Q4 2019 Earnings Call
Good morning, My name is Sylvia and I will be a conference operator today.
I would like to welcome everyone to de lever royalty Corp. Q4, 29, <unk> earnings Conference call. No. That's all lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then number one on your telephone keypad and if you would like to withdraw your question simply press Star then number two.
And I would like to turn the conference with Curtis Kravitz, VP investments and Investor Relations. Please go ahead Sir.
Thank you Sylvie good morning, ladies and gentlemen, welcome to Alaris royalty clubs conference call and webcast to discuss the financial results for the three in 12 months ended December 31st 2019, as well as a brief corporate update Curtis Congrats Vice president of investments and Investor Relations I'm joined on this call today by Steve King President and Chief Executive Officer everywhere.
As well as during fiscal Chief Financial Officer.
For a short presentation from Stephen difference there will be a question answer session to lines will be placed on mute until then to avoid background noise.
Before I begin I'd like to remind our listeners that all months given our in Canadian dollars unless otherwise noted listeners are cautioned that comments made today may contain forward looking information. This forward looking information is based upon a number of important factors and assumptions and as a result actual results could differ materially.
All information concerning the underlying factors assumptions risks.
Well in today in yesterday's press release and Mdna for the period under the headings forward looking statements in risk factors copies of which are available on SEDAR as well as our website.
<unk> for US data is also presented in may differ from the way other companies present, such data as with the forward looking statements. Please refer to last Night's press release, and then DNA for the period for more clarification.
I'll now pass the call over to doctors.
Thanks, Chris.
Our start I gave it a addressing some box and the financial impact at last Friday on February 28, or the conclusion sale a disappointing investment in a sandbox.
Where we were covered all the senior debt, including interest Duane recovered only 9.2 million you asked on the U.S. $40 million a preferred shares in the business.
4.1 million of those proceeds are being held in escrow for working capital adjustments to the 70 allegations and initial 2 million maybe available through an earn out.
But for our financial statements. We have only recorded what we received and we'll look further proceeds from escrow or earn out a as they come in.
So on $40 million, perhaps invested we collected 18 million or distributions overtime.
And that nine plus 9.2 consideration for total return to between minus 28, and 42% depending on future collections, that's an IR between minus nine and minus 16 or in a four year investment period.
The end result, a 35 million dollar U.S. loss on those preferred shares all was recorded in Q4 as we the December 31st with our are fair Fair fair value recording date, and Oh, It made sense with with the February 20 at close to to use that as an anchor.
The only revenue will show in Q1 2020 for sandbox is the interest on the secure data, which will be an immaterial amount is no distribution income was recorded after December 31st 2019.
A lesser concerning the most but a change in our financial statement presentation I. Once we used our stephan rates late in 2018, the accounting accounting treatment changed drastically.
For Alaris, you'll see assets and liabilities held for sale on both sides of our balance sheet, which are the assets and liabilities are sandbox at December 31st 2019, the net of which is what we've received last week.
Further details describing the accounting treatments are provided in a scintillating new note 11.
Hi, Steve will also address sandbox in his comments and other subsequent events on January 7th the successful redemption of SP I.
9.3 million dollar U.S. premium to cost as well as additional U.S. $7 million, a make whole distribution to the third anniversary of the deal those revenues will show up in Q1 2020.
On 85 million dollar U.S. invested a 50% or return and a 22% error and resulted in a significant pay down our debt facility.
As far as our 2019 results go another year record deployment of 193 million.
Two new partners in IMR, and stride and 400 contributions to planet fitness, a significant one unify accidents and others.
Second straight record here for revenue of 116 million, that's $3 or 17 cents a share about 16% increase from the prior year.
Q4 revenue was 30.9 million.
That's up from 25 point Threemillion into Q4 of 18, and 30 million and just this most recent quarter Q3.
As far as partner updates pleased to be sharing is a very positive news news across the portfolio.
LMS is completed Sensationally here and since the distribution from LMS has no color. It does move the needle they are up over 30% year over year. We have you 30% on our fair value in run rate adjustments and will confirm the final reset upon completion of the audit.
SCR continues to steadily improve and monthly distribution a I was just recently increased from 250 amounts to 350 amount.
Active January Onest, two how 2020 and incremental.
1.2 million over I recently, but its started 2018, two and a half million behind where it is today.
Our top of the call resets are expected from GW Heritage Fleet Planet fitness and also DMT after a big fourth quarter for DMT.
VCC continues to impress with an estimated five plus 5% reset and any share that continues to improve faster than we had expected that's approaching 1.5 times.
Set of resources had its first negative reset after three stream plus 6% increases, but that one comes along improving EBITDA EBITDA, which translates into a nice jump in that you see our making that the and even better piece of paper overall I.
Im are performing as expected and and pay the second straight common dividend Q4, and annualize after tax yield of 7% on those are common shares and we do expect those quarterly dividends continue in 2020.
We announced a temporary suspension of the Cc Con distribution starting in February 2020, due to required investment in working capital and we are managing the second distribution month to month, but have removed the full distribution from the estimated payout ratio and report back once more distributions for started but the conclusion of the sprint T mobile merger will be a much welcomed.
Catalyst for the business.
Or all expected net positive resets of 3.7 million or 10 cents a share and the weighted average increase of just under 5%.
The performance metrics.
Doesn't include that extra 1.2 million and are they coming from SCR. So that the new 4.8 million Canadian in revenues from the reset and SCR.
A much larger impact than even a full year of cc calm distributions of aside around 3 million Canadian.
On the fair value front aside from the sandbox loss, there was a small decreased less than half a 1% to the overall fair value of our investments.
Arms related increases to LMS heritage fleet, BCC, and GW and totaling just under 12 million and performance related decreases to kimco cc calm and a small an action totaling just under 15 million.
All of that recorded in the and the fourth quarter.
Transaction diligence costs for the year were 2.8 million compared to 4 million in 2018, which has a bit surprising given another record deployment, but a big portion of that deployment. In 2019 was at current partners planet fitness unified accident, which requires considerably less external financial and legal resources.
Our total cash <unk> expenses were 10.7 million in here down 12% from 12.1 in the prior year each of the three line salary benefits legal and accounting corporate office were down slightly year over year.
Thanks, that's all in very good shape and can currently about 250 million to deploy on our balance sheet.
And so the outlook for 2020 Q1, we're actually got revenue of 34.8 million.
25.5, as our run rate plus that Canadian a $9.3 million make whole revenue received from Sci in early January.
Our current analyze revenue without that extra Sci revenue. This is just going forward from here is 102 million and with expected DNA of 11 million. That's over 90 million of EBITDA on a very manageable current run rate payout ratio at a low nineties.
I'll pass it over Steve if we're going to questions.
Good day.
Great. Thanks Darren.
Obviously aside from sandbox very very pleased with our 2019 records deployment revenue and normalized EBITDA as Darren mentioned, but our fourth quarter reflects they know that very dynamic nature of our business and the things that can occur when you're dealing with with private companies.
What I thought it would be what would be useful today as for our shareholders to learn about what our process is what we go through in terms of our due diligence.
Added review process of investments and the chain of events as it related to sandbox.
So we review roughly 500 investment opportunities every year, which we typically choose between two and five each new investments starts with preliminary due diligence performed by our team of in house and ahead Alaris. It out of our 15 employees 11 of them are there SCPA cfas or lawyers with all with extensive track.
The actual experience.
Once that early due diligence is complete and we are satisfied with what we found that have an agreement with the company on the investment terms, we undergo a formal due diligence process that not only includes our own professionals, but the expertise of third parties that were four alaris.
Ernst and young on the financial side to law firms on the legal Jill due diligence and HR firms are looking to the people side of the businesses.
Over the course of two to three months. The final report has compiled based on the filings of all of these groups and presented to our board of directors at our banking syndicate for final approvals.
[noise] post closing our monitoring team is in regular contact with our partners and receive as detailed financial statements on a monthly basis and audited financials on an annual basis.
All of this information is uploaded in real time material web portal that every alaris employee has access to on any device.
Sandbox and other situations are monitoring staff became aware of problematic situations quickly and in fact much quicker than the banks involved in those files.
In doing this for 16 years now we feel that we've adopted best practices from the private equity industry and more importantly, we feel that our diligence and monitoring practices have led directly to our above market returns over a very large sample size.
Over the 16 years, we've made a compound annual or.
Hey.
A compound annual internal rate of return of 17%, which is outstanding and this incredibly competitive investment environment.
This number was 17% at this time last year and a 17% now even after giving effect to sandbox because of the gains we've had on other investments, including SP in January that is the nature of our business.
As it relates to sandbox, specifically, our monitoring worked well and as well as it could've.
Thats why we were able to act quickly to use our rights and remedies to effect change.
A top advisor was hired by the company to conduct the process the market for potential buyers are surveyed for interested parties at multiple bids were received.
When we last updated our shareholders. We had we had every indication that the process would result, interlayers getting full value.
But from that point until closing the deal was reprice numerous times based on.
Numerous factors.
The number of stakeholders and claims outstanding and a very recent decline in the business, where contributing factors in the final pricing, which is far less than what the original bids were.
[noise], we very much considered walking away from this transaction and staying in the investment, but it was deemed by our management team and board that this company would have required a significant amount of capital to improve the situation still point, where we could have received a material amount more honest sale.
And.
Putting more money at risk in the challenge situation, which is not as attractive attractive to us as redeploying that capital into into new partnerships.
If our remaining amounts are paid out over the next two years that will result in a 9% loss on our investment on an IR basis not a good result, but in the scheme of our overall results from investments. It's also not resolve the changes our track record one bet.
Moving forward, we have a group of partners that are operating at a very high level.
We'll be receiving as Aaron mentioned intense as the share on nude and distributions from our partners based on their 19 result.
And we have at this stage very strong likelihood of again, raising our annual deployment record.
For 2020 based on the pipeline of opportunities that we have visibility on and that are in process right now.
Obviously, the Corona virus has weighed heavily on the markets and our stock and something we're taking extremely seriously.
Looking at our portfolio and possible effects that are growing pandemic could have on our partners. There certainly are businesses that.
But it will impact if it if it's barrels out of control, but I also think that our portfolio is extremely well set up and this kind of scenario.
Our partners have a weighted to earnings coverage ratio of 1.6, meaning that there is 60% cash flow cushion.
Before they would not be making enough money to bear distributions and also many of our partners have no debt. So they are well suited for prospering in difficult times.
So thanks very much for your time today I'll now open it up to questions, but please keep in mind that due to the dispute that we have launched against the founders of sandbox. We will now be able to go into greater detail on the circumstances of that situation at this time, so Sylvia we'll open it up to questions. Please. Thank you Mr. King ladies and gentlemen, if you do have a question. Please proceed.
I will follow by one on your Touchtone phone you will hear eight suite on prompt acknowledging you request.
Should you wish to withdraw your question simply press Star followed by too and we ask that if using your speakerphone, please listen the handset before pricing and the keys.
And your first question will be from Gary homes at the Gentleman capital markets. Please go ahead.
Thanks, and good morning, let me start off with sandbox is quite topical yet I know you're limited in what you can say and given the legal actions, but can you maybe can you comment on whether you had and similar situation way with other companies fully of companies in the past, where you're trying to solve it.
And maybe go go back to that co founders over the owners of the business.
And how that played out it's a similar to kind of SM a few years backwards it completely different.
I think theres theres some similarities there by every case is very different one other things that that made this situation quite a bit better that asset was our our new ability to.
Take over the debt.
And at faster than what we're able to do and in the SMS case, which I.
I think had a direct.
Correlations that getting more value here than than we did with without them, but.
Very different factset here.
Okay, and where that other examples they can point 0.2 other than the FM.
No I think there was a b tele the only to that would be it would be similar.
And then we switching gear on obviously you as you commented to be grown a virus top of mind for investors.
In your portfolio companies operating across I guess, a span of sectors and I guess have you gone to your partners in a sense, what the potential impact could be and maybe stress tests.
We are on or other metrics on the ability to pay distribution if the situation worsened from here.
Yes, we have and will continue to.
It was contributing factor in MCC comp, they're having a tough time getting inventory.
Right now in terms of.
Handsets and tablets.
To sell other stores, so that was certainly a factor in.
Deciding to do not take a dividend from them four hour in the near future here as well as the spread T mobile merger connect letting the that set along the impact of that as well.
But other than that actually think most of our portfolio companies are in in good shape.
No I don't think too many of them are are dependent on on.
Travel or or anything like that.
And to some of our consulting companies like unify some of their because they're based on Seattle, which is a bit of hotspot. Most of their consultants are working from home now so still generating.
Generating revenue, even though there may have changed their their business practices. So we don't we don't see a lot of this quarter or speaking with planet fitness and in a couple of hours I know there.
Probably going to be.
Doing some things that will will help with the current situation, but obviously, it's it's kind of ever evolving on a seems like on an hourly basis or where certainly monitoring it closely.
And maybe ticket the other angle maybe on the positive side are you seeing businesses that might benefit from from this.
Comes mine or maybe you can go or maybe federal resources.
Yes look at Kimco makes sense people are going to want to really clean office, but we havent seen that I don't think that will be a effective.
Evidence I think is the one that.
It has seen a recent uptick.
In where they have some south American manufacturing facilities.
And they have had a mini inbound calls because our competitors with our Asian.
Facilities aren't able to deliver so.
Small benefit, but thats, probably the only bright side of what's going on at that rate now federal reserves as I think is a good point there too.
They provide all different kinds of products and training for first responders, so whether that's yes, municipally or or warfighters internationally. So.
These are the types of things that they do supply, whether there's max or anything else that that can help first responders and inefficient like this it would certainly help federal resources as well.
Got it and then just your last question capital deployment on the market conditions are quite volatile can you provide some color going behind the scenes on the activity level had to slow recently has valuation come off.
Any comments on that would be helpful.
Yes, it's too it's too early to fail on that Gary.
Also a process.
Processes that we've already won.
We're working towards.
I would say one thing on.
This all situation, let's say, it's nice to be in a situation to have a balance sheet as strong as ours is right now with access to as much capital as we have so.
Having the Sci and sandbox.
Sales go through already is is a great thing.
Those deals may have been in jeopardy of if they were delayed any further we're seeing some some transactions getting delayed or canceled because of nervous banks.
And so we're pretty happy to have as much dry powders, we have on our balance sheet thats for sure.
Okay got it and that's it for me. Thank you.
Thank you once again, ladies and gentlemen, if you do have any questions. Please press star followed by one that's Thompson.
Your next question will be from Jamie National Bank Financial. Please go ahead.
Yes. Thank you good morning.
Just want to go back to the sandbox or can you describe some of the a the declines in performance in revenue I anything specific round or around clients are products or anything on that front.
Fortunately cat Jamie Oliver.
Where we've been told by our lawyers not to get into any of those kind of detailed unfortunately I apologize.
Okay. Okay wasn't sure about maybe related just to them to the management team at sandbox and not be actual underlying performance.
Okay shifting to to SCR.
They look at the disclosures in the in the Mdna kind of sounds like.
They're the likelihood of further upside on the SCR distributions are payments seems a little bit limited.
Given that Stephen around revenue increases requiring.
To invest a portion of that free cash flow networking capital. So can you sort of describe what's going on there that that.
Mike prevent a further upside or or other puts and takes.
I mean, if the business continues on its current trend we absolutely expect.
Further growth we have been extremely conservative with SCR, they've been tremendous partners to work with we have left behind.
A lot of cash in the business to allow for working capital as they continue to grow so.
That is.
Not a significant concern again, we bumped it from 250 to 350 I think the top end is around five and.
And we're working towards that so I expect.
Okay.
Future increases that SCR based based on their last monthly report that we got.
There are a great track right now.
Okay and in the the normalized run rate distributions that SCR.
I think you just said it was 500, a 500 K monthly or against 6 million on an annual basis is that is that we're at a it tops out and then you get back into the call or is that a.
Is that how we should understand the distribution mechanics work.
Yes generally.
Okay.
As it relates to a cc calm can you just a walk me through in a little bit more detail how the.
The the sprint T mobile to T mobile merger is impacting the networking capital there and.
Other than I guess corona virus impacts on supply of handsets and tablets, what other factors are driving the.
Reduce performance.
The sprint volumes are down 25% across their system over the last year. So that's the number one factor I think you know spreads working on that merger with T. Mobile as has been a big disruption to their entire system. So I would say as one of their larger dealers SEC.
It was not immune to that so then you add in the they inventory issues with grown a virus and.
Now with the emerge or with the merger seemingly going ahead. There's there's just some uncertainty there theres going to need to be some some doors closed as they kind of integrate the two different dealer networks and so no. One is quite sure how thats going to work out the T mobile.
Economics for dealers is significantly better than what it's been for sprint. So there is there some upside there, but first we need to get through the uncertainty. So we'll look at it.
Suspend this that their dividend do us a temporarily and then hopefully restarted what was the best as idled and Jamie specifically to working capital out of that that T. Mobile's structure is more of a consignment model, so and networking capital isn't required so.
Today, they have to buy their own inventory and have that working capital. So it is a significant difference so getting that getting that done.
I will be as as we mentioned M&A add significant catalyst for air Force easy comp.
Okay, and then it sounds like if not better merger goes through no reason to think reagent or we wouldn't expect cc gone through recent or the distributions almost immediately or are there other factors at play that that would prevent that.
Yes, it would take it would take I would take a couple of months to work that's working capital changes through but.
Certainly our expectation is.
Among all of us others issues, obviously need to be resolved, but the company still making money and we would expect.
Distribution to restart and important to note there no debt and that company.
And.
Ownership management team that is there's all in with asset, but their own personal capital.
End of this business very recently and and.
Couldn't be happier with their with their partnership.
Okay.
Moving to to provenance, just a clarification question here around the around the fair value calculation.
In in the disclosures there was mentioning that forbearance agreement extends until March 2021, and the assumption in the fair value calculation includes distributions beyond that that point.
Are those distributions at the current level or at the normal level.
What is baked into the assumption, we have bacon a gradual increase from from the current level over time, so not a not an immediate a restart but just a gradual increase.
And a gradual increase back to the back to the previously I guess, what were 4.6 million U.S. distribution.
Yes.
Yep.
Okay.
Okay last one from me then is just around the the U.S. tax reforms.
Good how the significant impact on 2019, if it's for retroactive.
Can you talk about what the reforms could mean for 2020.
In and how that can impact toxin.
And how that affects potentially your view of dividend increases and payout ratio.
Yeah, we are.
We are actively working on a.
A work around should should they.
Come back and not be a.
Favorable towards us so for the for prior years, if it goes retroactive thats an amount we just have to have tomorrow for a small.
Without a 0.1 or by 2% to our our payout ratio going forward.
Again, it would be a you know I guess, our tax profile would be similar.
Two to 2020.
But we are hoping by the end of 2022 to have reduced or to have a based we found a new a new plan going forward, which would leave us in the same place we are today.
Are you able to elaborate a little bit more on what those plans are.
Not at this point, but it will the plan we have in the works is it again, we'll leave us in the very similar place shareholders business all the way through.
Okay. Thank you.
Morning.
Thank you.
And at this time is thinking we have no further questions. Please proceed.
Great. Thank you Sylvia and thanks, everybody for Ah for attending today.
I am actually believe it or not.
Regardless of the stock market I'm actually extremely excited about 2020, we've got a.
Manageable payout ratio today with.
With a huge amount of of cash disbanded. So every deal that you see a in the future for last will reduce our payout ratio and I into that.
At least into our target range, if not better so.
Looking forward exciting year, our deal flow is eyes as good as it's been.
Deals or are in process. So.
Thank you again.
Feels please feel free to reach address directly if you have any more questions. Thank you.
Thank you, Sir ladies and gentlemen, this doesn't do you conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines enjoy the rest of your day.
[music].
Yeah.
[music].