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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 Fiscal 2019 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 over to Mr. Dan Daviau, President and CEO.
Thank you, operator, and thanks, everyone, for participating on the conference call today. A reminder that our remarks and responses may contain forward-looking statements and involve risks and uncertainties related to the financial and operating results of Canaccord Genuity Group Inc. The company's actual results may differ materially from management's expectations for various reasons that are outlined in our cautionary statement and the discussion of risk in our MD&A. Our discussion today may also include non-IFRS financial measures. A description of these non-IFRS financial measures and their reconciliation to comparable IFSR (sic) [ IFRS] measures are contained in our earnings release and the MD&A for the fiscal quarter. By now, you've all had a chance to likely review the 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. I'm pleased to be reporting that we delivered another solid quarterly result and are on track for a strong fiscal year. Before we get in the details of our fiscal third quarter and 9 months results, I'd like to spend a few minutes discussing our acquisition of Petsky Prunier, which we announced separately yesterday evening. We are hosting today's call from New York, and I am joined by Jeff Barlow, the President of our U.S. Capital Markets Operation; and Don MacFayden, our Chief Financial Officer, who's in our Toronto office. I'd also like to welcome Sanjay Chadda, Partner and Managing Director of Petsky Prunier. As always, we'll be pleased to take questions from analysts and institutional investors following the conclusion of our prepared remarks. Our acquisition of Petsky Prunier represents another strategic milestone for our company. As we advance our priorities of the increasing contributions from stable, higher-margin businesses, which we can expect will contribute to more predictable and growing returns for our shareholders. If you've been following us for a while, you know that our U.S. capital markets operation is an important strategic asset for our company. It gives us a unique capability to provide clients from all of our geographies with access to thought leadership and execution capability in the largest capital market in the world. Under Jeff Barlow's leadership, the business has been carefully refocused and has just delivered its fifth consecutive quarter of profitability. Across all our capital markets businesses, we've reduced our focus to a smaller number of sectors where we know we have established mid-market domain expertise. And our track record of success in equity finance has helped drive growth in our advisory business. For the first 9 months of the fiscal year, advisory revenue of our U.S. business alone reached $35 million, which surpassed this team's record result from all of last year. With the addition of Petsky Prunier, we significantly strengthened our mid-market TMT and health care capability, a segment we've already established deep domain expertise. Clients of both firms will benefit from our meaningfully enhanced advisory capability and reach, in addition to the globally integrated sales, trading and equity research capabilities of our platform. Now turning to our firm-wide fiscal third quarter results. Despite the significant market downturn that took place late in the quarter, we earned record revenue of $314 million, an increase of 7% over the same period last year. And importantly, all our businesses were profitable. Excluding significant items, Canaccord Genuity Group Inc. earned pretax net income of $46 million and diluted earnings per share of $0.28 for the 3-month period. This brings our adjusted net income and diluted earnings per share of our first 9 months to $113.4 million and $0.69, respectively, well ahead of the entire year last year. We've -- we also have achieved meaningful marginal -- margin improvement, even as we've invested for growth. On an adjusted basis, our pretax profit margin for the first 9 months of fiscal 2019 increased by 4.2 percentage points when compared to the same period last year. We have also allocated more capital to share buybacks. For the 9 months ended December 31, more than 1 million shares were purchased and canceled. And we expect to continue our share purchase reprogram (sic) [ repurchase program ]. Turning to capital markets. This segment was our largest contributor of revenue and net income for the fiscal third quarter. Our combined capital markets earned revenue of $209 million this quarter, an increase of 7% over the same 3-month period last year. Excluding significant items, pretax net income contribution from this segment was $32 million, or 60% of the contribution of our combined operating businesses. Fiscal year-to-date, total capital markets revenue increased 25% compared to the first 9 months of our previous fiscal year. This was partly due to favorable market condition, but also a testament to our track record of delivering successful outcomes for our clients in a variety of economic climates. While the largest regional contributors to this result came from our Canadian and U.S. operations, I'm also pleased to report that our U.K. and European capital markets expectedly returned to profitability during the third fiscal quarter. We continued to focus on managing these operations to provide consistent and stable results. Partially offsetting this increase was a decrease in our revenue of our Australian operations, which was primarily due to mark-to-market losses on certain fee-based inventory positions. Firm-wide advisory revenues increased by 25% year-over-year, with the most notable contributions from our U.K. and European business, primarily due to the completion of some significant advisory mandates during the period. It's also interesting to note that we achieved large gains in commission and fee revenues, which increased 35% year-over-year on increased activity in Canadian and the U.S. markets. Some of this gain was due to our acquisition of Jitneytrade, which we completed earlier this year, but also notable gains that we achieved in our competitive positioning. While firm-wide investment banking and advisory revenue decreased modestly compared to the same period a year ago, our U.S. and U.K. and European operations both recorded year-over-year increases. I'd also like to highlight that Canaccord Genuity was the top equity underwriter in Canada for all of calendar 2018, exceeding not only our independent competitors, but every major financial institution in the country. And now turning to the performance of our global wealth operations. Our combined global wealth management operations earned revenue of $116 million for our third fiscal quarter, a year-over-year increase of 6%, which was primarily driven by higher commission-based and interest revenue in our Canadian business. Adjusted pretax net income was unchanged compared to the same quarter of last year, reflecting higher compensation expenses and increased hiring incentive in connection with our growth strategy. At the end of our third fiscal quarter, total client assets in our global wealth business amounted to $60.2 billion, a modest increase compared to the same period a year ago, but a sequential decrease of 8.5% from last quarter. This decrease was entirely driven by market depreciation during the period. We also note that this drop is less severe than those observed in the global -- broader global equity markets. We are continuing to add growth across our wealth management operation, and a more stable market backdrop at the start of this quarter has supported a return back to our higher asset levels. As I've said many times before, we are deeply committed to investing in and growing these operations to offset the inherent volatility of our capital markets business and to contribute to long-term stability for our shareholders. Assets in our Canadian wealth business increased by 26% year-over-year, reflecting our recruitment initiatives into higher market values over the year. I'm also very pleased to report that this business has delivered its eighth consecutive quarter of profitability. At current asset levels, we can be confident that this business will continue to be profitable, and we are focused on our initiatives that will drive long-term margin improvements. The pace of recruiting in our Canadian wealth business remain strong, and we continue to engage in active discussions with its -- sorry, establish advisory teams in our key markets across Canada. Retention of existing advisers and clients remain strong and the culture and environment remains healthy. While the value of client assets in our U.K. and European wealth operations was also negatively impacted by market declines, we note that excluding significant items, pretax net income for the 9 month of this fiscal year has increased 35% year-over-year to $37 million. This business remains core, and we are continuing to explore opportunities to add growth in this operation, another strategic asset for our firm. Subsequent to the end of the quarter, we announced the addition of McCarthy Taylor, an independent financial advisory firm, which serves clients across the U.K. Midlands. The firm provides bespoke financial planning and discretionary investment management and manages client assets of approximately GBP 171 million. In addition to contributing further to growth of our client assets, this development expands our national footprint and broadens our offering of fully integrated investment and wealth management services in this important region. In closing, I am pleased with the business and financial growth that we've achieved in the first 9 months of our fiscal year, and we're looking forward to a positive, productive final quarter. By steadily evolving our platform and expanding our client focus, while staying true to our independent roots, we are an increasingly stronger competitor in both our capital markets and wealth management businesses. Our diversified business model has proven its inherent strength, which we will continue to build upon. Looking ahead to the end of our financial year, we anticipate the impact of market events that took place in December will continue to be modestly evident in our fourth quarter results for our global wealth management business. But on balance, the growth and stability that we're achieving in these businesses is expected to offset the market-driven declines. Our outlook for activity levels in our capital markets business remains constructive. While we are limited in our ability to predict the market, we are a dominant mid-market competitor in our core focus areas. CG Capital Markets is differentiated in our ability to support a vibrant market for small- and midsized companies and the investors who follow them. We expect to see a continued need to transact by companies and financial sponsors in all of our key markets as they strive to stay competitive in a rapidly evolving global economy. And finally, I'd like to thank Michael Petsky and John Prunier and Sanjay Chadda, who is here, and the partners of Petsky Prunier for choosing Canaccord Genuity as the platform to continue the excellent momentum they've achieved for their employees and clients thus far. We're very much looking forward to accomplishing great things for our clients and shareholders together. With that, we'll be pleased to take questions from analysts and institutional investors. Operator, if you can please open the line.
[Operator Instructions] Your first question comes from the line of Jeff Fenwick with Cormark Securities.
So obviously, I guess, the big news of the quarter here is that Petsky Prunier deal. Sounds certainly, from the description you gave, to be very complementary to that platform you've got going in the U.S. Just wondering, can you give us any financial metrics of the business there, the revenue or any earning metrics? Or how should we be thinking about the contribution here going forward?
Well, certainly, it's going to be accretive. I'm going to turn over to Don to give you the financial metrics of the business, and then Jeff maybe to give you a little bit color around that.
Well, we disclosed that the revenue for the 12 months ended December for Petsky Prunier was USD 43 million. And really, I mean, with private companies, I mean, net income is obviously a difficult measure to translate into, as it would appear in the public with the -- as a division of this company. But I think it's fair to say that it will certainly be accretive for this upcoming year.
Yes, Jeff, you can think about it, and Don can disagree with me, but you can think about normal comp ratios for that business in line with all our other capital markets business and a slight -- some slight fixed costs associated with it. But 25-ish percent overall margin contribution wouldn't be an unreasonable working assumption. Jeff?
Yes, I think, the important point here is that this is a very complementary business to us. Our research platform, our sales platform, our back office doesn't change under this scenario. It's not a big burden to manage a few engagements that come out of an M&A-type firm. And so the cost structure, the non-comp cost structure of this transaction is very low. It leverages our business extremely well. And there is very little overlap in terms of the sectors that they focus on and the sectors that we focus on within technology in the U.S.
And Jeff, I'll just finally conclude. I mean, you know that I originally come from the Genuity side of this Canaccord Genuity merger, I can't even remember how many years ago, a lot. But we know the advantage of having an M&A-focused shop and having an add-on equity capability. The transaction is accretive without those things. But to the extent that we can add incremental equity capability on to what is an incredibly strong M&A franchise that the folks here at Petsky have grown, will be very much incremental to the numbers that you see on the page.
Okay. And then maybe some modest charges here as you've taken in there restructuring. I imagine, there might be a little bit of overlap within your advisory team there today.
No, nothing, 0.
Nothing, okay. Okay, that's great. Why don't we move over to the wealth management side of things? I mean, certainly, point well taken with respect to the sell-off through the end of the year and how that weighs on these businesses. But when I look at the U.K., I notice there's a bit of -- looks like maybe a bit of expense creep there, and there's some commentary about supporting the build-out and integration. So can you maybe just offer up a little color around where we are in that. You're well into having them onboard now for a good period of time, should be getting some of the benefits of that business, getting the integration done. So how should we be thinking about being efficient versus investing in the business go forward here?
Yes -- No, I think one of our key strategic objectives over the next year and 2 in that business will be to push margins, improve our margins. And in fact, when you look at our business this quarter, you don't see that. And part of it was the sell-off and part of that also was a series -- I don't want to call them onetime charges, because that's not fair. But charges that we didn't expect, call it, legal settlements, stuff like that, that we don't see on an ongoing basis in that business. I think that's what most negatively impacted that business in the quarter. We continue to believe margins in that business will improve materially over the next 8 quarters, so -- but to industry-standard margins. So when you look profit before tax margins in that business, there's no reason, I think that we can't be pushing those up 5 to 10 percentage points over the next period of time as we realize the synergies of the business. So we continue to be excited by the financial prospects of that business. We continue to see them moving materially higher. I think this quarter was a particularly awkward quarter, again, because of some one-offs, not onetime, if that's a different word, type charges, that flow through that. Don, any additional color on that? I'm sorry, Don and I are in different locations. So...
Yes, I think, in terms of the margin improvement over the coming 8 quarters, I mean, we are now commencing, beginning in April, an integration program in terms of back-office systems and so forth. And I think there are some real-life plans in place that will contribute to that, and we can demonstrate that as we go forward in the coming year.
And then maybe just on the expense front. I did notice a bit of an uptick also just in the overall corporate overhead here, headcounts creeping a little bit higher. I know it's been a big focus over the last couple of years to keep that very tight there. So anything to take away from that part of the business?
Don?
I think in terms of, as revenue goes up and there's been some headcount creep with some of the additions of growth in some of the businesses, you get some natural creep in expenses. There is -- were some adjustments in terms of additional reserves for normal course, legal-type activity. The increased trading activity on the U.S. side just brings some large -- or not large, but increased trading costs. So you get some creep in that front. It's all very profitable business, but it just attracts additional trading costs. But we've got programs in place to very much monitor and manage and control those kinds of expenses.
Okay. And then actually, I want -- I did want to circle back, actually, at some other questions around the U.K. business here. Just -- obviously, a lot of volatility happening in that market right now, a lot of uncertainty around Brexit. Like how would you characterize that impacting both wealth and the capital markets businesses in the U.K.?
Yes, on the wealth side, virtually -- I don't want to say no impact, but negligible impact on the wealth side of our business. That business continues to be a domestic-to-domestic business. And we just generally don't see the volatility associated with Brexit as impacting that market. It's a very, very, very small portion of our assets that are U.K. to U.K.-type assets that are held in central Europe -- not central Europe, but held in Europe. So even a hard Brexit minimally impacts that business. Where there is an impact on Brexit is just the uncertainty associated with Brexit on a capital markets business. As we've told you before, people don't finance and people don't buy and sell each other when markets are volatile. It's same in Canada, be the same in the U.S. So that continues to impact it, and you see that in our results with one quarter, it was losing money; and the next quarter, it was making money; and then the next quarter, losing money. Too much volatile -- volatility from our perspective. So we continue to look at ways to minimize the volatility in that business and in our overall results. And clearly, whatever we do will benefit our employees and our clients and ultimately our shareholders in what we're going through.
Okay. And maybe one last one, if I may. The dividend policy, I mean, we're heading into your final quarter of the year. I believe you typically target paying 25% to 50% as a special dividend.
Correct.
Any thoughts to offer there? And I mean -- certainly, as we've seen the business become a much more consistent earnings performer, any thoughts here around that dividend policy potentially changing as we head into the next year?
Yes, we set the dividend policy for the year. And I'm not here with the board right now, but we set it for the year. It's obviously been a subject of discussion with the board. Our policy hasn't changed right now, which is, we're going to continue to pay, as you indicated, between 25% and 50% of our adjusted earnings out by way of a special dividend at year-end when you add up all the dividends for the year. So we don't expect to see a change to that in the upcoming quarter. That being said, we're going to get to our year-end meeting in June and discuss our capital policy, be it dividend, share repurchases, because we are earning a lot of money, and we expect to be in a pretty positive capital position. Today, we've been investing our capital and growing the business, right. We've added $8 billion of wealth assets. That costs us money. We've continued to do acquisitions in our U.K. capital -- our U.K. wealth business. That costs us money. So we've been supporting the growth of our business and then, as of today, we just announced the acquisition, obviously, in our U.S. M&A business. That all being said, we've earned a lot of money. So we definitely got to sit down with the board in our June board meeting and discuss what's going to be our dividend policy going forward. Just midyear, it wasn't the right time to have that debate. That debate will be coming up.
Your next question comes from the line of Marko Kais with TD Securities.
Just a couple of follow-up questions on the Petsky Prunier acquisition. I was just wondering how does the $43 million in revenue generated last year compare to, say, previous 5-year run rate? And also, about your accretion assumptions, are you factoring in the 20 million -- 1/3 of the 20 million shares being issued in a year 1 accretion? And then after 3 years, then full 20 million shares are potentially issued. I was wondering what kind of revenue and margins do to you need for this to be accretive.
Sure. I'll let Don answer the first question, and then Jeff will talk a little bit about the financial history of the firm. Don?
Yes. Jeff can go into some of the historical revenue, but $43 million is -- was a good year, but it's not -- it wasn't sort of an exceptionally off-the-charts kind of a year. It was sort of a continuing there sort of upward progression in terms of their own growth. In terms of the accretion, it's -- we are factoring in the additional shares being issued as part of the upfront consideration, contingent consideration is all cash going forward. And it's strictly a P&L contribution. I think as Dan described, you can kind of back into what a recurring P&L ought to look like from a $40-odd million business given that it's really the normal course overhead expenses and compensation. They tend to be generally fairly profitable businesses.
And so just, maybe, Jeff, from a historical perspective and the progression of Petsky over the last 5 years, how would you reference that?
I would say, it's been very consistent growth. The firm has grown. This was a record year. We've added key bankers in a number of areas, the pipeline today is very strong, both in terms of absolute engagements, just looking at that. But also if you look at the trends in the businesses, fee levels have gone up, minimum fees have gone up, the types of -- the size of transactions has gone up. All the factors that you'd want to see in a business that's growing and succeeding and getting to the next level have made steady progress over that time period.
I mean, this is going to over double our M&A revenue in the U.S. And quite frankly, probably add 30% to 40% of M&A revenue broadly in the firm. So it's going to be a material contributor. And again, Marko, maybe off-line, we can help you model it up a little bit. But certainly, our math suggests that at any reasonable revenue level, given the earnout nature of the agreement, that this will be an accretive deal to us.
Okay. That was great. Now moving on to Canadian wealth, just wondering about the recruiting activity in the pipeline. And then any color that you can provide us on the client inflows or outflows year-to-date 2019, that will be helpful.
What was the second part of your question, Marko? Sorry.
Just the color around the inflows or outflows in the calendar year-to-date. Just interested in the kind of retail client sentiment that you're seeing right now.
Yes. Let me address the first part of your question, Marko, and then we'll maybe recircle back on the second part because I'm still not sure I understand it. In terms of the recruiting pipeline, it -- these things change week by week, so it's hard to give an answer. But this week feels really good. We've got lots of -- we're having lots of active dialogue with a number of advisers. As I've said before, you don't really know if someone is showing up until they show up with a picture of their spouse and kids and stick it on the desk behind them. But right now, the pipeline remains strong. Nothing's fundamentally changed in the underlying backdrop, both at bank-owned firms and some of our independent colleagues in terms of what's going on. We brought on 35 teams of advisers since we've started this initiative, probably close to $8 billion of assets we've brought on. That's over 2 years, so you can do the math in terms of what we've brought on. We continue to see significant recruiting activity, and we're not going to stop that. We have material room to add people. And we're going to continue to add, and our average book of advisers has going up. So I see that trend continuing. And from a financial perspective, I think the important part you need to know is when we bring somebody on, it takes a little while, weeks, months, quarters, maybe, for them to fully bring on their assets. In addition, we have a number of charges when we bring somebody on. We've got to pay transfer-in fees. So that recruiting activity just adds to future profitability. We hire someone today, it's not accretive in the first 3 months. It's not even accretive necessarily in the first 6 months but certainly becomes materially accretive thereafter. So I think you're going to see that activity continue to add to our profitability. And as we said on our broader wealth business, we anticipate margin improvement in our wealth business over the next year, 2 years and 3 years, because of things that, quite frankly, we've already done. Now I'd like to address your second question, and I don't want to ask for a third time. But I'm not sure I understood it, Marko.
Well, I was just wondering the client flows year-to-date, how it...
Client flows, okay. Don, do you want to address that?
Client flows, I'm not sure...
Don, net client adds vis-Ã -vis market down, what our waterfall looks like.
Oh, I think, I mean, there is positive inflow, I mean, in terms of organic growth and in terms of new clients assets, I think. A large part of the growth is adviser additions adjusted for the market downturn. But the decrease in the quarter-over-quarter from September to December was all market-driven.
Okay. And just lastly, if I could, just about your cannabis franchise. Just trying to estimate what is the potential for your U.S. market opportunity. And how do you see the capital-raising activity playing out in that market? And then for Canada, are we still in the consolidation phase? Is that playing out? And how much of a runway do you have in this market from either underwriting or advisory capacity?
Sure. I mean, cannabis continues to be an important part of our franchise. We continue to be the dominant underwriter in the sector. Last calendar year, there was 26 deals by U.S. companies, 26 deals by U.S. companies raising money in Canada, and we book around 24 of them. That's a pretty significant market share, obviously. By comparison, let's say, Canopy, the leading Canadian company, raised money 10x. I'm making up that number, but I'm not going to be too wrong. Most of those U.S. companies have only raised money once. They've done their initial public offering. So by definition, there's a significant runway of capital markets activity from U.S. participants. There's also significant M&A activity in the U.S. participants. It's a bit of a land grab in the U.S. as state by state by state, you see both medically and adult-use markets open up. So we continue to be engaged strategically with many of our most important clients. So we see good M&A pipeline going forward. In Canada, Canada continues to be an exciting market as well, although more mature. So that's -- but that activity won't stop and obviously, we have more competition with Canadian companies than we have with U.S. companies given that Canadian companies tend to be able to list on NASDAQ and have a broader group of underwriters, who will participate in that activity. And then finally, what you didn't ask about, Marko, is our European market. I mean, the European market is -- now look, we're in the first or second or whatever inning of the U.S. market. We haven't even started the game in Europe. And we'd been spending a lot of time, effort and energy in terms of both our advisory and financing capability for potential European entrants into the market. Still premature to say that's going to be a material contributor, but certainly, will replace any activity slowdown, from a Canadian standpoint, over time. So we continue to be excited by the market. Probably -- it certainly is less than 20% of our overall capital markets revenue, but it's a material and significant contributor to what we do for sure. Did that address all of your questions on that side?
Yes.
Your next question comes from the line of Jeff Fenwick with Cormark Securities.
I just have one additional question for you. Just with respect to the investment in growth, and one of the things maybe Don can help with is, when you look at your balance sheet, it's not always easy to know how much of the cash that's sitting there is actually available for the corporation to look at opportunities. So out of that sort of $900-plus million you've got sitting there, how would you characterize what's available to Canaccord Genuity to help support its growth?
Well, I think the -- rather than just looking at the cash number, I think, you really need to look at the working capital number. And that's what we generally consider capital available. But obviously, a lot of that capital is deployed in supporting the different businesses around the organization. In order to run a trading business -- active trading businesses in the U.K. and then in the U.S. and Canada, obviously, you need to deploy capital into inventories, deposits, margins that kind of thing. And with the capital raising side of the business, capital is deployed in terms of margin to support that capital raising ability. So there's lots of capital there, but it's just actively deployed in terms of supporting the business. In terms of initiatives, such as the Petsky Prunier acquisition, the capital is available to engage in those kinds of transactions. Sometimes it requires redeploying existing capital from one activity into another activity. So I think that's the way to look at it.
Yes. And so Jeff, Don will give you the right answer. But when I look at the business, I say, okay, we've got a number of strategic initiatives we're pursuing, be it the Petsky Prunier acquisition, other wealth acquisitions we'll be looking at or constant recruitment drive for Canadian advisers, plus our dividend policy, plus our share repurchase activities, and clearly, we believe we have sufficient capital to undertake all of those activities right now. So both from a shareholder perspective, returning capital by way of buybacks and dividends plus our strategic initiatives in terms of growing our 2 wealth businesses and the recent acquisition we did, we don't really see a need to call on shareholders' capital to pursue those activities.Operator, is there any other questions?
There are no further questions at this time. Please continue.
Okay. Well, that concludes our call for today. Thanks so much for taking the time to join us. I know this is a busy period for everybody with a lot of companies reporting. So we look for -- we look forward to providing you with another quarterly update in June with our fiscal year-end results. So thank you very much. Bye-bye.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.