Canaccord Genuity Group Q1 2024 Earnings Call Transcript

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August 4, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group, Inc. Fiscal 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. 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 Daviault, President and CEO. Please go ahead, Mr.

Operator

Daviau.

Speaker 1

Thank you, operator, and thanks for everyone joining us for today's call. As always, I'm joined by Don McFaden, our Chief Financial Officer. Today's remarks are complementary to our earnings release, MD and A and supplementary financials, copies of which have been made available for download on SEDAR and on the Investor Relations section of our website atcgf.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 are non IFRS financial measures.

Speaker 1

Please refer to our notice regarding forward looking statements and our description of non IFRS financial measures that appears in our investor presentation and in our MD and A. And with that, let's discuss our Q1 fiscal 2024 results. Firm wide revenue for the 3 month period amounted to $343,000,000 an increase of 8% compared to the same period last year. Excluding significant items, pre tax net income amounted to $33,000,000 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 $0.07 for the 3 month period with a $0.20 contribution from Wealth Management being offset by a negative contribution from Capital Markets.

Speaker 1

1st quarter profitability was impacted by higher interest expense due to 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 3 month period decreased by 8.4 percentage points year over year and 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 period when capital markets activities were so challenged across the industry and particularly in several of our core focused 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 $0.085 in line with the previous quarters.

Speaker 1

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 3.7% of our global workforce or 6.5% 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 operational roles.

Speaker 1

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 $10,000,000 in the 2nd fiscal quarter. This should better position us to achieve our historical profitability ranges in a 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 the previous fiscal quarter, our performance reflects a continued difficult backdrop for both capital raising and advisory activities. Revenue of $146,000,000 for the Q1 decreased by 11% compared to the same period last year.

Speaker 1

This division incurred a pre tax loss of $7,600,000 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 administrative 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.

Speaker 1

1st quarter revenue in this segment amounted to $30,000,000 Although this represents an increase of 137% compared to the same period a year ago, I will remind you that we incurred mark to market losses in 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 metal and mining sectors. Activity level in our advisory segment have outperformed the broader market since transaction volumes began to slow in early 2022, 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, 1st quarter revenue contribution from this segment was 51% lower than the same period last year at $40,000,000 Approximately 62% of this revenue was contributed by our U.

Speaker 1

S. Business, reflecting activity in the technology and Sumer Sectors. It was a difficult quarter for our UK Capital Markets business with small cap underwriting and advisory activity in the region at a near standstill. The impact of higher fixed costs in this reduced revenue environment led to an adjusted pre tax net loss of $6,000,000 This business continues to be a valuable contributor to our cross border capabilities in both underwriting and advisory, and we will expect it to improve as market conditions become more constructive. Demand for capital in our focus sectors remains exceptionally strong.

Speaker 1

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 4 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, there remains a lot of uncertainty in the pace and timings of deals launching and closing. While a significant improvement may not be reflected in the first half of this fiscal year, we reasonably anticipate stronger results towards the back half.

Speaker 1

Turning to our Global Wealth business, This division contributed 56% of our firm wide revenue for the 1st fiscal quarter. The adjusted earnings per common share from this division amounted to $0.20 which was offset by a loss in our Capital Markets division. On a consolidated basis, 1st quarter revenue from this division amounted to $191,000,000 up 3% from the previous fiscal quarter and up 18% compared to the same period a year ago. The adjusted pre tax net income contribution increased by 46% year over year to $36,000,000 Client assets at the end of the 3 month period amounted to $97,000,000,000 an increase of 7% compared to the same period last year. 54 percent or $103,000,000 of revenue in this division was contributed by our U.

Speaker 1

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 PSW acquisition, which was completed in the same period last year. Looking at our Canadian business, revenue of $73,000,000 was in line with the same period a year ago and adjusted pre tax net income of $9,000,000 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.

Speaker 1

Buying assets in this business amounted to $37,000,000,000 which is closer to the peak of $38,000,000,000 prior to the onset of the market downturn. The increase of 9.8% year over year and 4% sequentially is attributed to improving market valuations, of inflows and new assets from the Mercer acquisition, which closed in the previous quarter. We expect the revenue and net income contributions from this transaction will be more fully reflected in our next fiscal quarter. Revenue in our Australian business was in line with the same period a year ago at $15,000,000 Client assets in this business have increased 15% year over year to $5,400,000,000 and our recruiting efforts have helped us achieve a 6 percent increase in the number of advisory teams. Despite weak new issue activity, This business achieved modest profitability, which reflects our disciplined investments in growing the business.

Speaker 1

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 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 end. Like most of our peers, we look forward to a healthy increase in new business activity as our clients begin to anticipate recovery.

Speaker 1

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, Dawn and I will be pleased to take your questions. Operator, could you please open the lines?

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. 20 Your first question will come from Stephen Boland at Raymond James. Please go ahead.

Speaker 2

Good morning. Maybe just a little bit more on obviously the departures. And a good portion was in capital markets in Canada and the U. S. I guess I'm trying to see how you balance the departures 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.

Speaker 2

I'm just wondering again how you balance that out, departures ahead of trying to Actually get more penetration within certain year with your clients.

Speaker 1

Yes. Great question, Steve. I don't think that the statements necessarily are conflicting. When you think of departures, Let's say there was 100 ish people in our North American Capital Markets business, that's sub 4% of the people that we have Globally and sub 7% of the people we have in North America. We can easily take out optionality of the business without impacting our core segments.

Speaker 1

So some of the exits, not necessarily all of them, would have been in sectors and 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 the reductions, it's 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 Doesn't permit us to keep everyone in an environment like this.

Speaker 1

I'm not quite sure I answered your question perfectly, but that's the best I think I can do.

Speaker 2

Yes. No, that's good. And second question is, in your presentation as well, your acquisition strategy in the UK is You're looking to do accretive find look for accretive financing opportunities without diluting the group shareholders. So I guess the question would be, 1, are you still actively looking for more acquisitions in the UK? And Can you express that out in terms of accretive financing opportunities?

Speaker 1

Yes. I mean, I guess the first point is, Yes. We continue to look at acquisition opportunities in our U. K. Wealth Management business for sure.

Speaker 1

We've got a lot of offices there. We've got a lot of ability to In acquisitions, we continue to examine a number of different targets. To the extent that we're looking at anything bigger, we wouldn't be using Group's balance sheet. We've got mechanisms to fund locally as well there. Not that we're close to anything bigger, not that I'm even contemplating that necessarily right now.

Speaker 1

But we've got certainly an ability to fund there locally. We also have a reasonably robust balance sheet domestically in our UK 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 Yes, I don't see us getting further outside of something major. I don't see us getting further diluted in that business.

Speaker 1

But Listen, if we found something wildly accretive and we felt it made sense, I'd have 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.

Speaker 2

Okay. And then we'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 the Canadian brokers It's starting to do some of their own deals. You also mentioned Australia, when you start to see mining.

Speaker 2

Is that pipeline Do you see that building that gives you more confidence that the back half of fiscal 'twenty four will be No, there'll be a higher volume of deals.

Speaker 1

Yes. You'd have almost as good visibility as we would. But Yes. I mean, we're seeing increased activity. We're seeing the buyer strike starting to end a little bit.

Speaker 1

Obviously, we've seen broad good market performance on large cap stocks, material relative underperformance on the mid cap and Small cap stocks, sooner or later people are going to have to catch up with returns. So we're seeing people look at the market and It's premature and we're at the beginning of August. So it's a bad time to predict. But I'd like to think into the fall that we're going to see a pickup of business. M and A, we can predict a little bit better in advance.

Speaker 1

New issue activity is harder to predict in advance, as you know. But our pipelines are incredibly robust. We just the bid ask between where companies Sell stock and buyers want to buy it, it's narrowing. Let's put it that way.

Speaker 2

Thanks very much. Appreciate that.

Operator

Your next question will come from Rob Goff at Echelon Wealth Partners. Please go ahead.

Speaker 3

Good morning and thank you for taking my question.

Speaker 1

Hey, sir.

Speaker 3

I was encouraged with respect to your recruiting efforts On the wealth side in Australia, perhaps could you talk to your recruiting in wealth in both Australia and Canada? How is that pipeline looking,

Speaker 1

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's Dozens and dozens and dozens of people on that pipeline to the tune of Multiple tens of 1,000,000,000 of dollars of assets, bringing them always over is an issue. And when we do that, but Pipelines in all our markets, all our primary markets continue to be robust. Nothing's really changed From where we've been historically.

Speaker 1

The cost of bringing advisors over, the pace of bringing advisors over, We've been bringing we brought close to $20,000,000,000 of assets over to our franchise over the last several years. We continue See the pace of activity, same as historical levels, maybe slightly better. So 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 advisers, poor performing advisers with much stronger advisors.

Speaker 1

Our average book per advisor in Canada continues to grow. Our margins in Canada are remarkably strong given the lack of new issue business. So and our results in Canada are strong. The reason I spent so much time on Canada before I answered Australia is Australia is going through a similar trend is the trend we had in Canada. And that was intentional.

Speaker 1

That was always our strategy. Again, you're not going to see a material increase necessarily in the number of advisers in Australia. But the average book for advisor, the funds under management, the discretionary funds under management, the fee based funds, That all continues to grow. It's roughly doubled since we've done the Patterson acquisition. Again, we continue to have a very robust pipeline of potential candidates in Australia and is a very active effort in all of our primary jurisdictions.

Speaker 1

So Continue to feel that we're going to grow that business. And I'd like to think that in 5 years' time that our Australia business looks like our Canadian business. But It's obviously a pretty far out projection, but there's no reason to think we can't continue to grow that business the way we have. It's a very set of similar dynamics Australia as there is in Canada.

Speaker 3

Okay. And this is a bit more towards the numbers. Your restructuring Charges on the quarter were $3,300,000 and you made reference to those being roughly $10,000,000 on the current quarter. Would it be fair to say that the increase there would be offset or largely offset by lower development cost as they came in at $22,600,000 on the quarter, up from $13,300,000 Q on Q and $6,900,000 year on year.

Speaker 4

Hi, Rob, it's Don. I didn't follow all the numbers You said there, but yes, we had a small restructuring charge in the first in this current June quarter. There was Some changes, some personnel staff type changes in that quarter. And then the larger restructuring, which occurred this month, is makes up the $10,000,000 we refer to as a charge for the 2nd fiscal quarter. So Combined, they would be $13,000,000

Speaker 3

So the question there was just in general terms, With the restructuring costs being $7,000,000 higher for fiscal Q2, would you see Reasonably comparable savings through reduced development expenses that came in at $23,000,000 on the quarter. Is there a nice balance there?

Speaker 4

No, the development expenses are isolated. It's a different activity going through the development expenses. They 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 restructuring.

Speaker 3

Right. And that's where I was seeing those development Costs related to the bid decreasing with the 2nd quarter and looking for

Speaker 4

Yes, yes, yes. They're largely concentrated in that Q1. So I mean there might be some true As we go forward, but they're largely behind us.

Speaker 3

That's good. Thank you guys. Good luck.

Operator

Your next question will come from Graham Ryding at TD Securities. Please go ahead.

Speaker 5

Hi, good morning. Maybe you could just stay on the theme of this or Your capital markets outlook, you did mention that you feel like we may be getting closer to sort of the rate tightening Cycle coming to an end. It sounds like that's probably maybe a key ingredient needed here to get capital markets going. What are the other So the key things that you're looking for, you've seen a few cycles obviously in capital markets. What do you think Some of the key agreements we need to see to get capital markets activity going.

Speaker 1

Don't date me, Rob. The Yes. I mean, what we're talking about, don't date me, Graham, I meant, but don't the What we're referring to is the new issue business, right? Obviously, the M and A business, we've got a lot more visibility on and you know that you kind of predict M and A out in advance, I've told you that before. So we're feeling increasingly confident in our pipeline of M and A activity.

Speaker 1

Obviously, this last quarter was a poor quarter from an M and A completion perspective. So although chunky, we feel that There's a reasonably good pipeline going forward of M and A. So we feel pretty confident in stating, hey, this is going to be back half of the year weighted. You never know for sure and things could continue to get delayed, but we feel reasonably confident. When we look at our advisory revenue $40,000,000 in capital markets last quarter.

Speaker 1

I mean that's down from your average of $100,000,000 or $90,000,000 or $80,000,000 a quarter depending on the year you want to look at. So we feel confident that number will continue to go up. Investment banking is just really tough to predict. Our new issue business, as you know, we did $30,000,000 last quarter as we referred to. And again, this is down from $100,000,000 $150,000,000 quarters.

Speaker 1

This is a fraction, a 5th 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 from a pre pandemic perspective, we'll be doing $50,000,000 $60,000,000 a quarter in that business. I feel reasonably comfortable that we're at the place where People are going to kind of start waiting back into the market and we're going to see a pickup of activity. I'd like to think that that's 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 been narrow in a couple of stocks.

Speaker 1

So in our sectors, tech, Healthcare, sustainability, outside of the mining sector, we really haven't seen an immense amount of new issue activity. We're getting to the place where companies need to issue and buyers are going to be chasing returns. So I'm not I don't want to predict the recovery. It's Too soon, but if I said it was going up or going down, if I had to bet 1, I'd bet going up. That's kind of where we see activity levels.

Speaker 5

Do you buy into the theme that debt financing is expensive now for a lot of companies and at some point they're going to have to look back For the equity markets for capital needs? True, but

Speaker 1

a lot of our clients can't even Debt financing at competitive rates. And yes, debt financing is very expensive and that kind of impacts your M and A business more than anything else. But Again, our clients aren't heavy users of balance sheets, not all of them, but generally speaking. The mid cap tech And healthcare companies tend not to borrow a ton of money. But yes, and it's not that it's expensive, it's unavailable with that financing for the most part.

Speaker 1

So Yes, we do believe that we're going to see a pickup of that activity when we talk to our competitors, Particularly in the U. S, I think they see a pickup of activity as well, Graham. So again, I'm making a prediction, which I hate doing. But I think over the next 6 months, we should see a pickup of the new issue business broadly. And we're seeing a pickup In our retail channel, we're seeing some of the early stages of it, way too early to predict.

Speaker 1

And again, I hate making predictions in August when everyone's away and there's a natural slowdown September will be the real telltale sign.

Speaker 5

Okay, great. Maybe just jump into your U. K. Wealth business. It looks like assets are down like about 2% year over year.

Speaker 5

But if I look at the FTSE 100, maybe just as a proxy for the market, it was up 4% over that period. So I'm just wondering if there was any Advisor outflows or just asset outflows that are involved here, maybe some advisor attrition after that WDO, is there any color as to why the growth there has been lagging?

Speaker 1

Yes. There's 2 primary factors, I think, which caused the decline in assets. Number 1, There always is some small advisor outflows when you do an acquisition. We actually Model it and predict it in advance. I don't think it's anything out of the ordinary.

Speaker 1

You're always going to lose a little bit of assets on an acquisition No matter how hard you try, so some of it's that. But 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 more than the market, plus there's outflows in that market. So there's actually small organic Net inflows in our traditional wealth business there offset by the two factors that I just mentioned.

Speaker 5

Okay, that's helpful. And that small cap fund management business, what would the size of that be in terms of AUM?

Speaker 1

£1,000,000,000 down from about £5,000,000,000 I'm making up those numbers. I'm looking at Don.

Speaker 4

Yes. Those are generally in line. Yes.

Speaker 1

Yes. So maybe it was as high as £5,000,000,000 it's now £3,000,000,000

Speaker 5

Okay. And then Don, I got one for you. I guess on just the compensation ratio in the quarter was quite low. It seemed to be in particular very low in the Canadian Capital Markets. I think it's a 40% Comp ratio.

Speaker 5

Dan, you mentioned the stock based comp was a factor. Is that if the 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 in this comp ratio?

Speaker 4

There wasn't anything necessarily one off. It really was related to a 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. It 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.

Speaker 4

And once we get to the annual end of year, it tends to settle out at sort of a normal course kind of ratio. The 40% ratio in 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 maintained at roughly these levels, Then that would not be an impact going forward on a quarterly basis.

Speaker 1

Yes. If you look more broadly at our overall comp ratio in capital markets at 58.5 percent appreciate some jurisdictions are bouncing around. That's generally in line with our historical comp ratio in capital markets for the last 5 years or so. It tends to go up a little bit when the stock price goes up because our charges goes up, it tends to go down a little bit when our stock price goes down. So we're in Relatively lower quarter, but I'd say there's no real change to our typical guidance of 60 ish percent overall comp ratio for the year.

Speaker 1

That's probably where we'll kind of average out at.

Speaker 5

Okay. That's it for me. Thanks. Thank you.

Operator

There are no other questions. So I will turn the conference back to Mr. Davio for any closing statements.

Speaker 1

Great. Well, thank you, operator, and thanks for everyone joining us today on the call. That concludes our Q1 fiscal 2024 conference call. Don and I are as always to be available for other questions as he goes through the material. I appreciate your time.

Speaker 1

We are doing our AGM today. It's going to be taking place at 10 am if you wish to join us. Access details were provided in our information circular, They're also on our website if you'd like to join us. So thank you again everybody and look forward to speaking to you again.

Operator

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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Key Takeaways

  • Q1 firmwide revenue rose 8% YoY to $343 million, with adjusted pre-tax net income up 20% to $33 million and adjusted EPS of $0.07, driven by a $0.20/share contribution from Wealth Management that was offset by Capital Markets losses.
  • Management declared a quarterly dividend of $0.085 per share and highlighted a strong balance sheet to support strategic investments despite higher interest expense and isolated charges.
  • Following the quarter end, the firm will cut 3.7% of its global workforce (6.5% in North America) mainly in Capital Markets, incur a $10 million Q2 restructuring charge, and realign costs to restore historical profitability.
  • Global Capital Markets revenue fell 11% YoY to $146 million, resulting in a $7.6 million pre-tax loss as investment banking and advisory activity remained muted, although the pipeline is said to be strengthening for the back half of FY24.
  • Wealth Management contributed 56% of firm revenue at $191 million (+18% YoY) with pre-tax income of $36 million (+46% YoY), client assets at $97 billion (+7% YoY), and ongoing organic and acquisitive growth in Canada, the UK and Australia.
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Earnings Conference Call
Canaccord Genuity Group Q1 2024
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