Q1 2023 Canaccord Genuity Group Inc Earnings Call

Gentlemen, thank you for standing by. I'd like to welcome everyone to the Canacor Genuity Group in fiscal 2023, the first quarter results conference call. The first quarter results conference call. The first quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After 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 star then the number 2.

If you have any difficulties hearing the conference, please press star 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 Davio. President and CEO , please go ahead, Mr. Davio. Thank you, operator, and thanks to everyone for joining us for today's call. As always, I'm joined by Dom McVaden, our Chief Financial Officer.

Following the overview of our first quarter fiscal 2023 results, both Dawn and I will be pleased to answer questions from analysts and institutional investors. Today's remarks are complementary to our earnings release, MDNA, and supplementary financials, copies of which have been made available for download on Cedar, or on the investor relations section of our website at cgf.com. Within our update, certain reported information has been adjusted to exclude significant items.

in order 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 in the description of non-IFRS financial measures that appear in our investor presentation and also in our MDNA.

As widely reported and known to anyone following our industry, financial conditions in our first fiscal quarter have been challenging.

driven by geopolitical and macroeconomic factors that have impacted asset prices, market activity, and confidence amongst investors and corporates. and confidence amongst investors and corporates.

Despite this, we continue to help our clients achieve their business and financial goals and manage risk.

In addition to the more challenging backdrop, another headwind for this quarter's results was the impact of sharp declines in the market value of certain inventory and warrant positions earned in respect of our investment banking activities, which primarily impacted our Australian capital markets business and to a lesser degree our Canadian business. If you are working those are part of your ties with your Administration wood removable band. If you are workingCEM, is part of your business and you are working Steeliendo SAP look at a kind of control structure relationship organizationves are your own business and you are an individual. If there you need more makes drops from it to intake of will fund practices related events, you may not quite notice the benefits ofels or your business so your partner will work with your partner in order to investigate the risk of troubles and public safety, any changes may happen to their mood in your business, any changes may happen to your partner you

In our Australian business, the rapid deterioration and market values during the quarter translated into a significant decline in our fee-based share and warrant inventory values.

On a net basis, this market downturn had a negative impact on revenue of about $20 million in our Australian capital markets business. The impact of market declines also had a negative impact on revenue in Canada as we recorded facilitation losses of about $11 million offsetting our commission revenue and fee share inventory of justments of about $7 million.

All our inventories are actively managed and as such many physicians were monetized during the quarter. So we believe that any downside risk associated with these types of holdings in future reporting periods has been reduced.

Well, the market value of these position moves on a quarter to quarter basis. I will note that the quarterly net P&L impact of these positions has historically been positive on average over our holding periods. And the impact of these holdings on our overall revenue has not previously been material. And the impact of these holdings on our overall revenue has not previously been material.

Despite this, our platform performed well over the three-month period, giving us confidence in our ability to deliver solid financial results while exceeding our clients' expectations through the remainder of this downturn.

Our ongoing efforts to increase reoccurring revenue contributions from our expanded wealth management business and grow contributions from capital markets' advisory activities are helping to offset the impact of the abrupt decline in new issue activity. With that, I will turn to the financial highlights of our first fiscal quarter.

Firm wind revenue for the three-month period was $328 million on an adjusted basis.

Down 37% when compared to the same period a year ago.

Excluding significant items, pre-tax net income was $27.5 million.

which translated to diluted earnings per share of 11 cents.

Turning to expenses, firm-wide non-compensation expenses as a percentage of revenue were elevated at 31% for the fiscal quarter on an adjusted basis. At 31% for the fiscal quarter on an adjusted basis.

primarily reflecting higher general and administrative expenses in connection with increased travel and promotional activities.

These activities were targeted investments in our business development and talent retention efforts, which were concentrated in a short period of time following two years of COVID-19 restrictions.

We anticipate more normalized levels going forward.

Adjusted compensation ratio for the quarter was slightly elevated at 60.4%, generally in line with historical rates.

As we've said before, although our compensation ratio is prone to quarterly fluctuations,

We expect it to remain within our targeted range for the full fiscal year, noting that compensation expense will align with revenue levels.

Our business continues to be well capitalized, giving us financial flexibility to be opportunistic in this period of dislocation, while upholding our commitment to shareholder returns.

Reflecting this confidence our Board of Directors has approved a quarterly Common Chair dividend of 8.5 cents.

Turning to the performance of our operating businesses, I'll start with wealth management.

Although below recent all-time highs, assets in our global wealth management business have remained resilient in light of this significant reversal in global markets.

Our investment professionals in all geographies have maintained an unwavering focus on helping our clients navigate uncertainty and achieve their long-term goals.

During the quarter, we experienced net inflows in all our business, bolstered by our acquisition of Punter South Hall Wealth, which closed at the end of May.

At the end of the fiscal quarter, firm-wide client assets were $91 billion.

Now 4% year over year and 6% sequentially.

Primarily reflecting broad market declines in both equities and fixed income, which offset these net inflows.

On a consolidated basis, this division earned revenue of $162 million and contributed adjusted pre-tax net income of $25 million for the three month period. What Did Your Colourcing Mar? Considering? Your Food Power Census of Money? In ???? ount persu tradelicher thin C rich ut rad mo g x notes year triangular OM tá d fr fr x reg x area.

Revenue from our UK and Crown Dependencies business was flat year-over-year at $73 million, but increased by 7% on measured and local currency.

We're having a great experience integrating our recent acquisition of Adam and Co and PSW. And we are focused on creating additional value through synergies and our organic growth initiatives. We are focused on creating additional value through synergies We are focusing on creating additional value through synergies and our organic growth Green Uranus and our nearby you

which should contribute to margin strength.

With the PSW closing midway through the quarter, revenue and net income associated with PSW also will be more wholly reflected in our next fiscal quarter.

Revenue and we are Canadian and Australian wealth businesses decreased by 30% and 8% respectively.

largely due to the abrupt decline in new issue activity.

Increase in interest rates in both Canada and the UK have positively impacted interest revenue, which increased by 140% year-over-year and will continue to contribute to margin strength going forward. Our focus on supporting investment advisors and their clients, especially through volatile markets, has supported our recruiting and retention efforts.

In the last 18 months, we've added over $1.6 billion in recruited assets to our Canadian franchise.

The number of advisors in Australian business has also increased by 5% over year. The number of advisors in Australian business has increased by 5% over year. year.

We are actively considering a range of opportunities to support long-term profitable growth in our wealth management businesses globally.

through new products and capabilities as well as continued support for technology enhancements.

to keep up with the increasingly complex needs of our valued clients.

Turn it to the performance of our capital markets business.

Revenue in our global capital markets division was 164 million dollars for the three month period, down 49% year over year, largely due to the abrupt decline in new issue activity and losses in our inventory positions which offset this revenue.

Given the industry's slowdown and the diversification away from higher risk growth assets, I am pleased with the performance of our teams who delivered for our clients and protected our strong market position amongst the league table leaders in each of our geographies.

During the three month period, we participated in 80 transactions to raise over $6 billion dollars for corporate issuers.

Investment banking revenue for our combined global capital markets business was down 91% year over year and 87% sequentially to $12 million.

While we earn more in cash fees for our underwriting activities, these amounts reflect a markdown in connection with the impact of previously mentioned inventory positions.

I will note that our Australian capital markets business had an active quarter, completing 29 deals to raise over $1 billion for issuers.

While we are disappointed that gains were offset by inventory markdowns, supporting our clients through equity investment is an important part of doing business in this region.

I'm very pleased to report that advisory revenue increased 9% year over year to $83 million. I am very pleased to report that advisory revenue million dollars.

Our US and UK businesses recorded year-over-year increases of 36% and 59% respectively.

In the US, our mid-market TMT advisory team has ranked first for top four circuit value and positive particular individual volume in both the couldn't the fiscal quarter and calendar year to date.

Earlier this week, we announced our acquisition of UK advisory firm, Results International, which complements our previous investments to expand our advisory segment and will add domain expertise in the European healthcare and technology sectors.

where we already have strong global capability in both advisory and ECM.

We continue to be active globally and we feel good about the size and quality of our pipeline relative to the market. The our our you

In advisory, although market-wide announcements and completions have slowed, we have good visibility into the next six months and we expect this segment to steer on this new year.

Recently, we've seen some green shoots in ECM activity, but our expectation is that we will not see a meaningful recovery in new issue volumes until at least the third quarter of this fiscal year.

Our training businesses remain well positioned to respond to changes in the market backdrop, and we will continue to provide market-leading, execution capabilities for our clients in all businesses and geographies.

We expect that economic conditions will continue to tighten before they improve, and we will navigate more volatility and uncertainty alongside our clients. Historically, periods of market dislocation have created opportunities for us to differentiate ourselves and capture new market share.

Heading into our second quarter, activity levels have been similar to Q1, although we will end this quarter with lower expenses and less exposure to market-driven declines in our inventory.

In light of the current environment, we are managing our capital and expenses prudently to ensure the best use of our resources for continued balance sheet strength.

Having said that, our long-term strategy does not change.

We're committed to investing in our core capabilities which have been proven to provide differentiated value for our clients through economic cycles.

We will be opportunistic, yet thoughtful, in our deployment of capital as we position our business to emerge from this downturn in a stronger competitive position and accelerate long-term value creation for our shareholders. And accelerate long-term value creation for our shareholders.

With that, Don and I will be pleased to take questions. Operator, can you please open the lines?

Thank you, sir.

Ladies and gentlemen, we will now begin the question and answer session.

If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star 2.

Please stand by while we compile the Q&A roster.

Your first question comes from Jeff Fenwick of Coremark. Please go ahead.

Hi, good morning everyone. So Dan, why don't we talk about capital markets first and just a few things. I think you made some commentary around in your intro there. With respect to Australia, I'm obviously taking some negative marks there that hit the top line. I think you mentioned that there was about 20 million of marks there in the quarter. Is that correct? I'm just trying to get a sense of what the actual sort of like business going on versus some of the marks that you had to take there..

Hi Geoff, it's Don.

Yes, I mean, the inventory re-evaluations during the quarter resulted in a $20 million impact on revenue. It's just not marked. It's actually crystallized sales. It's just not marked. It's actually crystallized sales.

Out.

values that were lower than the March marks, so it shows up as a loss in the quarter.

or is there a reduction in revenue during the quarter? So the total values have been directly declined significantly from March to June . So it's not just marked to market. It's actual sales at lower than the March values. It's actual sales at lower than the March values.

Okay, okay understood and I think the comments there where you tried to close out as many as you could so you're not suffering that going forward. What's the environment?

like in Australia now. It's obviously levered toward mining. Any comments there on the OLA?

Yeah, I mean it's early to predict. I mean base metals and gold stuck a hit in the quarter as well as you know some of the emerging economies got whacked with a strong US dollar.

you know I were cautiously optimistic this is their busy period there's some are our winter vice versa i guess are some are there winter uh... we just hosted a big diggers and dealers conference uh... in western australia

You know, I think there's activity. I think it's premature for me to say, hey, everything's back to normal, but that would be too quick of a statement to make. I mean, we're optimistic over the next couple of quarters that it'll come back, but I think the worst of it was last quarter, but I'm not saying this quarter, everything's going to be rosy and back on, you know, historical $50 million dollar quarter run rate that that would be way too optimistic.

Yeah, and I guess, you know, I look at it in the past, it was a.

used to do like 40 million a year and revenue sort of pre-COVID and then started doing more than that in the quarter and just trying to get a sense of, you know, you know, you know, business, the business, the business. Yeah, I think it can be that bad. I mean, the business changed, right? We bought a big wealth business there. We materially expanded our footprint. We hired into our capital markets business. But, you know, I think we're, you know, I think we're, you know,

probably fourth on the league tables in Australia, like that's not a place that we were three and four years ago as that business has evolved. So the business is a bigger business than it used to be. That being said, so it's not 40 a year, but it ain't 40 a quarter either, right? Somewhere in between the two. And I wish I could give you better guidance, but it's primarily a new issue market. So we don't have as much visibility in that market as we have in some of our others.

And I guess, you know, if you look at the US, it was sort of the counterpoint to that. I mean, I think performed quite well in the quarters you highlighted. And I know advisories become such an important part of the business down there. You know, how's that environment looking? I imagine there was probably some things that might have been in process through the quarter that it helped you out. I mean, are you going to imagine you're seeing more people press pause in the short term? Or what's the environment? Yeah, we're not. Yeah, I mean, that's a fear. I don't think it's a reality yet. I think, you know, a person.

stage. Ask me again in nine months or six months, but right now we feel pretty cautiously optimistic on that. Okay, and then maybe one on wealth management, specifically with Canada, obviously seeing the volatility just associated with the level of commission activity in the business there.

Maybe give us a sense of how the advisors react to this environment. I think on the capital market side we all understand the ups and downs and how that works with their compensation. I mean, what's the mood along the advisors with the sort of volatility they're seeing in terms of the revenue opportunity with their businesses?

Great question. I guess it depends on what kind of advisor. I mean, we've got, you know, the majority of our advisors are pure wealth advisors. They earn commission fee and, you know, income that's relatively stable. In fact, if you look at our commission and fee line and are supplemental disclosure, you'll notice that our commission and fees actually went up in the quarter. What went down in the quarter was the new issue contribution in the wealth business, which we've always had, and quite frankly, at roughly $4 million dollars, that's probably the lowest level I've seen in my career.

challenging environment just given the volatility but what's the view look now?

It's about the same as it's always been. Maybe marginally better, which is kind of surprising, is typically in down markets, advisors aren't anxious to uproot and move, typically. You know, that being said, the same secular trends that we've seen for the last couple of years continue to apply, we continue to hire advisors. It's been a week since we've seen actually..

You know, another one will be joining us, you know, any day now. So, you know, that pipeline, I wouldn't say it's stronger or weaker than normal. I think it's just normal.

Okay, great. Thanks for that color. I'll pass the line along. Thanks, Jeff. Great questions.

You are next question comes from Stephen Bowland of Raymond James. Please go ahead. One can have numbers quite really on the facilitation losses.

in Canada. I mean, I just want to understand that that is like the liquidity that you're providing to institutional clients on a daily basis to help them out on positions. Is that the, you know, the typical definition? That is the typical definition of the facilitation loss. Yes, I would say our losses were concentrated and, you know, you know, you know.

a smaller number of names. Names as you could imagine Steve, you know the business that you know that you were all around You're the box in. So you know I would you know I wouldn't say hey We you know lost money with 200 clients on 500 names. We probably lost money with 20 clients on five names. You know I'm making up those numbers, but directionally it just to give you a little bit more color on it.

Okay, has there been any thought on bringing the capital down on that division? I mean, $11 million is material, but has it been thought of actually just shutting a little bit or providing less capital at this point? Yeah, I mean, the answer is no. That's the specific answer. But again, if you think of the nature where the business we're in, Steve, go back to failings, go back toabor completed by complicated. But, Steve – we spoke of issues along the way. Suite is empowering you. And do you know about strategic helicopters, which lots and lots of people all come up with? Well the manufacture capabilities of these parBIE clips is essential because you can physically guiltfully go through very difficult steps and

We are a leading mid market underwriter. You know, we're not the biggest trader, B.C. Tell us in Rogers, we're the biggest traders of a lot of mid market names. We need to traffic in those names. You know, that's not an option. So occasionally, you know, you will take the odd hit in some of these small names. And this was, you know, that, you know, I've been doing this for over three decades now. This was a pretty bad quarter from that perspective.

Okay, maybe just on the second in Canada just in terms of advisory fees.

You know, when markets tend to come down this sharp and maybe the outlook is, you know, overall is not great in terms of the economy and things like that, have you seen changes in, you know, the pipeline in Canada in terms of M&A? We're firms realize that they may not have access to capital and, you know, are actually opening up dialogue with, you know, competitors or complimentary companies to do M&A.

Yeah, maybe.

You know, there's pros and cons of a volatile market on M&A. Obviously, the pros are the ones you alluded to. You know, changes the dynamics, changes access to capital, creates, you know, I don't want to call it desperation M&A, but you know, M&A you have to do, so to speak. But on the other side of that, you've got increasing interest rates, you've got tightening capital and, you know, volatility kills as well as it helps, right? Because you take so long to get a deal done whenever one's stock price is increased. You know?

You gotta make sure you still have a deal. So, I think it goes both ways. I think the native, you know, the positives and the negatives, it's about the same. I mean, the environments about the same. Obviously, we didn't have a ton of revenue in Canada and our M&A sector this quarter. I think that's just a timing issue as much as anything else. We just didn't have a lot of closures this quarter. I think the overall environment is historically where it's been.

Right, okay and then one kind of high-level question when you talk about your compensation ratio, you know, getting back to your target range, but when I look at your outlook in your MD&A, it's kind of dour, it's that threat of recession going up. So how do we marry that?

You kind of said cautiously optimistic, but you know the NDNA is kind of negative. So I'm trying to figure out what your thoughts are. Are things you know, get worse or slowly better? Yeah, fair question Steve. I'm confused as well. No, I don't think we ultimately know what's going to happen here with the market. Obviously, we've got, we're still in the, you know, we've had a little bit of a, you know.

Dead cat bounce in the summer. I don't think anyone thinks that that's gonna continue on. You know, there is some optimism around, you know, later in the year, November to December , things getting much better, you know, post midterms, maybe post feds easing. So, you know, you know, give a prediction or give a time frame, don't give both, but, you know, things will get better. I'm just not sure when. So maybe that's the optimism you're seeing in the numbers. Your specific question around compensation ratio though.

is we manage to that comprehensive ratio. So obviously, in some of our jurisdictions with some of our people, it will be a top year. Our biggest, like any other firm like ours, our biggest expense is compensation, and most of that is variable. So we'd like to think we can manage within a pretty narrow set of compensation ratio parameters. So we wouldn't say that we expect our comprehensive ratio to be in line with historical standards, unless we were planning on managing to that.

That's all I have. Thanks very much guys.

Thank you so much and thanks for all your work.

Your next question comes from Rob Gough of Eschalan. Please go ahead.

Good morning, Dan, and thank you for taking my questions.

Thank you.

First, on the advisory side, could you perhaps talk to results? Both it's UK and European franchise and any opportunities you see there in terms of cross-selling on your global platform.

Yeah, listen, as you know, our strategy has been and continues to be to go deeper and verticals that we're good at, it's the easiest way to compete in very competitive markets like the US or the UK. Results is a very good, smaller firm that focuses on healthcare and technology, the two of the sectors that we globally focus on and coordinate on two of our most.

well, our two most important sectors, I think it's fair to say at this stage. So the interaction not only will be useful from a domestic UK domestic perspective, adding on additional M&A capabilities and sectors where I would be stronger than the UK, but more importantly, and what you've alluded to is being able to win cross-border mandates. We tend to be pretty good at that, or small enough firm to be agile, big enough to be, you know, global-ish.

So yeah, there will be an immense amount of interaction between primarily our US M&A practice and our UK M&A practice with the results. We see those businesses interacting well and we wouldn't have ventured into the UK M&A space through an acquisition like results unless our US team was completely aligned and on-site quite frankly encouraging that.

Do you see yourself pursuing further advisory acquisitions and more broadly on the issue of acquisitions? We all see the public pains but have the private market values corrected and come in with the public or perhaps more deeply.

When you ask the private versus public question, and I'll answer your first question in a minute, are you talking about wealth or are you talking about capital markets or both?

I was putting it out very broadly. Ten. Okay, I'll give it a broad answer then. On further M&A, I mean, we're always looking, you know, but when you're buying M&A boutiques, these aren't things that, oh, look, this is for sale, let's buy it, those guys seem great. You know, there's a long relationship that goes into any of these things. You're talking to people sometimes for years, you know, deciding whether this would be a great fit for your organization. So,

You know, we're not running around, you know, pounding the pavement trying to find M&A targets and key verticals. It's almost needle haystack type stuff, maybe slightly better than that, maybe several needles haystack, but it's, you know, you got to find the right cultural fit. These aren't huge acquisitions we're doing either, as you know, but they're important, they're strategic, and they've clearly changed the dynamic of our revenue picture in our capital markets business, and you see that, you know, specifically in this.

and then all of a sudden someone gets sold at a 60% premium to market in the public markets. Or in the U.S. or in the UK, well, so who knows. Public pricing clearly has come down. That's obvious. But premiums go up. So our valuation matrices really changing. I'm not so sure, but I'm not sure I have enough data points to answer that really intelligently.

I did like your reference to Fed's easing.

Something to look forward to.

Oh yes!

So they have given me the last stop.

Sorry, what was that? I missed that.

Your next question comes from RACIP, Banji of TD Securities. Please go ahead. Please go ahead.

If I can continue on the acquisitions side, more on the wealth management segment. I think there was some commentary last quarter on some inorganic growth opportunities on the Canadian wealth platform that you were working on. Is there any update that you can give this quarter or is this a longer process for down the road?

Yeah, I mean, I think we did reference again this quarter that we're looking at alternative ways and other ways of growing our Canadian wealth business. We've got a huge platform here. We think there's lots of great ways to grow it. We continue to examine opportunities, some of them go sideways, some of them go up, some of them go down, volatile markets don't help. But yeah, no, we continue to explore ways to grow our Canadian wealth platform for sure. I got nothing to announce today, and maybe nothing to announce in the next three months, but we continue to explore it.

previous quarters, are they still holding in with hours? There's some softness that you're seeing.

Hi, it's Dawn. Yeah, we don't provide that. Yeah, we don't provide that.

the level of granularity in our AUA or AUM type numbers. But we have seen positive net inflows and I think it's consistent with what we've been seeing over the course of the last year. It hasn't really increased or decreased. It's just steadily on the positive side.

Okay, I'll cut it fast.

Just my last question, also on wealth management. The interest revenue line item looks like it's moving in step with rising interest rates and then we've had a few more interest rate hikes after the quarter and then there are expectations for further rate hikes. Would it be fair to say that there's more upside towards this line item? I think it came in at 10 million this quarter.

Yeah, I think it'd be a fair assumption to make that as interest rates go up in our wealth side of our business, we earn more money. The spreads widen and we earn more money. So again, in our supplemental disclosure, you'll notice that our interest income in the inter global wealth business is probably at record quarterly highs, even at these rates. So clearly, and that's because our assets have grown so materially from where they were, two and three and four years ago.

Please, in gentlemen, there are no other questions from the phone lines. This will conclude your conference call for today.

We would like to thank everyone for participating and ask you to please disconnect your lines.

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