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 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.

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?

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.