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Edited Transcript of GMP.TO earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 GMP Capital Inc Earnings Call

TORONTO May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of GMP Capital Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah J. Starkman

GMP Capital Inc. - CFO and Corporate Secretary

* Harris A. Fricker

GMP Capital Inc. - CEO, President and Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to GMP's First Quarter 2017 Conference Call.

I would now like to turn the meeting over to Mr. Harris Fricker, Chief Executive Officer and President. Please go ahead, Mr. Fricker.

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Harris A. Fricker, GMP Capital Inc. - CEO, President and Director [2]

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

With me this morning, as usual, 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 to forward-looking information can be found in our 2016 AIF and our first quarter MD&A. These documents are available on our website and on sedar.com.

This quarter saw the return of challenging conditions for generating revenue across businesses. Following a more accommodating market environment during the fourth quarter, particularly in energy, investor conviction and risk appetite waned in the quarter. This resulted in subdued business activity, as clients once again headed to the sidelines. This quarter is a strong reminder that the market environment is dynamic and can change quickly. In particular, activity in our advisory franchise was down considerably compared with the strong first quarter last year. In fact, industrywide M&A transaction volume was down 32% year-over-year. That said, there were several bright spots for the quarter, including the performance of our equity commission business post the FirstEnergy acquisition, a notable year-over-year increase in equity underwriting revenue led by our energy and real estate franchises and the strong quarterly performance at Richardson GMP.

With that, let's take a closer look at the results for the quarter.

Total revenue of $49 million increased 7% from Q1 last year. Included in our results this quarter were $7.7 million in dividends received on our preferred share investments in Richardson GMP. In our core activities, higher commission and underwriting revenue were offset by lower advisory fees and lower fixed income trading revenues.

We reported adjusted net income of $7.1 million in the quarter and adjusted diluted earnings per share of $0.07. As I mentioned last quarter, our performance clearly evidences that we are realizing the benefits of the substantial cost-cutting efficiency measures undertaken over the past 2 years.

Let me now discuss the quarterly financial highlights for each of our business segments.

Capital Markets reported adjusted pretax earnings of $1.7 million, largely reflecting the increased operating leverage built into the business. While revenue of $38 million for this segment was down 13%, total expenses were down 19%, which is precisely the relationship we have worked so hard to achieve. The year-over-year decrease in revenue is largely driven by a 29 decrease -- 29% decrease in investment banking revenue and lower fixed income client trading activity in our U.S. operations. These decreases were partly offset by improved commission revenue following a strong contribution from GMP FirstEnergy.

Let me expand further. Performance in investment banking was mixed this quarter. On one hand, revenue in our advisory franchise was down 78% compared with Q1 last year. This reflects lower client activity following a strong fourth quarter during which a number of deals were consummated from our backlog. On the other hand, we saw a 40% rise in underwriting revenue led by our energy and real estate franchises. GMP Securities led or co-led 15 underwriting deals completed in Canada this quarter valued at $530 million. As I look forward, the investment banking pipeline remains fairly robust, as clearly conditions for a strong advisory and underwriting cycle remain in place.

One of the bright spots I mentioned in my opening remarks is equity sales and trading, where commission revenue increased 29% to $12.1 million for the quarter. This business has clearly benefited from the addition of the accomplished energy professionals at GMP FirstEnergy. Our equity business is also benefiting from the increased trade flow that typically arises from underwriting transactions. Following the addition of GMP FirstEnergy, we are now one of the most active traders of energy, in addition to our traditional strength in mining.

Principal transactions generated net gains of $8.2 million this quarter, down from net gains of $10.5 million in Q1 last year. This decrease was led primarily by lower fixed income client trading activity. Fixed income trading revenue dropped to $7.6 million this quarter as very low levels of volatility contributed to subdued client activity. We continue to believe there is meaningful upside in terms of activity levels in this business given its very low capital intensity.

With that, let's turn to the Wealth Management segment, where Richardson GMP recorded adjusted EBITDA of $11.3 million. Revenue of $77.4 million was up a notable 18% from Q1 last year, largely due to higher commissions and investment management fees on increased client activity and a 12% year-over-year increase in client assets. Since year-end, they grew AUA by $400 million, ending the quarter at just under $30 billion of AUA. This increase largely reflects net new client assets. Total team count now stands at 191, with average assets per advisory team an industry-leading $156 million. By any measure, Richardson GMP is Canada's leading independent wealth management franchise.

With that, I'll turn it over to Deb to discuss expenses.

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Deborah J. Starkman, GMP Capital Inc. - CFO and Corporate Secretary [3]

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Thank you, Harris.

Total expenses of $45.6 million this quarter decreased 8% compared with Q1 last year. It's worth noting that this quarter included $3.4 million in share-based compensation in connection with the unvested common shares issued to former FirstEnergy shareholders following the completion of that transaction late in Q3. The costs of those unvested shares will be recognized over a 4-year vesting period for accounting purposes and are being recorded in our Corporate segment. Excluding the impact of this incremental share-based compensation, which we consider as part of the purchase price paid notwithstanding the accounting treatment, total expenses was decreased 15% year-over-year. This decrease reflects lower variable compensation commensurate with decreased revenue generation in our Capital Markets business.

Fixed salaries and benefits are down [27%] despite the addition of GMP FirstEnergy and reflects the headcount reduction in connection with substantial restructuring in our Capital Markets business over the past 16 months. As mentioned during previous calls, the annualized run rate savings from these initiative is approximately $50 million, which represents roughly a 22% reduction to our expense line. However, it's worth repeating that keeping a close eye on expense creep is now simply part of the ongoing discipline of running our business. Given the increased competition from bank loan dealers and the thinning of the ranks amongst -- among Canadian independent players, we understand the importance of maintaining a lean business and safeguarding capital and liquidity. Like any business, there is always room to do things better, and we are committed to delivering on this to our clients and shareholders.

And now I'll turn it back over to Harris for closing remarks.

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Harris A. Fricker, GMP Capital Inc. - CEO, President and Director [4]

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Thanks.

Our results the past 2 quarters evidence the considerable operating leverage in our business and the strength and resilience of both our Capital Markets and Wealth Management franchises. It is no small feat that in the current environment to have generated adjusted diluted earnings per share of $0.07 per share in each of the past 2 quarters. Our performance, while not where we would like it to be, evidences we are on the right path to have considerable operating [port] to an upturn in the market environment. However, this quarter's business activity highlights how quickly market conditions change from quarter to quarter. We are confident that efforts to strengthen our franchise over the past 2 years will prove meaningful to our longer-term performance. It is these factors that have allowed us to be profitable in what can clearly be characterized as a challenging quarter for capital markets. Through our actions over the past 2 years, we believe we have built a dominant, independent player in the Canadian small- to mid-cap market. We continue to manage our expenses closely and, as always, our focus as prudent managers of capital and risk.

This concludes our remarks this morning. Thank you again for joining us today.

As a reminder, we will be hosting our Annual General Meeting of Shareholders at the Calgary Petroleum Club this morning, at 10:00 a.m. Mountain standard time. A slide presentation and live audio webcast will be accessible on our website. We look forward to seeing you there.

Thanks so much.

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Operator [5]

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