Q4 2019 Earnings Call
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Good day, everyone and welcome to the H.C. Holdings fourth quarter and for your 2019 conference call.
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I would now like to turn the conference over to Garrett Edson by CR. Please go ahead.
Thank you and good afternoon, we'd like to thank you for joining us to review HD Twos fourth quarter 2019 earnings results with me today or Phil Falcone, Chairman, President and CEO, we see two unlike Senate H.C. Twos, Chief Financial Officer. This afternoon's calls being webcast on our website at H.C. to dot com in the Investor Relations section.
Invite you to follow with our webcast presentation, which can be accessed on H.C. twos web site again in the IR section a replay of this call will be available approximately one hour after the call. The dial in for the replay is one eight for four or five one to two nine to one what the confirmation code of 137 0011 for.
Before I turn the call over to fill elect to remind everyone that certain statements and assumptions in this earnings call, which are not historical facts will be forward looking at are being made pursuant to safe Harbor provisions, but the private Securities Litigation Reform Act of 1995. These forward looking statements are subject to certain assumptions and risk factors that could cause he choose actual results.
The differ materially from these forward looking statements.
Factors that could cause these differences are more for at least discussed in our filings with the FCC. In addition, the forward looking statements are included in this conference call are only meet as if the date of this call and as stated in our FCC reports H.C. to disclaims any intention or obligation to update or revise these forward looking statements except as expressly.
Acquired by law.
During the call management will provide certain information that will constitute non-GAAP financial measures onto the FCC rules, such as but not limited to adjusted EBITDA insurance adjusted operating income insurance pretax adjusted operating income certain information required to me. It's close about these non-GAAP measures, including reconciliations with the most comparable GAAP measures.
It's available in the most recent earnings press release, which is also available on our website and finally as a reminder, this call cannot be taped or otherwise duplicated without the company's prior consent now I'd like to turn the call over 80, Twos, Chairman CEO and President Phil Falcone Phil.
Thank you Garrett and good afternoon, everyone. Thank you for joining us on todays call I'm going to review, our accomplishments, including our progress on our top priority of debt reduction and overhead.
Then I'm going to discuss or longer term vision and strategy for AC to.
Our CFO, Mike Santa will then provide more details on our fourth quarter and full year performance and then we'll take some questions.
Let me start by saying that our thoughts and good wishes, our with all of you our employees and easy to in our subsidiaries and their families stay healthy. These are certainly challenging times in United States in the world. So thank you to all of our investors and analysts are taking the time to join US today. It is appreciated.
2019 was a very successful year operationally freight C on several fronts.
Accomplishments over 2019 have positioned us well for further success.
In 2020.
Including notable progress toward significantly improving our capital structure and overhead reduction I.
I believe we're firmly moving in the right direction to transform H.C. too and we're all confident in our strategic direction moving forward.
For 2019, our adjusted EBITDA for our core operating subsidiaries.
127 million was the highest it's Ben since they see twos inception, and was 22 million higher.
In 2018.
Our construction segment hit its adjusted EBITDA target for the year, while our energy segment had a record year of adjusted EBITDA of 17 million aided by the acquisition of 20, New CNG stations and the retroactive tax credit that we signed into legislation toward the end of 2019.
When we first invested in energy in 2014.
It was doing 2.5 million in revenue on a pro forma basis. It is now becoming a material contributor to our plan as expected.
Total adjusted EBITDA for H.C. to more than doubled to a record 91 million. In addition to our strong core performance. We saw an 8 million reduction in our corporate holdco overhead from 26 million to 18 million and significant improvement year over year at broadcasting.
We also had strong contributions in pretax alewife from our insurance segment.
Beyond our operational performance, we made considerable progress during the year on the sale of our marine businesses, culminating in the completion of the sale of global Marine Group on February 28.
I also want to highlight the sale of 51% of H. a man.
For Malawi technologies to hang Tom was completed last week, a major milestone all things taken into consideration paving the way for us to close and the sale to hang Tong of our 30% ownership.
Which we anticipate occurring early in the second quarter as we complete some final logistical steps that have taken a bit longer due to the current global environment.
In addition to redeeming 77 million of 11.5% notes with a net proceeds from the completed sale of global Marine group.
Expect to further reduce the amount of principal outstanding on our 11.5% notes the net proceeds from the sale.
Hmm finally, with the sale of G.M. G.
We also reduced our overall consolidated indebtedness with the elimination of the Marine segment debt of approximately 66 million.
Not inclusive of any relief from the elimination of G.M. geez pension liability suffice to say I'm very pleased that we're delivering on our plans to reduce our debt and our corporate expenses.
Strategic assessment of the portfolio companies as a continual process for us from inception in mid 2014, when we made our first acquisition through today and into the future that process will not change as we look to continue to execute on the debt reduction strategy that began over a year ago sale of global Marine group, it's not a culmination of that strategy.
But rather just one step toward our goal of majorly, reducing if not completely eliminating our holdco debt.
Essentially our goal is to transition H.C. two from being a debt story to a growth and innovation story with an emphasis around our existing portfolio holdings, a broadcasting energy in life Sciences, well, we explore strategic options on DBM Global we noted in previous earnings calls at the evaluation process of our portfolio can.
Bunnies was ongoing that point last month, we publicly announced that we were in advanced discussions to divest our investment in continental insurance and that we were exploring strategic options for DBM global including a potential sale or refinancing to assist in our debt reduction plan.
First we have been very pleased with continental insurance since we added it to the platform in December 2015.
Since that time, we've grown our total adjusted capital base, nearly fourfold and less than five years.
Well, we've always been proponents of the opportunities to continue increasing shareholder value through the acquisition of additional blocks of LTC insurance.
However became definitively apparent during the back half of Q4 that both the management fee in dividend possibilities would not meet our long term expectations and objectives going forward.
With all of our businesses, we're constantly taking in new information and changing economic and regulatory environments, as well as listening to and value and evaluating various opportunities with insurance the opportunity to strategically exit at this stage would also allow us to continue with our long term.
Goal of debt reduction, while focusing on it and simplifying our overall corporate structure.
Well, we have not yet signed a definitive agreement we believed that the process was far enough along that it was important to provide our shareholders with an update in contact surrounding this potential sale of continental as well as grant the potential acquirer exclusivity as we further advance our discussions that began a number of months ago.
DBM global which has been another excellent performer since our acquisition in 2014 has been a perfect example of how H.C. to to make a timely purchase help grow particular asset.
Over the past five years Weve assisted DBM any acquisition process and most recently, we secured and arrange the financing for their grey Wolf transaction, which has proven to be an attractive addition to de <unk> overall business structure further helping DBM to significantly increase its adjusted EBITDA from 46 million on a pro forma.
Basis for the calendar year 2014 to 76 million in 2019.
With a strong adjusted backlog of 826 million, we continue to believe in the prospects for DBM next success over the long term as with insurance, we have been reviewing potential strategic alternatives, including subsidiary refinancing for DBM, which we believe will continue contribute to the evolution incident.
Occasion of H.C. twos business model and capital structure.
All of the sad given the current environment. We're also well aware that is suddenly become a much more challenging environments since our announcement last month.
Our strategic process is however remain ongoing but to be clear if we're unable to receive what we believe is proper value for insurance reconstruction, we can always address debt and interest expense reduction with financing at the subsidiary level [noise].
And read does it.
The sales when the economy rebounds.
We're excited about the prospects for a streamlined sharply focused in financially flexible H.C. too we believe that by focusing on a higher growth assets that HC. Two we will be best position for the long term to create additional shareholder value above and beyond what many think our assets are worth today, Let me now walk through each segment to give you a sense.
And why we're so excited about our future.
First our growing broadcast segment, which we discussed in detail on prior calls and where we've seen a significant change from year ago with our over the broadcast over the air broadcast platform.
A bit of a refresher what isn't over the air distribution platform.
Over the Arrow T.A. is a method of distributing content from one central system transmitter to multiple multiple devices at one time, including TV mobile devices et cetera.
Basically it's back to the days of your father's broadcast television basic transmission of free content over wireless spectrum. However, unlike 30 years ago. One doesn't have to have a 10 foot antenna on a roof of the home or apartment building you can now receive one of the 35 license television signals in your area or de amazed because they are called therapy.
Broadcast over the air with an inexpensive.
$30 intent.
And can watch NBC, CBS, NBC Fox CW et cetera.
Which are mandated via their FCC license to broadcast their content free of charge. This is driven many households to court caught or eliminate cable TV and get content from over the air stations, while utilizing the broadband connection for the subscription based over the top content or T T like Netflix.
S P, an apple plus Disney plus et cetera.
This cord cutting phenomenon continues to rapidly S escalate with no T.A. households, now nearing 20 million or nearly 50 million people [noise].
According to Nielsen up from just 16 million households in 2017.
Our platform capitalizes on this trend with our national footprint of 210 operating television stations.
And as soon to be operating 40, additional silent broadcast licenses across the country at which point, we will have a presence in DM age that represent close to 80% of the U.S. population.
As important technology advancements now allow for the delivery of up to six channels for each station to in high Def and four in standard Def definition for a total of six potential revenue streams for each station. This is much different than years ago, where you can only broadcast one channel per station in Los Angeles for instance.
It's where we have four stations, we could deliver up to 24 channels of content over the air a virtual skinny bundle bundle multichannel video programming distributor model.
Throughout the industry peers are commenting and adjusting their models based on the OTI a growth specifically recent remarks from a broadcast peer called the migration back okay and over the air Renaissance and we could not agree more younger demographics are subscribing to Netflix U.S.P., an apple plus.
And then complementing these.
Oh T T services through the purchase of a simple digital antenna.
That will go in their living room and window to provide them with free OTI a television the beauty of our strategy and our platform is that it is complementary to any content provider where service, it's not an either or but.
And in addition to as there is really no other way to get in front of the 50 million viewers and our eye balls as they leave cable TV behind.
What is great about our platforms that there are multiple ways for H.C. to to make money. Let me discuss a few different models that can be deployed.
One leased capacity to third party content providers based on a rate per of T. A household in that market of launch as we've done with C.D. asked with their launch of their nude dabble lifestyle network and many others.
This model is very similar to a cell tower model with very attractive margins and substantial operating leverage Mysmart model, we've seen a step up in rates per household.
Oh T. a market continues to increase and demand exceeds supply. In addition, the national footprint is a more value added proposition and a one stop shop, where we have pricing power as a result.
The revenue share model number two is with the content providers.
Add base revenue stream sharing the content providers AD based revenue stream as we're doing with the launch of chat or news and all piece of network and be in sports.
This model could be exceedingly attractive as an AD based model considering the number of AD dollars available today of course, the stronger the content the higher the AD dollars I've always said that with one station you will not attract the high quality content provider, but with a national footprint, you will attract a different higher quality provider as Evan.
And by bringing and.
The in sports dabble in chatter to H.C. to broadcasting.
The third is to provide our own content and control 100% of the AD revenue as we do with Rs Teca American network.
Each of course has its advantages and disadvantages, but with our 210 stations growing to 256 potential revenue streams per station you have a tremendous amount of capacity.
As I've said, because we now have a unique national footprint, we're now fielding incoming calls from high quality content providers.
We're losing eyeballs its cable subscribers decline in the past few months alone we've signed up as I mentioned tschetter, which as you all piece company and be in sports, which is the entity that controls much of the European soccer rights as well as CBS and their dabble networks. This along with the number of networks that we have.
Listing on our.
Platform today.
Like sports and news can be particularly valuable content and our recent agreements are beginning to validate a reason for entering the broadcast business.
We also believe there are other valuable non traditional ways, such as Offloading of mobile traffic to utilize the spectrum as we look to maximize the full capacity within our overall network as of today with our 210 stations. We were in 91 de amazing total across the U.S. in Puerto Rico. These 91 de amaze represents 70.
4% of the total U.S. TV households, according to Nielsen when we complete the build out of an additional 40 licenses.
We plan that we plan to bring online in 2020, we expect to have presence and approximately 100 damages that represent nearly 80% of the total U.S. TV households, including nine of the top 10, and 34 of the top 35 de amaze. This would make us the largest over the air broadcast distribution platform.
In the U.S.
Well, we've significantly reduced costs and increased our efficiency with Aztec American not as Tech America network structure. So that the network group is now positively contributing to the broadcasting segment the ramp up but stations is naturally increased our expenses on the station group side for instance, when bringing a station online we incurred.
Basic monthly tower rent electricity and Internet expense, while we wait to ramp up revenue, which can take some time.
There's no question, though as the O T. A market continues to expand we will attract more and more quality content providers and even non traditional content provider as.
While our station based alone has substantial asset value and continues to appreciate as we turn our focus to the top line and ramp up our customer base. We believe we will experience significant margin expansion in high marginal contribution to our cash flow due to our low cost structure and fixed overhead. This.
All of course equates to significant positive adjusted EBITDA and significant long term value for our shareholders.
We also continued to see a lot of potential with respect to our energy segment and believe it will be a much larger contributor over the long term.
And become a material part of our overall structure as we move forward. We first entered this business in 2014 through the purchase of a majority interest in American natural gas, which we recently renamed American Natural energy.
This entity designs builds owns operates and maintains domestic CNG commercial fueling stations for transportation.
This was the should strategic acquisition based on the thesis that compressed nat gas or CNG.
It would become a primary alternative as commercial vehicles transition away from environmentally unfriendly diesel fuel and enjoy the benefits of a much lower cost product.
As the American transportation sector transitions to a low carbon economy, we believe C. N G will play a key role in reducing emissions extending the lives of vehicles, and notably reducing fuel costs. Today. There are 175000 commercially available Nat gas vehicles on U.S. roads.
Spanning all weight classes in vehicle applications, and more and more fleets are converting to compressed nat gas vehicles, driven by the lower fuel and maintenance costs between the lower cost of natural gas compared to diesel over the long term and the reduce maintenance expenses then than traditional diesel fleets company.
Switching to compressed Nat gas vehicles see a full return on investment in 18 to 24 months.
We believe given the abundance of natural gas reserves in the U.S. the use of CNG for fueling and the emergence of renewable natural gas or are in gene as a low carbon footprint fuel source provide a viable cost efficient clean emissions alternative to the status quo.
We made significant progress in 2019 at AG acquiring 20 additional fueling stations in the southeast U.S. now have a network of approximately 60 stations, making us one of the largest owners and operators of CNG stations in the U.S. nearly doubling the volume of or gasoline gallons equivalent this.
Tradition.
And we were further aided by the renewal of the FTC for alternative fuels tax credit near the end of 2019. The FTC was renewed for three years retroactive to January Onest, 2018, which provides us with a 50 cents per gallon tax credit on every gallon.
Equivalent distributed it is reenergize the industry and we are expecting a strong 2020, thanks in part.
Due to the tax credit further as the tax credit is shared with our customers get incentivizes them to continue to expand their compressed Nat gas fleets and not increase the volume of C. N G usage at our stations.
See me opportunity with respect to natural gas and having patients in a long term outlook is paying off right now for HC two it took vision to see the opportunity in 2014.
And we have executed very well on that vision over the past few years at Angie with environmental concerns consistently at the forefront of everyone's mind, we remain very optimistic about the long term possibilities for value creation that energy as we believe the role CNG will play in the future will grow exponentially with.
Respective fueling commercial vehicles.
In addition to these high growth segments. We are also very excited about our Pan San life Sciences portfolio, particularly our investments in Medibeacon in our two technologies, where we also saw excellent progress in 2019 and have high hopes for moving forward to realize value.
In 2019, Medibeacon entered into an exclusive commercial agreement with Wal Dong Medicine, a leading pharmaceutical company in China.
Hanting water song exclusive rights to Medibeacon portfolio of assets in greater China.
Under the agreement Medibeacon will receive royalty payments on net sales in greater China and other <unk> Asia Pacific countries. In addition, while Dong made an initial equity investment a 15 million to fund medibeacon through the upcoming ft, a pivotal clinical trials and approval process.
Selling medibeacon adipose money valuation of 315 million.
Well Dong will also make a second equity investment of 15 million.
<unk> Predetermine post money valuation of 415 million upon medibeacon, achieving U.S. ft approval for its TGF, our measurement system, which Missouri measures kidney function in real time.
We now do you see to have invested a total of 25 million in medibeacon through pants, and and thus we are poised to realize substantial value from this investment.
Looking ahead, we expect the last clinical trial to begin in the back half 2020 from Medibeacon TGF our system because the system has already received FDA breakthrough device designation the trial will be highly visible as all will be able to see the results. This is a major benefit of receiving this designation.
As we expect considerable attention will be paid as a trial concludes in early 2021, which will put us in a stronger position to ultimately maximize the value of medibeacon.
We remain deliberate our approach, which we believe will position us best to realize an appropriate and strong valuation at the right time.
In addition to Medibeacon, our two technologies also entered into a strategic partnership with while Dong in 2019.
Under an exclusive distribution agreement, while Donald will distribute.
Our two lightning devices and products in greater China, and other Asia Pacific countries. In addition, huadong made a 10 million equity investment in our two out of post money valuation of 60 million that is funding the company's next phase of product and market development.
We expect commercial sales for our two devices in the U.S. to begin in the second half of 2020.
We're very excited about the potential for these investments to provide us with significant return on investment and maximize value for shareholders to sum up 2019 was a year of considerable progress for H.C. too as we grew adjusted EBITDA reduced non operating corporate expenses and began the path forward to transfer.
Forming our balance sheet and optimizing our capital structure as we begin to pivot from an early stage that story to a next stage growth and innovation story to allow us to maximize the full potential of our businesses.
2020 has already started strong with the divestiture of our marine business the debt reduction plan, taking hold and ongoing progress with cost cutting as we move forward with our insurance in construction strategic processes. We believe we're firmly on the path to strengthening our balance sheet and transforming HC two until long term growth.
And innovative company.
She twos portfolio is uniquely positioned and this management team not only remains committed to capitalizing on the value created over the years at de EM, but also driving growth and value within our energy in broadcast segments and life science subsidiaries, all while continuing our efforts to further reduce over.
Ahead, and improve margins to that point, we firmly believe these efforts will enhance shareholder value longer term.
Finally, we welcome Ms., Julie Springer as newest independent director to our board last month, our nominating and governance Committee went through a long and robust process searching for the Wright director, who not only had the requisite skill set to complement the board, but also add to the diversity of our board. The board had been looking for a qualified.
Candidate with deep marketing expertise and adding a proven leader in marketing and branding like Julie will help H.C. to communicate our long term strategy have evolved into a growth and innovation story with that I'll now turn the call over to our CFO, Mike Ciena, who will discuss some of our financial highlights.
Thank you, Phil Let's review, our fourth quarter and full year performance consolidated total net revenue for the fourth quarter 2019 was 498.4 million compared to 524.9 million in the prior year period as lower revenues from the construction telecommunications and Marine said.
Mints were partially offset by increases in revenue from insurance medical eliminations and energy segments.
Net loss attributable common in participating preferred stockholders for the fourth quarter of 2019 was 31.4 million or 66 cents per share compared to a net loss from 16.1 million for 36 cents per share in the prior year period.
Fourth quarter 2019 results included 50.4 million and goodwill impairment, mostly continental which I'll touch upon more in a minute well prior year period results included a bargain purchase gain of 6.3 million related to the completing two completing the acquisition in Japan as long term care business.
This KMG America Corporation, as well as a $29.2 million gain on the recapture of Warner Continental insurance is reinsurance treaties.
At the company's core operating subsidiaries, which comprise H. you choose construction Marine services energy and Telecom segment adjusted EBITDA for the fourth quarter 2019 increased 53% to 43.5 million compared to 28.5 million in the prior year period.
The increase of 15 million was primarily attributable to energy, which recognized 10.6 million in a FTC revenues from the renewal of the fuel tax credit for 2018, and 2019 as Bill pointed out.
Total adjusted EBITDA, which excludes our insurance segment more than doubled to 36.7 million in the fourth quarter of 2019 compared to adjusted EBITDA 15.1 million in the prior year period.
Increasing year over year adjusted EBITDA during the fourth quarter was driven by the improvements from our core subsidiaries as well as reduce losses that broadcasting in a meaningful reduction in non operating corporate expenses to end the year.
I'd like to highlight the significant reductions in costs at the brought chest broadcasting segment.
In addition, focusing on the build out of the OTI a platform. The team has done a great job executing on restructuring efforts, principally the Aztec American network, which was generating significant losses at the time acquisition.
For the full year 2019, our core subsidiaries increase their adjusted EBITDA contribution by 22.4 million.
226.8 million and broadcasting in life Science Sciences companies saw reduce losses.
We generated total adjusted EBITDA, excluding the insurance segment of 90.8 million, 104% increase compared to adjusted EBITDA of 44.5 million in the prior year.
As we saw improvements in results across most of our subsidiaries.
Yeah.
I would also like to know the decrease in adjusted EBITDA losses for non operating corporate which decreased by 8 million, which I'll touch on later.
Let's just stick a couple of minutes to go into a bit more detail in a few of our segments.
That construction, we recorded adjusted EBITDA for the fourth quarter 2019 of 20.8 million, an increase of 1.4 million over the prior year period.
Construction performed strongly for the full year 2019, as well generating adjusted EBITDA for the year of 75 point Sevenmillion.
Driven by.
Completion of certain large scale DBM global commercial fabrication and erection projects.
As well as contributions from Grey Wolf industrial.
As of December 31, 2019 reported backlog was 498 million.
Adjusted backlog, which takes into consideration awarded but not yet sign contracts at the M. Global and Gray will was a combined 826 million.
Near record adjusted backlog, mainly consisting of smaller to medium sized projects.
Which provides construction with significant visibility into 2020.
Into 2020 and 2021.
The adjusted backlog is a testament to the success of the combination of BBM and grey wolf capabilities, enabling them to cross sell additional services to customers.
At Marine services, we recorded adjusted EBITDA for the fourth quarter 2019 of 9.3 million, an increase of 2.4 million over the prior year period.
For the full year 2019, the segment generated a combined adjusted EBITDA of 30.7 million, which was slightly lower than the prior year period.
Excluding results from our Hmm joint venture 2019, adjusted EBITDA for our recent Marine divestiture Global Marine Group was 25.7 million.
Which I should know included the impact of an unfavorable 5 million dollar litigation settlement recorded a G.M.G.'s spss joint venture.
At energy, we recorded adjusted EBITDA in the fourth quarter of 12.4 million compared to adjusted EBITDA of.
8 million in the prior year period.
As Bill noted in his remarks, the segment benefited in the quarter from our portion of the renewal of the alternative fuels tax credit or a FTC, which was retroactive to January one 2018 as well as the acquisition of 20 CNG stations at the end of the second quarter.
As a no approximately half the 10.6 million of FTC revenues recognized in the fourth quarter was related to CNG sales for the acquired amped stations for the full year 2018 and 2019.
Yeah. If you see was extended through December 31, 2020.
As a no. It is typical that they have to she's only renewed for the current year in one year forward rather than for multiple years in advance.
The rep. The full retroactive credit from 2018 2019 in the year forward for 2020 points to the ongoing support for compressed natural gas.
We also think this will be an important business development tool for LNG and the broader industry as adoption them CNG continues.
The gross tax credits, which equates to 50 cents per gasoline gallon equivalent is shared with our customers and Susan has an incentive for them to continue the conversion of their fleets, the CNG and overtime larger C and D fleets would would mean greater volumes for our stations.
Meanwhile, and insurance, we generated pretax adjusted operating income for the fourth quarter of 10.5 billion, an increase of 1.2 million over the prior year period.
For the full year 2019 pretax AOL I increased by 85.1 million to 85.7 million.
The year over year improvement was driven by the kicked block, which contributed incremental net investment income and policy premiums.
Partially offsetting the related benefits paid and increases in claim reserves.
Further the legacy C.G.I. block benefited from higher net investment income.
Tribute to both the higher average invested assets as a result of reinvestment of premiums and income received.
The legacy block also benefited from a decrease in benefits and expenses related to favorable claims activity during the year principally in the first after 2019.
This was partially offset by an increase in SGN a across the platform primarily attributable headcount additions related to the acquisition of the kicked block.
During the fourth quarter, we recorded 47 million of goodwill impairment at the segment entirely related to our initial long term care block acquisition back in 2015, an unrelated to the kicked acquisition in 2018.
The goodwill test for insurance is a simple comparison, a book value to fair value. If the fair value was lower than the book value. It results in an impairment.
In 2019, driven by GAAP operating results Continental's books, I grew to approximately 500 million.
Most of of almost 199 million of accumulated other comprehensive income.
The increase in book value in 2019 was largely driven by 2019 net income.
Excluding the impact of the goodwill impairment of 99 million.
Put simply the overall book value increased by 99 million before the goodwill impairment and excluding the impact today OCI during 2019.
In addition, there were several factors that occurred in the fourth quarter 2019 that impacted the fair value of the insurance segment.
Primarily regarding our expectations with respect to levels of future management fees under our investment management agreement.
Along with our expectation of future dividends, you have to recent and ongoing discussions with our domestic regulator.
It's important to point out that these factors do not have a major impact on the operations of the business, but they do in fact, our ability to capture value that would otherwise be effectively trapped in insurance companies for the foreseeable future.
As a result of the above our book value at C.G.I. exceeded fair value and the company were recognized a goodwill impairment charge of 47 million.
As of December 31st 2019 insurance had cash and invested assets of 4.5 billion total GAAP assets of 5.6 billion in an estimated 338.2 million of total adjusted capital.
At the end of 2000 1982 at consolidated cash cash equivalents and investments of 4.6 billion, which includes cash and investments associated with HC Twos insurance segment.
Excluding insurance consolidated cash was 68.5 million.
I'd also like to touch on corporate expenses for a minute, which significantly decrease throughout 2019.
Portion of the 4.8 billion reduction in the fourth quarter was related to a reduction in bonus expense and a clawback of deferred cash compensation for management.
Since inception of HC two in 2014 management's bonus has been based on the growth in H.C. twos net asset value or NAV from the beginning to the ended the year in excess of or hurdle rate established by the board compensation Committee at the beginning of the year.
As a percent of that excess of shared what management.
However, the allocated amount may be reduced by the compensation committee by exercising negative discretion, which it has done in the past.
Because there was a decline in NAV in 2019 compared to 2018, the plan, which was established at H.C. juice inception, and has not been change to benefit management.
Wires deferred cash compensation to be clawed back.
In a clawback of approximately 800000 was recorded in the fourth quarter.
In addition, the corporate bonus plan for management includes a high watermark.
As a result, NAV growth and 2020 is going to be measure to a higher 2018, Mark and would still need to clear set hurdle rate before any share of NAV growth would be available at the management.
In addition to the decrease in bonus and claw back on their accrued bonus on a year over year basis, we saw reductions in nearly all of our expense categories. We take our corporate expenditures seriously and we continue to focus on finding ways to reduce our corporate costs without sacrificing our dedication to a strong comps.
Lines environment that is essential in a complex public company as we head into plenty plenty and focus on other strategic initiatives.
That said, our Q4 corporate adjusted EBITDA loss of 2.7 million.
Which includes the impact of deferred bonus clawback required under the terms of the bonus plan should not be viewed as a run rate for 2020.
As we've noted on past calls or expenses are typically are in the first step for the year compared to the second half a year.
Earlier this month, we announced a partial redemption number 11.5% notes that will reduce or no principal by 77 million.
On the closing of the sale of our 30% interest in nature men, which we now expect to occur early in the second quarter as we complete some final logistical steps that have taken a bit longer during the current global environment. We plan to announce another partial redemption for made she twos portion of the net proceeds.
Both redemptions will be completed in compliance with our 11.5% notes indenture and the combined decrease in aggregate principal outstanding will provide significant interest savings both in advance of our June payment and on an annualized basis.
Our current plan for 2020 is the upstream over 40 million in cash from our subsidiary as well we have the capacity upstream additional cash from our subsidiary as if the need arises. We currently intend to keep capacity at our subsidiaries as they and we execute on our strategic plans.
In addition, we entered into a new revolving credit line, which will provide 50 million of additional liquidity.
We remain very comfortable with their overall liquidity position in plenty plenty why we continue to focus on further expense reductions in pursuing our strategic initiatives to reduce holding company debt and unlock value within the HC two portfolio.
We will now open the line for questions operator.
Thank you.
We will now be conducting a question and answer session. If he would like to ask a question. Please press Star then one on your telephone keypad a confirmation Tom will indicate your line is in the question Q.
He may press star to if he would like to remove yourself from the question Q.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star case.
One moment, please why we poll for questions.
My first question will come from Sarkis Sherbetchyan, That's B. Riley Financial Inc. Please go ahead.
Good afternoon, and thanks for taking my question here.
First question is really relates to the the liquidity levers to the holding company. Mike I think you just mentioned you know $40 million of cash upstream from the subsidiaries to the Holdco, maybe she can give us a more detailed breakdown of the liquidity levers, especially after you anticipate on paying down.
The the 11 and a half so I think you mentioned $77 million.
Sure. Thanks Keith.
You know we would afford over the 40 over 40 million is really what we have planned and it's broken down there the normal cash flow leverage that we had last year around PBM insurance and PCG I, we have additional capacity down there that we were drawn to the extent we need to.
But right now that's our plan based on our strategic options going forward. You know, we expect to have pretty significant savings from the buyback that we talked about a 77 million.
And so we in addition, you know we're gonna do another redemption, when we close on Hmm.
So you know the 77 million, it's 9 million of of interest savings and then we of course kept the first closing venture men, which has been pushed out slightly just because of the things going on in the world Administratively we expected to take a little longer than we originally thought yes, sorry Keith.
I can just add to that that's a.
Obviously very good question in something that we.
Our have all planned out and are crossing the t's and dotting the i's on but Theres no reason to for US just to be concerned with that with meeting those liquidity me and especially as we look look to things going forward you know, we're going to see additional cost savings.
On the overhead and we haven't seen anything from a disruption perspective from an offer on the operation side. So we feel like we're in pretty good shape, we've got a revolver there as well, which we thought was very important for us to up to have that as as a.
As we look to move into 2020.
Okay, I guess, if if we can maybe no touch on just you know you mentioned, reducing the corporate overhead I think everyone's just kind of interested on.
Really understanding with a level of corporate expense you know, maybe you're targeting for fiscal 20, right I mean, if I can compare the upstream.
Figure you just cited a the levers and then add up the interest level pro forma for what you're going to pay down plus the corporate expense you know I'm, having a little bit of a difficult time kinda bridging the gap can you maybe kind of help us understand the opportunity and reducing overhead.
Yeah, I'll tell you one right off the top that we're all over and that's on the the real estate.
We've been out looking at additional space.
And the beauty of our set out here is HCT doesn't have to the long term lease. So we can exit a relatively quickly if necessary and I think we'll save a good chunk of change.
Going forward with that up with that in mind.
There's other things that we we as you look at the corporate overhead from a legal perspective, we've done a lot of work on both acquisitions et cetera over the number of years and that's typically than a not a sizable piece, but a piece that we can that as much.
More variable and that will come down.
And you know there there are other kind of nits and nats, there's not a lot of things that you can do on the reporting side, but over the last number of years, we've had as as we've kind of ramped up we have seen expenses kind of.
Increased you probably more than we had hoped and now we clearly have made over the last 12 months made a conscientious decision to really slow down on some of these things that we've been looking at which will really I think dropped to the bottom line and get our expense is more in line with.
Quite frankly, where they should be and that's that's a top priority for us it hasn't gone unnoticed you are not the only one that's a that's a asked that question over time, but we've already had a nice move with a with a reduction of that corporate overhead and you know there are no.
Number of different things that we can do and that we are doing that we'll continue to get that line because quite frankly, we're not there yet.
We've got some more wood to chop, but you can't do this stuff overnight and you know when we look at our model, there's no doubt that from a liquidity perspective.
We have internally bridge that gap you know, it's tough for me too.
Think of what you're well, how you're looking at it and what expenses you have on your spreadsheet, but I know that internally, we're very comfortable with with where we are and fully expect that to continue to improve as we go throughout the year. So so start case, we've talked about.
Well you know over 53 million enough cash flows from coming up from the subs. We do have some cash on the balance sheet and we do have additional capacity that we will pull up and all of these are a bunch of moving pieces as far as our strategic plan.
And when the timing of things roll wins. So we we have the ability to pull more up depending on where we are with our debt restructure our debt reduction strategy going through 2019, if that makes sense and in addition to that from a refinancing from a refinancing perspective.
Perspective at the subsidiary level, there are things, where the holding company there are situations, where the holding company will benefit.
Benefit, meaning cash on the balance sheet.
As there are certain things that we're doing with a focus on that not that we have to do but again when you talk about different levers.
Those are out there.
Okay. Thanks for that I'm, just kind of switching gears here talking a little bit about the insurance segment, you know I thought that spin you know a division that you guys were pretty.
Proud of and focused on as far as the kind of cash flow driver so little bit surprised to see that you know it's kind of been mentioned for for the sale process, maybe talk about that in a little bit more detail and maybe also what were the factors that kind of drove this impairment charge in the segment.
Yeah. So I'll start with you know why going down the path you know this the insurance business I was quite frankly very high on it's a business that ice structure.
There are the up from inception, I've always believed that there is an opportunity here and as a result the.
Certain certain things that I was looking out when we formed a C.
I was keen on getting into this space.
With the objective of.
The asset management fee.
And growing and growing that and growing the assets overtime.
When we first kicked off this strategy, we had an understanding of certain a certain management fee that we were going to get and possible dividends associated with that.
It is clear and it has become more clear in especially with regards to various meetings and discussions that we've had starting in 2019 and and quite frankly became more definitive as the year came on and especially in the fourth quarter.
After that we realize that that there was risk around the management fee.
And it's no secret that there are I don't want to say how come.
Tethadur, but the competition has also been under pressure with regards to a management fee reductions.
Well, we were hopeful that we weren't going to be able to work something out we've had certain meetings that took place in December quite frankly that.
That kind of changed how we thought about the business and changed our comfort level going forward with regards to the management fees that we had structure in our initial plan and especially as it relates to the dividend.
You know there there was hope that there and expectations that we would we wouldn't be able to extract certain dividends out of out of the company and again.
Dealing with long term care and and and the the rate increases that quite frankly seemed to be ongoing from an <unk> from a necessity perspective have really put a put a have tempered our enthusiasm around.
The dividend aspect and I think quite frankly, the combination between the two when you look out long term care you have to look at the risk parameters around it and are we comfortable unlike comfortable looking at.
That cash flow stream that we believe there is risk to it and a decent amount a rest to it now it's not going away, but it's not comfortable I don't feel comfortable quite frankly, having certain amount of capital at risk.
And looking at the dividend streams going forward. So I think I can look at looked at that business and and.
Granted theres a return on capital from a dividend stream, but I think I can take that capital unallocated elsewhere and generate a better return for shareholders and there's no magic to it other than that the business has become its still a good business Theres no question about it.
But.
You know again, there is no secret that certain regulatory authorities have have have questioned.
On the the the management fees of some of the bigger players in the industry and Theres. No reason to believe that that is not and will not and has not trickle down to well.
So that's pretty much yet.
And and as you know.
At one point, we kind of looked at it and said, Okay, where do we want to go with this what do we want to do and looking at.
That cash flow stream going forward and the potential I'm quite should say lack of dividends. We just came to that conclusion.
No more no less than.
No.
Okay and the factors on on the impairment.
Yeah. So you know basically it's a measurement of your fair value.
To your fair value for your book value. So the book value Insurance Company. If you ended the year was about before the impairment was about $500 million.
Had almost $200 million of AOCI guy so excluding that the book value was 300 million so when you're measuring your.
Good well compared to your I mean, your book value to your fair value for impairment tests.
The fair value was lower than the book value you have to take an impairment and so even without the factors that Phil described that have been impacting.
The fair value, we still would have had an impairment because.
The insurance company had 99 million of net income.
In 2019 before the impact of goodwill. So you had a book value increased by 100 million dollar so unless you're a fair value followed that you're going to have an impairment.
And just one last point to that I think from past conference calls, we expected an anticipated our dividends to be or I'm, sorry, our management fee to be you know 13, 14, 15 million and potentially going higher and <unk>.
Without question that is not going to be the case going forward at least with this asset base and it really became a.
They not an issue, but a question for us as we look at as we look to either continue building this business or exit.
Okay. Thanks for that I'm, just switching over to broadcasting real quick you mentioned the Buildout for broadcasting over the next 24 months any kind of target on on the VMM spend in that division, yes de minimis.
We've done the bulk of our Capex keep in mind that building out a station is about 150 to $200000.
Not a lot and it depends on whether your co located with an existing station as well and if your co located with an existing station you you tend to have additional savings. So the stations that are coming online I believe a should be around 40 station. It's.
It's not a tremendous amount of capex.
It is maybe in some of these are partially built out but from a maximum perspective, you could be looking at a.
Five $6 million maximum.
So not a lot of capex.
And do you feel comfortable that the broadcasting segment has enough.
Kind of make way without growth platform.
Yes, absolutely we are.
Really excited about this and you know it's one of the things as we looked at our business going forward, where our emphasis is going to be where do we want to focus and where do we think we're gonna have.
Great Great success, and the fact that we have this platform I'm. These are all license stations.
Very unique platform I'm, you're seeing a tremendous amount of ER cord cutting and quite frankly, there's more content out there that needs to get in front of people. In this is back to the old push versus versus pull phenomenon high ie search phenomenon.
But as you see the amount of content out there that.
He is.
Necessitates getting in front of what we call IBALT, we haven't natural platform for that that's a very unique and and in looking at.
On the competition.
They have a different model, there's a different model out there, it's an affiliate model and quite frankly.
One of the one of the benefits that we have is we I don't want to say, we have a blank slate because we do have a number of networks on there, but we have a tremendous amount of capacity to host Super high quality content providers and we're in discussions with people around that today as a result of kind of.
Our one stop shop, we can put people on 210 stations today.
Quite frankly, almost overnight and that's something that's that's a pretty attractive value add proposition for any content provider and now.
Granted there's you know if you look at the number of cable subscribers in the marketplace. There's 80 million households, the over the air market is 20 million households, and growing.
So if you are a cable network and you are on a cable provider do you do not have a natural distribution platform and as you lose eyeballs and it is.
Evident in the cable industry, you have to pick those up elsewhere. The only natural place to pick those up is in the over the air market and 20 million households is a pre or is it is a very high numbers and it's increasing in increasing an increasing if you look at that.
Five biggest areas four or five biggest DNA for over the year viewership.
[noise] like Dallas and in Los Angeles, that's our massive markets to to lose 25%.
You are your your youre viewership or not to have 25% of your viewership not on cable in certain markets. You Gotta have you have to find a way to get in front of those viewers. We are that way, we aren't that platform and we're seeing that grow.
So.
Continue monthly and everybody's seeing that growth monthly with with the declining number of not only.
The cable subs, but the DBS market and the DBS market is quite frankly falling off a cliff.
So we are the natural alternative.
And as I said in the earnings statement that its not an either or but in addition to where where a phenomenal complex complement for for any provider.
Any content.
Producers quite frankly that wants to cap can capitalize on the entire marketplace. Because you can't just do that with in the internet over the internet or over cable.
This market and this strategy was not you Couldnt do this 20 years ago were 25 years ago and the time is right because of the technology change the cord cutting and quite frankly, the just sheer amount of content out there and it goes back to what I've said that you could have.
The best.
The the most high quality content around but if you don't have a distribution platform nobody can see it so we're a natural complement to.
Those types of entities in the marketplace and work we're seeing now because we are getting recognized we're getting incoming phone calls I'm just by virtue of.
Some of the things that we're doing out in the marketplace.
Thanks, I'm going up hop back into the Q.
Okay. Thank you.
Our next question will come from Nick Brown upsets and Hope Associates. Please go ahead.
Hi, Thanks for taking my questions actually two questions.
First on the anytime and sale, maybe I misheard, but could you explain what you meant when you said I think you said you completed the sale last week, but then you said, it's not going to close until early second quarter. Just wanted to know what you meant by completing the sale unless I misheard sure as you know we signed up the ERP.
Purchase of HR man via hang Tong that deal was signed in the fall what took place last week was the purchase by hang Tong of the 51% of eight Shannon and owned by Wawa.
That closing.
Essentially.
Was a was that was a a step for us that we were waiting for in order to close our 30 plus percent sale. So that had to take place first it closed and quite frankly in this marketplace. We're very pleased that closed because we.
We thought it might even be delayed but the fact that that deal was closed.
And our deal and our closing was conditional on that that's what we were talking about from a from a delay in in the closing of our piece, but the fact, the fact flows means that ours will close.
It's just a function of whether it's a we were hoping by the ended the month, but looks like it's gonna be pushed into the first week or two of April.
Okay. That's helpful time, especially.
And then the other question on the potential insurance sale what is it about I mean, I understand why the economics aren't attractive to you anymore given that the changes, but what what makes it still attractive to the other <unk> other parties.
Well, if you have an existing insurance portfolio.
You may have different capital a different capital allocator that is looking at a different type of return.
You know when we think about our capital allocation or a cost of debt and our cost of capital in general we've got to making some.
Decent money.
On or decent return on our on our capital and then looking at growing this business. Yes. It is you know the deal that we did with Humana was a great deal I'm, not saying that there won't be the others out there in the marketplace like that but you know the expectation is that they.
Could it.
I couldn't necessitate some capital and the question is to really grow this business do we want to allocate additional capital to grow the business based on what we are seeing now with the the.
Management fees, where we expect them to be as well as the potential issues with the dividend and.
Others may have different return parameters may have a different infrastructure that can and could and maybe willing to accommodate those adjustments that are taking place in the market, but quite frankly, we're not.
Okay. Thank you for answering that.
You're welcome.
This will conclude our question and answer session.
This time I'd like to turn the floor back over to feel called cell count for any closing comments.
Okay. Thank you everybody for joining us today as a as always we will have.
People here, both Mike myself and Ah.
We'll be available to answer questions either today or throughout the week. We appreciate you joining we know how busy everybody can be and how tumultuous the market can be so we appreciate your time and be safe. Thank you very much.
The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.