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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 2018 Third 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, and thanks, operator, and thanks for everyone for participating on today's conference call. Joining me today on today's call is Don MacFayden, our Chief Financial Officer. And following the overview of our fiscal third quarter results, both Don and I will 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 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 expectations for various reasons that are outlined in our cautionary statements and in the discussion of risks in our MD&A. Our discussion today may also include certain non-IFRS financial measures. The description of these non-IFRS financial measures and the reconciliation to comparable IFRS measures are contained in our earnings release and our 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 the Investors Relation section of our website at canaccordgenuitygroup.com.So now let's review the highlights of our most recent quarterly performance. For the third quarter of fiscal 2018, Canaccord Genuity Group Inc. earned a record revenue of $309 million. Excluding significant items, quarterly net income was $39 million, our highest quarterly level in 7 fiscal years. This translated into adjusted earnings per share of $0.31.While, certainly, it's been an excellent market environment for small- and mid-cap equities, it's important to consider our performance this quarter in the context of the strategic advancements that we've -- that have taken place across our operations for the recent years. We have meaningfully improved our operating leverage by increasing the scale in our global Wealth Management operations and simultaneously extracting greater value from our global capital markets businesses. Our net profit margin for the 3-month period was 13%, our strongest in 8 fiscal quarters. Turning to the performance of our business units. Canaccord Genuity participated in 141 transactions during the third quarter to raise proceeds of $9 billion for global growth companies. The performance of our global capital markets business was able to deliver -- this quarter, highlights the commitment and dedication of the many professionals across our capital markets operations, who stayed close to their clients, worked hard to generate ideas and solutions when the markets were difficult and harnessed every opportunity to deliver for clients as soon as the markets were receptive. Our alignment efforts have helped us strengthen collaboration across regions, drive incremental revenue growth and harness opportunities to lead in emerging high-growth sectors. Fiscal year-to-date revenue per employee in this segment has improved by 54%. We achieved a year-over-year revenue improvement of 43% in this business, earning $196 million of revenue for the quarter. While revenue grew substantially, our expenses as a percentage of revenue in this segment decreased by 12 percentage points year-over-year, a result of our extensive efforts to capture greater efficiencies from our existing infrastructure, while improving our execution capabilities. The strongest contributor to this quarter's results was our Canadian capital markets business. This segment ended the 2017 calendar year as the dominant Canadian investment bank and that was by a wide margin, both on number of transactions and total amount raised. The increase in investment banking activity in our third fiscal quarter was the primary driver of total revenue growth for this business, which improved by 135% compared to a year ago. Our Australian operation is also on track to deliver another solid performance this fiscal year, and earned record revenue of $22 million for the 3-month period. The close working partnerships that we formed with early-stage growth companies creates opportunities to share in their success. In both regions, gains on our warrant and inventory positions from investment banking activity in the current period and prior periods has also contributed to the increase in investment banking revenue.Performance in our U.K. and Europe capital markets business was relatively flat, both year-over-year and sequentially. But I'll note that year-to-date revenue in this business is 11% higher than where it was a year ago. Our teams in the region have continued to be productive on several notable investment banking and advisory mandates, particularly through our Paris team, that we expect to close before the end of the fiscal year. I'd also like to highlight the seamless transition to MiFID II that took place in early January, ensuring an effective rollout for our business and our clients who required incredible commitment from our teams over the past year, and I'd like to thank them all for their efforts. Last quarter, we took further steps to streamline our U.S. capital markets operation by reducing headcount in areas that have been difficult to scale and intensifying our focus on driving profitability in our core focused areas. The impact of our efforts were evident in this quarter, as the business delivered pretax profit margin of 7 percentage points compared to the same period last year. While lower volatility led to a softer environment for trading activities, our trading operation in the region has continued to gain market share and is operating ahead of budget. Additionally, our international equity group delivered a strong third quarter revenue growth compared to the previous fiscal quarter. Although volatility is an inherent feature of our capital markets business, we will continue to partner closely with our clients and navigate these challenging markets together. While we expect additional natural periods of volatility, our ability to lead the market in key growth sectors of the global economy is centered around our independent advice and our globally integrated service model, which provides our business and our clients with a distinct advantage in any market. Our strategic shift to strengthening contributions from our global Wealth Management business has been an important driver of our performance for the quarter and for our current fiscal year. Year-to-date, our combined Wealth Management operations have contributed 60% of the fiscal 2018 pretax net income for our combined operating businesses. At the end of the 3-month period, total assets under administration and management grew 64% to $59 billion. Roughly 2/3 of this increase were driven by our acquisition efforts and 1/3 attributable to market gains, new assets and our recruitment efforts. Globally, Canaccord Genuity Wealth Management generated $109 million of revenue during our third fiscal quarter, a 62% increase compared to the third quarter of last year. Revenue in our U.K. and European Wealth Management business increased by 76% year-over-year to $60 million for the third fiscal quarter. Pretax net income for this business increased by 44% year-over-year to almost $12 million. This is the first quarter where the revenue and profitability associated with our acquisition of Hargreave Hale are fully reflected in our results. Although we incurred higher operating expenses resulted from the expansion of this business and our resulting headcount increase, profit margin in our U.K. and European Wealth Management business remains strong. Looking ahead, we anticipate continued margin improvement as our integration efforts progress. On that note, I'm very pleased to report that we're making excellent progress towards having all our employees in the region from both businesses working on the same platform. Our Canadian Wealth Management business earned revenue of $48 million for the 3-month period, a year-over-year increase of 48%. Increased private client participation in new issue activity and strengthening valuations for mid-cap equities were the primary drivers of the 21% year-over-year increase in assets for this business, which reached $14.5 billion at the end of the 3-month period. This business recorded pretax net income of $7.5 million for the quarter, up from a loss of $0.5 million 1 year ago. Excluding significant items, our expense ratio in this business was 78%, its lowest since fiscal 2011. Although we are certainly enjoying robust activity in transactional revenue, we've also maintained our long-term focus on increasing reoccurring fee-based revenues, which allows us to continually strengthen the net income contribution from this business. Discretionary assets under management at the end of the fiscal quarter were 12% higher than the same period last year, and we attribute much of this growth to our recruiting strategy. Our revenue mix in this quarter highlights the flexibility of our platform, which provides advisers with the resources and the support to operate in the -- in ways that best fit their business and their clients. Overall, I continue to be pleased with the progress we have made to create a more predictable business with greater consistency of earnings. We've managed our expenses carefully throughout the various market backdrops, and we continue to improve operational efficiencies across our operations. We maintain a solid capital position, which protects our capacity to increase business activity and enhance our earnings capability. At the end of the third quarter, our company had $513 million in working capital and $593 million in cash and cash equivalents. I'm also pleased to report that our Board of Directors has approved a cash dividend of $0.01 per quarter payable to shareholders of record on March 15, 2018. The start of our fourth fiscal quarter was characterized by constructive environment for activity levels in our core focus sectors. While we've just entered a period of abrupt market declines from the market highs that we've enjoyed in recent months, we remain encouraged by the solid fundamental landscape and the removal of extreme optimism. The industry, at large, feels to be on solid footings, and our overall pipeline for investment banking and advisory activity remains healthy. Most importantly, our business is increasingly better positioned to navigate these periods more effectively. Our efforts will always be centered around delivering a differentiated service offering for our clients and increasing the value of our business for our shareholders. Looking ahead, we will continue to evaluate ways to enhance our earnings capabilities across our capital markets and Wealth Management operations, whether they involve activities aimed at improving our operating efficiencies or growing our market share. And with that, Don, and I will be happy to answer questions from institutional investors and analysts. Operator, please feel free to open the line for questions. Thank you.
[Operator Instructions] Your first question comes from Jeff Fenwick of Cormark Securities.
So Dan, you did articulate about the -- within the mix of revenue within the Canadian capital markets group that the warrant gains were a significant component there. Can you give any color in terms of the relative proportion that they would have comprised? And then, maybe some discussion about how that ties into compensation, just given that I would assume a large portion of those would be unrealized gains?
Yes, I don't think your assumption on unrealized would be completely accurate. I mean, as the market goes up, we tend to realize things, but also I think, as you know, we would mark-to-market our position. So in any given quarter, we would have revenue come in, whether they were realized or unrealized as part of that position. I'll let Don speak to the quantum levels, specifically.
Yes, I mean, we don't disclose that in the specific -- to that level of granularity. I mean, we include the revenue realized and unrealized on investment banking transactions that comes in the form of warrants or shares in our investment banking line, so it's just part of that number. But we're on top of it, and it's -- we don't hesitate to crystallize those revenues on an opportunistic basis.
And Jeff, if you look through our supplemental disclosure and you look through our slide deck that was posted -- that's posted -- that will be posted online, you'll see the proportion of revenues in each sector. The cannabis sector is booked through our life science sector, and you'll see what proportion of revenues are in life science and you'll be able to kind of back door your way into both the underwriting and warrant gains, it'll all be there. It's not an immaterial number, but it's not a number that is shockingly large either. To Don's point, we would -- as markets increase, we would tend to liquidate these positions on a pretty regular basis. We wouldn't necessarily wait to the end of a warrant period or the end of -- the natural end of a market cycle to do that.
Okay. And that's helpful. And still sort of in the context of the cannabis sector, I mean that's one where I think the independents have clearly been benefiting by the big banks not being very active to this point of the space and certainly helpful for you as well, I imagine. And we did see BMO pop-up on one of the recent deals here. What are you thinking in terms of the expectations for the competitive landscape here? And when do the big banks begin to come in and try to push their way into more of the activity here?
Yes. I mean, listen, from our perspective, banks -- you'd expect me to say this certainly on a public call, but I honestly do believe it. The banks coming into this sector to the extent that they do come in, just adds further credibility to the sector, improves valuation, broadens distribution, all that kind of stuff. We've got a unique capability with an integrated retail platform and a global offering. To offer the companies, the growth companies, services they can't get anywhere. I mean, we did a cannabis conference in -- sorry, in Vancouver 2 weeks ago. We had over 1,000 people in attendance. You're just not going to get that type of offering for the bank. We also do cannabis conferences where we open up investor basis in the U.S. and in the U.K. through our extensive distribution there. Again, a bank simply will not be able to deliver that type of service. So we're happy if they want to come in. I mean, most of the money we would make in this sector isn't 4% underwriting of $300 million transactions. Most of the money we've made in this sector is helping little companies grow to be very big companies, and we don't really perceive bank competition in that area. Quite frankly, we'd welcome it, they wouldn't stand a chance.
Okay. And then, one of the other themes here, obviously, has been a good discipline around expenses. I know certainly as you go through a period where activity begins to pick up and there is a lot more going on there, I'm sure there's a temptation for beginning to invest more back into the business, including headcounts perhaps. So how are you feeling in terms of how the platform is positioned today to deal with the volume that you have? And should we expect that focusing on expenses to continue?
I mean, you've seen our revenue per employee numbers and you've seen our -- and if you look at our supplemental disclosure, you'll actually see the number of employees. We actually disclosed that. In fact, we disclosed it by region. So I don't think you're going to see those numbers bounce up. I mean, arguably, outside of the Hargreave transaction, they've been going the other way. In Canada, we certainly have the right infrastructure outside of a couple people here and there to continue to support the volume and the business. We see no material need to grow our U.S. or U.K. capital markets business. Australia has been relatively constant from a headcount perspective. I mean, you will see headcount increase in our wealth businesses, because we have -- we are strategically investing in those sectors, bringing on additional advisers and support for those advisers. So that will continue to move up. But overall, our cost structure, absent the onetime bump, so to speak, from adding the 200-or-so professionals from Hargreave, I don't think you're going to see a material, kind of, G&E or overhead cost increases. Again, arguably, we'll be pushing that -- yes, we'll continue to push that the other way.
Okay. And of course, yes, we should pivot over to the U.K. wealth. I mean, this was a first full quarter with Hargreave Hale in the mix for you. I guess, the one thing that stood out there is the relative level of compensation looks to be a bit higher, and I'm guessing, it's just given the mix of the types of employees you have within Hargreave Hale. But maybe just some comment there as well around that integration process, and is it fair to say that, that -- will that relatively higher level of comp and the mix be maintained? Or will that dip a little bit as you go through the process? And what should we expect?
Yes, you're right. We did see the bump in the compensation level on the Wealth Management U.K. side increase with the addition of Hargreave Hale. This is just a natural workforce there that added to the salaries line for that particular unit. Integration is underway. It's a longer-term process and was always expected to take 18 to 24 months. So we're just a few months into that now. So full integration some time in fiscal 2020, probably earlier part of that year than later, but we're still working our way through that. And with that, there'd be a natural rationalization of costs and so forth. But a lot of those costs will be seen on the systems side of the integration in terms of the cost savings and so forth. So…
Yes, but Jeff, so once you've had a chance to go through the supplemental disclosure and I appreciate there's tons of numbers in there, you'll see that our margin levels -- our pretax margin levels there, maybe they're down a tad from a couple of quarters before, but generally in line, historically with where those businesses are. And if you kind of draw a straight line over the past 12 quarters or 3 or 4 years, you'll see that margins, generally, are moving in the right direction. Our 9-month margins in that business are comparable to the fiscal 2017 business, so that the costs are going to compensation or the costs are going to other things. I mean, to a certain degree, one thing offsets the other. But as you heard us say in the call, we anticipate those margins to go up over the near term.
Your next question comes from Graham Ryding of TD Securities.
Maybe I could stick with U.K. Wealth Management. Can you quantify the margins or lift that you're targeting over the next 18 to 24 months?
I'm looking at Don, and Don is looking at me.
No. I don't think know. I don't think we'd be prepared to sort of quantify that or put a number on it. It's going to improve and will be heading in that direction that you'd expect. But in terms of quantifying it, I don't think we're in a position to do that.
Yes, Graham, the idea here, again, we bought a very good asset. It's a people-oriented business. You're not going to do things too quickly or too fast. We said that when we made the acquisition. The idea is, the acquisition was accretive on day 1. You've seen that in the numbers, right? We're kind of were at $8-ish million and now we're at $11.5-or-more million, $12 million of pretax net income. So you've seen that increase in the numbers. The idea will be, we will continue to improve those margins slowly over time, while you slowly integrate somebody into your system. For example, you could on day 1 just say, okay, everyone's on a new client system and then you're going to upset every adviser that they have or you can take 1 year and do it and slowly educate them and slowly bring their clients across and those are clearly margin accretive moves that we would make. So you can do it on day 1 or you could do it slowly. Our plan is to do it slowly. So we maintain the asset, we maintain our people, and we maintain our culture. That's what's going on. And that's why you're hearing some little bit of a reluctance in Don's voice and my voice to give you specifics. But all of those activities are going on. We've already moved the portfolio managers over to our location on [indiscernible] that trend -- that's already happened. Other advisers are moving right now. We're in the middle of creating space for them to move over. We're looking at adviser contracts, we're repricing some of those contracts. And again, as I mentioned, we'll be onboarding them onto our technology and systems over the course of the year, that's why we can say confidently that margins are going to improve. I appreciate you got a job to do in modeling, I'm just not sure we're prepared to give you exact numbers of where the margins are going to improve to over the short run.
Okay, no problem. Sticking with Wealth Management just in Canada, there was pretty good -- looked like a decent AUA growth in the quarter. Maybe just some context around what's driving the organic growth. Was there some material adviser recruiting? Or was it related to maybe some of the private placement activity? Just some color there, please.
Yes, again, in our supplement disclosure, as I've always mentioned, it's pretty -- we probably share -- we probably over share in that area. But if you look through our North American wealth business, you'll see our revenues went from $32 million to $48 million. And as part of that increase, our commission and fees that's normal type of fees went from $23 million to $29 million, it's a $6 million roughly increase. Our investment banking revenue, which is the deal-related revenue, it's retails proportion of the broader activity we're doing or transactions that are originated in investment banking went from $6 million to $16 million. So a normal quarter for that business is $8 million, $9 million, $10 million. It was $16 million. So you can see proportionally where they increased. Some of it came from -- just eyeballing this, 1/3 of it came from just normal kind of growth in assets and growth in advisers and 2/3 of it came from investment banking activity. As you've seen our net income, which was running somewhere $2 million, $3-ish million of net income a year went to $7.5 million of net income. Some of that increase should have happened just with the growth of our assets, some of that net income came from enhanced deal activity. And again, you could back it all up from those numbers pretty easy.
And then the AUA growth, how -- any color on recruiting advisers in the quarter?
We continue to recruit advisers in the quarter. I mean, we've brought on some. You're going to see -- our pipeline continues to be very robust in terms of bringing on advisers. As I think I mentioned to you in the past, it's -- things take time to bring over the right type of people, so we continue to have a good pipeline. We are expected to attract several more important advisers to our platform before the end of our fiscal year-end in the next 2 months. We'd expect additional people to be joining us, so that continues to move in the right direction. But I'd say the bulk of the asset increase this quarter is market gains. I mean, just growth in people's portfolio, that was bulk of it. Overall, you have market gains, you've had adviser growth, you've had net new assets, I think all 3 things contributed to it, but Don correct me if I'm wrong, the biggest contributor was just market gains.
I think for this past quarter, I think, that's a fair statement.
Okay, great. That's helpful. And then my last question just the cannabis sector is obviously been a strong sector for you this quarter, in particular. Can you talk to, I guess, the pipeline for financing activity and then perhaps M&A? Like should we expect there to be a natural shift in that space over to some more M&A activity? Or how are you viewing that?
I mean, we are -- well, yes, I mean, the financing activity continues to be robust. January, you just looked at the Canadian kind of lead table [indiscernible] [ 25% ] market share in the month of January. I mean, that was a very active M&A environment. You saw that last year -- the lead tables last year we were the dominant Canadian independent by a mile in terms of financing. And then again, that continued throughout January. I mean, you can just pull out the deal sheets and kind of look through the nature of that activity that was going on. Financing will certainly continue to happen as the markets allow it for sure. We would lead the vast majority of the cannabis, aim certainly more than half of them, and you've also seen some M&A pop up in the sector. And these companies are no longer small companies, they're relatively large companies. So publicly announced. Happy about Broken Coast. We were adviser to Broken Coast. That deal hasn't closed yet. We've seen -- there were CanniMed transaction where we're advising Aurora, that was a hostile transaction, it turned friendly. That's in the process of closing. And then most recently, you've seen Aphria buy Nuuvera, and we were Nuuvera's advisers. All of that is publicly disclosed. All of those deals kind of came to fruition. In other words, signed agreements in the month of January. So they're just going through the normal pipeline of closing a transaction.
Mr. Daviau, there are no further questions. Please continue.
Okay. Well, thank you very much everyone for the time today. Looking forward to continuing to produce our results. And if you have any questions, don't hesitate to call. Thank you.
This concludes today's conference call. You may now disconnect.