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 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 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 over to Mr. Dan Davio. President and CEO. Please go ahead, Mr. Davio.

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. 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 or on the Investor Relations section of our website at cgf.com. Within our update, certain reported information has been adjusted to exclude significant items to provide a transparent and comparative view of our operating performance. These adjusted items are non-IFRS financial measures. Please refer to the notice regarding forward-looking statements and the description of non-IFRS financial measures that appear on the investor presentation and our MD&A. Consistent with prior quarterly conference calls, today I will be discussing our quarterly and annual financial results in detail. After the prepared remarks, Don and I will have a limited amount of time to take related questions. And with that, let's discuss our fourth quarter and fiscal 2023 results. Without question, this has been an incredibly challenging year with persistent headwinds impacting investor confidence and activity levels across our industry. The small and mid-cap sectors and investors that we serve were particularly impacted by this downturn. While we did not meet our financial targets for the year, we've continued to defend and build upon our excellent market position in all CG regions and verticals. Firm-wide revenue for our fourth fiscal quarter amounted to $430 million, a year-over-year decrease of 14%. This was our strongest revenue quarter of the year and reflects an increase of 20% from the average of the prior three quarters. For the full fiscal year, we are in revenue of $1.5 billion, a decrease of 26% compared to the record set in fiscal 2022. Excluding significant items, adjusted earnings per share of 7 cents was the lowest quarterly result of the year and reflects the impact of a large regulatory provision and elevated compensation expenses, partly due to year-end adjustments and the impact of an elevated common share price on share-based compensation programs. Absent those headwinds, this would have been our strongest of the year. Adjusted earnings per share for the fiscal year amounted to 59 cents. Our full-year profitability was impacted by several factors, which included a material reduction in new issue revenue, the mark-to-market impact of a sharp decline in the market value of several inventory positions incurred earlier in the fiscal year, and the occurrence of several large isolated charges. Turning to expenses, on an adjusted basis, non-compensation expense as a percentage of revenue were 30% for the fiscal year, which is in line with pre-pandemic levels. Communication and technology costs increased by 14% in the fourth quarter and 16% for the fiscal year, primarily to support increased headcount in connection with our acquisition and recruiting efforts. Heading into fiscal 2024, we're planning for continued upward pressure on information technology and compliance expenses, which are expected to increase in all geographies. I will also note that beginning in Q3, our quarterly interest expense increased in connection with bank loans obtained for our wealth management acquisitions in the UK and Crown dependencies. Notwithstanding our intense focus on cost discipline measures across the organization, we continue to invest in conferences and other business development efforts throughout this difficult year to protect our market leadership in our core segments and verticals. Firm-wide compensation ratio for the fourth fiscal quarter was elevated at 64%, which reflects the aforementioned impact of a higher share price on stock-based compensation and partially offset by lower levels of incentive-based compensation. For the fiscal year, our compensation ratio was less elevated at 62%. We continue to manage our compensation expenses very carefully in the context of a continued difficult market. Our business continues to be well capitalized, and the Board has approved a common share dividend of $0.085, bringing our full-year dividend to $0.34, which is 6% higher than last year. Given the strategic activities that occurred during the quarter, we did not repurchase any shares. Turning to the performance of our operating businesses. In prolonged difficult markets, our wealth management division is an important source of earnings power and stability for our business. This division contributed 47% of firm-wide revenue and 100% of our earnings per share for the fiscal year. On a consolidated basis, fourth quarter revenue amounted to $197 million, bringing full year revenue to $708 million, a modest decline of 2% compared to the record set in the prior fiscal year. Adjusted pre-tax income for the fourth quarter increased by 26% year-over-year to $37 million, bringing the full-year amount to $126 million. Client assets at the end of the fiscal year amounted to $96 billion, below the peak of $102 billion just over a year ago. The decline primarily reflected the impact of lower market valuations partially offset by new assets from our acquisition of PSW in the UK and our recruiting efforts in Canada and Australia. Our UK wealth business delivered its highest quarterly revenue on record at $104 million, bringing the full year revenue contribution to $344 million, an increase of 11% over the last fiscal year. The adjusted pre-tax net income contribution from this business amounted to $26 million for the fourth quarter and $86 million for the fiscal year, increases of 12% and 2% respectively. Following the completion of recent acquisitions, we've been focused on integrating and organic growth efforts across the UK and Crown dependencies. While we still have plenty more to do, we are beginning to see the impact of certain synergies and our expanded financial planning capability. Notably, fourth quarter commission and fee revenue in this business increased by $11 million or 14% year over year, to $86 million bringing the full year contribution from the segment to a record of $311 million. Additionally, fourth quarter interest revenue increased substantially to $18 million bringing full year interest revenue to $30 million up from just $3 million in fiscal 2022. Despite the 71% decline from transaction-based revenue over the fiscal year, our Canadian wealth business delivered a relatively strong performance. Commission and fee revenue remained strong at $55 million for the fourth quarter and $228 million for the fiscal year, just slightly above the record set in fiscal 2022. Additionally, the higher interest rate environment positively impacted interest income, which amounted to $14 million for the fourth quarter and $46 million for the fiscal year, increases of 163% and 144% respectively. Adjusted pre-tax net income for the fiscal year decreased by 30% year-over-year to $39 million. mostly due to the abrupt and sustained decline in transaction-based revenue. Subsequent to the end of the quarter, we completed our acquisition of Mercer's Canadian private wealth business, and it has been a real privilege to welcome this group to CG. Together, they are entrusted with approximately $1.5 billion in client assets, and we're looking forward to supporting their continued growth and success. And finally, our Australian wealth business was modestly profitable for the fiscal year, despite the 39% year-over-year decline in investment banking revenue. Client assets in this business increased 2% year-over-year to $5.4 billion, largely due to an increase in net new assets in connection with our recruiting initiatives. Despite operating through the worst new issue environment that I can recall, Our capital markets division was modestly profitable on a consolidated basis for the fiscal year. Full-year revenue in this division was $793 million, on par with pre-pandemic levels, but profitability was impacted by higher costs in a reduced revenue environment. Excluding significant items, CG Global Capital Markets recorded a fourth quarter pre-tax loss of $5 million and earned pre-tax net income of $31 million for the full fiscal year, down 91% from the record set in fiscal 2022. On a consolidated basis, fiscal 2023 investment banking revenue fell by 73% year over year to $127 million, primarily attributed to the market-wide reduction in the activity levels. Additionally, if you've been following our company throughout the fiscal year, You will recall that the rapid deterioration in market values of certain inventory and warrant positions earned in respect of our investment banking activities in Australia and Canada had a negative impact on revenue of about $40 million, as reported in our first fiscal quarter. Given the industry's slowdown and the diversification away from high-risk growth assets, I am pleased with the performance of our teams, who delivered for our clients and protected our strong market position among the league table leaders in each of our geographies. In Canada, Australia, and the UK, the decline in new issue revenue was less pronounced than the overall market decline, reflecting a strong competitive position in our core focus sectors. Solid advisory activity helped to offset the impact of lower new issue activity. Fourth quarter revenue from this segment was $104 million, down 15% year over year, but up 38% sequentially. Advisory revenue for the full fiscal year was $363 million, down 26% from the record set last year, but substantially higher than all prior fiscal years, and again, outpacing broader market activity levels. Our U.S. business contributed 70% of fiscal 2023 revenue in this segment. While the average size and frequency of new M&A announcements has declined, our engagement with client remains robust and we are well positioned for when the market confidence improves. Given the industry-wide slowdown, results of our engagements will be most likely reflected in the second half of our fiscal year. And finally, our sales, trading, and specialty desks remain steady, providing liquidity for our clients and supporting increased volumes during bouts of market volatility. Ongoing investments in our technology and infrastructure position us to scale when volumes return. Recently, we announced some important leadership changes in our Canadian business, having appointed Stuart Raftis as CEO of the Canadian Broker-Dealer. and Jason Melbourne as the head of Canadian Capital Markets. Both Stuart and Jason have demonstrated exemplary leadership in their respective areas of oversight, and we are excited for them to lead our business into the next phase of growth. Additionally, Jeff Barlow has been appointed CEO of our U.S. Capital Markets business, a role that reflects the increased importance of our U.S. business to our global franchise under his leadership. While we are disappointed that we did not meet our profitability targets for the year, our business remains on solid ground, even with recent headwinds in the new issue market and the current economic uncertainty. The operating environment remains a challenge across all our geographies and core capital market verticals, but we are navigating headwinds in a much more constructive way than in past downturns. Importantly, we've come through an incredibly difficult period with our core strategy intact. Past investments to grow our wealth management businesses and expand our M&A offering have contributed to our resilience, and all our core business segments are positioned to benefit from an upturn in investor sentiment and increasing risk tolerance. we remain fully committed to operating our business in the best interest of our clients, employees, and public shareholders. We look forward to working with our new board of directors as we continue to explore a range of opportunities to increase the value for our company, just as we've always done. Before we move to the question period, I would like to remind you that with respect to our recently expired takeover bid, We are restricted to the detail that has been provided in our public disclosure under applicable securities laws. All related disclosures are available on CDAR under the Cantercourt Genuity Group Inc. profile. And with that, Dawn and I will be pleased to take 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 your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question will come from Jeff Fenwick at Cormark Securities. Please go ahead.