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Good morning, ladies and gentlemen. Welcome to RF Capital's First Quarter 2021 Results Conference Call. I would now like to turn the meeting over to Mr. Rocco Colella, Managing Director, Investor Relations. Please go ahead, Mr. Colella.
Thank you, operator. Good morning, everyone, and thanks for joining us today. Welcome to our first quarter 2021 earnings conference call. If you have questions following this call, please reach out to Investor Relations. Please see my contact information at the end of our earnings release. 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 uncertainties. Certain factors or assumptions which apply in the forward-looking information can be found in our latest AIF and MD&A. These documents are available on our website and at sedar.com. This morning, on the call is our President and CEO, Kish Kapoor; and our CFO, Tim Wilson. Kish will provide opening remarks regarding -- relating to the progress we continue to make in our transformational reset and other key takeaways from the most recent quarter. Tim will then cover financial results, and 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.
Thanks, Rocco. Good morning, everyone. Thanks for joining us. We hope that in spite of the global health challenges and current lockdowns, you had a chance to celebrate Mother's Day. It is these precious moments with the powerful women in our lives, celebrating the strength of our community and family bonds, that remind us of what matters most. At our own firm, we paused to celebrate not only Mother's Day but also the progress of our business. During Q1, we moved with purpose, invested in our capabilities, supported our advisers and their clients and along the way, posted strong financial results. With each step, we're inspiring confidence and building growth momentum for the long term. Some notable successes in Q1 include: AUA being the highest in our firm 17-year history at $33 billion, up $2 billion in the quarter, leading to record fee-based revenue of nearly $58 million and adjusted EBITDA at Richardson Wealth, the foundational centerpiece of our growth strategy, reaching $14.1 million for the first quarter, the highest in 7 years and 23% above last year. While market appreciation was a key driver, almost half of the AUA increase came from advisers attracting new assets. What excites me about these results is that our advisers, the crown jewels of our business, are setting personal best performances month after month, and they're drawing more high net worth clients to our firm than ever before. This momentum is also drawing attention from talented advisers who want to join our firm. Our recruiting pipeline is the best it's ever been, thanks to the addition of Dean Manjuris to an already talented corporate development team that includes ma Mike Ankers, JP Janson, Paul Landry and all our branch managers. While we expect many to join us this summer, we welcome to our growing family those that have joined us since the -- since we announced our transaction last fall, including David Chipman, Ted Evans, François Filion, Francois Normandeau, Li Yu, [ Liz Salle and Liz Savara ]. These are all strong indicators of future performance, especially as they come just 6 months after our consolidation of the ownership of Richardson Wealth. Building on this success, we spent much of the quarter defining a bold and ambitious strategy to become the brand of choice for Canada's top advisers and their high net worth clients. We recently unveiled that strategy internally in 12 virtual town hall meetings and countless one-on-one meetings. 94% of our advisers and employees indicated that they're excited to be a part of that journey. We know we must prove that we can deliver, and we will. To reduce execution risk, we've attracted considerable talent to our Board and leadership team. We added 5 independent Board members. These talented and sought after directors include David Leith, Nathalie Bernier, Vincent Duhamel, Jane Mowat and Sandy Riley. These directors, and indeed all of the company's director nominees, are highly accomplished leaders and bring a depth of expertise, diverse views and a strong desire to be fully engaged in helping us create meaningful value for our shareholders, clients and advisers. We also devoted time to strengthening our leadership team and redesigning our organizational structure so that we can better support our advisers and execute on our growth strategy. New leaders include Tim Wilson, Dean Manjuris and Julie Burnham. With each addition, we're increasing the probability of success. Another growth accelerator is striking the right strategic partnerships and we have a number of them in play. We're working with a preeminent global managed consulting firm to reinforce our strategy by leveraging their deep expertise in wealth management and large-scale organizational transformation. Our partnerships with Cormark and Bloom Burton have been paying dividends. Jamie Price, our thought leader in this space, tells me our deal flow is up significantly year-over-year, and by significantly, I mean that we participate in 277% more deals than in Q1 of last year. Sarah Widmeyer, [ Geoffrey ] and David Rubin will be announcing new partnerships in insurance in the coming weeks to further accelerate growth, including forming direct relationships with insurance companies as opposed to some third-party master general agencies. And of course, we will be continuously exploring the landscape of further partnerships and enhance our capabilities or deliver with significant input of our advisers, digital tools and latest technology that will make it easier for advisers to thrive at Richardson Wealth. And our momentum doesn't stop there. This past quarter, A Great Place to Work, the global authority of workplace culture, once again recognized us as one of Canada's best workplaces. More recently, they also recognized us as the Best Workplace for Women. To further strengthen our high-performing, adviser-centric entrepreneurial culture, our people led by [ Lynn Break ] and Jasmine Ariss, partnered with achievers and industry expert in the power of recognition to give everyone across the firm the tools to publicly recognize one another's accomplishments and milestones, and keep building on our strong momentum. Speaking of recognition, we're proud that Doug Mair, Director, Wealth Management and investment adviser in our Calgary office, was appointed to the Alberta Securities Commission for a 3-year term. Doug is a highly accomplished professional and is recognized as industry champion in the province of Alberta. I'm confident that Doug will be an outstanding addition to the ASC and the important role it plays in the administering the province's securities laws. And 5 of our high-caliber advisers are also finalists for the upcoming 2021 Wealth Professional Awards. The finalists include Canadian Advisor of the Year, Ida Khajadourian; Adviser of the Year - Alternative Investments, Francis Sabourin, Ida Khajadourian and Rory O'Connor; Adviser of the Year - Responsible Investments, Francis Sabourin; Portfolio/Discretionary Manager of the Year, Francis Sabourin and Marc Dalpé; and Excellence in Philanthropy and Community Service, Jonathan Ross. These individuals are just a sample of the quality of advisers we attract to Richardson Wealth. Their nominations recognize the incredible work they're doing for their clients and their communities. We congratulate them on a job very well done. Our young and talented marketing team, led by Susan Fry, have also kicked off a comprehensive brand awareness campaign to tell our story across the country. It includes social media campaigns, sponsorships, podcast and traditional media. It also includes client events where we invite Hartley Richardson, CEO of James Richardson & Sons, Limited; and Sandy Riley, CEO of Richardson Financial Group, to tell the powerful Richardson story to existing and prospective advisers and their clients. And on June 10, we're cohosting with Cormark a virtual event for clients and prospects on the 10 global trends that every smart person should know. All the accomplishments and activities I just outlined leave me with confidence or leave me convinced more than ever that our carefully mapped growth strategy will create meaningful long-term shareholder value. For those who want to learn more about our progress and ambition, I encourage you to read our latest annual report, which was just released last week. It is on our website. And in it, Rocco has done a great job of profiling some of our teams across the country, including candid photographs of them working from home. Photographs that I know many parents will be able to relate to. Before I turn it over to Tim, let me officially welcome him to his many -- to his first of many quarterly conference calls. Tim joined us from EQ Bank, where he was CFO for the past 9 years. Prior to that, Tim was President of Visa Canada. He has a proven track record of delivering profitable growth and improving operational performance. And while we only joined us on April 5, his fingerprints are all over a bold growth plan. Over to you, Tim.
Thanks, Kish, and good morning, everyone. I'm delighted to be joining the company as it pivots to an ambitious growth stance. I'm also excited to have the opportunity to work closely with Kish and the rest of the leadership team and look forward to speaking and virtually meeting with many of you over the coming months. Before we turn to our first quarter results, let me highlight 4 noteworthy items. First, given we only started consolidating Richardson Wealth last October, comparability of our consolidated results year-over-year is limited. As such, my remarks today will focus largely on the business drivers at Richardson Wealth. Second, you will notice we have introduced a new metric, gross margin. This is calculated as total revenue less adviser variable compensation. We use this metric as a measure of the amount that accrues to the company after we share a portion of gross revenue with the advisory team that drives that revenue. As a result, operating expenses now exclude this amount. This change is a matter of income statement geography and has no impact on EBITDA or net income. Third, the results of our largely breakeven Securities Clearing business are now included in the Wealth Management segment, with historical results realigned to that presentation. And lastly, Q1 results were affected by $7.6 million in transformation costs. These costs related largely to the implementation of our new management structure. Now on to the results. We are seeing early and strong momentum in nearly all areas of our business. On a consolidated basis, adjusted EBITDA was up $12.9 million year-over-year for 2 primary reasons: improved performance at Richardson Wealth on the strength of all-time high AUA and fee-based revenue; and the fact that we're now capturing 100% of that performance, versus 34% pre-acquisition. Because these consolidated results lack comparability and as I mentioned in my opening remarks, I will be focusing on the growth drivers of the Richardson Wealth business. At Richardson Wealth, adjusted EBITDA was $14.1 million in Q1 and has been trending upwards since Q2 of last year as a result of growing gross margin and a stable adjusted operating expenses. The adjusted EBITDA margin improved to 17.5% in Q1, up from 16.3% in the same period a year ago. Behind our higher gross margin, average AUA, a driver of revenue, was a record $31.9 billion and up 14% year-over-year. Growth was largely a function of market appreciation, but was assisted by organic factors, as Kish mentioned. Our strategic partnerships with Cormark and Bloom Burton allowed us to capitalize on a hot new issue market and record higher commission revenue. We participated in 215 new issues in Q1 versus 57 last year, an almost threefold increase. We anticipate deal activity to soften from Q1 levels in the remaining 3 quarters of the year. Improving operating leverage also helped EBITDA growth. Expenses were stable even as revenue climbed. Richardson Wealth's adjusted operating expense ratio declined 7 percentage points from 85% to 78%. We will continue to focus on disciplined cost management as we enter the execution phase of our growth. With that, let's now turn to a few key balance sheet items. Our net working capital at the end of March was nearly $96 million. With improving operating margins at Richardson Wealth and growing recurring fee-based revenues, we feel confident about RF Capital's ability to continue generating strong operating cash flows through 2021. We currently have $109 million in debt on our balance sheet. And our debt consolidated adjusted EBITDA is 2.3x. That, in our view, is a very manageable level of leverage. Our subordinated bank debt and promissory notes come due this September. We intend to renegotiate our subordinated debt and may look to increase its size to support strategic investments. That said, our overall appetite for leverage remains low. Looking out over the remainder of 2021, we anticipate revenue from continued AUA growth to be offset by slightly lower new issue commissions, and as a result, to realize stable EBITDA throughout the year, subject, of course, to broad market conditions. Thank you to all my team and to my colleagues for your hard work and support during my first quarter as CFO. I look forward to many more to come. Now I'll turn it over to Kish for closing remarks.
Thanks, Tim. To quote one of my favorite serial entrepreneurs, Richard Branson, "If your dreams don't scare you, they are too small." Our growth strategy is bold and audacious, but I believe the opportunities are achievable. We have accomplished so much even before implementing our new growth strategy. Each important step we take from here will just build on that momentum. Each step will help us become the brand of choice for Canada's top advisers and their high network clients. We look forward to sharing the details of our strategic plan at our upcoming AGM on May 26. So please mark that in your calendars. And before I turn the call back to Rocco, I would like to acknowledge the enormous contributions of Andrew Marsh and Elliot Muchnik, who left us this quarter for personal reasons. We couldn't have gotten here without them. Andrew he was with us for 17 years, including 11 as CEO of Richardson Wealth. He will continue to serve as an ambassador of Richardson Wealth as a significant and supportive shareholder. Elliot was Richardson Wealth's CFO for 14 years. He built a strong finance organization and guided the firm through multiple transactions. I would also like to thank Ben Scholten for his outstanding service as Head of Human Resources, Interim CFO and Head of Clearing Operations, as he steps into a consulting role in our newly created growth and enablement office, which includes embedded support from our strategic adviser partner. Please continue to be well and stay safe, and take every opportunity to say thank you to our heroic frontline workers and public health authorities. Without them, our road back to any sense of normalcy would be infinitely harder. I will now turn the back -- turn the call back to Rocco.
Thanks, Kish. That concludes our formal remarks this morning. Operator, we are now ready to open the call to questions from analysts.
[Operator Instructions] The first question is from Jeff Fenwick with Cormark Securities.
So Kish, thanks for the color at the start of the call on adviser recruitment activity. Obviously, you're not wasting any time in trying to build that pipeline. Can you just give us some sense of how that has been building? So you gave us, I think, 7 or 8 names of folks that have joined your groups. Perhaps some sense -- I know this takes a bit of time usually for the momentum to build up there and for those decisions to be made. I think you've referred to perhaps the summertime you might start to see a bit more activity on that front. But any kind of color there you could offer would be helpful.
Yes. So that's a great question. So we've been spending a considerable amount of time since October 20, 2020, when we took control of 100% of the asset, to refine our story, to gather input from all of our people across the firm as to what's important and what's not important, canvassing people in the market as to what's important to them in joining a firm that they think is going to be the brand of choice going forward. And that's taken us the better part of 120 days in capturing that information, including working with our strategy consultant on developing our long-term strategy. While we've been doing that, we've added people like Dean Manjuris to complement the works of JP Janson and Paul Landry and Mike Ankers. And through all of that effort, we now have a pipeline of people that we're talking to that is approximately $10 billion in assets that we're talking to today. So our pipeline is probably the strongest we've ever seen. It takes time to get all of these people along the finish line. We are fully engaged in those conversations, some are more mature than others. And I think when I look at our organization, I say to everyone, continue to grow the pipeline, continue to have the discussions. And in time, summer, fall and the winter, we will start seeing progress and people joining us. And I can't really add any more than that other than saying that the level of activity and the level of interest and certainly with Dean and even Julie Burnham joining us, we've had far more inbound conversations started by people saying, okay, well, let's -- we want to hear more about your story. They are now reading our annual report. They're reading our results. And we are going to share more of that at our AGM. And I think that excitement internally and externally is driving the growth of that pipeline. And hopefully, it's all going to translate into -- in fact, I'm confident it's going to translate into success and people joining us.
Great. That's helpful color. And maybe could you offer some commentary on the stability of the existing adviser base today? You mentioned you've been doing internal town halls in that same -- in the meantime, you've had external entity. I know Canaccord in the background, looks like been having some direct conversations of their own presenting their view. So what's your thought on the certain -- the current sort of morale and outlook of the adviser base today?
I think our morale internally is extraordinary. I think one of the things that we've done is make sure that all our advisers are fully engaged in the development of the strategy. They've participated in the town hall meetings, asked questions at the town hall meeting. Some people have participated by submitting their ideas for the things that are really critically important to them and that we, at the firm, have to invest in. We are doing so. We have heard through surveys about the things that are important to them. We are, I would say, getting feedback on those surveys. Like I just announced, 94% of them are very excited by the journey that we're on. Part of that journey, the message that we've laid out for them is very clear. First and foremost, we're going to focus on the 160 teams here. We're going to drive all initiatives that are designed to support them doing better here than anywhere else and addressing things that are important to them, including investing in technology platforms and makes sense to them. The second thing that we're going to do is supercharge recruiting, and they're excited by that. And the third thing is that we'll look at acquisitions on an opportunistic basis. So they get our strategy. They understand our strategy. They participate in discussions. And we're probably more engaged with them than we've ever been. In fact, I would say all our directors have reached out and spoken to 5 -- at least 5 advisers and got their input on what matters most of them. So I would hazard a guess that our level of engagement is extremely high. The feedback and morale, in my view, is also extraordinarily high. That doesn't mean that from time to time, we won't have 1 or 2 people that might be disappointed and for personal reasons or otherwise choose to go someplace else. But I have no doubt in my mind that all the people that I hear are here because they chose to be here in the last transaction. They chose to bet on a firm that is intent on building something for the long term. And certainly, we've built a firm that they asked us to build. They wanted us to make sure that we had a strong sponsor in the Richardson brand. So we're doing every single thing that we ask of them. I mean they're -- solving all of their issues? No. Are we intent on solving them? Are we marshaling the resources to do that, prioritizing them? Absolutely.
Great. And then you did call out some transformation charges that impacted the quarter here. I'm guessing there's a component that's -- the cost of working with the consultant to build the strategic plan and perhaps some severance. Anything else in those numbers? And is it going to continue at about that level for another quarter or 2? Or what's your expectation on that front?
First of all, I think you're right that, that is -- those are the 2 components to that set aside. We expect very low amounts to continue in transaction transformation costs. We -- the bulk of that is here. There's some -- there will be some -- we are embedding the consulting in our organization for the next 6 months. And so you're going to see some of those costs to make sure that we are executing against that strategy, but they're not [ anything ] of this size. Tim, do you want to add anything to that?
Yes. I'd say, Jeff, that one other thing is as we move through the year and think about restructuring our insurance operations, as Kish mentioned, we may have a charge related to that, but it's a onetime event that we will likely see in Q2 of this year.
But even the insurance one, we will have a onetime charge, but the recurring revenues that come from that onetime charge are 3x that onetime charge. So...
Okay. Understood. And you -- again, we're settling into a new reporting structure here. So I know the clearing state -- segments, sorry, has been merged in with the Wealth Management. So I assume that flows principally through the interest income and the other line?
Yes, that's right, Jeff. So it would be.
Yes. And then one small accounting one here as well. The adjusted EBITDA number, when I look at the segment details for Wealth, it didn't add back the entirety of the interest cost -- interest expense that you've listed there. Is there something that sort of deemed kind of run rate operational and maybe it's tied to clearing that didn't...
The component related to our securities for our land operations, which we don't add back.
[Operator Instructions] There are no further questions registered at this time. So I will turn the meeting back over to Mr. Colella.
Thank you all for joining us today. As always, feel free to reach out to Investor Relations if you have any further questions. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.