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Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group Inc. Fiscal 2019 Second 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 conference call over to Mr. Dan Daviau, President and CEO. Please go ahead, Mr. Daviau.
Okay. Thanks, Corina, and thanks, everyone, for participating in our conference call. As always, I'm joined by Don MacFayden, our Chief Financial Officer. We're also visiting our operations in the U.K. this week. And on that note, I'm also pleased to welcome our local partner, Alexis De Rosnay, who's the CEO of our capital markets business in Europe and the Global Head of our investment banking business. Following the overview of our fiscal second quarter results, I'm pleased to answer any 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 statements and in the discussions of risks around in our MD&A. Our discussion today may also include certain non-IFRS measures. A description of these non-IFRS measures and their reconciliation to comparable IFRS measures are contained in our earnings release and the MD&A for the 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. These items are available for download on SEDAR or the Investor Relations section of our website at canaccordgenuitygroup.com. So now let's review the highlights of our second quarter results. We started our fiscal year with strong activity levels across our operations, and this continued through our summer months. For the 3-month period, Canaccord Genuity Group earned 3 -- revenues of $300 million, an improvement of 57% compared to the same period a year ago and our highest second quarter revenue on record. Client participation was stronger during a typically slower season for our industry and a support -- and a supportive market for growth stocks created opportunities for us deliver for our clients on a variety of mandates. We also made further progress against our strategic priority of growing our global wealth management operation, which is driving stability across our organization and improving the predictability of our financial results. Although we incurred higher expenses associated with the increased activities in our capital markets operations and the business growth in our wealth management operations, our firm-wide expense ratio decreased almost 10% compared to the same period last year. We attribute this improvement to our continued focus on cost control and the stronger operating leverage that we are achieving across the organization. On an adjusted basis, our pretax income for the quarter amounted to $28.9 million, up 9% sequentially, and a significant improvement from the $3.5 million a year ago. This translated into diluted earnings per share of $0.23 for the quarter, and we estimate that over half of this amount was contributed by our expanded wealth management operations. On a year-to-date basis, we produced diluted adjusted earnings of $0.41, 55% of which was generated by wealth management. Our combined global wealth management business generated $116 million of revenue for the second fiscal quarter, a year-over-year improvement of 67%. At the end of the 3-month period, total client assets grew by 21% year-over-year to reach $65.8 billion. Excluding significant items, our U.K. and Europe wealth operations contributed pretax net income of $13 million, a year-over-year improvement of 74%, and this was achieved on revenue of $64 million. The profit margin remains a healthy 20%. Client assets in this region increased by 11% year-over-year to $45.2 billion or GBP 26.9 billion. Looking forward, we anticipate further organic growth and margin improvement as our combined teams leverage their complementary strengths and improve synergies to strengthen both client experience and our operating leverage. We are continually exploring partnership opportunities with established businesses and managers in the region with -- which have the potential to drive even further accretive growth in this business. In Canada, we've made excellent progress against our strategic priorities of increasing client assets and driving better returns in our wealth management business as we helped new and existing advisers grow. Excluding significant items, this business contributed pretax net income of $7.8 million, marking its seventh consecutive quarter of meaningful year-over-year profitability growth. Client assets increased significantly to $19.7 billion, which amounts to a year-over-year improvement of 55%. Within this amount, discretionary fee assets grew by 54% when compared to the second quarter of last year. The strong momentum that we've achieved to date and our collaborative culture are why CG wealth management continues to be a very attractive destination for top industry talent and clients they serve. Since we began our recruiting effort 2 years ago, we've added 35 advisory teams and more than $7.5 billion in client assets to this business. Across wealth management operations, we remain committed to continuous improvement program of advancing our technological infrastructure and transforming our culture to make it easier for established investment professionals and their clients to do business with us. The most significant revenue contributor for the second quarter came from our capital markets operations, a result that was primarily driven by the robust investment banking and advisory activity in our Canadian and our U.S. businesses. For the 3-month period, revenue increased by 50.3% year-over-year to $178.7 million. And excluding significant items, the pretax net income contribution from this segment amounted to $24.8 million, a significant improvement from the loss of $1.9 million in the same period last year. The stability we are achieving across this platform has positioned us well to move opportunistically into new areas of growth and capture additional market share across our key verticals. Despite the global reduction in new issue activity, Canaccord Genuity raised proceeds of over $7 billion during the 3-month period. And fiscal year-to-date, we've raised more than $18 billion for growth companies. Revenue earned from our investment banking activities during the period doubled compared to the second quarter last year to $55 million. Advisory activities in our key focus areas also increased substantially, and we earned revenue of $44 million, a 44% increase from a year ago. These results reflect contributions from diverse sectors where we have deeply established capabilities, including technology, life science, cannabis, consumer and mining. Now at this point, I'd like to take an opportunity to address some of the recent questions related to the proportion of our work in the cannabis sector. Without question, Canaccord Genuity has established itself as the leading investment bank and advisory firm in this industry, with the deep capabilities of our globally integrated coverage team. And we expect to be an increasingly strong competitor as this industry expands globally. While we're proud of our many accomplishments in this sector, I'll note that fiscal year-to-date, our cannabis-related business have only amounted to approximately 15, 1-5 percent of our global capital markets revenue. Our long-term strategy is focused -- is centered on having a diverse platform that can deliver sustainability for our clients, our employees and shareholders throughout the cycle. We are advantaged in our ability to move swiftly into new areas of growth and deliver compelling value for a broad spectrum of clients in any market. And to protect this capability, we're careful to manage our reliance on any single sector of business. The U.S. operation delivered its fourth consecutive quarter of profitability with a quarterly pretax profit margin of 8.3%. That's a significant improvement from the loss of 9.5% in the same period last year. This business earned record quarterly revenue of $72.7 million. And revenue generated through investment banking and advisory activities in this business increased by 282% and 54%, respectively, on a year-over-year basis. According to data from Dealogic, for the first half of our fiscal year, this team has advanced 8 spots in the ECM league tables compared to the same period last year. We've made an important priority to increase the diversity of revenue streams in this region with a particular emphasis on growing our advisory capabilities where we've made considerable progress in this area. Much of the growth in this segment has been through the health care and technology verticals that complement our strong track record of ECM activity in those sectors. Our trading business also performed well in what is normally a typically slower quarter. This has contributed to a year-over-year revenue growth of 22% for the first half of our fiscal year. In Canada, our capital markets business maintained its lead as the dominant investment bank in the country for both calendar year-to-date and for the 3-month period, during which we raised over twice as much capital than our closest independent competitor. We also recorded a 54% year-over-year increase in commission and fees in this region, largely reflecting the contribution from our recent acquisition of Jitneytrade. While we are still progressing with the integration of this business, we are encouraged by the strong contributions thus far. During the quarter, our inaugural SPAC announced the completion of its qualifying acquisition of Spark Power. With 0 redemptions, which has never happened before, this transaction demonstrates that Canaccord Genuity SPAC structure provides an attractive alternative for private companies looking to access the public markets. We also closed a $46 million financing for our second SPAC, Canaccord Genuity Growth Corp, and in recent weeks announced that Columbia Care, a U.S. cannabis player, has been selected as the candidate for a qualifying transaction. Fiscal year-to-date, our Australian capital markets business recorded 47.2% growth in revenue and, excluding significant items, a pretax profit margin of 16.3%. This team has become a reputable competitor in this market and has been active on increasingly larger mandates across a diverse range of sectors. I'm confident that we're well positioned to build on our strengths in this region, as we look to expand our market share in both capital markets and in wealth management. It was obviously a challenging period for our U.K. and Europe operations, where the current Brexit negotiations have increased uncertainties surrounding business activities in this region. Several transactions that were expected to close in the first half of our first -- of our fiscal year have been pushed back to the second half. That said, we are encouraged by current activity levels, which I've been fortunate enough to witness firsthand in my visit this week, and we anticipate a near-term return to profitability in this business. Maintaining our investment in our talented professionals across sales, research, banking and advisory is helping protect our competitive position in this region. Notwithstanding the recent volatility, heading into our third quarter, the fundamentals of a healthy environment for growth stocks remain in place. While we are certainly preparing to navigate some cyclical and market-driven challenges over the medium and long term, we continue to see good momentum for growth stocks, but we're well prepared for a rotation into value should it occur. Across our capital markets operations, we continue to focus on capturing greater efficiencies and strengthening our execution capabilities as we develop a unified global network of investment banking, sales, trading and research professionals. Despite lower overall M&A activity globally, the current environment for our advisory activity in our key focus sectors remains constructive. Financing is widely available, and valuations are increasingly reasonable. In -- Also in periods of increased volatility, our trading operations have proven their strength in managing above-average volumes. In closing, I'm pleased with the business and financial growth that we've achieved in the first 6 months of our fiscal year and are looking forward to a positive and productive second half. By steadily evolving our platform and expanding our client focus, while staying true to our independent roots, we are an increasingly stronger competitor in everything we do. Our diversified business model has proven its inherent strengths, which we have continued to build upon. With growing contribution from our wealth management business, which we wholly own, and the considerable upside of our capital markets business, which can deliver, we can be certain that our business is significantly less susceptible to changes in the operating environment. Our company continues to be well capitalized for investment in our strategic priorities with 8 -- with $605 million of working capital. We remain steadfast in our commitment to executing with excellence and to prudently deploy capital with a focus on driving predictable and sustainable results. And with that, Don and Alexis and I would be pleased to take your questions. So Corina, if you want to open it up, that would be great.
[Operator Instructions] Your first question comes from the line of Jeff Fenwick with Cormark Securities.
Just wanted to start my line of questioning, I guess, within Canada. Let’s look at the capital markets area here. The one number that maybe stood out to me down in the quarter was actually compensation. When I look at it as a percentage of revenue, it actually looked like it was down below where we typically would expect to see that level and -- which is a bit surprising to me in a quarter where you have a lot of advisory revenue as well, which tends to get a bit higher compensation -- incentive compensation out of it. So what's going on there? Is it an allocation issue maybe as well because it looks like a couple of million might have gone into the other bucket as well?
No, no, certainly not. Okay. You think the number is too low. Don't say that to all the employees, Jeff.
Yes, sorry, I just might look at it as a percentage of revenue. It's about 46%. And you've typically run a little north of 50% in Canada, yes.
In Canada? Yes. No, it's just the big quarters, Jeff, that's what happens. Canada had a big quarter. So you've got a fixed element of compensation in each of the geographies. And when things move up, that -- some of that fixed element of compensation doesn't move up, so you'll see that percentage come down. Compare and contrast that, for example, to the U.K. compensation number, which had a relatively lesser quarter, and you'll see the compensation ratio there is relatively high. Overall, on a firm basis, which is ultimately the way this is managed -- on a firm basis, our comp ratio is perfectly in line. It's a little bit down from the previous quarter, but kind of in those general boundaries that we've set for TheStreet and for yourself.
Okay. Fair enough. Why don't we move on to wealth management? Dan, you mentioned a new relationship with a family office network. Can you just give us a bit of color about how that works and sort of what the economics are with that relationship?
Yes. I don't want to overplay it, but I certainly did want to flag it. There's marketing networks that exist throughout the world that help us broaden our distribution platform into -- money is being managed a lot of places outside of what we consider traditional wealth or traditional institutions. And in the U.S., that tends to be the family office -- large family offices. We experienced it first in blockchain then in cannabis, a lot of interest in different sectors. It started inbound and then we kind of formalized it into an outbound type of interest. So it's broadening out our distribution channels, primarily in the U.S. So think of them as a lot of small institutions that end up being important customers of ours. The investment we've made is negligible. And the partnership, obviously, will play out over time.
And then just looking at the margin performance in the quarter, when we came back up here running around 15% on a operating margin basis. Is that a reasonable sort of long-term target for you guys now to be able to achieve that pretty consistently in Canada?
You're looking at the Canadian capital markets or the wealth?
Wealth management.
Wealth management. Yes, I think you'll see that as kind of settling in at about that range. There's obviously going to be some variability from quarter to quarter. But I think that's a reasonable target that we feel is certainly sustainable.
But Jeff, again, I think you understand the economics of hiring advisers. I know we've talked about it in the past. And clearly, an incremental adviser would produce a -- an operating or net income margin above that number. So the more we grow, the better that margin gets, absent us bringing on a lot of fixed cost, which we don't feel we need to do at this level.
Okay. And I guess, that's a good lead into my next question there. I mean, you had the successful raise from the debenture offering recently. I assume the focus is still within growing wealth in Canada for deploying some of those proceeds. And what are you seeing there in terms of opportunities for new advisory groups?
Yes. We've got a lot of things that are going on in our business, strategically, which is good. Obviously, our continued pursuit of advisers in Canada -- the right advisers in Canada is important. We do have a reasonably robust pipeline. It takes a long time. And it's hard work convincing people that we're the right platform for them. But we've had a lot of success as we kind of indicated in the numbers, $7.5 billion today. We continue to see a reasonably robust pipeline. I suspect we'll have some more people joining us over the next several weeks and months. But as I said before, you don't know until they show up with the pictures of their family behind their desk. So that certainly continues to be a use of capital. We continue to pursue tuck-in acquisitions in our U.K. wealth business. We're looking at lots of assets, and -- but I could have said that every quarter for the past 8 quarters that we're looking at lots of assets. We're not going to overstretch, but if we can find the right opportunity to tuck in, so that continues to be a use of capital. And then, of course, I've -- as I've said before, stabilizing our capital markets business and bringing in alternative revenue streams in our capital markets business could be something that's interesting. You saw that we bought Jitneytrade. That was an alternative -- that was very additive and EPS accretive to us and also provided some stability to our business. So we continue to look for things like that. So I'd say those would be the 3 most -- well, 3 of the 4 most strategic priorities. And I think the final thing we've talked about in the past is growing our Australia wealth business. And we continue to pursue both organic and strategic paths towards growing our Australia wealth business. So that -- those would be the 4 main uses of capital.
Maybe we can tip that over to U.K. and the wealth management operations there. You've had, I guess, Hargreave Hale in the mix now for about a year and maybe just some perspective from you how that's gone, opportunities for things like incremental margin improvements and expectations about how that business is going to evolve from here.
Yes, I mean, one of our reasons for coming over, we did our board meeting in the U.K. this week, and there's a lot of good reasons to do that. One of it was just a kind of a year in to welcome all our new colleagues from Hargreave Hale. And we had a dinner the other night that went phenomenally well and it gave a good chance to talk to people kind of one-off. And it's remarkable, the mood and the environment and how strong it is, you'd expect me to say that, but I wouldn't say it if it wasn't true. But we had a really remarkable amount of positive feedback on the integration, which is great. So it's going well. Their business results are strong, stronger than we expected. Part of that comes at a cost. The cost is take your time realizing synergies, take your time integrating on systems. We talked about that before. Take your time moving over people to one location. All of that groundwork has been done now, so I think we're in a position now where we can probably start to see margin improvement over the next 12 months in our wealth business because we are at -- right now, going through some of the harder areas that attacked that margin, putting everybody on one system, moving people into one office, unifying pay grids and all that kind of stuff. But Don, you may have better color than that.
Yes. We always said that we were going to take a slow and easy path towards integration, and so we're well through that. We still have a lot to do. And in particular, the systems integration is sort of scheduled for mid-calendar 2019, and we're planning towards that. And I think as we work our way through calendar 2019, we'll sort of see the true benefits of the back office and systems integration and combination of the -- bringing the Hargreave Hale unit and our existing operations together on one platform. I think we'll see those benefits over time through calendar 2019.
Yes. Jeff, there's a -- and I know you this and I know you've done this work. There's a good sample set of wealth -- public wealth managers in the U.K. And you can see that people in our size range or maybe slightly bigger than us could have margins that even approach 30% in this business. So there's clearly opportunities to do what we need to do. And if David Esfandi was in the room today who runs that business, he'd tell you the same thing.
Your next question is from Graham Ryding with TD Securities.
U.K. wealth management, I'll just stay on that theme. The size of any of the assets that you're looking at, is there sort of a range that is in your sweet spot now in terms of potential tuck-in deals?
Yes, I think you defined them right, tuck-in, not fundamental, so nothing that would require us to fund with equity. Nothing that we couldn't handle on our balance sheet. Nothing that we couldn't easily do. But if you thought of Hargreave as being a relatively significant acquisition at the time that takes time to integrate, anything we do from this point on would be very quick and painless integration. But again, there's other consolidators in this market, so we -- I think we've got to be very selective. Our key differentiator, in my opinion, is we've got a management team that understands the business well, that can roll up their sleeves. So the more work an asset needs, the better it is from our perspective.
Okay. Got it. The -- maybe sticking with the U.K. Just the capital markets activity continues to be softer in that division relative to your other areas. Maybe this is a question for Alexis. But beyond Brexit, is there anything more that's going on in the U.K. that's sort of weighing on -- weighing out on capital markets activity?
Yes. Well, look, MiFID II is perhaps even more substantial than Brexit in some ways. You've -- I'm sure you've understood the dynamics and the impact of that regulation, the impact on research, the impact on cost containment, the impact on commission trading and the likely consolidation in the U.K. broking sector, which is a part of what we do. And we do, as you know, the broking side and the M&A side as well. I'm sure you've seen that quite a few of our peers in the U.K. have had mixed fortunes with share price decreases and profit warnings, left, right and center. So this is an impact that is being felt not just with us, but with a large number of our peers. I think, for us, the key is to maintain a good business mix of revenue in terms of the sort of M&A, a revenue we're going to get from the U.K. and Paris where our Paris office is outperforming at the moment and has been outperforming for the past 15 months. You may have seen we advised on a very important transaction for Michelin to acquire Camso in Québec. That was really out of our Paris office for $1.5 billion, $1.6 billion transaction. So the mix -- the business mix of that M&A revenue, plus ECM revenue when it's there, it's something we're trying to do hopefully as well as or better than peers, which are sometimes just in U.K. broking and therefore rely only on ECM or just an M&A peak and rely only on M&A. So we're hoping that in a volatile environment, we will get to the point where that business mix helps us net-net.
Yes. And I think you'll see it in the press -- both in my comments -- well, certainly, in my commentary, you'll see that although we've lost money in that business in the first 6 months, I did say that we expect a return to profitability. Obviously, we've got pretty good visibility in our business. And I think we know what we're doing there. So we feel pretty confident that it's a timing issue, not a fundamental issue.
Okay. Got it. The -- jumping to your Canadian wealth management platform. Interest revenue in the quarter seems to have picked up a fair bit for quarter-over-quarter and year-over-year. I assume that's a reflection of rising rates. But is that just interest that you're earning on client cash that's in their accounts? And the second part of that question is, why is there not a similar dynamic in your U.K. wealth management platform?
It's margin lending. That's really the margin accounts, not really the cash balances. It's really closer on the margin accounts. So we've seen sort of greater activity in terms of -- as our adviser mix has changed over time, our level of margin lending has changed over time as well. So that activity has picked up, and that translates to -- into increased interest revenue. Margin lending is not a big factor in the U.K., so we see very little of that.
Got it. And then just my last question is with the recent market volatility, what have you seen in terms of the quarter-to-date in terms of your capital markets activity? And is it reasonable to expect this volatility to weigh on activity, both on the advisory side and the ECM side?
Yes. No, good question. I mean, we've -- we had a very, very, very active, how many verys did I say, but a lot of verys, very active October. You can see that in the market in Canada. I mean, there were several major U.S. cannabis companies that raised money, all of which we book on. Those deals are done and completed. We've led many other deals as well. So we've had a pretty active October and early November. And I guess, markets go up and go down. And I don't know where November and December will play out. We also have pretty good visibility, as you can imagine, on our M&A deals. We've announced many deals. You've seen them. And they all have closing schedules. And we don't see any risk to the closing of those transactions. So that continues to proceed. So I think I said in my prepared remarks that we have a relatively constructive environment going into this quarter. And you can't predict capital markets 6 months away, but you can certainly predict it 3 months away. And I think we feel pretty confident on where we stand in the next -- this quarter in our capital markets business.
Mr. Daviau, we have no further questions at this time. Please continue.
Okay. Well, listen, thanks, everybody, again for joining the call and appreciate -- I appreciate your questions. And we'll be out again in mid-February, and that's it. Thanks. Bye-bye.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.