Canaccord Genuity's (CCORF) CEO Dan Daviau on Q2 2017 Results - Earnings Call Transcript

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Canaccord Genuity Group Inc (OTCPK:CCORF) Q2 2017 Earnings Conference Call November 2, 2016 8:00 AM ET


Dan Daviau - CEO

Don MacFayden - SVP, incoming Chief Financial Officer

Brad Kotush - Chief Financial & Risk Officer

Adrian Pelosi - Chief Risk Officer

Nick Russell - SVP Finance


Graham Ryding - TD Securities

Sumit Malhotra - Scotia Capital


Good morning, ladies and gentlemen. Thank you for standing by. I’d like to welcome everyone to the Canaccord Genuity Group Incorporated Fiscal 2017 Second Quarter results conference call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] As a reminder this conference call is being broadcast live online and recorded.

I would now like to turn the conference over to Mr. Dan Daviau, President and CEO. Please go ahead, Mr. Daviau.

Dan Daviau

Thank you, operator, and thanks everyone for participating on the conference call today. Joining me on the call are Brad Kotush, our Chief Financial and Risk Officer; and Don MacFayden, our Senior VP Finance and incoming Chief Financial Officer.

I’ll begin by providing an overview of our second quarter results for the period ended September 30, 2016. Afterwards Brad, Don, and I will be please to answer questions from analysts and institutional investors.

A reminder 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 expectations for various reasons that are outlined in the cautionary statements and in the discussions of risks in our MD&A.

I encourage you to review our earnings release, MD&A, and supplementary financial information, all of which were made available yesterday evening. These documents can be found on SEDAR or on the Investor Relations section of our website at

As many of you may have read in our press release, Brad Kotush our Chief Financial and Risk Officer has decided to leave Canaccord Genuity Group in February. He’s staying on till we report our third quarter results in order to ensure an orderly transition of responsibilities to his successors. While he will be with us for three months, I’d like to take an opportunity today in front of all of you to thank Brad for his partnership and many contributions to our firm and employee over the past 18 years.

I’d also like to congratulate Don, who is here with us right now, on his appointment to Chief Financial Officer, Adrian Pelosi on his appointment to Chief Risk Officer and finally Nick Russell on his appointment to Senior VP Finance. These gentlemen have more than 45 years of combined experience with our organization and I’m confident that they are more than well suited to succeed in their new roles.

I’ll now provide you with an overview of our performance during our second fiscal quarter. The period of uncertainty before and after the Brexit vote and leading up to the U.S. Federal elections has impacted global equity capital markets activities since the start of 2016. The activity of this prolonged period of lower activity and small and mid-cap equities was evidence in our second quarter results.

Canaccord Genuity Group revenue for the second fiscal quarter of fiscal 2017 was a $194 million, an increase of 1.6% when compared to the same period of last year. While subdued investment banking activity impacted portability of our Canadian, U.S. and UK and Europe capital markets business. Our Australian capital markets it seems delivered a record results.

Additionally, our wealth management business in Canada and the UK and Europe both performed at breakout levels which helped mitigate the impact of dynamic changes in the industry landscape for our capital markets operation. We incurred a second quarter diluted loss of $0.03 per share, higher than the loss of $0.01 per share in the second quarter of the previous fiscal year.

Excluding significant items, net income for the second quarter $2 million, an increase of 3% when compared to the same quarter last year, but down from $8 million in the previous fiscal quarter. Since we announced our restructuring initiatives nine months ago, we’ve achieved most of our cost reduction goals, with an additional benefit from changes in foreign exchange rate.

For the second fiscal quarter firm-wide expenses, less significant items and incentive compensation were $87 million, a decrease of 7% compared to the same period last year. Additionally, second quarter general and administrative expenses reduced by 18% on a year-over-year basis, a testament to our ongoing commitment to cost containment.

During the quarter we also announced a $60 million price replacement of convertible debentures with a leading Canadian asset manager, and one of our long time shareholders. This has provided the capital flexibility to invest in our strategy of growing our Canadian wealth business while maintaining our current capital, which protects our capacity to increase business activity and our earnings capability. At the end of the second quarter our company had $385 million in working capital and $318 million in cash and cash equivalent.

It is important to note that these levels do not include the additional funds raised through our private placement, which closed subsequent to the end of our second quarter. I’d also like to note that we announced new dividend rates on our cumulative five year rate resets series A, preferred shares, for the period that comments just after our quarter on October 1.

As the dividend rate on these shares is linked to Government of Canada Bond Yields, the current lower interest rate environment means that we can expect additional cost saves with respect to our dividend payment obligations. Based on these new rates dividend payments on just this series of prefs are expected to be reduced by $500,000 for fiscal quarter. With the bulk of our restructuring initiatives behind us, we continue to explore additional sources of cost savings across our global platform, we’re making prudent investments in areas where we expect to deliver sustaining long term growth.

Now turning to the performance of our capital markets business. During the second quarter our global investment banking teams participated in 78 transactions to raise proceeds of $9.3 billion for global growth companies. For the period ended September 30, our global capital markets division generated revenue of a $127 million, the strongest performance as mentioned came from our Australian operation, which recorded year-over-year revenue increases of a 113%.

This performance was offset by our UK and European operations, which recorded revenue of $28 million, a 27% decrease from the $38 million in the same period last year. Notwithstanding Brexit however, I’m pleased to report that revenue in this business increased by 13% when compared to the most recent fiscal quarter, primarily driven by an increase in advisory activity.

As greater clarity develops with regard to the timing and form, that Brexit will take, we expect that new issue and M&A completion activity in this business will improve in the second half of our fiscal year. Given the challenging operating environment in this region, we are committed to thoughtfully reviewing all available opportunities with respect to having a long term sustainable business strategy in the UK and Europe. We remain fully committed to the delivery of innovative solutions and a consistent client experience. And we’re only going to consider options that offer superior value to our clients and our shareholders.

Notwithstanding a softer business environment, our Canadian capital markets teams continue to perform for clients and in our second fiscal quarter recorded a 14% year-over-year increase to $28 million. However when compared to the previous fiscal quarter revenue in this business decreased by 42%. Investment banking revenue and was down by 22%, a reflection of the seasonally lower activities during the summer months, and advisory fees importantly declined by 81%, due to the inherent variability and variable nature of this activity.

Total compensation expenses in the business for the second fiscal quarter increased by 11 percentage points to 62.7%, primarily the result of fixed amortization of previous share based compensation awards against a much lower revenue base for the period.

Our U.S. business recorded a slight year-over-year revenue decrease of 2%, while investment banking and advisory activity in this business were lower, our principal trading operation continues to post strong performance and increased by 38% to $19 million from $14 million in the same period last year.

Firm-wide revenue earned from principle trading during the second fiscal quarter improved by 53% on a year-over-year basis to $27 million. And 72% of our total principal trading revenue for the quarter was generated by our U.S. business.

Across our global capital markets businesses, we've recruited into our core focused areas to strengthen our global capability and improved cross-border activities in investment banking, equity research, and sales and trading. We are also gaining traction from expanding our capability in Dubai and Tel Aviv, and we expect these businesses to deliver growing contributions in the next quarter.

As a result of increasing corporate access in analyst marketing across the regions, we’ve experienced an increase in direct orders and attractive interest from new accounts. As we continue to leverage the strength of our integrated global platform to deliver differentiated service offerings, I am remaining confident that Canaccord Genuity will further establish our position as the dominant global independent investment bank.

And now turning to the performance of our global wealth management operations. Globally, Canaccord Genuity wealth management generated $64 million of revenue during our second fiscal quarter. Global assets under management surpassed $34 billion, a new records for our business. In the UK and Europe, our wealth management operation recorded second quarter revenue of $34 million and net income of $7.6 million before taxes and after inter segment allocations.

Even with the currency headwind resulting from the decline in the value of the pound sterling this business produced record results in Canadian dollar terms, when measured in local currency assets under management grew by 6% to £13.6 billion since the end of first fiscal quarter and grew by 20% over the past 12 months.

With the investments to improve our infrastructure behind us we've seen -- we've been able to steadily improve our operating margins in this business. For the second fiscal quarter expenses as a percentage of total revenue decreased by 4.6 percentage points on a year-over-year basis to 81%. Operating margins has improved to over 20% during the quarter, a level we believe is sustainable for this business compared to a level of 17% for fiscal 2016.

I'm also pleased to report that our Canadian wealth management business has achieved its second consecutive quarter of profitability. Expenses as a percentage of revenue in this business have declined steadily over the past two quarters and were 85% at the end of the second fiscal quarter, a year-over-year decrease of 2 percentage points and the lowest level since fiscal 2012.

With this divisions return to profitability we are now focused on actively recruiting established advisor teams to accelerate growth in this business. This initiative will support our earnings stability as additional advisor headcount will help to increase our share of stable and reoccurring fee based revenues. Additionally, as a key distribution channel for new issuers increased scale in our Canadian wealth business will increase support of our already strong capital markets business in this region.

Our strategy of selectively hiring advisors is a prudent and efficient approach to increase assets under management. In the recent months we've welcomed nine high performance investment advisory teams and we continue to gather commitments from others. These current and planned additions represent combined new assets of approximately $2.5 billion which brings us significantly closer to our stated goal of $15 billion in assets under administration and ultimately beyond that level for this business.

While the increase in costs associated with onboarding new advisors and client assets will have a short term impact on earnings in this division, I'm confident that our recruiting efforts will contribute to the long term revenue and asset growth in this business.

In both Canada and in the UK and Europe we're intensely focused on delivering on our strategy to increase scales so that we can build a stronger, more competitive business and provide improving returns for our shareholders.

Now, when I assumed the position of President and CEO one year ago one of my most important priorities was to eliminate any barriers that were making it difficult for our teams to maximize opportunities globally. With the support of my partners across the organization we've made tremendous progress to focus our business in areas we know we can lead. While the dynamic changes in our industry will continue to present new challenges, we're better equipped to withstand the impact of factors beyond our control.

Across our operations our teams have adopted a stronger bottom lined focus and harnessed opportunities to drive incremental revenue growth and ultimately earnings stability. With these elements in place we're now able to focus on growing our market share in the areas where we have the greatest potential to lead the market, grow our profitability and improve returns for our shareholders.

And with that we'll be happy to answer questions from institutional investors and analysts. Operator if you can please open the lines, thanks very much.

Question-and-Answer Session


Thank you. [Operator Instructions] Your first question comes from Graham Ryding from TD Securities. Your line is open.

Graham Ryding

Could you maybe just talk about the decision to -- with the money that you raised for the recruiting Canadian wealth management advisors. Can you just talk about your decision making and choosing to raise capital sort of using your existing capital?

Dan Daviau

Yes, I mean we -- and I can lead Brad or Don speak to it as well, maybe they'll provide some supplementary views on this. I mean we have an ample balance sheet to run our business or had an ample balance sheet to run our business, that was never the issue. The issue was we had a three year plan to grow our assets under administration and our wealth management business, given the way that business is transitioning both from a bank perspective and advisors wanting to leave the bank as well as the transitioning we've seen on some of the recent M&A transactions or rumored M&A transactions we had a chance to expedite that business plan and really had more advisors come at us than we've seen in a very long time.

So we want to take that business plan, a capital plan so to speak, that we had over three years and in theory execute it over three months or six months or 12 months that pushes up your capital requirement. Every advisor you bring on has a capital obligation associated with it. We felt that was the prudent and right thing to do to take advantage of the market opportunity. We had a chance to raise money that I perceived to be pretty good terms on a tax adjusted basis the interest rate on a convert is more than offset by the reduction in our dividend payment on our -- perhaps [ph], so I don’t think there is a long-term impact on earnings, at least short-term earnings and then converting what we perceive to an okay value, not where we really perceived value, but something we were prepared to stomach to get to a bigger place. We felt that was the right financing vehicle to do it.

So the short answer is, it was a way that accelerate the business plan and not withstanding that was painful, we think it was the right decision, relative to say buying another independent and issue a bunch of paper to do that or paying 2.5% of assets to buy a firm when you can buy individuals much cheaper than that much cheaper than 2.5% of assets and you’re getting the people you want and you’re getting -- you’re not bringing on ancillary infrastructure that you ultimately have to rationalize. So it was just a more prudent way to grow the business Graham, probably more than you wanted to know, but that's kind of how is at, Brad anything else on that.

Brad Kotush

No Dan, I think that’s accurate.

Graham Ryding

That’s helpful. Thanks. You mentioned you've brought a nine new advisor teams with 2.5 billion of AUA [ph] associated with those teams, how much of that AUA is currently within your numbers or -- and then how much you expect to flow through over -- and over what timeline?

Brad Kotush

Graham it’s Brad, I think we said 2.5%, I think that's what we have sight on and we haven’t achieve that, the number that we are recruiting in is probably closer to around 1.4 or 1.5ish, going to 1.6 [ph]. So, that’s going to come in and again that’s what our recruit had at their former firms and so we expect to have a reasonable amount of conversion of that. But I want to be clear that the number you quoted is what we ultimately hope to achieve over the short-term.

And of that book we expect that they have a high concentration of managed books, certainly one of the largest producers that we have is nearly close to 100% managed and the others are probably north of 60% to 65% AUM.

Dan Daviau

But Graham, none of those numbers are in the quarters that we just put out. Unfortunately, none of the addition in our assets that you see reported came from those advisors.

Graham Ryding

Okay, got it. But the nine advisory teams that you’ve recruited what’s a reasonable expectation for the money to -- the AUA to flow into your platform?

Dan Daviau

Well, experience has shown us there’ll be initial jump over the first 90 days. So, we’re going to have some more come in before the end of our quarter. And we would hope that within a year they would have anywhere between 80% to a 100% of what their formal books were.

Graham Ryding

Okay. That is helpful. And how should we think about the cost of recruiting like -- I appreciate your comments about the targeted growth for this platform as opposed to just buying a whole platform altogether. But how do we think about how the cost are going to flow through and then associated with that. Is this in development expense or does this flow through into just your overall compensation line, or --?

Dan Daviau

Yeah. There is several costs of the effort to put in place, I mean this is definitely a development item, so when you buy these book of businesses as you know its 10 year-ish loan that defer over 10 years. So, if you thought that you spend a billion dollars and that it would be 100 million -- sorry if you thought you spent a $100 million, it would be $10 million amortizing per year for example or $2.5 million bucks amortizing per quarter and then assuming you brought it all in at day one. So there’ll be that expense and that one more than offsets by the assets that come in and the fees associated with those assets.

The problem is the short-term impact of paying transfer-in fees, which you need to pay, to help the advisor bring this book in, as a short-term impact of paying transfer-in fees and the assets are just coming in. So then you’re realizing revenues. So I think you’ll see in both our press release and in what we talked about, you’ll see a -- and we don’t know exactly what that is at this stage. But you’ll see a short-term impact of transfer-in fees that doesn’t show up on compensation, offset a little bit by the new revenue coming in, but we just don’t know the timing between those two. Those are the two primary kind of ancillary expense items that you are going to see flow through our wealth statements.

Graham Ryding

Okay. That’s helpful. And then just if I could, my last question. Just the $6 million that you flagged as a non-recurring cost in the coming quarter. Could you just break that down into the components across the three different areas that you flagged?

Dan Daviau

I don’t think I’ll give you a complete visibility on it, but one area is just what we were talking about, those transfer-in fees, and it’s just hard for us to know the timing of those, as an asset comes in, as something comes in we got to -- you know somebody wants to transfer-in a 100 accounts, the average transfer-in fee, Don, right now is about $300 an account?

Don MacFayden

Well probably about half that.

Dan Daviau

So, $150 an account or whatever it is we got to pay that. So we just don’t know how fast it is, we’ve tried to make an estimate and we got a lease obligation, any gain on our continued effort to cut cost, we give up a floor in Toronto. There is just a onetime expenses associated with giving up a floor, we had [indiscernible] in that floor, that you basically got to expense right away and any difference between the rent we were paying and the rent that we sub-levered at, that’s a onetime expense as well, that’s going to impact it. We got pretty good visibility on what that number is.

And then finally in the context of the transition we just announced, there is some expenses, nothing extraordinary. Just given you a little heads up, these are charge associated with those, three things primarily in the new quarter, what do you call them one time or whatever, we’re not going to report them as a special provision, but they are there and we don’t want to steer people in the wrong direction.


Your next question comes from the line of Sumit Malhotra from Scotia Capital. Your line is open.

Sumit Malhotra

Couple of numbers questions to get started. Firstly, on the advisory fees. Now this has been an area of strength for the company and actually a quite consistent line item since the merger that goes back six years and what appears to have been a decent environment for advisory for assets [ph] in a global basis, this is one of the lowest numbers we’ve seen for Canaccord Genuity in the time that the two have been together. Is there any concern on your part about loss of market share in some of your key verticals or is this just a blip and we shouldn’t make too much of it?

Dan Daviau

I think you know how I’m going to answer that Sumit.

Sumit Malhotra

I’ll say it more directly, there has obviously been a lot of conversations about personal changes and my question is going to relate more to, what does the pipeline look like going forward in what seems to be decent environment for M&A?

Dan Daviau

Listen, I mean you will go back and you say, hey this is the lowest level in a while and you’re right, if you look back to the 10 or 12 quarters previously, it is. We’ve had several quarters of low 20 M&A revenues, like several quarters in the back and this one was 18 [ph] albeit lowest. We didn’t have any big M&A checks that flew -- that came in, in the quarter, like not. And that’s kind of rare. We typically would have a couple of chunky once and we just -- it was -- it’s a chunky business. I mean this, I would argue the 18-ish number is kind of the ones all added up, the smaller fees all added up and then typically you’d see a couple of bigger ones kind added on top of that, which is why that number kind of balloons up.

In the UK, we didn’t have strong M&A quarter and you wouldn’t expect to have a strong M&A quarter with Brexit going on, a lot of decisions got pushed to the right, not off the cliff, but simply pushed out to the right. In Canada it was the summer months and again sometime you have a chunky M&A check we didn’t have any, we had a lot of smaller ones, and the U.S. as well. So you’ve seen a big mega cap M&A environment, those are balance sheet driven large M&A trades, private equity lead trades that typically wouldn’t be our wheel house, never has been our wheel house, since I’ve been at the firm.

So the pipeline remains good, but it’s chunky M&A, so you never know. Like I put all those things at 50% probability till they’re announced. So I think we’ve got a reasonably strong pipeline for this upcoming quarter and certainly a strong pipeline beyond that quarter. We’ve recently replaced a number of people, as you know there has been a transition in our business, we replaced a number of professionals. M&A checks take time, they don’t -- you don’t start working on a deal day one and expect to announce it on day 20 or 30, expect to that announce it on day 180. It just takes that long. So some of those professionals have been in their seats 90 days or beyond that.

So an interesting environment. So I don’t think we’ve lost market share, I don’t -- that number could balloon back up to historical high levels. But you just don’t know, Sumit. So I don’t want to expose you or me to saying something silly. But the pipeline remains reasonably strong, I think you’ll see it improve in the UK with stability there, I think you will see it improve in Canada and then the U.S. will still be a ones and twos type market in terms of smaller M&A. But that’s generally been what we’ve done in the U.S.

Sumit Malhotra

Fair enough. Second number question for me was on expenses. You mentioned in your prepared remarks that the initiative to reduce fixed cost is trending well and I see that as well down about 7% year-over-year. Was a bit disappointing though in a quarter in which revenue is relatively flat year-over-year to see the incentive comp move up as much as it did.

Now I don’t -- in previous two Q4s you’ve talked about the need to protect certain individuals and perhaps that led to an increase. It sounds like somewhat -- I want to make sure maybe Brad can help here, it sounds like this one was more formulae referred to share based comp. I guess I would say, if you could just give us a little bit more detail on what exactly drove the incentive comp higher and how you as CEO and a large shareholder look at these numbers with revenue flat and variable comp up as much as it is.

Dan Daviau

A great question. If you look at our supplementary disclosures Sumit, I know you’ve done. Most of the comp drive increase, not all of it, but most of it, came from the Canadian capital markets or operation and came from share based compensation as a percentage of revenue, that went from roughly five and change percent to closer to 13%. That’s where most of the increase came from.

As you put people deeper and deeper into our stock, individuals which is something that we have stated we want to do. We want our senior producers all owning a lot of stock. We did that intentionally through the private placement, we did that last year through our compensation means and you amortize that stock over a three year basis however you amortize it, that’s a fixed charge. I mean that doesn’t go up and down with revenue, everyone owns that stock and you amortize it over a period of time.

When revenues half in the business, which is what happened in that quarter, again a timing issue. That line item doesn’t change to the point that you admit [ph], it becomes very mathematical. So as a percentage of revenue that goes up a lot, and that’s the primary driver of that number. It’s the primary driver of the entire increase in compensation, is the fact that our employees own a lot of stock and the stock is a fixed charge against compensation even when revenue fall.

Now people aren’t getting paid anymore, they have that stock, that stock’s just amortizing through the statements.

Sumit Malhotra

That 3.5 million that I see for share base comp in Canaccord Genuity, Canada this quarter which is up sequentially and it relates to the issuance that you had conducted that will be more of a fixed line going forward is that the right way to think about it?

Dan Daviau

I think so. Some of that when we get to Q4 and we really start to pay people. The non-share based comp may offset a chunk of that, in other words you’ll see a reduction in non-share based comp as a chunk of it. But if you go from quarter-to-quarter-to-quarter and until you get to a year end and we've a bad quarter, we pay once a year, we don't pay every quarter, we make estimates every quarter. So, Q4 is something where we'll sit down and reassess that and make sure that we're paying people the right amount relative to that, but yes that's a fixed charge per quarter, that's not going to bounce around a lot.

Sumit Malhotra

And look, this all comes back to 190 million plus of revenue, you're looking at this as a level that in what has been a tough take for independent brokerages [ph]. It’s not a bad level of revenue and you've actually been pretty consistent in that over the past year or so and my thinking was that with some of the fixed cost reductions you’ve made, that's now a level that's sufficient to keep this company on the right side of the breakeven mark [multiple speakers] disappointment that you didn't see it this quarter?

Dan Daviau

Yes I mean I wouldn't read too much into it. I think it becomes a geographical issue where that is the right level of revenue, it's a question of where you earn it and how you earn it and in Canada when your revenue goes down by 40%, it creates some anomalies and in the UK when you're looking money that creates anomalies.

But I think on balance you're right that is a level where we should be making money or breaking even because we're pretty consistent on it. But our principle trading business was much higher, Australian business was much higher, we only own half of that, so we only get half the benefits of those earnings. There is a minority charge against that as you know, depends on the tax jurisdiction and where we earn earnings and don't earn earnings, that materially effects our bottom line results.

But again negative $0.03 or negative $0.02 and positive $0.02 or $0.03, I don't want to say that these are accounting anomalies, but I'd argue for those types of levels 2 million, 3 million bucks one way or another is an accounting anomaly. I think you're right to assess that broadly speaking revenue of levels we're achieving, we should be achieving breakeven on a consistent basis. There's going to be anomalies depending on where we booked that revenue.

Sumit Malhotra

Last question is going to be on the UK wealth management business which in my view continues to be by far the best part of this company from an operating perspective. So when we convert the numbers into local currency, it looked extremely strong, 18% growth in revenue, 20% growth in asset under management.

So the first question would be, as far as the business is concerned you've certainly discussed the challenges that the European capital markets division is facing as a result of some of the, let’s call it macro-volatility, put this one to you directly, why do you think that your wealth business has been seemingly immune to a lot of the volatility we've seen for a number of years now given that it too definitely has a market facing component?

Dan Daviau

Our wealth business is just isn’t impacted by Brexit, arguably it was helped a little bit by Brexit, although it's mainly a wealth management business, there is still trading that happened around the Brexit vote which arguably helps our wealth business. That money is very sticky, a lot of its offshore, it's not moving around depending on whether Brexit happens or doesn't happen, arguably it could help that business.

So, we just have seen Brexit was either a good news thing or a no news thing for our wealth business, somewhere between the two.

Capital markets is different, people don’t issue equity when the markets are bouncing around or when the currency is falling dramatically which is what happened. They don’t issue equity and generally speaking they delay M&A decisions and on the margin that's half of our revenue, in the UK capital markets business, the new issue business and M&A business typically would be half of our revenue and half of our revenue gets materially impacted, you are going to see an impact on bottom line results. Brad I don’t know if you’ve got any other [multiple speakers].

Sumit Malhotra

I’ll tag Brad and if I can, I was just going to say Brad on the pretax margins of 18.5%, I think this is one of the best levels we've ever seen, if -- and it looks like it’s going back, it is the best level we've ever seen. Clearly all of these businesses have operating leverage when revenue is as strong as it was. Anything outside of just the strong revenue environment that in your view boosted this margin?

Brad Kotush

Well Sumit, I think in some of our commentary we talked about the investments that we've made and its set some of them and you’ve been following us long enough to have heard that some of those discussions and now they’re continually working on improving that. So it helps our investment managers be more effective. I think they’ve had improved investment performance and I guess a virtual cycle of having more efficient advisors, better performance and the ability then to attract more assets or convert into managed assets away from executional mix [ph] services. So it's been those -- the individuals responsible for running that business, I think they've done an excellent job and are very motivated to improve margins.

Sumit Malhotra

Last question for me and it relates to this a well, Dan you touched on it when you were talking about your Canadian wealth operations, there is certainly been charter in the market place about the value of wealth businesses inside independent broker dealers at times when their capital markets business is not firing on all cylinders. Your UK wealth business is one of that, maybe because it's on the other side of pond or it's not as visible for some of your investor base.

At least from my seat it feels like this business hasn’t gotten the appropriate valuation for just how much you could receive for it if it was to be for sale, now strangely on one hand it compliment the performance of the business and then say would you consider selling it, but in your mind have you contemplated at least showing the marketplace even in a smaller way just what this business could be worth if you were to float a portion of it.

Dan Daviau

Yes, I mean we could always do that and force the market to look at the value. But again I mean the assets are comparable to what Richardson GMPs assets are, the only difference is this business actually makes money, so there is rumors out there as to what Richardson GMPs business is worth, I mean it's kind of obvious what this business is worth applying any multiple of revenue or any multiple -- any percentage base of total assets.

So it's obvious what this business is worth I don’t need to spoon feed to the people. If your question is do we sell the business, I mean if we sold the business we know exactly what the impact on earnings would be, you’ve got 7 million bucks earnings this quarter times four, we know exactly what we would lose on earnings. We got to make assumptions as to what we do with that big chunk to cash that came in, but net-net-net I perceive selling that businesses is burning our office furniture to eat our office during the winter, that you’re not going to like what it looks like in the spring.

So, I’m not sure that that would be the prudent exit, to force to street to realize a couple of dollars in value in our stock, when we’re building a business over the next three years Sumit, I just don’t think that’s the right strategic move.

Sumit Malhotra

That’s a way I put it too, right. It seem strange for me to open by same this is the best part of the company and then say on the other hand have you contemplated this, but I think we’re coming about at the same way here. It seems like the entire value of the stock could be, of Canaccord Genuity as a whole, could be achieved by this business alone. And it doesn’t feel to me that that’s valued in the market and again maybe there is just more communication required on that front?

Dan Daviau

Yeah, yeah. Listen, at the end of the day our employees own a big chunk of stock including the employees that run that business for us. Own a big chunk of stock in our company. And I think we’re all aligned about creating value over the medium term for our stock. Medium-term doesn’t mean next quarter, medium-term means exactly that, the next couple of years. So, sooner or later the market will realize the value for it, or I guess we could force the market to realize the value for it, but that’s not a strategy that we need to pursue in the short run. We believe that that business has lots of legs left, maybe not that the marginal keep on going up, but the assets are up 20% year-over-year, Sumit, in local currency terms.

We continue to perceive real good growth opportunities. As you know, we continue to look at strategic opportunities with that and with respect to that business. And I’d say I’m getting tired of saying this, but this is probably a more -- there is more activity around the strategic side in that business than there is been maybe in the last couple of quarters. No guarantees that we’re going to get something done, but we’re looking at lots of stuff and trying to get something done. Again trying to be prudent on our acquisition side there.

So, we would see more upside if you walk in with the premise that you think you can double that business or whatever, why would you ever sale it today for a short-term value model. It just doesn’t make sense, like, as an M&A bank it doesn’t make sense, but more importantly as a large shareholder of this company, it doesn’t make sense.

Sumit Malhotra

Well, it did probably would be reflected more in the stock, I think you’ll agree if some of the other parts of the business the larger component of the business. We’re operating in a bigger way so that you could have the focus being as you say maybe more on whether there is 3 million of extra comp because the geography, we should we talking about the performance of this business rather than that stuff. So and that would be the hope for everybody there.

Dan Daviau

Yeah. No, couldn’t agree with you more that we need to perform better in our capital markets divisions. Got it.

Sumit Malhotra

Thanks for your time.

Dan Daviau



Mr. Daviau, there are no further questions at this time. Please continue.

Dan Daviau

Well, listen thanks everyone again for listening in on the conference call. And again thanks to Brad for the role he has played here in the transition over the next couple of months, and Don is available and we’ll get him out to meet with healthy subset of you guys over the next three months.

I’m very confident that from a transition point of view, this is going to happen seamlessly and excited by the opportunity for some of the new people who’ve been sitting in their roles for a long time. So, this certainly creates opportunity for everybody looking forward to that. And looking forward to a better environment in our mid cap arena and cautiously optimistic towards that. So, again thanks everybody for participating in the call and look forward to seeing you soon. Thank you.


Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect.

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