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 2024 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 that 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 Daviau, President and CEO. Please go ahead, Mr. Daviau.

Thank you, operator. and thanks for everyone joining us for today's call. As always, I'm joined by Don McFadden, our Chief Financial Officer. Today's remarks are complimentary to our earnings release, MD&A, and supplementary 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 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 our description of non-IFRS financial measures that appears in our investor presentation and in our MD&A. And with that, Let's discuss our first quarter fiscal 2024 results. Firm-wide revenue for the three-month period amounted to $343 million, an increase of 8% compared to the same period last year. Excluding significant items, pre-tax net income amounted to $33 million, up 20% compared to the same period last year and almost double compared to the previous fiscal quarter. This translated to adjusted diluted earnings per share of 7 cents for the three-month period, with a 20-cent contribution from wealth management being offset by a negative contribution from capital markets. First quarter profitability was impacted by higher interest expense due to market rate increases and several large, isolated charges, which led to increased development costs and higher general and administrative expenses. Firm-wide general and administrative expenses increased 14% year-over-year due to higher promotion and travel expenses, reflecting increased activity levels in connection with conferences and other client engagement opportunities, primarily in our capital markets division. Our compensation ratio for the three-month period decreased by 8.4 percentage points year-over-year and 10 percentage points sequentially to 54%, largely reflecting the changes in value of stock-based compensation awards. While our financial results remain below our expectations, our ability to deliver modest profitability during a period when capital markets activities were so challenged across the industry, and particularly in several of our core focused sectors, reinforces the earnings power of our wealth management businesses, which have continued to contribute stable and predictable earnings. Reflecting this stability, Our board of directors has approved a dividend per common share of eight and a half cents in line with the previous quarters. And lastly, we continue to have a strong balance sheet with sufficient capital to support our business priorities. In light of our expectations for industry-wide activity levels going forward, we undertook a process to establish a more cost-effective organizational structure. without compromising our market position or the client experience. This process has led us to think critically about the number of people that we need to advance our strategic priorities while helping our clients reach their goals. Subsequent to the end of the quarter, we implemented a reduction of approximately 3.7% of our global workforce or 6.5% of our North American workforce. The majority of employee departures occurred in our capital markets business, in addition to a smaller number in IT and operational roles. Importantly, these changes do not impact our day-to-day operations or our comprehensive client coverage in key sectors and verticals. As a result of this initiative, the company expects to record a restructuring charge of approximately $10 million in the second fiscal quarter. This should better position us to achieve our historical profitability ranges in a normalized revenue environment to continue investing strategically in the business and return capital to our shareholders. Looking at our global capital markets business, Notwithstanding the modest increase in activity levels in the previous fiscal quarter, our performance reflects a continued difficult backdrop for both capital raising and advisory activities. Revenue of $146 million for the first quarter decreased by 11% compared to the same period last year. This division incurred a pre-tax loss of $7.6 million. with positive contributions from Canada and Australia offset by losses in the US and UK. As previously mentioned, profitability in this division was largely impacted by increased general and administrative costs, in addition to the impact of fixed costs in a reduced revenue environment. Consistent with industry trends, investment banking revenue remains well below historical levels. First quarter revenue in this segment amounted to $30 million. Although this represents an increase of 137% compared to the same period a year ago, I will remind you that we incurred mark-to-market losses in certain inventory and warrant positions during that comparison period. Our Australian investment banking business contributed 48% of this amount, reflecting improved activity levels in the metal and mining sectors. Activity level in our advisory segment have outperformed the broader market since transaction volumes began to slow in early 2022, which was not unexpected given our core focus sectors. That said, beginning last quarter, the environment for completions has become less supportive. As a result, first quarter revenue contribution from this segment was 51% lower than the same period last year at $40 million. Approximately 62% of this revenue was contributed by our U.S. business, reflecting activity in the technology and consumer sectors. It was a difficult quarter for our UK capital markets business with small cap underwriting and advisory activity in the region at a near standstill. The impact of higher fixed costs in this reduced revenue environment led to an adjusted pre-tax net loss of $6 million. This business continues to be a valuable contributor to our cross-border capabilities in both underwriting and advisory and we will expect it to improve as market conditions become more constructive. Demand for capital in our focus sectors remains exceptionally strong. Next week, we are hosting our 43rd Annual Global Growth Conference in Boston, and it will feature presentations from 440 companies in dynamic growth sectors over four days. The environment across our industry appears to be improving, and we continue to enjoy a healthy pipeline of investment banking and advisory activity. We are seeing a modest uptick in buy-side appetite to put money to work in high-quality new issues. However, there remains a lot of uncertainty in the pace and timings of deals launching and closing. While a significant improvement may not be reflected in the first half of this fiscal year, we reasonably anticipate stronger results towards the back half. Turning to our global wealth business, this division contributed 56% of our firm-wide revenue for the first fiscal quarter. The adjusted earnings per common share from this division amounted to 20 cents, which was offset by a loss in our capital markets division. On a consolidated basis, first quarter revenue from this division amounted to $191 million, up 3% from the previous fiscal quarter and up 18% compared to the same period a year ago. The adjusted pre-tax net income contribution increased by 46% year over year to $36 million. Client assets at the end of the three-month period amounted to $97 billion, an increase of 7% compared to the same period last year. 54%, or $103 million, of revenue in this division was contributed by our UK wealth business and is in line with the record set in the previous quarter. This represents a year-over-year increase of 41%. which primarily reflects substantially higher interest income, and commissions and fee revenue contributed by the PSW acquisition, which was completed in the same period last year. Looking at our Canadian business, revenue of $73 million was in line with the same period a year ago, and adjusted pre-tax net income of $9 million increased by 39% year over year. Despite the impact of the prolonged downturn in new issue activity and the reduced market value of client assets, this business has delivered consistent revenue for the last eight quarters. Client assets in this business amounted to $37 billion, which is closer to the peak of $38 billion prior to the onset of the market downturn. The increase of 9.8% year-over-year and 4% sequentially is attributed to improving market valuations, positive inflows, and new assets from the Mercer acquisition, which closed in the previous quarter. We expect the revenue and net income contributions from this transaction will be more fully reflected in our next fiscal quarter. Revenue in our Australian business was in line with the same period a year ago at $15 million. Client assets in this business have increased 15% year over year to $5.4 billion, and our recruiting efforts have helped us achieve a 6% increase in the number of advisory teams. Despite weak new issue activity, this business achieved modest profitability, which reflects our disciplined investments and growing the business. In each of our wealth management businesses, we've increased engagement on a number of fronts aimed at driving both organic and inorganic growth. Across the organization, we've been focused on several important initiatives to strengthen our competitive position, drive growth in our wealth management businesses, and ultimately enhance value for our shareholders. We look forward to keeping you updated on our progress. Looking at the market backdrop, inflation is starting to come down and we believe the current rate tightening cycle is closer to its end. Like most of our peers, we look forward to a healthy increase in new business activity as our clients begin to anticipate recovery. Of course, we're keeping a realistic view of the pace of recovery. knowing that transaction volumes and broad market participation tends to improve sporadically before taking hold for a cycle. With that, Don and I will 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 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 your handset before pressing any keys. One moment please for your first question. Your first question will come from Steven Boland at Raymond James. Please go ahead.