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Edited Transcript of CF.TO earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q1 2020 Canaccord Genuity Group Inc Earnings Call

Vancouver Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Canaccord Genuity Group Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Joseph Daviau

Canaccord Genuity Group Inc. - CEO, President & Director

* Donald Duncan MacFayden

Canaccord Genuity Group Inc. - Executive VP & CFO

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Conference Call Participants

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* Jeffrey Michael Fenwick

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Robert Goff

Echelon Wealth Partners Inc., Research Division - MD & Head of Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group Fiscal 2020 First Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference call is being broadcast live online and recorded.

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

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [2]

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Thank you, operator, and thanks to everyone for participating again today on our conference call. As always, I'm joined by Don MacFayden, our Chief Financial Officer. We're very pleased to be joining here today from Boston. This is at the site of our 39th Annual Global Growth Conference, which we're hosting for the next 2 days. This 3-day event has become a premier event for global companies and investors focused on growth. And we are pleased to welcome more than 420 presenting companies and 2,500 registered attendees.

Following the overview of our quarterly results, both Don and I will be pleased 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's expectations for various reasons that are outlined in our cautionary statement and in the discussion of risks in our MD&A. Our discussion today may also include certain non-IFRS financial measures. A description of these non-IFRS financial measures and their reconciliation to the comparable IFRS measures are contained in our earnings release and MD&A for the fiscal quarter.

By now, you've all likely had a chance to review these documents and our supplementary financial information, which were made available yesterday evening. They are available for download on SEDAR or on the Investor Relations section of our website at canaccordgenuitygroup.com.

So now let's review the financial highlights of our first quarter performance of our 2020 fiscal year. Earlier this morning, we posted our quarterly investor presentation to our website. I won't cover the entire presentation during this call, but I will refer to certain slides to guide our discussion. A few weeks ago, we preannounced our headline results for the 3-month period. We did this in order to provide our shareholders adequate time to make an informed decision with respect to our $40 million substantial issuer bid, which is due to expire in just a few days from now. Having said that, most of you are already aware that we delivered another solid quarterly result. Almost all of our businesses achieved meaningful year-over-year improvements.

Total firm-wide revenue for the 3-month period was $325.5 million. This is a record for our first quarter. Excluding significant items, we earned pretax net income of $38.5 million and diluted earnings per share of $0.23, year-over-year increases of 32% and 21%, respectively. While it's still early in the fiscal year, the charts on Page 6 of our investor presentation show that our first quarter revenue, adjusted EPS and adjusted net income have all strengthened compared to our fiscal 2019 first quarter results. This gives us confidence that we are on track for another good year.

We continue to watch our expenses closely even as we invest into our core verticals. Firm-wide noncompensation expenses increased slightly as a result of increased business activity, but when measured as a percentage of revenue remained flat year-over-year. Our compensation ratio continues to be within our target range at 60% for the 3-month period. At the end of fiscal 2019, we announced a revised dividend policy, and I'm pleased to report that our Board of Directors has approved a quarterly dividend payment of $0.05 per common share, reflecting our confidence in the stability and earnings growth that is being driven by our global wealth management businesses. We also anticipate that share buybacks will continue to be an important feature in providing enhanced returns to our shareholders particularly in periods of strong performance by our capital markets businesses. Upon completion of our substantial issuer bid, we intend to apply to the TSX for a normal course issuer bid to be effective in our 2020 fiscal year.

And with that, I'll review the performance of our operating businesses. I'll start with our wealth management business. Excluding significant items, our combined global wealth management operations earned pretax net income of $23 million, an improvement of 25% compared to the same period last year. Revenue for the 3-month period was $130 million, and adjusted pretax margin for our combined North American and U.K. businesses increased to 18%. This is a sequential improvement of 4 percentage points. We are on track to achieve our mission 2020 goals for combined North American and U.K. wealth management businesses as we've outlined on Slide 9 of our investor presentation. Our Canadian wealth business achieved an important milestone in the first quarter with client assets surpassing $21 billion mark for the first time in our firm's history. Excluding significant items, this business earned pretax net income of $9 million, a year-over-year improvement of 80%. This was achieved on quarterly revenue of $57.8 million, up 24% compared to the first quarter of last fiscal year driven by increases in commission and fees revenues as well as higher interest on stock, loan activity and margin accounts. This business also achieved an impressive margin growth of 5 percentage points compared to last fiscal year, as the benefits of our increased scale are becoming increasingly evident in our financial results.

Assets in our U.K. and Europe wealth management business amounted to $45.6 billion, which includes approximately $1 billion added from our recent acquisition of the Miller Thomson assets. First quarter revenue in this business increased by 9% year-over-year to $72 million. Despite higher operating expenses related to the continued expansion of this operation and increased head count, the adjusted pretax profit margin in this business improved sequentially, up to 19.5% as our margin enhancement initiatives have begun to take effect. On a fully diluted basis, the adjusted earnings per share contribution from our combined U.K. and Canadian wealth management businesses was $0.13 or 57% of the total EPS of our combined operating businesses.

For context, I encourage you to take a look at Slide 19, which highlights the earnings stability that our growing wealth management business contributes. This is true even during a strong period for our capital markets business. Since we began our growth initiatives in this segment, significant time and effort has gone into ensuring successful integration of new advisers and clients over to our platform. We continue to pursue growth through selective recruiting and smaller tuck-ins, but we are now able to place greater emphasis on driving organic growth and margin improvements in both our Canadian and U.K. businesses.

And finally, in June, we announced our intention to acquire Patersons Securities, and we expect to close this transaction in the quarter ended December 31 of this year. With more than AUD 13 billion in client assets, this development supports our strategy of adding significant scale to our wealth management business and builds upon the work that our Australian partners have done to make Canaccord Genuity an increasingly strong competitor in that region.

Turning to the performance of our global capital markets business. Despite the global -- despite global growth concerns and some trade tensions, it was a productive quarter for our capital markets segment. We participated in 109 investment banking transactions globally, raising $13 billion for our clients. Our combined global capital markets business earned revenue of $190 million for the quarter, a year-over-year increase of 22%, mainly due to strong contributions from our Canadian and U.S. operations.

First quarter advisory revenue doubled on a year-over-year basis to $53.4 million, and more than $30 million of this amount was contributed by our U.S. business. Excluding significant items, pretax net income contribution from this segment amounted to $20.4 million, up 55% compared to the first quarter a year ago and a testament to the efforts to increase revenue diversity and add scale to our key verticals.

Our U.S. capital markets business earned record quarterly revenue, which includes 100 -- sorry, a 231% increase in advisory revenue, reflecting organic growth and contributions from Petsky Prunier acquisition. The decrease in trading revenues in this region are consistent with the seasonally slow period of our international equities business. Our Canadian business also had a strong quarter with a year-over-year revenue and adjusted pretax net income growth of 40% and 31%, respectively. Notwithstanding the significant volatility that impacted some of our core focus areas and the elevated facilitation losses in our Canadian capital markets business, we were within an acceptable range on a relative basis, as we supported our clients through this period. I will also note that the increase in general and administrative expenses in our Canadian business can be attributed to higher investments in conferences and marketing initiatives to support our increased business activities and market share growth. We do not anticipate similar expense levels in future reporting periods.

Our efforts to improve product and revenue diversity in our capital markets business is helping us improve our competitive position, while simultaneously enhancing value for our shareholders. In Canada, Canaccord Genuity was again the leading equity underwriter for the first 6 months of calendar 2019 based on the league table data provided by FP Infomart. And since our acquisition of Petsky Prunier, our U.S. business has also become a formidable competitor, taking the second place ranking for mid-market M&A in the U.S. TMT sectors. These tables are available on Page 15 and 16 of our investor presentation.

Our U.K. capital markets business ended the quarter close to a breakeven level, a result of the overall expense -- a result of lower overall expenses following our recent restructuring in addition to increased levels in the corporate broking and advisory businesses. Having just returned from a very productive trip to London, I am pleased to see the positive direction in this business under the leadership of Nick Russell and Stephen Massey, and I'm increasingly confident that this group can contribute on our platform. Heading into our second fiscal quarter, all our capital markets businesses are continuing to perform well. And assuming the markets remain accommodative, we look forward to executing on a good pipeline of capital raising and M&A mandates.

In closing, I am pleased with our quarterly performance. We've made significant progress in transforming our business mix, and we are deploying capital strategically to promote sustainable, profitable growth in our business and return excess capital to our shareholders. We are executing on our strategy with the idea that we can help our clients outperform, while increasing our earnings power. I believe there is meaningful upside from an investment in Canaccord Genuity.

Thanks, again, for joining us today, and I'll open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jeff Fenwick with Cormark Securities.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [2]

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So I wanted to start off in the wealth management side of the business, and specifically in the U.K., there looks like maybe there's a bit of a shift in the revenue mix that's going on, and by that I mean it looks like the run rate of revenue off the base of assets that you're managing there seems to be lifting a little bit. Is it just a factor of the tuck-in acquisitions that you've done? Or has there been a shift in some of the way the client assets are being managed that might account for that?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [3]

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Don?

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [4]

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I think it's really just the introduction of the assets and activity from the 2 acquisitions, McCarthy Taylor and Thomas Miller. There's no real shift in the nature of the underlying business.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [5]

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Fair enough. And then when we think about asset growth in this business, and it's a little bit different from in Canada. As I understand it, it's a little challenging over in the U.K. to approach an adviser and then have their assets follow along with them. So how should we think about what a realistic organic growth rate of AUA should look like in the U.K. absence the tuck-ins that you've been doing?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [6]

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Yes, I think a conservative approach would just assume market growth, assume no growth. I'm not saying that's our internal target, Jeff. But I think that would be the most conservative approach you can take through it. Really, where we're focused in the U.K. right now is less so on asset growth, inorganic or organic, much more so on margin improvement. As I think we've told you in the past, we've got a plan to materially increase our margin in that business. You're seeing the start of that take effect right now, with quarter-over-quarter, that margin up 0.5%, and directionally that's where we're going to go, our comparables. In the U.K., a similar asset size could have 25% plus pretax net income margin. So directionally, that's certainly what we're pushing towards over the next several quarters.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [7]

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Okay. And so it's safe to say we should see that just gradually trend higher than as we're watching that business?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [8]

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That's our plan.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [9]

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Okay, and then maybe we'll just switch over into the U.S. capital markets business, I mean obviously, a very big swing in advisory and you mentioned Petsky Prunier, and any other color you can offer around, is it a sector mix? Or I know you've been strong in particular sectors, TMT and health sciences, but anything changing there? And were there any really -- I know you just outsized fees in the quarter there that might account for that really big swing in the advisory that we saw?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [10]

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Not really. There's -- it's really 1s and 2s and 3s, that type of -- it's not like our Canadian business, where occasionally you can get a digit fee. It really is more blocking and tackling. So a big chunk of the increase was definitely the Petsky, but it wasn't the only increase. Our TMT sector in the U.S. continues to perform extraordinarily well and the M&A volume in that has picked up. Our sustainability sector has also been very active in the last quarter. So I just think everyone on our U.S. franchise has stepped up their game. M&A has become more central to their thinking. So we're cautiously optimistic. We'll continue to kind of see that similar trend. Don?

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [11]

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Yes. No, I think that's exactly right. It wasn't skewed by any outside -- outsized large transaction, as Dan mentioned, it's just 1s and 2s and 3s just building up. And activity in our key sectors in technology and the health care sciences area.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [12]

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I think it would be fair to say, Jeff, that the Petsky portion of these numbers is probably over what we've originally budgeted and expected, and the business is performing better than what we had anticipated.

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [13]

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Yes, yes, that's right. Everything is on track and better.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [14]

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Okay. And that's why I was kind of driving out there. I mean it was a pretty exceptional quarter on that front. And I know with M&A, it's never easy to forecast. But if it's a matter of just tapping into a growing pipeline and picking off those 1s and 2s, we could expect, in time, we should be maybe not seeing quite that number every quarter, but meaningfully higher than what you've been doing for the last couple of years.

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [15]

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Yes. Yes, that's right. I mean it wouldn't just simply annualize a single quarter. But I think in terms of an uptick from our historical run rate, I think we can look forward to that during this coming year.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [16]

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(inaudible) Don, did we disclose Petsky revenue?

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [17]

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Yes. At the time we did, it was just over $40 million for their calendar 2018.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [18]

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So Jeff, if you're doing math, we said it's performing better than that and take our historical M&A run rate and upticked it a little bit. Like, that's the math that would work.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [19]

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Okay. Makes sense. And maybe just one more I'll put in here is just around strategic considerations. It hasn't escaped me that big transaction with Piper Jaffray buying Sandler O'Neill, and to a lesser degree, we saw GMP's transaction that got voted on yesterday. I mean what are you seeing in the market there and the opportunities for Canaccord? Is either a buyer or a seller, perhaps? I mean I know that certainly it's the feeling that your performance just hasn't been getting recognized by investors to date. So what are your thoughts on that front?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [20]

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Yes. I mean strategically, there's very few assets in the capital markets business that we would need to acquire. I think we have most of the pieces we have. I think competitively, we're very well positioned in Canada. We're very well positioned in the U.S. I think we have all the pieces we want. In the U.K., that continues to be a volatile market that we are carefully managing through. And on the wealth side, I mean we've got a strategy in place of doing tuck-ins in the U.K., those will be smaller. Australia, we've made our bet with Patersons, and we're excited by the prospect of getting that closed and integrated. In Canada, there's very few wealth assets of size available. If we all know where they are, and of course, strategically, we'd be interested doing them at the right price if they fit into our business. So there's really not a lot to do on the buy side. And you saw that in part in both our increased dividend and our share buyback activity. If we felt that we needed that capital to do a meaningfully accretive acquisition, we wouldn't be buying back $40 million of stock. So I think you can read into that, that we intend to -- that we continue to be very, very profitable, and we're going to use that excess capital to buy our stock, which is what we're going to do. So that would be the kind of the tell, so to speak, if you were playing poker. So that's kind of where we are. But our Canadian business, I mean last year, we had $60 million of pretax net income in our Canadian business, the GMP business sold for less than that number. So we're above that number. So like the scale of our business and their business is completely different. Literally, we made more than what they sold the whole business for.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [21]

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Sure. And I guess, from my standpoint, does it mean that someone comes knocking on your door even just how you're trading at this very depressed multiples as far as I can tell.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [22]

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Yes. No, I can tell too. So, yes, our job is to create shareholder value. You never say never. Obviously, as a banker, I would never say never. But our -- we feel that our stock is materially undervalued, like to the tune of multiples, not to percent. So it'll be hard to strategically have an intelligent conversation when you think your stock is trading at 1/2 or 1/3 of where it should be.

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Operator [23]

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Your next question comes from Rob Goff with Echelon.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [24]

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Thanks for your new report and your coverage. I appreciate.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [25]

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I have never been called concise. And this is perhaps going back to Jeff's question a little bit. But could you talk to the Canadian wealth management margins and your outlook there in terms of further gains? And perhaps, going back again to the U.K. as well to paraphrase, I believe you were saying consistent gains as you were early in realizing on those gains. Could you talk to where they are being realized as well?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [26]

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We will let Don deal with both of those things. Don?

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [27]

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Well, on the Canadian wealth, I think, it's really a question of scale in terms of margin improvement. Each incremental dollar revenue that we add through our adviser acquisition program has a contribution to the bottom line because the variable costs are the variable costs, and it leaves a healthy margin after that. So it's really a question of scale and continuing to build on our program. In Canadian -- or on the U.K. wealth side, what was the question again?

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [28]

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There you had indicated a phrase that the margin enhancement initiatives were beginning to gain traction. So it's just one of -- can you talk to some of those initiatives? And is it one where we should look for consistent margining up of those margins?

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [29]

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Yes, I think, over time, when we acquired Hargreave Hale, it was really just sort of a bolt-on. There wasn't immediate integration in terms of platforms and systems and so forth. But that has commenced at the start of this fiscal year, a common platform. So there's going to be some synergies and enhancements just from moving off of 2 systems onto 1 system. So we've seen the introduction of that at the start of this year in this quarter, so that will continue as we progress through this current fiscal year. And some of the compensation programs in terms of rationalizing those and combining those was a multiyear program. So that will continue to work off -- we'll continue to see that during the course of this year and into the following year. So it's those 2 items, in particular, that will sort of lead to what we believe can be fairly significant margin enhancements in that region.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [30]

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So in Canada, Rob, like, last year, we did 13% pretax profit margins, last quarter we reported 16%. Obviously, these things will go up and down quarter-to-quarter. But you'll see in our investor presentation, we talked about, if we add $1 of inorganic, if we recruit an adviser, we'd like to think we'll put $0.30 to the bottom line or 30% to the bottom line. That invariably increases your margin. Like, assuming you don't take on a bunch of fixed costs, which we're not doing, that increases your margin. Obviously, organic growth if an adviser grows, that flows after you the pay the adviser and compensation that flows directly to the bottom line. So that's the advantage of scale. We continue to increase our assets. We continue to recruit aggressively. So we'd like to think that we can improve our margins. We have stated, again, in our public documents that overall, we see our margins improving like 5 percentage points in our wealth business, which, let's say, well, that's interesting, but that could be $500 million of revenue or $25 million of incremental net income just for margin expansion in our wealth business. So we continue to be excited by the prospects of that.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [31]

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If I may, could you talk to the dynamics of your Canadian wealth management recruitment pipeline, and then perhaps the prospects for tuck-in acquisitions in the U.K. wealth management?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [32]

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Sure. In the Canadian recruitment pipeline, it continues to be robust. I mean it goes through periods of where the pipeline is increasing and decreasing. But today, you got us on a good day, and the pipeline is pretty active and pretty robust. We see advisers from both firms we've recruited from in the past as well as new firms, some of the bank-owned dealers. So we continue to see a very good traction of people we're bringing on in all of our offices right across the country. So I think we'll continue to see that pace. As you've seen, again, in our updated presentation, we brought on, I think, 19-or-so advisory teams, brought on close to $9 billion in assets that way. So we'd like to think that we can kind of keep that pace up. I think I've been publicly in the past stating that, that $60 billion in assets growing to $80 billion in assets. A big chunk of that growth, probably half of that growth is going to be into our Canadian business. And of that $10 billion grow, we would see half of that being acquisitions or not acquisitions, but recruitment of advisers. So you can backdoor that into roughly $2 billion a year of recruitment, which is the pace we've been running at, quite frankly. We've been running at in excess of that pace. So it continues to be good. We continue to feel confident, and hopefully we'll overachieve our targets. On the U.K. side, tuck-ins by definition will be small. We're trying to integrate them into our business. Our primary focus on the U.K. will continue to be improving our margins from our existing business, but part of that will involve bringing in small firms at the right price into some of our treasury offices. I think we've got 10 offices now in the U.K. and offshore. That gives us the unique opportunity to bring in smaller platforms and integrate them into our offices that we really didn't have when we were just centrally located in London. So I think you'll see more of the acquisitions be smaller and into some of our treasury locations.

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Operator [33]

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

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [34]

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Thank you, operator, and thanks for joining us today. Just a reminder that our fiscal 2019 Annual General Meeting will take place at 11:00 a.m. today, Eastern Time, and the meeting will be webcast and available on our Investor Relations website. But for those of you on the call here that have joined us today from Boston, either as a client of the firm or an investor, we look forward to spending time with you over the next coming days and showcasing the very best that Canaccord Genuity has to offer. Operator, thank you very much. And if you can close the line, that would be great.

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Operator [35]

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