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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Welcome to RF Capital Group Fourth Quarter and Year End 2021 Earnings 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. I'm Rocco Colella, Head of Investor Relations. Welcome to our fourth quarter and fiscal 2021 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.
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 uncertainty. 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 under our profile at sedar.com.
On the call this morning is our President and CEO, Kish Kapoor; and our CFO, Tim Wilson. Kish will provide opening remarks on our progress, and Tim will then cover financial results. 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. This morning, we released strong earnings results. In a year of significant change inside and outside the firm, we are very pleased with our progress. But needless to say, our excitement is overshadowed by the distressing events in the Ukraine and recent tensions within our own country. I would have never imagined that the unprecedented turmoil related to COVID-19 and the more recent Omnicom variant would dominate the narrative for a second consecutive year.
And just as we begin celebrating the re-establishment of freedoms we all took for granted, we're now contending with the unimaginable and escalating military conflict in the Ukraine. We offer our sincere compassion and empathy to those who are impacted, directly or indirectly, by not only the prolonged global pandemic but also to all of us who sit on the sideline feeling totally helpless and deeply troubled by humanitarian crisis unfolding in the Ukraine. I have incredible confidence in the resilience of the human spirit and like so many, I pray for a swift and peaceful resolution.
Now, turning back to our own company, you will recall that it was only a few years ago when we sold our capital markets business to focus on Canada's fast-expanding wealth management industry, an industry that is expected to grow from CAD 4.4 trillion today to CAD 7.8 trillion by 2028, driven largely by demand from an aging population that is healthier and expected to live longer. And only over a year ago, we completed a transaction doing 100% of what is now known as Richardson Wealth.
Looking back to 2021, our first full year operating as Richardson Wealth was an enormous success. We posted strong financial results and we made significant investments to enhance our operating and digital platform for the long term. We strengthened our board, changed our leadership, and we reset a culture by committing to double down on supporting our advisors as our client. That included retaining the Boston Consulting Group to help us map out a bold but achievable five-year strategy to triple our AUA, revenue, and EBITDA by the end of 2025.
It was also a year that saw equity markets delivered record performance. The TSX was up 21.7%; the Dow, 18.7%; and the S&P, a staggering 26.9%. Helped by the strong global equity markets, record organic growth from our existing advisors, success in attracting new advisors, and a solid performance from a private client capital markets group in our first year inspired confidence that we will meet or exceed our ambitious goals.
AUA was CAD 36.8 billion, up CAD 6 billion or 19% from 2020 with net new and recruited assets accounting for a roughly half of that increase. Recurring fee-based revenue was CAD 243 million, up CAD 34 million or 17% from 2020. Commission revenue also increased 28% over the same period. Our partnership with Cormark and strong industry-wide origination activity, particularly in the first half of 2021, drove a 70% increase in new issue commissions. In addition, favorable equity market conditions resulted in increased client trading activity. These strong results contribute to a noteworthy 44% year-over-year increase in Richardson Wealth's adjusted EBITDA to CAD 56.8 million.
These record results were driven by the combination of the right strategy, extraordinary execution, tight cost management and outstanding collaboration and teamwork across the firm. But more importantly, these results are the outcome of our advisors success with more than 94% of our teams posting personal best in 2021. This year, we also welcome nine new advisor teams with many more progressing through a record CAD 16 billion acquisition pipeline. I'm very proud of these results at this stage in our journey, a long journey to build a brand of choice for Canada's top advisors and their high-net-worth client.
Turning briefly to Q4 where a quarterly revenue reached another record high. Revenue of CAD 86 million was up 42% from Q4 last year and up 8% compared with Q3. Consolidated adjusted EBITDA was CAD 12.3 million for the quarter, which is not indicative of our run rate performance given we recorded an incremental CAD 1.4 million of private client capital markets compensation expenses, which Tim will discuss in his remarks.
Excluding this amount, Q4 adjusted EBITDA would have been CAD 13.7 million and represented the highest quarterly result this year. Richardson Wealth reported adjusted EBITDA of CAD 13.6 million in Q4, 2021, compared with CAD 11.6 million in Q4 last year. Adjusted EBITDA at Richardson Wealth would have been CAD 15 million if you excluded the incremental private client capital markets compensation expense. In a moment, Tim will share a lot more about these results.
Looking ahead, in addition to maintaining our operating momentum, we're now focused on delivering on our Big Rock objectives for 2022. They include launching Envestnet, our new portfolio management platform in the next few months, seamlessly transitioning to Fidelity's world-class unified technology platform in the fall, moving to a new landmark headquarters in Toronto's waterfront, 100 Queens Quay in late 2022 and leveraging on new technology platform, and new carrying broker relationship with Fidelity to scale up every aspect of our business, identifying new revenue opportunities, manage costs and drive operating efficiency.
While I cannot predict the future, I can confidently say our business is far more valuable today than it was a year ago, and it'll be even more valuable when we deliver on our Big Rock initiatives this year. This has everything to do with the commitment, and extraordinary performance of all of our advisory teams and those that support them during these incredibly difficult times. I thank them for their support of our growth strategy, but more importantly, I want to thank them for the extraordinary support they've given to our 31,000 clients across the country. Their efforts delivered great results for their clients, resulting in more existing and new clients entrusting them with more of their wealth, and inspire confidence. We believe, in time, this effort, combined with the record results, will translate into a higher share price for our valued shareholders, including our advisors and employees who collectively own 31% of our shares.
To our shareholders, thank you for your patience and trust you've placed in us while we build this great firm for you. I will have more to say on our plans to attract more demand for our shares when I return with closing remarks.
With that, I'll turn the call over to Tim.
Thanks, Kish, and good morning, everyone. 2021 was an eventful year that we delivered record results through a combination of organic growth and expense discipline while, at the same time, advancing our growth strategy. The foundations we laid should 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 full-year and quarterly results, let me highlight two noteworthy items. For both full-year 2021 and Q4, the comparability of our consolidated results is limited given that we commenced consolidating Richardson Wealth in October 2020. As such, and to provide a better picture of the underlying trends in the business, my remarks this morning will focus solely on Richardson Wealth's performance. Beginning in Q1 2022, we will have lapped our reorganization and will have comparable consolidated financial results, so we will seek to provide supplemental disclosures for Richardson Wealth. Second, as I guided last quarter, the magnitude of adjusting items declined in Q4, and we anticipate even fewer quarterly items of note in 2022.
With that, let's turn to the key growth drivers of Richardson Wealth business. Richardson Wealth's full year adjusted EBITDA reached an all-time high in 2021, up 44% to CAD 56.8 million. This performance was fueled by record revenue growth and improved operating leverage. Fee-based revenue and commissions were up by 17% and 28%, respectively.
Average AUA, the primary driver of revenue, rose to CAD 34 billion and was up 18% year-over-year. While we have benefited from market appreciation, we also delivered on our strategy. Together, net new and recruited assets were a record CAD 3.4 billion in 2021. Our advisors and our recruiting team did a terrific job growing our franchise last year. It is also worth noting that 50% of our recruited asset came in the fourth quarter and will thus have a more meaningful financial impact in 2022.
Our commission revenues increased 18% largely due to robust new issue activity in the first half of the year. As a result of this market activity and our Cormark partnership, we participated in 575 new issues this year versus 364 last year, which is an increase of 58%. Improved operating leverage also helped EBITDA growth. Richardson Wealth adjusted operating expense ratio declined 610 basis points from 73.8% to 67.7%. We will continue to focus on disciplined cost management as we advance our growth ambition.
Turning briefly to fourth quarter results. Adjusted EBITDA was CAD 13.6 million and, although up an impressive 17%, is not indicative of our run rate performance. This quarter, we incurred CAD 2.1 million of expenses related to launching a new compensation program for our strengthened private client capital markets group, CAD 1.4 million of which was incremental to what we would incur in a typical quarter. This program better aligns this team's competition with market and provides them with the right incentives to continue driving revenue in a risk-aware way. This change effectively resulted in a full year of bonuses being recorded in Q4.
Excluding the incremental CAD 1.4 million of expense, adjusted EBITDA would have been CAD 15 million, which is a notable 29% increase from Q4 of last year. Q4 revenue of CAD 84.2 million was another quarterly record, up 23% from Q4 last year and up nearly 9% from Q3. This performance was a function mainly of fees and commission, which were driven by AUA growth. AUA was up nearly CAD 2.5 billion or 7% from Q3 to Q4.
Q4 also benefited from more robust commissions which rebounded from Q3 levels, higher insurance revenue and the highest quarterly revenue ever from our private client capital market team. As a result of this revenue growth and despite the compensation expenses I discussed earlier, the Q4 adjusted operating expense ratio declined more than 10 percentage points from 80.7% to [ph] 70.4% (15:53).
As we look forward to 2022, we anticipate strong adjusted EBITDA growth, driven by organic and recruited AUA and cost efficiency. Our expectation for EBITDA growth assumes a modest level of market growth in the 3% to 5% range. If market growth is less or if there's a substantial volatility in the market, our EBITDA growth expectation may be more muted.
We also began realizing an adjusted EBITDA benefit – or we will begin from our strategic relationship with Fidelity. As a reminder, we expect this relationship to deliver a CAD 10 million EBITDA benefit in the first year after we transition to their platform. This benefit comprises CAD 6 million in run rate cost savings and CAD 4 million of expense of like – in other words, CAD 4 million of cost that we would have incurred had we retained our proprietary carrying broker operation.
These benefits will materialize only after we transition to Fidelity platform, which will be completed in Q4 of 2022. So, we will realize only one quarter of uplift this year. In addition, the strategic agreement has the added benefit of providing the operating capacity needed to achieve our ambitious growth objective, it transforms our cost base to being largely variable and allows us to avoid significant future CapEx.
Now, I'll turn it over to Kish for closing remarks.
Thanks, Tim. A few years back, we set out to capitalize on the renaissance of a bygone era in the wealth management industry that saw more Canadians opting to entrust their wealth management to advisers looking – working at firms not owned by a bank. Our record performance in a period of significant change confirms that our strategy and our efforts will pay huge dividends in the long term.
The key is to stay focused and be relentless in executing our three-pillar strategy; double down on supporting our advisers; super charge recruiting, and opportunistically acquire apartment with like-minded firms to add scale or capabilities to our overall platform.
Equally important is raising our profile. A priority of mine is telling the compelling Richardson Wealth story as widely as possible to attract the industry's top talent, forge new strategic relationships, identify acquisition opportunities and broaden our appeal to investors, including expanding analyst coverage for our story, although I think Cormark does an extraordinary job.
This morning to help this effort, we announced two changes that are intended to broaden our appeal and increase demand for our shares. First, we plan to consolidate our shares on the basis of one share for every 10 shares currently held, and we're implementing a normal course issuer bid to buy back our share. We believe these actions may help to broaden the pool of investors, including investors whose internal investment policy prohibit or discourage them from taking an equity position in any company whose shares are trading below a certain price. The NCIB provides us with the flexibility to allocate capital during periods where we believe the market price of our shares may not fully reflect their value.
We made these and other foundational investments in 2021, which together with positive cash flow generation and a strong balance, including a new CAD 200 million revolving credit facility, leave us well-positioned to achieve our growth ambition and drive meaningful shareholder value.
Before I end the call, I welcome Susan O'Brien and Danny Montesi, who joined us this last quarter and chose to have our name on their door. I would also like to acknowledge Ida Khajadourian and Kathy McMillan, who are named leading Women in Wealth in Q4, an award that celebrates the wealth industries female trailblazers.
We're also committed to gender equality and diversity and building stronger and more supportive communities. Richardson Wealth has joined forces with women's executive network by sponsoring the 2022 and 2023 Women of Courage Award. This award is presented to extraordinary women who champion our country and its values across a diverse range of causes with courage and compassion, even if it means risking their careers, reputations and sometimes their lives.
In addition, we donated CAD 50,000 to the Black Opportunity Fund in support of its powerful mission to our black communities reach greater economic and social success. And more recently, together with countless employees, we helped to raise and give more than CAD 100,000 for essential humanitarian aid for the Ukrainian people.
Our community involvement and giving are a key part of our corporate identity and we believe, speak volumes about our principles, cultures and the people who work here. Let me close by saying that no matter what is happening in the world around us, the value of calm, thoughtful and expert face to face advice from health professionals, from political leaders and from wealth professionals is immense. What is particularly challenging times like this, when I'm especially proud of our unwavering commitment to help our advisors and their clients to navigate through these challenging times have served the complex wealth management need for the long term.
We thank you, our shareholders, for the ongoing patience and support. Like you, we now look at 2022 with enthusiasm energized by the growth prospects ahead of us. We look forward to updating you on our progress at our upcoming AGM on May 4.
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.
Thank you. [Operator Instructions] And the first question is from Jeff Fenwick from Cormark Securities. Please go ahead.
Hi. Good morning, everybody. Kish, I wanted to start off talking about the recruiting pipeline, and you started off the call today commenting about all the market turmoil that's been going on. And how does that type of environment impact those recruiting discussions? Does it get these – the advisor teams maybe to pull back a little while they're focused on navigating these headwinds or are you finding you're able to continue down the path with that pipeline and working towards signing up new groups?
It's a great question, Jeff. The market volatility and uncertainty clearly causes people to pause, especially pause with respect to the timing and when they might actually move from their firm. So they were delayed by several months or maybe even a quarter. But I would say to you that the level of engagement that we continue to experience in telling our story to recruits and the people are interested in hearing the story – not only our story, but the story of all the independent remains very strong.
I think that, if anything, the market volatility is just slowing down their decision as to when they might, in fact, leave. So, people would otherwise be scheduled to try and join us by the end of March, might now defer to the end of April or May. But that's really that's the issue, but it's not less of a desire to move or any slowdown in the level of engagement and activities than the discussions that we continue to have. In fact, our pipeline today, if I do it in the current state, at the end of the year was CAD 16 billion to-date. It's CAD 18.8 billion.
And what I love is that the number of people that are talking to us is now extending to many firms across the country. Except, you know, in the past, it might have been four or five. Now it's a broader range of firms, where people are working, are starting to talk to us. Some of the initiatives that we have now, especially in increasing the number of women, advisor teams at our firm is drawing a lot of people to talk to us. They're connecting with us on LinkedIn, connecting with us in pretty much every social media platform and reaching out to us.
So, I like the inbound interest. So, that's what's happening. But I do think that the events of the market and certainly Ukraine causes people pause as to the timing of when they might be.
Helpful. And when you talk about the pipeline, what's the hurdle there for a team to be considered in the pipeline? Is it that you've had an initial sort of productive engagement, some indication that they are interested in moving, like what's the hurdle there to put them in that bucket?
It's another great question. We have five different stages of how we measure and track our pipeline. There are some stages that are very early inbound-interest. We while we track that, we don't include that in our CAD 18.8 billion. We start including in CAD 18.8 billion is when people are actively engaged in discussions where they have a discovery meeting with us to learn more about our business. They come to our offices. They have a two-day presentation, and we think that in – during those times that they're not only interviewing with us, they're interviewing with other people, that shows a seriousness of intent. They're just simply trying to pick where they want to go.
So when we think that people are demonstrating that is when we actually start moving them up in our pipeline. From there, it moves into stages such as we would then give them, based on information they provide us offers so that they can consider our offer relative to competitors' offers. So we track them until we get them to a place where they've made a commitment to confirm date to arrive. So various different stages. But in aggregate, those stages are about CAD 18.8 billion.
And Nathalie's not on with me now, but one of the things we've been doing also is probability weighting each one of those bands to see – some people were just tire kickers coming to look at it and never going to be interested in us. So we rate them low. So we do some probability weighting in each of those bands. But that's how we look at that.
Okay. Great.
Right now, the bulk of what I would say, the CAD 18.8 billion is still very much in the early discovery stages. I don't know, Tim, if you know, but that probably represent about 50% to 60% of that pipeline. And then we – our expectation is we, every year, are going to continue to build that pipeline and then try to convert 15% to 20% of that pipeline into real candidates that will join us. And we now have actually, this year, really good line of sight on all the people that are going to join us between now and the end of the year.
The other thing that is impacting decision-making is that because we're launching investment in May and then we're launching Fidelity in September, October of the fall, that also gives people pause to delay their timing because what they want to know is that we've fully implemented those plans so makes their transition to come over much easier.
So we might be actually very backend-loaded in our recruiting results this year because people, for all the right reasons and saying, okay, I love investing, I love Fidelity decision, but I might want to actually then just come in October and September when you completed that. And also for the Toronto people who are moving into 100 Queens Quay, which also makes it easier for them. So some of these things are limited market volatility, our technology platform, our Big Rocks that's how we see it. But, otherwise, feeling very confident about what we are going to see in success this year.
Okay, great. And one of the other important growth drivers for you, you've mentioned, is strategic partnerships or other M&A that might complement the platform today. So where are you there? Do you have a list of potential targets that you've been engaged with, or is that something that comes a bit later once these other initiatives are in place?
Here it comes a little later. What we're doing in 2022 is investing in making sure that we have a very good data base of all what we think would be ideal targets for us. We will start investing in relationships with those people, probably closer to, I would say, the July, August, September time period so that we can initiate and start planning for some active transactions in 2023.
But 2022, we're not – we don't foresee doing a transaction. It's about making sure we have lots of intelligence, we're investing in the relationship, we're profiling people that would be a good fit for us, things like that.
Yeah, okay.
And, as you know, Jeff, we are – when we do eventually start executing on our acquisition strategy, a key component of that strategy is using our shares as currency. And as a part of that, we're not going to do anything at these prices because we think that these prices significantly undervalue our firm. And until it's a better reflection of fair value, we won't use the currency and because that's so central to our acquisition, we'll defer it. So, given we're building the business for the long-term, we're thoughtful, we're patient, we're deliberate and my focus and the entire management team's focus is just to continue to execute with excellence and deliver on every single promise that we make to our advisors. And then, everything else will turn out exactly the way it should.
Okay. And I guess then looking at nearer term investment in the business, you're MD&A called it a pretty, pretty sizable CapEx number CAD 27 million to CAD 33 million, we've targeted now for the year. That's quite a bit higher than I would normally have thought or you would have targeted for the business. So where is that? Where are those dollars being allocated? And, how does that sort of get spent over the year?
Yeah. Jeff, it's Tim. I would call 2022 an exceptional year for the level of capital investment, and it relates mainly to our real estate footprint. I mean, investing primarily in the Toronto office, which is roughly two-thirds of that total. But then, we're also doing some smaller redevelopments in Calgary and Burlington and other, another – potentially other offices beyond that. But in a normal year, I would expect that number to be more in the CAD 5 million to CAD 10 million range.
Yeah. I mean, I look at it and that's a pretty sizable proportion of the cash flow you're going to be generating this year. So just understanding that return. But at the same time, I guess in terms of capital allocation, you discussed the NCIB, so you are intending to be active on that over the year?
We are. I think we're still in the midst of determining exactly how active and what the right triggers will be for us to be in the market buying our shares. But I mean, bottom line is, we feel we have more than enough capital right now to execute on the NCIB and some volume, invest in the offices, as I mentioned earlier, complete our recruiting activities as planned. We are sitting right now at the benefit of being in an access capital position, so we think we have about CAD 15 million to CAD 20 million of excess capital at the moment. We're going to have strong operating cash flow during 2022, and we've got an untapped credit or partially tapped credit facility at the moment. So, we feel we have access to more than enough capital to do everything that's in our plan right now.
And I just want to add to that. Our Toronto, our key location at 100 Queens Quay is something that we've always shared with everyone in the past, but this is a big initiative for us. We entered into that arrangement in – we started looking for a place for consolidating all of our premises, moving from 145 King Street and 20 Toronto Street, all our employees into 100 Queens Quay. We did that – we made that decision in 2018, formalized the plan in 2020. And I would tell you, we've signed a 15-year lease to be in 100 Queens Quay.
All of our OpEx metrics are substantially better than the current metrics that we have. So when I looked at CapEx relative to OpEx, it was a no brainer to make that decision to go to that beautiful spot in Toronto and dramatically upgrade the space for us, dramatically – environmentally much better, more natural light for everyone, great recruiting place, to attract great talent. So, a lot of the factors here were fundamental to building a great place for the long run.
Great. And then maybe just the last area here to touch on, you mentioned the expansion of your private client capital markets group here. Maybe just a bit of color around what sort of product are you looking to expand the product here beyond the new issue distribution that I know we've been collaborating on. And so, I assume you've been building a team, that amount you called out as the bonus there for the Q4. I don't know if that's like a retention bonus or a new hire component, but I assume we're going to see maybe a little higher level of activity and perhaps a higher level of compensation expense then going forward.
So, first of all, we've had a team of people here now post the sale of the capital markets business in 2019. We've got a dedicated group of people that have provided a service to a wealth management client here. And that team has been with us for some years now. We've just decided to actually formally implement a compensation program for them that is a direct drive compensation program.
And after we sold our capital markets business, we had an opportunity to start forging relationships with others on the street more broadly speaking. Obviously, we have a terrific relationship with Cormark. We have a relationship with Bloom Burton, and there's many other independent firms that have now reached out to us and to some extent, even banks have reached out to us for offering products and services to our network that are of interest to our clients and certainly our advisors.
And this team is now focused exclusively on expanding those relationships, understanding those relationships and educating and introducing the bench strength, for example, Cormark's extensive research is now socialized very effectively within our organization. Bloom Burton there, there's other firms we're looking to express that same interests, and our team's job is to continue to work in building those relationships and try and bring the very best ideas through those relationships to our advisors and their clients.
And I think they've done a terrific job. We had a record year in 2021, and Tim shared some of the statistics on the number of – the growth in our new our new issued commission business. So we're – I would say, prior to 2019, we were constrained in the number of firms across the street that we could work with. That constraint has been lifted. We professionalize the experience of a solid leadership team under James Price, and Jamie has done an extraordinary job thinking it through, building the network, introducing our people to those firms so that we can actually get the right products and ideas right to our clients.
Great.
And then, Jeff, [indiscernible] (35:57) the numbers themselves. It wasn't a retention bonus or anything of that nature. This is an ongoing program. It will result in a higher level of run rate expenses going forward, but one that's directly linked to revenue, as Kish mentioned. So if they don't deliver, our expenses will obviously be lower.
The reason it was lumpy and we booked so much in Q4 is, well, the program had been under discussion for a while. That's when it was implemented and approved by our board. So we had – and we applied it retroactively. So the Q4 expense was indicative of the really solid performance that that team had throughout the year, but we just – we couldn't accrue any expense prior to the program being formally approved.
Okay. That's very helpful. Thank you for those answers. That's all I had.
Thanks, Jeff.
Thank you. [Operator Instructions] There are no further questions registered on the phone lines at this time. I'll turn the call back over to you, Mr. Colella.
Thank you, operator, and thanks again, everyone, for joining us today. As always, feel free to reach out to Investor Relations, if you have any 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.