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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 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 star followed by the number two. If you have any difficulties hearing the conference, kindly 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.
spk02: 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 and on the investor relations section to 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 the description of non-IFRS financial measures that appear in our investor presentation and in our MD&A. And with that, let's discuss our second quarter fiscal 2024 results. Our second fiscal quarter was characterized by a continuance of the challenging backdrop for capital-raising activities and ongoing uncertainty around M&A completions in our core focus sectors. The S&P 500, the TSX Composite, and the MSCI World Index declined 3.3%, 2.2%, and 3.3% respectively over the three-month period. Trading volumes across most of our core markets moderated from both the previous quarter and year-ago levels. Global ECM volumes remained subdued as new elements of uncertainty arose, and global announced M&A declined for three consecutive months. Against this backdrop, our wealth management business continued to deliver stable earnings contributions, which helps us deliver a break-even quarter despite losses incurred in our capital markets and corporate and other segments. Firm-wide revenue for the three-month period amounted to $337 million, which is roughly in line with our previous fiscal quarter. Revenue for the first half of the fiscal year amounted to $681 million, down 3% year over year. On an adjusted basis, we earned pre-tax net income of $16 million and $49 million for the three- and six-month periods. Year-over-year decreases of 67% and 37%, respectively. Excluding significant items, our firm-wide expenses were 3% lower than the second quarter of last year. Compensation expense for our second fiscal quarter decreased by $22 million or 10% year-over-year, bringing our compensation ratio to 59%. Given the reduced revenue environment, adjusted non-compensation expenses as a percentage of revenue was flat from the previous quarter at 36%. Our interest expense was 118% higher than the previous year's comparison period. primarily due to higher interest on bank loans to finance growth in our UK wealth business. And our communication and technology expenses increase 6% year over year to support our expanded business and increase investment in our regulatory and compliance capabilities. While cost containment is always top of mind, our industry is facing ever-increasing supplier costs, inflation, and limited alternatives for the systems that we rely on to execute for our clients and manage risk. We also incurred restructuring costs of $15 million in connection with the headcount reductions that we had previously disclosed in August. We continue to place a strong focus on cost discipline and have seen reductions in discretionary costs, particularly G&A. Managing our costs better positions us to achieve our historical profitability ranges in a normalized environment and return capital to our shareholders. On that note, I'm pleased to report that our Board of Directors has approved a quarterly common share dividend of 8.5 cents. Turning to the performance of our operating businesses, our global wealth management division earned revenue of $187 million in the second fiscal quarter, an increase of 11% compared to the same period a year ago. Excluding significant items, the pre-tax net income contribution from this division increased 18% year-over-year to $33 million, and 70% of this amount was contributed by our UK wealth management business. The adjusted earnings per share contribution from this division was $0.12 for the second fiscal quarter, which was lower than similar revenue quarters due to a greater allocation of certain expenses from our corporate and other segment. At the end of the fiscal quarter, firm-wide client assets amounted to $93 billion, up 5% year-over-year but down 4% sequentially, reflecting lower market values in the UK and Canada partially offset by new inflows. We continue to pursue positive net asset contributions in all our regions, both organically and inorganically. Last week, we announced that our UK wealth management business had acquired Intelligent Capital, a financial planning firm based in Glasgow with £220 million in client assets. Pending regulatory approval and other customary closing conditions, We expect completion to take place by the end of the current fiscal year. While we are always looking at potential acquisitions, our priority is improving organic growth, and we've implemented several initiatives on that front. We are also experiencing solid levels of engagement for our recruiting activities in Canada and Australia. This month, we welcome two new IA teams in our Canadian wealth business and several in Australia, which will be reflected in our third quarter disclosures. I will also note that fee-based revenue in our Canadian business accounted for 52% of second quarter revenue, which has helped us drive stable contributions from this business despite the prolonged reduction in new issue activities. Turning to our capital markets business, On a consolidated basis, revenue in this division was 30% lower than the same period last year at $145 million. Excluding significant items, this division recorded a pre-tax net loss of $6 million with losses in Canada, the US and the UK offsetting a modest profit from our Australian business. With persistent inflation and central banks holding interest rates higher for longer, the optimism that had been building in the capital markets began to retrench. While we did experience some positive momentum in deal activity during the quarter, underwriting activities remained quite depressed when compared to historical levels. Primarily on the back of a more accommodating Australian resource market, revenue from this segment was $31 million for the three-month period in line with the previous fiscal quarter. All geographies experienced declines on a year-over-year basis, but our UK and Australian business both reported increases when compared to our first fiscal quarter. The mining sector accounted for 53% of total underwriting activity in Q2 and continues to be one of the few bright spots for new issue activity, although demand was limited to a small subset of underlying commodities. On a consolidated basis, revenue from M&A advisory activities was $46 million for the quarter, which is less than one-half of where it was a year ago, and consistent with the broader industry, reflecting weaker completions and announcement trends. The 14% increase over first quarter revenue was driven by modest M&A growth in our U.S. and U.K. businesses. The technology sector accounted for 77% of our advisory activity during the three-month period. Principal trading revenue of $20 million was in line with the first fiscal quarter and declined 25% year-over-year, primarily attributed to lower activity levels in the US, which is our largest trading operation. Commission and fee revenue increased by 7% year-over-year to $39 million reflecting higher client trading activity and a modest uptick in new issue activity. Heading into our third quarter, underwriting and M&A activity levels are tracking higher than in the first half of the fiscal year. We have a strong pipeline of announced deals and we continue to see healthier levels of new engagements with many deals launching now. Barring another major setback in the coming months, we are cautiously optimistic that M&A revenue will meaningfully improve in the second half of this fiscal year. Engagement levels amongst our corporate clients and their desire for capital remains high within our core sectors and geographies. That said, investors continue to be judicious about putting money to work. We are seeing some increased activity but remain cautious in our outlook until we see a more sustained recovery for risk capital in the market. Like most market participants, we are encouraged by indications of improving sentiment as investors begin to look past the difficult environment that we've endured for almost two years. However, we expect that the capital markets will continue to be challenged for a while longer as investors await a clear inflection point. We continue to protect our strong market position, and I'm very confident that we will capture a meaningful share of activity in our core sectors when opportunities present. Although we are being realistic about the current macro pressures that we're all facing, we continue to invest in our business and our people, and we continually assess opportunities to materially improve our business. We are fully supporting our capital markets business through this downturn, while we're also pursuing organic and inorganic growth in our global wealth management businesses. We also have several major office relocations planned and additional investments to advance our technology and compliance infrastructure. That said, we are always managing our balance sheet carefully to protect our ability to provide outstanding opportunities and expertise for our clients in any market backdrop. With that, Dawn and I will be pleased to answer your questions. Operator, could you please open the lines?
spk00: Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you would like to ask a question, press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. There will be a brief pause while we compile the Q&A roster. We have our first question coming from the line of Steven Boland from Raymond James. Please go ahead.
spk04: Oh, morning, all. Yeah, I certainly want to be sensitive here, you know, what's developed in the Middle East, obviously, in the last month and change. I'm just wondering, like, in terms of the UK divisions, you know, the environment itself, you know, is the industry and yourselves kind of on hold or deals and, you know, whether it's deals or M&A, is that on hold? Is it a wait-and-see environment over there to see what, you know, hopefully ends at some point? Again, trying to be sensitive of the, you know, the question there.
spk02: Sorry, is it a capital markets question or a web question? A capital markets. Okay. Yeah, no, I don't think things are on hold. You know, I think we've been clear in our commentary that, you know, cautiously optimistic. Harder to measure, as you know, the new issue business, although that's picking up. But clearly the M&A business is picking up. We've seen, you know, we've seen good deal announcement activity, good deal launch activity. Some of the uncertainty associated with the financing and deals has disappeared. or moderated, maybe not disappeared. So, you know, particularly in the UK, I think we feel pretty good about that market improving, if that's your question. The new issue side, you just don't know. I mean, we're obviously active, particularly in a couple of sectors. I'm not sure that risk capital has returned to the market yet. Yesterday's announcement was positive and the market reaction was positive, but one day doesn't make a trend. So let's see how it plays out for the next month or so.
spk04: Okay. And just in terms of capital, your networking capital I think is under 700. I think I saw that number around 699, I think. Excuse me. Is this activity perhaps ramps up a little bit? Are we going to see a lot more more bought deals you think you're going to start to see more uh if it's new issue that um you know this is a best efforts type of environment um what's your thought there you know depending on the region as well i mean i know canada probably has earlier than well yeah all our regulated markets have different capital requirements for deals and the deals are done differently i know you're familiar with the canadian uh the canadian system um
spk02: you know, we keep reserves for capital for transactions. So, you know, obviously we didn't earn any money last quarter, so we didn't improve our capital position. In addition, we've got a number of, you know, large capital expenditures coming through in our large office moves. You know, we moved in Toronto, we're moving in Vancouver, what's consolidating our offices in New York. So there's Definitely an investment that we're making in the business and feel comfortable about that. But, yeah, we continue to have, you know, sufficient capital to conduct our business and do underwriting, if that's your question.
spk04: Thanks. And my last one will be just any update. This may have been in the MD&A somewhere or the notes. I apologize. I missed it. The regulatory issue with the foreign subsidiary. And the trading operation, is there any update there or any change in the provision?
spk02: Yeah, great question. No, there's no update. There's no update we have, let alone an update that we can provide to the street. No material developments either way.
spk03: Okay.
spk04: That's it for me. Thanks. Great question.
spk00: Our next question comes from the line of Graham Writing from TD Securities. Please go ahead.
spk03: Thank you. Hi, good morning. Dan, you made some comments just about, you know, difficult to predict, but you said the pipeline is stronger. You're seeing some deals launching now. Is that more of a reference to the M&A side of the activity in the pipeline that you're seeing, or is that a reference to both?
spk02: A little bit both, but if I had to pick one, it'd be M&A. I mean, M&A we have better visibility on, as you can imagine. The process is a three or six month process. We're seeing timelines come in. We're seeing deals launching now. We've obviously seen good level of announcements, deals announced, waiting, closing. So I think we've got more confidence in telling you that about M&A than we do about new issues. As you know, we've got lots of companies who would like to access the public markets, query whether there's a sufficient buying audience out there to actually get deals done. So, you know, as you've heard me say before, I mean, you know, in the last two recessions, the market bottomed in October, shockingly, the month, you know, that we just finished, yet the economy didn't bottom for six or eight months later. So, you know, We're, again, cautiously optimistic the market will improve, that the financing environment for small and mid-cap issuers will improve, and therefore our business will improve, but it's too premature to predict that very often.
spk03: Okay, that's very often. I guess at a macro level, what are you, I guess, paying most attention to in sort of seeing... You know, evidence is market volatility. Is it deal activity with large caps? What are you sort of keeping your eye on to sort of give you some comfort or your corporate issue clients give you some comfort that activity might pick up?
spk02: Yeah, I mean, you know, even in this market, we're still active, just not as active in deal size. They're smaller. So it's reception of deals primarily and, you know, reverse inquiries into companies. You know, there's lots of investors who are very supportive of their existing issuers, existing, you know, existing companies they have an investment in. And we're seeing if we can, you know, round out some of that. So, You know, general level of market activity, I would argue, but I know that's not a good answer to your question, but that's kind of what we're looking through. And we do see, as you can imagine, you know, with our $93 billion of wealth assets, we do see, you know, the flows inside our wealth business as well. And that's sometimes a pretty good indication of what we're doing and where we're going. You know, the Australian market was active, realized their Our summer is their winter. The Australian market was active last quarter, in the quarter we just reported, and continues to be active. That's primarily mining-driven, and even in the mining-driven, it's primarily a subset of mining, for lack of a better term, electrification-type stocks, uranium and rare earths and lithium. But that's been active for us, and it will continue to be.
spk03: Okay, that's helpful. On the wealth side, could you maybe just give us some context on what you're seeing on average from your clients both in the UK and Canada? Is this a market where clients are increasingly deleveraging and putting money perhaps into cash or are you actually seeing and is that impacting your organic flows and your organic growth in those platforms?
spk02: Yeah, I think the organic flows have been, I'll answer your question backwards. The organic flows, we continue to attract net new assets. That's been the case. It's in our culture. It's in our culture in the UK. It's in our culture in Canada and in Australia. So the question is never how much assets we attract. It's the assets you lose because you're always measuring net new assets. And the problem in an inflationary market is you lose assets, not for performance, not because they're being pulled out of our system, because people need their money. Or their kids need their money. So we've seen some assets pull out. Notwithstanding that, we're still positive that new assets are positive, but arguably just lifestyle assets are getting pulled out. In terms of their investment portfolios, we haven't seen a material change. People don't leave cash sitting around as much anymore. They're investing in, you know, short-term fixed income securities as opposed to just leaving it in cash. But, you know, besides that, we haven't seen material shifts in our clients' portfolios. I'm looking at Don when I'm answering that question.
spk01: Yeah, no, that's right. I mean, we do have cash-related or income-related type related products. So clients in a low interest rate environment would be more likely to be leaving cash in their accounts or investing in equities. But we have alternative products in this environment that will keep the assets in the system, so to speak, rather than have them go outside in order to generate that return. And clients have outside pressures where they otherwise might have borrowed to fund something. Now they're looking at not borrowing and using their assets that we would have otherwise held. It's a mix of all those things. We're seeing that as with everybody else.
spk03: Understood. One last one if I could. The restructuring charge you took in the quarter here, are you largely done on that front for now? If there is any sort of one-time items coming through in the next quarter or so. Is that going to be related to your office relocations, or are you largely done with the restructuring side of things for now?
spk01: We're largely done on the restructuring side of things. There might be a little bit flow through in subsequent quarters as provisions and so forth get trued up, but nothing substantive or material. And with respect to office moves and so forth, I don't think we'll see anything exceptional flowing through the P&L on that front. We're moving coincidental with termination of existing leases and real estate. So there's no exceptional costs on that front. Okay.
spk03: That's it for me. Thank you.
spk04: Thanks.
spk00: There are no further questions at this time. I'd now like to turn the call back over to Mr. Daviau for closing remarks.
spk02: Well, thanks everyone, and that will conclude the second quarter remarks, and hopefully mark a low point in our business. You know, I understand a couple of the analysts are on the road today, so as you kind of listen to this call, we're happy to catch up later. Look forward to our next quarterly update in February, and in the meantime, I'd like to extend my best wishes to all of you in the upcoming holiday season, and certainly for U.S. colleagues, happy Thanksgiving. As always, Don and I are available to answer questions later. So, thank you again very much.
spk00: Thank you. Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. Please disconnect your lines.
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