© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to RF Capital's Second Quarter 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 second quarter earnings conference call. If you have any questions following this call, please reach out to Investor Relations. My contact information can be found 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 the results could differ materially. Forward-looking information is subject to many risks and uncertainties. Certain factors or assumptions implied 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, our President and CEO, Kish Kapoor; and our CFO, Tim Wilson, are on the call. Kish will provide opening remarks, an update on our bold growth strategy and other key takeaways from the most recent quarter. Tim will then cover financial results. 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. Q2 was another transformative quarter. We achieved several milestones on our journey to become the brand of choice for Canada's top advisers and the high net worth clients. Specifically, we continue to track top talent to our Board and our leadership team.We took big steps towards delivering on our digital ambition by partnering with Envestnet for unified management account platform. Envestnet manages over $5 trillion in assets and supports 106,000 advisers across 5,100 companies. And we're not done there, we continue to canvas the marketplace to further enhance our technology platform. So stay tuned for more game-changing updates.We built a burgeoning recruiting pipeline and onboarded multiple advisory teams and have many other confirmed to join us in the next couple of months. What pleases me about this is that our story is resonating with those who value the name on our door and our high-performing advisor centric entrepreneurial culture. We migrated our insurance business in-house to capture more of the economies or the economics of that business. With this change, we're targeting our insurance revenue to grow to 7% to 8% of total revenue over time, up from the current 1% to 2%.We received the second highest rating in Canada in the annual investment executive brokerage report card and won awards for best place to work for women, mental wellness and a great place to work in Canada and Ontario. We launched our Adviser Concierge Desk to make it easier for advisers to succeed here than anywhere else.We're actively promoting a brand with comprehensive awareness and digital marketing campaigns to tell our story across the country using a combination of social media, sponsorships, podcasts and traditional media. This campaign also includes 2 exclusive events for clients, prospective clients, advisers, prospective advisers and other guests featuring Hartley Richardson and Sandy Riley, our founding fathers and 2 of Canada's prominent business leaders.Our first event in August will be broadcast live from the iconic Winnipeg Art Gallery, home to 14,000 pieces of Inuit art held in trust. Our fireside chat will be situated in the inaugural exhibition of the Inuit Art Center. There Hartley and Sandy will share fascinating stories about the inception and evolution of Richardson Wealth and the 165-year history of the Richardson brand. They will also share anecdotes about their friendship, their partnership and their families, including Hartley's grandma the Muriel, who was a subject of a 1957 Maclean's magazine feature article, where they declared her to be "The Shy Baroness of Brokerage." We expect to run a similar event in October in the stunning Canadian Museum of Human Rights.If you would like to join us at this virtual live event, please reach out to Rocco Colella. His contact information is found at the end of our earnings release.We announced again a virtual conference by advisers for advisers called Game Changers. At this conference, to be held in September, 20 of our top advisers have agreed to share their thoughts on how advisers can elevate their practices. This conference will include sessions on practice management, digital marketing, client prospecting, onboarding and hosting clients' events and building exceptional teams. It will also feature guest speakers on ESG, digital technology and a keynote speaker who knows everything about playing to win. This conference has been powered by our impressive group of external partners who provided sponsorship dollars to the tune of hundreds of thousands of dollars to support and endorse our game-changing messaging and our brand.And we delivered record results in metrics such as AUA, fee-based revenue and average household assets. We also saw our new issue business increase by nearly 200% this quarter versus the same period last year. These are outstanding results and are gradually being reflected in our share price. Our $2.47 share price is at a 52-week high, up 42% year-to-date. All these accomplishments made for a busy quarter, and not surprisingly, are generating a lot of positive energy across the firm.The amount of effort needed to kick start our transformational journey pales compared to what our growth momentum promises to produce.With that, I'll turn the call over to Tim.
Thanks, Kish, and Good morning, everyone. Building on Kish's remarks, Q2 was another strong quarter for our firm. The growth momentum we enjoyed in Q1 carried into Q2 as we had expected. We hit new record levels of AUA, fee-based revenue, AUA per advisory team and the number of households with average assets exceeding $1 million, to name a few. This performance was widespread, with 97% of all adviser teams growing their AUA in 2021. And our disciplined cost management efforts contribute to improved operating efficiency and profitability. All of this made for a strong first half of the year.Before we turn to the details of our second quarter results, let me highlight a few noteworthy items. As highlighted last call, the comparability of our consolidated results is limited, given that we commenced consolidating Richardson Wealth last October. As such, my remarks today will again focus largely on the business drivers at Richardson Wealth. In addition, Q2 results were affected by adjusting items of $5.8 million pretax or $4.3 million after tax. The nature of these adjustments is discussed in our MD&A.With that, let's turn to the key growth drivers of the Richardson Wealth business. At Richardson Wealth, adjusted EBITDA was $15.1 million, the second highest level in 7 years, 85% above Q2 of last year and 7% higher than in Q1. These increases are a result of the growing AUA and improved operating leverage in the business.The adjusted EBITDA margin improved to 19.8% in Q2, up sharply from 13.2% in the same period a year ago. What is also impressive is that we achieved this margin despite interest revenues still being pressured by low rates. Behind our higher gross margin, average AUA, which is the primary driver of revenue, was a record $34 billion and up 20% year-over-year. Growth was largely a function of market appreciation, so we added an impressive $1.9 billion in net new and recruited assets since June of last year. This will only get better as Christina Clement launches her practice management curriculum in Q3.Our commission revenue continued to benefit from a robust new issue market and our Cormark partnership. Although it was softer than the recent highs we enjoyed in Q1, we participated in 149 new issues in Q2 versus 50 last year, an almost twofold increase. We continue to expect that deal activity will taper off slightly from Q2 levels, particularly given the typically slow summer months in Canadian capital markets.Improving operating leverage also helped EBITDA growth. In Q2, Richardson Wealth's adjusted operating expense ratio declined an impressive 12 percentage points from last year from 76% to 64%. We will continue to focus on disciplined cost management as we advance our growth ambitions.With that, let's now turn to a few key balance sheet items. At the end of June, our net working capital increased to $102 million, up from $96 million at the end of March. 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 $108 million in term debt on our balance sheet and our debt to consolidated adjusted EBITDA ratio at 2x. That is a very manageable level. We have $12.1 million of promissory notes coming due in September this year, and our subordinated bank debt also comes due this fall. To help finance our aggressive growth plans and to capitalize on the current low interest rate environment, we intend to renegotiate and upsize our subordinated debt in Q3. That said, our overall appetite for leverage still remains low.Looking out over the remaining 2 quarters of 2021, we anticipate increased recurring fee-based revenue from continued AUA growth, offset slightly by lower new issue commissions and spending on strategic initiatives. As a result, we anticipate adjusted EBITDA in Q3 and Q4 to be largely consistent with Q2, subject, of course, to broad market conditions.Now I'll turn it over to Kish for closing remarks.
Thanks, Tim. Taking advantage of our considerable momentum. We're executing against our growth plan at an ever-accelerating pace and with great conviction. In the short period since we've unveiled our plan, we have and will continue to elevate our advisers' experience significantly, enhance our recruiting value proposition and raise our brand awareness while posting record results along the way. After a challenging multiyear journey to transform our company, we're finally attracting the attention of everyone, everywhere and being recognized with delivering on our promises. In doing so, we're bringing the enthusiasm and energy required to build a great company that we're all excited to be a part of.We thank you, our shareholders, for your patience and support over these years and look forward to updating you on our progress next quarter.I'll now turn the call back over 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 from Cormark Securities.
So Kish, just let's start off with the recruiting pipeline here and some commentary in your release. So some of the commentary was suggesting that the pace of client asset growth likely moderates to the back half of the year. I'm assuming that's more around just market expectations, but you also did say you do believe you can close some of that $10 billion pipeline through the back half of the year. Is that correct?
That's right. It starts in September and October and less so in December, but September, October, November.
And what are you seeing in the market today in terms of the sort of acquisition cost for those advisers? I've kind of heard that some of your competitors are getting pretty aggressive in what they're paying to bring those teams on board? Is it sort of trending the way you would expect? Is there going to be some inflation in the acquisition costs there for you? Or how do you think about that?
We've always been saying that there's a renaissance of a bygone era amongst the independents. And certainly, even the banks are into active recruiting efforts. So yes, the price has gone up. I don't -- I wouldn't say it's materially up, but for high-quality practice there's always been a premium.
And Jeff, I'll add to that and say that we've got a pretty detailed model that we run behind the scenes whenever we look at potentially attracting a new recruit. And we will do these deals only where they make economic sense for us. And in fact, I think it might have been just after the end of Q2 or towards the end of it, we backed away from one of these deals because the numbers just didn't add up for us. So we are being prudent about it and making sure we do these deals only where they add value.
And then in terms of building out the offering for clients, you did mention bringing the insurance operations in-house migrating to that in-house platform. Can you just give us some color on what's involved with that? I thought you might need to acquire or partner with an outside firm in order to make that happen. So what's the expectation there?
So I mean the first thing is that we have a relationship with another MGA, and we terminated that relationship sometime in the spring. I can't remember the exact day, it was April or May, and that now allows us to be our own MGA, and we can negotiate contracts directly with the carriers. And we're well underway to doing that. I think we might have even done that with 8 to 9 of the carriers. So that's a way for us to make sure that we have a direct relationship with the carriers that allows us to enjoy better economics when we are effectively issuing or selling policies under that program.And what's really involved other than that is to make sure that we have a complement of people across the country that can help our advisers introduce sophisticated plans for our clients driven by wealth plans and other strategies. So that's underway. In fact, we've got a good team built now. So our team is there. That's where we get, I think. And historically, we did almost $40 million of insurance premiums that our clients paid under the program. So we're already starting with a very good book of business, and we intend to grow that.
And I noted over the course of the year, so far, you've been building out your executive team as you stated in your plan and supporting that growth agenda. How should we think about the related costs there? Does that mean like the corporate overhead costs or sort of salary and benefit costs go higher here? Do they get blended into the wealth management segment? And what's the trajectory there?
So we've had some departures. And then we -- essentially, the people that have stepped in, have been taking on either positions from those departures, plus we have a number of people retire. And when those people retire, we've been replacing them. So it's been a plus and minus game. And I would say they're not material changes to our people plan.
And noted your transformation costs here in the quarter, about $2.5 million. And I know you've intended to keep that transformation office going at least to this point of your journey. Is that run rate from Q2, roughly what we should be expecting going forward? Or is it going to be more just maybe project specific?
I would think that run rate -- that number actually comes down in future quarters, Jeff, probably more in the $1.50 million to $2 million range, so down. And that will continue for a couple of more quarters from here.
And then maybe just one last one here on CapEx and as you're putting in some of these new solutions. How do we think about that? And is there a meaningful CapEx investment around the Envestnet platform? Or is that going to be more baked into the expense line?
So there's definitely some CapEx involved with a number of different initiatives underway. The Envestnet platform is probably the most significant. But we've also got various programs right now to renovate offices or move and consolidate different parts of our real estate footprint, which will also involve CapEx. All of that will then obviously flow into income over the next 5 to 10 years. And it will add up, and we'll provide more guidance on that as we head into the next few quarters and get greater visibility on the spending.
[Operator Instructions] So there are no further questions at this time, so Mr. Colella, I'll return the meeting back over to you for closing remarks.
Thank you, everyone, for joining us today. As always, please feel free to reach out to Investor Relations if you have any further questions. Have a great weekend. Thank you.
Thank you. Your conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.