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Good morning, ladies and gentlemen, and welcome to RF Capital Group Third Quarter 2020 Second Earnings Conference Call. I would now like to turn the meeting over to Mr. Rocco Colella, Managing Director, Investor Relations. Please go ahead, sir.
Thank you, Operator. Good morning, everyone, and thanks for joining us today. Welcome to our third quarter 2022 earnings 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 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. As always, these documents are available on our website and at sedar.com. This morning, our President and CEO, Kishore Kapoor; and our CFO, Tim Wilson, are on the call. Kish will provide opening remarks and key takeaways for the most recent quarter. Tim will then cover financial results, and 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.
Good morning, everyone, and thanks, Rocco. It is my pleasure to conduct this earnings call from our new headquarters in Toronto's fast-developing waterfront community. Our new space at 100 Queens Quay East has a magnificent 360-degree view, cutting-edge design, state-of-the-art technology and the highest standards in modern construction. It also has been designed for a wide range of hybrid work options. This move brings our corporate teams together from 2 locations to 1, and our Toronto branch will also be relocating here this month. We have effectively reduced our footprint in the downtown core from 100,000 to 85,000 square feet. And as you will see, in a vertical city that has a busy skyline, we have our own well-defined presence. I want to give a big shout out to Scott Stinnett, Lynne Break, James King, their teams and countless others who have worked tirelessly over the last several months and years to create this beautiful working environment for our fast-growing advisor base and their clients as well as all our adviser teams and corporate employees supporting them. I would also like to thank everyone who has been impacted by this move for their patience, encouragement and enthusiasm. A grand opening will be held over the next few months to showcase our space and welcome clients, recruits, investors and analysts to our new home. This is another promise delivered and what I'm most proud of is that this ambitious project, a $20 million project was completed on budget, on time-ish and a much lower future operating costs. With that, let's review the third quarter, which incidentally marks Richardson Wealth's second anniversary of operations. Despite the turbulent markets had a significant $3.5 billion drop in AUA since March 31 of this year, this quarter, we posted 8% growth in revenue year-over-year and record adjusted EBITDA of $17 million on a consolidated basis and $19.3 million at our Wealth Management segment. These results were primarily due to a threefold growth in interest revenue, 70% increase in insurance revenues over Q3 of last year. Those gains were offset by lower fee-based revenues and corporate finance revenues, both of which were impacted by the decline of 15.7% and 20.9% in the S&P TSX composite and S&P 500 indices, respectively. Tim will share more about our results in his remarks shortly. This quarter also featured the release of 3 million out of 6 million shares currently held in Escrow. With this release, our public float is now 44% of the outstanding shares. The remaining shares held in Escrow will be released next October, increasing our public float to 54%. On the people front, we welcome Sebastian Lacoste to manage our office in Ottawa and Graham Wescon and Susan Daily to our office in Kitchener as advisers. They join they join a growing list of people who are attracted to our story, including the 119 teams that are currently in our recruiting pipeline that exceeds $24 billion. Operationally, we continue to work hard to help prepare our advisers to integrate our new digital solutions into the practices, including engaging investment and fidelity to assist in this complicated undertaking. Although we are encountering some early challenges, I'm encouraged by the work Sarah Witmer, Scott tenet, Jan Samson and their teams are doing to resolve the issues identified by our adviser teams. Even more encouraging is the collaboration amongst our advisers who share best practices and lessons learned with one another. We expect the recruiting momentum to accelerate once these digital transformation projects have been fully implemented. Last week, we also began the process of electing an adviser to sit on our AR Capital Board of Directors as an adviser nominee director filling the seat vacated by the previous advisory incumbent, Mark Dalpe, Mark served on one or more of our Boards for the past 7.5 years and did a tremendous job providing wise counsel to the Board. We thank him for this service. Our entire company of 914 employees, advisers and adviser teams were invited to nominate a candidate and then participate in the vote to narrow the candidates down to the top 2. Advisers representing 82% of our assets along with 381 employees who support them voted for these candidates. 6 impressive candidates stood for election, including Stephen Cudmore, Brad Gustafson, Rosemary Horwood, Susan Brian, David Porter and Francis Sabrin. Steven Cutler and David Porter received the most votes. The Board is now conducting their due diligence on these candidates. And if they're both approved, we will hold our final runoff vote on November 16 to elect our IA nominee director. The new director will be announced shortly thereafter and will fill the vacancy effective Jan 1, 2023 and serve until our next AGM in the spring of 2023. Additionally, they will be included in the slate of candidates for election at the 2023 AGM. With an adviser now being reelected to our Board, I also recently announced the creation of a new CEO advisory council that will consist of advisor representation across the country, and the 5 election candidates noted about. This council will connect 4 times a year to provide me with direct feedback and guidance to help us continue to further enhance our overall adviser and client experience. Before I turn it over to Tim, I want to acknowledge 8 advisers who deserve special recognition. Last month, these professionals were named on the Globe and Mail's list of Canada's top 150 wealth advisers. In partnership with Shop Research, advisers across the country and industry were analyzed and ranked based on in-depth independent research and various criteria. From quantitative data such as revenue and assets under management to qualitative facts, such as their client experience and community involvement, a fulsome range of information is collected to make this decision. We are so proud of Rahim Chatur out of our Calgary office, Tim Conlin also out of our Calgary office, Mark Dalpe, from Montreal, Alexandra Horwood from Toronto, Ida Khajadourian from Toronto, Neil Kumar from Vancouver, Kyle Richie from Toronto and Tyler Steele from Vancouver. We salute each of these advisers for their extraordinary service to their clients. We're proud of them and all the exceptional advisers that call Richardson Wealth, their home. Many more Richardson Wealth advisers are also listened on the Globe and Mail and SHOOK Research provincial list of top advisers. Those names are still under embargo, so we will share them on our next call. There is one more person I would like to highlight. Hartley Richardson, the CEO of James Richardson & Sons Limited was inducted just last night into the Manitoba Business Hall of Fame. Hartley is being honored for demonstrating a vision unique among his peers, providing leadership to move others to achieve their goals, demonstrating true integrity and having built a legacy that will enrich those who follow. This award celebrates the greatest leaders and mentors in the province of Manitoba. On behalf of all of us at Richardson Wealth, we congratulate Hartley for his defending award and thank him for his leadership, commitment and contribution to the success of our company and for being a role model, who we all admire and deeply respect. With that, I'll turn the call over to Tim.
Thanks, Kish, and good morning, everyone. Even with the declining equity markets affecting our more market-sensitive business activities, we continue to deliver strong results, record results in fact. The combined impact of other revenue sources has more than offset declines in corporate finance activity and client trading. In Q3, adjusted EBITDA increased by 31% to a record $17 million, the second straight quarterly record. An increase of 8% in revenue to $85.9 million fueled that performance. Wealth Management's adjusted EBITDA rose by 30% to $19.3 million. That business increased its operating margin to 22.5%. 2 key drivers contributed to the revenue growth. First, interest revenue grew by $8.1 million or 201% since Q3 of last year and by 57% from Q2. When benchmark rates rise, we earn more on cash balances and margin loans. Even though margin loans decreased by 30% -- 32% year-over-year due to client deleveraging among the mid-volatile markets. As you would expect, the rate increases have been so significant that margin lending was still up. Second, we grew insurance revenue by 70% over last year to $2 million, thanks to our enhanced focus on that business. We expect to continue building our insurance business more broadly in the remainder of 2022 and into the new year. As mentioned at the beginning of my remarks, market-sensitive revenues remain soft. So interest and insurance revenue growth was partially offset by a $1.8 million or 46% decrease in corporate finance revenue from Q3 of last year, largely due to an industry-wide slowdown in new issue activity and a 5% drop in client trading commissions. We tend to see retail trading activity drop in the face of volatile markets. It isn't a surprise that corporate issuers and retail investors are taking a step back in this environment. And given the current level of uncertainty, we do not expect activity to pick up significantly in Q4. When corporate finance activity does pick up again, our partnerships with Core Merck and with Blue Burton will ensure that we are well positioned to take advantage of the increased industry activity. We benefited from our strategic shift towards more recurring fee income again in Q3. Due to a stable average AUA, fee revenue was relatively unchanged year-over-year. Average AUA benefited from the market rent up mid-quarter and was 0.5% higher compared with last year and down less than 2% sequentially. $1.7 billion net new assets over the past year and $470 million over the past quarter were just enough to offset market declines. As a result, Q3 fee revenue was consistent with both of those periods. It is unlikely that markets will recover substantially this year, so we believe that fee revenue will be flat into Q4. Now let's talk briefly about expenses. In line with stronger revenue growth, adjusted operating expenses increased by 8%. SG&A was up $1.5 million or 11% due to costs associated with stock borrowing activity and the timing of sales tax recoveries. In addition, we're seeing certain SG&A expenses gradually normalize, including office and business development expenses with a gradual return to office and in-person events. Compensation costs rose by 5% or $0.9 million as a result of hiring to support business growth and annual merit increases. The business growth component includes the effect of adding 19 FTE from adviser teams that were recruited over the past year. Compensation cost increases were offset in part by the true-up of corporate bonuses this quarter. As we move through Q4 and into 2023, we will continue to invest responsibly in our business to support our growth objectives. Expenses will be tightly controlled relative to revenue opportunities. As a reminder, we will convert to Fidelity's unified technology platform at December 31. The result will be an estimated annual EBITDA benefit of just under $10 million, including $6 million in run rate cost savings net of revenue sharing. As a result of this initiative, our cost base will also be more variable, and we will be able to achieve greater scale more quickly. The benefits will start to be realized in January of 2023. Next, let's look at some other notable items. Our capital levels remain strong. We had $102 million in net working capital at the end of September. Combined with positive operating cash flow and our credit facility, we have ample capital to support advisers, recruit more, repurchase shares under our NCIB and acquire businesses if the opportunity presents itself. A total of 18,000 shares were bought under our NCIB during the quarter, and we expect to remain active in Q4. Looking forward, we believe that Q4 adjusted EBITDA will be in line to slightly higher than Q3, largely due to rising interest rates. This view is premised on markets staying flat to where they are today. So as you would know, there is downside risk in the market, they could affect that EBITDA expectation. There is also upside if more of our insurance pipeline materializes in Q4 than we anticipate at the moment. As a whole, it was a great quarter. And through the first 9 months of the year, we are approaching our full year 2021 adjusted EBITDA despite a more challenging market environment. We remain confident that we will increase long-term shareholder value as we build upon the foundation that we have laid. Now I'll turn it back to Kish for closing remarks.
Thanks, Tim. With Q3 behind us, we're now focused on finishing the year strong. Financially, we're encouraged by the rebound in the equity markets in October, which resulted in $1 billion increase in our AUA during the month. If this holds for the balance of the year, we expect to post another solid quarter led by rising fee-based revenues, strong interest income and even more growth in our insurance business, which has many files in the mail with insurance carriers. Operationally, we will do everything we can to ensure a smooth transition to Fidelity in the new year as well as enhance the adviser experience on investment, and we will begin to press hard to attract advisers to our new offices across the country, including Toronto, Burlington and Kitchener. We remain confident that by focusing on building a great business for the long term, not only will we endure the challenges of a turbulent market in the near term, we will see our efforts translate into long-term value for you. Thank you for your patience and loyalty as we continue this difficult an incredibly exciting journey to transform our business to pursue opportunities in a $5 trillion wealth management industry, which is expected to double in the next decade or so. Finally, I'd like to thank you for joining us today, and I look forward to updating you on our progress next year. 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] Our first question is from Jim Byrne from Acumen Capital.
Congrats on the quarter. Tim, I guess, in your kind of remarks kind of touched on this a little bit, but obviously, interest revenues continue to climb. We just got another interest rate increase here in Canada. Is this kind of the level that you would expect for Q4? Obviously, it's pushing margins higher for the next number of quarters. Is this what we can anticipate?
Yes. I think I mean, we are obviously not economist, but the market is expecting further interest rate increases in Q4. I think right now, 25 more basis points in December and 25 in January, both of which will be further positives for our business. So we do expect interest revenue to climb from where it was in Q3 and then probably stabilize that level through 2023.
Yes. I guess my next question would be, I guess, as long as interest rates stay high or continue to move a little bit higher this, whatever that the interest income revenue was this quarter, we can kind of just build from that going forward.
Exactly. That's our current expectation. All premised on the market's view, but that's the belief at the moment.
Yes. Now that's perfect. Maybe a question for you, Kish. Good to see the recruiting pipeline continues to grow. Has there been any change in philosophy or strategy from your part, obviously, given the market volatility in the past number of months?
No, there's no change in strategy. We continue to tell our story as widely as possible pretty much in every province, every city. We are, however, deliberately not onboarding people to our platform until such time as we've completed our transition to Fidelity. I think that, that just simply makes sense. So not to be disruptive it for clients as they are on board, best to onboard them on our new platform. So that's about it on our strategy. It's a push towards onboarding in Q1 and Q2 of 2023. We do have something in the neighborhood of -- I don't know, Tim, I don't recall, it was about 11 to 12 offers that are out there. We believe out of those 11 to 12 offers that are in the hands of recruits 8 or so will onboard in Q1 or early part of Q2. So those are all really good signs. And one of the things that Natalie visit and her team are doing is making sure that we don't slowdown in building our pipeline and telling our story because the larger the pipeline, obviously, gives us a better chance and probability of being able to attract those 14 or 15 teams we wanted every year. Everybody takes their time in deciding as to when they will come on, some people's decision point on a 6-month journey. So the key is to always be building their pipeline.
Well, that's great.
And they're not going to stop?
Sorry, one last one?
Sorry, go ahead.
Sorry, Kish. Tim, maybe just one last one for me. Now that Toronto office space is large and complete and moved in. Just remind us of the capital plans for Q4 and then maybe the 2023 capital plans.
Yes. So there's a bit more of residual flowing through in Q4 from our Toronto office. So call it $5 million roughly that we'll see flow through then. Next year is obviously going to be much lighter given that we don't have a move of this magnitude. We do have business as usual investments that we make in different technology platforms, and we have a couple of other office renovations or enhancements that we're putting through. So I would expect capital outlays to be in the range of $10 million to $15 million next year. So we're still in the process of our 2023 planning and firming up that number. But broad messages, it will be down from 2022.
We look forward to having you here, Jim. The office is so spectacular. It will be fun to show it to you.
Yes, will have to get something in the calendar.
[Operator Instructions] The following question is from Jeff Fenwick from Cormark Securities.
All right. Kish, I just wanted to follow up on the recruiting pipeline. I mean that number now north of $20 billion, obviously, is very, very large. And I think you were just sort of speaking to you'd like to be able to onboard sort of 14 to 15 teams and, you know, sort of my math that's maybe $3 billion to $4 billion in client assets. So I'm just trying to get a sense of like with the operational investments done, assuming market conditions do improve, like what is the reasonable expectation on that $22 million pipeline is $3 billion or $4 billion the appropriate number in a year that you could onboard? Or do you think there's capacity to push beyond that?
So our plan is to be doing about $2.5 billion to $3 billion a year. And we think that, that is a good target. It's something that we can digest, we can onboard without having a poor experience on onboarding. But obviously, we see signs that we have greater demand, greater interest. We're not going to say no. We will add to our staffing because it does take a big team to assist on onboarding. So we will add to it if we start seeing early signs of a demand greater than that. And what we do is we meet biweekly just see the trends in our pipeline. We have good indications on when people will onboard or whether in the journey on the decision. And we see early signs, we will step up. But really, we're looking at $2.5 billion to $3 billion a year right now, at least for 2023, for sure.
Okay. That's helpful. And then maybe just maybe a bit of clarification around variable comp and how the interest revenue gets factored into that, I'm assuming it attracts less of a benefit for the employees there, so your variable comp percentage has fallen. Is that the right way to think about it?
Yes. I mean that's really just a true-up of our corporate cash bonuses. So to the extent that we remeasure our expectations against the targets that we set at the end of the year, we just normally true up every single quarter. And this year, partly based on the actual assets that we're bringing onboard from new recruits, we adjusted it down in Q3.
Okay. And I'm just trying to get a sense of the go forward. I think the last few quarters, it's trended down. It was 46% than 43% and then 40 this quarter, does it sort of normalize up a bit from here? Or do you think you kind of run, and I know mix is a factor, obviously, but how should we be thinking about that?
So the numbers you're quoting, I think, are the adviser compensation. That's correct?
Yes. That's correct. Yes.
So what I was talking about was the corporate cash bonuses that show up in the compensation line. I would expect to-- adviser compensation is a function of commissionable revenue. And so I would expect it to with interest rates having trended where they are and with expectations that interest rates are now stabilizing, I would expect Q3 a pretty good run rate. It may come down that percentage may come down marginally from where it is today, but not significantly.
Okay. And then I think you did speak to the CapEx expectations from here. And then just in terms of other just sort of run rate expense like the project you had the project office that was helping you execute on your strategic plan. Do those -- I assume that spend begins to fall away as well next year?
Yes. We will, next quarter, give you our expectations for performance in 2023 since we're still working through that planning cycle. But I would expect expenses to increase more in line with inflation from here. So some offsets from reduced expenditures on these more significant initiatives like Fidelity and Investnet. But as we mentioned, we'll continue to invest in our business and our growth opportunities. So there will be some offsetting expenses in other areas.
And I'd just jump in there for a second, Jeff. You talked about our recruiting momentum last about 1.5 years ago, we learned that there was a significant opportunity for us to grow our presence in Kitchener because we have a lot of inbound interest from our advisers. Our existing premises in Kitchener were already full and our lease was up. And so, we looked at a space in Kitchener. It made so much sense for us to relocate really downtown. We're in the midst of the offices of Google and Oracle, sort of epicenter of activity. And we knew that the pipeline was strong and in 1 year. Now we're going to triple our presence in Kitchener by some time in April of next year. And so, it just makes sense to open up a new office and spend the money. So we're always looking at first and foremost, is filling our existing offices that we have across the country where we have capacity. But every once in a while, we're going to see a market where there's a very strong inbound interest to want to join our firm. And at that time, we'll make a decision about the kind of space we need. So it's -- the good news is we have interest, we have demand, and therefore, we are spending money, but we're spending it prudently in opaline markets, so we think we're going to have high density within that office.
Thank you. And we have no further questions registered at this time. So I would now like to turn the meeting back over to you, Mr. Colella.
Thank you, Mark, 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 we thank you for your participation.