Q3 2019 Earnings Call

I think this call live on our website.

With me today, our Jerry Schwartz, Chris Kevin and other members of our leadership team.

Earlier. This morning, we issued our third quarter 2019 press release, and DNA and consolidated financial statements, which are available on the shareholder section of our website and have also been filed on SEDAR.

Our supplemental information package is also available on our website.

As you may recall at the beginning of the year, we determined onyx met the definition of an investment entity as defined by FRS 10. This change in status has fundamentally changed how we prepare present and discuss our financial results. It's important to note that periods ending on or before December 30, Onest 2008.

Teen have not been restated to reflect this change.

Accordingly readers of our third quarter materials should exercise significant caution in reviewing considering and drawing conclusions from period to period comparisons and changes as the comparisons across periods can be inappropriate or not meaningful if not carefully considered in this context.

As a reminder, all references to dollar amounts on this call on us unless otherwise stated and must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward looking statements contained in today's presentation and remarks.

With that I'll now turn the call over to Jerry to discuss our recent activity.

Thanks, Emily good morning, everyone.

Today, I'll provide an update on our activity within our private equity or private credit and our wealth management platforms.

In private equity, we've been really quite active with monetization so far this year.

We've realized about $775 million.

Of which approximately 70% was received in the third quarter.

The majority of this came from the Onyx partners for sale of Jack's family restaurants.

Which will have the way generated a terrific results with the gross return of 3.6 times, our capital and 38% IR.

We spoke about this on our last call so I'm not going to revisit today.

Our other realization activity in the quarter came in the form of secondary offerings at both Clariphy analytics and Sig calm good luck.

These businesses have together driven great value over the years as well as in this quarter.

And today represent our largest private equity holdings.

As you know our funds typically acquire control positions and we focus on execution rather than macroeconomic trends.

This allows us to drive important strategic decisions and defect change at the operating businesses. This takes work and time.

The results are rarely immediate but like everything we do we're focused on the long term clarity and Sig a pretty good examples of when we can do that well.

With Clariphy, which was acquired in 2016, we spent the first full two years of our ownership.

Beefing up the management team and working to successfully car of the company out of Thomson Reuters.

We also began the process for enhancing the organization's commercial capabilities.

By investing units will know in products and streamlining its cost structure.

In addition to that we completed three tuck in acquisitions and divested one division.

As Sig our thesis in buying it was based on working with the management to implement and secure cost savings.

And to improve the effectiveness in particular that sales force.

This is exactly what we focused on through the first three and a half years of our ownership.

We also accelerated growth.

Through geographic expansion and work to investing and innovate the company's portfolio.

Within the last years so.

Each company has gone public and has returned to us a significant amount of capital.

We've realized about half of our initial investment in clarified and more than 70% of or invest in these sig in the form of secondary offerings.

Based on closing prices at September 30.

Including realizations to date.

Our investments are each valued.

Both of these companies at more than two times our cost.

We're really happy with these outcomes.

We remain the largest shareholders of Clearvale and Sig.

And hold about $1.4 billion of public market shares in these companies combined.

We're excited to work with management of these companies on their respective growth trajectories.

Let me now look at the investing side we've deployed.

$155 million of capital in our private equity platform. This year and that of course doesn't include Onyx five Onyx partners fives.

Pending acquisition of Westjet Airlines.

Oncaspar completed its eighth investment with the acquisition of the International language Academy of Canada, known as Eyelock.

Which is the largest provider of English English language training in Canada.

Let me move on now from private equity to our credit platform.

At the credit platform, we currently manage approximately $12 billion of capital.

This is an increase of approximately 14% in the first three quarters of 29 team.

In the third quarter, we closed our 17th use COO and started warehouses for our next us and European vehicles.

Conditions, though for new close of being challenging.

Funding costs, so be moving higher credit spreads for the loans that we like to invest in have remained constant.

We are taking our time, finding the right assets that meet our risk return profile.

Slowly, but surely we're building up.

These warehouses for new clothes.

We're focused on growing our credit team.

More specifically, we're building out our origination capabilities for private debt platform.

We have two new people enjoy who joined US last month and that brings the origination team to five and we expect to add a couple more people to round out our expertise in the next few months.

I'll now provide an update on our wealth management platform.

Can chef.

Having completed our first full quarter of ownership of very much I'm happy to say.

The outflows we saw in the first half of the year have slowed significantly.

Client capital under management is up 1% for the quarter.

As investment performance offsetting a modest net outflow.

We've begun to introduce senior debt from Onyx credit to the gluskin.

Clients and thus far we've got we've received a really nice reception and they've invested a significant amount of money.

We've also begun to expand our wealth planning services.

We have two new team members, joining us and expect several more hires in the coming months.

The reason for this is the thoughtful planning and Onboarding of new clients is an important value added service for gluskin clients.

As well, we're just beginning the integration of gluskin and Onyx support functions will have more to talk about on that in the coming quarters.

So to wrap up we've had a good quarter monetization activity.

We continue to have a strong balance sheet with about 1.6 billion of cash and near cash.

And they have more than 5 billion of committed Uncalled third party capital available.

To deploy in new private equity investments.

We've also been laying the building blocks to support growth and to build value within our credit and wealth management platforms.

One last comment.

One of the cultural facets of Onyx is our teams alignment and personal investment in everything we do today, our team is $1.9 billion invested across our private equity platform.

Onyx credit.

Gluskin product and Onyx shares.

We all share in the risks and hopefully the rewards of our business together, we're focused on one thing and that is growing shareholder value.

Let me now turn the call over to Chris.

Thanks, Jerry and good morning, everyone.

Onyx reported net earnings of $100 million or 99 cents per share in Q3.

As I've noted in prior quarters My focus during these calls will be on segment earnings, which we believe best reflect on axes results.

On the segment earnings are computed before deducting stock based compensation and the amortization of intangibles and most of our pp any.

We've defined segment earnings this way to be comparable to the basis on which many of our publicly traded peers report and to be consistent with how we manage our business.

Q3 segment earnings were 131 million or $1.27 cents per share.

As has been the case in every quarter. This year Q3 segment earnings were driven by the investing segment, which contributed one dollar and 26 cents per share.

Our next continues to have the vast majority of us investing capital at work in private equity. So investing segment earnings will typically depend on the performance of our private equity funds.

A 4% gross return from Onyx is private equity portfolio in Q3 resulted in $146 million of net investment income.

The returns were primarily generated in Onyx partners for which contributed a gross value increase of $235 million.

Q3, the continuation of a solid year for Onyx private equity with a gross return of 15% in nine months.

The private equity gains in the quarter were partially offset by net losses on our credit investments of $18 million.

Most of this is attributable to mark to market losses on CLL equity, which was negatively impacted by a somewhat weaker quarter for the broader loan market and lower demand for structured credit.

But as those of you were at our Investor Day last month to know we focus on our COO platforms cash flow not mark to market fluctuations in the value of the investments.

And on that basis Q3 was another steady quarter for the CLL platform.

21 million of regular quarterly distributions and $11 million of management fees.

So 32 million of gross cash in the quarter on a little less than $500 million have invested capital.

This next scheduled details on X is shareholder capital at quarter end and provides Q2 and year end to bounce for comparison.

As you can see.

Theres not been any fundamental shifts in on excess capital allocation.

However exposure to private equity did decrease in Q3 to just over $3.9 billion, mainly due to $540 million of realizations, including the sale of jacks and the clarity and Fiveg secondaries, which Jerry discussed earlier.

These distributions from the funds were partially offset by net value increases primarily an LP for.

Looking near the bottom of the schedule you'll note that the total investing capital has only slightly increased from the hard and Avi we reported at year end.

However, as I noted last quarter and at Investor Day, Theres. Some onetime items that are making strong year to date investing results a little hidden.

Once you make the necessary onetime adjustments the changing in investing capital is principally the result of our year to date investing segment earnings.

596 million or $5 in 79 cents per share, which represents a 10% return year to date a.

A strong nine months.

With that I'll move on to the asset in wealth management segment, which generated net earnings of 1 million or one cents per share in Q3.

The private equity asset manager incurred a net loss of 1 million dollar Q3 down from a net contribution of $17 million in the prior quarter.

This decrease was the result of a 17 million dollar reversal of Mark to market carried interest due to net decreases in the value of Onyx partners three.

Since we're not yet accruing carried interest in Onyx partners for the net increases in that funds portfolio did not generate kerry to offset the carry reversal from fund three.

The other item of note in the quarter is a 9 million dollar contribution from wealth management. The first full quarter. Following our acquisition of glass can shop on June Onest.

Plus can chef added run rate management fees of about $72 million, bringing the segments annual run rate management fees to 328 million.

As Seth laid out in his Investor day presentation based on these run rate fees and a normalized level of private equity carried interest the perspective annual contribution from our asset in wealth management segment is about $135 million and we're working to grow that going forward.

That completes my comments on the quarterly results, we'd now be happy to take any questions.

Thank you.

To ask a question you would need to press star one on your telephone to draw. Your question press the pound key please standby, while we compile the Q and a roster.

And our first question comes from Nick Creep with BMO capital markets. Your line is open.

Okay. Thanks, I wanted to start with the pair questions on two of the operating companies.

I'll start with park Dean I noticed there was another sequential improvement in their earnings.

On a quarter over quarter basis is the inference there that the company had you kind of experienced a better peak summer season with respect to bookings in occupancy or is there anything else that's driving that performance maybe on the expense side that we see where yes. It was a look as Bobby it was a little bit of both we had we did have better bookings in the summer we had better on park spend.

And Steve Richard the New CEO has implemented some cost saves so we havent had nice year over year growth and we hope to see that same type of growth in 2020 has that business seems to be on a better track.

Okay got it and then another thing that stood out to me was theres pretty sizable decline in the net debt position of care stream health on their balance sheet. It just struck me as a better sequential improvement than I would've expected the quarterly cash flow to contribute organically. So.

I don't know it would just something has trivialise some favorable working capital changes, but I was wondering to get to that hit a little late there on the improvement in yes, we had an asset sale would have a division of our medical digital business and those proceeds were used to pay down debt.

Got it got it okay.

And then last one for me this is where approaching year end here.

We live in a very strong.

Year for equity credit markets, we just wondering if you're.

Turning to to get better visibility to the performance the potential for gluskin chef just given that a lot of those these are mostly crystallized at year end.

Yes, I think we'll be commenting on.

Performance fees.

Season, there was driven by.

Public markets and public markets can go up and down.

So we will consider them in the bank lender in the back.

Yeah, Okay fair enough alright, thanks, taking my questions.

Thank you and as a reminder.

If you would like to ask a question press star one on your telephone until withdraw your question press the pound key.

And we have a question from Paul Holden with see RBC. Your line is open. Thanks. Good morning, just have a couple of questions based on some comments that Chris Coleman made.

The first one is really related to lower demand for.

Structured credit maybe you can just expand on that point and what's driving lower demand for structured credit.

Yes, Hi, it's obviously for speaking in response Paul.

I don't think there was anything fundamentally changing in the market. It was more of a marginal change I think in terms of people's risk appetite.

For structured credit.

Which which had the close slightly under perform what you would have expected if you simply extrapolated the performance of the broader loan index. So I don't think theres anything significant a foot there, but there was just to sort of a slight change I'll say in the relative yields are the people are demanding from structured credit versus more.

Our traditional or higher rated credit.

Got it so it's not structural and your take on it is it's marginal versus significant in terms of fee risk pricing for this asset category.

Yes, thats right because just to put it in contact I think the CS leverage loan index was up like.

And you on an annualized basis kind of in the 3% or 4% range in the quarter, but as you know that class yields five or 6% or more.

So although it was up it was actually up less than at yielded which really means that pricing was off a bit. So you should expect that the close were off a bit on a mark to market basis and that was just a bit more than you would have expected because of the other issue.

Okay. That's helpful. And then second question is related to the carried interest reversal and Opie three what was driving that.

Yes, just mark to market ball.

But we're in a position where.

Well essentially most of our carried interest that thats a crude lies in opie three.

Whereas we're not yet accruing carry an old before so we had nothing huge but on an overall basis there was a net.

Mark to market right down across the the LP three portfolio in Q3 and not just flows through.

Onyx is eight points of carry on that fund just flows through the reversal of carry in the quarter right and that's on publicly traded companies, including including publicly traded yes, yes.

So it was there some kind of markdown on non publicly traded the privately held.

Yes, I think if you do the math, it's not all attributable to the public investments. So there were some relatively small write downs in other parts of the portfolio, but as you know, we mark our portfolio to market every quarter.

We don't have a rule of trying to keep things marked at the same level. They were at the quarter before we take a fresh look at everything each quarter and so small fluctuations are going to happen across across the portfolio every quarter sure got it.

And then one final question for me and this is more of a macro on and it's probably ask this question two or three times in past calls, but good asking again.

Yes, China.

Trade related taros potential for terrorists now maybe to get reversed.

Your minus just what has been the impact if any from existing tariff.

And therefore is there any potential benefit head tariffs are unwound here.

Thanks Partners perspective, the tariff issue has been relatively small it where there would be a slight benefit for one or two of the businesses that were to be resolved, but nothing meaningful.

On the uncapped side.

Yes, we have a.

You businesses with probably a concentration in on cap for where there is an impact from the tariffs weve tried to mitigate the impact through price increases and and and and cost reductions.

From vendors and value engineering as certain products.

So we've done our best to try to offset that to the extent that theres, a reversal that will be a benefit.

Got it okay. Thank you.

Thank you and as a reminder, if you'd like to ask a question press star one.

That concludes our question and answer session I'll now turn the conference back to Jerry Sports.

Thanks, everyone for participating today, we appreciate your support and as always feel free to contact Emily if you have any questions.

We're looking forward to speaking with you again next quarter and in the meantime enjoys is absolutely gorgeous throttle holiday.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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