RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to GMP's Third Quarter 2019 Conference Call.I would now like to turn the meeting over to Mr. Rocco Colella, Director, Investor Relations, GMP Capital Inc. Please go ahead, Mr. Colella.

[Rocco Colella, Director of Investor Relations]

Thank you, operator. Good morning, everyone. This is Rocco Colella, Head of Investor Relations at GMP. Welcome to our third 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 issued this morning.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 2018 AIF and our third quarter MD&A. Both of these documents are available on our website and on sedar.com.This morning, I am joined by our Chief Executive Officer, Kish Kapoor; and our Chief Financial Officer, Deb Starkman. Kish will start by providing an update on our progress relating to GMP's transformation strategy, including a review of the company's intention to accelerate growth in Wealth Management. Deb will then cover third quarter results. And then Kish will end with some brief closing remarks.I will now turn the call over to Kish.

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

Thanks, Rocco, and thanks to everyone joining us this morning. Having assumed the role of CEO of the public company less than 100 days ago, my mandate and that of my leadership team as set by GMP's Board has been very clear: close the sale of the Capital Markets business and prepare to prudently deploy the significant capital expected to be unlocked from the sale, exclusively on the large Wealth Management market in Canada; and listen, first to all stakeholders, particularly our partners at Richardson GMP and then act to communicate a compelling vision to consolidate the ownership of Richardson GMP under the public company, and make it a centerpiece of our strategy to leverage the Richardson brand to create the destination of choice for Canada's top advisers who share Richardson GMP's entrepreneurial spirit, independent culture and philosophy to deliver unparalleled face-to-face advice to Canadians opting for nonbank points of access for Wealth Management advice.We're making great progress on both fronts. First, we're on track to close the sale of Capital Markets business in Q4 with all but one regulatory approval in hand. While we wait for that approval, integration teams at Stifel and GMP are working closely to ensure a smooth transition of the business on day 1. Last month, Stifel's CEO, Ron Kruszewski, and his senior leadership team joined Harris Fricker, CEO of GMP's Capital Markets business, to host a town hall providing our Capital Markets professionals an opportunity to hear directly from Stifel about their success story of 23 consecutive years of record profits globally and their intention to help Harris and his team replicate that in Canada. Our people responded overwhelmingly in favor of Ron's message with Harris and other key personnel accepting offers of employment and agreeing to join Stifel at closing. All in all, we're well positioned to close the sale of Capital Markets business later this year.Now turning to my second priority, the one that excites me the most, involves GMP's intention to consolidate the ownership of 100% of GMP or Richardson GMP that is, and growing this highly coveted wealth franchise by deploying excess net working capital and public company currency to prudently and aggressively invest in our highly talented investment advisers and grow the business through recruitment, acquisition of complementary Wealth Management businesses and capabilities, development and introduction of new product and service offerings or partnering with third-party providers.Together with Andrew Marsh, Richardson GMP's CEO, I've had the pleasure of visiting Richardson GMP offices across the country and hosting various events, including town halls, conference calls and client events, and many of those locations were existing advisers, potential recruits and clients. Recently, we hosted events with Hartley Richardson in Calgary, where we have shared our go-forward vision, answered questions and received great feedback, including positive support for leveraging the Richardson brand with its rich 90-year history to continue building a firm focus on making Richardson GMP a destination of choice for Canada's top advisers who share a common winning culture and a philosophy of delivering unparalleled face-to-face advice.The support we heard during our visits across the country was confirmed last week when Richardson GMP was again recognized as one of this year's Best Workplaces in Canada. In fact, over 90% of the firm's advisers say that they are proud to tell others that they work at Richardson GMP. There is truly no better or more powerful endorsement than that of our own people. We've also spent a great deal of time sharing our transformation story with our current and prospective shareholders. There is strong interest in our vision and one we believe will garner even more attention once we complete the sale of the Capital Markets business and announce further details of the consolidation of interest in the Richardson GMP.To that end, the Special Committee of the Board, the Vend-In Special Committee, comprised entirely of independent directors, excluding any directors affiliated with Richardson Financial Group Limited, have been working with RBC Capital Markets to complete an independent valuation of Richardson GMP, an important first step in the process to acquire Richardson Financial Group's approximately 34.4% interest in Richardson GMP as well as the approximately remaining 31.2% held largely by Richardson GMP's investment advisers, management team and employees. That valuation work is ongoing and in advanced stages.All this confirms is that we have an exciting opportunity to collectively build something truly special for our valued shareholders, investment advisers, clients and employees for the long term, a firm that is focused exclusively on serving the Wealth Management needs of a growing number of investment advisers and a high -- and alternate net high worth clients looking for independent, nonbank points of access for advice.With that, I'll turn over to Deb for a review of third quarter results.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Kish. Let me begin by addressing the accounting treatment of discontinued operations and a change commencing this quarter in our reporting segments.In accordance with accounting standards, GMP Capital Markets business has been classified as discontinued operations as of September 30, 2019. Both current and comparative period results have been adjusted accordingly. It's worth highlighting that this quarter included notable nonrecurring items that impacted both discontinued operations and results from continuing operations. Discontinued operations included $14.8 million or $10.8 million after-tax and transaction-related costs, including contractual remuneration payments, professional and advisory fees, a restructuring provision and impairment charges.Results from continuing operations were impacted by an $8 million deferred tax expense charge relating to the write-down of deferred tax assets. This quarter also marked a change in our reporting segments. The company has changed the composition of its business segment disclosure to better reflect its current organizational structure following the announcement of the Stifel transaction. We believe this will provide readers an enhanced understanding of how management views GMP's core performance. Moving forward, our new segments are Operations Clearing, Wealth Management and a Corporate segment.The Operations Clearing statement includes the business of providing clearing services currently delivered to Richardson GMP and post-closing to Stifel's Canadian Capital Markets operation. This segment also includes our stock borrow and lending activity. Our Wealth Management segment reflects GMP's 34.4% ownership interest in Richardson GMP as well as dividends received on our preferred share investments in Richardson GMP. And the Corporate segment primarily comprises enterprise-wide items, including corporate functions.With that, let's turn to our Q3 results. Earlier this morning, GMP reported a net loss of $25.4 million in third quarter 2019. This loss was largely attributable to 2 significant items. First was an $18 million net loss from discontinued operations which is comprised entirely of our legacy Capital Markets businesses and included significant Sale Transaction-related costs. Second was the noncash deferred tax expense of $8 million mentioned earlier. Excluding these items, GMP would have recorded net income from continuing operations of approximately $600,000 in third quarter.Let me touch briefly on the new segments. Operations Clearing reported income before taxes of $507,000 in third quarter 2019, which is largely unchanged from Q3 last year. Operations Clearing revenue was $7.9 million in third quarter 2019, increased 52% compared with Q3 last year, primarily driven by higher interest revenue in connection with increased stock borrowing and lending activity. Wealth Management reported income before taxes of $1.2 million in third quarter 2019 compared with income before taxes of $1 million in Q3 last year.Richardson GMP's total revenue was $67 million in third quarter 2019, decreased 6% compared with the same period a year ago, primarily due to lower commission and lower interest revenue. Investment management fees rose third quarter 2019 compared with the same period a year ago. Adjusted EBITDA was $12.2 million in third quarter 2019, up from $10.4 million a year ago. Adjusted EBITDA in the third quarter includes the favorable impact of adopting IFRS 16.Client assets ended the quarter at $28.6 billion administered by 160 advisory teams, which represents an average book size of $179 million per team, one of the highest ratios in the industry. These results speak to the high-quality of Richardson GMP's earnings, the benefits of its scale and the caliber of its advisory team.For the 9 months ended September 30, 2019, GMP reported a consolidated net loss of $44.7 million compared with net income of $7.5 million in the first 9 months of 2018. The net loss in 2019 was primarily due to a $32.4 million loss from discontinued operations, which includes goodwill and intangible impairment charges as well as other transaction-related costs. The net loss was also impacted by the previously mentioned deferred tax expense of $8 million recorded during the year.And now I'll turn it back over to Kish for closing remarks.

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

Thanks, Deb. As you can tell, our financial results this quarter do not tell the whole story. The key takeaway for the quarter is that the sale of our legacy Capital Markets business is nearing the finishing line. The sale will mark the completion of the first step toward transforming 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.When I assumed the CEO role, we developed and implemented a 100-day plan supported by our Board and formed after listening to all our stakeholders, clients, investment advisers, employees and shareholders, to communicate our firm's strategic vision and signaling our intention to deploy considerable capital, including excess working capital at both GMP and Richardson GMP toward accelerating growth in Wealth Management.While we're attracting more interest in our compelling story, we believe the market is currently undervaluing retail wealth management franchise. With $4.4 trillion in retail wealth in Canada, which is expected to grow to $7.7 trillion by 2028, held across 16 million households, the growth opportunities in this market for an independent with scale are significant.Demographic trends support the growth of independent players that have expertise in providing holistic Wealth Management solutions. An aging population and growing complexity and sophistication of wealth solutions, we believe, supports the long-term value proposition of face-to-face advice.Not surprising, investor economics data indicates that there is a concentration of wealth across mass affluent and ultra-high net worth investors in Canada. Richardson GMP with its high concentration of fee-based assets and strong presence in the high and ultra-high net worth markets will represent the ideal platform for GMP to accelerate its long-term Wealth Management strategy. I'm confident that we're well positioned to succeed in this exciting new chapter in the history of our firm.I will now turn the call back to Rocco.

[Rocco Colella, Director of Investor Relations]

Thanks, Kish. That concludes our formal remarks this morning. Thank you for joining our third quarter earnings conference call. As always, please do not hesitate to reach out to Investor Relations if you have any questions. Thank you, and goodbye.