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spk00: 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.
spk05: 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?
spk00: 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.
spk03: Good morning. Maybe just a little bit more on, you know, obviously the departures. You mentioned, you know, a good portion was in capital markets in Canada and the U.S. I guess I'm trying to see how you balance, you know, the departures with, you know, some of the comments in your presentation that, you know, you expect to go deeper into your core capital markets businesses going forward, and that's part of your strategy. I'm just wondering, again, how you balance that out, you know, departures ahead of trying to, actually get more penetration with your clients?
spk05: Great question, Steve. I don't think that the statements necessarily are conflicting. When you think of departures, and let's say there was 100-ish people in our North American capital markets business, that's sub-4% of the people that we have globally and sub-7% of the people we have in North America. Um, the, you know, we can easily take out optionality of the business without impacting our core segments. So some of the exits, not necessarily all of them would have been in sectors and areas that aren't necessarily core to us, or aren't necessarily core to our business going forward. Some of them clearly are, but. When you look at the reductions, it's significantly less than what other people have seen on the street. We're probably a little late to it relative to some of our peers as well. Part of that may be impacted by the privatization and other things we were looking at, but these were relatively marginal, some very good people. But unfortunately, the current environment doesn't doesn't permit us to keep everyone in an environment like this. I'm not quite sure I answered your question perfectly, but that's the best I think I can do.
spk03: Oh, that's good. And the second question is, in your presentation as well, your acquisition strategy in the UK is you're looking to look for accretive financing opportunities without diluting the group shareholders. So I guess the question would be, one, Are you still actively looking for more acquisitions in the UK? And can you flush that out in terms of, you know, accretive financing opportunities?
spk05: Yeah, I mean, I guess the first point is, yes, we continue to look at acquisition opportunities in our UK wealth management business for sure. You know, we've got a lot of offices there. We've got a lot of ability to tuck in acquisitions. We continue to examine a number of different targets. Um, you know, to the extent that we're looking at anything bigger, we wouldn't be using. Groups balance sheet with, you know, we've got mechanisms to fund locally as well. They're not that we're close to anything bigger. Not that I'm even contemplating that necessarily right now, but, you know, we've got certainly an ability to fund their locally. We also have a reasonably robust balance sheet domestically in our UK wealth business. We're not without means in that business to continue to grow. you know, smaller acquisitions on our own balance sheet in that market. So, yeah, I don't see us getting further outside of something major. I don't see us getting further diluted in that business. But, you know, listen, if we found something wildly accretive and we felt it made sense, I'd have no problem owning less of something that was worth a lot more, you know, so that our interest is worth a lot more. But that's not currently the plan.
spk03: Okay. And then we'll sneak one more in. In the past, we've talked about signals that leading indicators that capital markets activity would improve. You mentioned the Canadian brokers starting to do some of their own deals. You also mentioned Australia when you start to see mining. Is that pipeline, do you see that building that gives you more confidence that the back half of fiscal 24 will be a higher volume of deals?
spk05: Yeah, Steve, you'd have almost as good visibility as we would. But yes, yes, I mean, we're seeing increased activity. We're seeing, you know, the buyer strike starting to end a little bit. You know, obviously, we've seen broad, good market performance, you know, on large cap stocks, relative, you know, material relative underperformance on the mid cap and small cap stocks. You know, sooner or later, people are going to have to catch up with returns. So we're seeing people look at the market and, you know, it's premature and we're at the beginning of August. So it's a bad time to predict. But I'd like to think into the fall that we're going to see a pickup of business. You know, M&A, we can predict a little bit better in advance. You know, new issue activity is harder to predict in advance, as you know. But, you know, our pipelines are incredibly robust. We just, you know, the bid ask between Where companies want to sell stock and buyers want to buy it, it's narrowing. Let's put it that way.
spk07: Thanks very much. I appreciate that.
spk00: Your next question will come from Rob Goff at Echelon Wealth Partners. Please go ahead.
spk01: Good morning, and thank you for taking my question.
spk07: Thanks, Rob.
spk01: I was encouraged with respect to your recruiting efforts on the wealth side in Australia. Perhaps could you talk to your recruiting in wealth in both Australia and Canada? How is that pipeline looking, terms looking?
spk05: Yeah, really robust in both markets is probably the best way to describe it. You know, Canada, you know, we have, we track and we have an active pipeline. You know, there's dozens and dozens and dozens of people on that pipeline to the tune of multiple, you know, multiple tens of billions of dollars of assets. Bringing them always over is an issue. And when we do that, but pipelines in all our markets, all our primary markets continue to be robust. Nothing's really changed from where we've been historically. You know, the cost of bringing advisors over, the pace of bringing advisors over, You know, we've been bringing, you know, we brought close to 20 billion dollars of assets over to our franchise over the last several years. You know, we continue to see that the pace of activity, you know, same as historical levels, maybe slightly better. So that's, that's great. And you can see that the net number of advisors in Canada hasn't grown that much. So we've cycled out. You know, retiring advisors, poor performing advisors with much stronger advisors. Our average book per advisor in Canada continues to grow. Our margins in Canada are remarkably strong given the lack of new issue business. So, and our results in Canada are strong. You know, the reason I spent so much time on Canada before I answered Australia is Australia is going through a similar trend as the trend we had in Canada. And that was intentional. That was always our strategy. Again, you're not going to see a material increase necessarily in the number of advisors in Australia. But, you know, the average book for per advisor, the funds under management, the discretionary funds under management, the fee based funds, that all continues to grow. It's roughly doubled since we've done the Patterson acquisition. Again, we continue to have a very robust pipeline of potential candidates in Australia. And there's a very active effort in all of our primary jurisdictions. So. Continue to feel that we're going to grow that business and I'd like to think that in 5 years time that our Australia business looks like our Canadian business, but that's obviously. It's obviously a pretty far-out projection, but there's no reason to think we can't continue to grow that business the way we have. It's a very set of similar dynamics in Australia as there is in Canada.
spk01: This is a bit more towards the numbers. Your restructuring charges on the quarter were 3.3, and you made reference to those being roughly 10 million on the current quarter. Would it be fair to say that the increase there would be offset or largely offset by lower development costs as they came in at 22.6 million on the quarter, you know, up from 13.3 Q on Q and 6.9 million year on year?
spk02: Hi, Rob. It's Don. I didn't follow all the numbers you said there. But yes, we had a small restructuring charge in the first, in this current June quarter. There was some changes, some personnel staff type changes in that quarter. And then the larger restructuring, which occurred this month, makes up the $10 million we refer to as a charge for the second fiscal quarter. So combined, they would be $13 million.
spk01: So the question there was just in general terms, With the restructuring costs being $7 million higher for fiscal Q2, would you see reasonably comparable savings through reduced development expenses that came in at $23 million on the quarter? Is there a nice balance there?
spk02: No, the development expenses are isolated. It's a different activity going through the development expenses. They were heightened in the June quarter. a lot of costs related to the expired takeover bid flowed through development costs. Nothing really to do with restructuring.
spk01: Right, and that's where I was seeing those development costs related to the bid decreasing with the second quarter.
spk02: Oh, yes, yes, yes. They're largely concentrated in that first quarter. So, I mean, there might be some true-ups as we go forward, but they're largely behind us.
spk07: That's good. Thank you, guys. Good luck.
spk00: Your next question will come from Graham Riding at TD Securities.
spk07: Please go ahead.
spk04: Hi, good morning. Maybe you could just stay on the theme of this for your capital markets outlook. You did mention that you feel like we may be getting closer to sort of the rate tightening cycle coming to an end. It sounds like that's probably a maybe a key ingredient needed here to get capital markets going? What are the other sort of key things that you're looking for? You've seen a few cycles, obviously, in capital markets. What do you think are some of the key ingredients we need to see to get capital markets activity going? Don't date me, Rob.
spk05: Yeah, I mean, what we were talking about, don't date me, Graham, I meant, but don't, the, what, what what we're referring to with the new issue business right obviously the m a business we've got a lot more visibility on and and you know that you can kind of predict m a out in advance i've told you that before So we're feeling increasingly confident in our pipeline of M&A activity. Obviously, this last quarter was a poor quarter from an M&A completion perspective. So although chunky, we feel that there's a reasonably good pipeline going forward of M&A. So we feel pretty confident in stating, hey, this is going to be back half of the year weighted. You never know for sure. And things could continue to get delayed. But we feel reasonably confident You know, we look at our advisory revenue, 40 million bucks in capital markets last quarter. I mean, that's down from your average of 100 or 90 or 80 million bucks a quarter, depending on the year you want to look at. So, you know, we feel confident that number will continue to go up. Investment banking is just really tough to predict. You know, our new issue business, as you know, we did 30 million bucks last quarter, as we referred to. And again, this is down from $100 million quarters, $150 million quarters. This is a fraction, a fifth of what we've been doing on a run rate basis. So again, not that we're going to go up to pandemic levels, but even from a pre-pandemic perspective, we'd be doing $50, $60 million a quarter in that business. I feel reasonably comfortable that we're at the place where people are going to kind of start wading back into the market, and we're going to see a pickup of activity. I'd like to think that that's going to happen in the fall or certainly going to happen into the back half of our fiscal year. We've seen broad market outperformance, as I've mentioned, generally, but it's been narrow in a couple of stocks. So in our sectors, tech, You know, healthcare, sustainability, you know, outside of the mining sector, we really haven't seen an immense amount of new issue activity and we're getting to the place where companies need to issue and buyers are going to be chasing return. So, you know, I'm not, I don't want to predict their recovery. It's too soon. But, you know, if I said it was going up or going down, if I had to bet one, I'd bet going up. That's kind of where we see activity levels.
spk04: Do you buy into the theme that debt financing is expensive now for a lot of companies, and at some point they're going to have to look back to the equity markets for capital needs?
spk05: True, but a lot of our clients can't even access debt financing at competitive rates. And yes, debt financing is very expensive, and that kind of impacts your M&A business more than anything else. But again, our clients aren't heavy users of balance sheets. not all of them but generally speaking you know the the mid-cap tech companies and healthcare companies tend not to you know borrow a ton of money but yeah and it's not that it's expensive it's unavailable with that finance right for the most part so um yeah i we we do believe that we're going to see a pickup of that activity when we talk to our competitors uh particularly in the u.s i think they see a pickup of activity as well graham so you know Again, I'm making a prediction, which I hate doing, but I think over the next six months, we should see a pickup of the new issue business broadly. And we're seeing a pickup in our retail channel. We're seeing some of the early stages of it. Way too early to predict. And again, I hate making predictions in August when everyone's away and there's a natural slowdown in the business. September will be the real telltale sign.
spk04: Okay, great. maybe just jump into your UK wealth business. It looks like assets are down like about 2% year over year. But, you know, if I look at the FTSE 100, maybe just as a proxy for the market, it was up 4% over that period. So I'm just wondering if there was any, you know, advisor outflows or, or just asset outflows that are involved here, maybe some advisor attrition after that PSW deal. Is there, Any color as to why the growth there has been lagging?
spk05: Yeah, there's two primary factors, I think, which cause the decline in assets. Number one, there always is some, you know, some advisor, some small advisor outflows when you do an acquisition. We actually model it and predict it in advance. I don't think it's anything out of the ordinary. You're always going to lose a little bit of assets on an acquisition, no matter how hard you try. So some of it's that. But we also have a relatively small cap focused fund management business inside that business. And like every other small cap fund management business inside that business, those are down more than the market, plus there's outflows in that market. So there's actually small organic net inflows in our traditional wealth business there, offset by the two factors that I just mentioned.
spk04: Okay, that's helpful. And that's small cap fund management business. What would the size of that be in sort of AUM?
spk05: Down from about 5 billion pounds. I'm making up those numbers. I'm looking at Don.
spk02: Yeah, those are generally in line. Yeah.
spk05: So maybe it was as high as 5 billion. It's now 3 billion pounds.
spk04: Okay. And then, Don, I got one for you. I guess it's just the compensation ratio in the quarter was... quite low. It seemed to be in particular, very low in the Canadian capital markets. I think it was a 40% comp ratio. You mentioned Dan, you mentioned his stock-based comp was a, was a factor. Is that, you know, if the shares are sort of continuing around this level, is that going to be a recurring theme for the next quarter or was there anything one-off here in this comp ratio?
spk02: There wasn't anything necessarily went off. It really was related to a decrease in stock price over the course of the quarter, and that translates into the charges for the stock-based compensation. It won't be, as we've talked about before, looking at it on a quarter-by-quarter basis, And especially on a regional basis, it tends to be kind of lumpy, so you can't really read too much into that. It's best to look at it over a longer term timeframe. And once we get to the annual end of year, it tends to settle out at sort of a normal course kind of ratio. The 40% ratio in Canada capital markets would not continue at that level, unless there's a dramatic change in the stock price up or down, obviously. then that would flow through, but if it maintained at roughly these levels, then that would not be an impact going forward on a quarterly basis.
spk05: Yeah, if you look more broadly at our overall comp ratio in capital markets at 58.5%, I appreciate some jurisdictions are bouncing around. That's generally in line with our historical comp ratio in capital markets for the last five years or so. It tends to go up a little bit when the stock price goes up because our charges goes up and tends to go down a little bit when our you know, stock price goes down, so we're in a relatively lower quarter, but I'd say there's no real change to our typical guidance of, you know, 60-ish percent overall comp ratio for the year. That's probably where we'll kind of average out at.
spk07: Okay. That's it for me. Thanks. Thank you.
spk00: There are no other questions, so I will turn the conference back to Mr. Daviau for any closing statements.
spk05: Right well, thank you operator and thanks for everyone joining us today on the call that concludes our 1st quarter fiscal 2024 conference call. Don and I are as always could be available for other questions as you go through the material. I appreciate your time. We are doing our today. It's going to be taking place at 10 AM. If you wish to join us access details were provided in our. information circular, but they're also on our website if you'd like to join us. So thank you again everybody and look forward to speaking to you again.
spk00: Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.
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