RF Capital Group Inc

TSX:RCG

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the RF Capital Fourth Quarter and Year-End 2024 Earnings Conference Call. I would now like to turn the meeting over to Ayeza Ahmed, Vice President, Finance. Please go ahead, Ayeza.

[Ayeza Ahmed, executive]

Thank you, Louise. Good morning, and welcome to RF Capital's Fourth Quarter 2024 Earnings Call. My name is Ayeza Ahmed, and I'm 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 this 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.

[David Kelly, executive]

Thank you, Ayeza. Good morning, everyone. I wanted to start with a personal note. Last month, I reached a 1-year milestone of service at Richardson Wealth. In reflecting on this anniversary, I'm reminded how inspired I was by the company's well-designed 3-pillar growth strategy. The clear and achievable strategy also fueled by enthusiasm. It lays out what we need to become plus what we need to do in order to become a serious contender in the Canadian marketplace. But just as important, it aligns with my core beliefs in this industry.

I believe the independent space is presenting an attractive alternative for Canadian investors who are seeking a differentiated offering. I'm also convinced that advisers and their teams who are working at large investment dealers are beginning to seek a new path to grow and flourish for their clients' success. These factors help me see the opportunity we have here at Richardson Wealth. They also help drive my decision to accept the Chief Operating Officer position. One year later, and now as President and Chief Executive Officer, it continues to be the right strategy. And as I will explain now, I continue to believe our 3 pillars are the right journey.

Last year, we achieved a major milestone by reaching $40 billion of AUA for the first time in our history. Our next step is to reach $50 billion. That requires a concentrated effort on execution and 2024 was exactly that. Last year, my full attention centered around Pillar 1, which is leading the work to double down on advisory teams support. Within Pillar 1, we had and continue to have 2 goals. First, we need to make it easier for our teams to work here. Second, we need to help them grow more valuable practices.

And if I circle back on the first one, making it easier for teams to work here, we're diligently focused on creating middle office excellence, which is delivered through our own adviser service center and Fidelity Clearing Canada ULC. However, we're not there yet. We are fully mobilized to resolve issues with pace and we're making steady progress. I'm also committed to celebrating wins as they occur, and we expect much more of that in 2025.

With respect to growing more valuable practices, we focused on enhancing existing platforms, and we also launched a new suite of business intelligence tools that give our advisers critical data and insights that are needed to see opportunities in their practices. I'll shift now to the second pillar of the growth strategy, supercharging recruitment, which continues to be a significant part of our growth strategy.

We welcomed some exceptional teams here in 2024, managing $1.8 billion in AUA. We continue to maintain a robust pipeline of advisers who are drawn to our culture and our brand to the extent of over $31 billion. In 2025, we will enhance our emphasis on our by-invitation-only mindset. That, along with some refinement to our discovery and our onboarding processes makes us confident in our ability to execute on Pillar 2 in 2025. Last year, the focus was to drive hard on Pillar 1 and Pillar 2 and in 2025, that will continue to be the case.

As for our third pillar, acquiring or partnering with like-minded firms, several factors, including the availability of targets, the target price expectations, our share price and our access to other forms of capital will impact our ability to execute on this pillar. That said, we did and we'll also continue to seek opportunities to work with parties that align with our strategy and in ways that generate value for our shareholders.

Turning to our financial results for 2024. Here's a quick summary. We ended the year with AUA of $39.5 billion, up $4.3 billion on the year. At a high level, the increase in AUA was helped by rising equity markets as well as strong recruiting activity and an increase in assets of existing clients. Revenue was $369.3 million, adjusted EBITDA was $57.3 million and free cash flow available for growth was $31.5 million. These results are relatively stable compared to 2023.

Finally, before I turn it over to Ayeza for a deeper dive into the financials, I want to provide an update on our executive searches. You will remember that last fall, we were conducting searches for a new RF Capital Chief Financial Officer and a Richardson Wealth national sales leader. The search for our national sales leader continues, and I'm confident I'll give you an update on that during our next call. However, I'm pleased to share that Francis Baillargeon is our new CFO. Francis brings experience, including with investment banks, focused on the investment in wealth management industries. He and I worked together at TD Bank when he was in corporate development. More recently, he spent 4 years as CFO for a scale-up flow EV charging, one of Canada's leading clean technology companies. So I'm thrilled to have him as part of my executive committee.

Ordinarily, Francis would have provided the financial results on the call today, but he has a commitment which was in his calendar before his employment began with us. So I Ayeza will do another great job like last quarter in his absence. You will meet Francis next quarter. And now I'll turn it back to Ayeza, who will take you through the financials in more depth.

[Ayeza Ahmed, executive]

Thanks, Dave. For the fourth quarter of 2024, RF Capital reported $96.9 million in revenue, an increase of 12% as compared to the fourth quarter of 2023. Fee revenue was up 15% due to higher average AUA and trading commissions increased 20%, driven by higher trading activity in client accounts. Corporate finance revenue increased 80% from higher structured note related fees, and interest revenue decreased 19% from a decline in benchmark interest rates while client cash and margin loan balances remain largely relatively stable. Insurance revenue declined 12% from lower sales activity from the fourth quarter last year.

Adjusted EBITDA was $16.2 million in Q4 2024 as compared to $14.5 million in Q4 2023. This result reflects the increase in revenue that I just mentioned, partly offset by an increase in adjusted operating expenses. Operating expenses were up due to an increase in legal provisions, higher carrying broker charges as a function of trading activity, higher benefits and annual inflationary increases in salaries as well as an increase in expenses linked to corporate finance revenue growth.

Discretionary expenses decreased from the fourth quarter of last year. Turning to cash flow. Free cash flow available for growth is the cash flow that the company generates before any investments in growth or transformation initiatives. It is intended to provide an indication of the cash that we generate organically to fund our strategic plans. In the fourth quarter of 2024, we generated $9.2 million of cash flow available for growth, up from $8.3 million last year, primarily due to higher adjusted earnings. Free cash flow is the net cash flow that the company generates from its continuing operations after considering its recruitment, transformation and strategic initiatives.

RF Capital generated free cash flow of $8.8 million in Q4 2024 as compared to a usage of $9.6 million in Q4 2023. That was driven by adviser loan payments and settlement of several legacy legal matters, both of which are reflected in free cash flow. Turning to our outlook. I will speak to some of the drivers of our revenue and profitability as we see them today. In 2025, we expect AUA will continue to be driven by growth in client assets and recruiting and is expected to correlate highly with equity market returns, which may be impacted by global economic conditions.

Interest revenue is impacted by prime rate trends, which economists expect to continue to decline before stabilizing later in the year. Turning to operating expenses. We are committed to finding savings and efficiencies where we can and driving operating leverage from our platform to remain profitable as inflation continues to impact certain core operating expenses. Furthermore, operating expenses will continue to be subject to mark-to-market expenses on RSUs and DSUs. Cash flow from growth will be driven by the factors just discussed and will primarily be deployed toward adding new advisers to the Richardson Wealth platform. Capital expenditures are expected to continue at normalized levels. With that, I will now pass the call back to Dave.

[David Kelly, executive]

Thank you, Ayeza. And before I open it up to Q&A, I would like to provide a quick closing comment. My overarching goal in 2024 was to ensure our advisory teams felt valued and respected and they have the products, services and tools needed to provide superior client advice and service. That has certainly not changed at all for 2025 with our corporate teams and advisory teams and the executive committee aligned. I'm confident we are on track to become the best independent choice in Canada. I'm very excited to lead the next leg of this journey. That concludes our prepared remarks. Louise, please open the line for questions.

[Operator]

[Operator Instructions] First question is from Jeff Fenwick, Cormark Securities.

[Jeff Fenwick, analyst]

David, I wanted to circle back to your commentary about the efforts you're making to improve the operations for the advisers there and your comment that you're not there yet. And I'm just wondering what at this point is missing? I know the transition to Fidelity has been underway now for, I guess, more than 2 years, maybe 2 or 3 at this point. And what's missing from the equation here? And what really is the problem there? And when do you think you can have that addressed?

[David Kelly, executive]

Yes, Jeff, thanks for the question. Listen, I think we've made a lot of progress on what I'll describe as platform and technology with Fidelity. I think we've got a good cadence now on what they're delivering to our advisers in terms of -- in particular, some of their straight through technology, which has been received fantastically well. Most of the problem, Jeff, centers on service, right, and just making sure that we have both our service levels aligned and service delivery aligned. And so we've got great ongoing conversations with teams at Fidelity, but we're also reimagining our adviser service center team, which is our middle office group and the way I describe it to our teams is that it's probably 60% of the experience that our advisers and associates feel in working with Fidelity. And so we're reengineering and redesigning that team.

And we think that we'll have that to a very, very good spot across the country by spring. We've got 2 very successful adviser pilots at the end of '24, we're now live with one of our first branches to also go through the pilot. And so I would say by late spring, Jeff, I think you'll start to see the momentum really turn.

[Jeff Fenwick, analyst]

And maybe turning to the adviser base of recruitment. Obviously, some good progress there, which is it's always good to see in terms of new teams coming in. But I did note that you've had -- it looks like a net reduction of 3 over the last quarter of the year. Just any comments there. I think we were sort of hoping to see some stability. I know you spent some time going across the country and talking to advisers and the teams there. And when they leave, is there a consistent theme as to why? And is there a way to sort of address what those concerns are, frustrations with that -- with those service levels? Or is it a question just being bid away and something that maybe you can't do anything with.

[David Kelly, executive]

Yes. No, I think there's always things you can do, Jeff, for sure, right? It was actually between October 1 and probably the third week of December. I spent hour with every single adviser or team at Richardson Wealth. And we spent about a half hour together talking about where we want to take the business, what we think we need to focus on, a really good dialogue back and forth with the teams on priority areas. And I would say that the feedback was very positive in terms of where they saw us focusing. I've really been describing that the heart of supporting the advisers rest with the mid-office excellence experience, which we talked about already. We do some work for them on integrating some of the tools and technology on their desktop, which is underway and in plan for 2025.

We need to do some work around making sure from a compliance perspective that we are meeting our regulatory requirements in as an adviser friendly way as we possibly can. And then it's just really energizing our corporate teams around the things that advisers need to do well. And so we're really, really focused on helping advisers find new clients, onboard them well, present financial plans, invest the money in service. And so I think when we pull all those 4 things together, the feedback has been very strong, Jeff, I think -- I do think the most important thing for the teams to feel is that change in model that we're making with our adviser service center teams in that mid office.

And again, very confident that, that will start to become very tangible for the teams in the spring. We have also been really leaning in on communication with the teams. And so we run a call now monthly across the country where we're consistently highlighting 3 to 4 things that have improved for them in the last month and we group those as sort of process platform and policy, and we're starting to get some good feedback and momentum there as well. So I think there's is absolutely things you can do. I don't think it's a very fancy formula. You need to tell people what you're going to fix it and then tell them what you're going to fix next. But I have confidence that we'll be able to get our team seeing the progress that they've been expecting as we move forward.

[Jeff Fenwick, analyst]

So it sounds like you're getting to a point now where you say those operational efforts are getting close to being at a level that is acceptable and expected for everyone. And hopefully, that avoids frustration for adviser teams. Are there -- I guess in terms of investment, though, and incremental capabilities, there are things on the -- you need to have on the shelf for the adviser tools for them that maybe you're missing today? And so do you need to continue to invest to make sure you're sort of at the leading point in the industry with respect to that sort of thing? And is that maybe another piece that you need to have there to help you attract and retain teams.

[David Kelly, executive]

Yes. I don't think the capital spend is particularly meaningful, Jeff in terms of what's required. I do think there's some capabilities that we need to help our advisers with, in particular, as you think about supporting their growth and ability to really grow their practices quickly. We have a number of those on tap in plan for 2025. I think what we're trying to be careful about and thoughtful of is we want to make sure the teams really feel our focus on making sure that mid-office excellence progress is achieved, Jeff, before we try and bring other things to the table, right?

And so we're just balancing the priority for our teams of making sure they really start to feel that difference in being able to service their clients. And then we're well positioned in '25 to add some capabilities to their desktop that will help them grow. So we're excited about being able to move from what I'll describe as transformation to investing for our teams, but we are really, really mindful of winning the mid-office excellence journey.

[Operator]

Next question is from Jim Byrne from Acumen Capital.

[Jim Byrne, analyst]

Maybe just a couple for me, Dave. You mentioned the kind of $50 billion goal, is there any time line around that? And then kind of secondly, just thinking about where you are in terms of corporate structure and kind of back office, mid-office, are there things that you would need to add to get to that $50 billion? Or is it largely going to flow right to the bottom line?

[David Kelly, executive]

Yes. I think the way we're thinking of $50 billion as the next stop in the journey, Jim, if I can phrase it that way. So not a specific time line, but really trying to rally the teams to get there as quickly as we can, obviously. I don't think there's a lot of material investment from an organization perspective that we need to make that would be incremental. So I would expect to see a lot of that drop to the bottom line. What happens things to the team, though, is we do need to make sure we've got our teams organized in a way that they can do their best work.

And I was mentioning earlier, what I'm trying to do is really structure the organization around this concept of adviser journeys and how do we make sure every single day, we're making that easier for teams to achieve what they want to achieve.

And so I think as we drive through that, there's likely to be some skills that we need to either add to the team that we don't have. And we'll also be thoughtful as we do that work to look for efficiencies at the same time. So I don't expect there to be a big capital investment in order to get where we need to go.

[Jim Byrne, analyst]

Okay. That's great. And then maybe just an update on the insurance initiatives. Are you happy with the progress to date? Is there anything there that you can do to maybe accelerate some of that growth?

[David Kelly, executive]

Yes. The way we think of that is insurance is an outcome, Jim, of an amazing financial planning conversation with clients, right? And so as we think about the business, what we're trying to do is to help our advisers get into as many financial planning conversations as they can with clients. But when you do that, the insurance opportunity explodes. And so we've had consistent progress, I think, from an insurance perspective. My view is there's significant upside from here. We're very focused on making sure our advisers are having great advice conversations with clients, and we know that opportunity will come.

[Operator]

There are no further questions registered at this time. So Mr. Kelly, I will return the meeting back over to you for closing remarks.

[David Kelly, executive]

Thank you, Louise. Really appreciate that. And listen, thanks, everyone, for participating in today's call. We really appreciate your time and focus. Please feel free to contact us with any follow-up questions. Have a great weekend. Louise, thank you so much. You may end the call.

[Operator]

Thank you. Your conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.