Q1 2024 Canaccord Genuity Group Inc Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by.
I would like to welcome everyone to the Canaccord Genuity Group, Inc. Fiscal 2024 first quarter results conference call.
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I would now like to turn the conference call over to Mr. Dan <unk>, President and CEO . Please go ahead Mr. <unk>.
Thank you operator, and thanks for everyone joining us for today's call.
As always I am joined by Dan Mcfadden, our Chief Financial Officer.
Today's remarks are complementary to our earnings release, MD&A supplementary financials copies of which have been made available for download on SEDAR.
And on the Investor Relations section of our website at <unk> Dot 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 or non <unk> financial measures.
Please refer to our notice regarding forward looking statements and our description of non <unk> financial measures that appears in our investor presentation and in our MD&A.
And with that let's discuss our first quarter fiscal 2024 results.
Firm wide revenue for the three months period amounted to $343 million, an increase of 8% compared to the same period last year.
Excluding significant items pretax net income amounted to $33 million up 20% compared to the same period last year and almost double compared to the previous fiscal quarter.
This translated to adjusted diluted earnings per share of seven for the three months period with a <unk> <unk> contribution from wealth management being offset by a negative contribution from capital markets.
First quarter profitability was impacted by higher interest expense due to the market rate increases and several large isolated charges, which led to increased development costs and higher general and administrative expenses.
Firm wide general and administrative expenses increased 14% year over year.
Due to higher promotion and travel expenses, reflecting increased activity levels in connection with conferences and other client engagement opportunities primarily in our capital markets Division.
Our compensation ratio for the three month period decreased by eight four percentage points year over year.
10 percentage points sequentially to 54% largely reflecting the changes in value of stock based compensation Awards.
While our financial results remain below our expectations, our ability to deliver modest profitability during a period when capital markets activities were so challenged across the industry and particularly in several of our core focus sectors reinforces the earnings power of our wealth.
Management businesses, which have continued to contribute stable and predictable earnings.
Reflecting this stability our board of directors has approved a dividend per common share of $8 five.
In line with the previous quarters.
And lastly, we continue to have a strong balance sheet with sufficient capital to support our business priorities.
In light of our expectations for industry wide activity levels going forward, we undertook a process to establish a more cost effective organizational structure without compromising our market position or the client experience.
This process has led us to think critically about the number of people that we need to advance our strategic priorities, while helping our clients reach their goals.
Subsequent to the end of the quarter, we implemented a reduction of approximately three 7% of our global workforce or six 5% of our North American workforce.
The majority of employee departures occurred in our capital markets business. In addition to a smaller number in it.
And the operational roles.
Importantly, these changes do not impact our day to day operations or our comprehensive client coverage in key sectors and verticals.
As a result of this initiative the company expects to record a restructuring charge of approximately $10 million in the second fiscal quarter.
This should better position us to achieve our historical profitability ranges and the normalized revenue environment to continue investing strategically in the business and return capital to our shareholders.
Looking at our global capital markets business.
Notwithstanding the modest increase in activity levels in the previous fiscal quarter. Our performance reflects a continued difficult backdrop for both capital raising and advisory activities.
Revenue of $146 million for the first quarter decreased by 11% compared to the same period last year.
This division incurred a pretax loss of seven $6 million with positive contributions from Canada, and Australia offset by losses in the U S and UK as previously mentioned profitability. In this division was largely impacted by increased general and.
<unk> costs. In addition to the impact of fixed costs and a reduced revenue environment.
Consistent with industry trends investment banking revenue remains well below historical levels.
First quarter revenue in this segment amounted to $30 million.
Although this represents an increase of 137% compared to the same period a year ago.
I'll remind you that we incurred mark to market losses, and certain inventory and warrant positions during that comparison period.
Our Australian investment banking business contributed 48% of this amount, reflecting improved activity levels in the metals and mining sectors activity level and our advisory segment has outperformed the broader market since transaction volumes began to slow in early 2000.
'twenty two.
Which was not unexpected given our core focus sectors.
That said beginning last quarter the environment for completions has become less supportive.
As a result first quarter revenue contribution from this segment was 51% lower than the same period last year at $40 million.
Approximately 62% of this revenue was contributed by our U S business, reflecting activity in the technology and consumer sectors.
It was a difficult quarter for our U K capital markets business with small cap underwriting and advisory activity in the region at a near standstill.
The impact of higher fixed cost in this reduced revenue environment led to an adjusted pre tax net loss of $6 million.
This business continues to be a valuable contributor to our cross border capabilities in both underwriting and advisory and we would expect it to improve as market conditions become more constructive.
Demand for capital in our focus sectors remains exceptionally strong.
Next week, we are hosting our 43rd annual global growth conference in Boston and it will feature presentations from 440 companies in dynamic growth sectors over four days.
The environment across our industry appears to be improving and we continue to enjoy a healthy pipeline of investment banking and advisory activity.
We are seeing a modest uptick in buy side appetite to put money to work in high quality new issues. However.
However, there remains a lot of uncertainty in the pace and timing of deals launching in closing.
Well a significant improvement may not be reflected in the first half of this fiscal year.
We reasonably anticipate stronger results towards the back half.
Turning to our global wealth business. This division contributed 56% of our firm wide revenue for the first fiscal quarter.
The adjusted earnings per common share from this division amounted to 20.
Which was offset by a loss in our capital markets Division.
On a consolidated basis first quarter revenue from this division amounted to $191 million up 3% from the previous fiscal quarter and up 18% compared to the same period a year ago.
The adjusted pretax net income contribution increased by 46% year over year to $36 million.
Client assets at the end of the three month period amounted to $97 billion, an increase of 7% compared to the same period last year.
54% or $103 million of revenue in this division was contributed by our U K wealth business and is in line with the record set in the previous quarter.
This represents a year over year increase of 41%.
Which primarily reflects substantially higher interest income.
And commissions and fee revenue contributed by the <unk> acquisition, which was completed in the same period last year.
Looking at our Canadian business revenue of $73 million was in line with the same period, a year ago and adjusted pre tax net income of $9 million increased by 39% year over year.
Despite the impact of the prolonged downturn in new issue activity and the reduced market value of client assets. This business has delivered consistent revenue for the last eight quarters.
Client assets in this business amounted to $37 billion, which is closer to the peak of $38 billion prior to the onset of the market downturn.
The increase of nine 8% year over year, and 4% sequentially is attributed to improving market valuations.
Sort of inflows and new assets from the Mercer acquisition, which closed in the previous quarter.
We expect that revenue and net income contribution from this transaction will be more fully reflected in our next fiscal quarter.
Revenue in our Australia business was in line with the same period, a year ago at $15 million.
Client assets in this business have increased 15% year over year to $5 4 billion and our recruiting efforts have helped us achieve a 6% increase in the number of advisory teams.
Despite weak new issue activity this business achieved modest profitability, which reflects our disciplined investments and growing the business.
In each of our wealth management businesses, we've increased engagement on a number of fronts aimed at driving both organic and inorganic growth.
Across the organization, we've been focused on several important initiatives to strengthen our competitive position drive growth in our wealth management businesses and ultimately enhance value for our shareholders. We.
We look forward to keeping you updated on our progress.
Looking at the market backdrop inflation is starting to come down and we believe the current rate tightening cycle is closer to its Ed.
Like most of our peers, we look forward to a healthy increase in new business activity as our clients begin to anticipate recovery.
Of course, we're keeping a realistic view of the pace of recovery.
Knowing that transaction volumes and broad market participation tends to improve sporadically before taking hold for a cycle.
With that Don and I will be pleased to take your questions. Operator could you. Please open the lines.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
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One moment. Please for your first question.
Your first question will come from Stephen Boland at Raymond James. Please go ahead.
Good morning.
Maybe just a little bit more on.
Obviously, the departures you mentioned a good portion was in capital markets in Canada and U S.
Yes.
Trying to see how you balance the dip.
<unk> with some of the comments in your presentation that you expect to go deeper into your core capital markets businesses going forward and that's part of your strategy I'm just wondering again, how you balance.
Got out.
Departures ahead of trying to actually get more penetration within certain here with the with your clients.
Great question Steve.
The.
Yes, I don't think that the statements necessarily are conflicting.
When you think of departures, let's say there was a 100 ish people in our North American capital markets business.
Thats sub 4% of the people that we have globally and sub 7% of the people we have in North America.
The.
We can easily takeout optionality of the business without impacting our core segments. So some of the exits not necessarily all of them would have been in sectors in areas that aren't necessarily core to us or aren't necessarily core to our business going forward. Some of them clearly are but when you look at when.
Look at the reductions is significantly less than what other people have seen on the street.
We're probably a little late to it relative to some of our peers as well.
Part of that may be impacted by the privatization and other things we were looking at but.
These were relatively marginal some very good people, but unfortunately, the current environment.
Sure.
It is to keep keep everyone in an environment like this I'm not quite sure I answered your question perfectly, but thats the best I think I can do.
Oh, that's good.
My question is.
In your presentation as well as your acquisition strategy in the U K is.
Youre looking to do accretive fine look for accretive financing opportunities without diluting our group shareholders.
So I guess my question would be one are you still actively looking for more acquisitions in the UK can you push that out in terms of.
Accretive financing opportunities.
Yes, I mean, I guess the first point is yes, we continue to look at acquisition opportunities in our UK wealth management business for sure.
We've got a lot of offices there we've got a lot of ability to tuck in acquisitions, we continue to examine a number of different targets.
To the extent that we're looking at anything bigger.
Wouldn't be using group's balance sheet.
Mechanisms to fund locally as well, they're not that we're close to anything bigger than not that im even contemplating that necessarily right now, but we've got certainly and ability to fund their locally. We also have a reasonably robust balance sheet domestically in our U K wealth business, we're not without means in that business to continue to grow.
Smaller acquisitions on our own balance sheet in that market. So I don't see us getting further outside of something major.
See as getting further dilutive in that business, but listen if we found something wildly accretive and we felt it made sense I've got no problem owning less of something that was worth a lot more so that our interest is worth a lot more but that's not currently the plan.
Okay, and then I'll sneak one more in in the past we've talked about.
Signals that leading indicators that capital markets activity would improve and you mentioned that.
Canadian brokers.
Starting to do some of their own deals you also mentioned, Australia, when you start to see mining.
That pipeline.
Do you see that.
Building that gives you more confidence that the back half of fiscal 'twenty four will be.
There'll be a higher volume of deals.
<unk> almost as good visibility as we would but yes.
Yes, I mean, we're seeing increased activity we're seeing.
Buyers' strike, starting to and a little bit.
Obviously, we've seen broad good market performance on large cap stocks relative material relative underperformance on the mid cap and small cap stocks sooner or later people are going to have to catch up with returns that were seeing people look at the market.
It's premature and we're at the beginning of August So, it's a bad time to predict but I would like to thank into the fall that were going to see a pickup of business.
M&A, we can predict a little bit better and advance new issue activity is harder to predict in advance as you know, but our pipelines are incredibly robust.
Yes.
The bid ask between where companies.
Stock and buyers want to buy it it's narrowing let's put it that way.
Okay. Thanks, very much I appreciate that.
Your next question will come from Rob Goff Echelon wealth partners. Please go ahead.
Good morning, and thank you for taking my question.
Sure.
I was encouraged with respect to your recruiting efforts on the wealth side in Australia, perhaps could you.
Talk to your recruiting and wealth in both Australia, and Canada, how is that pipeline looking terms looking.
Yes, really robust in both markets is probably the best way to describe it.
Canada.
We have we track and we have an active pipeline.
There is.
Dozens and dozens and dozens of people on that pipeline to the tune of multiple.
Multiple tens of billions of dollars of assets, bringing the mall was over as an issue.
And when we do that but our pipelines in all our markets all our primary markets continue to be robust nothing's really changed.
From where we've been historically.
The cost of bringing advisors over the pace of bringing advisors over.
We've been bringing we brought close to $20 billion of assets over to our franchise over the last several years, we continue to see the pace of activity.
Same as historical levels, maybe slightly better so thats.
That's great and you can see that the net number of advisers in Canada hasn't grown that much so we've cycled out.
Retiring advisors poorer performing advisers with much stronger advisors, our average book per adviser in Canada continues to grow our margins in Canada are remarkably strong given the lack of them given the lack of new issue business.
So in our results in Canada are strong.
The reason I spent so much time on candidly before I answered Australia is Australia is going through a similar trend as the trend we had in Canada and that was intentional that was always our strategy again, youre not going to see a material increase necessarily in the number of advisers in Australia, but the average booked for per advisor funds under management.
<unk> the discretionary funds under management are fee based funds that will continues to grow it's roughly doubled since we've done the Paterson acquisition again, we continue to have.
Very robust pipeline of potential candidates and Australia and Theres, a very active effort in all of our primary jurisdiction. So continue to feel that we're going to grow that business.
I'd like to think that in five years' time that our Australia business it looks like our Canadian business, but that's obviously.
It's obviously, a pretty far up projection, but theres no reason to think we can't continue to grow that business. The way we have very set at similar dynamics in Australia and Canada.
Okay.
Is it more towards the numbers youre restructuring charges on the quarter were $3 three and you made reference to those being roughly $10 million in the current quarter.
Would it be fair to say that the increase there would be offset or largely offset by lower development costs.
They came in at $22 6 million on the quarter up from 13, three Q on Q and $6 $9 million year on year.
Hi, Rob its dawn.
Yeah.
I didn't fall all the numbers you use.
You said, there, but yes, we had a small restructuring charge in the first in this current June quarter, there was some.
Some some some changes some personnel staff type changes in that quarter.
And then the larger restructuring which occurred this month.
It makes up the $10 million, we referred to as the charge for the second fiscal quarter. So.
Combined they would be $13 million.
Great.
The question there was just in general terms.
The restructuring costs being $7 million higher for <unk>.
Fiscal Q2, we do see reasonably comparable savings through reduced development expenses that came in at $23 million on the quarter is there a nice balance there.
No the development expenses are.
Our isolated it's a different activity going through the development expenses. They were they were heightened in the June quarter, a lot of costs related to the.
Expired takeover bid flowed through development costs.
Nothing really to do with the restructuring.
Right and that's where we're seeing those development related those development costs related to the bid decreasing with the second quarter and yes, yes, yes. They are largely concentrated in that first quarter. So I mean, there might be some true ups as we as we go forward.
But they're largely behind us.
Okay.
That's great. Thank you guys. Good luck.
Yes.
Your next question will come from Graham Ryding of TD Securities. Please go ahead.
Sam.
Hi, good morning.
Maybe you can just stay on the theme of this year.
Capital markets outlook.
You did mentioned that you feel like we may be getting closer to sort.
<unk>.
Rate tightening cycle coming to an end it sounds like Thats probably.
Maybe a key ingredient needed here to get capital markets going what are the other sort.
Sort of key things that Youre looking for.
<unk>.
You've seen a few cycles, obviously and capital markets.
You think some of the key agreements, we need to see to get capital markets activity going.
Zero.
No.
Yes, I mean, we're talking about.
Graham I met but don't.
What what.
What we're referring to was the new issue business right, obviously, the M&A business, we've got a lot more visibility on.
That you can kind of predict M&A out in advance and told you that before.
So we are feeling increasingly confident in our pipeline of M&A activity. Obviously this last quarter was was it was a poor was a poor quarter from an M&A completion perspective, so although chunky, we feel that there is a reasonably good pipeline going forward of M&A. So we feel pretty confident in saying that this is going to be back half.
For the year weighted you never know for sure and things continue to get delayed, but we feel reasonably confident when we look at our advisory revenue of 40 million Bucks in capital markets last quarter, I mean, thats down from your average.
<unk> 90, or 80 million Bucks a quarter, depending on the year you want to look at.
So we feel confident that number will continue to go up investment banking's, just really tough to predict.
Our new issue business as you know, we did 30 million Bucks last quarter as we referred to and again this is down from $100 million quarters $150 million quarters. This is a fraction of what we've been doing.
On a run rate basis, so again not that we're going to go up to pandemic levels, but even that from a pre pandemic perspective, we'll be doing $50 million to $60 million a quarter in that business I feel reasonably comfortable.
That.
We're at the place where people are going to kind of start wading back into the market and we're going to see a pickup of activity I'd like to think that thats.
I'd like to think that Thats.
It's going to happen in the fall or certainly going to happen.
Into the back half of our fiscal year.
We've seen broad market outperformance as Ed mentioned generally, but it's but it's but it's been narrow in a couple of stock so in our sectors Tech health.
Healthcare sustainability outside of the mining sector, we really haven't seen an immense amount of new issue activity and we're getting to the place where companies need to issue and buyers are going to be chasing returns. So.
I am not I don't want to predict that recovery, it's too soon but.
If I said it was going up or going down if I had to bet that's going up.
That's kind of where we see activity levels.
Do you buy into the theme that Scott.
Financing is expensive now for a lot of companies and at some point, they're going to have to look back.
To the equity markets for.
For capital needs.
True, but a lot of our clients can't even access.
Financing at competitive rates and yes that financing is very expensive and that kind of impacts your M&A business more than anything else, but.
Again, our clients are heavy users of balance sheets, not all of them, but generally speaking the mid cap tech companies and health care companies cannot borrow a ton of money.
Yes, and it's not that it's expensive it's unavailable for that client.
For the most part so.
Yes, we do believe that we're going to see a pickup of activity when we talk to our competitors, particularly in the U S. I think they see a pickup of activity as well so.
<unk>.
Again, I'm, making a prediction, which I hate doing but.
I think over the next six months.
We should see a pick up of the new issue business broadly and we're seeing a pickup in our retail channel. We are seeing some of the early stages of it way too early to predict and again I hate making predictions in August when everyone's away and there is a natural slowdown in the business September will be the real telltale sign.
Okay great.
Maybe just jumping to your U K wealth business.
It looks like assets are down about 2% year over year.
But.
If I look at the FTSE 100, maybe just as a proxy for the marketing was up 4% over that period. So I'm just wondering if there is any.
Advisory outflows.
Our largest asset outflows that are involved here, maybe some advisor attrition after that <unk> deal is there.
Any color as to why that the growth there has been lagging.
There's two primary factors I think what's caused the prime assets number one.
There always is some.
Some advisor some small advisor outflows when you do an acquisition, we actually model it and predict that in advance I don't think it's anything out of the ordinary.
Always going to lose a little bit of assets on an acquisition.
No matter, how hard you try so some of it's that.
We also have a relatively small cap focused fund management business inside that business and like every other small cap fund management business inside that business.
Those are down down more than the market plus theres outflows in that market. So there is actually.
Small organic net inflows in our traditional wealth business there offset by the two factors that I just mentioned.
Okay. That's helpful and that small cap fund management business, what would the size of that would be.
In terms of AUM.
<unk> down from about 5 billion pounds, making up those numbers.
Yes, those are generally in line.
So it maybe it was as high as $5 billion is now 3 billion pounds.
Okay.
And then Don I got.
One for you I guess on that just the compensation ratio in the quarter was quite low.
And it seemed to be in particular.
LOE in the Canadian capital markets, I think it's a 40% comp ratio.
You mentioned.
Dan you mentioned the stock based comp.
<unk> was a factor is that.
Shares are sort of continuing around this level is that going to be a recurring theme.
For the next quarter or was there anything one off here and this comp ratio.
And there wasn't anything necessarily one off it really was related to decrease in stock price.
Over the course of the quarter.
And that.
You don't get translates into the charges for the stock based compensation.
Won't be.
As we've talked about before looking at it on a quarter by quarter basis.
Tends to and especially on a regional basis it tends to be kind of lumpy. So you can't really read too much into that it's best to look at it over a longer term timeframe and once we get to the annual end of year. It tends to settle out at sort of the norm.
Normal course kind of ratio.
The 40% ratio in Canada, Canada capital markets would not continue at that level.
The effect of this unless there's a dramatic change in the stock price up or down. Obviously, then that would flow through but if it is maintained at roughly these levels then that would not be an impact going forward on a quarterly basis.
Yes, if you look more broadly at our overall comp ratio and capital markets at 58, 5%. Appreciate some jurisdictions are bouncing around as generally in line with our historical comp ratio and capital markets for the last five years or so it tends to go up a little bit when the stock price goes up because of our charterers goes up it tends to go down a little bit.
Stock price was down so we are there.
Relatively lower quarter, but I'd say theres no real change to our typical guidance.
66% overall comp ratio for the year, that's probably where we will try that.
Average OTA.
Okay. That's it for me.
Thanks.
Thank you.
There are no other questions. So I will turn the conference back to Mr. David <unk> for any closing statements.
Well, thank you operator, and thanks for everyone joining us today on the call that concludes our first quarter of fiscal 2024 conference call.
Sean and I are as always be available for other questions. As you go through the material I. Appreciate your time, we are doing our AGM today is going to be taking place at 10, a M. If you wish to join US access details were provided in our.
Information circular but they are also on our website, if you'd like to join US. So thank you again, everybody and look forward to speaking to you again.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everyone for participating and ask you to please disconnect your lines.
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