RF Capital Group Q3 2024 Earnings Call Transcript

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November 6, 2024

Key Takeaways

  • Positive Sentiment: The firm reported continued asset and revenue momentum with AUA up CAD 3.8 billion year-to-date (plus ~CAD 400M in October), Q3 revenue +5% and fee revenue +7% year-over-year, and fee-based revenues of CAD 204.5M for the nine months (+6%).
  • Negative Sentiment: Profitability and cash generation were pressured: Q3 adjusted EBITDA fell to CAD 12.5M (from CAD 16.9M a year ago), nine-month adjusted EBITDA declined 9%, and free cash flow and cash available for growth both decreased, driven partly by one-time leadership transition costs and lower RSU/DSU mark-to-market recoveries.
  • Positive Sentiment: Leadership transition completed with Dave Kelly named CEO (Oct 1); the company expects to announce a new CFO soon and is recruiting a national sales leader, and employee engagement ratings improved with a seventh consecutive "Great Place to Work" certification.
  • Positive Sentiment: Recruiting and growth pipeline remains strong: several advisor teams joined in recent months, management cites a recruiting pipeline with line-of-sight to CAD 1.5–2.0B of potential assets for 2025 (while noting competitive deal multiples and disciplined payback targets).
AI Generated. May Contain Errors.
Earnings Conference Call
RF Capital Group Q3 2024
00:00 / 00:00

Transcript Sections

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Operator

This conference is being recorded. [Foreign language].

Operator

All participants, please stand by. Your conference is ready tto begin. 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
VP of Finance at RF Capital

Thank you, Marna. 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.

Ayeza Ahmed
VP of Finance at RF Capital

Our contact information can be found at the end of our earnings release. I will now turn the call over to Dave Kelly.

Dave Kelly
President and CEO at Richardson Wealth

Thank you, Ayeza. Good morning, everyone. As you may recall, this January, I joined Richardson Wealth as Chief Operating Officer. Then, on October 1st of this year, I was named Kishore'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.

Dave Kelly
President and CEO at Richardson Wealth

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 advisory experience better and those of our clients, and how to address pain points and fill gaps. When I joined last January, I believed the three-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 one, doubling down on support for our advisors, and pillar two, supercharging recruitment.

Dave Kelly
President and CEO at Richardson Wealth

Regarding pillar one, 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 Advisory Service Center, and through our partnership with Fidelity. Last quarter, we announced Marcus Chun joined us as Head, Enterprise Technology and 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 processes and service.

Dave Kelly
President and CEO at Richardson Wealth

In October, we added three highly skilled professionals to our Advisory Service Center, a team that will transform new capabilities, build deep relationships, and strengthen our advisory support model and overall experience. Our partnership with Fidelity continues to strengthen, with some wins delivered recently that were acknowledged by our 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.

Dave Kelly
President and CEO at Richardson Wealth

Feeling valued also drives employee engagement, and I'm happy to say that for the seventh 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.

Dave Kelly
President and CEO at Richardson Wealth

In terms of pillar two, 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-tenured team joined our Pointe-Claire branch, and also in August, Riddle Wealth Management, formerly from Investors Group Private Wealth, joined our Victoria office. We continue to maintain a robust pipeline of advisors. We're 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've been 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.

Dave Kelly
President and CEO at Richardson Wealth

We've also been actively searching for a 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 CAD 3.8 billion since the beginning of the year and another CAD 400 million in October.

Dave Kelly
President and CEO at Richardson Wealth

Fee-based revenues were CAD 204.5 million for the nine months ending September 30th, 2024, which is up CAD 11 million, or 6%, over the same period last year. Adjusted Net Income was CAD 6.5 million, up CAD 2.9 million for the nine-month period in 2023. Adjusted EBITDA was CAD 41.1 million for the nine-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 one-time costs we recorded in the quarter related to our leadership transition. Our recruiting pipeline now stands at over CAD 29 million. 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
VP of Finance at RF Capital

Thank you, Dave. For the third quarter of 2024, we reported CAD 91.9 million in revenue, an increase of 5% as compared to the third quarter of 2023. 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 two quarters. Adjusted EBITDA was CAD 12.5 million as compared to CAD 16.9 million in Q3 2023, as revenue growth was offset by higher operating expenses.

Ayeza Ahmed
VP of Finance at RF Capital

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

Ayeza Ahmed
VP of Finance at RF Capital

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.

Dave Kelly
President and CEO at Richardson Wealth

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. My 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 to many top advisors and where the industry is on the cusp of a wave of growth.

Dave Kelly
President and CEO at Richardson Wealth

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 to please open the line for questions.

Operator

Thank you. Please press star one at this time if you have a question. The first question is from Jim Byrne. Please go ahead.

Operator

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

Dave Kelly
President and CEO at Richardson Wealth

Yeah, hey, Jim, it's Dave. We do have some real estate initiatives in flight in Halifax that will hit 2024 and some in 2025. And I would say just for 2025, our broader strategic and financial planning process is well underway, and we could provide a full update on our strategy for 2025 and beyond at the next call.

Dave Kelly
President and CEO at Richardson Wealth

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 that 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 is, what are you going after in the next, say, 6-12 months?

Dave Kelly
President and CEO at Richardson Wealth

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

Ayeza Ahmed
VP of Finance at RF Capital

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

Dave Kelly
President and CEO at Richardson Wealth

Jim, I'd just piggyback on that. Obviously, gross margin is something you want to increase over time. Interest rates are likely to maintain being a headwind for us into 2025, 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.

Dave Kelly
President and CEO at Richardson Wealth

Okay, that's very helpful. Thank you.

Operator

The next question is from Fernando Torella. Please go ahead.

Operator

Thank you. I just wanted to get maybe a bit more color on the advisor account 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, the stage of conversion, and maybe how multiples are trending on the recruiter books? Thanks.

Dave Kelly
President and CEO at Richardson Wealth

Yeah, hey, Fernando, it's Dave. We had two teams depart in the quarter, and the assets under management when they're with us was about CAD 456 million. The pipeline continues to be really strong, and so I'd say for 2025, we've got line of sight today on between CAD 1.5 billion and CAD 2 billion assets in terms of opportunity to join. I do think the competitive forces remain very strong for Fernando in terms of deal multiple, and so we're trying to be disciplined on two 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.

Dave Kelly
President and CEO at Richardson Wealth

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 four to five-year period. We've seen a number of offers north of two times 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 2025.

Dave Kelly
President and CEO at Richardson Wealth

Okay, thank you. No, 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 one-time 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.

Dave Kelly
President and CEO at Richardson Wealth

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

Ayeza Ahmed
VP of Finance at RF Capital

Yeah, sure. So, Fernando, the leadership transition costs relate mainly to one-time provisions relating to a consulting agreement and a net reversal of some of those 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 related to the comp piece.

Dave Kelly
President and CEO at Richardson Wealth

I would just say on the executive team, the two roles that I spoke to, Fernando, are the two that we need to fill, and so that's the CFO role as well as the national sales role. I think once those two roles are 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 team 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.

Dave Kelly
President and CEO at Richardson Wealth

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 for the firm.

Dave Kelly
President and CEO at Richardson Wealth

Okay, no, that's perfect. That's very helpful. Thank you. That's it for me.

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
VP of Finance at RF Capital

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

Dave Kelly
President and CEO at Richardson Wealth

Thank you.

Operator

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

Analysts
    • Analyst 1
    • Ayeza Ahmed
      VP of Finance at RF Capital
    • Dave Kelly
      President and CEO at Richardson Wealth
    • Analyst 2
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