RF Capital Group Inc

TSX:RCG

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the RF Capital Second Quarter Earnings Conference Call. I would now like to turn the meeting over to Mr. Tim Wilson, Chief Financial Officer. Please go ahead, Mr. Wilson.

[Timothy Wilson, executive]

Thank you, Karl. Good morning and welcome to RF Capital's second quarter 2024 earnings call. I'd like to remind you that our 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 implied to the forward-looking information can be found in our latest AIF and MD&A. These documents are available on our website and at sedarplus.ca.

Today I'm joined by our President and CEO, Kish Kapoor; and our Chief Operating Officer, Dave Kelly. Kish and Dave will discuss the executive succession plan that we announced yesterday; I will cover our detailed financial results and financial outlook; and Kish will then end with closing remarks; following which we will open the call to questions from analysts. If you have any questions once this call is complete, please reach out to Investor Relations. Our contact information can be found at the end of our earnings release.

I'll now turn the call over to Kish.

[Kishore K. Kapoor, executive]

Thanks, Tim. Good morning, everyone. I'll begin today with some thoughts on our executive succession plan and how we're positioning the next generation to lead the firm on our next leg of growth. As CEO, my focus has been on building a scalable platform, growing the business, and elevating an entrepreneurial, advisor-centric culture to become the brand of choice for Canada's top advisors and their clients.

I've also been focused on strengthening our brand and awareness and power and the meaning of the name on our door. Today, we are a leading wealth management firm with 22 offices nationally, 154 advisory teams, 900 employees, 30,000 clients, a full pipeline of potential recruits, a reputation for supporting women, and a platform that is digitally and physically transformed. We now manage CAD 38 billion in AUA, a record high, and in fact, as of this morning, at CAD 38.2 billion, which is CAD 3 billion higher than the beginning of the year. And it's up about CAD 10 billion from September 30, 2020, when I reported quarterly results for the first time as President and CEO of Richardson Wealth. We've been recognized by Great Place to Work for 6 consecutive years and named one of the best workplaces in financial services and insurance for 5 consecutive years. In that independent survey, 85% of our advisors say that they're proud to tell people that they work at Richardson Wealth.

We have consistently scored well in the Investment Executive Brokerage Report Card. The 2024 report card was published in the second quarter, and our overall ranking of 27 categories was 8.6 out of 10, an exceptionally positive result. In Q2, we hosted our annual summit, a practice management-themed advisor conference. More than 300 people attended, which was a vote of real confidence in our culture. It was 100% funded by the generous support of vendors, partners, and suppliers, demonstrating the value of being associated with our brand. Equally positive is that our people stuck with us since the beginning of our transformation journey, which we acknowledge was bumpy.

Advisors who manage 82% of AUA are still with us today, and many of them have experienced record highs in their practices. With us now honing in on our growth and recruiting, we attracted 5 new teams in the second quarter, the most in any quarter since Q4 2021. That included 2 top-producing teams, with a combined CAD 800 million in AUA. These were Mary Ellen Byrne Wealth Management, an all-women team; and Broadley & Associates, a female-led team. They joined us from TD and BMO, respectively.

Q2 also saw the addition of 2 more highly accomplished people added to our leadership team. Derek Perritt joined us as Head of Insurance and Tax and Estate Planning Services. A former TD corporate leader, Derek will help Dave Kelly drive Pillar 1 of our strategy, which is doubling down on support for our advisors.

We also hired Marcus Chun as Head of Enterprise Technology and Architecture. We announced this just this week. Marcus has a track record in the industry of delivering significant value by transforming and optimizing operational processes and technology platforms. He joined us from BMO Private Wealth, where he was Vice President and Managing Director of Strategic Management and Initiatives and Client Solutions. Marcus will help us design and lead data analytics, artificial intelligence, and robotic process automation capabilities for the business to optimize end-to-end processes and services.

With the arrival of Marcus, we are pleased to announce that Scott Stennett, Senior Vice President and Head of Digital Strategies and Advisor Services, will step into the role of Vice Chair for Richardson Wealth. Scott's immediate priority will be to ensure Marcus's smooth transition and then to help in a variety of corporate development activities, including assessing the competitive landscape and evaluating acquisition opportunities. Scott's experience and knowledge of our business, spanning every detail of the development of our operating and technology platform, including the transition to Fidelity, will be invaluable in this role. Scott has been a true gamechanger at our firm, and I know he will be in his new role as well. So, to recap, the business has been rebuilt, the platform strengthened and made ready to scale, and the leadership is in place.

Our financial results also highlight some positive momentum in our business. As I mentioned, as of this morning, AUAs are CAD 3 billion since the beginning of the year. Fee-based revenue were CAD 133.7 million for the first 6 months of 2024, up CAD 6 million, or 5%, over the same period last year. Net income was CAD 6.4 million, up from CAD 1.38 million for the 6-month period in 2023. Adjusted EBITDA was CAD 28.6 million for the 6-month period, up 2% over the same period last year. And our recruiting pipeline now stands at CAD 28.6 billion.

The firm is in a very good spot. Having led the rebuilding of the foundation and modernization of our business for growth, putting in the building blocks, now is the time for me to step aside. So, on October 1, 2024, I will hand the reins to Dave, and that's Dave Kelly. That will not be the only change. As you will have seen, Chief Financial Officer, Tim Wilson, has made the decision to move on. Tim will become Chief Financial Officer of [ Peoples Group ] at the end of August. Tim has been a big part of all we have done to transform the business, and we wish him the best as he returns to his roots in the banking industry. The search for a new CFO is now well underway.

The benefit of this timing is that it will allow Dave to play a big part in choosing our next CFO to partner with him going forward. When I recruited Dave in January of this year, I knew he was our future leader. He had all of the attributes, and in the 6 months he has been at Richardson Wealth, he has earned the respect of the team. I'm excited to see what he will do, as I'm sure you are. So, I'm now going to ask Dave to say a few words about his view on how we counter the opportunity in front of Richardson Wealth. Dave?

[David Kelly, executive]

Thanks, Kish. Good morning, everyone. Richardson Wealth is a business with a very strong platform, a very talented team, and a solid growth strategy. 6 months in, I am even more convinced that this company is very well positioned to be the dominant brand of choice for top advisors in Canada, and there are a number of reasons why I feel that way. Our advisor-centric culture, which is an uncommon mindset in today's industry; investments made in the core platforms which have modernized our business; the well-articulated growth strategy which gives us a winning path to continue building a great firm together; our unique value proposition, advisors are our clients, which guides our every action; the growing importance of independent wealth management options for clients and advisors; and our unstoppable belief in the power of entrepreneurialism.

In a landscape where independent firms are becoming a real draw for top advisory teams, and where the industry is on the cusp of a growth wave, I feel that we are winning the hearts and minds of advisors and clients who are seeking viable options. Richardson Wealth's entrepreneurial culture, and above all, our advisor-first commitment, differentiates us from all our competitors, and this is very appealing to wealth professionals. They are vital assets that I am absolutely committed to continuing to nurture. I chose Richardson Wealth because I believe strongly in the independent wealth management business model, and because I was very impressed by Kish's growth strategy and firm's values. Our foundation has been rebuilt for growth, and I'm super excited about this new opportunity.

Over the coming weeks, I'll be working closely with Kish on a smooth transition and on finding a CFO to replace Tim. When we speak next after Q3, I will have more to say about my thinking on how to take the firm forward and build on the great work that Kish and the team have done.

Before I end, I would like to say that I have deep gratitude for Kish's faith in me to be his successor, and I will do my very best to lead Richardson Wealth to new heights, standing firmly on his shoulders, and using the remarkable foundation he has built.

Now I'll turn it over to Tim, who will take you through the financials in more depth.

[Timothy Wilson, executive]

Thanks, Dave. For the second quarter of 2024, we reported revenue of CAD 91.2 million, an increase of 3% as compared to the second quarter of 2023. Fee revenue, the largest component of revenue, increased 5% compared to Q2 2023, driven by the increase in AUA.

Looking at other components of revenue, trading and corporate finance revenue both grew at double-digit rates relative to last year due to an increase in activity and the good work our ECM team has done finding attractive deals for our advisors and their clients. Those increases more than offset a 16% decline in interest income, which was down to lower client cash and margin balances, which is a trend that we've discussed in each of the last 2 quarters. Adjusted EBITDA was CAD 15.1 million as compared to CAD 15 million flat in Q2 2023, as the growth in revenue that I just discussed was offset by variable advisor compensation and higher operating expenses.

Expense growth was driven by a CAD 1.6 million swing in mark-to-market expenses on RFUs and DFUs, along with other factors that we detailed in our MD&A. Cash flow available for growth was still substantial in Q2 at CAD 8.6 million, even though it declined 1% or CAD 126,000 from last year. Free cash flow declined CAD 5.2 million to CAD 2 million, which is a good news story in our mind because the drop was a result of higher advisor recruiting and the associated payments.

Turning to our financial outlook for the remainder of 2024, AUA will continue to be driven by growth in client assets and is expected to correlate highly with equity market returns and recruiting activity. At the time of this call, equity markets are showing strength, which has resulted in approximately CAD 1 billion of AUA growth during the month of July alone, and we're confident that recruiting activity will remain high over the second half of the year.

With respect to interest revenue, we believe client cash and margin balances stabilized towards the end of Q2. Interest revenue will likely decline over the next few quarters, however, due to lower benchmark rates. The level of decline will depend on the extent and the timing of movements in the Bank of Canada and prime rates. And corporate finance revenue is expected to remain at moderate levels through year end.

Turning to operating expenses, we're committed to delivering operating leverage from the investments we've made across our platform, and despite the impact of inflation on certain core operating expenses, costs will also continue to be subject to mark-to-market adjustments on RFUs and DSUs. Cash flow for growth will be driven by the factors impacting adjusted EBITDA that I just discussed, and will primarily be deployed towards adding new advisors to the Richardson Wealth platform.

Finally, as this will be my last call, I just want to say thank you to all of our analysts, our investors, and our bankers, and of course, any of my colleagues who are listening to this call. I thoroughly enjoyed my time working with all of you, and I'm proud of what this company has accomplished over the past 3 years. It has been a truly great experience as we transformed the firm and readied it for the next phase of its growth. Richardson Wealth is in a very strong position, and I'm excited to see where the team will take it.

With that, I'll now pass the call back to Kish.

[Kishore K. Kapoor, executive]

Thank you, Tim. I will just close by saying that my time serving shareholders, clients, advisors, and all of our team as the leader of this firm has been a highlight of my career. I thank all of you for your support. As a member of the RF Capital Board of Directors and a significant shareholder, I will remain a staunch supporter and a cheerleader. I know that we have built Richardson Wealth into an outstanding company and attracting the very best advisor teams and leadership talent in the industry. While the stock price does not yet reflect what I know to be the growing intrinsic value, which is very disappointing, the work we did made this business a better business with a much brighter future.

There's a proverb I like, that talks about the importance of planting trees, even if one will not be around to see them become a full grown -- become full grown. In my time, we planted many trees. I know they will bear fruit for years to come and that day will tend them well and indeed plant many more.

With that, I'll ask the operator to please open the line for questions.

[Operator]

[Operator Instructions] The first question is from Jeff Fenwick of Cormark Securities.

[Jeff Fenwick, analyst]

I guess, congratulations all around and Kish, great to see a job well done and continuing on in Dave's hands, and Tim, best of luck in your next step here in your career. Maybe as a starting point here, as part of what we're seeing is the build-out of that Executive team and some talent brought -- being brought in, as you referenced. Maybe just a question there in terms of the views on the Executive team here. Is this -- again, about transitioning? Is there -- do you think, Dave, maybe there's an opportunity here to build out further? Are there some gaps that you want to fill? How are you thinking about that positioning, going forward?

[David Kelly, executive]

Yes. I think, Jeff, certainly much more to come as we get into Q3 for sure. The way I've been framing it for people is there's really 2 focuses in the near term, and one is about operational excellence, and that does require a set of skills in the marketplace, many of which we've got here today with some great leaders and great teams. But if we have an opportunity to add folks with that skill set, that will be a focus for sure.

The other thing we'll stay focused on always is just making sure we're able to help our advisors grow great businesses. And so, as I think about the talent and building out an amazing team, those will be the areas that we continue to focus on.

[Jeff Fenwick, analyst]

Okay. And I guess within that -- in that context, I mean, you've been with the firm for a while now and I'm sure have some thoughts on this, but what about priorities in terms of product build-out, solution build-out for the advisors? Are there some areas there that you'd like to prioritize for some investment over the next 12 months, maybe?

[David Kelly, executive]

Yes. Much more to come, Jeff, in that space for sure. And we'll deliver much more detail. I would say thematically though, we're always interested in supporting our advisors in any way that we can. And to the extent product solutions are accretive to their practices and what they're trying to deliver for clients, we'll always be looking in that direction.

[Jeff Fenwick, analyst]

Okay. And then maybe one a little more around the current news on the advisor team recruitment. You mentioned the jump in the client assets through July. Could you just sort of maybe walk us through the timing on when you recruit a team, when those assets typically are managed to be brought on board, the move in July there, was that predominantly those 5 teams joining? Or is there more to come out of that group in terms of onboarding their assets?

[Kishore K. Kapoor, executive]

So Jeff, it's Kish here. I would say that the advisor teams that have just onboarded here now, they're going to continue to expand their practice and continue to attract clients, so it's a period of time over which those assets come. So really, our growth this year has been a combination of net new assets that our existing advisors have been able to attract from their clients. It's -- and obviously, the market has been fantastic. And then of course they -- the people in the teams that we've recruited over the last 10 months. In fact, the last 10 months, we've recruited 10 teams, about 2.3 billion assets. And they take time to come onboard. Some people are very quick, it can take 60 to 90 days. And others, it takes 100 to 120 days. And sometimes, it's just -- as a result of where they've left and how slow the other institutions are in transferring the money. So, we're very patient, thoughtful, take the time. Our advisors are really good in certainly having those conversations with clients and making sure the clients don't feel there's a disruption in the experience. So, that's the key for us.

And just going back to the question that you asked, Dave Kelly, and I'd like to add to it. Our journey to get to this point, obviously, the last 3 years is to build a brand recognition, build a platform, invest in our premises, and do all the things to strengthen our culture to create a value proposition for our advisors. And once we completed that, it was critically important to me to attract the next generation of leaders. And the first step in attracting the next generation of leaders is to attract obviously, Dave Kelly. It took -- we started the journey started in September of last year. We went through a fairly exhaustive process to identify the right candidate. We had a market scan of 100 people.

We shortened the list of 16, narrowed it down to 4. But Dave Kelly was always at the top of our list. He had such an outstanding pedigree, such an outstanding experience. In fact, this morning, he got a text from Ed Clark congratulating him on this appointment and speaking -- and that spoke volumes about what people think about Dave Kelly, and certainly what our Board, the Richardson family, and I think of Dave Kelly and what he's able to build. And once Dave Kelly decided that this is a place where he wanted to be, he felt that we were ready now. In 2016, when he was at TD, he tried to buy the business and then obviously, for a variety of reasons, declined.

But here now, when you look at the business today, he felt compelled enough that this was a place for him, at age 54, to do what he does best is really operational excellence and unlock the benefits of all the building blocks. And once he came onboard; he took the time, got oriented with the business, took the time to understand all of our pain points that impeded our advisors' ability to succeed. And then we, together, started thinking about, okay, how do we add bench strength to our team. And progressively, we've started attracting Kevin Shubley, attracted Steven Hunter, attracted Derek Perritt, and then attracted very recently, Marcus Chun. And while we're doing that, we're also starting to see lots of inbound interest now from high quality recruiting candidates, all as a result of this incredibly powerful endorsement of our promise by Dave Kelly.

And when Dave is now when we had our conference here in Toronto, we had 300 people in attendance. It was such an outstanding conference. It was clear to me that his road trips, his meeting with advisors, their feedback to me about what they thought, he was the right person. He's attracting all that talent. I just think that's such a critical part of the story that I think your investors or the people that you write to will be really interested in about what the future holds.

[Jeff Fenwick, analyst]

Very much so. I'll pass it along.

[Operator]

[Operator Instructions] There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Kish Kapoor.

[Kishore K. Kapoor, executive]

Well, thank you, everyone, for dialing in. And thank you, everyone, for continuing to be patient. I know when we look at stock price performance, I'm ultimately accountable for that. And it's incredibly disappointing that it hasn't translated in value. It's a function of a variety of things, including what I think of macroeconomic events and trends and small cap issues, 75% of our stock held by insiders. But notwithstanding, I can feel the disappointment that you might have. But I think that now, especially since I understand the business inside out, we've grown it by CAD 10 billion since I first took over. We're at CAD 38 billion.

If you look at any outside external private company valuation metrics or precedent transactions, we know that our intrinsic value is far more substantial than where our stock is trading at. So I think in time, Dave Kelly is going to translate, unlock all of the value of our platform, which hopefully ultimately will be realized for the benefit of all our shareholders. So for our shareholders, I thank you for your patience. And thank you for trusting me, for not only building the platform today, but trusting me in helping the Board pick Dave Kelly as the next CEO. And I think the Board and certainly the Richardson family are just thrilled. Thrilled, thrilled, thrilled to see what Dave Kelly is going to be able to do. So thanks very much, and I'll close the meeting for today.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.