RF Capital Group Inc

TSX:RCG

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to GMP's Fourth Quarter and Year-End 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.

[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 fourth quarter earnings conference call. If you have any questions following this call, please feel free to reach out to Investor Relations. My contact information can be found at the end of our earnings release, which was 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 many risks and uncertainties. Certain factors or assumptions applied in forward-looking information can be found in our 2019 AIF and our annual MD&A. These documents are available on our website and on sedar.com.This morning, I am joined by our President and Chief Executive Officer, Kish Kapoor; and our Chief Financial Officer, Deb Starkman. Kish will start by summarizing the exciting news in connection with the consolidation of ownership in Richardson GMP. Deb will then cover fourth quarter and full year results, and then Kish will end with some brief closing remarks. I will now turn the call over to Kish.

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

Thanks, Rocco. Good morning, everyone. Thanks for joining us. Before we discuss the results of the fourth quarter and the year, let me recap for you the ambitious journey we've embarked on last year to transform GMP to create long-term value for our shareholders. You will recall that strategy called for a bold decision to sell our Capital Markets business and devote the capital unlocked from the sale exclusively towards pursuing opportunities in the wealth management industry. The latter involves, as a first step, consolidating the ownership of Richardson GMP into GMP and making it the foundational centerpiece of our vision to create a fully integrated financial services firm. Our goal is to leverage Richardson GMP's scalable national platform to gain a fair share of the $4.4 trillion wealth management industry in Canada today that is expected to grow to $7 trillion by 2028. With those lofty goals and a strong desire to deliver on our promise, we set in motion a series of steps that led us to announcing in June 2019 the entering into an agreement to sell our Capital Markets business to Stifel. This signaled our intention to focus on wealth management opportunities by consolidating ownership of Richardson GMP and leveraging the Richardson brand, which has a rich, 90-year history of success in financial services to accelerate growth. At the same time, we promised to return $21 million of the proceeds to our shareholders by way of a return of capital shortly following the Stifel closing.After obtaining 98.4% shareholder approval as well as regulatory approvals, we successfully completed the sale in December. At the time of closing, we also announced that following the sale, our estimated net cash position previously devoted exclusively to our Capital Markets business was in the range of $156 million to $166 million prior to the $21 million return on capital payment and allowance for transaction-related costs and operating losses to the date of closing. After distributing the $21 million to our shareholders, in addition to $3 million of ordinary course dividends and paying transaction-related expenses, including payment of a $1.8 million of Part VI.1 tax relating to our preferred shares, we finished the year off with a net cash position of $131 million. This marked the beginning of a new era at GMP. Confident in our ability to deliver, a special committee of the Board of Directors comprised solely of independent directors, excluding representatives of Richardson Financial Group, began in earnest the next phase of our strategy to transform GMP into a wealth management firm, starting with the consolidation of the ownership of Richardson GMP. They worked with RBC Capital Markets to complete a formal valuation of both Richardson GMP and GMP as required by securities law for related party transactions and relied on that work to negotiate a framework with Richardson Financial Group to acquire all the shares of Richardson GMP not already owned by GMP, all pursuant to the terms of the shareholders' agreement that governs the shareholders of Richardson GMP.RBC's valuation concluded that the value of Richardson GMP common shares was in the range of $4.25 and to $5.15, while the range for GMP's common shares was $2.20 to $2.90. A significant portion of the GMP common share valuation was directly derived from the valuation of Richardson GMP common shares given the company's ownership interest in Richardson GMP. After a period of negotiation, GMP and Richardson Financial Group were able to support a framework that used $5.14 and $2.57 per share as reference values for Richardson GMP and GMP common shares, respectively. The reference price for Richardson GMP share was determined after accounting for payment of a $36 million retention payment to investment advisers and discussed later in my remarks to you this morning. RBC provided a fairness opinion to the special committee and the GMP Board that consideration to be paid by GMP was fair from a financial point of view to GMP. As part of the process, Richardson Financial Group retained and paid for its own financial adviser, Cormark Securities, who similarly provided Richardson Financial Group with a fairness opinion that the exchange ratio was fair from a financial point of view to the Richardson GMP shareholders other than GMP.Earlier this week, based on this framework, we announced that GMP entered into a nonbinding term sheet with Richardson Financial Group to consolidate the ownership of Richardson GMP. This nonbinding term sheet was supported by the 2 representatives of the investment advisers on the Board of Richardson GMP. We also announced that all Richardson GMP shareholder groups have jointly provided notice to commence liquidity mechanism process under the Richardson GMP shareholders' agreement. That process mandates a 15-business-day period following the initiation of the RGMP liquidity mechanism during which time neither party can enter into a definitive agreement. That said, we expect a definitive agreement will be signed shortly after that window elapses.Upon receipt of shareholder and regulatory approvals and customary closing conditions, GMP will issue approximately 111 million common shares at closing to Richardson GMP's investment advisers and Richardson Financial Group.Richardson Financial Group with a current aggregate ownership stake of 24.1% will have an estimated aggregate ownership position of approximately 39.7% following completion of the transaction, and existing GMP shareholders and Richardson GMP investment advisers will hold 30.7% and 29.6%, respectively. This is a significant milestone in our transformational journey, which puts us one large step closer to realizing our ambition to build one of the dominant nonbank-owned wealth management firms in Canada, an ambition that has been 14 years in the making when Richardson GMP was just an idea on the back of a napkin. To say this is an extraordinarily big moment for our firm would be an understatement. It sets us on a clear path to be the destination of choice for Canada's top advisers we share our entrepreneurial spirit, independent culture and philosophy to deliver an unparalleled face-to-face advice to wealthy Canadians and their families opting for nonbank points of access for holistic wealth management solutions.Investment advisers representing over 82%, 82% of Richardson GMP have already indicated their support for the transaction by entering into acknowledgment and support letters. More are expected to support the transaction in the next few days. Needless to say, we are thrilled by this outcome. This outstanding result did not happen by accident. We spent the last several months, the last several years listening to our advisers and delivering on what they wanted to better serve their clients: clarity of ownership and a strong commitment for the long term. We're confident if we execute and deliver on our mission, they will help us create significant value for our shareholders over the long term and prove unequivocally that the wait was well worth it. I hope that you're able to sense my excitement level over the phone.Now before I expand on our strategy to expand our Wealth Management business, let me take a few moments to key -- to share key highlights of the transaction that will benefit all our shareholders. And as always, if you have any questions, you can reach out to our investor relations team or to me directly. The common shares to be issued as part of the transaction will be subject to escrow conditions. In particular, at closing, 10% of those common shares will be paid for -- paid to Richardson GMP shareholders with the remaining 90% subject to a 3-year escrow period. The escrow also has a claw back provision. If during the escrow period a recent GMP shareholder leaves to compete, they will forfeit the full 90% of the shares received. Those shares will be canceled. Further, the consideration will also be subject to a downward price adjustment if an investor adviser departures over the first year following closing exceeds 15%, measured on the AUA associated with those investment advisers as at the date of closing. The shareholders' agreement further contemplated that if a transaction results in Richardson Financial Group holding over 33.33% of GMP, GMP would make a cash payment to RFG, or Richardson Financial Group, to buy down the Richardson family to 33.33%. However, to demonstrate the strong support and long-term commitment to Richardson GMP's success, the Richardson family, with the approval of GMP, asked not to be bought down and instead elected to receive that consideration in GMP shares at the same price received by all shareholders.Given the exchange ratio, this meant that instead of being bought down from 39.7% to 33.33%, they would remain at 39.7% of the combined company if the transaction were to be completed, which represents a substantial reinvestment by Richardson Financial Group at $2.57 per GMP share, which represents, in essence, a reinvestment by Richardson Financial Group of approximately $45 million.The Richardson family also agreed to enter into a new royalty-free, long-term licensing arrangement for the use of their highly coveted name. As part of this arrangement, Richardson GMP will change its name to Richardson Wealth for the English-speaking market and Patrimoine Richardson for our French-speaking partners and their clients, a name that we, and more importantly, Richardson GMP's advisers believe best aligns with our go-forward wealth management strategy.By staying invested, lending their name and attending client events across the country over the last several months, the family has more than demonstrated their commitment and support to our transformation strategy. It also comes on the heels of having invested, along with GMP, in every liquidity pool over the last 5 years and their significant initial investment in both GMP and Richardson GMP.I would also like to take a moment to clarify the treatment and value of Richardson GMP's preferred shares held evenly by GMP and Richardson Financial Group. As mandated by the shareholders' agreement governing the Richardson GMP, GMP will purchase the RGMP preferred shares held by Richardson Financial Group at par for cash consideration of $30 million at closing. GMP shareholders will see the equivalent dollar-for-dollar value of the preferred shares in Richardson GMP. Both amounts are factored into the calculation of the RGMP and GMP share values assumed in the exchange ratio. The treatment and value is equal for both shareholders. The principal reason the shareholders' agreement contemplated the redemption of the preferred shares held by the Richardson Financial Group is the high after-tax dividend costs attached to these shares held by both GMP and Richardson Financial Group of prime plus 4%. The company has sufficient capital today to execute its plans in a more cost-effective financing alternatives to raise further capital if and when required. One of the last components of the transaction involves around -- revolves around recognition and retention. Concurrent with the closing, Richardson GMP also intends to implement a $36 million recognition retention program for all advisers, which will be in the form of a noninterest-bearing 3-year forgivable loan awarded on performance-based criteria.To be very clear, the Richardson GMP's valuation included the after-tax net present value impact of this recognition program. We feel that it was important to recognize the importance of the advisers to our success and the success of this transaction and to secure their commitment to help us build a great company to serve them and their clients for the long term, and of course, to create significant value for our shareholders. The program is designed to allow our advisers to receive their share of the program in cash, Richardson GMP shares valued at $5.14 per share or some combination thereof. As you can see, this transaction was complex but results, in our view, in a fair outcome for all shareholders. It is important to note that the above proposed transaction remains subject to approval by the simple majority of GMP's minority shareholders and regulatory approvals in the coming weeks. Once a binding agreement is entered into, you will be able to review the terms in great detail in the proxy circular that will be mailed to all shareholders in late March. Should the RGMP transaction not close, the shareholders' agreement provides that the liquidity mechanism process will automatically restart 1 year from termination. I hope that we provided greater clarity on some terms of the deal. Building shareholder value will be accomplished not by an exchange ratio calculation at a point in time, but by building an even stronger Richardson GMP for generations to come -- Richardson Wealth, I mean. Following closing, we will be tenaciously focused on deploying excess net working capital and utilizing public company currency, where appropriate, to grow prudently and aggressively. Key elements of our go-forward strategy include investing in our highly talented investment advisers, aggressive recruiting of top advisers, acquisition of like-minded IIROC member of wealth management businesses, acquisition of complementary asset management insurance capabilities, enhancing operating margins and offering greater choice of third-party product and services. There are several options available to accomplish such an ambitious plan. We intend to pursue these opportunities by either building them organically, pursuing strategic acquisitions prudently and/or partnering with proven third-party operators to explore, providing co-branded Richardson GMP financial products and services, including open innovation with emerging fintech companies and virtual day-to-day banking solutions.The addition of complementary and co-branded services to the Richardson Wealth offering can provide our advisers with additional opportunities to deepen their client relationships and meet more of their needs. Work on these initiatives is underway. We believe our plan positions us well to speed up our growth in the rapidly evolving financial advice industry.Before I turn the call over to Deb, I would like to make a few personal comments. There are many people that have made significant contributions to the success of GMP over the years. One of those individuals is Kevin Sullivan, whose resignation from the Board was announced today. Kevin, one of the founders of the company, provided tremendous leadership and support over his 24 years with this business. The Board thanks Mr. Sullivan for his contributions and wishes him all the best in his endeavors.A second individual who deserves special recognition amongst us -- is amongst us today. After 14 years at the firm, Deb Starkman, our Chief Financial Officer and Corporate Secretary, will leave the company at the end of March. She wears the brand on her sleeves and her heart. She has selflessly led a talented team of people to support our capital markets professionals for well over a decade and helped transition that business to Stifel. Without her relentless attention to detail and tenacity, we would have been challenged to complete that divestiture as successfully as we did. Deb, on behalf of all of us at GMP, thank you for your tireless and fearless leadership. You will be missed but not forgotten anytime soon. With that, I'll turn it over to Deb for a review of fourth quarter results.

[Deborah Joanne Starkman, CFO & Corporate Secretary]

Thank you, Kish. I have been fortunate to be part of this dynamic and entrepreneurial firm for 14 years. I'm immensely proud of my team and what we have accomplished. It's been an honor and a privilege to work alongside so many talented professionals. I've been working with Kish and the Board on my transition, and I leave knowing that the firm is in good hands as it enters the next chapter of its growth strategy. Let me now turn to our financial performance. Our fourth quarter and full year 2019 results highlight the completion of the sale of our Capital Markets business, the end of an era marked by a challenging period of declining opportunities in the resource, mining and specialty sectors in Canada and the significant onetime restructuring charges and professional fees incurred to transform the company to a wealth management-focused firm. In accordance with IFRS 5, the sale of the company's U.S. fixed income business in January 2019 and the more recent sale of substantially all of the assets of its Capital Markets business are both accounted for as discontinued operations at December 31, 2019. Both current and compared period results have been adjusted accordingly.Let me briefly address the sale of the Capital Markets business to Stifel. Cash consideration received of $42.2 million was determined at closing based on tangible book value of the Capital Markets business, not including cash, was $40 million. After giving effect to the sale, we recorded a $15.5 million accounting loss, which included both cash and noncash items, including a goodwill write-off of $21.1 million recorded in discontinued operations in Q4. Expenses in 2019 include goodwill impairment of $28.5 million and other asset impairments and provisions of $2 million, all reported in Q1. 2019 transaction-related professional fees and contractual remuneration payments were $34.4 million.Let's now turn to fourth quarter results. Revenue from continuing operations was $8.4 million in fourth quarter 2019, up 8% from Q4 a year ago. We reported a net loss from continuing operations of $5.3 million this quarter compared with net income of $1.1 million in fourth quarter 2018. The $6.4 million change from Q4 2018 was due to several factors, including recognizing a deferred tax asset of $2.6 million in Q4 2018, $1.8 million in tax expense recorded in Q4 2019 in connection with Part VI tax relating to GMP's preferred shares and $1.1 million in costs incurred in connection with our intention to consolidate the ownership of Richardson GMP.In our Operations Clearing segment, revenue of $7.7 million increased 24% compared with Q4 last year, largely due to higher interest revenue in connection with increased stock borrowing and lending activities. This increase was partially offset by lower other fees in connection with carrying broker and other administrative support services provided to Richardson GMP amid lower retail client activity. Expenses of $9.9 million increased 35% compared with Q4 last year, largely due to interest expense which rose 77% compared with Q4 2018 in connection with increased stock borrowing and lending activity. Higher selling, general and administrative expenses also contributed to the increase. Operating results in our Wealth Management segment were largely unchanged from Q4 last year and includes our share of Richardson GMP's net income.Our Corporate segment largely reflects enterprise-wide corporate functions and includes $1.1 million in professional fees recorded in connection with the announced transaction to consolidate the ownership in Richardson GMP.Turning very briefly to full year 2019, the net loss was $53.2 million, an increase of $55.7 million compared with 2018. This change was largely due to a $43.4 million increase in net loss from discontinued operations arising from the sale of the Capital Markets business as well as an $11.3 million increase in net loss from continued operations. Revenue from continuing operations was $36.8 million in 2019, up 18% compared with 2018. 2019 net loss from continuing operations was $13.7 million compared with a net loss of $2.4 million in 2018. $11.3 million increase in net loss is largely due to an $8 million noncash write-down of deferred tax assets in 2019, $3.1 million in professional fees and restructuring costs related to the announced transaction to consolidate the ownership in Richardson GMP and a $1.8 million tax expense recorded in the fourth quarter 2019 in connection with Part VI.1 tax relating to GMP's preferred shares. This was partially offset by a net increase in stock borrowing and lending activity in 2019.Now I'll turn it back over to Kish for closing remarks.

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

Thanks, Deb. From our perspective, there are 3 critical pillars to achieve success for any independent wealth management firm. They are: first, is having the best advisers and those that support them; second, is strong balance sheet; and third pillar is a strong long-term financial sponsor. We are blessed to have an abundance of all 3. We're fortunate that in Richardson GMP, we already have a formidable leading Canadian wealth management firm, already performing well, national in scale, top-quality advisers with average practice sizes of approximately $176 million, one of the highest in the industry in Canada. Additionally, Richardson GMP is consistently top-ranked in the Investment Executive annual Brokerage Report Card in serving high net worth Canadians. And for the second consecutive year, it was recognized as one of Canada's Best Workplaces. Second is a strong balance sheet. At the end of 2019, GMP has approximately $131 million in net working capital, net of the return of capital distribution and quarterly dividends paid at the end of December and before the Richardson GMP retention plan previously described, which, together with the approximately $37 million of working capital Richardson GMP, will allow the company to deploy toward accelerating the growth of our Wealth Management platform. The third and last critical pillar is a strong sponsor. By completing the consolidation of Richardson GMP, we're partnering with and leveraging the Richardson brand. The Richardson name will be on the door. In fact, as I noted earlier this morning, we announced that our Wealth Management business is being renamed Richardson Wealth. This new name will build on the strength and stability of the Richardson heritage and brand and their 90-year legacy of success in financial services. Speaking at a recent event in Calgary, Hartley Richardson, Chief Executive Officer of James Richardson & Sons, Limited, commented that Richardson Wealth is the first significant business that the Richardson family is inviting shareholders to invest alongside them and their 163-year history of wealth creation across multiple industries. That is a powerful endorsement of our business. I can say with great confidence that the Richardson family is committed to the long-term success of Richardson Wealth for generations to come.The rising sophistication and complexity of client portfolios, together with an aging and wealthy target demographic, supports the long-term value proposition of face-to-face advice. The clear message we hear from clients is that they value access, flexibility and personalization in the advice they receive, and they need that advice to come from a human. Make no mistake, Richardson Wealth's focus is on the delivery of face-to-face advice. We believe it will set us apart and offer the greatest potential in a demographic environment where the largest segment of the population not only has considerable wealth, they're living longer and have more complex needs across the entire household balance sheet with almost $29 billion of client assets under administration, 164 top-performing investor adviser teams serving approximately 33,000 clients, 600 talented employees, $272 million in revenues and $50 million in adjusted EBITDA in 2019. Our investment advisory teams, partners in this exciting journey are among the top in the industry with an average practice above $176 million client assets that they are interested to manage. Richardson GMP is a national scale, platform and services that we believe will afford us the greatest opportunity to create long-term value for our combined shareholders. Thank you for joining us today. We look forward to updating you at our next quarterly call.I will now turn the call back over to Rocco.

[Rocco Colella, Director of Investor Relations]

Thanks, Kish. That concludes our formal remarks this morning. Thank you for joining our fourth quarter earnings conference call. As always, please do not hesitate to reach out to investor relations if you have any questions, have a great weekend.