Canaccord Genuity Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canada Corps Genuity Group Inc. Fiscal 2025 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. Following the speaker's prepared 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, press star 2. If you have any difficulties here in the conference, please press star 0 for the 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 for joining us for today's call. As always, I'm joined by Don McFadden, our Chief Financial Officer. Also joining us today is Nadine Ann, our newly appointed Deputy Chief Financial Officer, who we were very pleased to welcome just a few weeks ago. 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 Plus 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 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 report. which we are pleased to be reporting from our new Vancouver office. Our second fiscal quarter was characterized by an improving backdrop for corporate finance and advisory activities in our core mid-market focus sectors and continuing strong performance from our wealth management businesses. Broad market indices posted strong relative returns. The S&P 500, the TSX composite, and world equities gained 5.9%, 10.5%, and 6.7% respectively over the three-month period. Against this backdrop, firm-wide revenues of $528 million for the quarter was in line with the previous fiscal quarter and increased 27% year-over-year, reflecting increases of 16% and 40% respectively from our wealth management and capital markets businesses. Fiscal year-to-date revenue amounted to $857 million, up 26% compared to last year. Excluding significant items, we earned firm-wide pre-tax net income of $42 million for the three-month period and $77 million fiscal year-to-date. year-over-year increases of 156% and 56%, respectively. This translated to adjusted diluted earnings per common share of 20 cents for the three-month period, bringing our fiscal year-to-date EPS to 33 cents, a substantial improvement from the 7 cents earned in the comparative period last year. We are pleased to see improving contributions from our capital markets businesses which further augments the continued strength and stability of our wealth management businesses. Our wealth management division contributed 85% of our adjusted earnings per common share over the six-month period, highlighting the advantages of our diversified business model. Turning to expenses, our firm-wide compensation ratio was within our desired range of 58.6% for the three-month period, excluding significant items Firm-wide non-compensation expenses of $135 million declined modestly on a sequential basis, but remained above our historic run rate. A large portion of our expense base, such as interest and trading expenses, will move in line with revenue due to client activity and volumes, or has offsets in the corresponding revenue lines. While trading and compensation expenses increased modestly due to stronger business activities, G&A and development expenses collectively were lowered by $8 million from the previous quarter. We are actively working to reduce non-compensation expenses against the backdrop of a potentially higher amortization expense in the next fiscal year, in connection with the important investments in our new flagship office in Vancouver, where half our Canadian wealth assets are based, and in New York, where we are consolidating three offices into one central location. We remain disciplined on our capital allocation and continue to maintain a healthy level of working capital to support improving activity levels and invest in our businesses. On that note, I'm also pleased to report that our Board of Directors has approved a common share dividend of 8.5 cents per share. Turning to the performance of our operating businesses, total revenue earned by our Global Wealth Management Division amounted to $217 million for the three-month period and $432 million for the six-month period. Year-over-year increases of 16% and 14%, respectively, and new records for each measurement period. The adjusted pre-tax net income contribution of $38 million for the three-month period was the strongest quarterly result from this division in three years and reflects year-over-year increases of 31%, 20%, and 11% respectively from our Canadian, Australian, and UK businesses. Consolidated pre-tax net income for the fiscal year to date amounted to $71 million, up 4% year over year, placing this division on track to exceed the full fiscal year record set out last year. Firm-wide client assets reached a new high of $110 billion, and I'm delighted to share that all three of our wealth businesses set new records for assets under administration and management during the quarter. This growth was fueled by enhanced market valuations, modest inflows, new assets from recent acquisitions in the UK, as well as our recruitment of advisors in Canada and Australia. We also received a foreign exchange benefit on the value of our UK assets when reported in Canadian dollars. We're continuing to advance our organic and inorganic growth priorities in all regions, with an emphasis on growing contributions from fee-based revenue streams. Our UK business continues to deliver consistent earnings, generating normalized EBITDA of approximately £18 million for the three-month period and £38 million for the fiscal year to date. Fee-related revenue in the UK and Crown dependencies has remained comfortably above 80% for eight consecutive quarters. During the quarter, we completed the acquisition of Cambridge-based Cantab Asset Management, which expands our foothold in the east of England and further enhances our financial planning capabilities in the UK. We also entered into a binding agreement to acquire Channel Island-based Brooks McDonald Asset Management International Limited, a quality financial planning and fund management business with funds under management of approximately 2.3 billion pounds. This business will form a strong complement to our offshore business and introduce financial planning capabilities in the region. We anticipate completing this acquisition by the end of our fourth fiscal quarter and look forward to supporting the continued success of the professionals and clients of this business. We also continue to experience positive momentum for our recruiting efforts in Canada and Australia. and this is helping to increase fee-based assets in both regions. In Canada, fee-generating assets have continued to increase and fee-related revenue accounted for 50% of total second quarter revenue in this business. I'm also very pleased to report that the average practice size per advisory team in this region has increased by 16% year-over-year to $277 million, and continues to be amongst the largest in the Canadian wealth management industry. Recruiting momentum in Canada remains strong. In the past month, we've been pleased to welcome teams in Calgary and Vancouver with combined assets of $1.8 billion. And finally, fee-related revenue in Australia business has improved by 4.6 percentage points year over year to 44.7%. As previously discussed, our recruiting momentum in the region is contributing to growth in this segment. During the quarter, we welcome two new advisory teams in the business, bringing our total recruits for the past 12 months to 10. Turning to the performance of our Global Capital Markets Division. On a consolidated basis, our Capital Markets Division generated revenue of $202 million for the three-month period, an increase of 40% year-over-year overall. primarily driven by higher corporate financing and advisory revenues, which increased by 67% and 70% respectively. Fiscal year-to-date revenue of $408 million earned in this division increased by 40% year-over-year. This growth has primarily been driven by our strategy of investing in our higher margin advisory capabilities, which began in 2019. To further enhance this capability, yesterday we were very pleased to announce an indirect investment in CRCIB, a top-ranked advisory firm to the $1.8 trillion renewable energy sector. Based in the U.S., CRCIB contributes to a global client base and brings deep knowledge of market dynamics and a 15-year track record in capital-raising M&A and project financing for renewable energy sponsors and developers. With this development, we've established a business collaboration agreement which will enhance CRC IB's ability to provide fully independent advisory services to a broader base of clients while bringing dedicated expertise and relationships to benefit CG's growing client base in this sector. We look forward to collaborating closely with this team to significantly enhance our collective impact in the rapidly growing energy transition segment. Consolidated advisory revenue improved by 70% year-over-year and 17% sequentially to $78 million, of which 72% was earned in our U.S. business, primarily in the technology sector. We also reported meaningful year-over-year increases in our Canadian and UK advisory businesses. Second quarter revenue from corporate financing amounted to $52 million, an improvement of 67% over near trough levels a year ago, but 21% lower than the previous quarter, reflecting typical summer seasonality and a brief rise in volatility during September. Activity in this segment was still heavily weighted in the mining and metal sector with improved contribution from the technology and life sciences sectors. Year-to-date corporate financing revenue of $117 million was almost double when compared to the same period last year. While our Australian business remains our largest contributor in this segment, we are pleased to see improving activity levels in North America and the U.K., Trading revenue for the three-month period improved by 36% year-over-year and 11% sequentially to $28 million, primarily driven by increased activity levels in our U.S. international equities group. The 12% decrease in commission and fee activity to $35 million for the three-month period reflects lower client activity in connection with lower new issue activity in our Canadian and US businesses and partially offset by increases in our UK and Australian businesses. We've been undertaking a reorganization of our US trading business to better focus on core trading activities while reducing our exposure to non-core businesses. While this will result in slightly reduced trading revenue in this business, it's not expected to impact our profitability. In all, the adjusted pre-tax net income contribution from our capital markets division amounted to $15 million for the three-month period, up from a loss of $6 million in the prior year and an improvement of 15% sequentially. Our adjusted pre-tax margin of 7% improved from 6% in the previous quarter. We continue to be actively engaged with our regulators towards a potential resolution on our U.S. regulatory matter. While we don't have any substantive updates at this time, we hope to have greater clarity in the upcoming quarters. As previously discussed, we have continued to make significant additional investments both from a financial as well as a process enhancement standpoint in our firm-wide compliance infrastructure, including with respect to the matters under review in the U.S., and we continue to promote a strong culture of compliance among all our employees globally. In closing, we are encouraged by the general positive momentum towards a more normalized interest rate environment, which bodes well for risk appetite and should support a gradual return to healthy market for corporate financing and advisory activities in our core focus sectors. Lower interest rates, potential government stimulus, and improved market flows should generally strengthen the new issue pipeline in our core mid-market sectors. Our M&A pipeline also remains strong, driven off record private equity availability and a cheaper lending environment as interest rates come down. A lower interest rate environment is also beneficial for net asset flows in our wealth management businesses as we anticipate increasing inflows and a reduction in outflows that were previously driven by the need for clients to access funds in a higher interest rate climate. M&A appears to be returning to more normalized levels and the investments we've made in growing our capability leaves us well positioned to capture share in our core segments while advancing our impact in the energy transition segment. We're continuing to invest in the growth of our wealth management businesses with a focus on growing contributions from fee-based assets in all regions while advancing our recruiting initiatives to further increase our market position in North America and Australia. We also remain strongly committed to improving non-compensation expense ratios noting that revenue growth is also a factor in achieving this goal. While we expect continued bouts of volatility relating to the ongoing geopolitical overhang and the U.S. administration change, our commitment to operating in the best interest of our clients and shareholders remains steadfast. With that, we will be pleased to take your questions. Operator, could you please open the lines?

Thank you, ladies and gentlemen. We will now conduct a 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 a question, please press star two. There will be a brief pause while we compile the Q&A roster. Your first question comes from Rob Jeff with Ventum. Your line is now open.

Good morning, and thank you for taking my question.

Thanks, Rob.

I guess my first question would be in terms of the U.S., can you perhaps dive a bit more into the outlook for the U.S. advisor business? It's now been three quarters of exceptional growth. How is that looking going ahead?

Yeah, I mean, we're in an environment, I think you know this, with lower interest rates, more access to credit, higher stock prices. Those are Traditionally, the main indicia of an improving M&A market add to the fact record private equity balances. A big chunk of our business there is private equity driven. So the pipeline is strong. Now, whether we'll execute it all this quarter or it'll go into our following quarter, but generally speaking, over the next, I don't want to be so quarter specific, but generally speaking, upward to the right materially. you know, you don't need to look far. Some of the US M&A comps that we would have and some of those firms trading at all 52-week highs. So I think they're seeing the same trends that we're seeing, Rob.

Okay, thank you. And perhaps turning to Australia, can you talk to both the organic and the inorganic growth in the Australian wealth?

Yeah, we're looking through both channels right now. I mean, from a What do you call hiring advisors, Rob? Organic or inorganic?

I would say that would be organic.

Okay. Well, we got a lot of organic, Rob. You know, we continue to have a strong pipeline of advisors that we're hiring. We just hired another two. We see additional pipeline for more, bringing on more teams of people. We opened up that Adelaide office. We continue to hire into Sydney and Melbourne. Perth, we're already strong, but we continue to hire there as well. Right across the prospect, we continue to increase the size of that business. It was at a record high from assets under management perspective this quarter. Now, realize that as we hire those advisors, we amortize the cost of hiring those advisors over a much shorter period in Australia than we do in Canada, three years as opposed to 10 years. So it does impact our profitability as we grow. You can note that in our development line in our supplemental financials. That's money well spent as we continue to grow. In addition to all of that, we've got fundamental organic growth as well, just growing our advisors' books of business and helping them grow their books of business. That's an active effort as well. Finally, on the inorganic side, we continue to look at firms that we could layer into our platform there. Can't really speak to that. There's nothing announceable within the next three months, but we continue to survey the landscape there and think about if there's a way to step up or, you know, lockstep our business there through acquisition. So we're certainly looking at that as well as one of our priorities.

Very good.

Thank you.

Thank you, Rob.

Our next question comes from Stephen Bolin with Raymond James. Your line is now open.

Good morning. Maybe just on the carbon reduction capital, you know, in the notes it says you have an option to get equity after giving them a loan. I'm just curious about maybe a little bit of a cautious step here. Are you cautious on the firm or are you cautious on the sector?

sustainability has been an important sector for our firm for a while you'll notice that when we bought pepsi four plus years ago it's been a phenomenal acquisition and it was in our fundamental tech sector we bought results in the uk again that was tech and health care and we bought sawaya in the us that was in our digital consumer and consumer area these are all core focuses for the firm We've always said that we're going to continue to look at M&A firms that specialize in our core sectors. Sustainability is one of those sectors globally. This really gives us a massive leg up. In buying any people business, Steve, you kind of take what's in front of you. And what was in front of us in this case was making an investment in them and having a partnership with them. Certainly, it'll allow us to walk before we run. We are an administrative change in the U.S. We don't think that's really going to impact anything, to be honest. But making this modest investment in them, helping them facilitate some of their ownership objectives, and then ultimately, over the next year, integrating together and partnering together on stuff, we'll see where it goes in a year from now. I suspect this will play out in the next year one way or the other.

That's good. Canada, well, there was a jump in the interest expense. You said that the cash balances at the broker level has increased. I'm just wondering, I know someone always takes the mood of the brokers. Is this cautiousness on the broker side, meaning they want to get out of equities or bonds, move into cash, or are they clearing out to gear up to deploy in different areas? I'm just trying to get a gauge on on the mood of the brokers.

I'll let Don get specifically into our interest. You really got to look at net interest income. You got to look at our interest income, less our interest expense. Just looking at the expense, it just gives half the picture. I don't think so. I think what you will see, and this isn't answering your question, but In a higher interest rate environment, people won't just leave their cash sitting around. They will invest in interest-bearing instruments. So it doesn't show up as cash on our balance sheet. It doesn't show up as our interest income. It's their interest income. Our interest income comes, I think you know, from our margin book, which is relevant to the interest rate environments there. And our interest expense reflects that. for the most part, at least in the Canadian retail business, the interest that we pay our retail investors for their cash balances. So that will vary to a fair degree based on whether they're leaving cash sitting there or they're investing in interest-bearing instruments. But I've done a terrible job answering that question, so I'm going to turn it over to Don.

I think you did a good job, Dan. But I think, I mean, if you look at the change in interest expense, it pretty well tracked the change in interest revenue. So there is a certain amount of just simply pass through interest there. And we, just for financial statement presentation purposes, we gross it up. So the interest revenue shows at the top line and the interest expense shows on the bottom line. The bulk of the interest revenue is coming from margin loans, however.

Okay. And maybe just, you know, do you have a gauge on what your brokers are thinking? That's really, I guess the question is, is it more cautiousness or they're getting really more bullish on the market? Because I know you're, you know, you have a portion of your guys here in Canada that certainly are stock pickers.

It's less and less, as you know. Our fee-based assets are at record levels. Our discretionary assets are at record levels. Those aren't stock pickers. Those are portfolio managers. That being said, you're right. We do have an increasingly smaller subset of our advisors that do pick stocks. If you're asking me just mother-in-law research, like me asking my mother-in-law what her views are, but when I talk to our brokers, yeah, they're getting more bullish on the small cap market, and that shouldn't come as a surprise to you because you're seeing the Russell hit new highs. You're seeing that disparity between large cap and small cap shrinking now from a valuation perspective and people chasing returns. in a declining interest rate environment. When rates go down that tends to happen and I'm telling you this is like I shouldn't be teaching you this but you know as interest rates come down those companies with further out cash flows become more valuable and that tends to be those smaller cap riskier stocks. So yeah I think generally our brokers are feeling increasingly confident. We're seeing that in our new issue business as well with higher retail participation. And you'll note, this is premature to make a comment, it really is, but you'll note in our financials, we disclose kind of the investment banking revenue inside our wealth business. That hasn't moved. You know, it's been $4 or $5 million a quarter. You know, that number's been as high as $20 and $25 million a quarter, to give you a sense of what some of the upside could be flowing through the wealth business from a new issue perspective.

Yeah, that was really my point because I always look at that number as a gauge of more retail, you know, privates and pre-rounds and things like that.

So, yeah, that's a good way to look at it. But realize, of course, this was the summer, right? You know, this quarter was July, August, and a volatile September. So, you know, those numbers would always seasonally be down in our Q2. That would normally be a poor quarter for new issues, no matter what kind of new issues. So I think a more telltale sign is what's going to happen this quarter and the quarter after.

Okay. Uh, last one for me, just, I know you don't give net sales or redemptions per business line, but just in the UK, uh, is it, is it fair to say that, that they're in positive, uh, inflows?

Yeah, but just right again, it was, uh, yes, yes. Positive inflows in all three of our wealth businesses. I would say, uh, You know, that one is probably, yeah, I don't have the exact number, so I'm not going to answer. But, yes, it was positive.

Appreciate it.

Thanks, guys. And we are going to try and get closer on that next quarter. We're just assembling all the facts. So I suspect next quarter we're going to start disclosing net flows in all of our businesses.

That would be helpful. Thank you. Thank you.

Our next question comes from Michael McHugh with TD Securities. Your line is now open.

Hi, good morning, guys. Just making sure everyone can hear me?

Yeah.

Okay, great. Fantastic. You actually just touched upon with that most recent question regarding the decline in UK wealth assets quarter over quarter in pounds. Was that driven by significant client outflows or any advisor departures or maybe what was driving that quarter over quarter drop?

The quarter-over-quarter drop in pound assets in the UK, I don't have that right in front of me. Don, do you want to start answering that question?

Yeah, I think the wealth business in the UK has a small fund asset management component to it, which has been historically very focused on smaller cap-type stocks. And they've been out of favor for a couple of years now and continue to be, you know, somewhat out of favor. There are signs of reemergence as prices are getting to be particularly attractive. So they are sort of, it looks like, turning the corner. But, you know, there's the private client side and the fund asset management side. So we just, we don't separate the two in our disclosure. They're kind of combined. So the movement you see is a reflection of both. As Dan mentioned, there's slight positive inflows. With the high interest rate environment, relatively speaking, that we continue to be in, outflows are a challenge. Even though we're making great progress on the inflows, clients for various reasons are still having outflows.

Yeah, thank you, Don, for reminding me, and I was able to look at the numbers while you were answering. Yeah, the marginal decline in town terms is solely due to our small asset management business. We have a fund management business there that sells, I think we've disclosed this in the past, mutual funds to other retail and whatever, and that has been declining. You know, that's not what we consider our core business. And it's tiny, like it's 5% or maybe 7% of the overall business, but it has suffered some decline. The actual normal wealth management business has increased.

You there?

Oh, I think I lost you for one second.

Yeah.

back on. Okay, yeah, great. Thank you. And then staying on the UK theme, you briefly discussed the couple of acquisitions of CanTab and the Brooks McDonald subsidiary. Would you be able to just go dive a little deeper into the strategic rationale and how you think they'll be additive to that UK wealth platform? I know you mentioned it briefly at the start, but if you could expand a little bit.

Sure. I mean, you know, For a long time, we bought businesses in the UK that were very, very good businesses, but we were subscale. And it was important for us to get to scale, to get to the margins, quite frankly, that our competitors are at and the margins that we felt we should be operating at. We are at scale in the UK now. We are a top 10 independent wealth manager. I think we rank sixth or seventh right now. Our pre-tax profit margins are in the low 20s or even down margins or even approaching 30. So we don't need to buy things for scale anymore in the UK. To the extent that we're buying things in the UK, there's a strategic rationale to develop a more holistic relationship with our clients. So CanTap had a large proportion of its business in the financial planning space, plus got us into the Cambridge market, which we wanted to be in. So it was a phenomenal acquisition from that perspective, and we're busy integrating that in. The Brooks McDonald International business, as you know, we've got a large Channel Island business. It's an important business. Our business tended to be a little bit more intermediary focused. Their business tended to be a little bit more client focused, having direct client relationships. Obviously, there's massive synergies when we take a market like that and we integrate it in together. And we bought it at what we perceived to be a very, very good price. So, you know, everything we're doing in the UK now has a strategic rationale as opposed to a scale rationale. But that tends to mean that there's smaller, more bite-sized acquisitions that we fund off our existing balance sheet. I'm not saying we won't look at something huge in the UK, but right now that's not our primary focus.

Great, thanks. And then just one more for me and then that'll be it. Just wondering, especially compared to last quarter, how you're feeling about the cap market pipeline on advisory and iBanking fronts? Any noticeable changes in your visibility towards activity this quarter?

Well, I'll start with the harder part, which is the new issue chunk of the business, the investment banking chunk of the business. It's obviously very hard to predict, but I think you could surmise that the pace of activity has increased. And there's a lot of transactions happening. October was a very busy month. I'm not giving you a super-duper MPI there. You just look at the tape. October was a busy month for new issues. And you think about some of the core sectors we do business with, mining, albeit the gold came down the other day, is in a very important sector to us. Gold's at record highs. The stock prices are catching up to where the bullion price is. That's created activity. You saw crypto go up. Most of the crypto companies go up 25% in the last couple of days. So, you know, and small cap tech has gone up. So those are all important sectors to us. That all bodes well for a very active new issue calendar. Again, I can't tell you what our new issue revenue is going to be in three weeks from now. But if I look at the pace of activity, if that's your question, then the pace of activity certainly has increased. Similarly speaking, M&A, which has a much longer pipeline, you know, from the the time a client walks in or you get appointed to do an M&A deal, you're going to book that revenue four, five, six months later. We do see an incredible amount of activity in our M&A business. Whether that gets booked this quarter or booked next quarter, I'm not so quarterly focused. But from an overall pipeline perspective, I do think we've got a pretty robust pipeline for the next six to nine months in our M&A business, certainly through from where we are right now. Again, I want to be cautious about when deals close. So I'm not saying that our M&A is going to go up a ton this quarter. It may, it may not, but that wasn't the question. The question was just a broad pace of activity and pipeline question, which I am confident on.

That's all for me. Thanks, guys.

Thank you. Okay, operators, any other questions?

There are no further questions at this time. I will now turn the call over to Mr. Daviau for closing remarks.

Okay. Thanks, everyone, for joining us today. Truly appreciate it. And thanks for your continued interest. As always, Don, Nadine, and I will be available to take additional questions at any time. We certainly are excited and look forward to providing our next quarterly update in early February. And with that, operator, maybe we can close the line.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. Please disconnect your lines.