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Good morning, ladies and gentlemen. Thank you for standing by. I would like to welcome everyone to the Canaccord Genuity Group Inc. Fiscal 2021 First 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. [Operator Instructions] As a reminder, this conference call is being broadcast live online and recorded. I would now like to turn the conference over to Mr. Dan Daviau, President and CEO. Please go ahead, sir.
Thank you, operator, and thanks to everyone joining us for today's conference call. As always, I'm joined by Don MacFayden, our Chief Financial Officer. Following the overview of our first fiscal 2021 results, both Don and I would be pleased to answer questions from analysts and institutional investors. A reminder that our remarks and responses during today's call may contain forward-looking statements that 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 risks 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 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 and 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 canaccordgenuity.com. We have also posted our quarterly investor presentation to the website. I won't cover the entire presentation during this call, but I will refer to certain slides to guide our discussion. Before we delve into our results, I'll share our thoughts about the current operating environment. The COVID-19 pandemic has continued to impact the economy and our daily lives. But we have more clarity in our outlook than at the time of our last update in June. Although the longer-term economic challenges are far from over, we continue to see good momentum for activity levels across our businesses and geographies. On Slide 5, we provide some additional detail about the impact of COVID-19 on our business activities. Although visibility on global growth rates remains low, bold reflationary efforts by central banks created an environment that gives us some assurance that the direction of growth will remain positive through fiscal 2021. Barring significant market disruptions, this bodes well for our core mid-market focused sectors and the investors who follow. Whether working remote or in the traditional setting that has shaped our business and our industry for years, our people are focused, ready to provide market-leading services, advice, and opportunities for clients across our capital markets and wealth-management operations. Their unwavering commitment to our clients and our business is clear in our fiscal first-quarter results. For the 3-month period ended June 30, we achieved quarterly revenues of $378 million, an increase of 16% from the same period a year ago. We set new records for new issue and trading volumes, which supported activity levels in both our capital markets and wealth businesses. I am also pleased to report that our Board of Directors has approved a quarterly dividend of $0.055 per common share, which represents a 10% increase from our quarterly dividend payments over fiscal 2020. Excluding significant items, pre-tax net income increased by 8% year-over-year to $42 million, and adjusted earnings per share for the first quarter amounted to $0.25. Excluding significant items, our wealth management business contributed roughly half of the EPS for our combined businesses, which reflects the stable earnings foundation that we have worked so hard to achieve. Our profitability for the 3-month period was impacted by higher compensation expenses. The increase in our compensation ratio for the current quarter was primarily due to an increase in the fair value of performance share units granted in prior periods, and reflects the particularly concentrated uptick in our share price, which increased 60% over the period. Our executive compensation framework has been designed to increase the relationship between compensation, our firm-wide results, and our share price performance. PSUs are paid in cash at the time of vesting, and this expense is subject to the influences of positive and negative share price performances over time. Importantly, our PSUs vest 3 years after they are granted, and no PSUs vested during the period. We also incurred some additional compensation expenses related to staffing reductions that took place during the 3-month period. These changes were in connection with our previously disclosed cost-reduction initiatives, and not a result of COVID-19. I'm pleased to report that in connection with our ongoing cost savings initiatives, our non-compensation ratio decreased by 7.2 percentage points year-over-year to 23%. We also incurred some natural cost savings, reflecting the reduction in travel, entertainment, and promotion resulting from the COVID-19 environment. We incurred higher trading costs to support increased activity levels, which were partially offset by a natural reduction in general and administrative expenses, given the drop in travel and promotion. Having said that, we continue to take steps to reduce our fixed costs, and our annualized cost base is significantly lower than in prior years. You may recall that in the second half of fiscal 2020, we were required to recognize some deferred tax assets in our U.S. operations, which reduced our effective tax rate for the period. This rate has returned to normalized levels of 22% in our first quarter, which is in line with the same period last year. Turning to the performance of our operating businesses, our global capital markets division earned a record quarterly revenue of $235 million, an increase of 24% compared to the same period of last year. I'll encourage you to take a look at Slide 23 of our investor presentation, which shows the revenue contributions by business activity, sector, and geography. While we make refinements within our focused areas from time to time, we have established an agile and defensive business that is capable of sustainably contributing to our firm-wide profitability through market cycles. Following the abrupt downturn in March, our teams mobilized to create thousands of virtual touchpoints for our clients, providing access to market insight conferences and deal and non-deal roadshows. This level of support has driven market share gains across all our geographies and positioned us as a stronger competitor in our core focus areas. Our U.S. and Australian businesses were the largest revenue contributors for the quarter, with increases of $20 million and $33 million, respectively. Significantly higher principal trading and commission and fee revenue were the primary drivers of the increase in our U.S. business. Robust new issue activity in the healthcare and technology sectors also supported a strong quarter for investment banking activity in the region. Despite significantly higher trading costs and lower contributions from advisory activities, this business achieved a pre-tax margin improvement of 5 percentage points when compared to the same period last year. Our Australian business earned quarterly revenue of $42.5 million, an amount that is almost on par with the best full-year revenue result for this business. This team has become an increasingly reputable competitor in the region, and has been active on investment banking mandates across a diverse range of sectors, with a particular emphasis on mining. We note that a portion of this amount is attributable to unrealized gains and certain inventory and warrant positions recorded in respect of our investment-banking activities. The market value of these investments can fluctuate significantly, which would in turn result in similar fluctuations in our revenue. Supporting growth clients through equity participation is an important element of our business in this geography, and we are always conservative in our approach to valuing these investments. Our Canadian team put up a solid quarterly result, with revenues of $55 million, up 41% sequentially but a decrease compared to the exceptionally strong quarter in the prior year. During the quarter, we completed some advisory mandates that were engaged prior to the onset of the pandemic, and the quarterly revenue contribution for this segment was strong by historical standards. Notably, contributions from our trading and commission businesses improved by 29%. And finally, our U.K. business delivered its third consecutive quarter of profitability. Despite the market-driven pause in advisory activity, total first quarter revenue in this business increased by 5% year-over-year. This was driven by stronger revenue contributions from investment banking and trading, which improved by 205% and 52%, respectively. The team is also an important participant in our global mining sector activities, which we expect to increase through the fiscal year. Next week, we are hosting our 40th Annual Global Growth Conference. While the format for this year's event has changed, our commitment to providing unparalleled experience for our clients has not. We've got over 500 companies, innovators, and entrepreneurs presenting from across North America, U.K. and Europe, and Australia, and we've coordinated more than 10,000 one-on-one meetings with growth- and value investors from all over the world. Moving to our wealth management businesses, following the heightened volatility that took place in March, investors enjoyed strong positive returns during our fiscal first quarter. Total client assets at June 30 were $69 billion, an improvement of 13% sequentially. Fluctuations in the value of assets in our client portfolios has been in line with the broader market value for equities, and partially offset by cash and non-equity products in our client portfolios. Our combined global wealth management business contributed adjusted pre-tax net income of $24 million for the first fiscal quarter. This translated to an adjusted earnings per share contribution of $0.12 or 48% of the diluted earnings per share for our combined operating businesses. In accordance with our margin improvement initiatives, we are seeing improving margin growth in both our U.K. and Canadian wealth-management businesses, and adjusted pre-tax profit margins for the 3-month period were 24% and 13%, respectively. As you will see on Slide 13, we remain on track to achieve our mission 2022 objectives in this division, notwithstanding the COVID-19-driven market pullback that took place in March. While the market-driven declines in asset values led to a small year-over-year decline in the revenue earned by our U.K. and European business, the first-quarter pre-tax net income contribution from this team improved by 14% year-over-year to $16 million. Our Canadian wealth business achieved a new milestone with total assets of $22 billion, an increase of 5% year-over-year. Investment banking revenue in this business increased by 48% sequentially, reflecting a robust market for new issue and origination activity. As expected, the lower interest-rate environment had a negative impact on revenue associated with our deposit and lending activities in this business. First-quarter interest revenue declined by 55% year-over-year to $2.5 million. Despite a brief pause in recruiting activity at the onset of the pandemic, we onboarded 4 new IA teams in our first quarter. Additionally, our recently announced enhancement initiatives for this business have helped us attract a growing pipeline of interested candidates. The integration of our expanded wealth management business in Australia has continued to progress very well. We're seeing excellent collaboration between this team and our capital markets crew, as we increase financing activities for small cap companies in this region. We continue to focus on opportunities to grow client assets in this business organically and pursue targeted recruiting opportunities. Across our wealth management operations, we continue to focus on our longer-term priorities of increasing assets from new and existing clients and advancing our product offering to meet the increasingly complex needs of our clients. These initiatives will help us to continue to improve margins and increase contributions to our firm-wide profitability. Looking forward, the resurgence of COVID- 19 cases and the potential for new lockdowns in some areas is indeed concerning. But we are also entering this phase of the pandemic more informed and better equipped to prevent the spread in our respective communities. Many of our employees are eager to return to the offices, and we've permitted a limited number to return with appropriate safety measures in place. We anticipate moving towards a hybrid working model for some groups longer term. But for the fast majority, we are working toward a phased and thoughtful approach to a safe return, only when it's right to do so. It's clear from our quarterly results that we can operate effectively in a fully remote or hybrid model. I'd like to thank my partners in the global operating committee and all our employees for their efforts in ensuring that our business activities suffered no disruption, and that the quality of our client experiences has not been compromised. On the topic of talent, issues of race and equality have come to the forefront in recent months. With the knowledge that diverse experience and perspective are integral to our success, we committed to improving diversity and inclusion across our company long ago, and we've made some meaningful progress. That said, events in recent months have highlighted that we have much more to do in our business, and also in our society. We know that this requires us to allocate more resources and commit to actively listening and learning, as we continually advance the policies and processes that improve every employee and clients' experience with us. In closing, hard work over many years has positioned us to benefit from the dynamics that are currently supporting healthy activity levels in our core focus sectors. Although some seasonality is expected, our fiscal second quarter is off to a strong start. Our clients continue to seek our support as they react to the near- and long-term impacts that the COVID-19 pandemic will have on their business and investments. We have the balance sheet strength to compete effectively, and we are confident in our ability to continue supporting our clients through additional downturns or volatile periods. However, we know that this is an environment that has the potential for new and unpredictable challenges, which requires us all to be nimble and adaptable. In everything we do, we will be guided by our core values, as we strive to deliver successful outcomes for our clients, while increasing the value of our business for our shareholders. With that, Don and I will be pleased to take questions from institutional investors and analysts. Operator, if you'd please open the lines.
Certainly. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Our first question today comes from Jeff Fenwick from Cormark Securities. Please go ahead.
So I just wanted to start my questioning off with the compensation expense and the PSU movement there that you referenced. Maybe just give us a little more color about how we should think about that expense line moving forward here, just in terms of how much of it is really driven by stock price, relative to changes in fundamental performance. And I just note that the stock has been strong so far into the second quarter now. Should we be expecting that line to remain elevated, similar to what we saw through this quarter?
Jeff, it's Don. I think the way to think about that line is that it was -- I think the -- it will certainly be impacted by the stock price because that's part of the calculation and part of the valuation metrics. In terms of the specific comp ratio, I would think that we will probably see it a little bit elevated from the numbers that we had last year and the year before. But I think for the 66% ratio or 66.9% ratio for this current quarter is probably higher than we would expect it to see it over the course of the year. I think this quarter it just became particularly concentrated because of the significant increase in stock price during the quarter.
Yes, Jeff, the average stock price this quarter went from [3.90 to upper 6s] in 1 quarter, which is such an anomaly, and which is what caused the large charge, the valuation charge to flow through in the quarter. These obviously aren't vested, they don't vest for some time, but GAAP requires us to mark-to-market these things.
A fair point there, though as you say, you are going to reserve against it. So was it factor in any considerations, in terms of using capital for things like buybacks, if you're having to reserve against compensation?
Well, we obviously do the valuation for the accrual, and there is a mark-to-market component to that. So, yes, it's part of the overall global compensation program. I think it's important to remember that these units have been awarded each year for the last few years as a part of compensation, and not in addition to compensation. So they've always been factored into our normal course compensation accounting, it just became particularly concentrated this quarter.
Again, Jeff, someone got paid $500,000, $200,000 would have been in PSUs and $300,000 would have been in cash and it's that $200,000 in PSUs that's getting marked-to-market when the stock goes up as much as it does in that quarter.
Understood. Why don't we talk about Australia capital markets a little bit? I mean, that was a very big number that we saw in the quarter and as you referred to, it sounds like a lot of broker warrants and inventory gains. I'm guessing that was probably the largest component to see it jump to that big number. What's your policy in terms of crystallizing gains when you see moves like that? Do you hold them as long as possible if there's a big move, is there a committee that reviews it, decides when to crystallize, or how should we think about that?
Certainly, the mark-to-market on the unrealized inventory positions on the warrants and fee shares was a significant component of the increase in revenue for Australia. But it was by far and away not the single largest, I mean there was certain significant cash revenue realized during the quarter as well. Australia has had a tremendous ECM market this past quarter and we've been very much a part of that. So it's all those things considered, it's not exclusively inventory positions. We actively review these positions and we aggressively seek to crystallize them over time. They are substantial in terms of the numbers of shares. So they have to be managed carefully, but it's actively monitored and we're very mindful of seeking to realize those profits as opportunities arise to do that.
And I think the point we made in the call, Jeff, which you heard is they're heavily discounted, they're appropriately valued in our statements. In other words, these aren't just pure mark-to-markets without appropriate discounts being placed on them. But to be clear, our Australian business has had a record quarter. Cash commission or positions, it's been very, very active. The mining sector is probably half of this business, has been very active, but it's not just the mining sector; our marriage of our wealth business and our Capital Markets business in that market, that premise that we made on integrating with Patersons is playing out. I mean, we are moved up significantly in the league tables there, probably number six and continue to move up and that's vis-a-vis the global banks as well. So our premise in the Australian investment is certainly playing out even better than planned obviously.
Sure. And I guess we're trying to handicap that increase in just the run rate of business and you see revenue quadruple, it's hard to want to straight-line that number, but if you're saying it's absolutely is largely driven by activity.
I don't think you want to straight-line that number too, but to be clear, Australia continues to be busy. When I say continues, I mean July, August, continues to be busy. Remember, this is their winter, not the summer and this is a very active market.
Yes, sure, thanks. That's great. And then, why don't we shed a little bit about on UK Wealth Management-- well, across all of wealth management you saw very nice bounce back in the AUA levels there? What are you seeing in terms of client inflows and opportunities for organic growth and what are the objectives there now, as things have the problems somewhat normalized, I guess, in the market there?
Yes, somewhat normalized I think is the right term. But, I mean, it continues to be a huge priority of ours, in both our businesses, our UK business and our Canadian wealth business and, quite frankly, our Australian business. So in the Canadian business, we've seen very good net inflows. Again, this is a complicated market that we're in, it's encouraging clients to get more full-service advice and we're actually bringing in a fair amount of assets, net inflows. UK as well, but not to the same pace as we've seen in Canada. So we're seeing good net inflows and again, we continue to recruit aggressively in Canada. We've brought on 4 teams recently in Canada and we continue to see a pretty good pipeline. Interestingly enough, teams are coming over that we've never met in person. We just met them in person the first time when they showed up. So, we continue to have a good pipeline of recruits. There was a pause certainly during COVID, but that pause is over now.
Okay. And I guess I'd probably ask the question, just your stock price is stronger, we note that you've added an activist investor to your Board, and just wondering if you're getting maybe a little more open-minded to some more aggressive strategic options for that business?
Yes. Eric Rosenfeld, who you're referring to at crescendo, who is joining our Board after the AGM today, yes, he's got an activist history, but he is also a well-known investor. When our stock was at much lower prices, he perceived value and there was huge amounts of value in our stock. We've articulated that point many times. Quite frankly, even at today's price, there is huge amount of value in our stock, when you look at where we're valued relative to our comps, either our domestic capital markets comps or our wealth comps. So we continue to see a lot of upside, and we continue to review opportunities both in our wealth businesses and our capital markets business. It's about how we create value. Having Eric on the Board, a significant shareholder on the Board -- because, David and I are significant shareholders as well -- is a very good thing for us. We like that and he's been very constructive in that effort. And remember, Eric is not the only guy that joined the Board. Jill also joined the Board. Jill Denham, who has got a very long history. From a diversity perspective now, we've got 30% of our Board being female, which is fantastic and we continue to improve that diversity. So there's a lot of things going on at the Board level right now, and we are aggressive strategically across a whole range of alternatives.
Our next question comes from Rob Goff from Echelon.
On the gold theme, could you talk a little bit about the flow that you're seeing in the gold markets in terms of your ability to cross sell a product across geographies?
In particular in the precious metals, Rob?
Yes.
Yes. We've got a very -- I'm not sure this is your question, but I'll answer this question anyway. We've got a very integrated global mining group. I mean, when you think about with some of our bases of operations: Canada, Australia and the UK, that's where the vast majority of mining financing happens in the world, plus our added U.S. distribution for accounts down there that are interested, and our global mining group -- like the rest of our firm -- is very integrated. The UK is winning incremental business because of its association and cross-selling with our broader platform. Australia is literally knocking the lights out. In the last 12 months, we've done a 116 mining deals. Now that's not just Canada, which is what you would see, but globally we've raised over $2 billion. We are number one in the global mining league tables by a wide margin, almost double our nearest competitor. So -- and that would include some very large banks that you'd be familiar with. So we've done a fantastic effort really coordinating our global team. You saw that we brought in Gene McBurney onto the platform as well recently, and a number of other people over the last 12 months, which were all incremental to what we had before. So we continue to have a huge effort in our mining practice.
Okay. So the inputs, if you could dive a little bit deeper into the Aussie success, like would you say that the warrants and such were less than 1/3 the revenues? Just to give us some sort of benchmark to draw that line.
I think try that -- I think we're not going to say it, but that's a good working estimate. If you listen to what Don said, he said it's a significant portion, but it's not the majority or whatever, he said. One-third is a good working estimate.
Okay. And if I can ask, in terms of your -- Burney Gene on board, are you looking to expand organically into that region or perhaps just a bit more clarity there?
It's all organic. I mean it's -- we're not looking to do a significant acquisition in Latin America or in the Caribbean. So, whatever growth we're going to do is on the back of the business that we have. We do -- have got a very good South American and Latin American fixed-income desk in New York and we're trying to partner that up with our equity capabilities, but it's just -- it's really about -- we're not trying to be more to more people, we're just trying to do more for our existing client base. So, if we can have incremental distribution and demand come out of that region and core sectors where we're good at it, then that's perfectly fine by us.
And you discussed the pipeline in terms of wealth management, could you talk to the pipeline with respect to tuck-in acquisitions for Capital Markets?
No, that doesn't exist. We're not really -- Yes, that -- I mean, I'm not saying never to anything, but most of our capital to the extent that we have had incremental capital, has been deployed -- absent the Petsky acquisition -- has been deployed growing our Wealth Management business. That continues to be our strategy. I mean, if we found the right team or right firm and a core vertical, we would look at that, especially if it was in a counter-cyclical product set, but that would be more opportunistic than something that we're planning on. Clearly, on the wealth side of the business we continue to look at acquisitions and we continue to look at acqui-hires both in Canada, the UK and Australia quite frankly. We want to grow all of those platforms.
Very good. Thank you. Great job.
Thanks. Good questions.
And I have no one further in queue at this time. I'll turn the call back to Mr. Daviau for closing remarks.
Okay, well, listen, thank you very much, operator. And just a reminder to everyone on the call, we're going to be hosting our 2020 Annual Meeting of Shareholders at 10:00 a.m. today, virtually. So certainly for the safety of our colleagues and shareholders, it's going to be done online only. Instructions to access the meeting have been provided in our management information circular, which of course is available on SEDAR. Shareholders will also have received instructions on voting information. So thank you again for joining us today. And, operator, I think we're done. So if you can close the lines, that would be great.
Certainly, thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you once more for participating and you may now disconnect your lines.