RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2018-Q1

[Operator]

To all participants, please standby. The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to GMP's First Quarter 2018 Conference Call. I would now like to turn the meeting over to Mr. Harris Fricker, Chief Executive Officer and President. Do go ahead, Mr. Fricker.

[Harris A. Fricker, President, CEO & Director]

Thank you. Good morning, and thanks for joining us. With me this morning is Deb Starkman, our CFO. Before we get started, I would like to remind you that this call is being webcast and will be available for subsequent replay.Our remarks and answers to your questions today may contain forward-looking information, and actual results could differ materially. Forward-looking information is subject to numerous risks and uncertainties. Certain factors or assumptions applied in forward-looking information can be found in our 2017 AIF and our first quarter MD&A. These documents are available on our website and on sedar.com.Q1 2018 marked a strong start to the year, led by a 90% year-over-year increase in investment banking revenue. Also contributing to solid earnings this quarter was ongoing profitability at Richardson GMP.A generally positive outlook for global growth drove investor and business confidence higher, despite lingering international trading disputes. Our underwriting business performed particularly well this quarter with meaningful client activity and revenue generation, specifically in cannabis and block chain. 2017 was clearly a breakthrough year for these sectors, and that momentum continued into the first quarter.GMP remains at the forefront of these emerging revenue opportunities that have rapidly become meaningful business silos for our franchise. The first half of Q1 was accommodated to new equity issuance but gave way to a pronounced volatility spike in February, which contributed to a sell-off in global equity markets. This volatility muted both underwriting and trading volumes in the back half of the quarter.With that, let's take a look -- closer look at our results for the quarter. Total revenue of $53 million increased 8% from Q1 last year. This increase largely related to higher investment banking revenue and higher interest revenue. Partly offsetting this increase was lower commission revenue and lower fixed-income trading revenue.You'll also recall that Q1 last year included $7.7 million in dividends received in connection with our preferred share investments in Richardson GMP. We reported adjusted net income of $7.3 million in the quarter and adjusted diluted EPS of $0.08. Our results this quarter also demonstrate the firm's considerable operating torque, with pretax earnings up 77% on total revenue growth of 8%. While we don't expect this level of divergence to repeat each quarter, it is a reminder of our ongoing commitment to delivering positive operating leverage and clearly evidences what can be accomplished with a modest improvement in market conditions.Let me now discuss the quarterly financial highlights for each of our business segments. Capital Markets reported adjusted pretax earnings of $10.7 million, largely reflecting significantly higher investment banking revenue. Total revenue of $49 million for the segment increased 28% from Q1 last year, while total expenses were up only 5% over the same period, attesting to an operationally lean business. The year-over-year increase in revenue was largely driven by a 90% increase in investment banking revenue as well as higher interest revenue. These increases were partly offset by lower commission revenue and lower net gains from principal transactions. Let me expand further on these items. Investment banking underwriting revenue increased 83% from Q1 last year, largely on strong client engagement in cannabis and block chain. On the advisory side of the business, revenues improved 117%, driven by higher fees in mining and special sits.GMP Securities led or co-led 13 underwriting deals completed in Canada this quarter, valued at just over $1 billion. We believe the market remains fairly constructive for investment banking business, and our dialogue with clients remains healthy across most of our sectors. However, in energy, a lack of hard time lines and a regulatory process that has been subject to dithering and near endless legal challenges will continue to be the major stumbling block for domestic and international investor confidence in the Canadian energy sector. International capital has little confidence that large-scale projects can be completed in Canada. As we have said in the past, the most disappointing aspect is that the pain is largely self-inflicted. Turning to equity sales and trading where commission revenue decreased 34% due to lower client trading volumes. That said, our equity business should benefit from the increased trade flow that typically arises from an increased number of underwriting transactions. However, as has been said many times in the past, this business remains the most affected by the structural changes in the industry, notably technological disintermediation. Principal transactions generated net gains of $6.9 million this quarter, down from net gains of $8.2 million prior. This decrease was led primarily by lower fixed-income client trading activity in our U.S. operations, resulting from muted client activity in those markets. Also contributing to the decrease was lower returns on principal inventories. With that, let's turn to the Wealth Management segment where Richardson GMP recorded adjusted EBITDA of $11.2 million this quarter.Revenue of $75.3 million decreased modestly due to lower commissions, partly offsetting this decrease was higher investment management teams. Total team count now stands at 176, with average assets per advisory team of nearly $170 million. Market leadership and recurring solid profitability at Richardson GMP evidences the success of the partnership between one of Canada's leading investment dealers and Canada's leading independent wealth management business. It is clear that both firms continue to benefit from a high degree of professional collaboration and significant mutual business synergies. We remain committed to deriving further synergies between our wholesale and retail businesses. With that, I'll turn it over to Deb to discuss expenses.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Harris. Total expenses of $46.3 million this quarter increased 2% compared with Q1 last year. This increase largely reflects higher variable compensation which rose 25%, commensurate with the 28% revenue increase in our capital markets business, as Harris mentioned earlier. This increase was mostly offset by lower noncompensation-related expenses and lower share-based compensation in first quarter 2018 in connection with the expiration of certain incentive arrangements.Noncompensation expenses decreased a notable 17% compared with Q1 last year, largely due to lower trading-related cost, commensurate with lower client trading volumes and our ongoing commitment to remaining operationally lean. Partly offsetting this decrease in noncompensation expenses was higher interest expense in connection with improved stock borrowing and lending activity this quarter, which was more than offset by higher interest revenue leading to improved profitability in the business. Given both the structural and cyclical challenges to our business, we understand the importance of maintaining a lean business while safeguarding capital and liquidity. Our cost structure is lean and highly variable. Our business is better diversified with net working capital in excess of $180 million. Our capital is strong; however, like any business, there is always room to do things better, and we're committed to delivering and driving increased shareholder value. We continue to manage our expenses closely and be prudent managers of the capital and risk. And now, I'll turn it back over to Harris for closing remarks.

[Harris A. Fricker, President, CEO & Director]

Thanks, Deb. An explicit element of our strategic agenda has been to diversify and further strengthen the noncommodities portion of our franchise, which is precisely what we have been doing. Our performance this quarter evidences what can be accomplished by an operationally lean and agile GMP franchise with only a modest improvement in the market environment.And we believe, when you combine this with net working capital well in excess of $180 million, we've clearly retained the capacity to pivot to the upside in improving markets. While we were pleased with our performance this quarter, we continue to believe there are further opportunities to streamline our business and drive operational synergies. Given our strong capital position, we will continue to deliver on our promise to return excess capital to shareholders. This is evidenced by the payment of a $0.10 special dividend in Q4 '17 and ongoing share repurchases. And just last evening, the Board approved the renewal of our NCIB, so we expect to remain active on share repurchases in 2018. Despite considerable progress, we continue to be vigilant on the cost side of the business and are considerably -- continually assessing opportunities to further lean up the business.We also continue to seek opportunity to drive revenue opportunities by building on our solid foundation and what is one of the best professional talent basis in the industry. GMP is clearly moving in the right direction.That concludes our remarks this morning. Thank you again for joining us. As a reminder, we will be hosting our Annual General Meeting of shareholders at the TMS Broadcast facility later this morning at 11 a.m., and we look forward to seeing you there. Thank you.