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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 2020 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, operator. And thanks, everyone, for joining us again here today for today's conference call. As always, I'm joined by Don MacFayden, our Chief Financial Officer. Following the overview of our quarterly results, both Don and I will be pleased to answer any questions from analysts or 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 financial and operating results of Canaccord Genuity Group Inc. The company's actual results may differ materially from management's expectations for various reasons that are outlined in our cautionary statement and in the discussion of our risk in our MD&A.Our discussion today may also include certain non-IFRS financial measures. A description of these non-IFRS financial measures and their reconciliation to comparable IFRS measures are contained in our quarterly release and MD&A for the fiscal quarter.By now, you've all likely had a chance to review these documents and our supplementary financial information, which were made available yesterday evening. They are available for download on SEDAR or on the Investor Relations section of our website at canaccordgenuitygroup.com. We've also posted our quarterly investor presentation to our website. I won't cover the entire presentation during this call, but I will refer to certain slides to guide our discussion.So now let's review the highlights of our third fiscal 2020 results. Overall, our business performed well. Our results underscore our consistent progress against our strategic initiatives. Fiscal third quarter contribution from across our operations were within target ranges and all our business units contributed to our firm-wide profitability.As outlined on Slide 6, we generated quarterly net revenue of $308 million, which were up 14% and down 7% from a record quarterly results last year. For the 9 months year-to-date period, revenue amounted to $904 million, roughly flat compared to the same period last year. Excluding significant items, we generated quarterly net income of $31 million for the 3-month period and $98 million fiscal year-to-date. On an adjusted basis, third quarter diluted earnings per common share was $0.23.Our net profit margin was 9.9% for the quarter, an increase of 1.1 percentage point sequentially and down from the 11.1% in the third quarter of last year. We continue to actively review efficiency opportunities. As part of our ongoing efforts to control and maintain our cost, we have identified strategies, which we believe, will reduce our annual cost base by approximately $20 million going forward, with a focus on lowering both our compensation ratio and our non-compensation costs.We expect to implement these strategies during the remainder of this fiscal year and over the course of fiscal 2021. This focus will result in continued momentum to control our expenses and help us achieve our sustainable margin growth objectives.On the back of 3-plus years of profitability of our U.S. capital markets, we were required to recognize $6 million of deferred tax assets in this operation during the third quarter, which had not been previous -- which had not been recognized previously because of the historical losses in the region.And finally, underscoring our commitment to enhance shareholder return, we've successfully returned over $77 million of capital to our shareholders during fiscal 2020.In addition to our increased common share dividends, we have completed approximately $46 million of share repurchases, reducing our common shares outstanding by nearly 7.2% since the end of fiscal 2019, and we anticipate continued buyback activity. I'm also pleased to report that our Board of Directors has approved a quarterly dividend of $0.05 per common share.Our ability to increase capital returns to our shareholders has been driven by the stability that we've gained through our global wealth business. So let's turn to the performance of that segment now.Turning to Slide 9. You can see we remained on pace to achieve our Mission 2022 objectives for this segment. At December 31, client assets grew to $72.8 billion, an increase of 21% compared to the same period a year ago. I will note that roughly $3 billion, 1/4 of this growth is attributed to the acquisition of Patersons Securities in Australia, which was completed in late October. Total revenue contributed by our global wealth business for the 3- and 9-month periods increased by 11% and 8%, respectively. When measured on a fiscal year-to-date basis, our combined global wealth business contributed adjusted pretax net income of $63.6 million, up 8% year-over-year. This translated to an adjusted earnings per share contribution of 59% for the first 9 months of fiscal 2020.Third quarter revenue in our U.K. and wealth management businesses increased by 15% compared to the same period a year ago, primarily due to higher commission and fees, revenue and contribution from the Thomas Miller and McCarthy Taylor acquisitions. Excluding significant items, the pretax net income contribution from this business was $14.3 million, an improvement of 35% over the same period a year ago.For the first 9 months of fiscal 2020, the adjusted pretax margin in our U.K. wealth business improved to 20.7%, up from 19.4% for the same period last year. We anticipate continued margin improvement as we advance our organic growth objectives and realized synergies from the businesses we've acquired in this region.Client assets in our Canadian wealth business increased by 15% year-over-year to $21 billion. The pretax profit margin in this business decreased to 9% for the 3-month period, a reflection of the suppressed new issue market and higher margins associated with new issue activity in this business. We continued to experience steady recruiting momentum in the Canadian wealth business as we focus on attracting high-quality advisers with stable and scalable books of business.The average book size per IA team in this business has increased by 17% year-over-year and an impressive 66% over 3 years to $143 million per adviser. Total revenue contributed by our Australian wealth management business was $11 million, up from $1 million a year ago and also reflects the contribution from our acquisition of Patersons Securities, which we closed on October 21. I'll remind you that Paterson operated on a breakeven basis prior to our acquisition, and we expect to extract greater value from the expanded business over time, as this team leverages the CG platform to grow its share of income-producing assets from existing and new clients.Across our global wealth operations, we remain focused on driving margin growth as we unlock greater value through sharing of best practices globally, continually advancing our technological infrastructure and reducing our non-variable costs.And now turning to the performance of our global capital markets business. A healthy level of client engagement supported a productive quarter in all our geographies. In the context of lower overall volumes in our key mid-market sectors, our investment banking performance was solid. We participated in 108 investment banking transactions globally, raising total proceeds of $8.7 billion for our clients during the fiscal third quarter. Excluding significant items, this contributed to pretax net income of $16 million for the third quarter and $45.2 million for the first 9 months of fiscal 2020.Globally, our capital markets business earned revenue of $174 million, a solid quarterly result by historical standards and an increase of 17% sequentially. When measured on a year-over-year basis, the lower investment banking and commission and fee revenue earned by our Canadian, U.S. and U.K. operations in the quarter were partially offset by the higher advisory fees when compared to Q3 of 2019.The total revenue for the third fiscal quarter amounted to -- the total advisory revenue amounted to $60.6 million, the second highest quarterly result in our firm's history. Our total U.S. capital markets business was the largest contributor to total capital markets revenue for the 3-month period, having reached $82.2 million. This includes a 125% year-over-year increase in advisory revenue, reflecting contributions from the Petsky Prunier acquisition, which closed in the fourth quarter of fiscal 2019.Revenue in our Canadian capital markets business was $48 million for the third fiscal quarter, which was down from an exceptionally strong third quarter for investment banking activity in the prior fiscal year. We continued to be a top ranked domestic underwriter in Canada. For calendar 2019, Canaccord Genuity was the #1 underwriter for IPOs and the #2 equity underwriter in Canada based on league tables provided by Bloomberg. I encourage you to look at those league tables on Slide 16 and 17 of our investor presentation, which highlights the strength of our franchise in North America.I'm also pleased to report that our U.K. and Europe capital markets business is on track to achieve profitability for the full fiscal year. Excluding significant items, this business earned pretax net income of $3.4 million. Notably, the completion of several advisory mandates during the quarter led to a 13% year-over-year increase in advisory fee revenues in this business.And finally, despite lower investment activity in the U.K. markets, I'll note that our team has advanced 7 spots to achieve a lead ranking for the number of aimed transaction for calendar 2019. Activity level in our Australian capital markets business improved markedly during the quarter. And this business recorded a year-over-year revenue increase of $6.8 million or 108% on higher investment banking and advisory activities.As we continue to move forward with the integration of Patersons Securities and leverage the strength of our expanded national footprint, we anticipate increasing contributions from both our capital markets and our wealth business in this region.I'd also like to highlight the diversification of our firm-wide revenue mix during the quarter, which can be seen on Slide 18. In addition to increasing contributions from higher-margin advisory activities, the technology and mining sectors contributed 38% and 12%, respectively, to our combined banking and advisory revenue.Overall, pipelines are healthy across all products in our fourth quarter, and we're positioned to continue to gain share in our key mid market-focused sectors in all of our geographies. As always, converting the pipeline to completion remains dependent on market conditions. While the completion of the Brexit bill and the recently announced trade agreement between the U.S. and Canada removed some, but not all uncertainty, event risk for our industry remains elevated.We move forward into the final quarter of fiscal 2020 with good momentum in our business activities in both capital markets and wealth management, coupled with a strong conviction that we have the right strategies in place and defensive revenue mix that positions us to deliver more consistent results throughout the economic cycle. With the progress we've made to improve our market position in each of our businesses and geographies and our targeted expense reduction plan, we expect to see sustained margin expansion, barring any meaningful disruption to the markets. As we execute on this next phase of our firm's evolution, we expect to further enhance profitability and grow returns for our shareholders.And with that, Don and I will be pleased to take questions from analysts and institutional investors. Thanks, operator, and we can open the lines.
[Operator Instructions] Your first question comes from Rob Goff of Echelon.
Perhaps, could we start off in the U.K., where with the U.K. capital markets now profitable, is there any consideration to going a little bit wider perhaps in terms of the scope? And also more broadly, can you discuss MiFID and how you've seen that realign the industry? Any opportunities you might see from that?
Yes. I mean, I think our key strength in all of our target markets, Rob, is to be narrow and focused. Like we got to be good. We got to be really good at something to our clients and not trying to be really good at everything to everyone. So I don't see us broadly expanding our focus in any of our key markets, U.K., U.S., Canada or Australia. So there'll certainly be people upgrades, there'll certainly be additions to -- in that business, and we're going to continue to invest in it, but not go more broad. From a MiFID perspective, I mean, most of it's played out at this stage in our financials. Again, we had -- I said this a while ago, and it's a good question. But we knew MiFID was coming 3 years ago or maybe it's 4 years ago now, like there's -- nothing was a particular surprise, to be honest. We changed our research format. We changed some of the sectors we were covering. We kind of adjusted our cost base well in advance of MiFID coming in place in the U.K. and, quite frankly, coming in place to certain markets in the U.S. and Canada and Australia. So yes, I don't see MiFID impacting our results one way or another at this stage. I gather, if there was going to be an impact, and I think it would be negligible, it probably will be positive, not negative as it plays out.
And if I may, as a follow-up, could we drop down to Australia. And could you talk to where you are in terms of the integration and perhaps more the coordination that you're seeing there with the capital markets?
Rob, it's Don. I think we've -- the integration is advancing well. It's been progressing kind of on track, on target. It involves some integration and movement of offices as there's some combination of teams. The 2 units are working well. As we talked about, the wealth management business of Patersons is a natural fit with the kind of capital markets activity that we do, that we already have in Australia. There is new issue participation. It is a bit of a small cap orientation. So there's a natural fit, and we're seeing that play out. So I think it's sort of on track, on target and going as planned.
And one other point I'd make, Rob, is our wealth businesses globally are becoming slightly more integrated. We did have global wealth off-site in London last week, where all our senior people from each of our respective wealth businesses got together. That really hasn't happened before. So it's nice to see sharing practices across the wealth businesses as well.
Your next question comes from Graham Ryding of TD Securities.
Maybe I'll just start with the target of hitting a 20% pretax margin for your global wealth business. Is that impacted at all with bringing Patersons into the mix? And if capital markets activity in Canada is soft, does that weigh on -- does that impact at all the target of hitting 20%?
No. We're going to hit 20%. That's the -- there's no option there, Rob. There's no option there, Graham. The -- no, I just think it was a soft quarter for -- I don't want to say onetime reasons. The margin was soft. And I don't want to say for onetime reasons because that's silly. But when you really kind of dig through it, there was 0.5 point here and 0.5 point there and 0.5 point there. We remain very confident in our overall margin assumptions. I think it's tough sometimes to measure these things on a quarter-to-quarter basis. But -- no, we remain very comfortable with both our revenue targets and our margin targets in our wealth business as we articulated.
Okay. That's helpful. And just Patersons, in particular, what is the strategy or visibility there on moving that business to a more profitable level? Does it require ticket or...
No. I mean, there will -- ultimately, we'll be recruiting, but you don't renovate your kitchen when your basement is falling apart. So I think our first objective is to make sure we stabilize that business really well and put the technology and systems in place. It's already was a good business, but now it's -- we can make it even a better business. So that's been our focus. And then ultimately, we are receiving a lot of attention in that market about people wanting to join us. I think we're being prudent in taking our time on that. We've been -- our Australia capital markets business has been involved in a number of very high-profile transactions recently in that market, in the mining space, in particular. I think the Patersons' advisers appreciate the access to enhanced deal flow that they've seen in the past. Integration is going incredibly well. To address Rob's earlier question, I mean, we're looking at even further integration efforts and operating even more as one firm very quickly. So I'm reluctant to overplay Australia. It was a relatively modest acquisition. And we never really built those numbers into our forecast and nor do I want or need to do that at that stage. It doesn't mean that we're not very positive about the business. I'd rather do a little bit of show you than tell you.
Fair enough. On the -- the non-comp expense was higher this quarter, but you did talk about surfacing $20 million in savings in fiscal 2021. And can you give any color on what the plan is? Or where you're going to surface those savings from?
Yes. A chunk of it will be comp, whether it's comp in terms of comp per person or a number of people, but we've certainly identified a big chunk of that savings being comp savings. The other big chunk will be non-comp, things like market data and G&A. I mean, I think you know this business as well as anybody. When you go from a period of extreme activity to a period of less activity, sometimes the expenses don't -- those fixed type of expenses don't follow as quickly as they need to. So I think there'll be an effort by our senior business leaders to bring down some of that non-comp expense pretty aggressively.
Okay. Jumping to your Canadian wealth management platform, the recruitment level has fallen off versus sort of the last few years. So I think your adviser count is down 5% from when it peaked in fiscal 2019. Can you talk about the environment for recruiting and retaining advisers?
Yes. I mean, again, I don't want -- I want to be careful with what I say. I don't think we have lost a single adviser that we are concerned about. So any of the transition you would see in the number of advisory teams would be very much at the small end of the scale, and that would be kind of a natural transition. We're certainly focused on the book size of our advisers, and that continues to go up, as you can see, as do our overall assets go up. So we're running at close to $150-ish million now I think. Don?
Yes. I think it's $143 million for advisers.
So that's very, very active. And the recruiting activity, you can't see and maybe we need to disclose it better in fairness. The number of good quality advisers coming on board because the recruiting activity hasn't really slowed. I think there was maybe a slight slowdown as some other firms were in the middle of transitioning, but I suspect we'll see a pickup in that activity over the next couple of quarters. Nothing has materially changed from the plan that we have talked to you about and nothing -- we don't suspect our actual pace of activity to slow down because it has been reasonably robust.
Okay. And just a small one on the tax rate. Tax rate, it was obviously low this quarter. Is that more of a onetime dynamic? Or are you required to sort of book these tax assets going forward?
No, it will be -- it's basically a onetime dynamic. We had deferred tax assets that hadn't been recognized. And the accounting rules are such that you have to pass certain taxes before you can recognize them. And with the consistent profitability we've had in the U.S., it just came to the point where we needed to recognize them now. It's accumulation of tax benefits associated with historical losses way back in the past as well as timing differences related to accounting and tax.
Okay. What's the normalized tax rate that we should be modeling going forward?
I think if you look historically in the low 20%, 22%, 23%. I think, historically, we sort of range between 20% and 25%. It's really a mix of the profits from the different regions, which have quite a wide variety of the tax rates. But generally, in that low 20s is probably the way I think about it.
Okay. Great. And if I could be greedy, just one more on the dividend. Is there a payout ratio you're targeting? I can't remember the strategy there, but how should we think about the potential for any dividend increases going forward?
Yes. Hopefully, we'll have an increasing dividend going forward. No. But the strategy that we've articulated, which I think is a good one, as we said, we will pay $0.05 a quarter and increase that as our wealth earnings increase. So you could see that we've done roughly $0.11 or $0.12 in wealth earnings for the last couple of quarters that hasn't given us the impetus to raise that dividend. But clearly, the idea was, let's stay -- let's base our dividend rather than on overall earnings on something that's relatively predictable, like our wealth earnings. So that will be the idea. As our wealth earnings go up, you should see our common share dividend continue to increase.
There are no further questions at this time. I will now turn the call to Mr. Daviau.
Well, thanks, and thanks to everyone, again for joining us today, and we'll certainly look forward to delivering our fourth quarter and fiscal 2020 full year results, it will be obviously early in June, a little later. So thank you, operator, and we're certain -- and we can disconnect.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, please disconnect your lines.