Q2 2022 Canaccord Genuity Group Inc Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by I'd like to welcome everyone to the Canaccord Genuity Group, Inc. Fiscal 2022 second quarter results Conference call.
All lines have been placed on mute to prevent any background noise and following the Speakers' 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 the star followed by the numbers too.
If you have any difficulty hearing the conference. Please 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 <unk>.
President and CEO. Please go ahead Mr. Gabriel.
Thank you operator, and thanks for everyone joining us for today's call as always I'm joined by Dan Mcfadden, Our Chief Financial Officer.
Following the overview of our second quarter fiscal 2022 results, both Don and I will be pleased to answer questions from analysts and institutional investors.
During today's discussion will refer to our earnings release, and MD&A copies of which have been made available for download on SEDAR and the Investor Relations section of our website at <unk> Dot Com, our quarterly investor presentation and supplemental financials are also available on our website.
Won't cover the entire presentation. During this call, but I will refer to certain slides to guide our discussion.
Within our update certainly reported information has been adjusted to exclude significant items in order to provide a transparent and comparative view of our operating performance.
These adjustment items, our non ifr S financial measures.
These refer to our notice regarding forward looking statements and the description of non <unk> financial measures that appear on page one of our investor presentation and in our MD&A.
I expect that you've all had the opportunity to review our quarterly disclosures that were made available last night.
The operating environment remained healthy throughout the three months period, and we experienced some seasonality in our new issue and trading businesses.
M&A activity has picked up substantially while new issue activity has declined from record volumes of recent quarters. It has remained comfortably above historic levels.
Our wealth management businesses in all of our regions performed strongly, albeit with lower contributions from new issue activity in Canada and Australia.
Firm wide revenue for the three month period amounted to $475 million and.
An increase of 22% compared to the same period last year.
When measured on a year to date basis adjusted revenue for the first half of fiscal 2022 amounted to $231 million, an increase of 30% compared to the same period a year ago.
Looking at slide six of our Investor presentation, we can see that our second quarter and first half results surpassed the prior fiscal year on every measure revenue net income and adjusted earnings per share.
Excluding significant items firm wide pretax net income of $96 million for the second quarter contributed to a year over year increase of 127% or $117 million for the first six months of fiscal 2022.
This translated to adjusted diluted earnings per common share a 58 for the second quarter and a $1 31 for the first half year over year increases of 107% and 147% respectively.
Well, we are certainly pleased with this result, we note that it was achieved in a more challenging backdrop for risk capital, where several ECM transactions, where either pulled the worst postpone in addition to the seasonality that is traditionally impacted our second quarter capital raising activities.
Our diversified platform has positioned us to generate stable growth regardless of the operating environment.
Slides eight and nine show the contribution of revenue and net income from our core businesses and geographies excluding.
Excluding significant items, our total expenses as a percentage of revenue for the second fiscal quarter decreased by seven two percentage points when compared to the same period, a year ago with non operating compensation costs coming in at 19% a year over year reduction of four percentage points.
This result was driven by a combination of revenue growth and expense discipline, resulting in an adjusted pre tax profit margin of 20% for the second fiscal quarter up seven two percentage points from the same period last year.
As evidenced on slide 10, we maintained a strong focus on the efficiencies and cost discipline measures that we implemented prior to the pandemic.
We've yet to see a meaningful increase in travel and entertainment costs, but as restrictions ease in person activities are increasing and related costs are moving up.
We expect this trend to continue as demand for in person or hybrid conferences return.
Although this activity is returning to more normal levels, we continue to operate with a disciplined and selective approach to our spending in this area.
Reflecting our focus on returning capital to shareholders. We have remained active in our NCI program, we expect that to continue through the second half of our fiscal year.
I'm also pleased to report that our board of Directors has approved a quarterly common share dividend of $7 <unk> for the second fiscal quarter.
Total capital deployment initiatives through the first half of fiscal 2022, including common share dividends and buyback activity amounted to $44 million or.
Or 28, 6% of our adjusted net income.
With that let's turn to the performance of our operating businesses activity levels in our global capital markets business remained very strong over the three month period, reflecting the strength of our mid market franchise and the steadfast commitment from our talented teams across the businesses and geographies firm wide capital.
Market revenue for the second fiscal quarter amounted to $305 million.
26% compared to the same period last year.
Our U S business was the largest revenue contributor for the three months period with total revenue of $179 million.
Up 59% compared to the same period a year ago.
Revenue contributed by our U K and Europe capital markets business increased 130% year over year.
Second quarter revenue in our Canadian and Australian businesses remained higher than historic levels, but declined 15% and 26%, respectively, reflecting lower new issue and trading activity when compared to the second quarter of last year.
Over the three month period, we participated in 128 transactions to raise gross proceeds of $16 billion for growth companies.
Firm wide investment banking revenue for the quarter was a very healthy $90 million, but down 18% compared to the same period a year ago.
Revenue earned from our trading activities were 28% lower on a year over year basis, a reflection of lower market volatility, which decreased market activity and revenue opportunities primarily in our U S and Canadian operations.
These declines were offset by a 279% year over year increase in higher margin advisory revenues, which amounted to $139 million for the stream month period.
Our U S business delivered a 419% increase in advisory fee revenues, which amounted to $104 million.
Surpassing all prior full fiscal year amounts from this team.
Our UK business with a substantial contribution from its Paris office and our Canadian Operation also delivered substantial increases in this segment with increases of 205% and 58% respectively.
Our exceptional track record of delivering ECM transactions and successful outcomes for mid market growth companies has helped to add to the growth in our advisory practice.
I am so pleased with our specialists in all regions, who can have that trusted conversation with top decision makers across sectors and regions and coordinate our delivery of innovative ideas and solutions to companies without conflict. We also made strategic investments in this segment to complement our ECM focus area and we're seeing the benefits of that.
Plan.
Building on the successful deployment of this strategy, we continue to explore further investments to grow our advisory capabilities.
Reflecting the increase in higher margin advisory activity, the second quarter adjusted pretax net income contribution from our capital markets business improved by 70% year over year to $73 million.
And adjusted pre tax profit margin increased by six percentage points to 24%.
Across our capital markets businesses, we continue to pursue opportunities for expanding our product offerings.
As we develop ancillary products to complement our midmarket capabilities, our long term earnings potential is enhanced.
Looking at the current quarter market activity has demonstrated that new issue and advisory levels remain robust through October.
The environment remains constructive and the final two months of this calendar year. We are optimistic that our Q3 results will continue to reflect our strong market position.
Our global wealth management businesses delivered another quarter of impressive growth firm wide client assets reached a new record up $98 billion up 34% year over year.
Total revenue for the quarter and our combined wealth management businesses amounted to $166 million.
An increase of 14% compared to the same period a year ago.
Excluding significant items, our second quarter pretax net income contribution increased by 18% year over year to $32 million.
This brings the total contribution for the first half of this fiscal year to $80 million.
Up 56% from the same period last year.
Client assets in our Canadian business reached a new record of $36 billion at the end of the second quarter with the average book per advisor growing by 44% year over year to $245 million.
This increase was driven by a growth in commissions and fees and interest revenue, which was partially offset by lower investment banking activity.
I will also note that the proportion of fee based revenue in this business increased to 45% a year over year improvement of 13 percentage points.
We continue to focus on growing contributions from this segment through our recruiting activities as well as continuing to support our existing advisors and expanding their offering to capture a greater share of wallet.
Fiscal year to date, the adjusted pretax net income contribution from this business amounted to $36 million.
An increase of 87% when compared to the same period in the prior year.
We also ranked very strongly in an independent survey of Canada's top wealth advisors with total number of CG advisors exceeding representation from all other independent firms by a wide margin.
While the recruiting environment remains competitive we continue to have strong momentum we.
We are also maintaining a strong focus on alternative ways to add products and services to grow and enhance our overall Canadian wealth offering.
Client assets in the UK and Crown dependencies increased by 27% year over year to $58 billion.
Revenue reached a new quarterly record of $75 million for the three month period up 17% year over year excluding.
Significant items the pretax net income contribution from this business amounted to $20 million for the second quarter and $39 million fiscal year to date increases of 40% and 30% respectively.
Our organic growth strategy is beginning to produce results and margins in this business continued to be strong.
Fiscal year to date, the adjusted pre tax profit margin in this business was 26, 4%.
Three six percentage points from the prior year.
During the quarter, we announced the completion of the 218 million dollar investment by certain accounts and funds of Hps investment partners.
On an as converted basis, the convertible preferred share investment into our U K wealth management division reduces our equity interest in this business by approximately 22%.
Our partnership with Hps continues to be positive and constructive as we continue to explore opportunities to materially add businesses to our platform in the U K in a manner, which is complementary to our existing business and accretive for our shareholders. I'm also very pleased to welcome our new colleagues.
Adam <unk> company.
This transaction closed on October one so the assets and revenues will begin to be reflected in our results for the second half of this fiscal year.
We are excited about the strategic fit of this highly complementary business and we look forward to a seamless integration.
This development will increase our client assets by roughly $3 billion and we expect it will be accretive to our adjusted earnings.
Finally manage assets in our Australian wealth business increased by 43% year over year to a record $5 billion.
Demonstrating our continued strong momentum in this region.
Second quarter revenue increased by 31% year over year to $19 million.
While revenue from new issue activity declined by 23% sequentially. This team delivered a new quarterly record of $16 million in commission and fee revenue up 40% year over year, we continue to execute against a broad range of opportunities in this business.
We remain focused on advancing advisor recruitment and asset growth as we maintain momentum as the premier brand for small and mid cap investors in Australia. Our recruiting success in this region have increased substantially because of this momentum and finally as our Australia franchise grows larger we continue to add.
Assess the appropriate ownership structure of that business to align our employee base in the region and provide the business the capital it needs to grow in conclusion I'm very pleased with our results for the second quarter and the first half of fiscal 2022.
Despite the environment for new issues, returning to more normalized levels. The global macroeconomic environment continues to provide a supportive backdrop for activities in our core mid market sectors. The M&A environment is the strongest we've seen and we are optimally positioned to deliver on our growing pipeline of strategic.
<unk>, our market position is stronger than ever and we are among the league table leaders in all of our geographies.
We are especially grateful for the trust that our clients and shareholders have placed in us and we strive to always exceed their expectations as the leading independent mid market investment banking and wealth management firm.
As travel restrictions ease we.
We are reestablishing the personal engagement that is so important for our employees and clients.
We entered the second half with a very strong balance sheet and a very healthy working capital position to support all our business activities. We continue to invest strategically do enhance our mid market capabilities.
And grow our wealth management businesses with our buyback activity or share count continues to trend lower supporting enhancements to our earnings per share in any market backdrop.
And with our balance sheet strength, we expect to be able to continue this activity.
As always we remain firmly committed to delivering outstanding experiences and results for our clients, while managing our business for profitable growth and creating sustainable long term value for our shareholders.
With that Don and I will be pleased to take your questions. Operator can 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. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press star two.
There will be a brief pause while we compile the Q&A roster.
Your first question comes from Jeff Fenwick of core Mark Securities. Please go ahead.
Hi, good morning, everyone.
So Dan.
I wanted to start with wealth management I mean, it's been.
Great Brian of adding client assets.
Particularly the assets average assets per team that's been growing quite a bit could you maybe just.
Discuss the dynamics about what's going on there now in terms of I know you were adding some teams.
Some smaller ones.
Good to go.
What's accounting now for the asset growth or is it more of a focus I'll just capturing more of those existing client assets is there a pipeline of advisers that youre looking to bring on over that sort of near to medium term, how do we think about growth in Canada from here.
Yes, great.
Great question, and obviously, it's something that.
<unk> continues to be front of mind for us.
I want to answer your question with all of the above I guess I mean.
First thing is we're seeing really good growth in our existing advisors. I mean, you saw that survey come out recently.
Although we have 2% market share we had 18% of the top advisers in the country and the Globe survey of the other day. So our 12, sorry, 12% 18 advisers or 12% of the advisor the global advisors kind of work for US. So we've got a great group of advisers that are growing their books materially.
Stuart was in a trade publication yesterday speaking a little bit about that in terms of what what the underlying growth of some of our advisors assets event. So that's been the primary driver of growth I'd say in the last.
In the last quarter, but we continue to attract new advisors as well, there's obviously nothing's really changed in the underlying trends in terms of us bringing on new people. We continue to meet a lot of new people and we continue to expect to see some people transitioning through the piece I mean, we just came through the summer that's not really a time.
Where people do a lot of transition, but I suspect over the next several quarters, we're going to see a pickup of the transition of existing advisors. We're also looking at adding new tangential segments to our wealth business and growing wealth assets that way as well. So we've been exploring a number of different alternatives.
As you know, Jeff we've invested $400 million growing our wealth platform, we're going to continue to invest we obviously have a very robust balance sheet. These days given our profitability. So we're going to continue to invest growing our wealth platform in Canada, we've invested a ton in technology talent and systems to Todd on branding and marketing everything.
That advisors need to grow their business. So nothing's changed on that strategy I'd say, if anything we're doubling down on it.
Okay, and then what about possible platform adds you had an initial approach there to the Richardson of South Korea, but there are other.
Independents in Canada, you might take a look at your I mean, you are in a position to as you saw.
Say financially to look at something like that or is that more on the individual teams.
Again all of the above.
Theres not a lot of things strategically available theres, just not a lot of large independent platforms out there as you know.
You can probably count them on less than one hand.
In terms of in terms of what what's out there, but strategically we felt there was a chance to bring on a.
Synergistic platform, we've really upped tiered our business.
240 ish million dollars per advisor.
Our advisor group as large it wouldn't help the brand to bring on.
A bunch of advisers with significantly lower box.
The reason we are as profitable as we are in our Canadian wealth business as the advantages you get from having very large advisors. Some very large advisory books and the profitability associated with that so we got to be careful about culturally what we bring on we built an incredibly strong culture and our wealth business and we want to be very <unk>.
So they have to not destroying that through something strategic something strategic should add to it and not take away from it.
And maybe a follow on to your comment there about the larger teams in the better profitability, obviously healthy just the pressure drop in the new issue business here, but.
This is still a good level of profitability of this sort of a low mark do you think a low watermark for further group here and on a normalized basis should be probably a bit higher or what's your sense.
Yes, I mean that would be if I was going to predict.
One business this would be the business I'd predict.
Forward looking.
Yes.
Hard to predict the new issue business and Thats, obviously down significantly 30 ish million dollars quarter over quarter of 25 ish million dollars quarter over quarter like we get that and that's going to happen new issue, but realize and I know you know this we're coming off the summer as well, we don't do a lot of retail driven new issue work in the summer.
So thats seasonally always slow.
Number one so I suspect there's upside from there number two our fee and commission revenue is going up like it just.
It tracks, our assets and our assets are going up so it's going up so yes, if you're asking me was this quarter a low quarter for our Canadian wealth business I think it was a low quarter for our Canadian wealth business that I think the profitability of that business will continue.
To grow higher I don't think it will be as high as it was when we had $40 million of new issue revenue flowing through that flowing through that business, but over time, we can certainly get there.
As our fee and commission revenue goes up.
And.
Thats helpful. Thank you and then why don't we talk a bit about Australia, I mean, you've made some very good progress there so far in wealth management there was some.
A brief comment in your release about looking at appropriate or inappropriate ownership structure in Australia can you just clarify that.
What's that pertain to you as a wealth as a cap markets is it both.
Like like Canada, we run an integrated wealth and capital markets business in Australia. So you can't really differentiate one from the other and say.
But we do want to continue to bring on advisors.
<unk>.
Many handfuls and Footfalls of advisers, joining us and Australia, it's a very similar strategy to this strategy we deployed in Canada.
And as part of that you're issuing equity.
The people who are joining you're issuing.
Sure.
Youre, giving advisers loans as well.
And as that business continues to grow and you can see it's becoming a more material part of our revenue not only the wealth side, but the capital market side its capital requirements change as well as it becomes bigger so I just we don't have anything to announce at this stage, but.
Now, we own 80% of that business that could adjust as we continue to grow that business and continue to bring people and teams on.
You can you can imagine a bunch of different scenarios and how that can play out and it's just premature to announce it but it's always something we're continuing to evolve as I've told people in the past Australia has a really long way away from.
From Toronto.
The furthest place on Earth.
So to the extent that we can have a little bit of local ownership in that business. That's.
Thats optimal from our perspective.
Okay, Great. That's helpful color I'll re queue.
Thank you so much great questions.
Your next question comes from Paul Golf of Echelon. Please go ahead.
It's accelerated rather Rob on the call.
Hey, guys. Good morning. Thanks.
Congratulations on the quarter you had another good quarter great quarter.
My first question would be on the strength of the U S advisory business can.
Can you talk to the verticals associated with that and just give us any further insights into the sustainability of that gross revenue lines.
Yes, great question.
<unk>.
Yes.
M&A is M&A is up globally, I think that not just us but most of the participants in the M&A market. We're seeing a very very strong underlying environment for M&A broadly speaking that being said.
Based on all the stats, we have our boat has risen more than all the other boats in the harbor, we've done remarkably well, but that shouldnt come as a surprise given the investments that we've made in M&A, we've talked about it at <unk>.
<unk>, we've done M&A acquisitions in the U S. We bought we bought pit SKU pruning a.
Two and a half years ago and that integration has gone incredibly well M&A is more in the ethos of our U S business, it's always kind of been there in some of our other markets, but it's become very very important to our U S business and we're earning disproportionately large fees on disproportionately larger assignments.
As as M&A kind of becomes further ingrained in our business. So.
Is it sustainable after a 400% uptick I don't know the answer maybe.
We continue to be in a very very good M&A environment globally and in the U S and have a robust pipeline of activity that we are continuing to execute.
As you probably also know M&A is probably one of the few businesses in our capital markets business, where you can project.
Yes.
When some of those to raise money you don't necessarily know two months before whether they are raising money when youre doing an M&A assignment you have got pretty good visibility for the next three to six months in terms of what the pipeline of activity looks like I'll be you could have.
Timing delays or what have you. So we feel pretty confident in our M&A pipeline and to be honest, we feel pretty confident in our new issue pipeline in terms of the activity that's going on there probably was a little bit of a.
Bump along the road post the summer late summer early September.
And that worked its way through the market I think as you can see the activity levels are still pretty robust out there.
Our market position, if anything is stronger not weaker than where it used to be in our most relevant markets.
Okay. Thank you.
Jeff touched on Canada, and Australia could we perhaps turning to the UK and talk through what sort of organic growth.
You are seeing margin expansion you're seeing.
And in terms of what you were looking for and what you are assuming for inorganic growth along looking at partnering H B.
Yes, all great great questions and something that's top of mind for us.
The from a from an inorganic perspective for the last several years, just taking a half a step back for the last several years, we've really truly been focused on increasing our scale of that business, mainly through inorganic initiatives and you know that we bought a number of companies and slowly integrated demand an increase.
Our margins as we were doing it.
Right out of the playbook that I think.
Pretty well articulated to you and to our shareholders.
That activity continues that being said.
We've had a serious initiative probably for the past six months about growing in or growing organically grow it just growing our business.
And increasing wallet share and increasing assets per existing client.
And that initiative is starting to take shape, we've seen reasonable organic growth in that business, but reasonable organic growth in that business is not 10% a year of 15% a year, it's 5% a year, 4% or 3% that's remarkable organic growth and that's kind of our objectives and thats kind of what we are witnessing right now so.
I think we are achieving our organic growth objectives.
Inorganically.
Through acquisitions, we continue to look at a number of different opportunities and our aggressive on a number of different opportunities not only do we have a phenomenal management team that we are incredibly confident in their ability to execute those acquisitions, but we now have a financial partner that increases our resolve.
And trying to get M&A done so.
As you had indicated hps and <unk> been a very good partner in albeit a relatively short period of time, there a minority investor in our business now they own 22% of our business.
Bought in at a law.
Roughly $1 billion Canadian valuation.
Certainly gave us the.
The currency through which to look at further acquisitions and we've been aggressively pursuing further acquisitions as well nothing clearly to announce at this stage M&A always has probability adjusted to it but we are looking at increasing the scale of that business. We think that is the scale of that business increases our margins.
Increase our scale increases and it even becomes a more valuable entity. We closed the Adam <unk> Company acquisition that integration is done was done relatively quickly.
And we see more acquisitions in our future as we scale that business.
Thank you and one last question if I may.
Asking about the recruitment of bank advisers onto the Canadian wealth platform could ask you about what you are seeing with your existing advisors.
Capturing accounts from banks.
See individuals migrating from banks at a greater pace than you have historically.
Yes.
Yeah, Great question I'm not sure I've got that visibility at this stage to be able to.
Articulate that but what we really look at when we measure this not so much. It's hey are we capturing clients that used to be clients at a bank and bringing them over here.
Our internal organic growth efforts are obviously.
Visors can win new clients, but it's more about increasing their share of wallet of their existing clients.
We tend to find not all of our advisers, but certainly for a subset of our advisors that they have 20% or 30% of our clients.
Investable assets, how do we get that to 50 or 60 or 70, we could double our book size just by effecting that strategy. So it's much easier to increase your share of wallet from an existing client.
Then when a new client so to speak and if we're supporting our advisers growth. It's more along those lines I would argue.
Sure.
Very good thank you.
There are no further questions from the phone line. So I would like to turn the conference back over to Dan David Miller for closing remarks. Please go ahead.
Thank you very much operator, I really appreciate it and I appreciate everyone joining us today on the call again.
Listen we've had a remarkable amount of success over the last six or eight quarters, we continue to perform certainly above expectations.
Incredibly proud of our team and the team Thats executed where for the most part back in the office and have returned to the office and culturally we think thats phenomenon, because I think culturally we've certainly changes organization.
We certainly look forward to the upcoming holiday season and.
And the continuation of reopening in most of our regions I'd certainly like I know, it's early but let me be the first to extend my best wishes for a safe and happy holidays.
So we'll talk to you again in February when we release, our third quarter results and thank you operator, we can close the lines.
Thank you ladies and gentlemen, this does conclude your call for today, we thank you for participating and ask that you. Please disconnect your lines.
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Okay.
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