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Edited Transcript of CF.TO earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q2 2020 Canaccord Genuity Group Inc Earnings Call

Vancouver Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Canaccord Genuity Group Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm 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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* Graham Ryding

TD Securities Equity Research - Research Analyst of Financial Services

* 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 Inc. Fiscal 2020 Second Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference call is being broadcast live online and recorded. I would now like to turn the conference call over to Mr. Dan Daviau, President and CEO. Please go ahead.

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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 participating on the conference call today. As always, I'm joined by Don MacFayden, our Chief Financial Officer, and we're very pleased to be joining you from our Vancouver offices this morning where it's -- where I'm not as pleased to say, it's a very, very early start for us today.

As many of you are aware, our company was founded here in Vancouver more than 50 years ago. Many of the past and current employees in this part of the country have been integral to supporting our domestic and international expansion into the leading independent wealth and capital markets firm that we are today. And I'm pleased to be working alongside them this week.

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 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 comparable IFRS measures are contained in our earnings release and our 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 the Investor Relations section of our website at canaccordgenuity.com.

We've also 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. So now let's review the highlights of our second quarter performance for our 2020 fiscal year.

The operating backdrop during the 3-month period was impacted by an uncertain interest rate environment, trade wars and ongoing confusion surrounding Brexit. Additionally, the North American summer months have been traditionally slower periods for our business and contributions from the cannabis sector were negligible on the back of a very volatile period for these stocks in the second quarter.

There was a time when such events would have had a more profound impact on our profitability. But I am pleased to report that we delivered a solid quarterly financial result. This is testament to the efforts to increase reoccurring revenue contributions from our global wealth business while intensifying our focus on growing our share of higher-margin capital markets activities, with particular emphasis on advisory.

Total firm-wide revenue for the 3-month period was $271 million. And excluding significant items, we earned pretax net income of $28.6 million, which translate to adjusted diluted earnings per share of $0.18. Our global wealth management business contributed 72% of this amount.

Despite a softer quarter for capital markets activities in our core focus sectors, firm-wide revenue for the first 6 months of the fiscal year improved by 4% and our year-to-date adjusted pretax net income and earnings per share are in line when compared to the same period a year ago, putting us on track for another good year financially. I encourage you to take a look at Page 6 of our investor presentation for additional detail.

On an adjusted basis, firm-wide expenses for the 3-month period were $242 million, down 10% when compared to the second quarter of last year. Firm-wide expenses as a percentage of revenue increased slightly, a reflection of reduced revenue during the quarter and the nonvariable nature of certain components of compensation and other overhead expenses.

Finally, and perhaps most importantly, we have continued to focus on increasing capital returns to our shareholders. During the quarter, we closed a substantial issuer bid, which resulted in the purchase and cancellation of 6.3% of our issued and outstanding stock. Subsequent to the completion of this bid, we filed a normal course issuer bid, which commenced in August and will continue for 12 months.

I am pleased to report that our Board of Directors has approved a quarterly dividend payment of $0.05 per common share. In aggregate, we've returned more than $69 million to our shareholders during the first 6 months of our fiscal year.

And with that, I'll review our operating businesses, and I'll start with our wealth management business.

Excluding significant items, total combined global wealth management operations earned pretax net income of $22 million, an improvement of 5.3% compared to the same period last year. Excluding significant items, this translated to an earnings per share contribution of $0.13 for the quarter.

Revenue for the 3-month period was $115 million and the adjusted pretax profit margin for our combined North American and U.K. businesses increased to 18.8%. While assets in our Canadian wealth business increased 3.4% year-over-year, the sequential decrease of 4% or $0.8 billion was primarily a result of lower market values.

Second quarter revenue in this business was $48 million, down 6% from a year ago, primarily due to lower new issue activity during the traditionally quieter summer months and a significant reduction in Canada's related financing activity. I will note that in a year-over-year basis, the adjusted pretax net income contribution from our Canadian wealth business has improved 24% compared to the first 6 months of last year, and the pretax profit margin also improved by 2 percentage points.

We continue to experience steady recruiting momentum in our Canadian business, our track record of success in this initiative has helped to make CG wealth management a very attractive destination for top industry talent and the clients they serve. Since we began our recruiting initiative in 2016, we have welcomed 41 advisory teams and more than $9.6 billion in client assets.

Turning to our wealth management business in the U.K. and Europe. When measured in local currency, client assets in this business increased by 1% year-over-year to GBP 27.1 billion. In Canadian dollars, we recorded a decrease of 2.3% compared to a year ago, which is primarily the result of the impact of foreign exchange. The adjusted pretax profit margin in this business improved by 3 percentage points sequentially to 23% as our margin enhancement initiatives continued to take effect. We remain on track to achieve our Mission 2022 goals for our combined North American and U.K. wealth management businesses, as we've outlined on Slide 9.

Subsequent to the end of the fiscal quarter, we completed our acquisition of Paterson Securities, which significantly expands our wealth management business in Australia. The impact of this development will be reflected in future reporting periods. Prior to joining the CG platform, Paterson's operated on a breakeven basis. As we integrate our 2 businesses, we anticipate unlocking greater value from both groups as we endeavor to make our Australian operation a material contributor over time.

Across our global wealth management operations, we remain focused on driving margin as we unlock greater value through our integration efforts. We are also committed to a continuous improvement program of advancing our technological infrastructure and transforming our culture to make it easier for established investment professionals and their clients to do business with us.

Now turning to the performance of our global capital markets business. Despite global growth concerns and recession fears, coupled with a volatile quarter for some of our traditionally strong sectors, it was a reasonably productive quarter for our capital markets business. We participated in 67 investment banking transactions globally to raise $8.2 billion for our clients. Our combined global capital markets businesses earned revenue of $149 million for the quarter, a decrease of 17% when compared to the relatively strong second quarter of last year.

Excluding significant items, the pretax net income contribution from this segment amounted to $9 million, comprised equally of contributions from our U.S. and Canadian business. Outside of North America, I'm pleased to report that our U.K. and Europe business delivered a modest profit for the quarter. Second quarter revenue from investment banking and advisory activities in our U.K. business improved by 109% and 56%, respectively, when compared to the same period last year.

Since refocusing this group under new leadership, the stability in this business has improved markedly. Fiscal year-to-date revenue per employee has increased 35% year-over-year, and they are increasingly winning new client mandates as client service levels improve.

The challenging environment for small cap investment banking activities in Australia persisted through the second quarter, but activity levels improved late in the 3-month period. This team has been active on several advisory and underwriting mandates, and we are seeing increased activity levels from the mining sector, particularly in this region.

On a year-to-date basis, firm-wide revenue from advisory activities represented 39% to $95 million, and half of this amount was contributed by our U.S. business. The team has continued to deliver strong results since we added Petsky Prunier to our platform and is currently ranked third place for mid-market M&A in the U.S. TMT sectors.

Despite an environment of reduced financing activities in our second fiscal quarter, Canaccord Genuity has also held its lead as the top underwriter for Canadian equities for the first 9 months of calendar 2019 and the top IPO underwriter by a wide margin. The tables are on Page 15 and 16 of our investor presentations.

It was a seasonally slower quarter for trading activities in our key markets, and volumes were further impacted by the heightened geopolitical risk and the relative underperformance of small and mid-cap equities during the period. The elevated facilitation losses in our Canadian capital markets were within acceptable range on a relative basis as we supported our clients through a period of lower overall volumes.

The second half of our fiscal year has traditionally been the most productive period for U.S.-based international equities group, and we anticipate stronger contributions from this group for the balance of the year.

Heading into our third fiscal quarter, all our capital markets businesses are continuing to strengthen market share as we leverage our domain expertise and continuously improve our market position in the verticals where we know we can add the most value for our clients. Assuming markets remain accommodative, we look forward to executing a good pipeline of capital raising and M&A mandates in all our geographies.

Our efforts to improve product and revenue diversity across our business and geographies is helping us improve our competitive position as we simultaneously enhance value for our shareholders. As debates around trade talk, Brexit and interest rates continue, we are cautious in the near-term outlook but remain focused on managing our business for the long term, where we see tangible upside for our clients and our shareholders.

We believe we offer shareholders unique exposure to some of the most dynamic growth industries in our global economy, coupled with predictable and growing contributions from our wealth management business. For context, I'll encourage you to take a look at Slide 19, which highlights the earnings stability that our growing wealth management segment contributes.

Despite more than 50% of our firm-wide revenues coming from capital markets in our second quarter, our global wealth management business contributed more than 70% of our earnings per share for the quarter. Our diversified business model has proven its strength in prior cycles, and we continue to enhance our stability by limiting our reliance on any single sector or business, enhancing the predictability of our revenues.

We are executing on our strategy with the idea that we can help our clients to outperform while we increase our earnings power and we are enthusiastic about the opportunities ahead for our business.

Again, thanks for joining us today, and we'll open the line for 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 the line of 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 Dan, why don't we start with the most recent news being the Patersons acquisition closing there? So you mentioned opportunities to enhance the performance there. How should we think about that rolling out? Are there opportunities for some quick wins maybe in terms of getting back office aligned with the rest of the platform or some items like that, that might help you right out of the gates? And then I guess this is the question of reasonable opportunities for organic growth or tuck-ins into the platform going forward.

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

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Yes, great question. There were some synergies immediately on the transaction. We announced about 10% headcount cuts when we did the transaction, at least we announced that in Australia. So there's certainly synergies, primarily on the capital market side of the business. The wealth side of the business is completely incremental. So there's really not a kind of tangible economic synergies on that side of the business.

The business is performing, just coincidentally, performing better than it has historically because mining is more active in Australia than it was in previous periods. So reasonably excited by, to your point, call it, short-term wins.

The rest of it just takes time, no different than our Canadian business, to be honest. 4 years ago in Canada, we were losing $5 million a quarter. We've made $15 million in the first 6 months of that business here in Canada this year. So I think you're going to see it incrementally over time, Jeff. That's the plan.

Don, is there incremental comments to that?

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

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Yes. I think the addition of our capital markets platform to the Patersons adviser base will have some very positive synergistic benefits as that adviser team and that client network has a real appetite for that kind of a product. And I think there'll be some huge benefits along those lines.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [5]

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And Jeff, the final comment is on our capital -- with our Australia capital markets business, it's impacted by positions we own. The business itself has been very active. But when you mark to market positions, fee positions that we've taken in stock, it sometimes looks that it mutes the activity level that we report in our capital markets business. So that business in and of itself has been very active, muted by some losses on some fee stock it took.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [6]

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Yes. That's fair enough. Why don't we then move the focus of wealth management over to the U.K.? I guess the thing I noted there was a nice uptick in the earnings margin there on the business and you'd spoken to that materializing this year. So I guess that's what this is that we're seeing in the quarter. And is there prospects for that to trend maybe a little higher as we go forward?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [7]

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Yes. We're certainly not done on our margin improvement exercise. We've got pretty tangible goals that we've laid out there. You'll see it in our slide deck and we've talked about it before. So we're not finished on the margin side of our U.K. business by any means. I think you'll continue to see margin improvement in that business and quite frankly, our Canadian business.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [8]

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And then maybe with respect to Canada, noted that you're actively recruiting there and have been building progressively. I guess the last couple of quarters, we've seen a little bit of attrition in terms of just the count of teams that are there. So what's the balance right now between adding, letting some guys roll off and getting the AUA growth moving again?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [9]

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Yes. For the math in that business to be as compelling as it is and for an incremental adviser, the incremental margin is 30%, like it's large. But the key to that, Jeff, is not increasing your fixed cost base, not increasing your rent, not increasing the number of compliance people, branch managers and everything else you need.

So the attrition you would see is planned attrition. We continue to bring on larger advisers and less large advisers continue to exit the platform, and that's been the strategy. So I don't want to overgeneralize, but I don't think we've lost an adviser that has been problematic to us in a very long time, 3 years probably.

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Operator [10]

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Your next question comes from the line of Rob Goff with Echelon.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [11]

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My question first would be on the U.K. Could you talk to the market conditions that you were seeing there in terms of consolidation of the marketplace? The second question to follow on that would be in terms of the Canadian wealth Management, are you seeing any change in adviser economics? Are you seeing any greater supply of advisers coming out of banks?

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

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On the consolidation of the marketplace in the U.K., that's a wealth comment, I assume.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [13]

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Yes, yes, yes.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [14]

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Okay. Good question. Yes. I mean we've done a significant number of acquisitions, as you know, Rob, in the U.K., 3 in the last 2 years, 3 significant ones in the last 2 years. What we've messaged to The Street, in fact, how we're operating them, is really driving for margin improvement in the U.K. and it's hard to do both things. It's hard to drive your margins up and keep on buying firms aggressively. So I'm not saying we've paused on our acquisition strategy, but we are swallowing what we bit off intelligently right now.

And I think that will -- certainly, if opportunities arise and opportunities are arising, to be clear, we will continue to do acquisitions. But right now, our primary focus rather than an aggressive external look is internally managing the business. There's been large transactions, as you're aware, in that marketplace, which certainly more than justify the value of our U.K. wealth business. And obviously, with that level of activity, we're approached all the time both on the buy and sell side. But right now, we're really pushing that business to drive the results we'd like it to achieve.

Sorry. The second part of your question was the Canadian wealth pipeline...

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [15]

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Just in terms of the Canadian wealth management, are you seeing...

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

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Yes, an increased number of advisories from bank. Yes, it's always symptomatic, I'd say. As we start hiring advisers from a certain institution, that always leads to more advisers coming from that institution. So we do have a relatively robust pipeline of recruits that are joining us.

Well, I'd say it's on pace. That is where it's been historically. We have a budget in place for that. We certainly have targets in place for that. Arguably, we're ahead of targets on that. So we continue to see the same level of activity. We've got the relative advantage of very good advisers wanting to leave their existing platform and relatively few places that they want to go to. And we tend to be at the top of that list these days. Culturally, the institution is a very good place.

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Operator [17]

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Your next question comes from the line of Graham Ryding with TD Securities.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [18]

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Maybe you could just start with a couple of just housekeeping. Acquisition costs on the wealth management side, would that be related to -- these are the onetime items, the -- would that be related to the Paterson acquisition? Or what was that related to? There was some from the capital markets division, also in the wealth management space.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [19]

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It relates to the wealth management group. A large part of it is the Patersons acquisition. And there is something to do with the U.K. as some additional costs come through from the earlier acquisitions.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [20]

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Okay. No problem. And then the facilitation losses in the Canadian capital markets side, I was surprised a little bit on that because I didn't think you had a very large principal trading business. Can you elaborate on what was driving that?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [21]

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Yes. I mean, as you know, Graham, we're the top cannabis underwriter in the world. And this quarter, we had literally 0 or negligible contribution to our net income from cannabis. The reason for that is it wasn't that we did no cannabis transactions because even though there was incredibly muted activity, there were still a couple of transactions. Whatever transactions we would have done, that profitability would have been eaten up by our facilitation losses, primarily in the cannabis stocks.

So cannabis overall, historically, we've reported that, that's been as much as 20% of our capital markets revenue. And I think if we had a similar report this quarter, we would have said it's 0% of our capital markets earnings.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [22]

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Right. Okay, okay. So just to confirm, that 20%, that's not total revenues. 20% of your capital markets revenues sort of, I guess, fiscal '19, is that what you're referring to?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [23]

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Yes. I forget which reporting period we reported that for, Don. Did we report it for fiscal last year?

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Donald Duncan MacFayden, Canaccord Genuity Group Inc. - Executive VP & CFO [24]

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It's for fiscal 2019, yes.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [25]

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Yes. So we did roughly $700 million in revenue last year in capital markets and we said it's less than 20%. So you can certainly do the math around that. And that would have had a significant contributor to our net income. This last quarter, the contribution would have been 0 to our net income.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [26]

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Okay. Got it. And then the impact on your Canadian wealth management division, just with the sort of slowdown in cannabis, should we just interpret that as the investment banking activity, that's where you're going to see and feel that? Or does it also commensurate with the trading side?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [27]

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Yes. That's the line item it flows through, for sure. So if you look through our wealth management business here, and I'm just referring to our supplemental financials, you see that our investment banking activity declined from $15 million of revenue to $9 million of revenue. That is the new issue portion of revenue that flows into Canadian wealth, and that was materially reduced, primarily because of cannabis, but also the summers are just slow.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [28]

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Okay. Fair enough. And then -- so obviously, their sentiments changed to some extent in this -- the cannabis space, certainly in Canada. What about the U.S. market opportunity? I know there was sort of a regulatory angle there. Can you just speak to the sort of outlook and the prospect for cannabis-related activity from the U.S. market? Has that changed?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [29]

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Yes, not -- no, I don't think anything has changed. Notwithstanding the lack of contribution in this quarter, truth be told, we have a massive pipeline of activity in the cannabis sector going on, not only of deals that we hope to announce one day or hope to bring to market, deals, quite frankly, that have been announced and done. The U.S. perspective, we were the adviser on most of the large M&A trades that went on in the sector. Most of those trades are held up in HSR and competition filings. We expect most of those things to close and those are all announced transactions.

We've also been a huge underwriter of SPACs in the space, as you know, and a lot of the fees on the SPACs are back-end loaded. They come in when you de-SPAC. So we've already earned some fees upfront from the SPACs, but there's a fair number of fees. And we're talking tens and tens and tens of millions of dollars.

So we continue to be pretty excited about the prospect of U.S.-based cannabis revenue. We continue to be the dominant underwriter and dominant adviser in the sector. In addition to our SPAC activity and financing activity and M&A activity, we've been doing debt deals in the sector. We did a debt deal for a client a few weeks ago. And we continue to be pretty active overall in the sector. So who knows. But generally speaking, we've had still a fair amount of buoyant activity.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [30]

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Okay. That's helpful. And those SPACs, right, there was a couple of large ones that came through, I think, this quarter. Do the fees of those, they get deferred? Or were there any fees that sort of -- that came through this quarter?

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [31]

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Well, again, I don't want to speak to any specific transaction. But a normal SPAC, either a portion of the fee, less than half of it upfront, and the other portion of the fee, more than half of it when the company de-SPACs. So the upfront portion we would have earned already.

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Operator [32]

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There are no further question at this time. I will turn the call back over to the presenter for closing remarks.

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Daniel Joseph Daviau, Canaccord Genuity Group Inc. - CEO, President & Director [33]

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Okay. Thank you, operator, and thanks again for all of you joining us today. We look forward to providing you our next quarterly update in early February. And operator, if we can please close the lines. Thank you.

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Operator [34]

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