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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 the RF Capital Second Quarter 2023 Earnings Conference Call.
I would now like to turn the meeting over to Mr. Tim Wilson, Chief Financial Officer. Please go ahead, Mr. Wilson.
Good morning, and welcome to RF Capital's second quarter 2023 earnings call. As a reminder, this call is being webcast and available for replay.
I'd also like to remind you that our remarks may contain forward-looking information and that actual results could differ materially. Forward-looking information is subject to many risks and uncertainties. Certain factors or assumptions applied 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, I'm joined by our President and CEO, Kish Kapoor. Kish will share our key takeaways from Q2, then I will cover our detailed financial results and our financial outlook. Kish will then end with closing remarks, following which we will open the call to questions from analysts. If you have questions, once this call is complete, please reach out to Investor Relations. Our contact information can be found at the end of our earnings release.
I will now turn the call over to Kish.
Thank you, Tim. Good morning, everyone. We're so pleased to be hosting this call from Calgary, our second largest market in Canada. In the past 2 years, we recruited 4 great teams in the city and our pipeline has many more high potential recruits based here. This momentum is in large part due to our extraordinary branch manager, Neil Bosch and his management team, along with the Calgary-based Paul Landry from our corporate acquisition team.
These leaders as well as our 36 local adviser teams together are generating serious traction, telling our story and spreading our word about the name on our door. I've also had the pleasure of taking multiple business trips to Calgary over the past few months, including attending a special branch hosted Stampede event, which, yes, was my first rodeo. With each visit, I see optimism building about our future from our entrepreneurs, our teams and our employees.
Needless to say, we are all very bullish on the growth opportunity how we present and are thrilled to be hosting this important call with the team here today. But this optimism is not limited to one city. I'm seeing it across our company with all my market visits. I especially witnessed it when we hosted our annual advisors conference, we refer to as our summit, in Austin, Texas this past May.
This is a payer-own way format where everyone from across the company can join with travel accommodation at their own personal expense. We had over 150 attendees, and many of our advisors rewarded their own team members with an invitation to participate. We had some of the world's best money managers on stage, and many of our bright advisors also shared their business strategies.
Like any extraordinary company, we're deeply inspired by each other and enjoy the chance to celebrate the firm we have become and the future we have in store. We also hosted 3 meetings for our CEO Advisory Council, 2 virtually and 1 in-person. This council was created just this year to solicit a feedback from a group of advisors who represent their respective branches and peers. Topics have been meaty and our discussions have been highly productive with an immense engagement from every member. The optimism on hearing from this esteem group is also nothing short of magical. Our optimism is also attributable to what we have already achieved in the past 2 years, ending in 2022. Since our transformation journey started, our AUA has increased 28% to $36 billion.
Revenue has increased 33% to $354 million and adjusted EBITDA has increased 77% to $62 million. This is a testament to the character, resilience and commitment of our advisor teams who believe in our vision and knew we would deliver on our promises. The advisors who stayed put through it all to manage 95% of our AUA. They knew when the renovations were done, we will have a beautiful new home and in the end, the chaos will be worth the headaches and the frustration.
In fact, over the past 2 years, while managing through the disruptive technology, integration and the pace of change never experienced here, their businesses grew by 20%. Imagine what they can accomplish now that most of the heavy lifting is behind us. The optimism is also ignited by industry recognition too. In this year's investment executive brokerage report card, we rank second in a 3-way tie amongst 14 firms surveyed. We also increased our Net Promoter Score to 74, a level considered to be exceptional. For the fifth consecutive year, we were named as Best Workplace in Financial Services & Insurance by Great Places to Work. 9 of our advisors were also recognized as Canada's Top 100 Women Wealth Advisors for 2023 by the Globe and Mail and SHOOK Research.
Our second quarter results highlight the shift in focus to growth. Our transformation costs were down from $4.3 million last quarter to $413,000 this quarter. This is a 90% decline. Our recurring fee-based revenues were up almost $2 million or 3% of the same period last year and now stand at 90% of revenue. Interest revenue is up 61% over the second quarter of last year. Our recurring pipeline is up $6 billion versus last year and almost $1 billion sequentially. And excluding one large commission, insurance revenues and adjusted EBITDA were also up over last year. Tim will have more to say on all of this in his remarks. However, our stock price has not yet taken the significant improvements in our platform and financial performance into account.
I'm confident that in time, they will align especially as we deliver on the growth phase of our journey, including our organic recruiting and M&A strategic pillars. This is the 1 area that has been a disappointment for our shareholders and needless to say, for me, as President and CEO. But all the work will translate hopefully soon. The enthusiasm we are experiencing is infectious and excitement is growing, especially now that our digital transformation is complete.
Now it's time to focus on growth and that, of course, is highly motivating. Our potential is very apparent, and this gives us much energy and drive to become the destination of choice for Canada's top advisors. I'm grateful to all our Richardson Wealth people for their hard work in delivering these results and for trusting that the long-term gain was worth the short-term pain. I assure you my team and I will continue to work as hard as we did during the successful transformation phase to drive growth and even harder to inspire investors to see the immense value and potential in our business. In the meantime, thank you for your loyalty and your patience.
And thank you to my Alberta colleagues who have such a positive outlook on our company, including Edmonton base David Porter, advisor and member of FCSI Advisory Council as well as Board member of RF Capital Group and our other CEO Advisory Council members in Alberta. Rob Campbell from Edmonton and Calgary based Susan O'Brien and Garry McCulloch.
With that, I will pass the call over to Tim.
Thank you, Kish. For the second quarter of 2023, RF Capital reported $89 million in revenue. The reported results showed a 2% decrease over last year, but removing the impact of one large insurance sale made in the second quarter of 2022, revenue increased 7%. At a more granular level, fee income increased 3% relative to last year, which is directionally consistent with the 6% increase in ending AUA and the 1% increase in average AUA.
Interest income increased 61% over the prior year, reaching over $12 million. Interest income has been a meaningful source of revenue diversification, as we continue to experience relatively low levels of corporate finance revenue with the drop-off in equity financing activity. Insurance income comprised 4% of total revenue in the second quarter, which is above our internal target for this year and moved us towards our goal of increasing its revenue assorts to 5% to 6% of revenue in the coming years.
We reported $15 million of adjusted EBITDA in Q2 relative to $16.6 million in the prior year. Behind that, gross margin was flat for the quarter at approximately $52 million, and adjusted operating expenses increased 4%. In light of inflation and wages, the return to office and travel activity as well as the investments we've made in growing our business, we see continuing OpEx growth to 4% as a pretty good outcome.
And looking at the results in another way, if we remove the impact of that large insurance commission last year, adjusted EBITDA was up by over $2 million relative to 2022. We ended the second quarter with $89 million of working capital, which is consistent with Q1, 2023. We have solid organic cash flow and have not yet drawn on our credit facility to fund strategic initiatives. We will likely draw on it in Q4, however, as our recruiting and our advisor succession planning activities ramp up.
Turning to our outlook. We currently expect adjusted EBITDA to be flat as compared to the prior year versus our previous expectation for 10% growth. The change is because of the ongoing softness in capital markets activity. Our forecast is for markets to remain flat in 2023, which is unchanged. While the TSX is now up relative to this time last year, our advisors ran very diversified portfolios for their clients that include cash, funds and private market investments.
These asset classes do not tend to have as high of a correlation to equity markets. Additionally, we expect adjusted operating expenses to increase in the second half of the year as compared with Q2 levels, primarily because we do not expect continued recoveries in our share price -- share price related expenses. We will also continue to invest in building our platform and attracting Canada's top advisors.
With that, I'll now pass the call back to Kish.
Before we open the call to questions from our analysts, I would like to reiterate how excited we are about the future of Richardson Wealth. We have proved that our advisory teams can grow and serve the clients while we transform our business. We have demonstrated that we are prepared to work tirelessly in delivering on our promises, and we've proved that we have the courage to take bold steps towards achieving our goal.
Our goal of tripling the size of our business through the thoughtful and well sequenced execution of our 3-pillar growth strategy. Now as we turn our focus to growth, I'm confident that we can prove that we can drive organic growth, accelerate recruiting and acquire like-minded firms and in the process, significantly improve our share price performance.
That concludes our prepared remarks. Operator, please open the line for questions.
[Operator Instructions]. The first question is from Jim Byrne from Acumen Capital.
A couple questions. Maybe first one for you, Tim. Just remind us what your capital program looks like this year and where you're spending some of those funds on some of the offices?
Yes. So our capital program is significantly lower than it was last year. So last year, we invested close to $30 million in renovating offices and other premises across the country. And this year, we pulled that back quite significantly -- expect CapEx for the year to come in at around $10 million or $11 million. And again, most of that renovating a few of the offices across the country, including building out our -- primarily actually building out our Kitchener location where we recently attracted a number of new advisors to the firm and we're creating space for them to work.
Okay. That's great. And then Kish, it's good to see the recruiting pipeline is still growing. Tim, you mentioned in your remarks about Q4. Are there teams signed up that you expect to be adding over that time period or you get good line of sight for the back half of the year?
So, we have a very good line of sight at the back end of the year in terms of the people that have expressed an interest in joining us and offer letters are out to these teams. But it's hard always to get a definitive date on when they're going to onboard. With the summer holidays, it certainly more difficult for them to actually commit to the time lines. But we do have a very good line of sight on the people that have expressed an interest on joining our firm.
Okay. Great. And then maybe just can you give us an update on Fidelity and the conversion, and I know that the headaches were long-lasting. Maybe just kind of give us maybe a final update on where that is?
Well, I mean, it's a really good question. I would say to you that our advisors and their teams experienced challenges with the Fidelity vibration, and that is probably not to be -- is not unexpected, given it was such a large and significant undertaking, where we were reporting 315,000 accounts, 100 million historical transactions for 32,000 households where there's an extensive amount of learning of our new systems relative to our old systems.
They were learning Fidelity about the white glove experience that our advisors have come to get used to. Just all of that change did for the first 6 months, obviously, great challenges for our teams. But our teams are progressively identified for us what the pain points were, where the gaps were, and then we've been working together with Fidelity in addressing many of these.
And I would say to you that incrementally, it's getting better week-after-week. And I would say this is not an exact statistic. But if we had 15,000 open tickets in the month of January, we're now down to about 1,000. And so, we're now getting to a place where the experience is dramatically better.
But that doesn't mean we've completed all of the changes that we need to make in terms of enhancing safer processing. And some of those will be completed in Q3 and Q4. So I think by the end of the year, we should have a very good sort of steady-state operation in Fidelity.
[Operator Instructions]. The next question is from Jeff Fenwick from Cormark Securities.
So maybe just the first question as a follow-up to the last one just on the Fidelity conversion. I guess there's still a little bit of there in the quarter when I look through the numbers on completing that. Are we through that now? And do you continue to think that you're going to get the anticipated cost savings that you did give us a little bit of guidance on the OpEx going forward here. I just want to clarify that?
Yes. So everything is in line with our original expectations -- when we talked about over the last few quarters. So our transformation costs were low in the quarter and actually tapered off in each month. So we're -- our run rate on transformation costs related to Fidelity is virtually 0. In terms of the cost savings, we said we expect to realize $5 million to $6 million of 5 or so of EBITDA benefit during the year.
And we recently refreshed those numbers and they still stand. That said, we do expect OpEx to increase relative to Q2 levels as we look forward to Q3 and Q4. There are a couple of reasons for that. 1, we had -- we had recoveries related to our RSU and our DFU plans, because of the decrease in our stock price. We certainly hope that, that won't persist into the next couple of quarters. And then we're continuing to invest and build out some of our teams in order to better support our advisors and enable growth across the company. So those investments will also start to show up more in the coming quarters.
And maybe back on to recruiting, Kish, maybe we've seen a number of players out there being pretty aggressive in the market and certainly Wellington-Altus is pushing very hard. And there's some movement we sort the Gluskin Sheff team for the breaking apart some going to RBC, something independent. I mean what's your impression of the dynamic out there? Does that really impact the pipeline from year-end and the nature of the offer that you're putting in front of those advisor teams you're targeting?
Yes and so Jeff, I didn't hear your question completely, but I'm going to give you what I think I heard back. It's really what's happening in the environment. I would say independents continues to enjoy success, and that's a good thing. And when we talk about that, there's more and more people talking about joining independents, and that's a good thing for all independents.
And the reason our pipeline is increasing. It's increasing because of that particular trend, where more and more people are seeing advisors that have joined independents enjoy some success. Others are not starting to want to hear the story. They hear our story. They hear the story of some of our competitors, lots of activity. But I don't see very significant change in actually the pricing relative to the recruiting offers, but we've kept our steady and it's more really about what we've built, what our story is for the long-term and the success that we're enjoying. So that's what we're seeing in the marketplace.
Okay. I think that's helpful. And then I mean you did reference the share price. And I guess, just given the cadence of some of the recruiting may be weighted towards the end of the year, what about share buybacks and using some of the capital of the year the cash you have available today to maybe ramp up the buyback activity?
We always continue to get advice around these issues by pretty much everybody on base REIT. We certainly entertain that at our Board and have those discussions. And at this stage, really, I don't really have anything more to comment on the fact that we continuously look at all of our options on what we should do that.
And as you can imagine, we've just gone through 24 months of incredible change achieved most of the things that we said we're going to do. And for me, personally, it is really disappointing that some of this effort has been translated into a good share price. And obviously, I own that, and I'm going to do everything in my power now to get the story out to drive growth, drive recruiting success before I do that sorry, drive acquisition success and persuade people that we have built something that is far more valuable than it is reflected in our share price.
Okay. That's helpful color. Maybe one last one here. I noted you're -- the charge from discontinued operations tied to some litigation from the prior transaction with respect to the Capital Markets Group. Is that the end of that? Is there any other outstanding matters there that are sort of contingent liabilities for you -- bit surprised us were 3 years, I guess, effectively past that transaction. So any color you can offer there?
Well, the comment on offer is that when we did that transaction, we knew we had a couple of outstanding matters at that time, and we provided for them on our financial statement at that time in terms of where an estimated liability would be. And the charge this quarter is essentially a reflection of crystallization of that open item related to a matter that was -- will be pertaining directly to that sale in December of 2019 of our Capital Markets business. And to the extent that we expect -- I don't think we expect anything significant left in that on a go-forward basis. But there's 1 or 2 small things, but we think we're and we can provided for.
There are no further questions registered at this time. I will turn the call back to Kish Kapoor.
Thank you, everyone, for joining us today. And as always, please feel free to reach out to Investor Relations if you have any further questions. Have a great weekend.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.