Canaccord Genuity Group's CEO Paul Reynolds on Q1 2014 Results - Earnings Call Transcript

Aug.10.14 | About: Canaccord Genuity (CCORF)

Canaccord Genuity Group Inc. (OTCPK:CCORF) Q1 2015 Earnings Conference Call August 6, 2014 8:00 AM ET

Executives

Paul Reynolds – President and Chief Executive Officer

Brad Kotush – Executive Vice President and Chief Financial Officer

Analysts

Geoffrey Kwan – RBC Capital Markets LLC

Paul Holden – CIBC World Markets, Inc.

Graham Ryding – TD Securities

Sumit Malhotra – Scotia Capital Markets

Operator

Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canaccord Genuity Group Inc. First 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. (Operator Instructions) Thank you. Mr. Paul Reynolds, you may begin your conference.

Paul Reynolds

Thank you, operator, and thanks to everyone participating on our conference call today. With me on the call is Brad Kotush, Chief Financial Officer of Canaccord Genuity Group. As usual, I'll provide an overview of our fiscal first quarter results for the period ended June 30, 2014. Afterwards, both Brad and I will be pleased to answer questions from analysts and institutional investors.

I remind 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. 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 discussions of risks in our MD&A.

We encourage you to review our earnings release, MD&A, and supplementary financial information, all of which remain available yesterday evening. These documents can be found in the investor relations section of our website at canaccordgenuity.com. I will now provide you with an overview of our performance during the first quarter.

For the three months ended June 30, revenues increased across all of our divisions. We attribute this growth to the success of our diversification strategy and the differentiated global service we provide to our clients. Canaccord Genuity Group revenue for the three-month period was $245.6 million, an increase of 31% compared to the same period last year.

Our results this quarter were characterized by the positive momentum in the Canadian capital markets business, which started during the second-half of fiscal 2014. On an adjusted basis net income for the three months ended June 30, 2014, was $24 million or $0.20 per share. Driven by increased business activity we recorded expenses of $222 million, an increase of 25% over the same period last year. This increase is also partly attributable to our operations outside of Canada.

During the quarter the Canadian dollar depreciated relative to the U.S. dollar and British pound, it was translated into higher overall expense levels compared to the same period last year. Despite higher operating expenses and the occurrence of one-time costs associated with restructuring initiatives, we continue to realize cost synergies across our global business. For the quarter, our expenses as a percentage of revenue decreased by 4.6% compared to the same period of last year.

At the end of our first quarter, we had working capital of $435 million. Our balance sheet remains strong, liquid, and well-capitalized for continued investment in the growth of our business. As part of our commitment to enhancing shareholder value during the quarter we purchased and cancelled 264,200 common shares, bringing the total shares purchased for cancellation in the most recent NCIB program to 3,558,144 shares.

I'm also pleased to confirm that our board of directors has approved a dividend of $0.05 for the first quarter.

Now, turning to the performance of our capital markets business, for the period ended June 30, our global capital markets division generated revenue of $179.2 million, an increase of 37% over the first quarter of 2013. During the quarter our global investment banking team participated in 115 transactions, raising total proceeds of $11.3 billion.

While financing activities increased across all regions our U.S. and Canadian capital markets divisions were the strongest performers for the period, contributing 35% and 32% of total global capital markets revenues respectively.

In the U.S., our capital markets division generated $62.3 million in revenue, an increase of 18% over the same period of last year. The improvement in this business was led by 115% increase in investment banking revenues. The American market presents a significant opportunity for our business and we continue to invest in growing our presence in this region. This past quarter we have added significant depth and experience to our equity research and investment banking teams.

The biggest improvement in this quarter came from our Canadian capital markets team, this division generated revenues of $58.2 million, an improvement of 77% over the same period last year. In improving market environment, our strong market position in the region enabled our team to grow investment banking revenues for the period by 162%. The differentiated global service level, our investment banking and advisory teams are able to provide as evidenced by our role as the lead advisor and bookrunner to longtime client Amaya Gaming Group in a $4.9 billion transaction that closed August 1.

During the month of May, institutional trading activity softened in all regions but the slowdown was most pronounced in UK and Europe. Despite this our UK and Europe capital markets business continued to grow and increased revenues by 11% over the same period last year to $44.8 million for the quarter.

By leveraging the strength of our global platform in the Asia-Pacific region we have broadened our reach into additional sectors and continued to gain market share. First quarter capital markets revenues for the region increased to $12.4 million, a full 203% improvement over the same period of last year. As we continue to pursue growth in this important geography we expect this division to generate further revenue growth.

Global advisory revenue for the quarter was $32.7 million, a decrease of 9% from the same period of last year. Lower advisory activity in our U.S., UK and Europe operations was partially offset by 166% increase in advisory revenues from our Canadian operations. We have cultivated a strong pipeline of investment banking and advisory business in all of our regions as growing number of mid-market clients recognized the value of our unique global perspective and cross-border capabilities.

Our outlook for the mid to long term performance of our investment banking and advisory businesses continues to be strong. Over the past year, we have focused on a strategic repositioning of our global wealth management operations. By adopting a stronger client service philosophy and reducing fixed costs, the changes we have made to our wealth management business are reflected in our first quarter results, as stronger and more competitive businesses have emerged.

Globally, Canaccord Genuity Wealth Management generated $64.1 million of revenue and increased assets under management and administration by 24% to $32.1 billion during the quarter compared to the same period last year. Further reflecting improved market conditions in the region, our Canadian wealth management division earned $32.4 million in revenues, an improvement of 21% over the first quarter of 2014.

Assets under administration increased by 18% compared to the same period of last year and discretionary assets under management increased by 44% to $1.3 billion, importantly, the momentum we are building in our Canadian wealth management division and the impact of strategic and operational changes led to a 56% reduction in year-over-year losses for this business.

Our UK wealth management business continues to grow and increased first quarter revenues by 12% to $30.1 million, with 67% of revenue in this geography generated through fee based and managed accounts this growth speaks to the quality and depth of our expertise in the region. Our priorities for the coming year, we focused on further driving cross-border collaboration placing clients of Canaccord Genuity Group at a great advantage to leverage a growing network of ideas and professionals.

We will strive to protect and increase our competitive position through disciplined investments in our growth while maintaining a firm-wide culture of cost containment. We are committed to maintaining our strong position in Canadian capital markets and growing our wealth management business in the region.

We will continue to invest strategically in our U.S. capital markets division a business we expect to grow aggressively in the coming years. We will focus on enhancing our leadership position in the UK and European mid-market and growing our advisory capability in continental Europe. We will also pursue strategic opportunities to grow our UK wealth management business.

And with those comments now operator I'd like to open up the call to institutional investors and analysts for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Geoff Kwan with RBC Capital Markets. Please go ahead.

Geoffrey Kwan – RBC Capital Markets LLC

Hi, good morning.

Paul Reynolds

Hi, Geoff.

Geoffrey Kwan – RBC Capital Markets LLC

My first question for you, I was just thinking about where the deal pipeline stands, stay relative to when we were talking a few months ago. Directionally, how do you feel? Do you feel better about it and if you can provide some color around what geographies might be driving that and also whether or not – is it underwriting and M&A or is it kind of one more than the other?

Paul Reynolds

Yes, if I think, as I said in the prepared remarks is, we've got a very strong pipeline in both M&A and equity underwriting across all geographies. We did see over the last quarter, as you saw in the results a slight slowdown in the UK and the U.S. over the last quarter as well. But I mean, we still have strong pipelines and are doing – our teams are very active. And we've seen a strong pickup in our Canadian capital markets business and in our wealth management business as you saw in the results we just put out.

Geoffrey Kwan – RBC Capital Markets LLC

Okay. Second question I had with just on the compensation ratio and you started out the year with a good year-over-year revenue increase and with the pipeline presumably that should hopefully translate into a good solid year-over-year increase on revenues. The compensation ratio last year, I think was around 59%. How are you thinking about where that may play out for the rest of the year based on your outlook?

Paul Reynolds

Yes, I mean, our guidance on that is really same as it has been for the last year. It's going to be somewhere between 58% and 59% for the year.

Geoffrey Kwan – RBC Capital Markets LLC

Okay. Last question I had was, looking at the balance sheet the equity in convertible securities zones, the long position went up from above $220 million to $730 million in the quarter, just wondering if there's any color you can provide around that?

Brad Kotush

Yes, sure Geoff, as part of the IFRS accounting we're required to record any bought deals as part of our inventory even though it's already sold to clients and so there is an equal and offsetting payable. So that's really largely attributable to the Amaya transaction, that's now closed.

Geoffrey Kwan – RBC Capital Markets LLC

Okay. Great. Thank you.

Paul Reynolds

Great. Thanks.

Operator

Your next question – your next question comes from Paul Holden with CIBC. Please go ahead.

Paul Holden – CIBC World Markets, Inc.

Thank you. Good morning.

Paul Reynolds

Good morning, Paul.

Paul Holden – CIBC World Markets, Inc.

Wanted to – so you talked about the outlook for M&A and underwriting being positive. I mean the one part of the business in this – I think this goes for all firms sort of globally. That's not (inaudible) it's institutional trading commissions. Any sense of what could make that a more positive trend or any thoughts on how you can grow that business line?

Paul Reynolds

Probably more volatility, Paul, I mean, it's – I think either you've seen a sustained increase in commissions which has been happening over multiple years or you're seeing just lack of trading activity due to the very lack of volatility we've seen over the last six months.

Paul Holden – CIBC World Markets, Inc.

Okay. It was just really.

Paul Reynolds

We are working on very much global solutions for our clients on the sales trading side. So we've got a global electronic trading business that we are out actively marketing right now. We've got a new global CSA product that we're going to be actively out promoting starting here quite soon. So we are trying to proactively invigorate that line of business but it's with a strong headwind.

But it's the same for everyone. I think you've seen almost all the companies that have reported recently had the same kind of drop in commission levels that we've seen.

Paul Holden – CIBC World Markets, Inc.

Okay. With respect to the products, on the ones you're going to launch in Canadian wealth management, the Global Portfolio Solutions. Is that really designed to drive revenue or is it to create more stable revenue and will it be – should it be profit enhancing? How should we look at that in terms of the financial?

Paul Reynolds

I mean, it's a good question and it will drive both of more stable revenue and drive revenue. So it's a new proprietary product that our IAs in Canada will have. It's already being introduced to our UK business and it will provide our Canadian IAs with a unique product that is global, it will have Asian stocks, it will have Australian stocks, it will have European and UK stocks and U.S. stocks in that mix. And I think it's something that's not – most Canadian portfolios have Canadian stocks, this will give them an option to have a more global type portfolio.

Paul Holden – CIBC World Markets, Inc.

And it sounds like it's going to be launched roughly six months or so from now, is that right? And what kind of needs to be done between now and then to get the launch complete?

Brad Kotush

It should be launched at the end of September.

Paul Holden – CIBC World Markets, Inc.

End of September, okay. And then with respect to operating costs, so you confirm that one of your priorities for the year is cost containment. We did see a bit of cost inflation in the quarter. Again, I understand relative to the size of the increase in revenues not a big deal but just wondering that should we look for sort of some cost inflation on a year-over-year basis going forward or more flatish costs, and you can help with that?

Paul Reynolds

Generally, what you will see in an increased revenue environment, you will see your travel and promo expenses go up in relation to that increased activity and we definitely saw that in Canada as Canada recovered. But I mean, as you look at it as percentage of revenue our expenses generally declined by still over 4%. I don’t know, Brad, you got any other comments you want to make?

Brad Kotush

Yes, I think overall as a proportion of revenue it was down 4% and I think we are – as we look at the expenses obviously we are focused on and there are number of things that drove the expenses sequential and I think the other thing to keep in mind, that as some of those revenue increases as a result of changes in FX will also have increases in the underlying expenses. The absolute amount, don't increase in the foreign jurisdiction and there's an effect that happens in relation to FX.

So there are a combination of things, one of the things you saw sort of crystallize this quarter was an increase in some of the Canadian expenses and Paul alluded to some of the G&A in Canada increasing but that's certainly consistent with the increases in revenue but that doesn't mean it's not something we're focused on and are working to control.

Paul Holden – CIBC World Markets, Inc.

And then in terms of Amaya transaction given that it closed August 1, the fees and revenues associated with both the advisory and underwriting – your fiscal Q2 results?

Brad Kotush

Yes.

Paul Reynolds

Yes.

Paul Holden – CIBC World Markets, Inc.

Okay. And then final question with respect to a potential dividend top-up is that, something that's still potentially on the cards for this fiscal year?

Paul Reynolds

Yes, I mean, as we said on our last call is that, if we did pay special dividends it will be twice a year, so we'll have a – I'm sure a very strong conversation with our board coming up in the next period and if we're going to pay when that would be, when we would pay our first time.

Paul Holden – CIBC World Markets, Inc.

Great, got it. Thanks for your answers.

Operator

Your next question comes from Graham Ryding with TD Securities. Please go ahead.

Graham Ryding – TD Securities

Yes, just – few of my questions were asked. I'm just wondering if you can touch on the UK wealth management market. I know once you get your technology platform in place you'll be in a position to maybe consider some tuck-in acquisitions. What does the margin look like in the UK right now for deal evaluations in that space?

Paul Reynolds

Yes, I mean, Graham. Most of the businesses that we have talked looking at and the ones we are actively starting to look at now are much smaller acquisitions. They're more in the £1 billion type of size, very similar to the Eden Financial deal we did almost two years ago now which has been a very successful transaction for us.

And they're still the very fragmented market with many sub-scale players. We've got a strong list of businesses that we're looking at that makes sure they're culturally been into the business mix of what we're trying to drive. But I think you'll see over the next 12 to 24 months that we'll start to make small bolt-on acquisitions like we discussed before that will be accretive and help us take that margin in that business from the kind of 24%, 25%. It is today upwards of 30% in line with some of the larger UK wealth management businesses that are there today.

Graham Ryding – TD Securities

Okay. Then…

Paul Reynolds

Valuation lies, I think we stated just 2% for Eden, on assets about £20 billion – sorry, £20 million pounds for £1 billion pounds in assets and I think that will be kind of the range you're looking at for business of that scale.

Graham Ryding – TD Securities

Okay. That's helpful and then you say, Eden was a very successful. Is there anything you can point to as sort of what your focus is on how you make these deal successful when you bring in a $1 billion of asset.

Brad Kotush

Yes, I mean, a lot of it is making sure that you retain the assets and the clients. And lot of the – Eden was also focused around retaining the assets and growth. And when you look at that acquisition you basically took the assets of most of the front office people and we took none of the back office and none of their compliance settlement which took out significant cost.

And if you look at the margin from when we bought Collins Stewart originally to where it is today that margin has increased. And that transaction helped us – not just that transaction, that was one of the many factors that helped us increase our margin.

Graham Ryding – TD Securities

Okay. That makes sense. Thanks.

Operator

(Operator Instructions) Your next question comes from Sumit Malhotra – with Scotia Capital. Please go ahead.

Paul Reynolds

Good morning, Sumit.

Sumit Malhotra – Scotia Capital Markets

Hey, good morning, guys. Couple of balance sheet questions to start, probably for Brad and looking at the change in shareholders' equity in the quarter, I understand the Canadian dollar appreciation, it was helpful to the last couple of quarters, worked against you in the AOC [ph] this time around, so that's self-explanatory.

The LTIP costs this quarter, which look to be about $44 million, a lot larger than we've seen in the past and certainly did seem to have an impact on driving down the book value sequentially. Would you be able to give some color as to why that was so large this quarter?

Brad Kotush

Yes, absolutely, Sumit. We've been talking for the last little while that we were going to buy rather than issue any further shares from treasury, we're going to buy shares into the employee benefit trust. And that's why you see it as a much larger than normal purchase because in all three of our main operating jurisdictions we've now – are you – well we've always used in Canada, now in the UK and the U.S. we formed these employee benefit trusts and that's why you're seeing a much larger number than previously.

Sumit Malhotra – Scotia Capital Markets

So, just so I got that right, you bought through treasury rather than in the market.

Brad Kotush

No, we bought in the market.

Sumit Malhotra – Scotia Capital Markets

Oh, you bought in the market.

Brad Kotush

But the accounting rules – with that – when we buy them into the trust we take them out of equity until their release from – or until they vest.

Sumit Malhotra – Scotia Capital Markets

So, I see – and I'm sure it's the same in your statement so this is just in my model here, but there is a line right below that's a release of the vested common shares which about $13.6 million this quarter. So how does this play out going forward? Does the – is there an acquisition of shares that has to be made every quarter or is it a large one that you did in Q1 and we don't see it being that meaningful going forward?

Brad Kotush

Well, it's larger in Q1, because we're paying our year-end bonus and that's when we buy the shares for the RSUs.

Sumit Malhotra – Scotia Capital Markets

Right.

Brad Kotush

And overtime and typically the next round of that in a significant way will be to the extent we pay half year bonuses from our pool but those are typically much smaller and then over the course of – because these are generally now a three to five year vesting cycle depending on the geography it should probably even-out where we – the purchases will offset or be offset by the vesting of the shares.

Sumit Malhotra – Scotia Capital Markets

All right, so if I hear that last part correctly I – and not to put words in your mouth, but I think it should probably won't have as much of a negative impact on the shareholder's equity line going forward as it did this time around?

Brad Kotush

That's correct.

Sumit Malhotra – Scotia Capital Markets

All right, we can follow up on that...

Brad Kotush

But well – and I'll say that, to the extent though that if we have a much greater top line and then therefore generate a much larger bonus pool that could result in a higher number but that's not necessarily that thing when we were making a lot more money.

Sumit Malhotra – Scotia Capital Markets

Nobody will complain about that.

Brad Kotush

Yes.

Sumit Malhotra – Scotia Capital Markets

So and this is somewhat related, the networking capital position. Again, I think I might calculate it a little bit different than you folks reported but that was down about $35 million or so sequentially. Did this LTIP issue play into that, number one? And number two, how much of an impact did currency fluctuation have with the CAD appreciation in the quarter on that decline?

Brad Kotush

Well, I'd probably say it was that you take that adjustment that we had through the other comprehensive income and then also take a look at the – what was done for the LTIP that we just discussed.

Sumit Malhotra – Scotia Capital Markets

So that would be the bulk of the decline?

Brad Kotush

Correct.

Sumit Malhotra – Scotia Capital Markets

All right, and then – maybe, somewhat related, we've talked and I know the question about the special dividend or the buyback has come up, and we can look at the numbers and see that last year you paid about 75% of operating earnings back to shareholders. I think with this quarter with the regular and the special it was about 37%.

What's the best way to phrase this, Paul? How does some of this noise for lack of a better term with currency fluctuation and LTIP purchases, which obviously has an impact on the capital position, does it change your bigger picture of you on how well capitalized Canaccord is and how much you're willing and able to return to shareholders?

Paul Reynolds

No, I mean I think our stated view is not changed. I mean, our plan is to pay on an annual basis at least 50% of earnings to shareholders and that hasn't changed. I think as I said in the call we're very well capitalized and a strong liquid balance sheet. And we feel that we can – with the profitability of our businesses can be affected by that.

Sumit Malhotra – Scotia Capital Markets

All right, so let's look and actually talk about the business here for a moment. One of the positive aspects in the quarter seemed to be at least in my view the strength in the Canadian revenue environment. And I know in the past Canaccord has talked about that being a higher margin business for the company where the top-line in Canada starts moving. Perhaps first big picture and then I have one that's more specific.

You had some comments in the past about how the Canadian revenue outlook was somewhat challenged. I wanted to get your take on whether Canada is now playing some catch-up with the rest of the world in terms of market activity and your outlook for revenue here for the balance of the fiscal year?

Paul Reynolds

Yes, I mean, I think you just summed it up perfectly. We're seeing definitely a marked pick-up in activity in our Canadian business both on the equity underwriting side and to a slightly larger extent the M&A side. And you saw that in our last quarter results and I think you'll see that to continue.

And I think our view, Sumit, on the balance of the year is I think you'll see a strengthening in all our businesses in the latter half of this year. Generally, the first two quarters are our weakest two quarters and our last two quarters are generally our strongest and I think that trend will continue this year.

Sumit Malhotra – Scotia Capital Markets

And last one, that says, closer to Canada and also in the North American banner is the wealth management operations. It seem like 12 to 18 months ago a lot of us were very focused on the large operating losses being posted in this business, and when I look at my numbers here from the low point which is about a $7.5 million quarter loss, it's down to $2.3 million this time and seems like we're not talking about it enough. So I wanted to get some thoughts from you here. Obviously there has been a pick-up in revenue in the last couple of quarters. I think it was the first quarter of growth on the top line of this business and quite a few quarters now.

So what do you think is the driver, Paul, to get you to break-even in this segment? Is it exclusively a revenue issue at this point or in your view is there still more that can be done on the cost side, that's part A? And then part B to for you to refine a little bit more, how far away do you think we are especially based on your comments on the Canadian revenue outlook from being back to break-even in this division.

Paul Reynolds

Yes, Sumit, I mean, it's basically it's a combination of both further cost reductions that has been implemented that you'll see further cost come out over the next two to three quarters and gain the revenue has picked up in general transactional volume. We've seen that in the Canadian marketplace which is helping us. And I think also with the new products we're going to be launching, again more revenue will come in through those products or stable revenue will come in through those products.

So our view on this business is that by the end of this year, it will be at least break-even, if not profitable.

Sumit Malhotra – Scotia Capital Markets

The end of fiscal 2015?

Paul Reynolds

Correct.

Sumit Malhotra – Scotia Capital Markets

Thanks for your time.

Paul Reynolds

Great, thanks.

Brad Kotush

Thanks, Summit.

Operator

There are no further questions at this time. Mr. Reynolds, I'll turn the call back over to you.

Paul Reynolds

Great, thank you. And just a reminder that we'll be hosting our Annual General Meeting of Shareholders today at 10:00 AM Eastern Time at the TMX Broadcast Center in Downtown Toronto and we hope to see some of you there. And for anyone who cannot join us in Toronto, the event will be webcast and available on the events page in the investor relation section of our company's website.

So with that thank you very much. And we look forward to speaking to you next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call for today. You may now disconnect.

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