Q1 2020 Earnings Call
Good morning, My name is Pat I'll be your conference operator today at this time I'd like to welcome everyone to the Alaris Realty Corp. Q1, 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If you'd like to ask a question. During this time simply press Star then.
For one on your telephone keypad, if you'd like to withdraw your question. Please press Star then the number two thank you Mr. Curtis corvettes. Please begin your conference.
Thanks.
Good morning, ladies and gentlemen controllers.
It's called web cast to discuss the financial results for the three months ended March 31st 2020.
<unk> corporate update.
Curtis Congrats vice president of investments and Investor Relations that I'm joined today on the call, but Steve King President and Chief Executive Officer, as well as during fiscal Chief Financial Officer.
Her short presentation from Stephen during Q1 day session. The life will be placed on mute until then to <unk> background.
Before we begin I'd like to remind our listeners that all amounts given our Canadian dollars unless otherwise noted listeners are cautioned that comments made today may contain forward looking information as forward looking information based upon a number of important factors and assumptions and as a result actual results could differ materially additional information concerning the underlying factors.
Options and risk is available in last nights press release on R&D named for the period under the headings forward looking statements and risk factors copies of which are available on SEDAR dot com as well on our website.
Yeah first datas also presented in may differ from the way other companies present, such data that's what sort of any statements. Please refer to last night's press release, and then DNA for the period for more clarification.
I'll pass the call over to Derica School.
Thanks, Chris Good morning, everyone. Thanks for joining our call.
Record quarter revenue doesn't quite resonate today after almost two months of living with coordinate teams. So this quarterly update will be a little different than most.
Before I start I would like to address our normalized EBITDA off the top I read a couple of analysts reports last night on this morning, I talked about a big normalized EBITDA Miss and that's completely inaccurate and I just want to clarify this refer everyone to kick off the call. So our guidance that we gave a couple of months ago with our yearend results call forever.
Many of just under 35 million, which included 9.3 million a onetime revenue from SB <unk>. So normalize revenue should have been just over 25 million.
Revenue in Q1 was 34 million less 9.2, SB I. I for 24.8 million sorry, just a couple hundred thousand less than a then expected. Some additional transaction costs were incurred in the quarter due to the sandbox sale I live deals were working on but those are backed out of normalized EBITDA each quarter as their transaction specific.
Janney stock based comp was pretty much as expected, resulting in normalized EBITDA of 21.2 million I remember that should not have been a surprise to anyone based on our previous disclosures.
Oh, that's all I've heard as Gordon mentioned, even back to our partner companies has been wide ranging.
The consumer facing businesses were hit hardest location closures across the board in mid March.
Those businesses are just now starting to reopen their first relocations last week and this week in certain states.
A couple of businesses that were struggling pandemic.
We are dealt a serious blow a number of business is providing a central services led by federal resources for 11 leverage their existing government contracts a massive recent contract wins, providing P. P to the U.S. army generating homes in the northeast U.S.
Kimco sooner janitorial services business start to take off as extra cleaning services.
As well as your contract wins have more there are placed any customers who close our offices.
Dan T., Fcr, and LMS and others that provide a central services have operated throughout the pandemic with varied levels of impact.
Our consulting business have adapted well to working from home at have also operate it throughout the pandemic.
All that being said the revenue impact so far has been limited the suspension of distributions for Providence in March and deferred distributions from body card tours and planet fitness in Q2.
A handful highlights from the core all distributions were paid through the end of March except for 200000 U.S. from Providence for March resulting in about 34 million dollar revenue again 9 million plus from SB I as part of the redemption in early January as CSPI businesses sold.
[noise] I'd be sale sandbox and the SB I redemption in the quarter gave us well time proceeds of over 155 million, allowing us to significantly reduce our outstanding debt to the quarter just weeks before the pandemic settled out settle them.
The impact of covert Nigeria was most apparent on the fair value is hard investments.
Total was 96 million, but 11 and change was due to a reclass from unrealized to realize gains relating to the SB I redemption.
And those items wash so the actual covert 19 impact on fair values is approximately 85 million about $2, a 33 cents a share at about 10% of the toward total portfolio.
Those reductions are as follows so Providence, a really unfortunate timing as they were making good progress prior to the pandemic, but were 15 million of senior debt in front of us and a business and industry hit hard.
Means no visibility on future distributions for US right now so we've written the preferred shares to zero.
The bank is continuing to be patient with the business I forget indication of future distributions will inform the market as appropriate but I do like is that the Providence management team was whereas arguing with me over our disclosures because they they continue to operate and that and a and have have some flexibility and and from their bank and.
Turning to get us back on track, but for now we thought the best course of action was to have a very conservative race to zero.
Cc calm as another consumer facing business with location closures at a time that they are already suspended distributions I know senior debt here, though and I and I finally completed merger between sprint and T. Mobile does give some late into the title.
But the impact of covert pushes regular distributions further down the line, resulting in a reduction of fair value of 11 million U.S. down to just under 4 million you asked at March 30 Onest.
After plan fit us all locations close mid March so no revenue for almost two months and they are just starting to reopen locations certain states.
Lastly, this was an excellent health heading into this TTM records for revenue and EBITDA at the end of February and we do expect district revenue stream to fully recover we've deferred distributions for Q2 for now and are working with our senior lenders with an expectation of restarting later in 2020.
The fair value is roost reduced based on a deferral of some distributions in 2020 as well as a negative 5% reset and next year, which will be the first negative negative first ever negative reset for planet fitness.
Resulting a reduction of 7.6 million, new SD to 67.6 million us.
The common shares and flat if it is we're also written off written down.
Well at 13% or 2.2 million us based on.
That the delay in the future expected earnings.
Our body Congers like planet fitness all locations. It further elective surgery centers were closed mid March one clinic reopened last week and more each week scheduled in May and other business that was an extra health health and also had record revenue and EBITDA at the end of February.
I know senior debt here, so the recovery is expected to be quicker and easier.
Distributions deferred for Q2 and expected restarting the back half of 2020.
So deferred distributions in 2020, and a negative performance metric reset in 2021 does translate into a fair value reduction of 3.2 million us, leaving a fair value of 43.7, new asset March 31st.
Dan TNL master, both providing essential construction related services and both operating throughout but we have allowed for profit potential deferral is required for a month or two that are fair value assessments and negative resets expected with some softening of their business means a reduction of $3.5 billion you asked for DMT, leaving a fair value.
65, and a half billion and a fair value reduction of 5.1 million Canadian for LMS, leaving at fair value of 44.1 million Canadian.
Ever actions heritage and fleet.
Each experienced small reductions and fair value simply due to expected negative resets in 21, So limited impact in the in the business, but enough that we do expect a negative reset next year and aggregate approximately 5 million us for these four businesses, where we expect distributions to can you continue to route.
No change in fair value for Kimco global like.
Our unify stride and federal resources at each of these businesses have seen limited or positive impact from covert 19.
After all those adjustments book value per share for Alaris at March 31st stands at 15, 70 15 78.
In today's earnings release, we announced a reduction of our dividend of approximately 30% effective at our next dividend now quarterly to declared in June and paid in July.
Of this year, the new annual per share rate as $1.16.
The data 29 cents per quarter per share.
The deferral of distributions from planet fitness somebody contours as well as impartial distributions from provenance and immerse common dividends and the opportunity to better position our payout ratio coming out of this were key drivers in a dividend decision.
An important part of the dividend discussion was a term sheet, we have with our senior lending syndicate that gives us significant flexibility as this at this new dividend level to manage cash flow and maintain bank covenants throughout.
We're extremely pleased with our lending partners led by HSBC and BMO as they continue to support us as they have since we got started over 15 years ago.
I should note at for the quarter Bank covenants all in very good shape and currently have about a 180 million to deploy on our balance sheet.
We also launched an anti being late March.
We have been successful in buying back or just over 1 million shares saving of a 1.2 million an after tax dividends at that new dollar 16 annual dividend rate.
And after tax savings of just over a million dollars after paying.
Interest on a 9 million or so borrow to buyback those shares.
The average price of the shares bought back has been about $8, a 50 cents more than a 45% discount to our book value at March 31.
You will note some changes in presentation our income statement.
We enacted this quarter in an effort to simplify we included all revenues net of any FX forward contracts that we used to manage our us revenue exposure all on one line.
And the detailed still provided for readers are.
In the notes for the financial statements, we combine all gionee on online.
We will provide the details in the M&A as required.
Total Genie expenses for the quarter were 2.77 million compared to 2.53 and the prior period with really nothing of significance report on any of the three previous line items as far as differences.
Transaction diligence for the quarter were $2 million compared to point 2 million in the prior period.
Costs relate to the sandbox sale as well as a couple of for prospective investments and the pipeline.
And as you know where those numbers do fluctuate on a quarterly basis I give out given the based on transaction activity.
On the tax front still nothing to report on the Canadian and the things, but we did receive further clarity on the U.S. environment and learn we can no longer deduct certain intercompany interest.
At December 30, Onest, we'd estimated total potential tactical of almost 12 million and I'm pleased to report that number has turned out to be just under two as a result of certain rules and applying the guidelines amount that we may not even have to pay based on the retroactive application. The guidelines I will provide more information as that.
Is that the issue becomes more certainty.
We continue to work on a more efficient structure moving forward to return us to the same effective tax rate as we have seen historically.
And finally, given the uncertain economic environment, you will read our disclosure we have pulled our detailed guidance for now and we'll get back to providing those numbers as soon as we can.
I will pass over to Steve King, our President and CEO, great. Thanks, Darren and thanks, everybody for for logging and.
We've been doing this for 16 years and we've been public for 12, and so many times over those years investors have set at the end of meetings. So what keeps you up at night, what's what's the biggest risk to your business model and I have to admit I did not foresee or consider virus taking.
Down the economy like Govan 19 has.
So while we're not through this yet and there will undoubtedly be information over the next few weeks and months that we still don't know.
From where we sit today it appears that our portfolio and our investment strategy has been very successful and cushioning the blow this crisis.
By nature Alaris investment basic often required service businesses businesses that for the most part of continued to operate and prosper throughout this period.
12 of our 16 partners continue to operate profitably and managed to find ways to adapt during this challenging time.
The four companies that are.
Consumer facing the two material ones body contours and planet fitness both companies have very good financial.
Next ability on their balance sheets and also business models that are really well suited to a full recovery and in fact, both companies are reopening as we speak.
So with a manageable amount of cash flow interruption, our thought process on our dividend and our share buyback program turned to what would be the best what would leave us in the best position for the long term.
It's been our stated long term objective for many years to have a payout ratio below 70%.
With the markets reaction to our stock I Miss pandemic, sending our share down so dramatically.
It was certainly reflective of a lower dividend and we felt that this is the right time to make a move that will take us to that long term objective immediately as soon as body contours and planet fitness resume their payments to us.
We also believe in the best opportunities for an Investor often comes in times like this.
We wanted to be in a position to preserve capital to take advantage of those situations that are there for us.
With $180 million of availability on our balance sheet today, a lower cash cost of equity on our debit after our dividend cat and generating excess free cash flow on a monthly basis, we're in an excellent position to grow.
The greatest period of wealth creation, and our 16 year history was the four years coming out of the 2009 recession.
Highly successful private companies don't want to sell common equity coming out of a trough are less dilutive preferred shares are ideally suited for an environment like this and the opportunities that we have at hand reflect that.
Obviously this period is not been signed for anybody ourselves included but I'm inspired by the incredible work of our partner companies that have that they put in to respond to the challenge. The examples of leadership creativity compassion and work ethic that our partner management teams have displayed over the last few months makes me even more confident in our future than I was before.
I'd like to thank all of them for helping us and all of their employees through this period.
The next few months will undoubtedly be roller coaster, good new that bad having partners are strong businesses and balance sheets and.
And having the financial flexibility ourselves, we expect to come out of this healthy and growing.
So Pam I'll put it back to you to open up for any questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone you will hear three John from acknowledging Everquest and your questions will be pulled in the order. They are received should you wish to decline from the pulling process. Please press star followed by too.
Speakerphone, please lift your handset before pricing any Keith one moment for your first.
[music].
Your first question comes from Gary How does your Dan. Please go ahead.
Thanks, Good morning.
First question just on the.
Dividend cut here, maybe give us a bit more color kind of how you came up with that.
80%, I guess, given where the dividend yield was why not due principally to cut to give you any chip buffer here.
Yes, there was a few things Gary.
First of all the in the short term, we we've lost.
23% of our.
A little under that.
Of our revenue in the in the short term.
From body contours and planet fitness. So obviously, we we wanted to stay below 100% even in this.
Kind of blowdown environment that we're in today.
But probably the single biggest thing is as I mentioned getting to longer term. Once once everything is recovered we wanted to be below 70% payout ratio.
And quite frankly, it's not it's not prudent are acceptable for a company to be paying out.
17% to 20% dividend yield so.
We wanted cash cost of our equity at today's price, where the market is that to be.
To me more acceptable for us and and so those are kind of.
The overarching things that led us to our decision and I think Gary I would add also that in Q1, we did have some additional revenue in from SP and a low payout ratio for the quarter. So approximately 11 or $12 million of extra funds that will help us manage through the fat.
Body contours and and planet fitness.
Fast for Q2 and.
And anyone else that we need to give help too. So we thought that that 30% was the right number to give us lots of flexibility to add to add to give a deferral assistance whether partners that might need it as well as body contours and flat fitness and still be well in line with any of our bank requirements.
Okay, Great. That's helpful. And then maybe related to this just looking at the how you think about and see I'd be versus capital deployment here I guess I think shares right now are yielding roughly 12% at that you can deploy capital and initial yield and roughly 13% is that kind of how you think when you might turn on the top.
For buybacks versus capital deployment.
It's not just math.
We.
The other question that you have as as a management team is how to improve your your cost of capital going forward.
And a lot of that as as we saw after 2009 is to show growth and positive momentum coming out of this so.
We're not going to.
So spend everything that we have on non share buyback, we want to make sure that that we're still showing growth and adding great long term assets to our portfolio. So.
So I think continued to be mix.
But we've got some some opportunities at hand, both with our current partners and and potential new partners as well that we do want to.
Save our capital for and and show growth coming out of this.
And then maybe just on the capital deployment side.
Can you elaborate a little bit more in terms of what you're seeing I guess on the flip side Thats. Your team has been held back a little bit to do for due diligence purposes, given the the travel bans and whatnot.
Yet, we we have become experts at zoom and teams and Webex and hang out than any other.
Mode. You can you can talk to somebody online with and it's actually been very effective and like a lot of companies I think it. It makes you reconsider some of our old habits of.
Of traveling face to face as much as we have in the past but.
Only face to face, there's still a big part of our business.
We do have several opportunities on the table right now that were Fortunately, we were able to spend.
So face time with before.
Before this.
This.
Lockdown happen so.
Where we think there are some some great opportunities here and as I mentioned some of them our with our current partner so.
It's a.
It's a tough environment for everybody, including us, but as I mentioned that if for an investor like is it really.
Separates us from our competitors, even more than we were in the past and.
Hi, I'm actually quite excited about what the next couple of years are going to bring for us.
Okay, and if again Thats sneak one more and just realistically when do you think planet fitness and body contract could we assume distribution and when they we start will it be a portion of the full rate or how should we think about that.
Yes, it's too early to tell Gary.
So they have.
By the contours has actually opened.
Some clinics already.
Planet Fitness is is planning to within the next two weeks and certain states. So it really is going to depend how quickly both companies are able to roll out that strategy I would I would suggest that body contours is.
Probably on a on a faster schedule because someone offering non essential surgeries, that's always going to be the first thing restarted in every state.
Whereas jim's might that might lag that a little bit and it's a little uncertain. How are we going to have some fall starts and then have to go back that's that's probably more likely in a gym scenario than Ana and surgical center, so still lots to determine there so.
We'll giving any kind of.
Timeframe or expected rollout.
We are hopeful for for the second half of this year.
I would say I'll also add Gary that our dividend reduction does certainly contemplate.
These businesses not restarting in Q3, I mean, we're certainly hopeful that.
We have given ourselves lots of room for for any.
Future deferrals that we need to provide their actual a restart.
Our.
Well in advance of our of our forecast.
Okay got it okay. That's it for me thanks very much thanks.
Your next question comes from Scott from some with RBC. Please go ahead.
Hi, Good morning, just a couple of follow up question on planet fitness and body cancer, how did both companies do coming out of the 2008 2009 recession and how does their their footprint their location footprint compare.
Now versus.
Then just wondering what kind of network growth.
Yes, both companies are significantly bigger.
They would have been ano eight or nine one of the things that when we did our due diligence on body contours, specifically we looked at.
We looked at how the entire industry did coming out of Oh, We don't island, where we're really pleasantly surprised the.
The impact was.
Negligible.
For that industry coming out of the last recession. So.
Then anecdotally for both companies right now.
Things look very strong.
[music].
Almost everybody that had surgeries.
In March and April that were postponed almost all of them have.
Re signed up to get them done.
And in May and June.
When they opened up their first location last week.
People were very very.
Excited about coming back.
People that had previous surgeries booked and also new.
Clients as well that that signed up but after their initial consultation so and also with with planet fitness. There Theyre online cancellations are our way way smaller than what they had forecast when the when this cobot started and people seem to be very keen to get back.
To the gyms, and probably have been little to inactive and eating a little bit too much while on the on locked down. So so for both of those companies that is a factor and then.
Both from just kind of early anecdotal evidence seem to be well well suited for a quick come back.
Data on industry penetration.
Basically density locations.
Industry now versus Stan.
For for.
First on a below efforts if we're talking about low end.
Planet fitness and basically looking at the elective cosmetic surgery business the.
The low to mid priced Jim business.
Yes, both.
Both really wouldn't have been.
Had huge footprints in no eight or nine.
Both of it to have grown extremely quickly since then.
Obviously with Sona belt with Sony Belo It would be more just sort of Belo has grown a lot obviously liposuction plastic surgery was very much large industry.
Back then as well, but for saw Novello, there are there particular footprint.
Wasn't as Big then their doctors that do surgeries for them.
I would have been doing surgeries back then.
Just as much that they just weren't part of sort of below at that time and planet fitness most of their growth as you probably know as has been sense owing on time so yes.
And one of the one of the key attractions for us and for other people with with planet fitness is the fact that it is better suited for going through down times like this that at $10 a month.
Thats, a lot more robust and downtimes than than $100 a month.
And so thats one of the key drivers to.
For us as as an investor and you've seen that with with our planet fitness the parent company. They went down considerably at the start of covert Theyve had.
Very nice recovery sense.
And people I think I understand that they are going to be one of the quicker Wednesday, or whatever and and I will fare better and the tough environment.
Thanks, Steve that's helpful.
Later.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star followed by one.
Your next question comes from a new free hard with Stifel. JMP. Please go ahead.
Hi, Good morning, guys, just a couple of questions first on the taxes.
And I just want to make sure I understood. Your opening comments correctly in the Mdna you talked about meeting levied with some new.
Potential tax liabilities in the us to totaled 12 million current in deferred.
Combined did I understand you correctly in saying that 12 is really now to and could go to zero.
Yes, the Mdna mentioned, the Z basically the accounting entries.
We have through installments and prepayments in 2019.
Pay most of those taxes.
And so the net new obligation coming out of this is a max of 1.8 million.
Okay. So it really okay. So.
It's not that big a deal then relative to what you disclosed in the.
No it's considerably less than what we disclosed at year end.
It will result in a in a higher tax rate for the first half of 2020 until we can.
Finalize our our capital structure to get back to where we are in a.
Where we were before this these guidelines are applied.
Okay. So what should we be thinking about in terms of a tax rate for the first half of this year.
I would say.
Traditionally we've been close to 20 from the U.S. standpoint, so so higher than that maybe 26 27 in the us.
For half a year.
I think going back to something in the low Twentys Paulson.
Low 20, there 20 that thats our target.
Okay, Alright, thats helpful and then.
With respect to the companies, where you're going to have royalty deferrals I'm just curious how do you plan on.
Addressing that will you go around and talk to each of these guys on a one off basis or will you try to implement some sort of set policy with all the partners at summit.
So once you have a certain amount of cash flow exceeds all their fixed cost than you guys would be eligible to some percentage of that or I'm. Just curious as to what your thoughts or is that how you're going to have those conversations.
The time arises yes, it will be not the case by case basis. So we do expect all of those myth.
Dividends from our partners.
To come back to us.
Some of them if they come back.
In into.
A large excess free cash flow physicians that quickly, we'll have some kind of a cash flow sweep or something like that others. If it if it takes longer.
Maybe we put it on the backend to be caught up on on that eventual exit or something like that but.
We do want to be flexible with with our partners. They are working very hard and obviously they didn't cause any of this mayhem. So we do want to be flexible and work with them on a case by case basis. Just one quick example, anue and the case of.
Got it contours or planet fitness, if they have a negative reset next year of the bottom of the color I want to think as we've discussed of them is about just holding that flatten them sort of that's one easy way to start catching up.
In the absence of.
A lump sum payments. So there's a there's a number of different ways that we're looking at but Thats certainly one easy way to start picking it up X reset and none of that is in our is in our forecast our payout ratio or anything like that.
Okay, and then just lastly, with respect to the two partners, where you have common equity holdings in imposed to dividends have been deferred.
How do you realize value on a common equity outside of an exit now that the dividends for the time being at least have been suspended.
Yes for it we have common equity in.
In just a couple of companies and.
So those those are unstructured dividends.
Even if we don't expect them in the short term we are.
We look at things from a very long term approach, we do expect dividends from them at some point and and also exit gains as well so.
It will be different in every case, yes, our mervyn they if they have historically paid.
Dividends to their common shareholders throughout and we do expect that one too.
To return.
This has always been one that we really never have advertise expectations for dividend on on planet fitness that would be more exit focus. So we do expect of our common dividends too.
To restart at some point and but right now the right thing for them to do is conserve cash and be ready for what's next.
And also.
Just like for Us Theres a lot of opportunities that are coming out of this for our partners.
Atlanta Fitness is a great example, whereas you know three months ago Plateau planet fitness franchise system was one of the hottest properties in the in the private equity markets.
Now some of their real small.
Operators are are having a real tough time they.
Dead on their balance sheet, they're having a tough time getting through that so.
Well capitalized.
People like like our partners. The they can take advantage of that so paying a common equity dividend for planet fitness or whoever it is may not be the right thing coming out of it because there may be some really good opportunities to further capital towards.
Gotcha, Okay. Thank you.
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Your next question comes from will work with rich with with Rich Company. Please go ahead.
Hi, guys just before all of this happened I think you had said something like 11 million Bucks in terms of operating costs.
Does that still sound like a reasonable number to use for this year.
Yes, I think so our certainly our our travel and.
<unk> expenses are have gone down significantly.
So, but thats a few hundred thousand dollars Airseal 11 remains our guided number.
Okay, and Thats before stock based comp, but it does include the due diligence costs that youre going to incur no no due diligence costs is always so so that 11 million would be for salaries and benefits corporate office and legal and accounting that's not deal related transaction costs will always be outside of that and we'll.
Always be it will always depend on activity. So this quarter was 2 million because we have that the sandbox exit as well as a couple of transactions that are that are live next quarter could be a completely different number depending on depending on activity.
Thank you.
You bet.
Mr. King there are no further questions at this time. Please proceed.
Great. Thank you Pam and thanks again for everybody for for joining us feel free as always to add to contact myself or darrin or Curtis after the meeting at any time too.
Go through any other questions.
In any other time in our history coming out with a quarter, where we had 10% of our portfolio written down like this.
Probably would have been pretty somber mode around this office.
Given what's happened in the world and.
Given that our stock of down 60% not 10%.
We're actually very excited to have come up with this quarter and then to present to everybody kind of how our portfolio is down I would I would really recommend.
Investors and analysts going through our mdna going through on a company by company basis, how our our portfolio has done.
Thank you have a tough time coming out of that process.
Feeling anything but positive about about how things are going for our company and combine that with the opportunities that we think we'll come out of this for us.
This is an exciting time for us. So obviously were our first priority is to get through this and make sure all of our partners in staffer are healthy and and safe. But this is this is a very good time for us and for our type of structure. So thanks again for tuning in and we'll we'll be talking to again next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and I would you. Please disconnect your lines have a great day.