RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to GMP's Second Quarter 2019 Conference Call. I would now like to turn the meeting over to Mr. Harris Fricker, Chief Executive Officer and President. Please go ahead, Mr. Fricker.

[Unknown]

Thank you. Good morning, and thanks for joining us as we walk through GMP's second quarter results and provide you with an update on recent strategic developments. With me this morning are Kish Kapoor, the newly appointed Interim President and CEO of GMP Capital; and Deb Starkman, our CFO.Before we get started, I'd 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 second quarter MD&A. These documents are available on our website and on sedar.com.Today's call, Deb and I will undertake as usual a high-level review of the firm's performance during the second quarter of 2019. And Kish will follow by providing additional color on recent strategic developments, which includes shareholders voting overwhelmingly to approve the previously announced sale of substantially all the firm's Capital Markets business to Stifel Financial Corp.As was announced earlier, and following the successful shareholder vote on August 6, effective today, I will be stepping down as President and Chief Executive Officer of GMP Capital. I will continue to be President and Chief Executive Officer of the acquired Capital Markets business and will continue to be a Director of GMP Capital until the closing of the transaction.Concurrently, GMP's Board of Directors has appointed Kish Kapoor as Interim President and Chief Executive Officer.At this time, I'd like to take a moment to introduce him. While he is new to the role, he is certainly not new to the firm. He currently sits on the Board of GMP Capital, of Richardson GMP and Richardson Financial Group Limited. He has held a number of senior executive roles in the wealth management space, including serving as President of Wellington West Holdings and was one of the co-founders of Assante Corporation, previously one of the largest wealth management firms in Canada. He assumes the role of CEO at a critical time in the firm's history as it exits the Capital Market business and pivots the franchise towards redeploying considerable capital to accelerate growth in Wealth Management.Before we review the quarterly results, I'd like to make a few comments as I step down from the public company CEO seat. It has been a great honor to lead this firm for the past 9 years and indeed to call GMP home for the past 18.I look forward to continuing to lead our Capital Markets team as we embark on this next step in our journey with our new partners at Stifel.I'm excited about the prospect of combining one of the best small- to mid-cap franchises in the country, with one of the best middle-market franchises in the world.As I depart the seat, I want to extend my sincere thanks to our shareholders for their ongoing support of the GMP franchise, and of course, I would be remiss if I did not thank the entire GMP family for their unshakable commitment and dedication to excellence in meeting the needs of our clients. Thank you.With that, let's turn our attention back to second quarter results. The results this quarter were impacted by a 35% decrease in the dollar value of common equity underwriting transactions compared with the same period a year ago with business activity declines in the cannabis, blockchain and mining sectors, and an uncertain market environment resulting from geopolitical tensions and seemingly endless trade war rhetoric.Client conviction remained low and the performance in our underwriting franchise dropped commensurately. Client trading activity was also muted. While difficult to quantify, the Stifel transaction and market rumors preceding the announcement also proved to be a meaningful revenue distraction across the firm as employees and clients alike waited for the dust to settle.In the context of this muted client activity, GMP delivered total revenue of $26.5 million, an adjusted net loss from continuing operations of $550,000 and an adjusted diluted loss per share of $0.02. The Board 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 from continuing operations was $26.5 million, as I mentioned previously, down from $37.5 million in Q2 last year. The decrease was primarily due to weaker investment banking revenue and weaker commission revenue. Partly offsetting these decreases was higher interest revenue.Investment banking revenue decreased 22% compared with the same period a year ago, largely due to lower underwriting revenues, and this is largely in the mining and cannabis sectors.The second quarter of last year included strong client engagement and notable capital raisings in the capital -- cannabis and mining sectors, creating a stronger comparable. Our deal flow in this quarter was consistent with trends across the industry, which reflected material lower -- materially lower volumes. Underwriting revenue decreased 28% compared with the same period a year ago, which is commensurate with a 35% decrease in the dollar value of industry-wide common equity underwriting transactions over the same period last year.M&A revenue was largely unchanged compared with second quarter 2018. Our dialogue with clients remains very positive as we focus seamlessly on transitioning the Capital Markets business to Stifel later this fall.Commission revenue decreased 55% compared with second quarter 2018, largely on lower client trading volumes amid an uncertain market environment.Principal transactions generated net losses of $2.4 million in the second quarter compared with net losses of $0.3 million in 2018. The lower returns from principal transactions was largely due to unrealized losses on securities, acquired in connection with investment banking mandates, partly offset by lower losses in connection with client trade facilitation.Interest revenue increased by 74% in second quarter 2019 compared with second quarter 2018 in connection with increased stock borrowing and lending activity.With that, let's turn to the Wealth Management segment, where Richardson GMP reported adjusted EBITDA of $11 million this quarter on total revenue of $69 million. Income before tax for the quarter was $2.7 million versus $6.6 million the prior year.Total assets under administration ended the quarter at approximately $29 billion, administered by 161 advisory teams. This translates into one of the highest ratios of revenue per advisory team in the industry in Canada.As Kish will discuss later in the call, Richardson GMP will become the foundational centerpiece for GMP Capital moving forward. This focus on accelerating growth in Wealth Management represents an exciting new -- next phase as considerable resources are deployed to further evolve the firm's capabilities in the wealth management space via Richardson GMP. I hold Andrew Marsh, Richardson GMP's CEO, and his executive team in the highest regard and wish them every success in continuing to build what is the best independent wealth management platform in the country.With that, I'll turn it over to Deb to discuss expenses.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Harris. Total expenses decreased 12% in second quarter 2019 compared with the same period last year. The decrease was largely led by lower employee compensation and benefits expense, which decreased 35% compared with second quarter 2018.Leading this decrease was lower variable compensation, which decreased 37% commensurate with lower revenue generation in the quarter. Share-based compensation was also down compared with second quarter last year due to lower cost in connection with the GMP FirstEnergy transaction shares, which added $1 million in 2019 second quarter and $3.3 million in 2018 same period.Noncompensation expenses increased 31% compared with second quarter 2018. This increase was largely due to $2.8 million in costs incurred in connection with the Stifel transaction. Excluding these costs, noncompensation expense increased 8% compared with Q2 last year, largely due to higher interest expense in connection with increased stock borrowing and lending activity.As always, we continue to be prudent managers of risk, while safeguarding liquidity and capital. Following the closing of the Stifel transaction, the aggregate excess capital with GMP and Richardson GMP will be deployed to accelerate growth in Wealth Management.Some of the more notable uses of cash this past quarter and since the announcement of the Stifel transaction include a further investment in Richardson GMP by acquiring additional common shares during the quarter through the Richardson GMP liquidity pool plan. We returned a portion of capital to shareholders via common and preferred share dividends and lastly, we incurred $2.8 million in transaction costs this quarter with additional costs in connection with the Stifel transaction expected in the second half of the year.Before I turn the call over to Kish, I would like to take a moment to thank Harris for his leadership at the firm. I hold him in the highest regard both professionally and personally.And now I'll turn it over to Kish for closing remarks.

[Unknown]

Thanks, Deb. Good morning, everyone. On behalf of our Board, everyone at GMP and Richardson GMP, let me also begin by thanking Harris for his many contributions for the better part of the past decade to both GMP and Richardson GMP.I know that everyone, including me, admire his strong leadership and fierce determination to build a team, a company, a culture that embraces philosophy that he who dares wins. It's that winning attitude that I believe attracted many talented professionals to the firm, an attitude that I believe will serve Harris well in transitioning the Capital Markets business to Stifel, and in his new role following closing of the sale transaction as leader of Stifel's business in Canada.I would also like to thank GMP co-founders, Gene McBurney and Kevin Sullivan who dared to compete and did so successfully in the entrepreneurial segments of the Canadian Capital Market segments over the past quarter century. And a special thank you to Kevin for his special -- for his significant contributions to Richardson GMP, a firm he co-founded with the Richardson family; Andrew Marsh, President and CEO of Richardson GMP; and the many talented investment advisers and employees that all dared to join them in building a strong alternative for Canadians looking for wealth management advice from firms other than a bank.I would like to thank our Board of Directors led by Don Wright for making a bold decision to transform GMP by recommending to our loyal shareholders to diversify our iconic Capital Markets business, focus our capital -- significant excess capital exclusively on wealth management and leverage the Richardson brand to accelerate growth in Wealth Management.And a big thank you to our shareholders for their overwhelming vote of confidence earlier this week in our go-forward strategy to transform GMP. We're grateful for your support and your patience during the challenging years. We promise to be relentless in our effort to create value and will strive to continue to earn your trust in the months and years to come.It's early days, but since the announcement less than a month ago, our shares have traded up by almost 30% and the average trading volume has increased too. It means we are attracting more interest in our compelling story and shareholders have recognized more fully the value of our 1/3 interest in Richardson GMP and the significant excess cash we expect to have on our balance sheet following the sale of the Capital Markets business.This is a great start, and I intend to spend the next 100 days telling our story to attract even more interest in our company from shareholders, investment advisers and potential acquisition targets.On this first day on the job as CEO, let me express my gratitude to the management team and employees who have worked tirelessly for months to prepare the Capital Markets business for sale to Stifel and to the investment advisers, their teams and those that support them at Richardson GMP for participating in several conference calls to enthusiastically ask tough questions about our strategy going forward and share their best ideas to build on the success that they already enjoy at Richardson GMP today.It is this level of engagement, openness, transparency throughout our organization that I believe affords us the best opportunity and indeed competitive advantage to succeed in this next chapter in the history of our firm.With this solid momentum and the overwhelming support for the sale of Capital Markets business, I look forward to working closely with Deb and Andrew Marsh and their teams to develop and implement a plan approved by our Board and formed after listening to all our stakeholders, that being the clients, investment advisers, employees and shareholders; and deploy considerable capital, including excess working capital at both GMP and Richardson GMP toward accelerating growth in Wealth Management.Core elements of this growth strategy will include leveraging the Richardson brand, their 90-year history in financial services and their 160-year legacy of building successful Canadian businesses to help transform GMP into a firm that can be the very best at providing high net worth clients independent nonbank points of access for their wealth management needs for generations to come.The next step envisions the company consolidating the ownership of Richardson GMP by acquiring the 2/3 of the shares in Richardson GMP, that it currently does not own, in an all-share transaction. Richardson GMP is an award-winning firm that since 2010 has been awarded top ranking in the Investment Executive Brokerage Report Card for products and services dedicated to high net worth and ultrahigh net worth investors, and most recently was recognized as one of Canada's best workplaces for 2019.Today, Richardson GMP has approximately $29 billion in client assets, administered by 161 advisory teams. The average assets per investment advisory team are among the highest in the industry, as Harris said, at $175 million per team.To purchase the 2/3 interest in Richardson GMP, not already owned by GMP, the Board has formed a special committee comprised entirely of independent directors, excluding any directors affiliated with Richardson Financial Group Limited to enter into discussions with Richardson Financial Group Limited and the representatives of the investment advisers on the Board of Richardson GMP. As part of this effort, the special committee has retained RBC Capital Markets as financial adviser and as an independent valuator to prepare a formal valuation of Richardson GMP.Acquiring GMP with its proven scalable wealth management platform will allow us to first partner with the Richardson family, GMP's largest shareholder, holding a 24.1% ownership stake and the owner of approximately 33.3% of Richardson GMP. This will bring to the company a powerful brand, reputation and rich history in creating wealth in a variety of industries, including financial services over more than 5 generations.Second, we'll accelerate our vision to continue building and growing a top-tier wealth management business, that it becomes a fully integrated financial services firm with Richardson GMP being the centerpiece to provide a comprehensive suite of client solutions across the entire household balance sheet. And lastly, allow us to deploy our excess net working capital and public company currency to prudently and aggressively grow the business and recruitment of financial advisers, acquisition of complementary wealth management businesses and capabilities, development and introduction of new products and service offerings.It would also allow us to invest in a variety of operating revenue initiatives to improve the service offering to our investment advisers and their clients, and to expand margins.It is worth repeating that any acquisition of Richardson GMP would only occur following the completion of the Stifel transaction, and would occur in accordance with the shareholders' agreement governing Richardson GMP, which includes a shareholder liquidity mechanism that contemplates GMP making an offer, after consultation with the investment adviser representatives on the Richardson GMP Board, which would only require the acceptance of the Richardson Financial Group, also after consultation with the investment advisers representatives on the Richardson GMP board, to proceed to closing of the transaction. And of course, a transaction of this importance would require both shareholder and regulatory approvals. All the details of which will be in an information circular that will be sent to shareholders of GMP, if and when an agreement is reached.Additionally, if the acquisition of Richardson GMP is completed, it would result in Richardson Financial Group Limited continuing to be the largest shareholder of GMP, with its current holdings increasing by the amount received in GMP's shares in exchange for its 33.3% interest in Richardson GMP. If successful, the public company and all of its subsidiaries will be renamed to reflect the Richardson brand.The full details of the liquidity mechanism can be found in our annual information form on our website and on SEDAR.In closing, we see significant opportunities to partner with the Richardson family, our top-performing investment advisers and management of Richardson GMP to deliver significant long-term returns for shareholders and employees.I'm fully committed to an active and ongoing dialogue with our shareholders and our broader stakeholders.We are fortunate to have the benefit of starting with an industry-leading Wealth Management business that is performing well. In fact, last year, Richardson GMP generated adjusted EBITDA of $45 million on total revenue of $290 million, of which approximately 70% is fee-based recurring revenues. And Richardson GMP at scale in its operations will add significant assets without incurring many fixed costs, thus enhancing margins for subsequent asset growth.To learn more about our strategy to transform GMP, please visit our website and view the presentation posted today under the Investor Relations section.That concludes our remarks. Thank you for joining our call this morning. I look forward to updating you on our progress over the coming quarters.