RF Capital Group Inc. (RCG) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the RF Capital Group Second Quarter 2025 Earnings Results Conference Call. As a reminder, today's call is being recorded and in a listen-only mode. I would now like to turn the meeting over to Francis Baillargeon, Chief Financial Officer. Please go ahead, Francis.

Thank you, and good morning, everyone, [ Boma ] and welcome to RF Capital's Second Quarter 2025 Earnings Call. My name is Francis Baillargeon, and I am the Chief Financial Officer. 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 cedarplus.ca. Today, we'll provide a brief update on our second quarter 2025 performance and some comments on our plans going forward. I will cover our detailed financial results and outlook and also offer some brief remarks on the transaction we announced earlier this Monday, July 28 with iA Financial Corporation. As a reminder, we are happy to answer any questions from analysts or shareholders, which you can be directed to our Investor Relations team in Mailbox. Their contact information can also be found at the end of our earnings press release. I will now provide a review of Q2, including an update on our 3-pillar strategy. Under Pillar 1, strengthening support for our advisory teams, our focus remains squarely on executing 2 overarching goals. #1, making it easier for our teams to work here so they can provide superior client advice and service; and #2, enabling our teams to grow more valuable practices. To make it easier to work here, we are dedicated to creating middle office excellence, which is delivered through our adviser service center and Fidelity Clearing Canada. I am pleased to advise that all our teams except for those from 1 branch, have now been onboarded to our new dedicated middle office model. This means our teams now have relationship managers providing end-to-end ownership for all operational issues. They are essentially responsible for carrying the baton to the finish line. Since the start of this initiative, the overarching objective of middle office excellence is to make it easier for our teams getting things out of their way so they can focus on more client-centric activities and repeating success for consistent service experience. Since launch, we have seen a significant decrease in turnaround time on problem resolution, an increase in the quality of responses and the ability for the relationship managers to handle 80% of the issues without requiring any involvement from Fidelity. These are indicators that we have the right people bringing a higher caliber of service to our team. It's a real win. With enabling our teams to grow more valuable practices, we continue to enhance our digital platform by adding tools that enhance capabilities in our toolkit. We recently entered into an agreement with CapIntel to offer support to advisers with their prospecting activities. CapIntel gives advisers the means to create dynamic and customized proposals along with the ability to provide instantaneous comparisons between existing and optimized portfolios. FactSet is another tool we have invested in. This is a best-in-class market data tool that combines research analytics and content along with streaming real-time data in a single platform. We are now also engaged with Salesforce. This provides a suite of tools for various business functions, including sales, service and marketing. I think, it's a central hub for managing data and interactions, Salesforce will enable our advisers to build stronger connections and improve the client experiences. These are the nuts and bolts of our vision to deliver a fully integrated adviser digital workstation that will ultimately provide seamless access to all core tools, applications and data in a unified user-friendly single pane of glass interface. Empowering advisers to work efficiently and collaborate effortlessly. We'll also drive productivity by reducing the amount of swivel chair activities by creating a single location to look for information from across different platforms. This work, which addresses the need for an integrated desktop experience aligned with business, regulatory and technology objectives is expected to increase efficiency, lower operational risk, create a higher IRI on digital tools and provide faster and personalized client service. We began this journey in May by identifying the capabilities and processes to improve upon. Into next year, we will begin our technology adoption and integration. And going forward, we will continue to enhance integration of this technology stack and we expect advanced digitization with high levels of automation and connectivity. This adviser digital workstation is part of the continued execution of the 2 overarching goals under our first pillar to strengthen adviser support, making it easier to work here and helping our advisers to grow more valuable businesses. As our go-forward strategy, it's also something we'll continue to report on in the coming quarters. Moving on to Pillar 2. I want to touch on recruitment, which remains the key driver of our growth strategy. While we did not onboard any new teams in Q2, we were pleased to welcome a new Senior Adviser from a bank-owned dealer on July 14. However, we continue to have engaging discussions with advisers, who are aligned to our culture and our long-term goals and anticipate that we will be extending invitations to many in our very robust pipeline. In Q2, we gathered a group of our highly engaged advisers from across the country in our Toronto offices to help develop an enticing message targeted at advisers from other firms in these videos, which will appear in social media in September, our advisers talk in their own words, about the power of partnership, our deep-rooted entrepreneurialism, our culture, our company brand and our digitization. Our brand is also portrayed in a unique way, which we believe will help differentiate Richardson Wealth from our competitors. Finally, with respect to our third pillar, which is acquiring or partnering with like-minded firms, the situation remains unchanged. As a reminder, to execute successfully on this, there are many dependencies, including the availability of targets. The target's price expectations, our own share price, economic stability and our access to other forms of capital. As always, we'll continue to be open to opportunities to work with parties that will align with our strategy and in ways that will generate value for our advisers, clients and shareholders. I'll now touch on our financial results, highlighting positive momentum in our business. We ended the quarter with AUA of $40.4 billion, up $3.2 billion on the year on the back of supportive equity markets. This quarter, adjusted EBITDA was $10.7 million and free cash flow available for growth was $1.8 million. These results show an upward trend from the first quarter of 2025. For the second quarter of 2025, RF Capital reported $89.3 million in revenue, a decrease of 2% as compared to the second quarter of 2024. Fee revenue was up 6% due to higher average AUA. Non-fee revenue was down with corporate finance revenue decreasing 30% from lower underwriting fees and new issue commissions. Interest revenue decreased 21% from a decline in benchmark interest rates and insurance revenue declined 24% from lower sales activity compared to the second quarter last year. Adjusted EBITDA was $10.7 million in Q2, 2025 compared to $15.1 million in Q2, '24 but was up $1.2 million from Q1, 2025. Operating expenses were flat year-over-year as higher carrying broker charges and the absence of a $1.5 million recovery compared to Q2, 2024 related to a legacy legal matter were offset by mark-to-market on share-based compensation. Operating expenses were down $7.3 million from Q1, 2025 due to cost discipline seasonal factors and lower mark-to-market expenses. Q2, 2025, our closing 5-day volume weighted average share price decreased, resulting in a mark-to-market recovery on the revaluation of our share-based compensation liability of $1.3 million compared to a $0.2 million recovery in Q2 of 2024. Discretionary expenses also decreased from the second quarter of last year, primarily driven by lower spending on consulting and conferences. 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 second quarter of 2025, we generated $1.8 million of cash flow available for growth, down from $8 million last year, primarily due to lower 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 investments. RF Capital had a free cash flow usage of $0.2 million in Q2, 2025 as compared to $1.9 million of free cash flow generation in Q2, 2024 that was driven by decreased cash flow available for growth and higher expenditure on real estate initiatives, partly offset by lower adviser loan payments. Turning to our outlook. I will speak to some of the drivers of our revenue and profitability as we see them today. For the rest of 2025, 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, including U.S. trade policies and tariffs. Interest revenue is impacted by primary trends, which economists expect to continue to decline throughout the rest of the year as well as client cash and margin loan balances. 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 also continue to be subject to mark-to-market expenses on RSUs and DSUs. In particular, our mark-to-market expenses increased as our share price increases, which if the trend holds, will have a meaningful impact on our financial results for Q3. Cash flow for growth will be driven by the factors just discussed and will primarily be deployed towards adding new advisers to the Richardson Wealth platform. Capital expenditure is expected to continue at normalized levels. We will now also touch briefly on the transaction that we announced this past Monday. RF Capital Group announced that it had entered into a definitive agreement to be acquired by iA Financial Corporation, a Canadian insurance and wealth management company. The proposed transaction contemplates the purchase by iA of all of the issued and outstanding common shares of the company for $20 per share in cash by way of a plan of arrangement under the Business Corporations Act of Ontario. The total consideration is $597 million, which includes $370 million for the acquisition of 15.6 million common shares and have issued an outstanding and $2.9 million of share-based compensation instruments as of June 30, 2025, subject to adjustment in connection with any valid exercise rights of descend by shareholders. This total consideration also includes $227 million for the outstanding portion of revolving debt and preferred shares. Pursuant to the arrangement agreement, the purchaser will also acquire all of the issued and outstanding cumulative 5-year rate reset preferred shares Series B of the company. More information is available in our press release relating to this transaction. Closing of the transaction is expected to occur during the fourth quarter of 2025, subject to the receipt of the required approvals from the company's common shareholders and certain regulatory approvals as well as the satisfaction of other customary closing conditions. Dave Kelly will continue to serve as President and CEO of RF Capital through completion of the transaction and remains committed to executing the company's strategic plan and ensuring a smooth transition of the business following the closing. As I mentioned, further information about the proposed transaction is available on our website, and we encourage all shareholders to review all materials published by both iA and RF Capital related to this transaction. More detail will be available in our upcoming circular we expect to be mailed to shareholders towards the end of the month of August. We expect to call a shareholders' meeting to be held by the end of September for shareholders present in person or via proxy to vote each of their common and/or preferred shares in regards to this transaction. This transaction marks an exciting milestone for everyone at Richardson Wealth, brings a great future for our advisers, clients and colleagues and provides exceptional value for all shareholders. Our Board of Directors after receiving fairness opinions from 2 financial advisers, unanimously recommended the transaction to shareholders. Before we conclude, I have a couple of additional comments to add. Once again, we are proud to be recognized by Great Places to Work. For the sixth time now, Richardson Wealth has received the best workplaces in financial services and insurance recognition, a testament to our collaborative workplace culture. We have also just been named a best workplace for inclusion and an accolade that speaks to our practices, policies, people and culture. And last month, Investment Executive Magazine released their annual brokerage report card results. As you may know, this survey is an important public barometer of the perceived quality and reputation of Canadian wealth management firms has garnered a great deal of industry attention over the last several years. And as a result, it's an important tool used extensively by acquisition teams hours included. I'm happy to share that this year, our overall rating went from 8.6 to 8.8 out of 10. Our Net Promoter Score, which reports our advisers' willingness to refer other advisers to affirm rose from 58 to 74 out of 100. This survey shows important momentum in many areas, and we feel an undertone of cautious optimism in the results. We believe our advisers are in agreement with the direction we are headed, but remind us that we are not there yet. Another important nuance from this survey is our partnership mindset seems to be having an impact. I believe this is exactly attributable to our open and transparent communication, which happens to be in our one-on-one meetings during our roadshow branch visits, which we just completed last month or even as we pass each other in the hall. This is creating culture of collaboration and alignment, which is, of course, foundational to our future success. As partners, we will succeed if we are aligned and working together towards the same goals. We're looking forward to the year ahead at Richardson Wealth, partnering with our advisory teams and continuing to build on this great momentum. And with that, I will conclude this earnings call. Thank you, everyone, for listening. Once again, please feel free to contact us via our Investor Relations department with any follow-up questions. And we wish everyone a wonderful and in many cases, long weekend. Thank you.

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