Q2 2025 Canaccord Genuity Group Inc Earnings Call

Good morning ladies and gentlemen.

Speaker Change: Thank you for standing by. I'd like to welcome everyone to the Canada Corps Genuity Group Inc. Fiscal 2025 Second Quarter Results Conference Call. All lines have a place on mute to prevent any background noise.

Speaker Change: Following the speaker's prepared 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.

Speaker Change: 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 Daviau, President and CEO. Please go ahead, Mr. Daviau.

Dan Daviau: Thank you, Operator, and thanks to everyone for joining us for today's call. As always, I'm joined by Dawn McFadden, our Chief Financial Officer. Also joining us today is Nadine Ann, our newly appointed Deputy Chief Financial Officer, who we were very pleased to welcome just a few weeks ago.

Dan Daviau: Today's remarks are complementary to our earnings release, MD&A and supplemental financials, copies of which have been made available for download on CDAR Plus and on the Investor Relations section of our website at cgf.com.

Dan Daviau: Within our update, certain reported information has been adjusted to exclude significant items to provide a transparent and comparative view of our operating performance.

Dan Daviau: These adjusted items are non-IFRS financial measures. Please refer to our Notice regarding Forward-Looking Statements and the Description of Non-IFRS Financial Measures that appear in our Investor Presentation and in our MD&A. And with that, let's discuss our second quarter...

Dan Daviau: results, which we are pleased to be reporting from our new Vancouver office.

Dan Daviau: Our second fiscal quarter was characterized by an improving backdrop for corporate finance and advisory activities in our core mid-market focused sectors.

and continuing strong performance from our wealth management businesses.

Dan Daviau: Broad market indices posted strong relative returns. The S&P 500, the TSX Composite and World Equities gained 5.9%, 10.5% and 6.7% respectively over the three-month period.

Dan Daviau: 16% and 40% respectively from our Wealth Management and Capital Markets businesses.

Dan Daviau: Fiscal year-to-date revenue amounted to $857 million, up 26% compared to last year.

Year-over-year increases of 156% and 56% respectively.

Dan Daviau: This translated to adjusted diluted earnings per common share of $0.20 for the three-month period, bringing our fiscal year-to-date EPS to $0.33, a substantial improvement from the $0.07 earned in the comparative period last year.

Dan Daviau: We are pleased to see improving contributions from our capital markets businesses, which further augments the continued strength and stability of our wealth management businesses.

Dan Daviau: Our Wealth Management Division contributed 85% of our adjusted earnings per common share over the six-month period.

Dan Daviau: Excluding significant items, firm-wide non-compensation expenses of $135 million declined modestly on a sequential basis, but remained above our historic run rate.

Dan Daviau: A large portion of our expense base, such as interest and trading expenses, will move in line with revenue due to client activity and volumes.

or has offsets in the corresponding revenue lines.

Dan Daviau: in connection with the important investments in our new flagship office in Vancouver, where half our Canadian wealth assets are based, and in New York, where we are consolidating three offices into one central location.

Dan Daviau: We remain disciplined on our capital allocation and continue to maintain a healthy level of working capital to support improving activity levels and invest in our businesses.

Dan Daviau: On that note, I am also pleased to report that our Board of Directors has approved a common share dividend of $0.085 per share.

Dan Daviau: year-over-year increases of 16% and 14% respectively, and new records for each measurement period.

Dan Daviau: The adjusted pre-tax net income contribution of $38 million for the three-month period was the strongest quarterly result from this division in three years.

Dan Daviau: and reflects year-over-year increases of 31%, 20%, and 11% respectively from our Canadian, Australian, and UK businesses.

Dan Daviau: This growth was fuelled by enhanced market valuations, modest inflows, new assets from recent acquisitions in the UK, as well as our recruitment of advisors in Canada and Australia.

Dan Daviau: Our UK business continues to deliver consistent earnings, generating normalized EBITDA of approximately £18 million for the three-month period and £38 million for the fiscal year to date.

Dan Daviau: Fee-related revenue in the UK and Crown dependencies has remained comfortably above 80% for eight consecutive quarters.

Dan Daviau: We also entered into a binding agreement to acquire Channel Island-based Brooks MacDonald Asset Management International Ltd.

Dan Daviau: We anticipate completing this acquisition by the end of our fourth fiscal quarter and look forward to supporting the continued success of the professionals and clients of this business.

Dan Daviau: We also continue to experience positive momentum for our recruiting efforts in Canada and Australia and this is helping to increase fee-based assets in both regions.

Dan Daviau: And finally, fee-related revenue in Australian business has improved by 4.6 percentage points year-over-year to 44.7%.

Dan Daviau: As previously discussed, our recruiting momentum in the region is contributing to growth in this segment. During the quarter, we welcome two new advisory teams in the business, bringing our total recruits for the past 12 months to 10. Turning to the performance of our Global Capital Markets division.

Dan Daviau: an increase of 40 percent year-over-year, primarily driven by higher corporate financing and advisory revenues, which increased by 67 percent and 70 percent respectively.

Dan Daviau: Fiscal year-to-date revenue of 408 million dollars earned in this division increased by 40% year-over-year. This growth has primarily been driven by our strategy of investing in our higher margin advisory capabilities which began in 2019.

Dan Daviau: To further enhance this capability, yesterday we were very pleased to announce an indirect investment in CRC-IB, a top-ranked advisory firm to the $1.8 trillion renewable energy sector.

Dan Daviau: Based in the U.S., CRC-IB contributes to a global client base and brings deep knowledge of market dynamics and a 15-year track record in capital raising, M&A, and project financing for renewable energy sponsors and developers.

Dan Daviau: With this development, we have established a Business Collaboration Agreement which will enhance CRC-IB's ability to provide fully independent advisory services to a broader base of clients, while bringing dedicated expertise and relationships to benefit CG's growing client base in this sector.

Dan Daviau: Consolidated advisory revenue improved by 70% year-over-year and 17% sequentially to 78 million dollars of which 72% was earned in our U.S. business primarily in the technology sector.

Dan Daviau: We also reported meaningful year-over-year increases in our Canadian and UK advisory businesses.

Dan Daviau: Second quarter revenue from corporate financing amounted to $52 million, an improvement of 67% over near trough levels a year ago, but 21% lower than the previous quarter, reflecting typical summer seasonality and a brief rise in volatility during September.

Dan Daviau: Activity in this segment was still heavily weighted in the mining and metal sector with improved contribution from the technology and life sciences sectors.

Dan Daviau: Year-to-date corporate financing revenue of $117 million was almost double when compared to the same period last year.

Dan Daviau: While our Australian business remains our largest contributor in this segment, we are pleased to see improving activity levels in North America and the UK.

Dan Daviau: The 12% decrease in commission and fee activity to $35 million for the three-month period reflects lower client activity in connection with lower new issue activity in our Canadian and US businesses and partially offset by increases in our UK and Australian businesses.

Dan Daviau: We have been undertaking a reorganization of our U.S. trading business to better focus on core trading activities while reducing our exposure to non-core businesses.

Dan Daviau: In all, the adjusted pre-tax net income contribution from our Capital Markets Division amounted to $15 million for the three-month period, up from a loss of $6 million in the prior year and an improvement of 15% sequentially.

Dan Daviau: Our adjusted pre-tax margin of 7% improved from 6% in the previous quarter.

Dan Daviau: In closing we are encouraged by the general positive momentum towards a more normalized interest rate environment which bodes well for risk appetite and should support a gradual return to healthy market for corporate financing and advisory activities in our core focus sectors.

Dan Daviau: Lower interest rates, potential government stimulus, and improved market flows should generally strengthen the new issue pipeline in our core mid-market sectors.

Dan Daviau: Our M&A pipeline also remains strong, driven off record private equity availability and a cheaper lending environment as interest rates come down.

Dan Daviau: M&A appears to be returning to more normalized levels and the investments we've made in growing our capability leaves us well positioned to capture share in our core segments while advancing our impact in the energy transition segment.

Dan Daviau: We're continuing to invest in the growth of our wealth management businesses with a focus on growing contributions from fee-based assets in all regions while advancing our recruiting initiatives to further increase our market position in North America and Australia.

Dan Daviau: We also remain strongly committed to improving non-compensation expense ratios, noting that revenue growth is also a factor in achieving this goal.

Dan Daviau: While we expect continued bouts of volatility relating to the ongoing geopolitical overhang and the U.S. administration change, our commitment to operating in the best interest of our clients and shareholders remains steadfast. With that, we will be pleased to take your questions. Operator, could you please open the lines?

Speaker Change: Thank you ladies and gentlemen. We will now conduct a question and answer session. If you would like to ask a question press star then the number one on your telephone keypad. If you would like to withdraw a question please press star two.

There will be a brief pause while we

Speaker Change: Your first question comes from Rob Jeff with Ventum. Your line is now open.

Rob Jeff: Good morning and thank you for taking my question. Thanks, Rob.

Rob Jeff: Um, I guess my first question would be in terms of the U.S., can you perhaps dive a bit more into the outlook for the U.S. advisor business? It's now been three quarters of exceptional growth. How is that looking going ahead?

Speaker Change: Yeah, I mean, we're in an environment, I think you know this.

with

Speaker Change: Lower interest rates more access to credit higher stock prices. Those are

Speaker Change: Traditionally the main indicia of an improving M&A market add to the fact record private equity balances.

Speaker Change: you know a big chunk of our business there is private equity driven.

Speaker Change: You know you don't need to look far some of the US M&A comps that we would have and some of those firms trading at all 52 week eyes so I think they're seeing the same trends that we're seeing Rob

Speaker Change: Thank you and perhaps turning to Australia, can you talk to both the organic and the inorganic growth and the Australian wealth?

Speaker Change: Yeah, we're looking through both channels right now. I mean, from that, what do you call hiring advisors, Rob, organic or inorganic?

I would say that would be organic.

Speaker Change: Okay, well, we got a lot of organic growth. You know, we continue to have a strong pipeline of advisors that we're hiring. We just hired another two. We see additional pipeline for more.

for bringing on more teams of people.

Speaker Change: You know, we opened up that Adelaide office. We continue to hire into Sydney and Melbourne. Perth, we're already strong, but we continue to hire there as well.

Speaker Change: the prospect. We continue to increase the size of that business. It was at a record high.

Speaker Change: from assets under management perspective this quarter. Now realize that as we hire those advisors, we amortize the cost of hiring those advisors over a much shorter period in Canada, or sorry, in Australia than we do in Canada, three years as opposed to 10 years.

Speaker Change: So it does impact our profitability as we grow. You can note that in our development line in our supplemental financials, but

Speaker Change: You know, that's money well spent as we as we continue to grow. So, you know, in addition to all of that, we've got fundamental organic growth as well. Just growing our advisors books of business and helping them grow the books of business.

And that's an active effort as well.

Speaker Change: Finally, on the inorganic side, we continue to look at firms that we could layer into

Speaker Change: layer into our platform there, so can't really speak to that. There's nothing announceable in the next three months, but we continue to survey the landscape there and think about if there's a way to step up or, you know, lockstep our business there through acquisition. So we're certainly looking at that as well. It's one of our priorities.

Thank you. Thank you, Rob.

Speaker Change: Good morning. Maybe just on the carbon reduction capital, you know, in the notes it says you have an option to get equity after giving them a loan. I'm just curious about maybe a little bit of a cautious step here. Are you cautious on the...

on the firm or you're cautious on the sector?

Uh, I'm just-

because it doesn't seem to work.

Speaker Change: And we bought Sawaya in the U.S. That was in our digital consumer and consumer area. These are all core focuses for the firm.

Speaker Change: We've always said that we're going to continue to look at M&A firms that specialize in our core sectors. Sustainability is one of those sectors globally. This really gives us a massive leg up.

Speaker Change: In buying any people business, Steve, you kind of take what's in front of you and what was in front of us in this case was making an investment in them and having a partnership with them.

Speaker Change: Certainly, it will allow us to walk before we run. We are an administrative change in the U.S. We don't think that's really going to impact anything, to be honest.

Speaker Change: But making this modest investment in them, helping them facilitate some of their ownership objectives, and then ultimately over the next year.

Speaker Change: integrating together and partnering together on stuff. We'll see where it goes in a year from now. I suspect this will play out in the next year one way or the other.

Speaker Change: Okay, that's good. Canada wealth, there was a jump in the interest cash balance, the interest expense.

Speaker Change: You said that the cash balances at the broker level has increased. I'm just wondering, I know someone always takes the mood of the brokers. Is this cautiousness on the broker side?

Speaker Change: They want to get out of equities or bond and move into cash, or are they clearing out to gear up to deploy in different areas? I'm just trying to get a gauge on the mood of the brokers.

Speaker Change: I'll let Dawn get specifically into our interest, you know, you really got to look at net interest income, right? You got to look at our interest income less our interest expense, so just looking at the expense it just gives half the picture. But, you know, I don't think so. I mean, I think what you will see, and this isn't answering your question, but

Speaker Change: In a higher interest rate environment, people won't just leave their cash shitting around. They will invest in interest-bearing instruments. So it doesn't show up as cash on our balance sheet.

Speaker Change: It doesn't show up as our interest income, it's their interest income. Our interest income comes, I think you know, from our margin book, which is relevant to the interest rate environments there. And our interest expense reflects.

Speaker Change: For the most part, at least in the Canadian retail business, the interest that we pay

Speaker Change: our retail investors for their cash balances. So, that will vary to a fair degree based on, you know, whether they're leaving cash sitting there or they're investing in interest-bearing instruments. But I've done a terrible job answering that question, so I'm going to turn it over to Don.

I think you did a good job, Dan.

If you look at the change in interest...

Speaker Change: expands to pretty well track the change in interest revenue so there is a certain amount of just simply

Speaker Change: We've passed through interest there and we just for financial statement presentation purposes we grow set up so the interest revenue shows at the top line and the interest expense shows on the bottom line. The bulk of the interest revenue is coming from margin long so however. [inaudible]

Speaker Change: you're more bullish on the market because I know you have a portion of your guys here in Canada that

Speaker Change: certainly are stock pickers. Yeah, it's less and less, as you know. I mean, our key-based assets are at record levels. Our discretionary assets are at record levels. Those aren't stock pickers. You know, those are portfolio managers.

Speaker Change: That being said, you're right. We do have an increasingly smaller subset of our advisors that do pick stocks. And if you're asking me just, you know, mother-in-law research, like me asking my mother-in-law what her views are, but, you know, when I talk to our brokers,

Speaker Change: Yeah, they're getting more bullish on the small cap market and that shouldn't come as a surprise to you because

Speaker Change: You know, you're seeing, you know, the Russell hit new highs. You're seeing, you know, that disparity between large cap and small cap.

Speaker Change: shrinking now from evaluation perspective and people chasing returns in the declining interest rate environment. When rates go down that tends to happen and I'm telling you this is like

Speaker Change: I shouldn't be teaching you this, but as interest rates come down, those companies with further out cash flows become more valuable.

Speaker Change: and that tends to be those smaller cap riskier stocks. So yeah, I think generally our brokers are feeling increasingly confident. We're seeing that in our new issue business as well with higher retail participation.

Speaker Change: And you'll note, this is premature to make a comment, it really is, but you'll note in our financials we disclosed kind of the investment banking revenue inside our wealth business. That hasn't moved.

Speaker Change: you know it's been four or five million dollars a quarter you know that number has been as high as 20 and 25 million dollars a quarter to give you a sense of what some of the upside could be flowing through the wealth business from a new issue perspective.

Speaker Change: Yeah, that was really to my point because I always look at that number as a gauge of more retail, you know, privates and pre-rounds and things like that. So, yeah, that's a good way to look at it. But realize, of course, this was the summer, right? You know, this quarter was July, August and a volatile September.

Well,

Speaker Change: Last one for me, I know you don't give net sales or redemptions per business line, but just in the UK, is it fair to say that they're in positive inflows?

Speaker Change: Yeah, but just, right? Again, it was, yes, positive inflows in all three of our wealth businesses. I would say, you know, that one is probably, yeah, I don't have the exact number so I'm not going to answer, but yes, it was positive.

Okay, I appreciate it. Thanks, guys.

Speaker Change: And we are going to try and get closer on that next quarter. We're just assembling all the facts, so I suspect next quarter we're going to start disclosing net flows in all of our businesses.

That'd be helpful. Thank you. Thank you.

The next question comes from Michael

Michael: Hi, good morning guys. Just making sure everyone can hear me. Yep.

Speaker Change: Regarding the decline in UK wealth assets quarter over quarter in pounds, was that driven by significant client outflows or any advisor departures or maybe what was driving that quarter over quarter drop?

Um...

Speaker Change: The quarter over quarter drop in pound assets in the UK, I don't have that right now.

front of me. Dawn, do you want to?

start answering that question and then.

Dawn McFadden: Yeah, I think the wealth business in the UK has a small fund asset management component to it, which has been historically very focused on smaller cap type stocks.

Dawn McFadden: There is the private client side and the fund asset management side, so we don't separate the two in our disclosure. They're kind of combined, so the movement you see is a reflection of both. And as Dan mentioned, we have slight positive inflows.

Dawn McFadden: With the high interest rate environment, relatively speaking, that we continue to be in, outflows are a challenge. Even though we're making great progress on the inflows, clients for various reasons are still having outflows.

Speaker Change: Yeah, thank you, Don, for reminding me, and I was able to look at the numbers while you were answering. Yeah, the marginal decline in pound terms is solely due to our small asset management business. We have a fund management business there that sells...

Speaker Change: I think we've disclosed this in the past, you know, mutual funds to other retail and whatever, and that has been declining.

Speaker Change: You know, that's not what we consider our core business, and it's tiny, like it's 5% or maybe 7% of the overall business, but it has suffered some decline. The actual normal wealth management business has increased.

Oh, I think I lost you for one second.

Speaker Change: Staying on the UK theme, you briefly discussed a couple of acquisitions of CanTab and the Brooks McDonald subsidiary, would you be able to just go dive a little deeper into the strategic rationale and how you think they'll be additive to that UK wealth platform? I know you mentioned it briefly at the start, but if you could expand a little bit.

Sure, I mean, you know

Speaker Change: For a long time, we bought businesses in the UK that were very, very good businesses, but we were sub-scale, you know, and it was important for us to get to scale, to get to the margins, quite frankly, that our competitors are at and the margins that we felt we should be operating at.

Speaker Change: We are at scale in the UK now. We are a top 10 independent wealth manager, I think we rank 6th or 7th right now. Our pre-tax profit margins are in the low 20s, our EBITDA margins are even approaching 30.

Speaker Change: So we don't need to buy things for scale anymore in the UK. To the extent that we're buying things in the UK, there's a strategic rationale to develop a more holistic relationship with our clients.

Speaker Change: You know, CanTap had a large proportion of its business in the financial planning space, plus got us into the Cambridge market, which we wanted to be in. So it was a phenomenal acquisition from that perspective and we're busy integrating that in.

Speaker Change: The Brooks MacDonald International Businesses, as you know, you know, we've got a large Channel Island business. It's an important business. Our business tended to be a little bit less

Speaker Change: a little bit more intermediary focused. Their business tended to be a little bit more client focused, having direct client relationships.

Speaker Change: Obviously there's massive synergies when we take a market like that and we integrate it in together.

Speaker Change: And we bought it at what we perceive to be a very, very good price. So, you know, everything we're doing in the UK now has a strategic rationale as opposed to a scale rationale. But that tends to mean that there's smaller, more bite-sized acquisitions that we fund off our existing balance sheet.

Speaker Change: I'm not saying we won't look at something huge in the UK, but right now that's not our primary focus.

Silence.

Speaker Change: Great, thanks. And then just one more for me and then that'll be it. I'm just wondering, especially compared to last quarter, how you're feeling about the cap markets pipeline on advisory and iBanking fronts? Any, you know, noticeable changes in your visibility towards activity this quarter? Well, I want to start with the harder part, which is the new issue chunk of the business.

investment banking. Thank you.

Speaker Change: It's obviously very hard to predict, but I think you could surmise that the pace of activity has increased.

Speaker Change: and there's a lot of transactions happening. October was a very busy month. I'm not giving you a super duper MPI there. You just look at the tape. October was a busy month for new issues.

Speaker Change: So, you know, and small cap tech has gone up. So those are all important sectors to us. That all bodes well for a very active new issue calendar. Again, I can't tell you what our new issue revenue is going to be in three weeks from now. But if I look at the pace of activity, if that's your question.

then the pace of activity certainly has increased.

Speaker Change: Similarly speaking, M&A, which has a much longer pipeline, you know, from the time a client walks in or you get appointed to, you know, do an M&A deal, you know, you're going to book that revenue four or five, six months later.

Speaker Change: We do see an incredible amount of activity in our M&A business, whether that gets booked this quarter or booked next quarter.

Speaker Change: I'm not so quarterly focused, but from an overall pipeline perspective, I do think we've got a pretty robust pipeline for the next six to nine months in our M&A business, certainly through from where we are right now. Again, I want to be cautious about...

Speaker Change: when deals close. So I'm not I'm not saying that our M&A is going to go up a ton this quarter. It may, it may not, but that wasn't the question. The question was just a broad pace of activity and pipeline question, which I am confident of.

That's all for me. Thanks guys. Thank you.

Okay, Aquila, are there any other questions?

Speaker Change: There are no further questions at this time. I will now turn the call over to Mr. Daviau for closing remarks.

Dan Daviau: Okay, thanks everyone for joining us today. Truly appreciated and thanks for your continued interest. As always, Don, Nadine, and I will be available to take additional questions at any time. We certainly are excited and look forward to providing our next quarterly update in early February and with that operator maybe we can close the lines.