RF Capital Group Inc

TSX:RCG

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Third Quarter 2024 Earnings Conference Call.

I would now like to turn the meeting over to Ayeza Ahmed. Please go ahead, Ayeza.

[Ayeza Ahmed, executive]

Thank you, Marina. Good morning, and welcome to RF Capital's Third Quarter 2024 Earnings Call. My name is Ayeza Ahmed, and I am the VP of Finance.

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 applied in 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 am joined by our President and CEO, Dave Kelly. Dave will provide a brief update on the last quarter and some comments on his plans for going forward. I will cover our detailed financial results and financial outlook. We will then open the call to questions from our analysts. If you have questions once the call is complete, please reach out to Investor Relations. Our contact information can be found at the end of our earnings release.

I will now turn the call over to Dave Kelly.

[David Kelly, executive]

Thank you, Ayeza. Good morning, everyone. As you may recall, this January, I joined Richardson Wealth as Chief Operating Officer. Then on October 1 of this year, I was named Kish Kapoor's successor as President and CEO. While my tenure in this company has been relatively short, I'm very enthusiastic about our future and confident our team is on track to work together to position Richardson Wealth as the best independent choice in Canada.

As I begin, I want to thank Kish for his leadership in rebuilding our foundation and positioning us for growth. Over the last few years, he has planted many trees for the future to use his words, and we are grateful for his limitless passion for the company and commitment to our advisory teams.

For the last 10 months, I've been on a listening and learning journey, getting to know our advisors, their teams, their practices and doing deep dives with our corporate team. I have been zeroing in on where we have opportunities to make our advisor experience better and those of our clients and how to address pain points and fill gaps.

When I joined last January, I believe the 3-pillar strategy was exactly the right one for this company and for the industry, and I still believe this 10 months later. That said, we continue to be most focused in the near term on Pillar 1, doubling down on support for our advisors and Pillar 2 supercharging recruitment.

Regarding Pillar 1, my overarching goal as CEO is to ensure our advisors feel valued and respected and that they have the products, services, technology and tools they need to build and grow strong practices and to provide superior client advice and service. This requires diligent focus on creating mid-office excellence, which is delivered through our own mid-office team, the Advisor Service Center and through our partnership with Fidelity.

Last quarter, we announced Marcus Chun joined us as Head Enterprise Technology Architecture. Marcus has an impressive track record in the industry of delivering significant value by transforming and optimizing operational processes and technology and has quickly proven to be a valued addition to our leadership team.

With our relentless focus on ensuring mid-office excellence, this team is now helping us design capabilities to optimize end-to-end proceeds and service.

In October, we added 3 highly skilled professionals to our Advisory Service Center, a team that will transform new capabilities, build deep relationships and strengthen our advisor support model and overall experience.

Our partnership with Fidelity continues to strengthen with some wins delivered recently that were acknowledged by advisor and associate teams.

In addition to the Advisory Service Center, we are looking at all corporate teams across the organization making sure every team is organized in a way that allows them to do their best work, work that, as I said earlier, is needed to provide our advisors with the right products, services and tools so they can do their best work and ensure they feel valued.

We don't anticipate a major change in headcount through this exercise.

Human value also drives employee engagement, and I'm happy to say that for the 7th year in a row, we've been certified as a great place to work, a global organization with over 30 years of experience in conducting research on workplace culture. Our results were received at the end of last quarter, and I was particularly pleased with the positive momentum we experienced. Specifically, 87% of our participants agreed they would tell others that they are proud to work here, which is up from 84% last year. And 86% of our employees agreed that taking all things into account, I would say Richardson Wealth is a great place to work, up from 80% in 2023. Keeping in mind this survey was conducted during our leadership transition, this is an indication that our company handled major organizational change very well.

In terms of Pillar 2, last quarter, we enjoyed more success with our recruiting efforts. In September, we welcomed Troiani Wealth Management to our Burlington office from Scotia Wealth Management. In August, Simpson & Partners and other long tenure team joined our Pointe-Claire branch and also in August, Riddell Wealth Management, formerly from Investors Group Private Wealth, joined our Victoria office.

We continue to maintain a robust pipeline of advisors, who are drawn to our culture and our brand and I am confident we will announce more success in our recruiting efforts on the next call.

On the Q2 call, I stated that we'll be working diligently on finding a new CFO to replace Tim Wilson, who left Richardson Wealth in August. Our search has been very successful, and we expect to be in a position to announce our incoming CFO in the coming weeks.

We've also been actively searching for our national sales leader. Working closely with me, this individual will oversee the business goals and revenue of all of our branches and lead sales operations to drive long-term profitability for the firm. We have interviewed some talented potential incumbents and feel positive that we are zeroing in on the individual who will be best fit for our culture and company objectives.

Before I turn it over to Ayeza, who will elaborate on the financial results, I want to provide just a quick overview of how we're doing. And our results continue to highlight positive momentum in our business. Assets are up $3.8 billion since the beginning of the year and another $400 million in October. Fee-based revenues were $204.5 million for the 9 months ending September 30, 2024, which is up $11 million or 6% over the same period last year.

Adjusted net income was $6.5 million, up $2.9 million for the 9-month period in 2023. Adjusted EBITDA was $41.1 million for the 9-month period, down 9% over the same period last year. And year-to-date adjusted EBITDA was down 2% from last year when normalized for onetime costs we recorded in the quarter related to our leadership transition.

Our recruiting pipeline now stands at over $29 billion. I will be in a position to provide a full update on our go-forward strategy and plan at our next analyst call.

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

[Ayeza Ahmed, executive]

Thank you, Dave. For the third quarter of 2024, we reported $91.9 million in revenue, an increase of 5% as compared to the third quarter of '23. Fee revenue, the largest component of our revenue increased 7% compared to Q3 2023 driven by an increase in AUA.

Looking at the other components of revenue, trading commissions, corporate finance revenue and insurance income all grew at double-digit rates relative to last year due to an increase in sales activity. Those increases more than offset an 18% decline in interest income, which was down due to lower client cash balances, a trend that we've discussed in the past 2 quarters.

Adjusted EBITDA was $12.5 million as compared to $16.9 million in Q3 '23 as revenue growth was offset by higher operating expenses.

Operating expense growth was driven by onetime costs recorded in the quarter related to our leadership transition and lower mark-to-market recoveries on RSUs and DSUs as we detailed in our MD&A. Cash flow available for growth was $6.2 million in Q3, down $5 million from last year. Free cash flow was $3.9 million, down $2.3 million from last year as we invested in advisor recruiting.

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, approximately $400 million of AUA growth in the month of October.

With respect to interest revenue, we expect to see a decline in line with lower benchmark rates. The level of the decline will depend on the extent and timing of movements in the Bank of Canada and prime rates. Corporate finance revenue is expected to remain subdued through year-end.

Turning to operating expenses. We expect discretionary expenses to remain well managed. Operating expenses will continue also to be subject to mark-to-market expenses in RSUs and DSUs. Cash flow for growth will be driven by the factors impacting adjusted EBITDA and will primarily be deployed towards adding new advisors to the Richardson Wealth platform.

With that, I will now pass the call back to Dave.

[David Kelly, executive]

Thanks for that, Ayeza. On the Q2 call, my comment is that my immediate objective would be working with Kish on a smooth transition. I'm happy to report that our transition was, in fact, extremely comfortable. For that, I thank the advisory teams, the corporate teams and Kish for their transparency, encouragement and support and mostly for their collective vote of confidence. A new journey serving shareholders, clients, advisors and our teams is one that I will invest in wholeheartedly and with the hopes of helping Kish's trees bear fruit. I also hope to plant many more for our advisors' future.

As I said on the Q2 call, we are very well set up to win our share as we look at a landscape where independent platforms are becoming a major draw for many top advisors and where the industry is on the cusp of a wave of growth. Our firm is built and ready to grow, and I'm excited to be leading the next leg of this journey.

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

[Operator]

[Operator Instructions] The first question is from Jim Byrne.

[Jim Byrne, analyst]

just a couple of quick questions for me. Remind us of any capital plans or major investments required for 2025? I thought there were some stuff maybe in Halifax or Ottawa that was going to be required. I just can't remember exactly where we stand on that.

[David Kelly, executive]

Yes. Jim, it's Dave. We do have some real estate initiatives in place in Halifax, that will hit in '24 and some in '25. And I would say, just for '25, our broader strategic and financial funding process is well underway, and we could provide a full update on our strategy for '25 and beyond at the next call.

[Jim Byrne, analyst]

Okay. That's great. And then this is probably going to be the same answer. But just kind of thinking about margin targets, I noticed kind of the gross margin profit was down in the quarter and obviously, the EBITDA margin was down for explained reasons, but just kind of get an idea of what that long-term target from an EBITDA margin perspective? What are you going after in the next, say, 6 to 12 months?

[David Kelly, executive]

Ayeza, do you want to put some context on the change and then I can weigh in.

[Ayeza Ahmed, executive]

Yes. So currently, gross margin is reflecting a change in our revenue mix quarter-over-quarter as interest income has declined and we're seeing the fee revenue picking up, and we're expecting that fee revenue will be driven by AUA growth and recruiting in the near future.

[David Kelly, executive]

So Jim, I'd just piggyback on that, obviously, gross margin is something that you want to increase over time. Interest rates are likely to maintain not being a headwind for us into '25 but we'll try and offset that with revenue growth from other sources, particularly assets and insurance and continue to be thoughtful as we look at operating expenses.

[Operator]

The next question is from Fernando Torrealba.

[Fernando Torrealba Tesi, analyst]

I just wanted to get maybe a bit more color on the advisor count and the pipeline. I see that there were some team consolidations, but could you maybe comment on how many team departures, if any there were during the quarter? And then on the pipeline side, can you maybe give us a bit of details on the size, stage of conversion and maybe how multiples are trending on the recruited books?

[David Kelly, executive]

Fernando, it's Dave. We had 2 teams depart in the quarter. And the assets under management [ when they were ] with us was about $456 million. The pipeline continues to be really strong. And so I'd say for '25, we've got line of sight today on between $1.5 billion and $2 billion assets in terms of opportunity to join. I do think the competitive forces remain very strong, Fernando, in terms of deal multiple. And so we're trying to be disciplined on 2 things. The first -- most importantly is just making sure that we are recruiting teams of a very high caliber. We think about making sure every addition is accretive to both the business and the culture.

And so, we've had recruiting success this year for sure, but we've also turned down a number of teams that just weren't a fit either from a culture perspective or a business model perspective. And you can expect us to continue to be disciplined. Multiples continue to be aggressive in the marketplace.

And so we are ensuring that we're managing our recruiting process to ensure payback periods remain in sort of that 4- to 5-year period. We've seen a number of offers north of 2x for sure where the math just didn't work for us at Richardson Wealth. And so I think you'll continue to see it be a very competitive recruiting environment as we look into '25.

[Fernando Torrealba Tesi, analyst]

Okay. That's perfect. And then maybe just one more. If you could get a bit more color on operating expenses. I mean I know you quoted on the MD&A a onetime expense related to leadership transitions. But if you can maybe share what that consisted of exactly? And then just more broadly, you've been adding some really strong executive people to the team. Just wanted to get a sense of what we can expect in terms of related OpEx in future quarters? And how close you are to where you want to be in terms of building out the executive team?

[David Kelly, executive]

Ayeza, do you want to go a leadership transition, and then I'll speak to the more structure for the leadership team.

[Ayeza Ahmed, executive]

Yes, sure. So Fernando, the leadership transition costs relate mainly to onetime provision relating to a consulting agreement and a net reversal of some bonus provisions as a result of change in executive team members, including the change in CEO and CFO. And that's really -- you'll see an increase in SG&A from the consulting agreement and a decrease in our employee compensation in the quarter are related to the comp piece.

[David Kelly, executive]

And I would just say on the executive team, the 2 roles that I spoke to Fernando are the 2 that we need to fill, and so that's the CFO role as well as the national sales role. I think once those 2 roles in place, then the senior levels of the organization will be set. We've got some work to do as a leadership team. As I mentioned, just making sure we've got our teams set up in a way that allows them to do their best work. We're trying to really build the organization around a deep understanding of the experience for our advisors and associates and what they need in order to be successful.

So we'll work through that in Q4 and Q1. But as I mentioned earlier, I don't expect there to be a material change in the operating expenses as you look to [ salaries confirmed ].

[Operator]

There are no further questions registered at this time. I would now like to turn the meeting over to Ms. Ayeza Ahmed.

[Ayeza Ahmed, executive]

Thank you, Marina. Thank you, everyone, for joining the call. Have a great weekend.

[David Kelly, executive]

Thank you.

[Operator]

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