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 2025 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. Following 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 two. If you have any difficulties here in the conference, please press star then zero for the operator at any time. As a reminder, this conference call is being broadcast live online and recorded. I would now like to turn the conference over to Mr. Dan Daviau, Chairman and CEO. Please go ahead, Mr. Daviau.

Thank you, Operator. 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 relations presentation and in our MD&A. Before we begin, I am pleased to share that with the approval from our Board of Directors, Nadine Ahn has been appointed to the role of Chief Financial Officer for Canaccord Genuity Group with immediate effect. Since we welcomed Nadine as our Deputy Chief Financial Officer in October, she has been working closely with Don McVaden and our broader Global Operating Committee to ensure a seamless transition. And I have every confidence that she will continue to make a positive impact for the company and our shareholders. As we have previously disclosed, Don will remain very active in a senior finance capacity within our North American business, contributing his extensive experience rooted in over three decades of financial leadership across the organization. We are all deeply grateful to Don for his invaluable wisdom and expertise and look forward to his continued contributions. Both Nadine and Don are joining me on today's call. And with that, let's review our third quarter results. Our third fiscal quarter was characterized by improving performance across North American broad market indices with bouts of volatility driven by a mix of monetary policy developments, ongoing geopolitical risks, and the U.S. elections. Against this backdrop, our wealth management businesses continued to deliver impressive growth, and we also benefited from improving activity levels for corporate financing activity in most of our geographies. Firm-wide revenue for the three-month period was $451 million, up 16% year-over-year, and bringing our fiscal year-to-date revenue to $1.3 billion, up 22% year-over-year. Excluding significant items, firm-wide pre-tax net income for the three-month period amounted to $40 million, a decrease of 11% year-over-year. This translated to an adjusted diluted earnings per share of 17 cents for the three-month period. While this is a disappointing result in the context of our revenue growth, our profitability for the three-month period was impacted by certain elevated non-compensation expenses, which reflect ongoing investments in the growth of our wealth management businesses and certain client-related provisions, increased premise and equipment expense related to our new offices in Vancouver and New York, as well as increased professional fees and provisions recorded during the period largely in connection with previously disclosed ongoing regulatory matters. Our compensation ratio for the three and nine-month periods were 56.5% and 58.1% respectively. The lower ratios largely reflected a shift in our business mix by vertical segment and geography during the three-month period. As previously noted, our compensation ratios can be subject to variability between quarters and is best reviewed on an annual basis. I will note that our long-term averages have not changed. We are encouraged by a modest uptick in capital market activities over the past few quarters, and we look forward to fully participating in a recovery for mid-market equities in our core sectors when opportunities arise. Our wealth management business continues to be a source of resilience and earning strength. These businesses contributed 76% of our adjusted earnings per share for the third quarter and 82% of adjusted EPS for the fiscal year to date. On that note, I am pleased to report that our Board of Directors has approved a dividend per common share of $0.085. Turning to our wealth management operations. Firm-wide client assets grew to a new record of $115 billion at the end of the three-month period, improvements of 4% sequentially and 16% year-over-year. This improvement reflects positive inflows, market growth, and contributions from our recruiting and acquisition activities. The adjusted net income from this division totaled $36 million for the three-month period. representing a slight decline of 4% compared to the same period last year. This was primarily due to the impact of the previously mentioned rise in non-compensation costs. When measured on a fiscal year-to-date basis, adjusted pre-tax net income of $108 million increased by 1% year-over-year. Our business in the UK and Crown dependencies contributed record quarterly revenue of $116 million for the three-month period, up 14% year-over-year and bringing year-to-date revenue to $332 million, which is also a new record for this reporting period. Measured in local currency, client assets increased 7% year-over-year to a record of 36 billion pounds. Approximately £1 billion of this increase reflects assets from our acquisition of Cantab Asset Management, which was completed in October. Fee-related revenue in this business continues to be strong and remain comfortably above 80% of total revenue for nine consecutive quarters. The business achieved normalized EBITDA of around £20 million for the three-month period, marking an 11% increase from the second fiscal quarter. This brought year-to-date normalized EBITDA to approximately 58 million pounds. Our UK wealth management business was our largest contributor of adjusted pre-tax net income for the three- and nine-month period. That said, the quarterly and year-to-date contributions were flat when compared to the prior year's comparison period, primarily reflecting investments in our growth and capabilities. As the impact of inflows from our recruiting and acquisition activities are reflected in our results, we expect margins in this business to improve. And finally, we look forward to completing our acquisition of Brooks McDonald Asset Management International in the current fiscal quarter, which we expect will add just over £2 billion in client assets. Third quarter revenue in our North American wealth management business increased by 25% year over year to $96 million, largely attributed to higher commission and fee revenue. While we experienced a modest uptick in revenue from new issues during the quarter, activity levels in the segment have remained below historical levels, reflecting a reduced risk appetite among investors. Despite the reduced contributions from new issue activity, year-to-date revenue of $274 million represents 92% of the record revenues earned by this business in the prior full fiscal year. Client assets in this business improved by 17% year-over-year to a record $42 billion. and fee generating accounts now represent 55% of total assets under administration in this business. I'm also pleased to report that the average practice size per advisory team has increased to $292 million. We continue to experience solid recruiting momentum in this business, and we've had an excellent experience onboarding new teams in Calgary and Vancouver. The adjusted pre-tax net income contribution from this business was $9 million for the three-month period, down 17% from the prior year's comparison period. Profitability was impacted by higher premise and equipment costs in connection with our new Vancouver headquarters, in addition to an increase in our G&A for an elevated client-related expense, which is one time in nature. On a fiscal year-to-date basis, adjusted pre-tax net income improved by 5% year-over-year to $30 million. And finally, our Australian wealth management business earned record quarterly revenue of $21 million for the three-month period and $59 million for the fiscal year-to-date, increases of 31% and 27% respectively. Similar to our North American business, New issue activity remained below historical levels, but we are pleased to see a 31% year-over-year increase in revenue from this segment to $21 million for the three-month period. Managed client assets grew to $8 billion at the end of the three-month period, a year-over-year increase of 33% and a new high for this business. Our recruiting activity in this region remains strong and is contributing to a growth of fee-based assets, which contributed 43% of the total revenue in the third quarter. Adjusted pre-tax net income amounted to $2 million for the third quarter, bringing the year-to-date contribution from this business to $4 million, surpassing the full-year amount earned in fiscal 2024. Turning to the performance of our Capital Markets Division, On a consolidated basis, revenue earned by our capital markets division amounted to $211 million for the third quarter, which was relatively flat when compared to the prior fiscal quarter. This brought fiscal year-to-date revenue to $618 million, a year-over-year improvement of 29%. Third quarter profitability in this division was flat compared to the most recent fiscal quarter and down 11% year over year to $15 million. While our Canadian, Australian and UK businesses had positive contributions, our US business continued to be impacted by the previously mentioned expenses in relation to our ongoing enforcement matter. Additionally, trading expenses in this business increased in line with the increase in trading revenue. Our advisory segment was the largest contributor to our consolidated capital markets revenue mix in the quarter, although revenue of $70 million was down 6% from the same period a year ago. While still our largest contributor of advisory revenue for both the three- and nine-month periods Fees earned in our U.S. business declined by 28% year-over-year to $31 million in the third quarter. This reflects the timing of deal completions, which benefited our revenue in the prior fiscal quarter. On a year-to-date basis, advisory revenue in this business is up 25% year-over-year, and we continue to see this as a constructive environment. Our Canadian business experienced a notable increase in advisory revenue of 115% year-over-year to $23 million. While we had visibility into a solid pipeline of advisory mandates, our third quarter revenue was disproportionately impacted by a large fee by the completion of a significant mandate. Despite operating in a persistently difficult market for capital markets activities, Advisory revenue in our UK business was up 21% sequentially to $16 million. On a consolidated basis, corporate financing revenue increased by 46% year-over-year to $58 million as clients took advantage of more favorable conditions to raise capital. This brought our year-to-date revenue in this segment to $175 million, up 75% compared to the same period a year ago. Our Australian business reported a 28% year-over-year increase in new issue revenue to $21 million, reflecting a robust environment for mining sector activities. I will note that we anticipate some seasonality over the coming months, as this period typically marks a slower summer season in Australia. Corporate financing activities also showed modest improvements in our Canadian and U.S. businesses. which contributed 19 million and 17 million dollars respectively. While we've been pleased to see an improving operating environment for corporate financing, activity levels for small and mid-cap companies often trail broader market trends as we await a more supportive environment for risk equities. Revenue on our trading businesses improved 18% year-over-year and 28% sequentially to 35 million dollars. largely reflecting improved retail flows in our U.S. international equities group. We continue to work towards resolving our U.S. enforcement matter. In connection with our periodic assessment of the adequacy of our provisions, we increased our provision based on engagement with certain regulators during the quarter. We do not have any other substantive update, nor is it clear when we can expect resolutions. We've also had an active effort around reducing non-compensation expenses and improving our profitability, recognizing that compliance-related spending will continue to be elevated in the near term. Our outlook for the balance of our current quarter is constructive. As we look towards our 2026 fiscal year, we are optimistic for strong performance driven by continued strengthening of the corporate financing and advisory activities in our core capital markets verticals, coupled with a continuance of growing contributions from our wealth management businesses.

And with that, Dawn, Nadine, and I will be pleased to take your questions.

Thank you.

Ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question, please press star 1. on your telephone keypad. If you would like to withdraw your question, please press star 2. There will be a brief pause while we compile the Q&A roster. Your first question comes from Steven Bolin with Raymond James. Your line is open.

Good morning, everyone. Can we just dig into the growth in the expenses in G&A and the Canadian wealth management division. I know you said there are some client-related provisions as well as maybe new costs for the new headquarters. Am I reading that or can we get a breakdown?

Yeah, you nailed it. I mean, we just opened up a huge new office in Vancouver. Certainly, you've seen the incredible growth that we've had in our Canadian wealth business. We're increase in the Vancouver space is now in that quarter. So you've seen an uptick on that cost, but the other costs are kind of one-time-ish, not one-time-ish, but they're not recurring. There's a couple of specific client-related costs that we have to incur some expenses in. So those costs will come down next quarter. Not the least cost, but certain client costs.

Don, I don't know if you have other comments. Yeah, I mean the lease cost would obviously be captured in the premises and equipment line and the client-related activity and some professional costs and so forth would be in G&A. Also, typical seasonal activity in this quarter also contributes to a little bit of an uptick in the G&A number.

Okay, so I know you don't like giving guides, but that $8 million you reported on the G&A, $5 million related to this client-related provision or $4 million? What's the run rate, Don, Nadine, in terms of what you think?

Well, it wouldn't be a run rate. It would just sort of be a one-time component in terms of the impact on the Q3 numbers. Those costs go back to historical numbers.

So probably the run rate would be in the $4 or $5 million, which previously is what you've been reporting for the last couple of years?

Yes.

Okay. Can you talk about what the client-related, you know, matter is?

It's irrelevant to the proper picture stuff, to be honest, and we won't get into specifics, but we just have to examine it.

Okay. It's not an ongoing matter that's going to lead to recurring costs.

Okay. And, like, why would the new headquarters – in Vancouver, is it just wealth management there or is it capital markets in there? I'm just, why, why would that premise be booked in that division as opposed to corporate?

Well, we've got four floors, I think four, five floors on four. Yes. Four floors, three and a half, three and a half member wealth. So most of it's a wealth.

Got it. Okay. Thanks for that. Um, just in the U S provision, The language in the MD&A says that you booked this for another increase in provision, but there's a likelihood that it may go higher. I'm just curious, is it just you wouldn't have booked more because you don't know what that amount is, but you do believe it's going to go higher?

We don't know. I think we don't know what the amount is going to be ultimately. So we book the estimate on the basis of the information we have. Okay. All right.

Let's move to the positive. Basically, Dan, you always talk about the pipeline for M&A. Maybe you could just go through each of the main divisions. You say you always have a good kind of pipeline. Yeah.

Yeah, but again... separating them up by country, you know, as you kind of divide the M&A line into little teeny buckets, you're always going to get some volatility around it just because you've got, you know, some big fees that fall into one quarter and don't fall into another quarter. So, you know, the direction of travel is exactly as I indicated, up and to the right. We're probably in, and I'm sure your own folks would tell you this, Steve, we're probably in probably one of the more buoyant M&A markets I've seen in the last several years. Just prices are good. You've got a great regulatory environment in the U.S. You've got access to capital. You know, you continue to have, you know, huge private equity balances looking to put out money. So we're probably in one of the more conducive M&A environments going forward. How that books into every single corner, you know. We've got visibility, but not that kind of visibility. Things get delayed a week, two weeks or three weeks, but. generally up and to the right, and it continues to be a very conducive market. So you saw it in the U.S. last quarter, all just very, you know, timing-related. Canada went up. It's less relevant, but we continue to see that improving in the course to come.

Including the current quarter. Okay. That's it for me. Thanks very much. Good questions. Thank you.

Your next question comes from Robert Goff with Ventum. Your line is now open.

Thank you, and good morning. My question would be on the advisory business. Would you also describe the advisory business as being one of the more buoyant markets?

Yeah, that's what I was describing, the M&A advisory business. Sorry, I misnamed it. Yeah, our M&A, is that what you're talking about, or are you talking about our wealth business?

It's both buckets that look strong. So both the mergers, acquisitions, and the underwriting business look relatively robust.

Oh, sorry, the underwriting business?

Yeah, the underwriting business.

Yeah, well, again, Rob, you see it as well as I would see it, to be honest. Yeah, it's getting better, for sure. You know, weeks like last week don't help. You know, volatility kills new issues, as you know. Or is it this week? Everything's a blur. Everything's a blur. It was this week, I guess. So, yeah, I think as we get to that little hint of stability and the risk trade improves where we're seeing it, it's for sure there. Our U.S. business is disproportionately impacted by the IPO market. Like that's a higher percentage of our activity there. So, you know, we're seeing, you know, IPOs get done and starting to improve the pace of that. So that's helpful. And then we're seeing a number of small cap financing startups. We've done several in Canada last week outside of our traditional mining sector, which is 45% revenue. We're seeing that broadening out into some of the other sectors as well. So, yeah, we're constructive on that. But as I've always said, we have less visibility, you know, We do a deal next week that we weren't 100% sure even existed this week. So you don't have the same degree of visibility as you do on the M&A business. But yeah, broadly speaking, we see deal payback pace of activity increasing.

Thank you. If you could turn to Australia and the wealth side for a minute. It was nice to see the AUM increase in local currency, 9.1 versus 8 in flat advisors. Can you talk to your organic growth prospects and perhaps broader or inorganic growth in advisors?

Yeah, I mean, we continue to have an active plan in place to recruit advisors from competitors and banks in that market. Very similar to the strategy we've employed in Canada as successfully. We've brought on tens and tens of billions of dollars of advisors. And that market continues to be very active, and there's good coordination between our Canada and our Australia wealth business about how to grow that market intelligently. So it is working out according to plan, but it's the law of small numbers. I mean, we started at three. We're now at eight. And in Canada, we're at 42. So we've got some work to do to replicate what we have in Australia and what we've built in Canada and Australia, and we're actively working at that in Australia next week, the week after next. You know, we continue to have very, very strong aspirations for that market, and we think we can do a phenomenal business there.

And the advisor economics remain very attractive in Australia?

Yeah, arguably more. Markets are always changing. Arguably, the model is better in Australia than it even is in Canada.

Thank you.

Your next question comes from Graham Riding with TD Security. Your line is now open.

Hi, good morning. Your AUA growth in Canadian wealth was strong, and according to you, have some success recruiting or closing some new advisors joining the business?

Hi, Graham, it's Don. Yes, we did have some growth. larger-sized books come into the business during the quarter as a result of the recruiting effort. I mean, as you know, it tends to be lumpy, so it does stand out when we do get that.

We certainly have important buyers in Vancouver, in Calgary, and in Ottawa.

Okay, great. And then on your UK wealth, it looks like there's a little bit of margin compression going on. It seems to be around the compensation side.

What would be driving that?

Well, it's just our continued efforts at improving organic growth and putting systems and so forth in place, which is gaining traction. But you obviously always incur the cost before you get the benefit. So there's a little bit of that, as well as we closed on the Cantab acquisition right at the start of the quarter on October 1st. So there's always a little bit of noise as we integrate that new business into it. existing larger platform. There's nothing exceptional.

It's just sort of those kinds of costs. Okay. That's it for me. Thank you.

Listen, I mean, absent the expenses, the corridor was a great, it was a good corridor, exactly what we had hoped to kind of. We're all over, so certainly appreciate the questions, and we continue to look forward to our upcoming quarter Q4, which will be our year-end, and lots of moving pieces around that. So appreciate everyone's participation on the conference call, and our next formal update won't be until June, but we'll obviously be talking to you folks before then in term. Nadine and myself and Dawn are around, your participation in this and goodbye from New York, which is where we're sitting today.

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