Ladies and gentlemen, thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group Inc. Fiscal 2023 first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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, then the number two. If you have any difficulties hearing the conference, please press star 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.
Thank you, operator, and thanks to everyone for joining us for today's call. As always, I'm joined by Don MacFayden, our Chief Financial Officer. Following the overview of our first quarter fiscal 2023 results, both Don and I will be pleased to answer questions from analysts and institutional investors. Today's remarks are complementary to our earnings release, MD&A, and supplementary financials, copies of which have been made available for download on SEDAR or on the Investor Relations section of our website at cgf.com. Within our update, certain reported information has been adjusted to exclude significant items in order 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 also in our MD&A.
As widely reported and known to anyone following our industry, financial conditions in our first fiscal quarter have been challenging, driven by geopolitical and macroeconomic factors that have impacted asset prices, market activity, and confidence among investors and corporates. Despite this, we continue to help our clients achieve their business and financial goals and manage risk. In addition to the more challenging backdrop, another headwind for this quarter's results was the impact of sharp declines in the market value of certain inventory and warrant positions earned in respect of our investment banking activities, which primarily impacted our Australian capital markets business and, to a lesser degree, our Canadian business. In our Australian business, the rapid deterioration in market values during the quarter translated into a significant decline in our fee-based share and warrant inventory values.
On a net basis, this market downturn had a negative impact on revenue of about CAD 20 million in our Australian capital markets business. The impact of market declines also had a negative impact on revenue in Canada as we recorded facilitation losses of about CAD 11 million, offsetting our commission revenue and fee share inventory adjustments of about CAD 7 million. All our inventories are actively managed and, as such, many positions were monetized during the quarter. We believe that any downside risk associated with these types of holdings in future reporting periods has been reduced. While the market value of these position moves on a quarter-to-quarter basis, I will note that the quarterly net P&L impact of these positions has historically been positive on average over our holding periods, and the impact of these holdings on our overall revenue has not previously been material.
Despite this, our platform performed well over the three-month period, giving us confidence in our ability to deliver solid financial results while exceeding our clients' expectations through the remainder of this downturn. Our ongoing efforts to increase recurring revenue contributions from our expanded wealth management business and grow contributions from capital markets advisory activities are helping to offset the impact of the abrupt decline in new issue activity. With that, I will turn to the financial highlights of our first fiscal quarter. Firm-wide revenue for the three-month period was CAD 328 million on an adjusted basis, down 37% when compared to the same period a year ago. Excluding significant items, pre-tax net income was CAD 27.5 million, which translated to diluted earnings per share of CAD 0.11.
Turning to expenses, firm-wide non-compensation expenses as a percentage of revenue were elevated at 31% for the fiscal quarter on an adjusted basis, primarily reflecting higher general and administrative expenses in connection with increased travel and promotional activities. These activities were targeted investments in our business development and talent retention efforts, which were concentrated in a short period of time following two years of COVID restrictions. We anticipate more normalized levels going forward. Adjusted compensation ratio for the quarter was slightly elevated at 60.4%, generally in line with historical rates. As we've said before, although our compensation ratio is prone to quarterly fluctuations, we expect it to remain within our targeted range for the full fiscal year, noting that compensation expense will align with revenue levels.
Our business continues to be well-capitalized, giving us financial flexibility to be opportunistic in this period of dislocation while upholding our commitment to shareholder returns. Reflecting this confidence, our board of directors has approved a quarterly common share dividend of CAD 0.085. Turning to the performance of our operating businesses, I'll start with wealth management. Although below recent all-time highs, assets in our global wealth management business have remained resilient in light of the significant reversal in global markets. Our investment professionals in all geographies have maintained an unwavering focus on helping our clients navigate uncertainty and achieve their long-term goals. During the quarter, we experienced net inflows in all our business, bolstered by our acquisition of Punter Southall Wealth, which closed at the end of May.
At the end of the fiscal quarter, firm-wide client assets were CAD 91 billion, down 4% year-over-year and 6% sequentially, primarily reflecting broad market declines in both equities and fixed income, which offset these net inflows. On a consolidated basis, this division earned revenue of CAD 162 million and contributed adjusted pre-tax net income of CAD 25 million for the three-month period. Revenue from our U.K. and Crown Dependencies business was flat year-over-year at CAD 73 million, but increased by 7% when measured in local currency. We're having a great experience integrating our recent acquisition of Adam & Co. and PSW, and we are focused on creating additional value through synergies into our organic growth initiatives, which should contribute to margin strength.
With the PSW closing midway through the quarter, revenue and net income associated with PSW also will be more wholly reflected in our next fiscal quarter. Revenue in our Canadian and Australian wealth businesses decreased by 30% and 8% respectively, largely due to the abrupt decline in new issue activity. Increase in interest rates in both Canada and the U.K. have positively impacted interest revenue, which increased by 140% year-over-year and will continue to contribute to margin strength going forward. Our focus on supporting investment advisors and their clients, especially through volatile markets, has supported our recruiting and retention efforts. In the last 18 months, we've added over CAD 1.6 billion in recruited assets to our Canadian franchise. The number of advisors in our Australian business has also increased by 5% year-over-year.
We are actively considering a range of opportunities to support long-term profitable growth in our wealth management businesses globally through new products and capabilities, as well as continued support for technology enhancements to keep up with the increasingly complex needs of our valued clients. Turning to the performance of our capital markets business. Revenue in our global capital markets division was CAD 164 million for the three-month period, down 49% year-over-year, largely due to the abrupt decline in new issue activity and losses in our inventory positions which offset this revenue. Given the industry slowdown and the diversification away from higher risk growth assets, I am pleased with the performance of our teams who delivered for our clients and protected our strong market position amongst the league table leaders in each of our geographies.
During the three-month period, we participated in 80 transactions to raise over CAD 6 billion for corporate issuers. Investment banking revenue for our combined global capital markets business was down 91% year-over-year and 87% sequentially to CAD 12 million. While we earn more in cash fees for our underwriting activities, these amounts reflect a markdown in connection with the impact of previously mentioned inventory positions. I will note that our Australian capital markets business had an active quarter, completing 29 deals to raise over CAD 1 billion for issuers. While we are disappointed that gains were offset by inventory markdowns, supporting our clients through equity investment is an important part of doing business in this region. I'm very pleased to report that advisory revenue increased 9% year-over-year to CAD 83 million.
Our U.S. and U.K. businesses recorded year-over-year increases of 36% and 59% respectively. In the U.S., our mid-market TMT advisory team has ranked first for deal volume in both the fiscal quarter and calendar year to date. Earlier this week, we announced our acquisition of U.K. advisory firm Results International, which complements our previous investments to expand our advisory segment and will add domain expertise in the European healthcare and technology sectors, where we already have strong global capability in both advisory and ECM. We continue to be active globally, and we feel good about the size and quality of our pipeline relative to the market. In advisory, although market-wide announcements and completions have slowed, we have good visibility into the next six months, and we expect this segment to perform well throughout the fiscal year.
Recently, we have seen some green shoots in ECM activity, but our expectation is that we will not see a meaningful recovery in new issue volumes until at least the third quarter of this fiscal year. Our trading businesses remain well positioned to respond to changes in the market backdrop, and we will continue to provide market-leading execution capabilities for our clients in all businesses and geographies.
We expect that economic conditions will continue to tighten before they improve, and we will navigate more volatility and uncertainty alongside our clients. Historically, periods of market dislocation have created opportunities for us to differentiate ourselves and capture new market share. Heading into our second quarter, activity levels have been similar to Q1, although we will end this quarter with lower expenses and less exposure to market-driven declines in our inventory. In light of the current environment, we are managing our capital and expenses prudently to ensure the best use of our resources for continued balance sheet strength. Having said that, our long-term strategy does not change. We're committed to investing in our core capabilities, which have been proven to provide differentiated value for our clients through economic cycles.
We will be opportunistic yet thoughtful in our deployment of capital as we position our business to emerge from this downturn in a stronger competitive position and accelerate long-term value creation for our shareholders. With that, Don and I will be pleased to take questions. Operator, can you please open the lines?
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star two. Please stand by while we compile the Q&A roster. Your first question comes from Jeff Fenwick of Cormark. Please go ahead.
Hi, good morning, everyone.
Dan, why don't we talk about capital markets first, and just a few things that I think you made some commentary around in your intro there. With respect to Australia, I'm obviously taking some negative marks there that hit the top line. I think you mentioned that there was about CAD 20 million of marks there in the quarter. Is that correct? I'm just trying to get a sense of what the actual sort of like business going on versus some of the marks that you had to take there.
Hi, Jeff. It's Don. Yes. I mean, the inventory revaluations during the quarter resulted in a CAD 20 million impact on revenue. It's just not marks. It's actually crystallized sales at values that were lower than the March marks. It shows up as a loss in the quarter or as a reduction.
Okay.
In revenue during the quarter. The total values of inventory declined significantly from March to June. It's not just mark-to-market, it's actual sales at lower than the March values.
Okay, understood. I think the comments there were you tried to close out as many as you could, so you're not suffering that going forward. What's the environment like in Australia now? I mean, it's obviously levered toward mining. Any comments there on the outlook?
Yeah. I mean, it's early to predict. I mean, base metals and gold took a hit in the quarter as well as, you know, some of the emerging economies got whacked with a strong U.S. dollar. You know, we're cautiously optimistic. This is their busy period. Their summers are winter, vice versa, I guess. Our summers are their winter. We just hosted a big Diggers & Dealers conference in Western Australia. You know, I think there's activity. I think it's premature for me to say, "Hey, everything's back to normal." That would be too quick of a statement to make. I mean, we're optimistic over the next, you know, couple of quarters that it'll come back.
You know, I think the worst of it was last quarter, but I'm not saying this quarter, everything's gonna be rosy and back on, you know, historical CAD 50 million a quarter run rate. That would be way too optimistic.
Yeah. I guess, you know, I look at it in the past, if it was, you used to do, like, CAD 40 million a year in revenue, sort of pre-COVID, and then started doing more than that in a quarter, and just trying to get a sense of, you know, you built up that business. I suspect over that period.
Yeah. The business yeah, it ain't gonna be that bad. I mean, the business changed, right? We bought a big wealth business there. We materially expanded our footprint. We hired into our capital markets business. You know, I think we're probably fourth on the league tables in Australia. Like, that's not a place that we were three and four years ago as that business has evolved. The business is a bigger business than it used to be. That being said, it's not, you know, 40 a year, but it ain't 40 a quarter either.
Yeah.
Right? Somewhere in between the two. I wish I could give you better guidance, but it's primarily a new issue market. We don't have as much visibility in that market as we have in some of our others.
Mm-hmm. I guess, you know, if you look at the U.S., it was sort of the counterpoint to that. I mean, I think it performed quite well in the quarter as you highlighted, and I know advisory's become such an important part of the business down there. You know, how's that environment looking? I imagine there was probably some things that might have been in process through the quarter that helped you out. I mean, are you gonna, I imagine you're seeing more people press pause in the short term, or what's the environment look like there for the quarter?
Yeah. I mean, that's a fear. I don't think it's a reality yet. I think, you know, a pessimistic person would say, "Hey, when is M&A gonna stop?" Unlike our new issue business, we do have pretty good visibility on our M&A business. You just know the timetables associated with M&A. If we're working on stuff now, that's revenue in six months. We've got a pretty good pipeline, a pretty good visibility. You know, I think we're, again, I keep on using this cautiously optimistic after a bad quarter, but we're cautiously optimistic that our M&A is pretty resilient at this stage. You know, ask me again in nine months or six months. Right now we feel pretty cautiously optimistic on that.
Maybe one on wealth management, specifically with Canada. Obviously seeing the volatility just associated with the level of commission activity in the business there. Maybe give us a sense of how the advisors react to this environment. I think on the capital markets side, we all understand the ups and downs and how that works with our compensation. I mean, what's the mood among the advisors with the sort of volatility they're seeing in terms of the revenue opportunity with their businesses?
Yeah. Great question. I guess it depends on what kind of advisor. I mean, we've got. You know, the majority of our advisors are pure wealth advisors. They earn commission fee and, you know, income that's relatively stable. In fact, if you look at our commission and fee line in our supplemental disclosure, you'll notice that our commission and fees actually went up in the quarter. What went down in the quarter was the new issue contribution in the wealth business, which we've always had, and quite frankly, at roughly CAD 4 million, that's probably the lowest level I've seen in my career. If you were an advisor that did a lot of new issue business, you were, you know, impacted materially.
If you're an advisor that does a lot of, you know, wealth management and earns fees and net income, you probably were flat to marginally up in the quarter. I guess it depends who.
Sure. Maybe just a comment on the recruiting pipeline in Canada. I know you've had success in that over the last 18 months. It's probably a bit of a challenging environment just given the volatility, but what's the outlook now?
It's about the same as it's always been. Maybe marginally better, which is kind of surprising because typically in down markets, advisors aren't anxious to, you know, uproot and move, typically. You know, that being said, the same secular trends that we've seen for the last couple of years continue to apply. We continue to hire advisors. We, you know, another one will be joining us, you know, any day now. So, you know, that pipeline, I wouldn't say it's stronger or weaker than normal. I think it's just normal.
Okay, great. Thanks for that color. I'll pass the line along.
Thanks, Jeff. Great questions.
Your next question comes from Stephen Boland of Raymond James. Please go ahead.
Thanks. One kind of numbers question, maybe on the facilitation losses in Canada. I mean, I just want to understand that that is like liquidity that you're providing to institutional clients on a daily basis to help them all out on positions. Is that the, you know, the typical definition?
That is the typical definition of facilitation loss. Yes. I would say our losses were concentrated in, you know, a smaller number of names. Names, as you could imagine, Steve, you know the business that you know that you are all around, you're the boss in. You know, I wouldn't say, "Hey, we, you know, lost money with 200 clients on 500 names." We probably lost money with 20 clients on five names. You know, I'm making up those numbers, but directionally, just to give you a little bit more cover on it.
Okay. Has there been any thought on, you know, bringing the capital down in that division? I mean, CAD 11 million is pretty material, but you know, has there been thought of actually just shutting a little bit or providing less capital at this point?
Yeah. I mean, the answer is no. That's the specific answer. But again, if you think of the nature of the business we're in, Steven, we are a leading mid-market underwriter. You know, we're not the biggest trader of BCE, Telus, and Rogers. We're the biggest traders of a lot of mid-market names. We need to traffic in those names. You know, that's not an option. Occasionally, you know, you will take the odd hit in some of these small names. This was. You know, I've been doing this for over three decades now. This was a pretty bad quarter from that perspective.
Okay. Maybe just on the second in Canada, just in terms of advisory fees. You know, when markets tend to come down this sharply and maybe the outlook is, you know, overall is not great, in terms of the economy and things like that, have you seen changes in, you know, the pipeline in Canada in terms of M&A, where firms realize that they may not have access to capital and you know, are actually opening up dialogue with you know, competitors or complementary companies to do M&A?
Yeah. Maybe. It's you know, there's pros and cons of a volatile market on M&A. Obviously, the pros are the ones you alluded to. You know, changes the dynamics, changes access to capital, creates, you know, I don't want to call it desperation M&A, but, you know, M&A you have to do, so to speak. But on the other side of that, you've got increasing interest rates, you've got tightening capital, and, you know, volatility kills as well as it helps, right? Because it takes so long to get a deal done when everyone's stock prices change 30%, you got to make sure you still have a deal. So I think it goes both ways. I think the net of, you know, the positives and the negatives, it's about the same.
I mean, the environment's about the same. Obviously, we didn't have a ton of revenue in Canada in our M&A sector this quarter. I think that's just a timing issue as much as anything else. We just didn't have a lot of closures this quarter. I think the overall environment is, you know, historically where it's been.
Right. Okay. One kind of high-level question when you talk about your compensation ratio, you know, getting back to your target range. When I look at your outlook in your M&A, it's kind of dour. It's, you know, that, you know, threat of recession going up. Mary, I mean, you kind of said cautiously optimistic, but you know the data kind of negative. I'm trying to figure out what your thoughts are. Are things, you know?
Yeah.
Does it get worse or it's slowly better?
Yeah, fair question, Stephen. I would, you know, I'm confused as well. No, I don't think we ultimately know what's gonna happen here with the market. Obviously, we're still in. You know, we've had a little bit of a, you know, dead cat bounce in the summer. I don't think anyone thinks that's gonna continue on. You know, there is some optimism around, you know, later in the year, November, December, things getting much better, you know, post-midterms, maybe post-Fed easing. You know, give a prediction or give a timeframe, don't give both. You know, things will get better. I'm just not sure when. Maybe that's the optimism you're seeing in the numbers. Your specific question around compensation ratio, though, is, you know, we manage to that comp ratio.
Obviously, you know, in some of our jurisdictions with some of our people, it will be a tough year. You know, like any other, you know, firm like ours, our biggest expense is compensation, and most of that is variable. You know, we'd like to think we can manage within a pretty narrow set of compensation ratio parameters. We wouldn't say that we expect our comp ratio to be in line with historical standards unless we were planning on managing to that.
Okay. That's all I have. Thanks very much, guys.
Thank you so much. Thanks for all your work.
Your next question comes from Rob Goff of Echelon. Please go ahead.
Good morning, Dave, and thank you for taking my questions.
Oh, thank you.
First, on the advisory side, could you perhaps talk to Results, both its U.K. and European franchise and any opportunities you see there, in terms of cross-selling on your global platform?
Yeah. Listen, it's as you know, our strategy is good. It has been and continues to be to go deeper in verticals that we're good at. That's the easiest way to compete in very competitive markets like the U.S. or the U.K. Results is a very good, you know, smaller firm that focuses on healthcare and technology, the two of the sectors that we globally focus on and coordinate on two of our most, well, our two most important sectors, I think it's fair to say at this stage. The interaction not only will be useful from a domestic U.K. domestic perspective, you know, adding on additional M&A capabilities in sectors we're already strong in the U.K. More importantly, and what you've alluded to, is, you know, being able to, you know, win cross-border mandates. We tend to be pretty good at that.
We're a small enough firm to be agile, big enough to be, you know, global-ish. So yeah, there will be an immense amount of interaction between primarily our U.S. M&A practice and our U.K. M&A practice with the Results. We see those businesses interacting well. We wouldn't have, you know, ventured into the U.K. M&A space through an acquisition like Results unless our U.S. team was completely aligned and on-side and, quite frankly, encouraging that.
Okay. Do you see yourself pursuing further advisory acquisitions? More broadly on the issue of acquisitions, like, we all see the public pains, but, have the private market values corrected, concurrently with the public or perhaps more deeply?
When you ask the private versus public question, then I'll answer your first question in a minute. Are you talking about wealth? Are you talking about capital markets or both?
I was putting it out very broadly, Dan.
Okay, I'll give a broad answer then. On further M&A, I mean, we're always looking, you know. When you're buying M&A boutiques, these aren't things that, oh, look, this is for sale, let's buy it. Those guys seem great. You know, there's a long relationship that goes into any of these things. You're, you know, you're talking to people sometimes for years, you know, deciding whether this would be a great fit for your organization. You know, we're not running around, you know, pounding the pavement, trying to find M&A targets in key verticals. It's almost needle haystack type stuff, maybe slightly better than that. Maybe several needles haystack. You know, you gotta find the right cultural fit.
These aren't huge acquisitions we're doing either, as you know, but they're important, they're strategic, and they've clearly changed the dynamic of our revenue picture and our capital markets business. You see that, specifically in this quarter with the relatively bigger uptick in M&A. That's going on. Have we seen a change in valuations? I don't think we're that active in the market to really be able to say that there's been a shift in valuations. It's not like we're looking at 22 targets and looking at the pricing of those targets.
I suspect pricing will come down, but you know, you say that and then all of a sudden someone gets sold at a 60% premium to market in the public markets or, you know, in the U.S. or, you know, in the U.K. Well. Who knows? Public pricing clearly has come down. That's obvious. You know, premiums go up, so are valuation matrices really changing? I'm not so sure, but I'm not sure I have enough data points to answer that really intelligently.
Very good. I did like your reference to Fed easing. Something to look forward to.
It was, yes.
That would be it for me, so best of luck.
Sorry, what was that? I missed that.
Your next question comes from Rasib Bhanji of TD Securities. Please go ahead.
Morning. Thank you.
Hey, Rasib.
Hey. If I can continue on the acquisitions side, more on the wealth management segment. I think there was some commentary last quarter on some inorganic growth opportunities on the Canadian wealth platform that you were working on. Is there any update that you can give this quarter, or is this a longer process for down the road?
Yeah. I mean, I think we did reference again this quarter that we're looking at alternative ways and other ways of growing our Canadian wealth business. We've got a huge platform here. We think there's lots of creative ways to grow it. We continue to examine opportunities. Some of them go sideways, some of them go up, some of them go down. Volatile markets don't help. Yeah, no, we continue to explore ways to grow our Canadian wealth platform for sure. I've got nothing to announce today and maybe nothing to announce in the next three months, but you know, we continue to explore it. It is a focused area of growth and an area that we will commit more capital to for sure.
Yep, makes sense. Continuing on the wealth management side, there was some commentary in the press release about net inflows for the Canadian and U.K. businesses. Just wondering if you can provide a number or how much your net inflows have been for these two businesses. Like relative to previous quarters, are they still holding up well, or is there some softness that you're seeing?
Hi, it's Don. Yeah, we don't provide that or the level of granularity in our AUA or AUM type numbers. Yeah, we have seen positive net inflows, and I think it's consistent with what we've been seeing over the course of the last year. It hasn't really increased or decreased. It's just steadily on the positive side.
Okay. Just my last question, also on wealth management. The interest revenue line item looks like it's moving in step with rising interest rates, and then we've had a few more interest rate hikes after the quarter, and then there are expectations for further rate hikes. Would it be fair to say that there's more upside towards this line item? I think it came at CAD 10 million this quarter.
Yeah, I think it'd be a fair assumption to make that as interest rates go up in our wealth side of our business, we earn more money. You know, the spreads widen, and we earn more money. Again, in our supplemental disclosure, you'll notice that our interest income in our global wealth business is probably at record quarterly highs, even at these rates. Clearly, that's because our assets have grown so materially from where they were two and three and four years ago. Therefore cash balances have grown, margin requirements have grown, everything has grown. Yeah, I think we had about CAD 10 million in net interest income in our wealth business this last quarter. You know, that number will continue to increase if interest rates continue to go up.
Okay. That helps. Those are all my questions. Thank you.
Great. Great questions, and thanks for joining.
Ladies and gentlemen, there are no other questions from the phone lines. This will conclude your conference call for today. We would like to thank everyone for participating and ask you to please disconnect your lines.