RF Capital Group Inc. (OTCPK:GMPXF) Q2 2022 Earnings Conference Call July 29, 2022 10:00 AM ET
Corporate Participants
Rocco Colella – Managing Director Investor Relations
Kish Kapoor – President and Chief Executive Officer
Tim Wilson – Chief Financial Officer
Conference Call Participants
Jim Byrne – Acumen Capital
Jeff Fenwick – Cormark Securities
Operator
Good morning, ladies and gentlemen, and welcome to the RF Capital Group Second Quarter 2022 Earnings Conference Call.
I would now like turn the meeting over to Mr. Rocco Colella, Managing Director Investor Relations. Please go ahead. Mr. Colella.
Rocco Colella
Thank you, operator. Good morning, everyone and thanks for joining us today. Welcome to our second quarter 2022 earnings call. If you have questions following this call, please reach out to Investor Relations. My contact information can be found at the end of our earnings release issued last evening.
Before we get started, I would like to remind you that this call is being webcast and available for subsequent replay. Today’s remarks may contain forward-looking information and actual results could differ materially. Forward-looking information is subject to many risks and uncertainty. Certain factors or assumptions applied in the forward-looking information can be found in our latest AIF and MD&A. As always, these documents are available on our website and at sedar.com.
This morning, our President and CEO, Kish Kapoor, who was in our Montreal office today, and our CFO, Tim Wilson, who is with me here in Toronto are on the call. Kish will provide opening remarks and key takeaway from the most recent quarter. Tim will then cover financial results. Kish will end with closing remarks following which we will open the call to questions from analysts.
I will now turn the call over to Kish Kapoor.
Kish Kapoor
Thanks, Rocco, and good morning, everyone. Market conditions during the second quarter were the most challenging since 1970. The S&P TSX composite index and the S&P 500 fell 13.8% and 16.4% respectively during the quarter. This contributed to a $3 billion decline in our AUA in the second quarter, wiping out most of the gains we enjoyed in 2021. As a result, our fee-based transactional and capital markets revenue are all down sequentially. But on the positive side, as a result of average AUA being higher on a year-over-year basis. fee based revenue were up 6% from the second quarter of last year.
Offsetting these declines was a significant increase in insurance revenues from half a million last year to 9.2 million this year. One large insurance contract, the largest in our history, and one close by a recent team that joined us in Montreal, accounted for most in fact accounted for much of the growth and more generally, many advisors are now including insurance in their core financial planning services. The further positive was the 83% increase in interest revenue in Q2 to 8.1 million. Interest revenue was higher because of rising benchmark rates. The net effect of these factors resulted in our total revenues, rising to 91 million in the quarter, a new high for us.
Furthermore, adjusted EBITDA also climbed to a historic high of 16.6 million on a consolidated basis, and 18.3 million in wealth management. While we are pleased with these results, especially since they highlight the benefit of increasing revenue diversification. We remain cautious about our outlook for the coming quarters like many in the financial services industry, market sentiment remains weak, and this is likely going to have a protracted impact on our AUA revenues and EBITDA for the coming quarters.
That said, we remain excited about our business and are executing our three-pillar growth strategy successfully. From a strategic standpoint, three new advisors joined our firm during the second quarter, and we lost one to a competitor. We’re making great strides and making many of our promises and expect more advisors to join us in the coming quarters. I would like to take this opportunity to welcome the following advisors, Clive Holmes and Joanna Calder, Matteo Verrilli and Caroline Ste-Marie and Michel St-Laurent.
In addition, we’re encouraged by the 3 billion in growth in our recruiting pipeline, which has now reached 21 billion. A highlight in our strategic progress with launching investment at this quarter. So far, the feedback from our advisors has been very positive. As you might expect, though, with a project this size and scope, there remains more work to be done in terms of training and helping them to use this sophisticated portfolio management platform.
Outsourcing our carrying broker operations to Fidelity’s unified platform is proceeding as planned with a conversion scheduled for December 31. This conversion will complement our launch of investment nicely. Our advisors have told us at end of year conversion makes the most sense for them and their clients. It simplifies tax reporting and allows more time with customizing the platform.
Last month, we hosted our first in person advisor conference as Richardson Wealth. Over 200 people representing 85% of AUA attended the conference in Winnipeg in person, and several 100 more participated virtually. Due to our firm’s deep roots and a proud history, a conference theme was appropriately titled Back to the Future. And Winnipeg was an obvious choice since it was there, where our growth story began nearly two decades ago. We received excellent feedback from our advisors about our progress, which reassures us that we’re on the right track and inspires confidence in our future. This feedback is consistent with what we heard from our valued IA teams, our clients during a coast-to-coast roadshow that started in Sydney BC, and ended this past week in Charlottetown, PEI. Even though the markets are challenging, people are encouraged by the progress we’re making, and cared enough to share their ideas and their concerns on how we can do more to better serve them and help manage the significant pace of change at our firm. Personally, I find a constructive criticism and thoughtful input the key to our success and as it helps allocate resources and priorities to the areas of greatest impact.
Turning to our shares, we remain disappointed by the performance which has only been made worse by the drop in the equity markets. We’ve been active under our NCIB during the quarter repurchasing 16,000, shares for cancellation and a further 6000 shares to-date in July. The NCIB gives us the ability to return capital to shareholders right by repurchasing shares, when the market price does not fully reflect their value.
All-in-all, the events of the past few months have been challenging for all. In this environment, we see our advisors investing more time helping their clients navigate the current market environment. And we’re squarely focused on supporting them in doing so.
With that, I’ll turn the call over to Tim.
Tim Wilson
Thanks, Kish, and good morning, everybody.
As mentioned earlier, our investments in strengthening our organization and diversifying our revenue sources paid off this quarter. Adjusted EBITDA increased by 24% to $16.6 million. The increase was fueled by a 15% rise in revenue to $91 million and positive operating leverage. Wealth Management’s adjusted EBITDA grew by 18% to 18.3 million in that business, the operating margin grows to just over 20%.
Let me expand on the three key drivers of revenue growth highlighted by Kish. Interest revenue grew by 83% to $8.1 million. We earn more on our cash balances and margin loans as benchmark rates rise. With interest rates expected to rise even further in the second half of the year, we anticipate interest revenue to increase from Q2 and contribute to further EBITDA growth.
Insurance revenue is $9.2 million, up from 500,000 in Q2 of last year. While insurance revenue will likely be lower in future quarters because of the one material contract that we closed in Q2, we expect to continue building our insurance business more broadly, thanks to our growing pipeline of opportunities.
Additionally, fee revenue was up by $3.4 million or 6%. Higher average AUA contributed to this increase as a result of volatile market conditions, our AUA ended June at 33.9 billion, approximately the same as last year. But because of the pattern of increase last year and decrease this year, the average, which is what drives the revenue was up by 5%. Sequentially, AUA was down $3.2 billion, or 8.7%. With about half of the decrease occurring in June. We did not expect markets to stage recovery this year to believe the pressure on fee revenue will continue into Q3 and Q4. That pressure will be partly offset by the addition of new advisory teams.
Corporate Finance revenue was down 59% because of weak new issue activity across the industry. We participated in 65 transactions this quarter compared to 149 in Q2 of last year, companies would pause capital raising activities due to the challenging market conditions. We did not expect activity to pick up significantly in the second half of 2022.
Now, let’s talk briefly about expenses. In comparison with a 15% increase in revenue, adjusted operating expenses were up by 11%. The increase was led largely by higher compensation costs. We experienced a 14% increase in this area due to annual inflation adjustments, challenging labor market conditions and general hiring to support business growth.
We also saw an increase in share-based compensation expenses in connection with a deferred compensation program that was implemented in Q1 2021 after Richardson Wealth became fully owned by a public company. These deferred compensation grants best and are amortized into income over three years so the program costs are still ramping up. Until the program reaches steady state in 2024, cost increases will continue to be more significant.
In supported business growth, SG&A increased by $1 million, or 8% across a variety of categories. Part of the increase was driven by a return to work and a return to business travel. As we look into the future, we will continue investing responsibly in our business to support our growth goals.
As mentioned earlier, the conversion to Fidelity’s unified technology platform will take place on December 31. Outsourcing our carrying broker operations will result in an annual estimated EBITDA benefit of just under $10 million, including $6 million of run rate cost savings. As well, our cost base will become more variable and we will be able to achieve greater scale faster as a result of this initiative. We will begin to realize these benefits in January 2023.
Now, let’s look at some key balance sheet items. We continued to have strong capital levels. At the end of June, we had $104 million in total net working capital and $10 million to $15 million of excess. As stated previously, we expect to drive down on that excess this year to finance our growth plans. Combined the positive operating cash flow and our credit facility, we have ample capital to support all of our growth initiatives. This includes supporting existing advisors, recruiting more repurchasing shares under our NCIB and acquiring businesses if the opportunity presents itself.
So overall, it was a really solid quarter. And because of our performance year-to-date, we still expect full year adjusted EBITDA for 2022 to be higher than in fiscal 2021 despite the challenging market conditions. This expectation is of course subject to broad market conditions.
Our ability to deliver on our promises and support our advisors remained strong as we enter the second half of 2022. And we continue to believe that the foundations we are laying will translate into long-term shareholder value.
Now, I’ll turn it back to Kish for closing remarks.
Kish Kapoor
Thanks, Tim. There are two common threads in all transformative strategies like ours. First, a commitment must be made to deliver. And second is that one must have the discipline and courage to stay the course amid market disruptions. And rest assured we intend to do both of these well. With the strong commitment of our board, our people, our management team, to our long-term goals, and our success to-date, I’m confident we’re building the brand that all our shareholders can be proud of, and one that we believe will in time, create sustained value for all.
Thank you for joining us today. And we look forward to updating you on our progress in the coming quarters. I’ll now turn the call back over to Rocco.
Rocco Colella
Thanks, Kish. That concludes our formal remarks this morning. Operator, we’re now ready to open the call to questions from analysts.
Question-and-Answer Session
Operator
Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Jim Byrne from Acumen Capital. Please go ahead. Your line is open.
Jim Byrne
Good morning, guys. Congrats on a solid quarter. Kish maybe you could just talk about what you’re seeing on a competitive environment. Just hearing a couple anecdotes through some friends and clients just about increased competition even the banks getting more involved in recruiting. Just wanted to see what you’re seeing out there and how confident you are in your pipeline conversion.
Kish Kapoor
Well, thanks for the question, Jim. Thanks for attending the call, especially on a Friday, just before a long weekend. We see that the competitor landscape is actually pretty solid. We see a lot of activity amongst independents being very successful in engaging in conversations with people working at bank-owned firms telling the story about the strength of independence. And I see in fact, and hear stories of pretty much all the independence, enjoying success like us, in attracting people to the firm.
And in terms of the banks, I think banks have never really stopped recruiting. And they’re always a force to be reckoned with. But I think the market is so big, I think what do we got [indiscernible] today, some $5 trillion, the size of the pricing in Canada is expected to double by the end of 2030. That in the context of this growing market and even though it’s disruptive now, I think there’s a lot of money in motion. A lot of people are listening to the stories of the independence. And there’s a very healthy, both competition and movement amongst various organizations.
So maybe there’s a little bit of slowdown because of the market, people are a little concerned about moving when having to have the conversation with the clients, because the portfolios are down. But when you look at our pipeline having grown by 3 billion, we’re seeing a lot of activity, a lot of people having the conversations planning, whether it’ll be this quarter, next quarter or the third quarter, everybody’s starting to explore all of their options. So I would say it’s a very healthy environment. I know, Tim, you want to add anything to that?
Tim Wilson
No, it’s exactly right. I’d say more broadly, we remain committed to our recruiting goals, our desire to bring in approximately $2 billion of new recruits per year. And we believe that the efforts that we’re making on that front are really paying dividends as we see our pipeline continuing to grow.
Kish Kapoor
And, Jim, in our [Navin] [ph], who heads up our corporate development team tells me in the last a while we met more billion-dollar teams that have had conversation with us than we had in a long time. So these are all good signs. And some of these calls that we’re getting now are all inbound, which is also very meaningful and interesting.
Jim Byrne
Okay, thanks for that. Maybe just kind of a two-part question. I thought, remind me, maybe I was mistaken. The Fidelity conversion, is that a move to December 31 from kind of October? If that’s not the case, then I’m mistaken. But and then also maybe just an update on capital spending for your office space in Toronto?
Kish Kapoor
Right. So on the Fidelity, we always thought it was going to be in Q4, we had two windows on when we would move to Fidelity with either early in Q4, or late in Q4. And we decided that for a variety of reasons, including the advice that we got from our IAs, that it’s smoother transition for clients and it simplifies tax reporting, it’s a much cleaner cut off from one system to the next system. And that there was just an overwhelming consensus that we should migrate at December 31, for that reason, and also, we’ve had a fairly significant amount of change within our organization, including people embracing and adopting investment and all of the training.
And taking all of that into account, we thought that it was absolutely proven to not take the first window to take the second window and the second window December 31, we think, especially in discussions we also had with Fidelity and it makes the most amount of sense. And so that’s why we picked that. And with respect to the second question, and perhaps I can turn that over to Tim to answer.
Tim Wilson
The move to the Toronto office that continues to move along quite well, and within our plans, even with all the disruptions that have happened with supply chains and the construction labor market in Ontario. So we’re pleased with how that’s moving along. And we’re scheduled to start moving in at the beginning of October. With that, obviously, we are spending money, the original capital budget was a little over $20 million. And we’ve probably outlaid about a third of that so far. And then, as I mentioned in my remarks, we expect to use our excess capital or excess working capital this year, and a good portion of that will actually be on the Toronto office in the move.
Jim Byrne
Okay. That’s it for me. Thanks, guys.
Kish Kapoor
Thanks, Jim.
Operator
Thank you. [Operator Instructions] The next question is from Jeff Fenwick from Cormark Securities. Please go ahead. Your line is open.
Jeff Fenwick
Hi, good morning, everybody. So Kish, just wanted to start off with the insurance sales you’ve had going on in that one sizable one you called out in the quarter. Can you just run us through it, — that’s a much more sizable, I guess commission off of that than I might have expected. Can you just run us through like what type of insurance product was that? It was just like a very large, someone using P&C against a business they own within your group? Or was it a life insurance contract or any color you can offer up there just a bit larger than would have thought you might see?
Kish Kapoor
So Jeff, let me just step forward and answer that question first. And then Tim can add to do it. You’ll recall that last year, around April of 2021, we launched our own MGA after terminating the relationship with BPI. And our team did an extraordinary job in building a good platform to be able to support our advisors, including hiring a number of consultants to assist in that support, and also negotiated really good contracts with eight life insurance carriers, a direct contract so that, our opportunity to provide better service or advisors, better compensation to advisors. All of that was done by the end of September of last year.
And we started seeing not only a greater adoption of insurance strategies within our organizations through, a lot more financial plans being done. Identification, I think we’re probably more cases this year. Last year, in fact, our total insurance revenues at the end of June are about 12 million, all of 2021 was 6 million. So we’re already doubling that trend. And what we were also very fortunate to have experienced this year is, we’ve been recruiting and attracting a lot of talent from firms where financial planning was at the heart of everything, and people have deep insurance capability. And some of the people that have joined us in the recent past that came to us from investors group have a very significant understanding. And one of them that joined us here in our Montreal office is a very sophisticated advisor did some very sophisticated planning for ultra-high net worth family. And as a part of their overall estate planning for multiple generations using very sophisticated [indiscernible] mind mapping. He was able to persuade them and get them to understand the benefits of insurance for their family for multiple generations. And they bought, essentially, a life insurance policy for a variety of members of the family. And I think they’ve only done half of it now and they will probably do another half later, next year, maybe. But he’s engaged in a lot of activities like this, as are now some of our other advisors. And that’s what we’re seeing some of the success. Does that help you frame what our insurance plan is?
Jeff Fenwick
It does, yes. And I guess the trick is always trying to benchmark against a reasonable expectation on progression from here, as you mentioned, you’re up year-over-year nicely. And it looks like you’ve probably had one contract, though, that really swung the needle by several million dollars. So you don’t want to bake in an assumption that those come along, and they’re nice to have, and you’ve got people capable of doing it. But that’s not your standard sort of result, I guess we’d expect?
Kish Kapoor
No, no, and you’re right. Asset management fee-based business is easier to predict. And forecast insurance is not, but it’s a great business to be in. Right now, our revenues are somewhere between 1.5% of gross or in insurance. Our strategy and goal is to get that to 7% to 8.5%. It may take us three years to do that. But we obviously are recruiting people that understand it, and knowledgeable enough to actually explain it to clients. So all of that isn’t right direction. But I agree that in modeling, it’s harder to do.
Jeff Fenwick
Fair enough. And then maybe we can switch over to the recruiting pipeline and maybe connected in with the move over to Fidelity and investment everything’s sort of fully baked in here to the end of the year. What are the prospects saying to around how much that influences their decision to move? Do they want to wait until that settled? I mean, obviously encouraging to see several teams come over during the quarter in a period of volatility. I thought that was impressive to pull that off. So what’s the feedback there? Are they waiting for the most timely period in terms of — you been operationally prepared for them to step in? And we can expect things maybe to accelerate after that happens? Or how should we think about that?
Kish Kapoor
That’s a good question, too. So we expect the few teams that will in fact, join us early in Q3, well in advance of our move to Fidelity. And I’m when I say few teams, two to three teams to join us early. But the bulk of the teams that have expressed a strong interest in joining our firm, really, were going to join us as soon as Fidelity was implemented. And so those teams we will likely now see joining us in January and February 2023 and not in November or December of this year. So it’s a mix of both. There are people who are — feel that their business will be significantly advantaged by joining us now, relative to where they are. And they think that Fidelity is just going to be a benefit. And they’ll be able to cope with the disruption. They’ll move quickly. And others sizable practices are going to be a little bit more cautious, especially with the market as well. And while they’re completely committed and ready to come. They told us look, we just think it’s more prudent for us to come in January and February 2023. And we’re accommodating because, we think about our business in the long-term, I’m not going to push anyone to come in at a time, which is not perfect for them. And we end up having to wait several quarters before they come. That’s okay, we just have to get the Fidelity decision done right. Make sure that our 164 teams are well transitioned over. They don’t have any significant disruption.
And likewise, when new people come on board, we want to make sure that their experience also is extraordinary. So, if I look back here on the end of Q2 2023 or Q1 of 2023 and say, we thank God we got we waited for Fidelity and we’ve digested it, I’m going to be good with that.
Jeff Fenwick
That’s helpful color and makes a lot of sense. Maybe we could just touch on the run rate of the G&A and the business is, you call it, some inflation there. And there’s a bit of pressure everywhere, I know on wages currently. And you are speaking to higher G&A to the back half of the year versus last year? How should we think about that in terms of sequentially from here, I know you’ve had some initiatives underway, and probably some added spend, as you’re ramping up your — on your various things that you’ve got on the go there. Is the G&A likely decline progressively, then over the remainder of the year, and then I know you’ve stepped down a bit with the Fidelity at the start of next year.
Kish Kapoor
I’m going to get Tim to answer that question. But I just want to give you one overarching statement is that, while we see everything else is going on in the industry just like the market. There really is still a war on talent going on in the country. People are very aggressive in hunting for talent, paying for talent. And we have not been immune from suffering the consequences of that. In the beginning of the quarter, we lost more people than we expected. And it was hard for us to find replacements. In fact, when we made seven offers, we only got two successful candidates for replacements. But towards the end of the quarter, the trend started reversing where we put out 10 offers and we got all 10. So we’re starting to attract talent back again. So there’s been ebbs and flows. And that’s one talent and some of which are reflected in the numbers. And Tim can speak to that. So over to you, Tim, for that.
Tim Wilson
Thanks, Kish. It’s a great question, Jeff, given the trends that we see in the business year-over-year, so we you look at it sequentially, I don’t actually expect much growth in SG&A over the remaining quarters of the year. We continue, obviously to invest heavily in the business and growth initiatives. But I think, I would call that if I look forward, the numbers should be flat to very modestly up.
Jeff Fenwick
Great. Okay. That’s very helpful color. That’s all I had. Thank you.
Kish Kapoor
Have a great weekend.
Operator
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Colella.
Rocco Colella
Thank you, everyone for joining us today. As always, please feel free to reach out to Investor Relations. If you have any further questions. Have a great long weekend. Stay safe. Thank you.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
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