RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to GMP's First Quarter 2019 Conference Call. Today's conference is being recorded. I would now like to turn the meeting over to Mr. Harris Fricker, CEO and President. Please go ahead, Mr. Fricker.

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

Thank you. Good morning, and thanks for joining us as we walk through GMP's first quarter results. 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 2018 AIF and our first quarter MD&A. These documents are available on our website and on sedar.com. A number of market variables weighed on investor sentiment and market activity to start the year. Most notable was uncertainty surrounding global growth prospects. And while equity markets rebounded from fourth quarter lows, client conviction remained stubbornly low. In particular, capital raising activity was at historic lows as issuing clients across the industry remained on the sidelines for the first quarter. The dollar value of industry-wide common equity underwriting transactions in Canada was down 62% compared with the period a year ago. As a direct result, the performance in our underwriting franchise dropped. Client trading activity was also muted. On a more positive note, revenue from principal transactions rebounded significantly from the immediately preceding quarter, and we grew advisory revenue by 8% year-over-year. Wealth management, our partners at Richardson GMP, reported another solid quarterly performance. Our reported results this quarter were impacted by a $28.5 million noncash impairment charge in our capital bare markets business, which Deb will address later in the morning's call. However, it is important to note that this is a noncash charge taken in accordance with accounting standards that has zero impact on regulatory or working capital. In the context of muted client activity, we delivered adjusted earnings from continued -- continuing operations of $7 million and adjusted diluted EPS of $0.07. We have also declared a quarterly cash dividend of $0.025 per common share. With that, let's take a closer look at our results for the quarter. Total revenue was $37.5 million, down from $47 million in Q1 last year. The decrease was primarily due to weaker underwriting revenues. Commission revenues were also down year-over-year in its weaker client trading activities. Probably offsetting these decreases were higher returns from principal inventories, higher advisory revenue and higher interest revenue. Let me now discuss the quarterly financial highlights for each of our business segments. Capital markets reported first quarter pretax adjusted earnings from continuing ops of $9 million, down from $12 million in Q1 last year. Total revenue of $34.1 million decreased 21%. The decrease was driven almost exclusively by the aforementioned lower underwriting revenue. Commission revenue was also down due to lower client trading activity. As previously mentioned, these decreases were currently offset by higher returns on principal inventories and higher interest revenue in connection with increased stock borrowing and lending activity. Allow me to expand further. Restaurant banking revenue was $10.9 million in the first quarter, down 63% compared with Q1 last year. This decrease was led entirely by the decrease in underwriting revenue compared with the same period a year ago, largely due to weaker client activity in Cannabis, Blockchain and Energy. First quarter of last year, a group of strong client engagement and notable capital raisings in the Cannabis and Blockchain sectors, thus creating a strong comparable. Partly offsetting this decrease was higher M&A revenue, which increased 8% compared with the first quarter, largely due to higher revenue generation in the Cannabis sector. Principal transactions generated net gains of $12.5 million in the first quarter compared with, $2.6 million in Q1 last year. This increase is primarily driven by a recovery of previous unrealized losses resulting from the rebound in equity markets this quarter relative to a volatile Q4. Also contributing to the year-over-year improvement is lower losses in connection with client trade facilitation. We believe that the market remains fairly constructive for investment banking business, and dialogue with clients remains robust and positive across most of our sectors.A few weeks ago, we hosted our annual Cannabis conference here in Toronto. The takeaway from the conference gives us reason for continued optimism for this growth sector given the leadership role the GMP Securities plays in this arena. We had a number of delegates attend -- a record number of delegates attend, and we hosted a record number of one-on-one meetings between the 32 leading North American Cannabis companies in attendance and institutional investors. However, in Energy, the lack of progress on energy infrastructure progress, together with a noncompetitive and unclear regulatory environment continues to lead to massive migration of international capital out of western Canada. We believe it is inevitable that the Canadian energy sector will eventually recapture the interest of global investors, however, only to the extent there is the willingness and political conviction to address some of the larger and broader aspects of the industry, many of them structural. Make no mistake, GMP remains long-term bullish on Canadian energy. We are encouraged by the conditional approval of the Trans Mountain pipeline by the National Energy Board this past February, and there is also a palpable sense of optimism in the oil patch following the election of a sector-friendly provincial government in Alberta last month. We believe the new -- we believe the new government's commitment to lowering corporate taxes and streamlining a cumbersome and unclear regulatory process will go a long way towards stemming the flow of capital out of our country. However, the energy sector needs a catalyst at the federal level to accelerate the return of capital. As I have said many times in the past, the way forward is striking the balance between extracted industries and new clean technology and renewable energy. With that, let's turn to the wealth management segment where Richardson GMP reported adjusted EBITDA of $11.3 million for the quarter on total revenue of $68 million. Total assets under admin ended the quarter at nearly $29 billion, up 5% from the start of the year. Our partners at RGMP manage a highly coveted wealth management business that is consistently profitable and scalable. And just last week Richardson GMP was recognized as one of this year's best workplaces in Canada for 2019. With that, I'll turn it over to Deb to discuss expenses.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Harris. Before I comment on expenses, let me address the noncash goodwill impairment charge recorded this quarter as mentioned by Harris in his opening remarks. During the quarter, we performed an interim goodwill impairment test in accordance with applicable accounting standards. With consideration given to various factors, including the year-over-year decline in investment banking fees and commissions and a long downturn in the Canadian Energy sector, we determined that the recoverable value with the capital markets CGU was less than its current value. Accordingly, GMP recorded a pretax noncash goodwill impairment charge for $28.5 million for the quarter. Further detail can be found in note 11 of our quarterly financial statements and in our quarterly MD&A. As Harris mentioned in his opening remarks, this charge has no impact on regulatory or working capital. Adjusting for the noncash goodwill impairment charge, total expenses decreased 19% or $6.1 million this quarter compared with Q1 last year. Decrease was largely led from lower employee compensation and benefits expenses each decrease 32% compare with Q1 last year. Variable compensation was also down 32%, commensurate with lower revenue generation this quarter. The decrease in share-based compensation reflects lower transaction share cost, which added $1 million and $3.1 million respectively to share-based compensation in Q1 2019 and Q1 last year. Selling General and Administrative expenses decreased 10%, largely lower -- due to lower deal-related expenses, commensurate with weaker investment banking and trading activity. Our efforts on the cost [ related ] to business continue to benefit our bottom line. In particular, the ratio of employee compensation to revenue in our capital markets statement was $49.3 million at its lowest level in over a decade. We continue to be prudent managers of risk while safeguarding liquidity and capital. We entered the quarter with solid net working capital with $179 million. And now, I'll turn it back over to Harris for closing remarks.

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

Thanks, Deb. We entered 2019 an operationally leaner franchise, focused on our core and consistently profitable Canada capital markets and wealth management businesses. Moving forward, we are focused on strengthening these businesses by driving revenue opportunities and growing client assets. The first quarter was not conducive to capital raising activity and as a result clients stayed on the sidelines. However we have been focused on rebuilding value over time, and we measure success beyond one quarter's results. While the organizational changes made over the past several years have produced improved financial results, there is ongoing frustration that the price of our shares does not yet reflect the benefits of these changes. Our position is clear, we will focus on operating in markets where we are impactful and disruptive. That concludes our remarks this morning. As a reminder, we will be hosting our annual general meeting of shareholders at the TMX broadcast facility later in the morning at 11 a.m. We look forward to seeing you there, and thank you for joining us today.

[Operator]

This conclude today's call. Thank you for your participation. You may now disconnect.