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Good morning, ladies and gentlemen. Welcome to RF Capital Third Quarter Results Conference Call. I would 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. I'm Rocco Colella, Head of Investor Relations. Welcome to our third quarter 2021 earnings conference call. If you have 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 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, our President and CEO, Kish Kapoor; and our CFO, Tim Wilson, are on the call.First, Kish will provide opening remarks on our progress and growth momentum in 2021 and key takeaways from the most recent quarter. Tim will then cover financial results. And finally, 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, and good morning, everyone. Two weeks ago, we celebrated the first anniversary of Richardson Wealth and Patrimoine Richardson. During that time, our new Board and new leadership team, with considerable input from our exceptional advisers, mapped out an ambitious growth strategy. While we're still in the early stages of our multiyear transformation, I couldn't be prouder of the considerable progress we have made to date.Q3 was another strong quarter of success on several fronts. At Richardson Wealth, we posted record results on many key financial metrics. Again, our AUA was $34.4 billion, up $5.5 billion or 19% from a year ago. And you may have read our press release earlier this week, which stated that in 1 month since Q3 ended, our AUA increased a further $1.3 billion to $35.7 billion.Our fee-based revenue was $62 million, up $9 million from the same time a year ago. On an annualized basis, that represents just under $250 million of recurring top line revenue. These strong results contributed to an 18% increase in Richardson Wealth's adjusted EBITDA from a year ago.Strategically, we enjoyed equal success this quarter. We launched several new initiatives to support our advisers, including an adviser concierge and an adviser action desk, which allow advisers to efficiently access support for every day and more complex service-related needs; in-house insurance capabilities and expanded tax in the state planning team; comprehensive digital marketing campaigns and exclusive client events featuring Hartley Richardson and Sandy Riley to build our brand across the country; a training and practice management program to enhance the adviser experience that included the launch of our Richardson Wealth masterclass, and our first ever virtual adviser conference called Game Changers, which allowed top advisers to share their growth strategies and learn from industry experts.We also made game-changing investments towards delivering on our digital ambition through strategic relationships with Envestnet and Fidelity. Envestnet's state-of-the-art managed account platform is used by over 108,000 advisers across more than 6,000 companies and supports USD 5 trillion of assets. The implementation is tracking to a May 2022 rollout. If that was a big step, then our strategic relationship with industry giant, Fidelity, can only be categorized as a quantum leap forward. In Q4 of next year, Fidelity will begin providing custody, clearing and trade settlement services to Richardson Wealth, and we will no longer operate our carrying broker.We anticipate that approximately 45 employees will transition to Fidelity. We will retain in-house middle office team to ensure continuity in service, and more importantly, no disruption in delivering a best-in-class adviser and client experience. With Fidelity, we gain access to their world-class adviser and custodial platform, global scale, expertise and reputation. We've also secured the operating capacity to meet our bold ambition to grow to $100 billion. Fidelity manages $14 trillion in assets worldwide, and with our $34 billion in client assets, they have $63 billion on the custody in Canada. Fidelity's commitment to ongoing technological innovation will be tailored to Richardson Wealth's growth priorities and our advisers' success.We expect to realize an estimated EBITDA lift of just under $10 million in the first year following the transition. This strategic relationship will also transform our costs to be largely variable and reduce future capital investments in technology.With these game-changing moves, we will fundamentally transform our adviser technology platform, and it will be second to none. They are powerful indicators that we're playing to win. What further contributes to my optimism about tomorrow's results is that, this quarter, we welcomed 5 new top-performing advisers without losing a single team. This is a first in our history. I'd like to take this opportunity to welcome the following advisers and their teams to Richardson Wealth: Paul Borisoff, Tim Conlon and Maria Miletic, Bashar Kamel, Andrew Mason and Rick Morrison and Susan Carson. Shortly after the end of the quarter, we also announced that another leading adviser, Susan O'Brien and her team, also decided to put our name on her door.Further, we have built an all-time high recruiting pipeline, which currently stands at $15 billion. It's clear that our story is resonating both internally and externally. Of course, we won't convert everyone in our pipeline, 10% to 20% is a reasonable target.We have also attracted talent in our corporate offices that will enable us to better support and recruit advisers. For example, our brand has recently appealed to powerful and inspiring women such as Natalie Bisset, Julie Burnham, Christina Clement, Sasha Isaacs and Jan Samson. These hires reflect our commitment to promoting diversity and, in particular, gender diversity across our firm. I would like to take this opportunity to welcome all of our new employees to Richardson Wealth. With that, I'll turn the call over to Tim.
Thanks, Kish, and good morning, everyone. All the achievements outlined by Kish made for a busy first 3 quarters of the year. And I believe that the foundations we're laying for our growth strategy will begin to translate into a higher level of EBITDA and greater shareholder value in the coming quarters.Before we turn to the details of our third quarter results, let me highlight a few noteworthy items. As highlighted in previous calls, 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 mainly on the business drivers at Richardson Wealth. And for the sake of simplicity, all of the comparisons I discuss today will be against Q3 of last year, unless noted otherwise.We have been reporting a high number of items of note over the past 2 years, which reflects the significant transformation that we have undertaken. In Q3 2021, we were still in the midst of that journey, so we recorded $12.8 million of pretax adjusting items, or $11 million after tax, that are related to our ongoing transformation program. The nature of these adjustments is discussed in our MD&A.We anticipate that the number of items of note will decline in Q4 and going forward. We expect that these expenses will lead to significant EBITDA benefits in future periods. For example, as Kish mentioned earlier, we anticipate that outsourcing our carrying broker operations will result in an estimated EBITDA benefit of just under $10 million in the first year after the expected September 2022 transition. In other words, the payback period against the charges that we took in Q3 will be less than a year. This partnership has the added benefit of transforming our cost base to being largely variable, and will allow us to achieve greater scale faster.With that, let's turn to the key growth drivers of the Richardson Wealth business. At Richardson Wealth, adjusted EBITDA was $14 million, up 18% year-over-year, fueled by revenue growth and improved operating leverage. Our adjusted EBITDA margin was 18.1%, up from 17.6% last year. Behind the 14% increase in gross margin, average AUA, the primary driver of revenue, was a record $34.4 billion in Q3 and up 16%.Over the past year, growth has been a function of market appreciation, but we also added an impressive $2.5 billion in net new and recruited assets. Our commission revenues declined 11% due to lower new issue revenue. After a robust first half of the year, new issue activity softened industry-wide in Q3. We participated in 82 new issues in Q3 of this year versus 102 last year.Improved operating leverage also helped EBITDA growth. In Q3, Richardson Wealth's adjusted operating expense ratio declined 120 basis points from 68.4% to 67.2%. We will continue to focus on disciplined cost management as we advance our growth ambitions.With that, let's turn now to a few key balance sheet items. Our net working capital increased to $109 million at the end of September, up from $102 million at the end of June. Our view is that we are holding approximately $15 million to $20 million of excess working capital at the moment, and we expect to draw on it to invest in our strategy over the coming quarters.In addition, to help finance our aggressive growth plans and capitalize on the current low interest rate environment, we renegotiated and upsized our debt facility this quarter. Our new $200 million revolving credit facility has an initial 2-year term, with an option for additional 1-year terms at our request and subject to the lender's approval. Combined with our strong current and expected future operating cash flows, and our excess working capital, the facility provides ample funding and flexibility to accelerate our growth strategy.During Q3, we drew $80.5 million on the facility to repay in full $65 million in subordinated bank debt and $12 million in net promissory notes payable. After the draw, we had $111 million in debt and preferred share liabilities on our balance sheet, and our debt to consolidated adjusted EBITDA ratio was 2.2x. In our view, that's a very manageable level.Heading into Q4, we anticipate increased recurring fee-based revenue from recruiting success and stable equity markets, offset by new issue activity and higher spending on strategic initiatives. As a result, we anticipate Q4 adjusted EBITDA to be slightly above Q3 levels, which is, of course, subject to broad market conditions.Now I'll turn it over to Kish for closing remarks.
Thanks, Tim. As I highlighted in my opening remarks, we're in the early stages of a multiyear transformation journey and making considerable progress toward our ambitious growth plan. The big picture is that in the short few months since we've unveiled the details of our growth plan, we have posted record results, leveraged strategic relationships and partnerships to accelerate growth and attracted top talent to ensure execution success. And 93% of our advisers, 93%, the driving force of our business, have achieved personal best performances this year. Several of our advisers also won industry awards that celebrated -- that celebrate demonstrated excellence in the wealth management industry. Alexandra Horwood and Benji Miles were recognized just last week in the Global Mail's ranking of Canada's top advisers. And Joseph Bakish, Francis Sabourin, Ida Khajadourian, and Rosemary Horwood were named 5 Star Advisers by Wealth Professional. I remain convinced that our best days are ahead of us. We have the right growth strategy, the right leadership, the right Board, the right culture, the right results, and, above all, the right advisers and their highly valued clients. Our motivation to win has never been stronger.We thank you, our shareholders, for your ongoing patience and support. While I, too, am disappointed that our accomplishments haven't resulted in an increase in share price, I can say to you that we will continue to deliver on our promises, drive results and inspire confidence along the way. And I believe that, in time, the market will recognize our strong performance. We look forward to updating you on our progress. 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] And first question is from Jeff Fenwick from Cormark Securities.
So, Kish, nice to see that cadence picking up of advisers joining the firm that message resonating in the market to bring them in. Maybe just from a modeling expectations perspective here, could you provide a little color around how long it typically takes to bring that adviser in-house once they agree to work with you and get their assets on to your platform?
Sure. Typically, if I look at the 5 that joined us last quarter, that journey, for them, would have started -- for some of them that arrived in September, that journey would have started in the beginning of June as they were exploring alternatives across the country. And when they did come over in September and October, I would say, a couple of them have been able to migrate their client assets, almost 85% of their assets within a 45-day period and some a little longer. But generally, that's the runway that they see.
And then I also wanted to talk about your Fidelity agreements. You took some charges there in the quarter to prepare for that, which Tim alluded to in the commentary. So in the intervening period now between now and September of next year, so are there no other charges to be taken? And then once that transition happens, I guess, in September, is that cost savings impact felt effectively day 1?
I'll let Tim talk about that.
Yes, Jeff, happy to answer that. No. At the moment, we don't expect any further charges in between -- between now and the transition next September. We're continuing to refine the project plan, so that may change, but, I mean, even worst case, nothing even close to the magnitude of what we took this quarter. In terms of the cost savings, the $10 million is actually an EBITDA benefit that we quote. And it's a combination of cost savings and then some revenue sharing, so a little bit of give up on the revenue side. So about $12 million of cost savings, offset by $2 million of revenue sharing, $10 million bottom line, and that will be felt day 1. It kicks in immediately.
Okay. That's helpful color. There was some guidance in your commentary or in the MD&A about the OpEx sort of building here through the end of the year. Maybe give us some color around where you're investing in the business? Are you building out different functions at the head office? Or where is the OpEx build is going to come from?
Yes. It's not so much building out functions. I think we are committed to very tight cost controls, even as we grow, and we believe that a lot of the head office infrastructure we have today is scalable, at least over a reasonable degree of growth. It's more -- the spending is going to be more investing in the actual programs themselves. So this is going to be investments in our digital capabilities that -- digital marketing capabilities, enhancing our website and building our brand across the country. I think that's the biggest piece of it. And then there's a few platform investments that we need to make. Those investments don't qualify as capital expenditures. So we're putting them through as OpEx in Q4.
And -- see here, I had one other. You -- in your comments, you suggested that of the working capital today, you got about $15 million to $20 million, that's effectively excess that you're feeling comfortable to tap into. And I guess what -- the remaining capacity on your new facility as well. So a fair amount of available capital to go out and invest in the business. Any more thoughts around where you want to target that? Is it sort of in the insurance opportunity? Is it the asset management space? Or is this -- I know that the [ IA ] recruitment, of course, remains front and center for you, but any commentary you can offer there?
Yes. I mean, if I were to look at all of that capital to be deployed, the first and foremost priority is recruiting over and over and over again. And then, obviously, to continue to enhance our platform, some of which are well underway with our partnership with Envestnet and partnership with Fidelity, but bulk of that excess capital is going to go towards recruiting. And then to the extent that we are looking at insurance opportunities, we're buying a book of business, but that's -- we're going to be able to buy a book of business for a multiple of 3x EBITDA, very accretive to do that. We might spend up to $3 million in doing that, $3 million or $3.6 million, I think it is, and we'll do that over the next several months. And in terms of other acquisitions, while we're talking to many, we're not going to be intending to deploy a lot of cash to doing those transactions. If anything, we're going to do equity. And except for -- there is an opportunity for us to consider building our own asset management capabilities. And in that case, we will deploy some capital in OpEx, but that's even over a 12- to 18-month period of time.
There are no further questions registered at this time. I'll turn the call back over to Mr. Colella.
Perfect. Thank you, operator, and 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. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.