Canaccord Genuity Group Inc. (OTCPK:CCORF) Q2 2024 Earnings Conference Call November 15, 2023 8:00 AM ET
Company Participants
Dan Daviau – President, Chief Executive Officer
Don MacFayden – Chief Financial Officer
Conference Call Participants
Stephen Boland – Raymond James
Graham Ryding – TD Securities
Operator
Good morning ladies and gentlemen. Thank you for standing by. I’d like to welcome everyone to the Canaccord Genuity Group Inc. fiscal 2024 second quarter results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. If you have any difficulties hearing the conference, kindly press star then zero for Operator assistance at any time.
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.
Dan Daviau
Thank you Operator, and thanks to everyone joining us for today’s call. As always, I’m joined by Don MacFayden, our Chief Financial Officer.
Today’s remarks are complementary to our earnings release, MD&A and supplemental financials, copies of which have been made available for download on SEDAR and on the Investor Relations section to our website at cgf.com.
Within our update, certain reported information has been adjusted to exclude significant items to provide a transparent and comparative view of our operating performance. These adjusted items are non-IFRS financial measures. Please refer to our notice regarding forward-looking statements and the description of non-IFRS financial measures that appear in our investor presentation and in our MD&A.
With that, let’s discuss our second quarter fiscal 2024 results.
Our second fiscal quarter was characterized by a continuance of the challenging backdrop for capital raising activities and ongoing uncertainty around M&A completions in our core focus sectors. The S&P 500, the TSX Composite, and the MSCI World Index declined 3.3%, 2.2%, and 3.3% respectively over the three-month period. Trading volumes across most of our core markets moderated from both the previous quarter and year ago levels.
Globally, CM volumes remain subdued as new elements of uncertainty arose and global announced M&A declined for three consecutive months. Against this backdrop, our wealth management business continued to deliver stable earnings contributions, which helps us deliver a breakeven quarter despite losses incurred in our capital markets and corporate and other segments.
Firm-wide revenue for the three-month period amounted to $337 million, which was roughly in line with our previous fiscal quarter. Revenue for the first half of the fiscal year amounted to $681 million, down 3% year-over-year. On an adjusted basis, we earned pre-tax net income of $16 million and $49 million for the three and six-month periods, year-over-year decreases of 67% and 37% respectively. Excluding significant items, our firm-wide expenses were 3% lower than the second quarter of last year.
Compensation expense for our second fiscal quarter decreased by $22 million or 10% year-over-year, bringing our compensation ratio to 59%. Given the reduced revenue environment, adjusted non-compensation expenses as a percentage of revenue was flat from the previous quarter at 36%.
Our interest expense was 118% higher than the previous year’s comparison period, primarily due to higher interest on bank loans to finance growth in our U.K. wealth business, and our communication and technology expenses increased 6% year-over-year to support our expanded business and increased investment in our regulatory and compliance capabilities.
While cost containment is always top of mind, our industry is facing ever-increasing supplier costs, inflation and limited alternatives for the systems that we rely on to execute for our clients and manage risk. We also incurred restructuring costs of $15 million in connection with the headcount reductions that we had previously disclosed in August.
We continue to place a strong focus on cost discipline and have seen reductions in discretionary costs, particularly G&A. Managing our costs better positions us to achieve our historical profitability ranges in a normalized environment and return capital to our shareholders. On that note, I’m pleased to report that our board of directors has approved a quarterly common share dividend of $0.085.
Turning to the performance of our operating businesses, our global wealth management division earned revenue of $187 million in the second fiscal quarter, an increase of 11% compared to the same period a year ago. Excluding significant items, the pre-tax net income contribution from this division increased 18% year-over-year to $33 million, and 70% of this amount was contributed by our U.K. wealth management business.
The adjusted earnings per share contribution from this division was $0.12 for the second fiscal quarter, which was lower than similar revenue quarters due to a greater allocation of certain expenses from our corporate and other segment. At the end of the fiscal quarter, firm-wide client assets amounted to $93 billion, up 5% year-over-year but down 4% sequentially, reflecting lower market values in the U.K. and Canada partially offset by new inflows.
We continue to pursue positive net asset contributions in all our regions, both organically and inorganically. Last week, we announced that our U.K. wealth management business had acquired Intelligent Capital, a financial planning firm based in Glasgow with £220 million in client assets. Pending regulatory approval and other customary closing conditions, we expect completion to take place by the end of the current fiscal year. While we are always looking at potential acquisitions, our priority is improving organic growth, and we’ve implemented several initiatives on that front.
We are also experiencing solid levels of engagement for our recruiting activities in Canada and Australia. This month, we welcome two new IA teams in our Canadian wealth business and several in Australia, which will be reflected in our third quarter disclosures. I will also note that fee-based revenue in our Canadian business accounted for 52% of second quarter revenue, which has helped us drive stable contributions from this business despite the prolonged reduction in new issue activities.
Turning to our capital markets business, on a consolidated basis revenue in this division was 30% lower than the same period last year at $145 million. Excluding significant items, this division recorded a pre-tax net loss of $6 million with losses in Canada, the U.S. and the U.K. offsetting a modest profit from our Australian business.
With persistent inflation and central banks holding interest rates higher for longer, the optimism that had been building in the capital markets began to retrench. While we did experience some positive momentum in deal activity during the quarter, underwriting activities remain quite depressed when compared to historical levels. Primarily on the back of a more accommodating Australian resource market, revenue from this segment was $31 million for the three-month period, in line with the previous fiscal quarter.
All geographies experienced declines on a year-over-year basis, but our U.K. and Australian businesses both reported increases when compared to our first fiscal quarter. The mining sector accounted for 53% of total underwriting activity in Q2 and continues to be one of the few bright spots for new issue activity, although demand was limited to a small subset of underlying commodities.
On a consolidated basis, revenue from M&A advisory activities was $46 million for the quarter, which is less than one half of where it was a year ago and consistent with the broader industry, reflecting weaker completions and announcement trends. The 14% increase over first quarter revenue was driven by modest M&A growth in our U.S. and U.K. businesses. The technology sector accounted for 77% of our advisory activity during the three-month period.
Principal trading revenue of $20 million was in line with the first fiscal quarter and declined 25% year-over-year, primarily attributed to lower activity levels in the U.S., which is our largest trading operation. Commission and fee revenue increased by 7% year-over-year to $39 million, reflecting higher client trading activity and a modest uptick in new issue activity.
Heading into our third quarter, M&A and underwriting activity levels are tracking higher than in the first half of the fiscal year. We have a strong pipeline of announced deals and we continue to see healthier levels of new engagements, with many deals launching now. Barring another major setback in the coming months, we are cautiously optimistic that M&A revenue will meaningfully improve in the second half of this fiscal year.
Engagement levels amongst our corporate clients and their desire for capital remains high within our core sectors and geographies. That said, investors continue to be judicious about putting money to work. We are seeing some increased activity but remain cautious in our outlook until we see a more sustained recovery for risk capital in the market.
Like most market participants, we are encouraged by indications of improving sentiment as investors begin to look past the difficult environment that we’ve endured for almost two years. However, we expect that the capital markets will continue to be challenged for a while longer as investors await a clear inflection point. We continue to protect our strong market position and I’m very confident that we’ll capture a meaningful share of activity in our core sectors when opportunities present.
Although we are being realistic about the current macro pressures that we’re all facing, we continue to invest in our business and our people, and we continually assess opportunities to materially improve our business. We are fully supporting our capital markets business through this downturn while we’re also pursuing organic and inorganic growth in our global wealth management businesses. We also have several major office relocations planned and additional investments to advance our technology and compliance infrastructure. That said, we are always managing our balance sheet carefully to protect our ability to provide outstanding opportunities and expertise for our clients in any market backdrop.
With that, Don and I will be pleased to answer your questions. Operator, could you please open the lines?
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now conduct a question and answer session. [Operator instructions]
We have our first question coming from the line of Stephen Boland from Raymond James. Please go ahead.
Stephen Boland
Morning all. I certainly want to be sensitive to what’s developed in the Middle East obviously in the last month and change. I’m just wondering, in terms of the U.K. division, the environment itself, is the industry and yourselves kind of on hold, or are deals and–you know, whether it’s deals or M&A, is that on hold, is it a wait-and-see environment over there, to see what–you know, hopefully it ends at some point. Again, trying to be sensitive in the question there.
Dan Daviau
Sorry, is it a capital markets question or a wealth management question? Just so I understand.
Stephen Boland
Capital markets.
Dan Daviau
Okay. No, I don’t think things are on hold. I think we’ve been clear in our commentary that, you know, cautiously optimistic. Harder to measure, as you know, the new issue business, although that’s picking up, but clearly the M&A business is picking up. We’ve seen good deal announcement activity, good deal launch activity, some of the uncertainty associated with the financing in deals has disappeared, or moderated, maybe not disappeared. Particularly in the U.K., I think we feel pretty good about that market improving, if that’s your question.
The new issue side, you just don’t know. I mean, we’re obviously active, particularly in a couple of sectors. I’m not sure that risk capital has returned to the market yet. Yesterday’s announcement was positive and the market reaction was positive, but one day doesn’t make a trend, so let’s see how it plays out for the next month or so.
Stephen Boland
Okay, and just in terms of capital, your net working capital, I think is under 700 – I think I saw that number, was it 699, I think? As this activity perhaps ramps up a little bit, are we going to see a lot more bought deals? Do you think you’re going to start to see more, if it’s new issue, that this is a best efforts type of environment? What’s your thought there, depending on the region as well? I know Canada and probably Australia–
Dan Daviau
Yes, all our regulated markets have different capital requirements for deals, and the deals are done differently. I know you’re familiar with the Canadian system. We keep reserves for capital for transactions. Obviously we didn’t earn any money last quarter so we didn’t improve our capital position. In addition, we’ve got a number of large capital expenditures coming through, large office moves. You know we moved in Toronto, we’re moving in Vancouver, we’re consolidating our offices in New York, so there’s definitely an investment that we’re making in the business and feel comfortable about that. But yes, we continue to have sufficient capital to conduct our business and do underwriting, if that’s your question.
Stephen Boland
Okay, thanks. My last one will be just any update–just maybe in the MD&A somewhere or in the notes, I apologize if I missed it, the regulatory issue with the foreign subsidiary and the trading operation, is there any update there or any change in the provision [indiscernible]?
Dan Daviau
Yes, great question. No, there’s no update. There’s no update we have, let alone update that we can provide to the street. No material developments either way.
Stephen Boland
Okay, that’s it for me. Thanks.
Dan Daviau
Great questions.
Operator
Our next question comes from the line of Graham Ryding from TD Securities. Please go ahead.
Graham Ryding
Hi, good morning. Dan, you made some comments about difficult to predict but you said the pipeline is stronger, you’ve started seeing some deals launching now. Is that more of a reference to the M&A side of the activity and the pipeline that you’re seeing, or is that a reference to both, you’re seeing some positive signs on–
Dan Daviau
A little bit both, but if I had to pick one, it’d be M&A. I mean, M&A, we have better visibility on, as you can imagine. The process is a three- or six-month process. We’re seeing timelines come in, we’re seeing deals launching now. We’ve obviously seen good level of announcements, deals announced, awaiting closing, so I think we’ve got more confidence in telling you that about M&A than we do about new issues. As you know, we’ve got lots of companies who like to access the public markets query whether there’s a sufficient buying audience out there to actually get deals done, so.
As you’ve heard me say before, in the last two recessions the market bottomed in October, shockingly, the month that we just finished, yet the economy didn’t bottom until six or eight months later, so we’re again cautiously optimistic the market will improve, the financing environment for small and midcap issuers will improve, and therefore our business will improve, but it’s too premature to predict that, Graham.
Graham Ryding
Okay, that’s fair. Then I guess at a macro level, what are you, I guess, paying most attention to in terms of seeing market volatility, is it deal activity maybe with large caps? What are you keeping your eye to give you some comfort, or your corporate issuer clients, give you some comfort that activity might pick up?
Dan Daviau
Yes, even in this market we’re still active, just not as active, and deal sizes are smaller, so it’s reception of deals primarily. We’re reverse inquiries into companies, there’s lots of investors who are very supportive of their existing issuers, existing companies they have investments in, and we’re seeing if we can round out some of that. General level of market activity, I would argue, but I know that’s not a good answer to your question. But that’s kind of what we’re looking through, and we do see, as you can imagine with our $93 billion of wealth assets, we do see the flows inside our wealth business as well, and that’s sometimes a pretty good indication of what we’re doing and where we’re going.
The Australian market was active, realize our summer is their winter, so the Australia market was active in the quarter we just reported and continues to be active. That’s primarily mining driven and even in the mining driven, it’s primarily a subset of mining – for lack of a better term, electrification type stocks, uranium and rare earths, lithium. But that’s been active for us and will continue to be.
Graham Ryding
Okay, that’s helpful.
On the wealth side, could you maybe just give us some context on what you’re seeing on average from your clients, both in the U.K. and Canada, like is this a market where clients are increasingly deleveraging and putting money perhaps into cash, or are you actually seeing–and is that impacting your organic flows and your organic growth in those platforms?
Dan Daviau
Yes, I think the organic flows have been–I’ll answer your question backwards. The organic flows, we continue to attract net new assets, that’s been the case in our culture. It’s in our culture in the U.K., it’s in our culture in Canada and in Australia, so the question is never how much assets we attract, it’s the assets you lose, because you’re always measuring net new assets. The problem in an inflationary market is you lose assets not for performance, not because they’re being pulled out of our system, but because people need their money or their kids need their money, so we’ve seen some assets pull out. Notwithstanding that, we’re still positive, net new assets are positive, but arguable just lifestyle assets are getting pulled out.
In terms of their investment portfolios, we haven’t seen a material change. People don’t leave cash sitting around as much anymore – they’re investing in short term fixed income securities as opposed to just leaving it in cash, but besides that, we haven’t seen material shifts in our clients’ portfolios. I’m looking at Don when I’m answering that question.
Don MacFayden
Yes, that’s right. We do have cash related, or income type related products, so clients in a low interest rate environment would be more likely to be leaving cash in their accounts or investing in equities, but we have alternative products in this environment that will keep the assets in the system, so to speak, rather than have them go outside in order to generate that return. Clients have outside pressures where they otherwise might have borrowed to fund something; now, they’re looking at not borrowing and using their assets that we would have otherwise held, so it’s a mix of all those things and we’re seeing that as with everybody else.
Graham Ryding
Okay, understood. One last one, if I could – just the restructuring charge you took in the quarter, are you largely done on that front for now, and if there is any one-time items coming through in the next quarter or so, is that going to be related to your office relocations or are you largely done in the restructuring side of things for now?
Dan Daviau
We’re largely done on the restructuring side of things. There might be a little bit flow through in subsequent quarters as provisions and so forth get trued up, but nothing substantive or material. With respect to office moves and so forth, I don’t think we will see anything exceptional flowing through the P&L on that front. We’re moving coincidental with termination of existing leases and real estate, so there’s no exceptional costs on that front.
Graham Ryding
Okay. That’s it for me, thank you.
Operator
There are no further questions at this time. I’d now like to turn the call back over to Mr. Daviau for closing remarks.
Dan Daviau
Well, thanks everyone. That will conclude the second quarter remarks, and hopefully mark a low point in our business. I understand a couple analysts are on the road today, so as you kind of listen to this call, we’re happy to catch up later. We look forward to our next quarterly update in February, and in the meantime, I’d like to extend my best wishes to all of you in the upcoming holiday season, and certainly for our U.S. colleagues, happy Thanksgiving.
As always, Don and I are available to answer questions later, so thank you again very much.
Operator
Thank you. Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. Please disconnect your lines.
Read the full article here
