RF Capital Group Inc.

Thank you operator. Good morning everyone and thanks for joining us today.

Welcome to our first quarter 2021 earnings conference call. If you have questions following this call, please reach out to Investor Relations.

Please see my contact information 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 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 sedar.com.

This morning on the call is our President and CEO, Kish Kapoor and our CFO, Tim Wilson. Kish will provide opening remarks relating to the progress we continue to make in our transformational reset and other key takeaways from the most recent quarter.

Tim will then cover financial results. And 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. Good morning everyone.

Thanks for joining us. We hope that in spite of the global health challenges and current lockdowns, you had a chance to celebrate Mother's Day.

It is these precious moments with the powerful women in our lives, celebrating the strength of our community and family bonds that remind us of what matters most. At our own firm, we paused to celebrate not only Mother's Day but also the progress of our business.

During Q1, we moved with purpose, invested in our capabilities, supported our advisors and their clients and along the way posted strong financial results. With each step, we are inspiring confidence and building growth momentum for the long term.

Some notable successes in Q1 include AUA being the highest in the firm's 17-year history at $33 billion, up $2 billion in the quarter, leading to record fee-based revenue of nearly $58 million and adjusted EBITDA at Richardson Wealth, the foundational centerpiece of our growth strategy reaching $14.1 million for the first quarter, the highest in seven years and 23% above all last year. While market appreciation was a key driver, almost half of the AUA increase came from advisors attracting new assets.

What excites me about these result is that our advisors, the crown jewels of our business, are setting personal best performances month-after-month and they are drawing more high net worth clients to our firm than ever before. This momentum is also drawing attention from talented advisors who want to join our firm.

Our recruiting pipeline is the best it's ever been, thanks to the addition of Dean Manjuris to an already talented corporate development team that includes Mike Ankers, JP Jansen, Paul Landry and all our branch managers. While we expect many to join us this summer, we welcome to our growing family those that have joined us since we announced our transaction last fall, including David Chipman, Ted Evans, Francois Filion, Francois Normandeau, Li Yu, Louis Sally and Liz Savaya.

These are all strong indicators of future performance, especially as it comes just six month after our consolidation of the ownership of Richardson Wealth. Building on this success, we spent much of the quarter defining a bold and ambitious strategy to become the brand of choice for our Canada's top advisors and their high net worth clients.

We recently unveiled that strategy internally in 12 virtual town hall meetings and countless one-on-one meetings. 94% of our advisors and employees indicated that they are excited to be a part of that journey.

We know we must prove that we can deliver and we will. To reduce execution risk, we have attracted considerable talents to our Board and leadership team.

We added five independent Board members. These talented and sought-after directors include David Leith, Nathalie Bernier, Vincent Duhamel, Jane Mowat and Sandy Riley.

These directors and indeed all of the company's director nominees are highly leaders and bring a depth of expertise, diverse views and a strong desire to be fully engaged in helping us create meaningful value for our shareholders, clients and advisors. We also devoted time to strengthening our leadership team and redesigning our organizational structure so that we can better support our advisors and execute on our growth strategy.

New leaders include Tim Wilson, Dean Manjuris and Julie Burnham. With each addition, we are increasing the probability of success.

Another growth accelerator is striking the right strategic partnerships and we have a number of them in play. We are working with a preeminent global management consulting firm to reinforce our strategy by leveraging their deep expertise in wealth management and large-scale organizational transformation.

Our partnerships with Cormark and Bloom Burton have been paying dividends. Jamie Price, our thought leader in this space, tells me our deal flow is up significantly year-over-year.

And by significantly, I mean that we participated in 277% more deals than in Q1 of last year. Sarah Widmeyer, Jeff Fray and David Rubin will be announcing new partnerships in insurance in the coming weeks to further accelerate growth, including forming direct relationships with insurance companies as opposed to through third-party master general agencies.

And of course, we will be continuously exploring the landscape of further partnerships that enhance our capabilities or deliver with significant input of our advisors, digital tools and latest technology that will make it easier for advisors to thrive at Richardson Wealth. And our momentum doesn't stop there.

This past quarter, A Great Place to Work, the global authority of workplace culture, once again recognized us as one of Canada's best workplaces. More recently, they also recognized as the best workplaces for women.

To further strengthen our high-performing advisor-centric entrepreneurial culture, our people led by Lynne Brejak and Jasmine Ariss partnered with Achievers, an industry expert in the power of recognition, to give everyone across the firm the tools to publicly recognize one another's accomplishments and milestones and keep building on our strong momentum. Speaking of recognition, we are proud that Doug Mair, Director, Wealth Management and Investment Advisor in our Calgary office, was appointed to the Alberta Securities Commission for a three-year term.

Doug is a highly accomplished professional and is recognized as industry champion in the Province of Alberta. I am confident that Doug will be an outstanding addition to the ASC and the important role it plays in administering the Province's securities laws.

And five of our high caliber advisors were also finalists for upcoming 2021 Wealth Professional Awards. The finalists include Canadian Advisor of the Year, Ida Khajadourian, Advisor of the Year, Alternative Investments: Francis Sabourin, Ida Khajadourian and Rory O'Connor, Advisor of the Year, Responsible Investments: Francis Sabourin, Portfolio, Discretionary Manager of the Year, Francis Sabourin and Marc Dalpe and Excellence in Philanthropy and Community Service: Jonathan Ross.

These individuals are just a sample of the quality of advisors we attract at Richardson Wealth. Their nominations recognize the incredible work they are doing for their clients and their communities.

We congratulate them on a job very well done. Our young and talented team, led by Susan Fry, have also kicked off a comprehensive brand awareness to tell our story across the country.

It includes social media campaigns, sponsorships, podcasts and traditional media. It also includes client events where we invite Hartley Richardson, CEO of James Richardson & Sons, Limited and Sandy Riley, CEO of Richardson Financial Group to tell the powerful Richardson story to existing and prospective advisors and their clients.

And on June 10, we are co-hosting with Cormark a virtual event for clients and prospects on the 10 global trends that every smart person should know. All the accomplishments and activities I just outlined leave me with confidence or leave me convinced more than ever that our carefully mapped out growth strategy will create meaningful long term shareholder value.

For those who want to learn more about our progress and ambition, I encourage you to read our latest Annual Report which was just released last week. It is on our website and in it, Rocco has done a great job profiling some of our teams across the country, including candid photographs of them working from home, photographs that I know many parents will be able to relate to.

Before I turn it over to Tim, let we officially welcome him to his first of many quarterly conference calls. Tim joined us from EQ Bank where he was CFO for the past nine years.

Prior to that, Tim was President of Visa Canada. He has a proven track record of delivering profitable growth and improving operational performance.

And while he only joined us on April 5, his fingerprints all over our bold growth plan. Over to you, Tim.

Thanks Kish and good morning everyone. I am delighted to be joining the company as it pivots to an ambitious growth stance.

I am also excited to have the opportunity to work closely with Kish and the rest of the leadership team and look forward to speaking and virtually meeting with many of you over the coming months. Before we turn to our first quarter results, let me highlight four noteworthy items.

First, given we only started consolidating Richardson Wealth last October, comparability of our consolidated results year-over-year is limited. As such, my remarks today will focus largely on the business drivers at Richardson Wealth.

Second, you will notice we have introduced a new metric, gross margin. This is calculated as total revenue less advisor variable compensation.

We use this metric as a measure of the amount that accrues to the company after we share a portion of gross revenue with the advisory team that drives that revenue. As a result operating expenses now exclude this amount.

This change is a matter of income statement geography and has no impact on EBITDA or net income. Third, the results of our largely breakeven securities clearing business are now included in the wealth management segment with historical results realigned to that presentation.

And lastly, Q1 results were affected by $7.6 million in transformation costs. These costs related largely to the implementation of our new management structure.

Now on to the results. We have seen early and strong momentum in nearly all areas of our business.

On a consolidated basis, adjusted EBITDA was up $12.9 million year-over-year for two primary reasons, improved performance at Richardson Wealth on the strength of all-time high AUA and fee-based revenue and the fact that we are now capturing 100% of that performance versus 34% pre-acquisition. Because these consolidated results lack comparability and as I mentioned in my opening remarks, I will be focusing on the growth drivers of the Richardson Wealth business.

At Richardson Wealth, adjusted EBITDA was $14.1 million in Q1 and has been trending upward since Q2 of last year as a result of growing the gross margin and stable adjusted operating expenses. The adjusted EBITDA margin improved to 17.5% in Q1, up from 16.3% in the same period a year ago.

Behind our higher gross margin, average AUA, the driver of revenue, was a record $31.9 billion and up 14% year-over-year. Growth was largely a function of market appreciation but was assisted by organic factors, as Kish mentioned.

Our strategic partnerships with Cormark and Bloom Burton allowed us to capitalize on a hot new issue market and record higher commission revenue. We participated in 215 new issues in Q1 versus 57 last year, an almost threefold increase.

We anticipate deal activity to soften from Q1 levels in the remaining three quarters of the year. Improving operating leverage also helped EBITDA growth.

Expenses were stable even as revenue declined. Richardson Wealth's adjusted operating expense ratio declined seven percentage points from 85% to 78%.

We will continue to focus on disciplined cost management as we enter the execution phase of our growth. With that, let's now turn to a few key balance sheet items.

Our net working capital at the end of March was nearly $96 million. With improving operating margins at Richardson Wealth and growing recurring fee-based revenue, we feel confident about RF Capital's ability to continue generating strong operating cash flows through 2021.

We currently have $109 million in debt on our balance sheet and our debt to consolidated adjusted EBITDA is 2.3 times. That, in our view, is a very manageable level of leverage.

Our subordinated bank debt and promissory notes come due this September. We intend to renegotiate or support needed debt and may look to increase its size to support strategic investments.

That said, our overall appetite for leverage remains low. Looking out over the remainder 2021, we anticipate revenue from continued AUA growth to be offset by slightly up lower new issue commissions and as a result to realize stable EBITDA throughout the year, subject of course to broad market conditions.

Thank you to all my team and to my colleagues for your hard work and support during my first quarter as CFO. I look forward to many more to come.

Now I will turn it over to Kish for closing remarks.

Thanks Tim. To quote one of my favorite serial entrepreneurs.

Richard Branson, if you your dreams don't scare you, they are too small. Our growth strategy is bold and audacious but I believe the opportunities are achievable.

We have accomplished so much even before implementing on new growth strategy. Each important step we take from here will just build on that momentum.

Each step will help us become the brand of choice for Canada's top advisors and their high net worth clients. We look forward to sharing the details of our strategic plan at our upcoming AGM on May 26.

So please mark that in your calendars. And before I turn the call back to Rocco, I would like to acknowledge the enormous contributions of Andrew Marsh and Elliot Muchnik who left us this quarter for personal reasons.

We couldn't have got here without them. Andrew was with us for 17 years, including 11 as CEO of Richardson Wealth.

He will continue to serve as an ambassador of Richardson Wealth is a significant and supportive shareholder. Elliot was Richardson Wealth's CFO for 14 years.

He built a strong finance organization and guided the firm through multiple transactions. I would also like to thank Ben Scholten for his outstanding service as Head of Human Resources, Interim CFO and Head of Clearing Operations, as he steps into a consulting role in our newly created growth and enablement office, which includes embedded support from our strategic advisor partner.

Please continue to be well and stay safe and take every opportunity to say thank you to our heroic front line workers and public health authorities. Without them, our road back any sense of normalcy would be infinitely harder.

I will now turn it the call back to Rocco.

Thanks Kish. That concludes our formal remarks this morning.

Operator, we are now ready to open the call to questions from analysts.

Hi. Good morning everyone.

Good morning Jeff.

So Kish, thanks for the color at the start of the call on advisor recruitment activity. Obviously you are not wasting any time and try to build up pipeline.

Can you just give us some sense of how that has been building? So you gave us, I think, seven or eight names of folks that have joined your groups.

Perhaps s sense, I know this takes a bit of time usually for the momentum to build up there and for those decisions. I think you referred to perhaps the summer time you might start a bit more activity on that front.

But any kind of color there you could offer would be helpful.

Yes. So it's a great questions.

So we have been spending a considerable amount of time since October 20, 2020 when we took control of 100% of the assets to refine our story, to gather input from all of our people across the firm as to what's important and what's not important, canvassing people in the market as what's important to them in joining a firm that they think is going to be the brand of choice going forward. So that's taken us a better part of 120 days in catching that information, including working with our strategy consultant on developing our long term strategy.

While we been doing that, we have added people like Dean Manjuris to complement the works of JP Jansen and Paul Landry and Mike Anchors. And though all of that effort, we now have a pipeline of people that we are talking to that is approximately $10 billion in assets that we are talking to today.

So our pipeline is probably the strongest we have ever seen. It takes time to get all of these people along the finish line.

We are fully engaged in those conversations. Some are more mature than others.

And I think, you know, when I look at our organization, I say to everyone, continue to grow the pipeline, continue to have the discussions and in time, summer, fall and the winter, we will start seeing progress in people joining us. And I can't really add any more than that other than saying that the level of activity and the level of interest and certainly with Dean and even Julie Burnham joining us, we have had far more inbound conversations started by people saying, well let's, we want to hear more about your story.

They are now reading our annual report. They are reading our results.

And we are going to share more of at our AGM. And I think that excitement internally and externally is driving the growth of that pipeline.

And hopefully, it's all going to translate into, in fact I am confident it's going to translate into success in people joining us.

Great. That's helpful, color.

And maybe could you offer some commentary on the stability of the existing advisors base today? You mentioned you have been doing internal town halls?

And in the meantime, you had an external entity, I know Canaccord in the background look like they have been some direct conversations of their own presenting their views. So what's your thought on the current sort of morale and outlook of the advisor base today?

I think our morale internally is extraordinary. I think one of the things that we have done is make sure that all our advisors are fully engaged in the development of strategy.

They have participated in the town hall meetings, asked questions at the town hall meetings. Some people have participated by submitting their ideas for the things that really critically important to them that we, the firm, have to invest in.

We are doing so. We have heard through surveys of other things that are important to them.

We are, I would say, getting feedback on those surveys. Like I just announced that you 94% of them are very excited by the journey that we are on.

Part of that journey is a message that we have laid out for them is very clear. First and foremost, we are going to focus on the 160 teams here, waiting to drive all initiatives that are designed to support them doing better here than anywhere else and addressing things that are important to them, including investing in technology platforms that make sense to them.

The second thing that we can do is supercharge recruiting. And they are excited by that.

And the third thing is that we will look acquisitions on an opportunistic basis. So they get our strategy.

They understand our strategy. They participate in discussions and I am probably more engaged with them than we have ever been.

In fact, I would say, all our directors have reached out and spoken to at least five advisors and got their input on what matters most to them. So to hazard a guess, our level of engagement is extremely high.

The feedback and morale, in my view, is also extraordinarily high. That doesn't mean that from time to time, we won't have one or two people that might be disappointed and for personal reasons or otherwise choose to go someplace else.

But I have no doubt in my mind that all the people that are here, are here because they chose to be here in the last transaction. They chose to bet on a firm that is intent on building something for the long term.

And certainly we built a firm that they asked us to build. They wanted us to make sure that we had a strong sponsor in the Richardson brand.

So we are doing everything that we asked them. Are we solving all of their issues?

No. Are we intent on solving them?

Are we marshaling the resources to do that prioritizing them? Absolutely.

Great. And then you call out some transformation charges that impacted the quarter here.

I am guessing there was a component that's the cost of working with the consultant to build a strategic plan and perhaps some severance. Anything else in those numbers?

And is it going to continue at about that level for another quarter or two? Or what's your expectation on that front?

Well, first of all, I think you are right. Those are the two components to that's set aside.

We expect very low amounts to continue in transaction transformation cost. The bulk of that is here.

There is some, there will be some, we are embedding that consulting our organization for the next six months. And so you are going to see some of those costs to make sure that we are executing against that strategy.

But they are not going to be this large. Time, you want to add anything to that?

Yes. I would say, Jeff, that one other component is, as we move through the year and think about restructuring our insurance operations, as Kish mentioned, we may have a charge related to that.

But it's a one-time event that we will likely see in Q2 of this year.

But even the insurance one, we will have a one-time charge but the recurring revenues that come from that one-time charge are three times that one-time charge.

Okay. Understood.

And you again were settling into a new reporting structure here. So I know the clearing segments has been merged in with the wealth management.

So I assume that flows principally through the interest income and the other line?

Yes. That's right, Jeff.

Yes. And then one small accounting one here as well.

The adjusted EBITDA number, when I look at the segment details for wealth, it didn't add back the entirety of the interest expense that you have listed there. Is there something that's sort of deemed run rate operational, maybe it's tied to clearing?

The component related to our securities for a land operations which don't add back.

Okay. That's all I had.

Thank you.

Thanks Jeff.

Thank you all for joining us today. As always, feel free to reach out to Investor Relations if you have a further questions.

Have a good day.