Q2 2024 Canaccord Genuity Group Inc Earnings Call

Okay.

Good morning, ladies and gentlemen, thank you for standing by.

Welcome everyone to the Canaccord Genuity Group, Inc. Fiscal 2024 second 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 invite a question. Please press star followed by the number too.

If you have any difficulties hearing the conference kind of requests started than there is 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 to CDW.

Thank you operator, and thanks to everyone joining us for today's call as always I'm joined by Don Mcclain, Our Chief Financial Officer.

Today's remarks are complementary to our earnings release M DNA and supplemental financials copies of which have been made available for download on SEDAR and on the Investor Relations section to 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, our non <unk> financial measures. Please refer to our notice regarding forward looking statements and the description of <unk>.

<unk> financial measures that appear in our investor presentation and in our MD&A.

And with that let's discuss our second quarter fiscal 2024 results. Our second fiscal quarter was characterized by a continuance of the challenging backdrop for capital raising activities and the ongoing uncertainty around M&A completions and our core focus sectors.

The S&P 500, the <unk> composite.

And the MSCI World Index declined three 3% to 2% and three 3% respectively over the three month period.

Trading volumes across most of our core markets moderated from both the previous quarter and year ago levels.

Global ECM volumes remained subdued as new elements of uncertainty arose and global announced M&A declined for three consecutive months.

Against this backdrop, our wealth management business continued to deliver stable earnings contributions, which helps us deliver a breakeven quarter, despite losses incurred in our capital markets and corporate and other segments.

Firm wide revenue for the three month period amounted to $337 million, which is roughly in line with our previous fiscal quarter.

Revenue for the first half of the fiscal year amounted to $681 million down 3% year over year.

On an adjusted basis, we earned pretax net income of $16 million and $49 million for the three and six month periods year over year decreases of 67% and 37% respectively. Excluding significant items our firm wide expenses were 3% lower than the second.

<unk> quarter of last year.

Compensation expense for our second fiscal quarter decreased by $22 million or 10% year over year, bringing our compensation ratio to 59%.

Given the reduced revenue environment adjusted non compensation expenses as a percentage of revenue was flat from the previous quarter at 36%.

Our interest expense was 118% higher than the previous year's comparison period, primarily due to higher interest on bank loans to finance growth in our U K wealth business, and our communication and technology expenses increased 6% year over year to support our expanded business.

And the increased investment in our regulatory and compliance capabilities.

Cost containment is always top of mind, our industry is facing ever increasing supplier cost inflation and limited alternatives for the systems that we rely on to execute for our clients and manage risk.

We also incurred restructuring costs of $15 million in connection with the head count reductions that we previously disclosed in August.

We continue to place a strong focus on cost discipline and have seen reductions in discretionary costs, particularly G&A.

Managing our costs better positions us to achieve our historical profitability ranges in a normalized environment and returned capital to our shareholders.

On that note I am pleased to report that our board of directors has approved a quarterly common share dividend of $8.05.

Turning to the performance of our operating businesses, our global wealth management Division earned revenue of $187 million in the second fiscal quarter, an increase of 11% compared to the same period a year ago.

Excluding significant items the pretax net income contribution from this division increased 18% year over year to $33 million and 70% of this amount was contributed by our UK wealth management business.

The adjusted earnings per share contribution from this division was <unk> 12 for the second fiscal quarter, which was lower than similar revenue quarters due to a greater allocation of certain expenses from our corporate and other segment at the end of the fiscal quarter.

Wide client assets amounted to 93 billion.

Up 5% year over year, but down 4% sequentially.

<unk> lower market values in the U K, and Canada, partially offset by new inflows.

We continue to pursue positive net asset contributions and all of our regions both organically and Inorganically.

Last week, we announced that our UK wealth management business had acquired intelligent capital our financial planning firm based in Glasgow, with 220 million pounds and client assets.

Pending regulatory approval and other customary closing conditions, we expect completion to take place by the end of the current fiscal year.

While we are always looking at potential acquisitions, our priority is improving organic growth and we've implemented several initiatives on that front.

We are also experiencing solid levels of engagement for our recruiting activities in Canada and Australia.

This month, we welcomed two new IAA teams in our Canadian wealth business and several in Australia, which will be reflected in our third quarter disclosures.

Also note that fee based revenue in our Canadian business accounted for 52% of second quarter revenue.

Which has helped us drive stable contributions from this business. Despite the prolonged reduction in new issue activities.

Turning to our capital markets business on a consolidated basis revenue in this division was 30% lower than the same period last year at $145 million.

Excluding significant items. This division recorded a pretax net loss of $6 million.

With losses in Canada, the U S and the UK offsetting a modest profit from our Australia business.

With persistent inflation and central bank's holding interest rates higher for longer the optimism that had been building in the capital markets began to retrench.

While we did experience some positive momentum in deal activity during the quarter underwriting activities remain quite depressed when compared to historical levels.

Primarily on the back of a more accommodating Australian resource market revenue from this segment was $31 million for the three months period in line with the previous fiscal quarter.

All geographies experienced declines on a year over year basis, but our U K and Australian business, both reported increases when compared to our first fiscal quarter.

The mining sector accounted for 53% of total underwriting activity in Q2 and continues to be one of the few bright spots for new issue activity.

Although demand was limited to a small subset of underlying commodities.

On a consolidated basis revenue from M&A advisory activities was $46 million for the quarter, which is less than one half of where it was a year ago and consistent with the broader industry, reflecting weaker completions and announcement trends.

The 14% increase over first quarter revenue was driven by modest M&A growth in our U S and UK businesses, the technology sector accounted for 77% of our advisory activity during the three month period.

Principal trading revenue of $20 million was in line with the first fiscal quarter and declined 25% year over year, primarily attributed to lower activity levels in the U S, which is our largest trading operation.

Commission and fee revenue increased by 7% year over year to $39 million.

Reflecting higher client trading activity and a modest uptick in new issue activity.

Heading into our third quarter underwriting and M&A activity levels are tracking higher than in the first half of the fiscal year.

We have a strong pipeline of announced deals and we continue to see healthier levels of new engagements with many deals launching now.

Barring another major setback in the coming months, we are cautiously optimistic that M&A revenue will meaningfully improve in the second half of this fiscal year.

Engagement levels amongst our corporate clients and their desire for capital remains high within our core sectors and geographies.

That said investors continue to be judicious about putting money to work.

We are seeing some increased activity, but remain cautious in our outlook until we see a more sustained recovery for risk capital in the market.

Like most market participants we are encouraged by indications of improving sentiment as investors begin to look past the difficult environment that we've endured for almost two years.

However, we expect that the capital markets will continue to be challenged for a while longer as investors await a clear inflection point.

We continued to protect our strong market position and I'm very confident that we will capture a meaningful share of activity in our core sectors when opportunities present.

Although we are being realistic about the current macro pressures that we're all facing we continue to invest in our business and our people and we continually assess opportunities to materially improve our business.

We are fully supporting our capital markets business through this downturn, while we're also pursuing organic and inorganic growth in our global wealth management businesses.

We also have several major office relocations planned and additional investments to advance our technology and compliance infrastructure.

That said, we are always managing our balance sheet carefully to protect our ability to provide outstanding opportunities and expertise for our clients in any market backdrop.

With that Don and I will be pleased to answer your questions. Operator could you. Please open the lines.

Thank you, ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question.

<unk> dot and the number one on your telephone keypad. If you would like to advise a question press Star then the number two there.

There will be a brief pause while we compile the Q&A roster.

We have our first question coming from the line of Steven Li from Raymond James. Please go ahead.

Hi, good morning, all.

Yes.

Dan I certainly wanted to touch.

Whats developed in the Middle East obviously in the last month of an unchanged.

I'm just wondering like in terms of the UK Division.

The environment itself.

As the industry and yourselves kind of on hold or are deals and.

Whether it's deals or M&A is that on hold and sort of wait and see environment over there to see what.

Hopefully ends at some point.

Again trying to be sensitive.

The question there.

Sorry.

As a capital markets question on our website.

Capital markets Okay.

Yes, no I don't think things are on hold.

I think we've been clear in our commentary that.

Yes, Im cautiously optimistic harder to measure as you know the new issue business, although that's picking up.

But clearly the M&A business is picking up we've seen.

We've seen good deal announcement activity good deal launch activity some of the uncertainty associated with the financing and deals has disappeared.

Or moderated maybe not disappeared so.

Particularly in the UK I think I think we feel pretty good about.

That market improving.

If thats your question the new issue side, you just don't know I mean, we're obviously active.

Typically in a couple of sectors I'm not sure that risk capital is returned to the market yet yesterday's announcement was positive.

And the market reaction was positive, but one day doesn't make a trend so let's see how it plays out for the next month or so.

Okay, and just in terms of capital Youre not working capital I think is under 700, I think I saw that number around.

It was at 699.

Excuse me.

As this activity.

Perhaps ramps up a little bit.

Are we going to see a lot more bought deals do you think youre going to start to see more if it's new issue that.

This is our best efforts type of environment.

Canada, probably Australia.

Yes.

While all our regulated markets have different capital requirements for deals and the deals are done differently I know youre familiar with the Canadian.

Canadian system.

We keep reserves for capitals for capital for transactions, though.

Sure.

Obviously, we didn't earn any money last quarter.

We didn't improve our capital position. In addition, we've got a number.

Large capital expenditures coming through.

Large office moves you know, we moved in Toronto, where moving in Vancouver with consolidating our offices in New York. So there is definitely an investment that we're making in the business.

And feel comfortable about that.

But yes, we continue to have sufficient capital.

<unk>.

To conduct our business and do underwritings, if thats your question.

Okay. Thanks, and my last one would be just any update this may have been in the MD&A somewhere at or the notes are all.

Apologize if I missed it the regulatory issue with the foreign subsidiary and the trading operations or any update there or any change in the provision.

Yes, Great question no. There's no update there is no update we have let alone update that we can provide to the street.

No material developments either way.

Okay. That's it for me thanks.

Great question.

Our next question comes from the line of Graham Ryding from TD Securities. Please go ahead.

Sure.

Hi, good morning.

Dan you made some comments just about.

Difficult to predict the pipelines are stronger you start seeing some deals launching now.

Is that more of a reference to the M&A side of <unk>.

The activity in the pipeline that you're seeing or is that a reference to both yes.

Sam.

Talk a little bit a little bit both but if I had to pick one would be M&A I mean, M&A, we have better visibility on as you can imagine the process is it three or six month process, we're seeing timelines come in we're seeing deals launching now we've obviously seen some good good level of announcements deals announced.

In closing so I think we've got more confidence and telling you that about M&A than we do about new issues as you know.

We've got.

Lots of companies, who would like to access the public markets.

Whether there's a sufficient buying audience out there to actually get deals done so.

<unk>.

<unk>.

As you've heard me say before.

But in the last two recessions the market bottomed in October shockingly.

We just finished the economy didn't bottom for six or eight months later so.

We are again cautiously optimistic the market approved at the financing environment for small small and mid cap issuers will improve and therefore, our business will improve but it's too premature to predict that Graham.

Okay. That's fair enough and then I guess at a macro level like what are you.

I guess paying most attention to certain scene.

Evidence is market volatility is it.

Deal activity menu large caps, what do you sort of.

Keeping your eye on just sort of give you some comfort or your corporate issuer clients, maybe some comfort that.

Activity might pick up.

Even even in this market were still active just not as active.

And deal sizes are smaller so its reception of deals primarily in reverse inquiries into companies.

There's lots of investors, who are very supportive of their existing issuers existing exists.

Existing companies Daman investments in it and we're seeing if we can round out some of that so.

General level of market activity.

Argue but I know that's not a good answer to your question, but that's kind of what we're looking through and we do see as you can imagine.

With our $93 billion of.

Wealth assets, we do see the flows inside our wealth business as well and Thats, sometimes a pretty good indication of what we're doing and where we're going.

The Australia market was active realize there are some or is their winter the Australia market was active.

Last quarter in the quarter, we just reported and continues to be active that's primarily mining driven and even in the mining driven it's primarily a subset of mining.

For lack of a better term.

Electrification type stocks uranium.

Rare Earths in lithium.

But.

That's been active for us and will continue to be.

Okay.

That's helpful.

On the wealth side could you maybe just give us some context on.

What youre seeing on average from you.

Your clients both in the UK and Canada.

Is this a market where clients are increasingly deleveraging and putting money perhaps into cash or are you actually seeing.

And is that impacting your organic flows and your organic.

Growth in those platforms.

I think the organic flows have been I'll answer your question backwards the organic flows.

We continue to attract net new assets.

In the case, it's in our culture and our culture in the UK, it's in our culture in Canada and in Australia. So.

The question is never how much assets, we attract the assets.

Because youre always measuring net new assets and the problem minimum in an inflationary market as you lose assets not for performance not because they're being pulled out of our system as people need their money.

And that's where their kids need their money. So we've seen some assets pull out notwithstanding that we're still positive net new assets are positive.

But arguably.

Arguably just lifestyle app.

Assets are getting pulled out in terms of our investment portfolios were happening.

We haven't seen a material change.

People don't leave cash sitting around as much anymore, they're investing in.

Short term fixed income securities.

As opposed to just leaving it in cash, but besides that we haven't seen material shifts in our clients portfolios, but I'm looking at dawn when im answering that question.

Yes, no that's right.

I mean, we do have cash related or income.

Type related products so clients.

In a low interest rate environment would be more likely to be leaving cash in their accounts are investing in equities, but we have alternative products in this environment that will keep the assets in the system. So to speak rather than have them go go outside in order to generate that return and clients have outside pressures where.

They otherwise might have borrowed to fund.

Something now Theyre looking at.

Not borrowing and using their assets that we would've otherwise held so it's a mix of all of those things.

We're seeing that as as with everybody else.

Okay.

Understood and one last one if I could just.

The restructuring charge you took in the quarter here or we are largely done.

That front for.

For now.

If there is any.

Sort of one time items coming through in the next.

Quarter, and so is that going to be related to this your office relocations R. R.

Are you largely done the restructuring side of things for now we're largely done on the restructuring side of things there might be a little bit flow through in subsequent quarters as as provisions and so forth to get get true up, but nothing nothing substantive or material.

And with respect to office moves and so forth I don't think we will see anything exceptional flowing through the P&L on that front, we're moving coincidental with <unk>.

Termination of existing leases in real estate. So there's there's no exceptional costs on that front.

Okay.

That's it for me thank you.

Thanks.

There are no further questions at this time I would now like to turn the call back over to Mr. <unk> for closing remarks.

Well thanks, everyone.

That will conclude the second quarter remarks.

Hopefully a low point in our business.

Sure.

I understand a couple of the analysts on the road today, So as you kind of listen to this call we're happy to catch up later.

Look forward to our next quarterly update in February and in the meantime.

I'd like to extend my best wishes to all of you in the upcoming holiday season, and certainly for our U S colleagues happy Thanksgiving.

As always Don and I are available to answer questions. Later, so thank you again very much.

Thank you ladies and gentlemen, this concludes today's conference call for today.

For participating please disconnect your lines.

Okay.

[music].

Yes.

[music].

Yes.

Yes.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Yes.

Sure.

Sure.

Okay.

Okay.

Yes.

Okay.

Okay.

[music].