© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group Inc. Fiscal 2019 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being broadcast live online and recorded. I would now like to turn the call over to Mr. Dan Daviau, President and CEO. Please go ahead, Mr. Daviau.
Thank you, operator. And thanks to everyone for participating on the conference call. I'm joined by Don MacFayden, our Chief Financial Officer. Following the overview of our first fiscal quarter results, both Don and I would be pleased to answer questions from analysts and investors. A reminder that our remarks and responses during today's call may contain forward-looking statements and involve risks and uncertainties related to the financial and operating results of Canaccord Genuity Group Inc. The company's actual results may differ materially from management's expectations for various reasons that are outlined in our cautionary statement and in the discussion of risk in our MD&A. Our discussion today may also include certain non-IFRS financial measures. A description of these non-IFRS financial measures and their reconciliation to the comparable IFRS measures are contained in our earnings release and MD&A for the fiscal quarter. By now, you've all likely had a chance to review these documents, our supplementary financial information, which were made available yesterday evening. They are available for download on SEDAR or on the Investor Relations section of our website at canaccordgenuitygroup.com. Now let's review the highlights of our first fiscal quarter. We started our fiscal year with strong operating and financial performance across most of our regions. For the 3-month period, Canaccord Genuity earned revenue of $274 million, an improvement of 37% compared to the same period a year ago. Revenue growth was broad-based across our wealth management and capital markets businesses. Client participation was stronger during a typically slower season for our industry as trade tensions and political uncertainty were more than offset by an environment of healthy earnings growth supported by U.S. tax reform and strengthening commodity prices. Although we incurred higher expenses associated with supporting increased activity in our capital markets operations and business growth in our wealth management operations, excluding significant items, our firm-wide expenses as a percentage of revenue dropped by 9.3% compared to the same period a year ago, a testament to our continued focus on cost control. On an adjusted basis, our pretax net income for the quarter amounted to $25 million, a significant improvement from the $1.6 million a year ago. This translated into diluting earnings per share of $0.19, and we estimate that 63% or $0.12 of this amount was contributed by our expanded wealth management operations. Total client assets in our global wealth management operations grew by 69% year-over-year and 8% sequentially to reach $66.2 billion at the end of our first fiscal quarter. With the addition of Hargreave Hale in September 2017, our wealth management business in the U.K. and Europe achieved revenue growth of 73% year-over-year to $65.8 million. When measured in local currency, total client assets in this business increased by 76% year-over-year and 9% sequentially to GBP 26.9 billion. Excluding significant items, pretax net income in this business increased by 60% year-over-year to $13.5 million. As our combined teams in the region continued with their integration process, they are working together to enhance their offerings with a focus on delivering strong investment performance and enhanced client experience. We anticipate further organic growth and margin improvement as these teams leverage their complementary strengths. In our Canadian wealth management business, total client assets increased by 49% year-over-year to $18.9 billion. And within this amount, we saw an increase of 40% in discretionary fee-based assets when compared to the first quarter of last year. Pretax net income in this business improved by 63% year-over-year to $5.2 million. Recruiting activity in Canada continues to be robust. And during the quarter, we welcomed new advisory teams and additional client assets in Vancouver, Winnipeg, Edmonton and Toronto. The revenue and net income contributions from these additions will be more wholly reflected in our future reporting periods. Consistent with our ongoing strategic focus of increasing contributions from our global wealth business, we have continued to make investments to enhance our technological and back-office infrastructure so that we can support further business growth and seamlessly transition new clients to our platform. And now I'll turn to the performance of our global capital markets business. Total revenue earned by our global capital markets operation amounted to $156.2 million, an improvement of 28% compared to the same period last year. During the 3-month period, Canaccord Genuity raised proceeds of over $11 billion for global growth companies, which drove a year-over-year increase of 76% for revenues generated through investment banking activities. Advisory fee revenue also increased substantially, reflecting growing demand for independent and conflict-free advice. These results reflect contributions from multiple sectors and business lines as our clients were able to take advantage of the diverse expertise and execution capability across our platform. During a typically slower quarter for our industry, our U.S., Canadian and Australian businesses saw higher banking and advisory levels which translated into meaningful year-over-year revenue growth for these segments. Notably, our U.S. operation earned record quarterly revenue of $76.2 million. And revenue generated through investment banking and advisory activities in this business increased by 263% and 29%, respectively, on a year-over-year basis. This business delivered a pretax profit margin of 10%, a significant improvement from a loss of 4% in the same period last year. Our Canadian capital markets business maintained its lead as the dominant Canadian independent investment bank during the 3-month period, having raised almost twice as much capital than the next-ranked independent competitor. In Australia, Canaccord Genuity is a leading investment bank for small cap equities as well. Results in our U.K. operation were impacted by the timing of transaction closings in the region and reduced new issue activity by our retained client base. With a higher advisory component, timing of revenue in this business can be uneven on a quarter-to-quarter basis. Principal trading revenue for the period increased by 20% year-over-year, primarily attributed to higher volumes in our U.S. and U.K. operations. In Canada, trading volumes were lower due to reduced volatility and seasonality. But Canaccord Genuity and Jitneytrade remain the 2 top independents for block trading volumes in the country for the quarter. For the 3-month period, revenue per employee in our global capital markets business increased by 25% compared to a year ago. During the quarter, we took further steps to adjust our staffing mix in our U.K. capital markets operation to improve alignment with our global platform. We continue to focus on capturing greater efficiencies and strengthening our execution capabilities across our capital markets operations as we develop a unified global network of investment banking, sales trading and research professionals. Over the course of this year, we can also expect the impact of our acquisition of Jitneytrade as well as our planned increased investment in our Australian operation will be more meaningfully reflected in our future results. Heading into our second quarter, the fundamentals of a healthy environment for growth stocks remain in place. While we are prepared to navigate some cyclical and market-driven challenges over the medium and longer term, we continued to see good momentum for growth stocks. With increased contribution from our wealth management businesses and improved operating leverage across our operation, our business is increasingly well-positioned to withstand periodic changes in the market environment. We maintain our collective focus of delivering stronger outcome for our clients and achieving our longer-term strategic objectives. Next week, we'll host our 38th Annual Growth Conference in Boston and we have confirmed attendance from over 350 companies across technology, health care, industrial, consumer and sustainability sectors. Over the 2 days, we'll showcase our incredible global capabilities as we connect industry leaders and investors in more than 4,000 one-on-one meetings and a robust series of presentations and panel discussions. This year, we've also added an extra day to fulfill demand for a dedicated blockchain and digital assets symposium, which will bring together leading industry participants to explore trends and opportunities in this rapidly growing sector. I continue to be confident in our market position, which continues to strengthen our ability to provide objective, independent advice as we deliver stronger outcomes for our clients, and ultimately, for our shareholders. Our company continues to be well capitalized for investment in our strategic priorities with $564 million of working capital. And finally, last night, we announced that the holder of our existing convertible debenture and a long-time investor in our company has recommitted to our business by agreeing to exchange its existing convertible debenture and using the entire proceeds to subscribe to a new convertible debenture at a significantly increased conversion price of $10 per share. The coupon on this new debenture has also been reduced by 25 basis points. To provide an equal opportunity for other investors, we've also announced a public offering with the same terms. Given the significant increase in the conversion price, there will only be a negligible increase in our fully diluted shares outstanding. And with that, Don and I would be pleased to take your questions. Operator, please open the line.
[Operator Instructions] Your first question comes from Jeff Fenwick from Cormark Securities.
Dan, I just wanted to start with the growth in Canada wealth management. They're obviously a nice step-up for you in the quarter. Can just give us maybe a bit of description around the nature of the assets you're bringing in? Are they basically similar from a revenue and margin profile versus what you've got there today?
Yes, I don't think anything has significantly changed, Jeff, directionally in what we are doing. I mean, the -- where we are recruiting the advisors may have changed a little in the quarter, but the fundamental nature of the advisor hasn't changed. Primarily wealth-based advisors, some of them have a bit of a mix of business. Arguably, the cost associated with bringing on advisors may be coming down a touch. But nothing really has fundamentally changed. We brought on roughly $2 billion of assets during the quarter and we continue to have a reasonably robust pipeline of a similar number going forward.
And just in terms of the integration effort that's required to bring them on, I mean, I guess you've got that pretty well established at this point. But is there much work to do as you bring them over? It's more of a, I guess, back-office type of effort?
Yes, no, it is. But again, and now having done, I'm going to guess, close to 30 advisors, advisory teams, maybe that's a slight an exaggeration, but not much. No, I think we've well honed our skills of bringing on the advisor. Our support professionals in our firm have been phenomenal. Some of the larger advisors we've brought on, I mean, it's been full-on nights, weekends. And our guys -- our teams have really stepped it up to bring on them. And generally speaking, the easier you make that process in terms of onboarding our advisors, the more likely they're going to recommend to their friends to join us and say what a good process it has been. So we really do spend a lot of time, effort, energy, money to ensure that. And you can see that a little bit. It's -- a little bit of our costs have come up, and when you kind of dig into it, a lot of that's related to the cost of onboarding or transferring fees.
That was going to be my follow-on. Your G&A was higher there, but it sounds like that is tied to this effort.
It's tied to a lot of things. But certainly a chunk of it is that, yes.
Okay. And then I noticed -- so you completed the Jitneytrade acquisition in the quarter. Looks like you brought on, I don't know, maybe 50 or so people into the mix here. So a pretty decent step-up in the headcount in that segment of the business. Can you just run through -- what does the revenue model look like for that? Is it volume and -- presumably volume- and commission-based. And like, do we need to think about anything here in terms of some margin pressure in the near term? Or is that a pretty good standalone business from a profitability standpoint?
Yes, I think the nature of your -- I think you answered your question as you asked it. I don't think there's any significant change that you could expect in our business. It really provides us with new products -- futures and options, primarily, although there's other businesses there, obviously. So that hasn't changed at all. They do have some technology spend that they've been doing historically to modernize or electronic-ize some of their offerings. That is spend we're going to continue to make. You'll see that -- you've seen that flow through the statements on this quarter. So I'd say no material changes. I mean, it's important to have a lower cost offering. And it was really important to bring on some new technology and new products that we weren't offering. And really, the effort there is all about cross-selling. Our clients selling them futures and options and other businesses, and vice versa, their clients selling a more traditional broad suite of products.
And I guess my concern is just, obviously, the segment margins there with a lot of those bodies coming in the door, that there's a similar profitability profile, so we can assume there's going to be an appropriate or similar step-up in the level of revenue within the segment there to offset that?
Yes, I'm looking at Don while I'm answering the question. He's not responding. Go ahead, Don.
Well, no. I think -- I mean, it's certainly incremental and profitable. I mean, we haven't really talked about the numbers specifically because it was really a way to generate synergies between their business and our business. And you make the whole greater than the sum of the parts. So I think that's really what was driving it. And certainly, some of the -- I mean, it does come with its own back office infrastructure-type base. So that's part of the headcount as well. It's not all front-office staff.
Yes. I guess when I think about your question, Jeff, margin -- and it's a good one. I mean, margin should ultimately relatively quickly improve. There's huge synergies in our back office. And at the end of the day, their cost plus our cost should just equal one of our costs on that front. So there will be big synergies I suspect we'll start to achieve as we self-clear. They used an external clearer for most of their business, and we're going to continue to enhance our clearing internally on that.
And I guess, looking across your results here, the one other standout in my mind was what happened in the U.S. capital markets business there. I mean, that was a really impressive quarter for them from an investment banking perspective. So what's going on down there? Are you getting some synergies? And the cannabis space is helping them out? Or where is that growth coming from?
Not much on that side of the equation. I mean, really, it's a very, very strong quarter in corporate finance, and that would be our traditional sectors that we operate down there, the health care and technology sectors -- primarily be driving it. But we had a reasonable advisory quarter this quarter. And then importantly, our principal trading business, our International Equity Group business, normally would slow down in the June -- the quarter that ends June, and quite frankly, the quarter that ends September. It's a retail flow business. And we haven't seen that slowdown. So typically, in the first 2 quarters, that business would be slower and it didn't slow down these 2 quarters. So it continued its pretty robust pace, and that's market share gains and new customers and all that kind of stuff. So no, we're very pleased with our U.S. business. I mean, it's been 3 quarters now of enhanced profitability. And we continue to see -- we're in the middle of the summer now, we're into August. But we have our big growth conference in Boston in August. So August sometimes isn't as slow as it otherwise could be. And then September is always a very active month for health care companies in the U.S., with both our activity and some of our competitors' conferences, you tend to see a pretty robust September. Not that we have perfect visibility of that at this stage, but our U.S. business continues to perform very strongly.
Your next question comes from Graham Ryding from TD Securities.
Could I just start on the wealth management? I appreciate the color you gave on what came in the door and what sort of visibility you have on the pipeline. Is there -- what sort of target would you have or are you willing to share for this year, fiscal 2019, in terms of what would you view as a good year recruiting at AUA?
Yes, it's -- I don't think we're out there targeting that particular number. I mean, we continue to see our commission and kind of fee line, the typical line you would see in wealth management, it continues to increase commensurate with assets. That shouldn't come as a surprise to you. And that is going to continue to move up to the right, assuming we continue to recruit as we are. So it's really hard to kind of project the recruiting activity, although the pipeline now is pretty robust with a number of different people in it. The actual timing of people's moves sometimes is very surprising to even us, Graham, like someone says they're coming in a month, then it takes 4 months or 5 months, and that happens all the time. So I think we're being a little cautious as to kind of those numbers. Rest assured that every time we put out a quarter result, the actual assets that we have over here are greater because it takes a little bit of time for these assets to come in, and that's what's continuing to happen right now. The volatile part of our Canadian wealth business is the deal revenue. And you'll notice that in the last couple of quarters, not this quarter, the deal revenue was exceptional. And that was driven by a lot of small-cap activity flowing through the retail side of our equation. That deal revenue came down this quarter. So if you'll actually look, our profitability in our Canadian wealth business and our revenue in our Canadian wealth business actually came down this quarter from last quarter. High commission revenue -- or higher commission revenue, but $6 million less of deal revenue flowed through there. More to a normalized pace, I would argue.
Yes, okay, that makes sense. The -- jumping to capital markets. There was a comment that you made in the MD&A about just -- and also in your prepared comments, just about timing about some of the activity in that market. Is there anything specifically you're referencing there? Do you have some visibility on deals that are coming through? Or what were you alluding to there?
I can't remember what was exactly in my prepared comments. But we've got good visibility on our M&A pipeline. I mean, some of that pipeline, quite frankly, has closed and we've already booked fees for this current quarter. So M&A is one of the few areas in our business where we probably have 3 months to 6 months of reasonable visibility. And we continue to think our advisory pipeline activity for both this quarter and the quarter after is reasonably robust.
Okay. Because it just -- it was a particularly light quarter in the U.K., more on the underwriting side, I just thought that maybe there was some timing specifically around that. But ...
Well, there is. And we do have some larger M&A transactions that we have announced in the U.K. that are pending closure, and some of those are relatively chunky fees. Our business in the U.K. tends to -- like our Canadian M&A business, tends to have some larger fee events. And that's going to -- depending on the timing of when those close, that's going to impact quarterly results. In a perfect world, I would love to be able to report our U.K. results once a year, not 4 times a year because I think it would give a better picture of how that business is performing.
Okay, got it. And then just generally, as you look across your different geographies and sticking with the capital markets and then either both on underwriting the M&A side, like, what is your pipeline looking like? And as we move through the summer, what sort of visibility do you have?
Reasonably good. I mean, you noticed in our comments and our prepared comments, we've taken a reasonably bullish tone. Again, you don't have perfect visibility, particularly on capital raising. But absent a major market correction or absent some enhanced volatility, which we're prepared to deal with when it comes, but right now, our activity continues to be reasonably strong, certainly for this quarter and going into -- to the extent that we have visibility, going into the quarter that starts September 30. So we continue to see reasonably good visibility to the extent that you can predict in your capital markets business.
Yes, fair enough. Jumping to the -- maybe just some color on the convertible debenture. Why are you paying off the existing convertible now and replacing with a newer, larger one?
Yes, I mean, again, part of this is investor-led. The existing convertible debenture, you'll remember -- or maybe I can refresh everyone's memory, was a $60 million convertible debenture we did to one private -- one investor, and we did it as a private placement. It converted at $6.50 a share, and so fully diluted, because we're making money -- a fair amount of money now that more dilutive treatment is to look at the shares outstanding that it would dilute into as opposed to the interest charge associated. So we've had to fully dilute for those shares outstanding. It's almost 9.3 million shares, $60 million divided by the $6.50 conversion price, 9.2 something million shares. So our earnings results, our EPS that we've been showing for the last 3 quarters have had an additional 9.3 million shares in that EPS calculation. We couldn't call the debenture till December next year, December 2019. We had an opportunity with this large shareholder, who believes our stock is going to trade up a lot, to repurpose that debenture. So effectively take the $60 million -- the intrinsic value on that $60 million in our opinion and the investor's opinion, was $73.5 million. So we converted the $60 million debenture into a $73.5 million debenture, but with a convertible price of $10 a share as opposed to $6.50. We've also brought down the interest cost by 25 basis points of that convertible debenture. So that $73.5 million of debenture at $10 a share converts into 9.3 million shares, not -- sorry, converts into 7.3 million shares, not 9.3 million shares. So it converts into 2 million shares less. By definition, accretive, less shares outstanding. So on -- in and of itself, that is a transaction that anybody would do any day. If you have an investor who believes that your stock's going to go up a lot and is prepared to -- especially this type of investor, a long-term, supportive investor of our company, who believes your stock's going to go over the $10 conversion price and they're prepared to convert, you would do that deal every day. So we did that deal. And we would have brought down our shares outstanding in doing the deal. The problem was last time we did this convertible debenture over 2 years ago, some of our existing shareholders weren't particularly pleased with the fact that we did a private placement to one investor. So this time, to try and accommodate broader demand, we opened up a chunk, in this case, $40 million, to other shareholders, so that they could participate as well. Net-net-net, let's say we do $115 million convertible debt, and we were just debating that this morning, that'll be 11.5 million fully diluted shares outstanding, up from the 9.2 million shares outstanding but obviously providing significant excess liquidity for us as well to continue to grow. So that's really the rationale behind the thing. I don't want to call it fun with numbers, but when a large Canadian mutual fund investor wants to make a 5-year commitment to your company and commit to a stock price over $10 a share, up almost 40% from where we're trading, that's something that I think any of our shareholders would be supportive of.
Okay, that's good color. My last question is more of a housekeeping question. Just, it looked like a lower tax rate this quarter. Is there anything specifically driving the low tax rate this quarter?
Yes. Don?
Well, it really depends on the mix of the profits amongst the different regions because there's obviously quite a wide array of tax rates in the different regions that we operate in. And then sometimes, we have unrealized deferred tax assets that offset what would otherwise be a tax expense.
So strength in the U.S. division drove the lower tax rate, is that fair?
Yes. Basically, yes.
That would have been a quicker answer. Yes, that's what drove it.
Mr. Daviau, there are no further questions at this time. Please continue.
Thank you very much, everyone. And just a reminder, we're going to be hosting our Annual General Meeting of Shareholders today at 10:00 a.m. Eastern Time at Goodmans LLP in the Bay Adelaide Center in downtown Toronto. Hopefully, you can join us. But for anyone who cannot join us in Toronto, an audio replay will be made available on the Events page of our Investor Relations section of our company website. Thank you, all, again for joining us today and we look forward to updating you again in November when we release our second quarter results. Thanks very much.
Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. Please disconnect your lines.