© 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 2022 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.
Thank you, operator, and thanks for everyone joining us for today's call. As always, I'm joined by Don MacFayden, our Chief Financial Officer. Following the overview of our second quarter Fiscal 2022 results, both Don and I would be pleased to answer questions from analysts and institutional investors.During today's discussion, we will refer to our earnings release and MD&A, copies of which have been made available for download on SEDAR and the Investor Relations section of our website, at cgf.com.Our quarterly investor presentation and supplemental financials are also available on our website. I won't cover the entire presentation during this call, but I will refer to certain slides to guide our discussion.Within our update, certain reported information has been adjusted to exclude significant items in order to provide a transparent and comparative view of our operating performance. These adjustment items are non-IFRS financial measures. Please refer to our notice regarding forward-looking statements and the description of non-IFRS financial measures that appear on Page 1 of our investor presentation and in our MD&A.I expect that you've all had the opportunity to review our quarterly disclosures that were made available last night. The operating environment remained healthy throughout the 3-month period, and we experienced some seasonality in our new issue and trading businesses. M&A activity has picked up substantially. While new issue activity has declined from record volumes of recent quarters, it has remained comfortably above historic levels. Our wealth management businesses in all our regions performed strongly, albeit with lower contributions from new issue activity in Canada and Australia.Firm-wide revenue for the 3-month period amounted to CAD 475 million, an increase of 22% compared to the same period last year. When measured on a year-to-date basis, adjusted revenue for the first half of Fiscal 2022 amounted to CAD 231 million, an increase of 30% compared to the same period a year ago.Looking at Slide 6 of our investor presentation, we can see that our second quarter and first half results have surpassed the prior fiscal year on every measure: revenue, net income and adjusted earnings per share.Excluding significant items, firm-wide pretax net income of CAD 96 million for the second quarter contributed to a year-over-year increase of 127%, or CAD 117 million, for the first 6 months of Fiscal 2022. This translated to adjusted diluted earnings per common share of CAD 0.58 for the second quarter and CAD 1.31 for the first half, year-over-year increases of 107% and 147%, respectively.While we are certainly pleased with this result, we note that it was achieved in a more challenging backdrop for risk capital, where several ECM transactions were either pulled or postponed, in addition to the seasonality that has traditionally impacted our second quarter capital raising activities. Our diversified platform has positioned us to generate stable growth regardless of the operating environment.Slides 8 and 9 show the contribution of revenue and net income from our core businesses and geographies.Excluding significant items, our total expenses as a percentage of revenue for the second fiscal quarter decreased by 7.2 percentage points when compared to the same period a year ago, with nonoperating compensation costs coming in at 19%, a year-over-year reduction of 4 percentage points. This result was driven by a combination of revenue growth and expense discipline, resulting in an adjusted pretax profit margin of 20% for the second fiscal quarter, up 7.2 percentage points from the same period last year.As evidenced on Slide 10, we've maintained a strong focus on the efficiencies and cost discipline measures that we implemented prior to the pandemic. We've yet to see a meaningful increase in travel and entertainment costs, but as restrictions ease, in-person activities are increasing and related costs are moving up. We expect this trend to continue as demand for in-person or hybrid conferences return. Although this activity is returning to more normal levels, we continue to operate with a disciplined and selective approach to our spending in this area.Reflecting our focus on returning capital to shareholders, we have remained active in our NCIB program, and we expect that to continue through the second half of our fiscal year. I'm also pleased to report that our board of directors has approved a quarterly common share dividend of CAD 0.075 for the second fiscal quarter.Total capital deployment initiatives for the first half of Fiscal 2022, including common share dividends and buyback activity, amounted to CAD 44 million, or 28.6% of our adjusted net income.With that, let's turn to the performance of our operating businesses. Activity levels in our global capital markets business remained very strong over the 3-month period, reflecting the strength of our mid-market franchise and the steadfast commitment from our talented teams across the businesses and geographies.Firm-wide capital market revenue for the second fiscal quarter amounted to CAD 305 million, up 26% compared to the same period last year. Our U.S. business was the largest revenue contributor for the 3-month period, with total revenue of CAD 179 million, up 59% compared to the same period a year ago. Revenue contributed by our U.K. and Europe capital markets business increased 130% year-over-year. Second quarter revenue in our Canadian and Australian businesses remained higher than historical levels, but declined 15% and 26%, respectively, reflecting lower new issue and trading activity when compared to the second quarter of last year.Over the 3-month period, we participated in 128 transactions to raise gross proceeds of CAD 16 billion for growth companies. Firm-wide investment banking revenue for the quarter was a very healthy CAD 90 million, but down 18% compared to the same period a year ago. Revenue earned from our trading activities were 28% lower on a year-over-year basis, a reflection of lower market volatility which decreased market activity and revenue opportunities primarily in our U.S. and Canadian operations.These declines were offset by a 279% year-over-year increase in higher-margin advisory revenues, which amounted to CAD 139 million for the 3-month period. Our U.S. business delivered a 419% increase in advisory fee revenues, which amounted to CAD 104 million, surpassing all prior full fiscal year amounts from this team. Our U.K. business, with a substantial contribution from its Paris office, and our Canadian operation also delivered substantial increases in this segment, with increases of 205% and 58%, respectively.Our exceptional track record of delivering ECM transactions and successful outcomes for mid-market growth companies has helped to add to the growth in our advisory practice. I'm so pleased with our specialists in all regions who can have that trusted conversation with top decision-makers across sectors and regions and coordinate our delivery of innovative ideas and solutions to companies without conflict.We also made strategic investments in this segment to complement our ECM focus area, and we're seeing the benefits of that plan. Building on the successful deployment of this strategy, we continue to explore further investments to grow our advisory capabilities.Reflecting the increase in higher-margin advisory activity, the second quarter adjusted pretax net income contribution from our capital markets business improved by 70% year-over-year to CAD 73 million, and adjusted pretax profit margin increased by 6 percentage points to 24%. Across our capital markets businesses, we continue to pursue opportunities for expanding our product offerings. As we develop ancillary products to complement our mid-market capabilities, our long-term earnings potential is enhanced.Looking at the current quarter, market activity has demonstrated that new issue and advisory levels remain robust through October. If the environment remains constructive in the final 2 months of this calendar year, we are optimistic that our Q3 results will continue to reflect our strong market position.Our global wealth management businesses delivered another quarter of impressive growth. Firm-wide client assets reached a new record of CAD 98 billion, up 34% year-over-year. Total revenue for the quarter in our combined wealth management businesses amounted to CAD 166 million, an increase of 14% compared to the same period a year ago.Excluding significant items, the second quarter pretax net income contribution increased by 18% year-over-year, to CAD 32 million. This brings the total contribution for the first half of this fiscal year to CAD 80 million, up 56% from the same period last year.Client assets in our Canadian business reached a new record of CAD 36 billion at the end of the second quarter, with the average book per adviser growing by 44% year-over-year, to CAD 245 million. This increase was driven by a growth in commissions and fees and interest revenue, which was partially offset by lower investment banking activity. I will also note that the proportion of fee-based revenue in this business increased to 45%, a year-over-year improvement of 13 percentage points.We continue to focus on growing contributions from this segment through our recruiting activities as well as continuing to support our existing advisers and expanding their offering to capture a greater share of wallet.Fiscal year-to-date, the adjusted pretax net income contribution from this business amounted to CAD 36 million, an increase of 87% when compared to the same period in the prior year.We also rank very strongly in the independent survey of Canada's top wealth advisers, with total number of CG advisers exceeding representation from all other independent firms by a wide margin. While the recruiting environment remains competitive, we continue to have strong momentum. We are also maintaining a strong focus on alternative ways to add products and services to grow and enhance our overall Canadian wealth offering.Client assets in the U.K. and Crown Dependencies increased by 27% year-over-year, to CAD 58 billion. Revenue reached a new quarterly record of CAD 75 million for the 3-month period, up 17% year-over-year. Excluding significant items, the pretax net income contribution from this business amounted to CAD 20 million for the second quarter and CAD 39 million fiscal year-to-date, increases of 40% and 30%, respectively.Our organic growth strategy is beginning to produce results, and margins in this business continue to be strong. Fiscal year-to-date, the adjusted pretax profit margin in this business was 26.4%, up 3.6 percentage points from the prior year.During the quarter, we announced the completion of the CAD 218 million investment by certain accounts and funds of HPS Investment Partners. On an as-converted basis, the convertible preferred share investment into our U.K. wealth management division reduces our equity interest in this business by approximately 22%. Our partnership with HPS continues to be positive and constructive as we continue to explore opportunities to materially add businesses to our platform in the U.K. in a manner which is complementary to our existing business and accretive for our shareholders.I am also very pleased to welcome our new colleagues from Adam & Company. This transaction closed on October 1. So the assets and revenues will begin to be reflected in our results for the second half of this fiscal year. We are excited about the strategic fit of this highly complementary business, and we look forward to a seamless integration. This development will increase our client assets by roughly CAD 3 billion, and we expect it will be accretive to our adjusted earnings.Finally, managed assets in our Australian wealth business increased by 43% year-over-year to a record CAD 5 billion, demonstrating our continued strong momentum in this region. Second quarter revenue increased by 31% year-over-year, to CAD 19 million. While revenue from new issue activity declined by 23% sequentially, this team delivered a new quarterly record of CAD 16 million in commission and fee revenue, up 40% year-over-year.We continue to execute against a broad range of opportunities in this business. We remain focused on advancing adviser recruitment and asset growth as we maintain momentum as the premier brand for small and mid-cap investors in Australia. Our recruiting success in this region have increased substantially because of this momentum. And finally, as our Australia franchise grows larger, we continue to assess the appropriate ownership structure of that business to align our employee base in the region and provide the business the capital it needs to grow.In conclusion, I'm very pleased with our results for the second quarter and the first half of Fiscal 2022. Despite the environment for new issues returning to more normalized levels, the global macroeconomic environment continues to provide a supportive backdrop for activities in our core mid-market sectors. The M&A environment is the strongest we've seen, and we are optimally positioned to deliver on a growing pipeline of strategic activity. Our market position is stronger than ever, and we are among the lead table leaders in all of our geographies.We are especially grateful for the trust that our clients and shareholders have placed in us, and we strive to always exceed their expectations as the leading independent mid-market investment banking and wealth management firm. As travel restrictions ease, we are reestablishing the personal engagement that is so important for our employees and clients.We enter the second half with a very strong balance sheet and a very healthy working capital position to support all our business activities. We continue to invest strategically to enhance our mid-market capabilities and grow our wealth management businesses.With our buyback activity, our share count continues to trend lower, supporting enhancements to our earnings per share in any market backdrop. And with our balance sheet strength, we expect to be able to continue this activity.As always, we remain firmly committed to delivering outstanding experiences and results for our clients while managing our business for profitable growth and creating sustainable long-term value for our shareholders.With that, Don and I would be pleased to take your questions. Operator, can you please open the lines?
[Operator Instructions] Your first question comes from Jeff Fenwick, of Cormark Securities.
So Dan, I wanted to start with Canadian wealth management. I mean, it's been a great run of adding client assets, and particularly, the average assets per team has been growing quite a bit. Could you maybe just discuss the dynamics about what's going on there now in terms of -- I know you were adding some teams and letting some smaller ones go. What's accounting now for the asset growth? Is it more of a focus of just capturing more of those existing client assets? Is there a pipeline of advisers that you're looking to bring in over the sort of near to medium term? Or how do we think about growth in Canada from here?
I mean, great question. And obviously, it's something that continues to be front of mind for us. And I want to answer your question with “all of the above,” I guess.I mean, the first thing is we're seeing really good growth in our existing advisers. I mean, you saw that survey come out recently, and although we have 2% market share, we had 18% of the top advisers in the country in that Globe survey the other day. Sorry, 12%. 18 advisers, or 12% of the global advisers, kind of work for us. So we've got a great group of advisers that are growing their books materially. Stuart was in a trade publication yesterday speaking a little bit about that in terms of what the underlying growth of some of our advisers' assets have been.So that's been the primary driver of growth, I'd say, in the last quarter, but we continue to attract new advisers, as well. There's obviously -- nothing's really changed in the underlying trends in terms of us bringing on new people. We continue to meet a lot of new people and continue to expect to see some people transitioning through the piece. I mean, we just came through the summer. That's not really a time where people do a lot of transition. But I suspect over the next several quarters, we're going to see a pickup of the transition of existing advisers.We're also looking at adding new tangential segments to our wealth business and growing wealth assets that way, as well. So we've been exploring a number of different alternatives. As you know, Jeff, we've invested CAD 400 million growing our wealth platform. We're going to continue to invest. We obviously have a very robust balance sheet these days, given our profitability. So we're going to continue to invest growing our wealth platform in Canada. We've invested a ton in technology. We have a ton in systems, a ton in branding, a ton in marketing, everything that advisers need to grow their business. So nothing's changed on that strategy. I'd say, if anything, we're doubling down on it.
Okay. And then what about possible platform adds? I mean, you had an initial approach there to the Richardson Wealth Group. Are there other independents in Canada you might take a look at here? I mean, you're in a position to, as you say, financially, to look at something like that. Or is the focus maybe more on individual teams?
Again, all of the above. The -- there's not a lot of things strategically available. There's just not a lot of things strategically available. There's just not a lot of large independent platforms out there, as you know. You can probably count them on less than one hand in terms of what's out there. But strategically, we felt there was a chance to bring on a synergistic platform.We've really up-tiered our business. At CAD 240-ish million per adviser, our adviser group is large. It wouldn't help the brand to bring on a bunch of advisers with significantly lower books. I mean, the reason we are as profitable as we are in our Canadian wealth business is the advantages you get from having very large advisers and very large advisory books and the profitability associated with that.So we've got to be careful about culturally what we bring on. We've built an incredibly strong culture in our wealth business, and we want to be very sensitive to not destroying that through something strategic. Something strategic should add to it, not take away from it.
And maybe a follow-on to your comment there about the larger teams and the better profitability, I mean, obviously, felt just the pressure of the drop in the new issue business here, but this is still a good level of profitability. Is this sort of a low, do you think, a low watermark for the group here and on a normalized basis it should be probably a bit higher? Or what's your sense for Canaccord?
I mean, I'd be -- if I was going to predict one business, this would be the business I'd predict, forward-looking. Yes, hard to predict the new issue business, and that's obviously down significantly, CAD 30-ish million quarter-over-quarter, CAD 25-ish million quarter-over-quarter. Like, we get that, and that's going to happen, new issue.But realize, and I know you know this, we're coming off the summer, as well. We don't do a lot of retail-driven new issue work in the summer. So that's seasonally always slow, number one. So I suspect there's upside from there.Number two, our fee and commission revenue is going up. Like, it tracks our assets, and our assets are going up. So it's going up.So yes, if you're asking me was this quarter a low quarter for our Canadian wealth business, I think it was a low quarter for our Canadian wealth business, and I think the profitability of that business will continue to grow higher. I don't think it will be as high as it was when we had CAD 40 million of new issue revenue flowing through that business, but over time we could certainly get there as our fee and commission revenue goes up.
That's helpful. And then why don't we talk a bit about Australia. I mean, you've made some very good progress there so far on wealth management. There was some, just a brief comment in your release about looking at an appropriate ownership structure in Australia. Can you just clarify? Is that --? What's that pertaining to? Is it wealth? Is it cap markets? Is it both?
I mean, like Canada, we run an integrated wealth and capital markets business in Australia. So you can't really differentiate one from the other and say -- but we do want to continue to bring on advisers. We've had many handfuls and footfuls of advisers joining us in Australia. It's a very similar strategy to the strategy we deployed in Canada.And as part of that, you're issuing equity to people who are joining, you're issuing -- you're giving advisers loans, as well. And as that business continues to grow, and you can see it's becoming a more material part of our revenue, not only the wealth side, but the capital market side, its capital requirements change, as well, as it becomes bigger.So I just -- we don't have anything to announce at this stage. But right now, we own 80% of that business. That could adjust as we continue to grow that business and continue to bring people and teams on. You can imagine a bunch of different scenarios on how that could play out. And it's just premature to announce it, but it's always something we're continuing to evolve, as I've told people in the past. Australia is a really long way away from Toronto, the furthest place on Earth. So to the extent that we can have a little bit of local ownership in that business, that's optimal from our perspective.
Your next question comes from [ Paul Goff ] of Echelon.
It's actually his brother, Rob, on the call. You had another good quarter, a great quarter. My first question would be on the strength of the U.S. advisory business. Can you talk to the verticals associated with that and just give us any further insights into the sustainability of those revenue lines?
Great question. I mean, M&A is up globally, I think you know that. Not just us, but most of the participants in the M&A market, we're seeing a very, very strong underlying environment for M&A, broadly speaking.That being said, based on all the stats we have, our boat has risen more than all the other boats in the harbor. We've done remarkably well. But that shouldn't come as a surprise given the investment that we've made in M&A. We've talked about it at length.We've done M&A acquisitions in the U.S. We bought Petsky Prunier 2.5 years ago, and that integration has gone incredibly well. M&A is more in the ethos of our U.S. business. It's always kind of been there in some of our other markets, but it's become very, very important to our U.S. business. And we're earning disproportionately large fees on disproportionately larger assignments as M&A kind of becomes further ingrained in our business.So is it sustainable after a 400% uptick? I don't know. The answer is, maybe. We continue to be in a very, very good M&A environment globally and in the U.S. and have a robust pipeline of activity that we are continuing to execute.I think as you probably also know, M&A is probably one of the few businesses in our capital markets business where you can project. When someone goes to raise money, you don't necessarily know 2 months before whether they're raising money. When you're doing an M&A assignment, you've got pretty good visibility for the next 3 to 6 months in terms of what the pipeline of activity looks like, albeit you could have timing delays or what-have-you. So we feel pretty confident in our M&A pipeline.And to be honest, we feel pretty confident in our new issue pipeline in terms of the activity that's going on. There probably was a little bit of a bump along the road post the summer or late summer or early September. That has kind of worked its way through the market. I think as you can see, the activity levels are still pretty robust out there. And our market position, if anything, is stronger, not weaker, than where it used to be in our most relevant markets.
Okay. I know Jeff talked on Canada and Australia. Could we perhaps turn to the U.K. and talk to what sort of organic growth you are seeing, margin expansion you are seeing and in terms of what you are looking for and what you are seeing for inorganic growth along with your partner in HPS?
All great questions and something that's top of mind for us. From an inorganic perspective, for the last several years, just taking half a step back, for the last several years we've really truly been focused on increasing our scale of that business, mainly through inorganic initiatives. And you know that we bought a number of companies and slowly integrated them in and increased our margins as we were doing it, right out of the playbook that I think we pretty well articulated to you and to our shareholders. That activity continues.That being said, we've had a serious initiative probably for the past 6 months about growing organically, just growing our business and increasing wallet share and increasing assets per existing client. And that initiative is starting to take shape. We've seen reasonable organic growth in that business. But reasonable organic growth in that business is not 10% a year or 15% a year; it's 5% a year or 4% or 3%. That's remarkable organic growth, and that's kind of our objective, and that's kind of what we're witnessing right now. So I think we're achieving our organic growth objectives.Inorganically, through acquisitions, we continue to look at a number of different opportunities and are aggressive on a number of different opportunities. Not only do we have a phenomenal management team that we are incredibly confident in their ability to execute those acquisitions, but we now have a financial partner that increases our resolve in trying to get M&A done.So as you had indicated, HPS, and they've been a very good partner in albeit a relatively short period of time, they're a minority investor in our business now. They own 22% of our business. They bought in at roughly a CAD 1 billion valuation. Certainly gave us the currency through which to look at further acquisitions, and we've been aggressively pursuing further acquisitions, as well. Nothing clearly to announce at this stage. M&A always has probability adjusted to it. But we are looking at increasing the scale of that business. We think that as the scale of that business increases, our margins increase, our scale increases and it even becomes a more valuable entity.We closed the Adam & Company acquisition. That integration is done. It was done relatively quickly. And we see more acquisitions in our future as we scale that business.
And one last question, if I may. We often ask you about the recruitment of bank advisers onto the Canadian wealth platform. Could I ask you about what you are seeing with your existing advisers capturing accounts from banks? Do you see individuals migrating from banks at a greater pace than you have historically?
Great question. I'm not sure I've got that visibility at this stage to be able to articulate that. But what we really look at when we measure this, not so much as, hey, are we capturing clients that used to be clients at a bank and bringing them over here, our internal organic growth efforts are obviously, hey, advisers can win new clients, but it's more about increasing their share of wallet of their existing clients, right? We tend to find, not all of our advisers, but certainly for a subset of our advisers, that they have 20% or 30% of a client's investable assets. How do we get that to 50% or 60% or 70%? We could double our book size just by effecting that strategy.So it's much easier to increase your share of wallet from an existing client than win a new client, so to speak. And if we're supporting our advisers' growth, it's more along those lines, I would argue.
There are no further questions from the phone lines. So I would like to turn the conference back over to Dan Daviau for closing remarks. Please go ahead.
Thank you very much, operator. I really appreciate it. And I appreciate everyone joining us today on the call again.Listen, we've had a remarkable amount of success over the last 6 or 8 quarters. We continue to perform certainly above expectations. I'm incredibly proud of our team, and the team that's executed were, for the most part, back in the office and have returned to the office. And culturally, we think that's phenomenal. Because I think, culturally, we've certainly changed this organization.We certainly look forward to the upcoming holiday season and the continuation of reopening in most of our regions. I'd certainly like -- I know it's early, but let me be the first to extend my best wishes for a safe and happy holidays.So we'll talk to you again in February when we release our third quarter results. And thank you, operator. We can close the lines.
Thank you. Ladies and gentlemen, this does conclude your call for today. We thank you for participating and ask that you please disconnect your lines.