I will start with capital markets. Our combined global capital markets business earned revenue of $206 million for the three-month period, a decrease of 32.5% when compared to the same period a year ago. Obviously, our total revenues continue to be impacted by the lack of new issue activity in our core markets. Historically, investment banking revenue has represented one-third or more of our total capital markets revenue. whereas this quarter it dropped to 17%. The U.S. was our largest contributor of revenue in this division at $129 million for the three-month period. Of this amount, 58%, or $75 million, was attributed to advisory activities, which remained robust through the three-month period. On a consolidated basis, capital markets advisory revenue was down 27% year over year, but increased 22% sequentially, which reflects quarter-over-quarter increases from our Canadian and US businesses. Principal trading and commission and fee revenue decreased by 12% respectively compared to the second quarter of last fiscal year, reflecting softer client activity levels across markets. Investment banking revenue for our combined global capital markets business was down 60% year-over-year, slightly above the 55% global decline in ECM volumes and to be expected given our core mid-market growth sectors. The 184% increase when compared to the most recent financial quarter is largely due to the write downs on inventory and warrant positions that impacted our first quarter results. Inventory P&L in respect of warrant, fee shares and facilitation activity returned to levels more consistent with the period before Q1 of this year, reflecting the absence of the larger market movements we saw in Q1. Unsurprisingly, the metal and mining sector has been the strongest for our underwriting activities, accounting for 49% of fiscal year-to-date investment banking revenues, primarily within our Australian, Canadian, and UK businesses. The healthcare sector contributed 23% of revenue in this segment, primarily from our U.S. business. Notwithstanding the dramatic reduction in ECM activity that has been persistent through the first half of this fiscal year, we continue to defend and build upon our excellent market position in all CGD regions and verticals. While several deals continue to be pushed as companies await a more stable environment, our clients remain highly engaged. In this environment of rising interest rates, supply chain pressures, and inflation, the demand for capital among small and growth-oriented companies will remain high. We expect that our investing clients will inevitably become more active in supporting high-quality new issues in time. Additionally, we're not expecting the IPO market to reopen quickly, but history tells us there can be a strong bounce back when it does, and we are very well positioned to recapture our historic leadership in this segment. We appreciate this is a difficult environment with arguably the worst new issue market in decades. That said, we are reassured and encouraged by the fact that our capital markets business produced adjusted pre-tax net income of $26 million in EPS of 10 cents per share. Our wealth management division remains resilient throughout the three-month period, despite the reduced new issue activity in our Canadian and Australian businesses. Firm-wide client assets amounted to $88.6 billion as of September 30th, a decrease of 10% compared to the same period last year. The decline was primarily attributed to lower market values and the impact of foreign exchange, partially offset by new assets and positive inflows. Our combined global wealth management businesses earn revenue of $170 million for the three-month period, an increase of 2% year over year, bringing fiscal year-to-date revenue to $332 million. The adjusted pre-tax net income contribution was $28 million, which represents 54% of our firm-wide pre-tax net income for the quarter and 60% of our EPS. Our UK business was the largest contributor during the three-month period with revenue of $81 million, of which 79% was from fee-based accounts. Record quarterly interest income of $3.7 million partially offset the higher variable interest rate expense associated with the previously mentioned bank loans to support growth in this business. Looking ahead, we expect continued contributions from our recent acquisition of PSW in addition to greater benefits from the synergies we are unlocking as we progress with the integration of the businesses that we have acquired in the past 12 months. Despite the dramatic decline in new issue activity, second quarter revenue from our North American wealth management business was relatively flat year over year at $73 million. The decline in new issue activity in this business was offset with record interest revenue of $11 million for the three-month period. And finally, second quarter revenue in our Australia business declined 21% year over year to $15 million. bringing the fiscal year to date revenue to $31 million. And finally, second quarter revenue in Australia business declined 21% year over year to $15 million, bringing the fiscal year to date revenue to $31 million. While this total is below last year's record levels, I will note that it is comfortably above the full year revenue that this business generated in fiscal 2020. We're continuing to invest in the growth of our wealth management businesses, which also supports our earnings stability through market cycles. In Canada and Australia, we are having productive engagements in support of our recruiting initiatives. And with our enhanced scale, we are also turning our attention to developments that will support new asset inflows globally. You've heard me say before that we remain committed to our long-term strategy despite the near-term global economic challenges. Like all industry participants, we remain cautious in our near-term outlook, but I continue to have incredible confidence in our future. We have proven we can be incredibly agile and productive in a broad range of challenging environments, and this one is no exception. Our independence allows us to support our clients in creative and innovative ways during difficult times, and this gives us a strong competitive advantage when conditions improve. Our trading businesses continue to provide excellent support for our clients in wealth management and capital markets, and our technology teams remain focused on enhancing our firm-wide capabilities to ensure we are well positioned to scale when volumes return. We are also steadily adding to our product capabilities to increase opportunities for our business and our clients throughout the cycle. While prolonged market downturns are always uncomfortable, we are fortunate to have an outstanding mix of capable and talented professionals who share our commitment to supporting our clients throughout the downturn and emerging in a position of greater strength. With that, we will now open the line for questions.

Operator?