RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to GMP's Fourth 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, sir.

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

Good morning, everyone. Apologies for the technical difficulties with the line this morning, which gets us off to a late start. But thank you for joining us as we walk through GMP's fourth quarter and 2018 results.Here with me this morning, as usual, is Deb Starkman, our CFO. Before we would get -- we get started, I would like to remind you 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 2018 annual MD&A. These documents are available on our website and also on sedar.com.The operating environment of fourth quarter turned decidedly negative. Significant equity market volatility in December led to negative performances across virtually all asset classes and as a result, client activity was tepid. Trade-related uncertainty and slowing global growth were the primary drivers of the equity market selloffs. The S&P/TSX Composite Index declined 11% in the quarter, with the energy sector being particularly hard hit by a combination of sharply lower oil prices and ongoing pipeline capacity constraints.The price of WTI ended the year at $51, after reaching an intra-year high of $86 in October. That said, we are encouraged to see a sharp reversal in general investor sentiment and a rally in global equity markets in the first 2 months of 2019.Despite the negative backdrop in Q4, we are pleased to have delivered adjusted net income from continuing operations of $8.2 million equating to EPS of $0.09.Total revenue was $38.3 million in the quarter, down from $52.8 million in Q4 last year. The decrease was primarily due to unrealized losses from principal transactions, particularly in December for the aforementioned reasons but the majority of which have reversed in first quarter with a rebound in global equity markets.Commission revenue was also down year-over-year. Partly offsetting these decreases was stronger investment banking revenue, up 9% and the increase was led largely by another robust quarter for underwriting activity in the cannabis sector.Our partners at Richardson GMP reported adjusted EBITDA of $10.6 million in the quarter and total revenue of $69.1 million. Our performance this quarter is a testament to the strength and resiliency of our core Canadian capital markets business and a continued profitability of our industry-leading Wealth Management business.The Canadian capital markets are what we know better than most and where we are consistently top-tier and profitable.Looking back on the full year, we are encouraged by both the solid revenue and earnings growth we reported in 2018 and the considerable sides -- strides we made towards sharpening the firm's focus on our core and profitable Canadian capital markets and Wealth Management businesses.As challenging as 2018 was in many respects, particularly in the fourth quarter, GMP delivered solid financial results from continuing operations. We grew revenue by 15% and recorded adjusted net income from continuing ops of $34.8 million. Leading the way was a 46% increase in investment banking revenue with year-over-year growth from the cannabis, blockchain and energy sectors.Of note, our noncommodities business accounted for 70% of total investment banking revenue in 2018. The firm generated adjusted EPS from continuing ops of $0.40 and ROE was 17.4%.In 2018, we also returned $23.1 million to shareholders through common stock dividends and share repurchases. We are also pleased to have reinstated a quarterly cash dividend of $0.025 per common share and declared 2 special cash dividends of $0.10 and $0.075 per common share in March and November, respectively. These decisions were made in recognition of GMP's improved financial performance, strong capital levels and positive outlook for the franchise.Let me now walk you through the quarterly financial highlights for our 2 business segments. Capital markets reported fourth quarter pretax adjusted earnings from continuing ops of $6.5 million, down from $15.4 million in Q4 last year. Total revenue of $34.5 million decreased 29%. The decrease was driven almost exclusively by unrealized losses on principal inventories. However, it is worth noting that the majority of such mark-to-market losses have reversed in the first 2 months of 2019.Commission revenue was also down as client trading activity paused amid heightened equity market volatility. These decreases were partly offset by higher investment banking fees, which rose the aforementioned 9% compared with Q4 last year.Expenses of $28.2 million were down 16% compared with Q4, largely due to lower employee compensation and benefits expenses and lower selling, general and admin expense.Let me now expand further. Principal transactions generated net losses in the quarter of $11.1 million compared with net gains of $4.6 million in the same period last year. This decrease was led largely by unrealized losses on principal inventories, acquired in connection with investment banking mandates and higher losses from client trade facilitation amid volatile equity markets.Investment banking revenue of $35.5 million increased the aforementioned 9%, primarily driven by higher underwriting revenue, which increased 15% compared with Q4 last year. This quarter included our colead of core lease $520 million RTO as well as capital raisings for a number of other players in the cannabis sector. Advisory revenue in Q4 2018 decreased by 7% compared with the same period a year ago. In fourth quarter of 2018, Canadian independent dealers continue to benefit from significant capital raising and advisory activity in the cannabis space. Canadian capital markets experienced a surge in cannabis listings with initial support from Canadian investors giving way to capital inflows from increasingly international investing audience.GMP Securities is proud to continue playing a leadership role in this entrepreneurial growth sector. On a less positive note, there was no abating in the bear market commodities for commodities that began in 2014 and remains a significant headwind for all Canadian dealers, including GMP. The dollar value of industry-wide common equity underwriting transactions completed in Canada in the energy and mining sectors was down 88.7% and 34.6%, respectively, compared with an already anemic 2017.Let me take this opportunity to comment briefly on the state of the Canadian energy sector. While we are encouraged by last week's conditional approval of Trans Mountain by the National Energy Board, albeit construction is several years away, the harsh reality is the ongoing Canada risk-off trade, coupled with lack of progress on pipelines and infrastructure, led to a massive migration of international capital out of Western Canada and primarily into the United States, where there are far less regulatory, financial and political obstacles to operating.According to the Canadian Association of Petroleum Producers, 2018 marks the fifth straight year that capital spending has contracted. Frankly, our energy industry is mired in Indus regulation and procedure. Canadian energy companies are among the best in the world at what they do, but seemingly endless political dithering has created considerable hurdles to their progress, hurting -- thus hurting the sector's global competitiveness.We have been blessed as a country with one of the great caches of resource wealth in the world and harvesting that responsibly, which, of course, includes the gold standard on the environmental side, should actually -- absolutely be the rule that governs government and business alike.Make no mistake, GMP remains long-term bullish on Canada. Oil remains the world's #1 source of energy and we don't see that abating for decades to come. However, balancing oil and gas with new technology and renewable energy is the way forward for Canada's energy economy as long as an appropriate balance is struck between the two.Canadian energy will recapture the interest of global investors only when there are increasing signs we are willing to address some of the larger and broader challenges of the industry, many of them structural. More importantly, GMP FirstEnergy remains well positioned as the only viable independent in Canada's largest and most valuable industry.With that, let's turn to Wealth Management, where Richardson GMP reported adjusted EBITDA of $10.6 million in the quarter and assets under admin ended the year at $27.4 billion with the advisory teams at 166.Our GMP remains a core building block of long-term value creation. Our partners there manage a highly coveted Wealth Management business that is consistently profitable and increasingly scalable. Richardson GMP is focused on growth. Over the next 5 years, they strive to grow client assets to $50 billion and lift the adviser roster to 250. Given changes the Canadian banks are making under Wealth Management businesses, our partners at our GMP are optimally positioned to attract large book investment advisers who want to be in the advice delivery game. And now, I'll turn it over to Deb for a review of expenses.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Harris. Before my remarks on expenses, let me address the accounting treatment and discontinued operations. As you are aware, and consistent with our stated objective of focusing on our profitable Canadian capital markets and Wealth Management businesses, on December 11, 2018, GMP announced that it has entered into a definitive agreement in respect of the transaction that subsequently resulted in the sale of GMP USA. Management determined that GMP USA met the criteria under International Financial Reporting Standards as discontinued operation at December 31. As required by accounting standards, the result of discontinued operations are presented separately and the consolidated income statement is compared to information restated accordingly.Net loss from discontinued operations was $8.7 million in the fourth quarter and $12.6 million for the year.Let me now review expenses from continuing operations. Expenses of $37 million decreased 15% compared with Q4 last year, largely due to lower employee compensation and benefits, which decreased 15% and lower selling, general and administrative expenses. This decrease in employee compensation expense was led by a 30% decrease in variable compensation commensurate with lower revenue generation. The decrease in selling, general and administrative reflects lower transaction cost amid weaker trading activity and lower business development expenses.As always, we continue to be prudent managers of risk, while safeguarding liquidity and capital. We ended the quarter with solid net working capital of $179 million.Now I'll turn it back over to Harris for closing remarks.

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

Thanks, Deb. 2018 was clearly an important year of transformation for GMP and a return to solid operating performance from continuing operations. It marked the conclusion of a multiyear process that resulted in meaningful changes to our organizational structure. The harsh reality is that we faced some monumental industry challenges over the past decade. Our key strategic focus has been to ensure we are active in markets where we can be relevant and a top-tier player. That means Canada, and it means being a meaningful player in the capital markets, including underwriting and advisory and the Wealth Management segment to our 33% ownership stake in Richardson GMP.I'm reminded as I conclude of a Viking saying that best summarizes GMP's operating philosophy. It goes something like this, "What's coming will come and we'll meet it then." The shifts in the global capital markets aren't coming, they are already here and have been here with us for the better part of a decade. The decline in legacy businesses as a consequence of structural change to our industry is a simple reality. We believe GMP has successfully counteracted these obstacles through an unrelenting focus on our core and profitable Canadian business, where we remain a highly agile top-tier industry player.With net income from continuing operations of nearly $35 million in 2018 and adjusted ROE of 17.4%, we believe our Canadian operations remain the fulcrum for sustainable earnings momentum.Today, GMP is unequivocally more focused, leaner and nimbler, retaining the cap capacity to pivot to the upside from a position of strength. We continue to work -- working toward identifying additional areas where we can improve in an effort to enhance shareholder returns.That concludes our remarks this morning, and we want to thank you for joining us today.

[Operator]

Once again, that does conclude today's teleconference. Thank you all for your participation. You may all disconnect.