RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the GMP's Third Quarter 2018 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.

[Harris A. Fricker, President, CEO & Director]

Thank you, operator. Good morning, and thanks for joining us as we walk through GMP's third quarter results. With me this morning is Deb Starkman, our CFO.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 numerous risks and uncertainties. Certain factors or assumptions applied in forward-looking information can be found in our 2017 AIF and our third quarter MD&A. These documents are available on our website and also on sedar.com.This quarter marked a strong start to the second half of the year, and as we repeatedly said, the earnings power of our franchise becomes evident in a more favorable market environment. In recognition of GMP's enhanced operating performance and positive outlook for the franchise, the Board of Directors made the decision to reinstate a quarterly cash dividend of $0.025 per common share. In addition, the board also approved a special cash dividend of $0.075 per common share. Both cash dividends are payable on December 3, 2018, to common shareholders of record on November 19, 2018. We are pleased to return excess capital arising from GMP's group financial performance to our shareholders.Now let's turn our attention back to the quarter. This quarter, all the elements for a robust investment banking deal activity were present. These included low interest rates, generally high equity market valuations, low volatility and synchronized global growth coupled with strong CEO and investor confidence.The operating environment during the third quarter provided meaningful opportunities to work with clients across multiple sectors to help them raise capital to grow their businesses. And notwithstanding some macro flashpoints at both the positive and negative ends of the market spectrum during Q3, this accommodative business environment helped drive year-over-year revenue growth to 72%.Leading the way was our strong core Canadian Capital Markets business, whose revenue grew by a sizable 186% from Q3 last year. Growth was broad-based across both product and industries with meaningful contribution from cannabis, blockchain, energy and mining franchises this quarter. And given our firm's considerable operating leverage, this revenue growth translated into a 300% increase in pretax earnings. We are pleased with our performance this quarter and the delivery of adjusted ROE of 21%.Before we review the quarter in more detail, let me make a few comments on the evolving diversification and resiliency of GMP's franchise. We are proud to have translated an early leadership position in the emerging businesses of cannabis and blockchain into meaningful business silos and significant contributors to the firm's profitability. Just last month, the Financial Post named GMP's banking team as one of the top influencers in cannabis in their inaugural Cannabis Power rankings. This recognition reflects our talented professionals, transactional expertise and deep relationships with early entrepreneurs in the space and the significant capital we have helped raise for our clients over the past few years. In fact, through the first 9 months of 2018, these 2 sectors now represent our 2 largest businesses in Capital Markets, followed closely by our traditional strongholds in energy and mining. These emerging sectors together with our special situations for franchise have provided the key ingredients for a meaningful step change in our nonresource franchise, offering much-needed stability and diversification from what has been a beleaguered commodities tape.Revenue from our nonresource franchise accounts for nearly 2/3 of our Q3 investment banking revenue. We are clearly moving in the right direction and have the right teams in place to capture these and other emerging opportunities.We're equally encouraged that the strong Capital Markets' momentum from Q3, particularly in cannabis, has extended into October. With that, let's take a closer look at our results for the quarter.We generated revenue of $59 million in the third quarter, up 72% over a year ago. This increase was driven largely by higher investment banking revenue and a higher returns on principal inventories.Adjusted net income of just over $11 million and adjusted EPS of $0.13 compared quite favorably with the roughly breakeven results in Q3 last year. And once again, our Wealth Management team grew revenues, profitability and assets under administration.Our results reinforce our ongoing commitment to deliver positive operating leverage and the benefits of strong collaboration with Canada's leading, independent wealth management firm, Richardson GMP.Turning briefly to the first 9 months of 2018 results where GMP's adjusted net income of $23 million was up a notable 149% compared with the same period a year ago. This growth reflects a 22% increase in revenue to $156 million, primarily due to stronger investment banking revenue, which increased 66% on the stronger activity in cannabis, blockchain, energy and mining. Adjusted diluted earnings per share was $0.25.Let me now discuss the quarterly financial results for each of our business segments. Capital Markets reported adjusted pretax earnings of $17 million, up sharply from a loss of $3.6 million in Q3 last year. Total revenue of $55.4 million for this segment increased 115%, while total expenses, excluding a $5.5 million cost rationalization charge recorded in connection with staff departures, increased 30% over the same period, driven largely by higher variable compensation in line with stronger revenue generation.The increase in revenue was largely driven by higher investment banking revenue, higher returns on principal inventories and higher interest revenue in connection with increased activity and our stock borrowing and lending business. Partly offsetting this increase was lower commission revenue, which decreased 20% from Q3 last year.Let me explain further on these items. Investment banking revenue was $35.2 million, up 162% from a year ago. Underwriting and M&A, both rose sharply this quarter. The composition of our banking revenues for the quarter remains diverse and reflects meaningful contributions from multiple sectors. Our underwriting franchise benefited from increased client activity, notably in blockchain and cannabis, while our M&A franchise benefited from notable mandates in energy, mining and blockchain.It is worth noting that during the third quarter, nearly 61% of investment banking revenue was generated from our growing nonresource franchise, which is consistent with our objective to continue gaining greater market share in those areas.Let me take the opportunity to comment briefly on several emerging opportunities. In cannabis, Canada is the only G7 nation to legalize the use of both medical and recreational cannabis, and GMP Securities is proud to have played a pivotal role in the evolution of many Canadian producers into world-class companies. Canada is the undisputed front-runner in the global cannabis industry and GMP strives to work alongside clients as they continue to leverage their domestic expertise and significant growing capacity.And in blockchain, just next week, GMP will be hosting its second Annual Blockchain Technology Conference, which represents a unique opportunity to hear directly from recognized blockchain experts on topics, such as institutional investing in blockchain, regulation, cryptomining and tokenization to name a few. We have an exciting lineup of digital visionaries and icon for GMP's Blockchain Cryptocurrency Conference.In energy, the story of the challenges faced by Western Canada producers is well documented. Canadian energy sector is struggling to recapture the interest of global investors. We estimate that the current pipeline infrastructure gridlock and lack of real capacity, combined with a heavy oil price -- heavy Canadian oil price discount relative to North American benchmark, is costing the Canadian economy roughly $16 billion annually.GMP FirstEnergy has concluded that Canadian oil sands products are easily the cheapest crude oil barrels for sale anywhere in the world. In short, we are squandering the enormous resource wealth upon which our nation has been built.On a positive note, we see increasing signs of the return of deal activity following a strong third quarter. We are hopeful that an increase in real capacity, higher refinery demand and an increase in pipeline capacity following Enbridge Line 3 coming online in early 2019 will bode well for the sector and Canadian oil prices.Let's now discuss principal transactions where we generated net gains of $11.7 million this quarter. The increase was led primarily by higher returns on principal inventories acquired in connection with investment banking mandates, partly offset by lower fixed income client trading revenue in our U.S. operations.With that, let's turn to the Wealth Management segment where Richardson GMP recorded adjusted EBITDA of $10.4 million this quarter, up from $8.5 million a year ago. Revenue of $71 million increased 7% over Q3 last year. The increase reflects higher investment management fees on higher assets under admin and higher interest income. Richardson GMP ended the quarter with client assets of just over $30 billion and a total team count of 169 with average assets per advisory team of nearly $180 million. Richardson GMP remains a market leader and is widely recognized as Canada's leading independent wealth management business. This business is profitable, scalable and continues to grow under a very capable management team.With that, I'll turn the call over to Deb to discuss expenses.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Harris. Total expenses of $53.4 million this quarter increased 42% compared with Q3 last year. This quarter, we recorded a $5.5 million cost rationalization charge in our Capital Markets business in connection with staff departures. Excluding these items, expenses increased 27%, which compares quite favorably with the revenue increase of 72%, discussed by Harris earlier on the call. The increase in expenses largely reflects higher employee compensation and benefits expense, which were up 61% from Q3 last year. This was led largely by higher variable compensation, which increased commensurate with the sharp rise in revenue and the cost rationalization charge mentioned earlier. Also, contributing to the increase in total expenses was higher noncompensation-related expenses up 9% from Q3 last year, primarily due to higher deal-related expenses commensurate with strong investment banking activity during Q3 and higher interest expense in connection with increased stock borrowing and lending activities. And as always, we continue to be prudent managers of risk, while safeguarding capital and liquidity.We ended the quarter with a solid net working capital of $186.2 million. And through the first 9 months of 2018, we purchased 2.7 million common shares under our NCIB at an average cost of $2.81 per share.And now I'll turn it back over to Harris for closing remarks.

[Harris A. Fricker, President, CEO & Director]

Thanks, Deb. Our results this quarter represent another solid performance for GMP and are a testament to the resiliency of our business model.Our cannabis and blockchain franchises have admirably filled the void of a beleaguered commodities tape and our nonresource franchises now account for nearly 2/3 of our investment banking business. That said, as the commodity space stages an inevitable turnaround, GMP will lead the way. We are pleased that capital activity -- Capital Markets' activity in the fourth quarter has, as mentioned earlier, started on a very robust note.Our primary focus every day is on the needs of our clients and leveraging the full capabilities of our franchise to further meet their needs.Let me close with the following. First, given our financial performance, we are delighted to not only have reinstated a quarterly cash dividend on our common shares but also pleased that the board approved a special cash dividend. Second, our cash and capital position remains extremely strong, which provides several options to retain -- to return cash to our shareholders going forward. Third, we continue to deliver profitability despite operating through some of the worst conditions in commodities in decades. And fourth and last, we see greater potential in our platform, and we intend to fully leverage our capabilities and deliver more to our clients and shareholders, and as a result, help unlock greater shareholder value. We see these factors as catalysts for GMP's continued growth.That concludes our remarks this morning. Thank you again for joining us today.