RF Capital Group Inc.

Harris Fricker - President, CEO & Director Deborah Starkman - CFO & Corporate Secretary

Thank you. Good morning and thanks for joining us as we walk through GMP's second-quarter results.

With me this morning is Deb Starkman, our CFO. Before we get started, I would like to remind you that this call is being webcast and will be available for subsequent replay.

Our remarks and answers to your questions today may contain forward-looking information and actual results could differ materially. Forward-looking information is subject to numerous risks and uncertainties.

Certain factors or assumptions applied in forward-looking information can be found in our 2017 AIF and are second quarter MD&A. These documents are available on our Web site and also on sedar.com.

Improved net income performance this quarter highlights the benefits of the firm's enhanced operating leverage and the continued momentum in emerging industries, namely cannabis. Adjusted net income of just over $4 million was up dramatically despite a revenue backdrop that remain relatively flat.

The second quarter started slowly as lingering volatility and uncertainties caused investors to hit the pause button. This was followed by the inevitable flight of perceived safety and large-cap stocks resulting in muted activity in the small to mid cap space, thus negatively impacting performance of our trading business.

However, capital markets activity namely underwriting, gradually improved with GMP leading notable deals in the cannabis and mining sectors. We are encouraged that this capital markets momentum has continued into the third quarter with investment banking revenue expected to be up notably from Q2 levels.

Heading into the traditional dog days of summer, the improvement is broad-based, not only in emerging industries, but also in our traditional areas of strength in mining and energy. Notable contribution is expected from block chain with the closing earlier this week of the much anticipated transaction for the crypto merchant banking firm, Galaxy Digital.

GMP clearly remains at the forefront of this emerging industry. With that, let's take a closer look at our results for the quarter.

As mentioned in my opening remarks, total revenue of $43.8 million was largely unchanged from Q2 last year. Lower commission revenue and interest income in our stock borrowing and lending business was largely offset by higher principal transaction net gains.

We reported adjusted net income of $4 million in the quarter and adjusted diluted EPS of $0.04 leading the way with growth in our Canadian capital markets franchise and the ongoing profitability and growth from our partners at Richardson GMP. Our results reinforce our ongoing commitment to deliver positive operating leverage and the benefits of strong collaboration with Canada's leading independent wealth management firm.

Turning briefly to the first half of 2018, where a 32% increase in adjusted net income from first half last year was led largely by a 35% increase in investment banking revenue and operating efficiencies and profitability at Richardson GMP. GMP's adjusted net income was $11.4 million in the first half of 2018, up notably from adjusted net income of $8.6 million recorded in the first half last year.

Adjusted diluted earnings per share was $0.12. Let me now discuss the quarterly financial highlights for each of our business segments.

Capital markets reported adjusted pre-tax earnings of $5.7 million, up from $2.6 million in Q2 last year. Total revenue of $40.1 million for the segment decreased 3%, while total expenses excluding last year's impairment charge, decreased 11% over the same period.

The decrease in revenue was largely driven by lower commission revenue and lower interest income in our stock borrowing and lending business. The decrease was offset by higher principal transactions net gains.

Investment banking revenue was largely unchanged from Q2 last year. Let me expand further on these items.

In investment banking a decrease in M&A revenue was offset by a rise in underwriting revenue, which benefited from stronger activity in cannabis and mining. While revenue in our healthcare and cannabis sector grew 127% to just over $10 million this quarter, we also saw 13% revenue increase in our mining practice.

It is worth noting that while GMP recorded an increase in underwriting revenue from Q2 last year, the value of industrywide common share underwriting transactions was down 35% over the same period. We believe the market remains fairly constructive for investment banking business heading into the second half of 2018, with notable deals that include Galaxy Digital, Klondex Mines and Raging River expected in Q3.

Importantly, rebounding energy prices and progress on the pipeline file are potential catalysts for increased deal activity in the Canadian oil patch. Additionally, this October, Canada will become the first G7 nation to legalize the recreational use of cannabis.

This will provide Canadian cannabis companies a significant competitive advantage over the U.S and global counterparts. GMP is proud to play the pivotal role in the evolution of many Canadian producers into world-class companies in the cannabis space.

Principal transactions generated net gains of $3.8 million this quarter, up from net gains of $2.8 million in Q2 last year. This increase was led primarily by higher returns on principal inventories, partly offset by lower fixed income client trading activity in our U.S operation.

With that, let's turn to wealth management. Richardson GMP recorded adjusted EBITDA of $13.2 million this quarter, up from $11.5 million.

Revenue of $74.7 million increased 6% over Q2 last year. This increase reflects higher interest income and higher investment management fees on higher assets under administration, which ended the quarter at just over $30 billion.

Total team count stands at 172, with average assets per advisory team of nearly 176 million. Richardson GMP remains a market leader and is widely recognized as Canada's leading independent wealth management business.

The business is profitable and growing. With that, I will turn the call over to Deb to discuss expenses.

Thank you, Harris. Total expenses of $43.1 million this quarter decreased 57% compared with Q2 last year.

You will recall that our Q2 last year included a $52 million noncash goodwill impairment charge recorded in capital market. Excluding this item, expenses decreased 10%.

This decrease largely reflects slower employee compensation and benefits expenses, down 9% from Q2 last year. This was led largely by a 24% decline in share based compensation in connection with the expiration of certain incentive arrangements and a 7% drop in variable compensation.

Also contributing to the decrease was lower non-compensation related expenses which decreased 13%, primarily due to reduced trade relating costs commensurate with lower client trading volumes, decreased business development expenses and lower interest expense in connection with weaker stock borrowing and lending activity in the quarter. Over the past several years, we’ve been disciplined with respect to discretionary spend and other fixed costs in our pursuit of operational efficiencies.

These efforts are ongoing and clearly evidence our commitment to remain in operationally lean. And as always, we continue to be prudent managers of risk, while safeguarding capital and liquidity.

During the first half of 2018, we purchased 1.5 million common shares under our NCIB, generating gains of $2.2 million in shareholders' equity. As communicated previously, we will utilize our NCIB when we believe it will enhance value to shareholders.

And I will turn it back over to Harris for closing remarks.

Thanks, Deb. As we move into the second half of the year, there are numerous indicators that give rise to optimism.

These include strong working capital position, combined with the benefits of an operationally lean and agile franchise, ongoing profitability despite operating through some of the worst conditions in decades, increasing signs that capital markets activity will be robust in the back half of the year, rebounding global energy prices and a covenant strategic asset in Richardson GMP. As always, we will continue to focus on driving revenue opportunities by building on our solid foundation.

It is our belief that GMP is clearly moving in the right direction. That concludes our remarks this morning.

Thank you again for joining us today.