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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 Fourth Quarter and Year-End Results Conference Call. [Operator Instructions] As a reminder, this conference call is being broadcast live online and recorded. Now, I'd like to turn the call over to Mr. David (sic) [ Daniel ] Daviau, President and CEO. Please go ahead, Mr. Daviau.
Thank you, it's Dan Daviau. Thanks, operator, and thanks, everyone, for participating in the conference call. I'm joined by Don MacFayden, our Chief Financial Officer. Also just in the room here with us today is Pat Burke, our President of Canada and Nick Russell, our Senior VP of Finance. Following in the overview of our fiscal fourth quarter and year-end results, both Don and I would be pleased to answer questions from analysts and institutional investors. A reminder you that our remarks and responses during today's call may contain forward-looking statements that involve risks and uncertainties related to the financial and operating results of Canaccord Genuity Group Inc. The company's actual results may differ materially from management's expectations for various reasons that are outlined in our cautionary statements and in the discussions of 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 the comparable IFRS measures are contained in our earnings release and MD&A for the fiscal quarter. By now, you've all likely had a chance to review the 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. So now let's review the highlights of our fourth quarter and fiscal year-end performance.Canaccord Genuity Group earned record revenues of over $1 billion for 2018 fiscal year, and $322 million for our fourth fiscal quarter, increases of 16% and 19%, respectively. Our pretax net income for the fiscal year was $111 million, an increase of 81% compared to a year ago. This translated to diluted earnings per share of $0.59 for the fiscal year, and our fourth quarter contributed $0.28 to that amount. We've now begun to break out earnings per share by business segment. And for fiscal 2018, we estimate that our Global Wealth Management business contributed $0.36 or about 60% of our total EPS, with the remaining $0.23 contributed by our global Capital Market operation. Against a generally favorable backdrop for growth stocks, our capital markets and Wealth Management business both contributed to our profitability for the year. Our pretax profit margin for the fourth quarter was 16%, while it was 11% for the full fiscal year. With a refocused and aligned capital markets business and a newly expanded Wealth Management business, we improved our operating leverage and achieved our goal of making our business less susceptible to changes in our operating environment. In keeping with our entrepreneurial and agile culture, we made several moves designed to add value to our shareholders, while prudently managing our capital expenditures and ensuring appropriate risk management for our business. The most significant development for the fiscal year was the acquisition of Hargreave Hale. And this was financed without diluting shareholder value. Last night, we also announced that we agreed to increase our ownership stake in our Australian business to 80% from 50%. For a relatively small increase in our diluted common shares, we achieved our objective of more closely aligning this business with our global platform. This operation has steadily increased its contributions to our overall group results since our initial investment back in 2011, and we look forward to capturing a greater share of this growth while we explore opportunities to expand our Wealth Management business in the region and increase contributions from the Capital Markets business. We can also expect that our acquisition of Jitneytrade and its related technology business, Finlogik, will meaningfully increase our margin leadership in our Canadian trading business. This development also helps to advance our technological expertise as we look forward to the potential future development of Fintech solutions to support continued growth across our Wealth Management operations.While it takes some time for the impact of most of our recent efforts to be fully reflected in our results, our shareholders have responded favorably to our move so far. The common value of our common shares on the last trading day of fiscal 2018 increased by 36% compared to a year ago. Our book value per diluted common share improved by 12% year-over-year to $5.71. And factoring in our dividends, our total shareholder return improved by 12.2 percentage points to 39.1%. As many of you are aware, we have made it a major priority to appropriately adjust our cost structure. Over the past 2 years, we achieved our goal of removing a significant amount of fixed cost from our operations. Despite higher cost from increased business activity and the expansion of our WealthManagement operations, we reduced our firm wide expense ratio by 3.6 percentage points for the fiscal year. In keeping with this objective, equity participation continues to be an important element of our partnership culture. At the end of the fiscal year, we took additional measures to better align our compensation strategy with the longer-term performance of the business by shifting the performance goals from a revenue base to a long-term profitability base.A significant portion of senior officers compensation, including my own, will be -- now be in the form of PSUs. And the future payment or payout will be conditional on the achievement of certain market-based and financial performance matrices over a multiyear period. Effective March 31, we also made certain non-substantial changes to the company's long-term incentive plan, which governs our share-based award program. These changes had the effect of causing a change in the method of expensing these awards. So they are now expensed in the period they are deemed earned rather than over their vesting period. With this accounting change, the cost of share-based awards granted in respect of fiscal 2018 as well as the unamortized expense of outstanding awards granted prior to fiscal 2018 were expensed in the fourth quarter. This created an additional charge of $48.4 million. This amount has been treated as a significant item for the purpose of determining our fourth quarter and our fiscal 2018 results.We provided significantly more detail in our MD&A and related disclosure. But in a nutshell, the change better provides matching of revenue and expenses in a period. I'd also like to note that a similar treatment of share-based awards has been in place for a number of other industry participants for years. We believe this approach will result in greater transparency of financial results. Importantly, share-based awards are generally covered through shares held in employee benefits trust. So this change in accounting treatment has no impact on our cash or our book value, or our regulatory capital. And with that, I'll briefly review the performance of our operating businesses. While our capital markets business was the largest contributor of revenue for the fiscal year, the most significant growth was achieved in our Global Wealth Management operations. Our strategic shift to strengthening contributions from Wealth Management has been an important driver of our performance, and one which will improve the stability and predictability of our earnings over a longer-term. At the end of the fiscal year, our total client assets increased by 59% to $61.3 billion. Globally, Canaccord Genuity Wealth Management generated $370 million of revenue for the fiscal year, an improvement of 39% compared to a year ago and a record for this segment.Our combined growth -- our combined Global Wealth Management businesses nearly doubled their pretax net income contribution for the fiscal year to $57.5 million. This amounted to 48% of the fiscal 2018 pretax net income for our combined operating businesses or approximately 60% of the earnings on an adjusted EPS basis, as I had previously mentioned.Revenue in our expanded U.K. and Europe Wealth Management business increased by 49% year-over-year to $201 million for the fiscal year. When compared to the same period last year, fourth quarter revenue in this business almost doubled to $65 million. Pretax net income for this business increased by 35.5% year-over-year to $37 million for the fiscal year. Although we incurred higher operating costs resulted from the expansion of this business and our increased headcount, the profit margin remains strong. With the combined platforms being much larger and more diversified, we have a stronger offering for our clients in the region and a stronger foundation from which we can expect further margin expansion as we grow.Revenue in our Canadian Wealth business also increased by 28% for both the 3- and 12-month period to $51 million and to $169 million, respectively. This business contributed pretax net income of $20 million for the fiscal year, a substantial improvement from just the $2 million simply 1-year ago. Since we began our restructuring efforts in 2016, we've added advisory teams and new clients representing over $5 billion in assets. We've meaningfully strengthened our competitive position as the leading independent Wealth Management business in Canada.Assets in this business increased by 18% over the fiscal year to $15.6 billion. And after the end of the year, we continued to welcome new advisory teams and additional assets in Vancouver, in Winnipeg, Edmonton and Toronto, increasingly from our competitors with both the banks and our independent competitors.We began -- we begin the 2019 fiscal year with the strong growth trajectory across our Global Wealth Management businesses. With an unwavering commitment to support growth in ways that enable the most productive relationships with clients. We are well positioned for future organic growth and seamless integration of new clients and portfolios. As we help our investment professionals in all regions continue to drive asset growth from new and existing clients. And now, briefly turning to our Capital Markets business. For the 12-month period, our global capital markets division participated in 455 transactions to raise proceeds of $34.5 billion for our global growth clients, $9.5 billion of which was raised in the fourth fiscal quarter. With the support of backdrop for growth stocks, we reinforced our market position as a leading independent investment bank and advisory firm for mid-market growth companies.Fourth quarter was our strongest revenue period in the fiscal year. For the 3-month period, our global capital markets teams earned revenue of $201 million, bringing this segment's revenue for the fiscal year to $638 million, an improvement of 7% from a year ago. While we've steadily increased revenue, we've also captured greater efficiencies and strengthened our execution segments, our capabilities across this segment. Improved collaboration between our business and regions has helped drive incremental revenue growth and position Canaccord Genuity to lead the market in emerging high-growth sectors, such as cannabis and blockchain. Because of our efforts, revenue per employee in our global capital markets business has improved by an impressive 38% since we began our realignment initiatives in fiscal 2016. Our Canadian Capital Markets business maintained its lead as the dominant independent investment bank in the country for both number of transactions and total amount raised. This has continued into the start of our 2019 fiscal year. Total revenue in this business segment increased by 39% year-over-year, driven primarily by increased investment banking activity, which nearly doubled over the 12-month period to $125 million. Advisory activity in Canada also strengthened, primarily attributable to our engagement in notable transactions in the Canada sector in the fourth fiscal quarter, which led to a 174% increase in advisory revenues compared to the fourth quarter of our last fiscal year.We achieved significant profitable growth in our U.S. capital markets operation. Our pretax net income in this business grew to $5.3 million for the fiscal year where the total revenue contribution was in line with prior periods. Revenue from advisory activity in this business increased 48% year-over-year. We also experienced strong flows across our institutional equity business, and our teams in the region continued to gain market share with notable strong growth in the International Equities Group. Our team in the U.K. and Europe and Dubai have continued to be productive and, despite a slow start to the fiscal year, this region delivered positive results in the last 3 consecutive quarters. Revenue generated from investment banking in this business increased by 33% year-over-year, and we've seen particularly strong advisory activity from our Paris team.And finally, our Australian Capital Markets business delivered another strong performance despite the brief loss of momentum for growth stocks in early in the year, I return to robust activity levels for small-cap equities in our core focused sectors led this business to deliver a record revenue result for the second half of the fiscal year. We look forward to continuing to harness greater opportunities through our increased investment in this business.Although volatility is an inherent feature of our capital markets business, the industry at large feels to be on reasonably solid footing. Our overall pipeline for investment banking and advisory activity remains healthy, and we are positioned for continued strength in our sales and trading businesses.I'm encouraged by the depth and quality of the people on our platform, and their ability to form trusting relationships with leaders of some of the world's most compelling growth companies and industries. That's what drives our investment banking and origination activities. And that's why we're seeing increased opportunities in M&A. Overall, I continue to be pleased with the progress we've made to create a more predictable business with greater consistency of earnings. We've a solid capital position, which protects our capacity to increase business activity and enhance our earning capability, while being prepared for development outside of our control.At the end of the fourth quarter, our company had $576 million of working capital and $863 million in cash and cash equivalents. In connection with our commitment to return a portion of our earnings to shareholders, I'm also pleased to confirm that our Board of Directors has approved a dividend payment in the amount of $0.12 per common share, comprised of $0.01 based quarterly dividend and $0.11 supplemental dividend. We ended the year with strong performance and an increasingly positive outlook for both our Wealth Management and Capital Markets businesses.We've worked hard to increase stability in our business. And the changes we have made delivered the added benefits of driving enhanced outcomes for our clients and making us a stronger competitor in everything we do. I believe that a significant market share opportunity exists for the differentiated offerings of an independent investment bank in Wealth Management firm. And I'm confident that Canaccord Genuity is best positioned to capture this share. We know that continuing to advance our business will require an ongoing discipline and commitment across the organization. We will continue to evaluate ways to enhance our earnings capabilities across all of our operations. At the same time, we will make disciplined investments in our business, broadening our technological capability and further developing our digital offerings. Our efforts will always be centered around delivering a differentiated service to our clients and increasingly the value -- and increasing the value of our business for our shareholders. And with that, Don and I will be happy to answer questions from institutional investors and analysts. Operator, thanks, and if you want to open the lines.
[Operator Instructions] Your first question comes from line of Jeff Fenwick with Cormark Securities.
Dan, why don't we start with the Wealth Management segment there, start with Canada. I mean, some good progress in terms of new teams on board and it seems like that the offer you're putting in the market there is resonating. Can you give us a bit of color on what sort of profile adviser is this offer from Canaccord resonating with? And is there any commonality around what they're looking for when they move over to your platform?
Great question, Jeff. I mean the advisers we're looking for are, generally speaking, more substantive advisers. Certainly I don't think we've hired an adviser with under $100 million book. I mean, the average book is, I'm looking at Don when I'm answering this question $250 million.
Yes, in that ballpark, yes.
Maybe even a little higher. In terms of the average adviser that we bring over, the average adviser would be $250 million adviser. That's really looking for a platform that they can continue to expand and continue to develop their relationship with their clients. So for certain advisers being on a bank platform makes a lot of sense. Others, they are looking for an independent platform, whether it's because they're -- have a range of offerings that a bank won't support, they have a range of products that a bank won't support or quite frankly, they are not getting the value add from a bank offering and think that their share of that contribution is being too significantly taxed.So those are the people that are coming over. Generally speaking, if you're very long in your career, you're not going to make that transition. So generally speaking, these are people that still have 10-plus years in their minds left in their career. And I think, what's really happening -- I think that trend is continuing to accelerate. We continue to see a number of people coming out of the bank organizations. And again, not to say anything about any of my independent competitors, we seem to be a place they want to go. There is not a lot of places, first of all, they can go, which is not a lot of big independent platforms left in this country. And when they are making their choice, it seems like we're winning our disproportionate share of those advisers as they come over. What we've seen of late, and I mean of very late, is in fact some advisers transitioning from other independent platforms to us. So we're starting to see that trend accelerate as well.
And, I guess, one question is, how much does your current offering coming to the capital markets business resonate with these folks? I mean, I'm thinking specifically at cannabis here, I mean may be that's little bit too much of a short-term trade for somebody to look at in terms of moving their book over to you?
I would say, of the 5, I'm making this number up Jeff, but I'm not -- and that's a great question. I'm happy to answer -- you asked that, but I would say of the $5-ish billion of assets we've recently attracted, $4.8 billion of it, and I'm making up that number obviously, and I'm probably exaggerating a little, they're pure wealth assets that have nothing to do with our new issue offering. The vast, vast majority don't participate in new issues.
Okay, great. So why don't we move over to the U.K. I mean, still in the first year of having Hargreave Hale on board. Can you give us a bit of an update on how that integration effort is going there and any update on the synergies as well that you're looking to get from that business?
I'll let Don speak to the synergy point in a minute. From an integration perspective, there is a number of things to do in integrating a business. And because the transaction was accretive from the day we did it, we elected and ensure that we're protecting the value of the business by slowly integrating the business. That's what we articulated when we did the -- when we closed the acquisition in September, as you're aware. And we had 6 months of the acquisition in. We've earned $0.36 a share, as I indicated in earnings from our wealth business, that's only with Hargreave in. So you can imagine that number is probably higher on an annual basis or certainly on a quarterly basis. So they've moved into our London office. We've repriced most of the advisers onto our pay schedule and our pay grid. We've officially changed the name on the wealth side of the business to Canaccord Genuity Wealth. That's already done. On the asset management side, everybody has moved in. We've repapered a lot of the employees in terms of -- onto our contracts. So the integration is going as well as expected. We've lost a couple of people. Most of that is by our choice. We've realized the synergies that I think we've -- probably in Don on an expedited basis than what we were initially expecting.
Yes. I mean, the acquisition wasn't really driven by achieving benefits in synergies, it was, as we've seen it's been immediately accretive on a standalone basis. Synergies will evolve and materialize over time, as the operations become more and more integrated. And when we sort of -- sometime in early fiscal 2020, the operations will actually be combined and they will be on common platforms and so forth, and that from an operational perspective we'll start to see the synergies really start to develop. But as I said, the acquisition wasn't driven by achieving by the benefits of achieving synergies. It was something that was to come and we're really on pace in order to achieve that. But it's a 12- to 18-month process.
Yes. And then importantly, you'll remember, Jeff, with the 8 offices they have, it provides that platform for growth. So as I -- as we alluded to in the past, we're not done. I mean, in our offshore businesses, we have significant market share. But outside of London, where we have 7 other offices, there's very good opportunities to continue to stay in that business, which we're actively looking at.
Okay. And I guess, I asked both the integration side of things, I know that often can cause a bit of attrition on the asset side of the business, and I noticed that it was down. You mentioned 4% sequentially there. So just wondering if that was a factor in the moment of the way or were there some other factors at play?
No, I don't think there has really been any sort of drift away in terms of assets. I think, I mean, it is subject to market movements. So I think some of that may have just been market driven.
Yes. Looking through their asset build and then the vast majority of that, maybe even more than 100% of that has been active movement.
And -- so, okay. Why don't we move on to capital markets here in Canada. I mean, obviously, the cannabis space is continuing to be very active and a central driver of the jump in activity. Any thoughts here on what the outlook for that is now? It seems from our perspective this is likely to continue for, I guess, sometime and evolve. What do you view of the prospects from here and it seems like maybe it might extend down into the U.S. increasingly as well, and maybe you comment on how you positioned from that side of things too?
Yes. I think you guys see it the same way we see it. I think you've got -- there is good visibility. Maybe where we've got a little bit more enhanced visibility, I would say, is we do have an active cannabis practice in the U.S. We've hired dedicated bankers down there. We had a conference in the U.S. this year. Last year, we had 200 and change people there. This year, we had 700 people in our conference in New York. So there is increased interest, as you know. There continues to be financing activity going on. We're seeing increasingly global participation in those financings. So the investor base is broadening out to your point. I mean, Canada is doing what it should do in this cycle. You're seeing some consolidation. I think we're getting certainly more than our fair share of the M&A activity in that space, in that consolidation activity in Canada. And then of course, we're seeing a number of U.S. and International companies looking to raise money privately and publicly. And again, I think we're getting well more than our fair share in that activity given our platform you'd expect that, given our global platform. That's true in the U.S. and, quite frankly, it's becoming increasingly true in Europe. So this isn't a space that's disappearing tomorrow, that's for sure.
I guess, one other thing that stood out in the quarter was the strength of the, I guess, was the International Equities Group in the U.S. Can you give us an update on that? Is that just a market activity driven or there's some new clientele getting mixed in there as well?
Well, it's driven by a lot. I think, they focus on the International equities and the domestic over-the-counter stocks in the U.S. and a lot of that's driven by the American retail client flow that they get from their customers to really sort of the other broker-dealers in the U.S. And it's just been a very active market. So they are just doing a lot of trading activity and taking the small spreads on that trading activity, and it's just been very busy and it's been going well.
Now when you look through our "principle trading line" in the U.S., in our supplemental, you'll always see that our December quarter, the quarter that ends December and the quarter that ends March, are the 2 strongest quarters in that business. That's historically. I think, what we're pleasantly seeing now is that activity is continuing. Normally that's a business that slows down throughout the summer, given the retail nature of it. We haven't seen that slowdown yet. But we plan for it, let's put it that way.
And, I guess, when that's lifting there for you, I mean, is that less -- does that have less of a direct drive compensation structure behind it. When I look at that comp line as a percent of revenue, it looked like it was down a bit versus what we've seen earlier in the year?
The business is a different business, although comp as a percentage of revenue would be lower in that business. That's often offset by increase in trading cost. It's an expensive business to trade, because we're trading in a lot of foreign markets. So the contribution margin for that business is very good. But it's made up, I think, you got to look at the comp line in that business combined with the trading cost in that business. Those 2, I don't want to say, offset against each other, but they are inversely related.
Yes, the comp is driven through P&L, not just revenue.
Your next question comes from the line of Graham Ryding with TD Securities.
Can I start with your Canadian Wealth Management platform? You're obviously quite active with recruiting advisers in AUA in the quarter. And I think you mentioned $5 billion you've recruited since fiscal 2016. How much of that came in the quarter? And is all of that now in your AUA or is some of that $5 billion like still you had a commitment, but it's not necessarily in your AUA today?
I'll let Don answer the first part of your question. I'll answer the second part of your question. As you know, you bring over a new adviser, it takes some time for them to bring over their book of business, just a natural kind of transition takes some time. I think we can safely say with a lot of confidence that we're well through the $5.6 billion that we've announced today, and that's just a natural flow of having hired more people and having their assets slowly transition. I'd say of the advisers we've hired and there is a lot of them, I can only think of one case in my mind where the assets coming over were not as good as or better-than-expected. So we've had a very positive experience in transitioning the assets, obviously, it takes time. So yes. And again, just in the last 3 days, we've recruited 3 new advisers, and we're not going to keep that pace up of a person today. But the inbound telemarketing is a lot better than the outbound telemarketing. We're getting a lot of phone calls from a lot of people looking for a new platform, and we continue to recruit people. That being said, you asked a very specific numerical questions I'm going to turn over to Don.
Yes. I'm not sure exactly what you're referring to. But we're at $9 billion 2 years ago in terms of assets in Canada. We're now at $15.6 billion. So clearly a good chunk of that has been through the recruiting efforts, because obviously...
He asked specifically in this quarter, what have we recruited? What's the recruitment number in this quarter, not asset growth number. [indiscernible] We have that number, I just don't have it handy.
Yes. I had sort of -- versus what -- between this quarter and what's came over and included sort of post-March 31st, so just I want to clarify that before I -- we can get back to you specifically on that.
Okay, great. But just to confirm, it sounds like of the $5 billion you've recruited, some of it is still yet to flow through, is that correct?
Yes, yes, yes.
Okay, got it. The other thing is, you -- couple of years ago, you raised a debenture of $60 million to fund recruiting advisers. How much of that has been deployed or is all of it been deployed?
Yes, money is fungible. You're right. That was a -- it was a rallying cry. There wasn't a pool of money that we just kept in a separate account. We called it the recruiting account. Money is, obviously, very fungible. We probably spent most of that $60 million, to be honest, at this stage. But that would not slow us down one heartbeat in terms of continuing to recruit. We're obviously very profitable. We continue to make a lot of money, and we continue to deploy resources towards recruiting. But that money was well deployed in our recruiting efforts to date.
So it sounds like you're pushing your appetite, you don't imply to slow down at all. You would continue this pace as long as the interest is there?
Yes. But I -- now it's -- you have a pipeline of activity. It takes a long time, I think, I indicated to you this before, it takes a long time to get somebody to switch and make them comfortable in the new platform. So we build up a pipeline over a long period of time. We're -- I'm not sure that, that pace will continue at this pace. I'm hopeful it will, but I'm not sure it will, but certainly access to capital won't be a delaying factor in it.
Got it. Switching to U.K. Wealth Management. There is some volatility just quarter-over-quarter in the margin. But for fiscal 2018, you delivered 18.5% pretax margin, I believe, I have that number right. Is that a realistic margin for next year and then should we expect that to increase in fiscal 2020 once you realize some of these Hargreave synergies, is that the right way to think about this?
Yes. Don, can touch on the exact numbers in terms of our margin expectations. Generally, margins will be going up in the business. Obviously, as you integrate a business in, you're carrying double sets of lots of stuff. So that would have a negative effect on margin or not a positive effect on margin. Clearly, our plan is to continue to take the margin in that business up over time, and I think you'll -- I think that's what you'll see.
There was a drop in the number of brokers in the U.K. quarter-over-quarter. Can you just talk about what was behind that and how the retention of the Hargreave Hale advisers, in particular, has been?
I think anytime you kind of buy an operation, there is a small subset of people that aren't going to fit in the new business for one reason or another. Those were well-expected, well-defined and completely understood. So I would say, that reduction was -- 90% of it was planned.
And is there anything material there in the -- on the AUA front with those reductions or did some of those assets stay in-house or do those assets leave at the brokers?
No. There is no real material reduction. I mean, it's a bit different in the U.K. where the assets are more closely tied to the organizations as opposed to the individual. So it really hasn't had an impact.
Got it. And then my last question, just to make sure that I heard the tone correctly around the cannabis sector. It sounds like you feel the equity underwriting portion, that may slow down domestically, but globally, you see interest in demand there picking up for activity and then a consolidation phase should or could lead to sort of M&A activity remaining high, is that the right tone?
Yes, to the extent that you can predict capital markets, I think that's fair enough. You know that's probably a pretty good statement. That being said, there was a $250 million or $225 million block deal yesterday for a large cannabis company. We're a significant participant in that financing. There is going to be others. So no sooner do I say that, then material revenue continues to develop. But there is a lot of financing activity by U.S. companies right now booked into the U.S. both privately, which you wouldn't necessarily see. It wouldn't be as transparent to The Street and publicly.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
Thank you, everybody.