RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to GMP's Second Quarter 2020 Conference Call. I will now turn the meeting over to Mr. Ben Scholten, Chief Financial Officer for GMP Capital. Please go ahead, Mr. Scholten.

[Ben Scholten, Interim Chief Financial Officer]

Thank you, operator. Good morning, everyone. This is Ben Scholten, Interim CFO at GMP. Welcome to our second quarter earnings conference call. If you have questions following this call, please reach out to Investor Relations. 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 today 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 applied in forward-looking information can be found in our latest AIF and MD&A. These documents are available on our website and on sedar.com. In addition, information relating to Richardson GMP has come from Richardson GMP.Joining me on the call this morning is our President and CEO, Kish Kapoor. Kish will provide opening remarks relating to the key takeaways from the most recent quarter. I will then cover second quarter results including a review of GMP's strong capital and liquidity. Kish will then end with closing remarks.I will now turn the call over to Kish.

[Kishore K. Kapoor, Interim President, CEO & Director]

Thanks, Ben. Good morning, everyone. Thanks for joining us. We hope that you and your families are safe, healthy and benefiting from the strong community response to COVID-19 in Canada relative to other countries that have been less fortunate.It is truly a proud moment to be a Canadian. As a country, we were masked to protect others and with minimal resistance, political or otherwise, embraced social distancing as a powerful ally in the ongoing fight against the pandemic.At GMP and Richardson GMP, we did and are doing everything we can to keep our employees, clients and business safe, including ensuring that we serve our respective clients with minimal disruption.Financially, in the midst of these challenges, we are pleased that our net cash position at the end of June at both GMP and Richardson GMP remained strong at $122.8 million and $58.2 million, respectively. That said, we're not immune to the impact of the pandemic.The operating results of both businesses for the quarter were affected by things beyond our control, including ongoing uncertainty of the capital markets and the historically low interest rate environment that we find ourselves in. But we're more than pleased by the results of things within our control.Assets under administration at Richardson GMP experienced a strong $4.8 billion or 20.4% bounce back from the March lows, highlighting why we are so excited by the growth prospects of that business. It has shown extraordinary resilience in an extremely challenging environment, largely due to the professionalism of its teams of highly qualified advisers and those that support them at both Richardson GMP and RF Securities Clearing.And on our long journey to transform GMP, the special committee continues to engage in negotiations with Richardson Financial Group Limited and the 2 IA representatives on the Richardson GMP Board with regard to a potential consolidation of 100% ownership of Richardson GMP under GMP. They've also welcomed and listened to the input of shareholders.Now that the declaration of emergency has ended in Ontario, in accordance with the terms of Richardson GMP shareholders' agreement and specifically, the liquidity event mechanism, the parties must now conclude the negotiations by no later than September 22, 2020. While they all remain optimistic that a transaction with Richardson GMP will be concluded, shareholders are cautioned that there can be no assurance that a deal will be reached or under what terms they will mutually agree.As we await the outcome of these discussions, we have been engaged in a variety of initiatives to prepare the company for the future, including winding up our operations in the U.K. and the Bahamas. We have also resolved many matters that remained outstanding following the sale of the capital markets business to Stifel and have a handful left to complete. These initiatives and other measures to streamline our operations positions us to move quickly to become a wealth management focused firm if and when a transaction to consolidate the ownership of Richardson GMP is approved by shareholders.Finally, before I turn the call over to Ben again to provide his overview of second quarter results, let me take the opportunity to provide you with an update on our preferred share dividends. While our net working capital of $122.8 million is more than sufficient to pay our quarterly preferred dividends of approximately $1 million on September 30, the Board has temporarily suspended the dividends on both classes of common of the company's preferred shares as a result of statutory restrictions under the Ontario Business Corporations Act.These satisfactory -- these -- sorry, these statutory restrictions require us to obtain shareholder approval at our AGM to reduce our common shares' stated capital in order to be able to pay the dividends. Once we get that approval, rest assured, we will resume paying preferred dividends, including those that have accrued as at June 30. Further details can be found in our MD&A and press release issued this morning.Now I'd like to welcome Ben back to his first conference call since assuming the role of Interim CFO. Ben joined GMP in 2006 and brings to the role a wide breadth of experience in all aspects of our financial operations. I would like to thank Ben for his leadership and strong support in helping us manage effectively through this pandemic. Ben?

[Ben Scholten, Interim Chief Financial Officer]

Thanks, Kish. Our second quarter results from continuing operations were as expected. Our carrying broker was moderately profitable in the quarter even as COVID-19 continued to disrupt the marketplace.Richardson GMP had small losses in April and May but returned to profitability in June as its largely fee-based assets benefited from market appreciation throughout the quarter. This was partly offset by a sharp decline in interest revenues caused by a drop in the prime rate from 3.95% to 2.45% since the beginning of the pandemic.At GMP, a key measure of our performance is changes to our cash position while we await the outcome on the potential Richardson GMP transaction. This is a number that we know is important to shareholders, key to the future plans of the company and one that we pay very close attention to protecting.At the end of Q2, as Kish noted, our net working capital was $122.8 million. This number decreased $3.3 million from the end of Q1 after the payment of $1.1 million in preferred dividends; a $1.4 million net loss from continuing operations net of a noncash $500,000 share of Richardson GMP's net loss, which does not impact working capital; a $400,000 payment of Part VI.1 tax relating to dividends paid on our preferred shares; a $600,000 loss from discontinued operations; just over $100,000 of professional fees incurred relating to the potential consolidation of 100% of the ownership in Richardson GMP under GMP; and an approximate $300,000 foreign exchange loss reported in other comprehensive income. These declines were partly offset by $600,000 in tax recoveries relating to prior periods.Strong net working capital leaves us confident in our ability to not only endure the prolonged effects of the global health crisis but be well positioned to allocate capital opportunistically. We've also been working on identifying and executing new revenue-generating and expense-saving opportunities, including pursuing other strategies to grow our securities borrowing-lending business, increasing interest revenues and lowering operating costs with the wind-up of operations that were not sold to Stifel and through renegotiating or canceling contracts with certain vendors.With all of these changes, we expect to further lower run rate costs and offset them in part with future preferred and common dividends from Richardson GMP. It is worth noting that commencing next quarter, net vendor notes payable will reduce our net working capital calculation as at September 30 by $12.8 million given those become due in September 2021.Lastly, I wanted to thank all our hard-working people for their continued support and commitment as the carrying broker transitioned seamlessly since the outbreak of the pandemic. As a result of all of you, we are functioning extremely well. Thank you for making my transition into this new role that much easier.Now I'll turn it over to Kish for closing remarks.

[Kishore K. Kapoor, Interim President, CEO & Director]

Thanks, Ben. In closing, I would like to acknowledge fellow Board members, Gene McBurney and Fiona Macdonald, who both retired from the Board since our last call.Gene was a founding member of GMP Securities in 1995 and was instrumental to the company's early success in the entrepreneurial segments of the Canadian capital markets. Fiona was appointed to the Board in 2013 and brought more than 25 years of experience in the area of executive compensation and human resource strategies to the Board. On behalf of the Board, we thank Gene and Fiona for their leadership, strategic guidance and informed insights, including the encouragement to continue the bold journey to transform GMP into a wealth management firm. We wish them both the very best.Finally, I would like to close by thanking our highly valued clients, loyal shareholders and talented partners at GMP, RF Securities Clearing and Richardson GMP for their patience and support as we navigate through the pandemic on our journey to an exciting future at GMP and Richardson GMP and in fact, Richardson Securities Clearing. Please be well and safe. And I'll turn the call back over to Ben.

[Ben Scholten, Interim Chief Financial Officer]

Thanks, Kish. That concludes our formal remarks this morning. Thank you for joining us today. As always, please reach out to Investor Relations if you have questions. Goodbye.