Q2 2020 Alaris Royalty Corp Earnings Call
Good morning, ladies and gentlemen, welcome to the Q2 Twentytwenty earnings Conference call.
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This call is being recorded on Wednesday July 29 Twentytwenty.
I would now like to turn the conference over to Curtis Curtis.
Please go ahead.
Thanks.
Good morning, ladies and gentlemen.
[laughter] for the three and six months ended June Thirtyth, two top 20 as well.
[laughter] Investor Relations.
Steve.
Sure.
Okay.
[laughter] station from Stephens.
That's right.
Yeah.
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Steve.
Forward looking statements. Please refer to last night's press release on R&D for the period for clarification.
Hello.
Thanks, Chris and thanks, everyone for joining we're certainly pleased to be reporting.
Really solid quarter in a a truly unique business environment [laughter], we continue to be so impressed with the management teams they partner with [laughter] a couple of the battle through full location closures.
Extra reopening.
Well most of all creative did really well throughout and a couple of thrived as opportunities present themselves.
Oh, the financial impact of cold it on a this quarter was much different than Q1.
Q2, we saw the deferral of revenue as we disclosed last quarter from body contours, and platts fitness, which resulted in expected period over period declines in revenue and EBITDA.
The three and six months ending June Thirtyth.
At this time, we still do expect to click that revenue, but have a record and even on our financial statements will do so when we collect.
Oh I'm, sorry, we did collect all accrued interest on the kimco sub debt as they finalize our new credit facility in the period as well as a 400000 dollar common share dividend, we receive remember the corridor.
Normalized earnings in the quarter of 16.2 million normalized EBITDA of 17.3 million down for the prior year period again due to those revenue deferrals.
We clearly a normalized earnings and this quarter as there was significant and there was a significant accounting entry in the period related Saks [laughter] that related to 2019 change in U.S. income tax regulations.
Hi, it's important to add though that just as we disclosed last quarter that our Max exposure is still less than 2 million. So that's something we felt we need some additional explanation the notes that statements and any MTV.
Normalized earnings that normalized EBITDA, the six month period again down to the revenue deferrals and the fair value adjustments that hit earnings in Q1.
Overall, the number of positive envelop developments to report on through the quarter.
First and foremost fair value increases even half million and book value per share for Alaris at June Thirtyth as a approximately 15 50.
I'll start with LMS, a write off of about $8 million. They were down 5 million in Q1, we were expecting LMS to have some challenges in a covert environment, but to the required nature business. A instead resulted in increasing revenues and EBITDA at April may and June so instead of a small negative reset for LMS and support.
21 of the potential for a deferral of revenue.
We're expecting reset a better than 10% and no interruption and distribution.
Hi, GW after know a fair value adjustment in Q1, we do hours, a small 3.2 million dollar decrease in fair value.
Q2, as April and May were softer than expected to hospitality industry drop off but June and the rest is you're looking much better GW. Their management is forecasting a 10% decline in revenue, which would mean that 8% decline in our distribution and results in a reduction in fair value, having said that we remain very bullish on June.
GW and the long term.
And they expect a very good year of growth and 2021.
Our chemical I want to businesses, we haven't had a positive news on in quite some time or they are thriving in this environment businesses are clean more than ever.
Some specifics to covert clean ups and some just regular contract increases from cleaning from a three or four days a week to five or six or once a day the twice a day.
Kimco refinanced its prior credit facility switching to a new banks and a much more flexible facility in the banks that we know well.
During the quarter, we've already received their first partial distribution of $100000 U.S. in the middle of July and I've noticed your first distribution in two years.
Translates into a small but important fair value increase of 1.5 million.
[noise] for BCC, what a terrific come back they've had from a complete shutdown of all locations in the middle of March full credit to this terrific management team for managing through the closures right back to all locations now open and distributions restarting handful for Q3, well ahead of schedule of our initial estimate of Q1 2021.
Well take on a 2 million dollar increase in the fair value.
We also added a new partner Curie electric for 17 million U.S.
15% yield on our Prefs had a small amount of common.
Shares of common shares and we do expect a dividend on on a management team. We we are a big fans of.
We also announced the conversions winning contracts that will go to shareholders for vote at the end of August alongside a 7% increase in the annual dividend or trust distribution to account for higher taxes on the trust distribution.
The trust us conversion will allow us to retain more capital internally by reducing admin expenses relating to operating subsidiaries in the Netherlands, and more importantly, reducing our effective tax rate on U.S. revenue returning us what overall tax rate comparable to where we were before these changes came out.
As well as a lower payout ratio.
Our NC IP that we launched in late March allowed us to buy back 1.2 million shares at an average price of $8.69.
Saving almost a million a half an after tax dividends at the new expected annual distribution rate us dollar 24 per share.
We also announced a favorable bank amendment that gives us all the flexibility we need over the next 12 to 15 months and we're getting to work on an extensive facility. The currently matures September of 2021 and are you I I just add we've been.
Very appreciative of the sport our entire banking syndicate has has shown us throughout.
In one or more interesting developments the significant opportunity arose for us to support our current partner federal resources on their largest U.S. government contract in the history.
On our typical preferred equity investment, but instead to show of support that allows us to use our balance sheet availabilities precipitous drop participate in a meaningful way et cetera resources continues to be a primary provider a PE to U.S. government agencies in this case collectively by over 4 billion protective gloves.
The U.S. government over the next 75 to 100 days.
DNA was higher than normal a current quarter.
With approximately one half million dollar spent on that trust conversion.
You know a onetime nonrecurring expense that we added back.
Normalized tables in the Mdna.
Sadly more than offset the savings on January we've experienced as Stephen iron ore and what else. It Alaris has been on a plane or say the hotel since early March.
And finally, given the continued uncertainties in the economic environment, we continue to not provide full year detailed guidance for now and we'll get back to providing those numbers as soon as again. However, we are confident providing our expected Q3 revenues of 22.8 billion and that's just what we're expecting from preferred distributions and and nothing on the federal reserve.
As opportunity.
So those are things I wanted I mentioned I'll pass it over to Steve before heading into Q.
Great. Thanks Darren.
I'd say, it's been tough to watch the news and read the newspaper over that five months.
Feeling.
Some serious nervousness presiding over 850 million dollar portfolio private companies, but as we sit here in late July.
Nervousness has really turned to the admiration for our partners and excitement for the opportunities that are presenting themselves coming out of this this locked down.
So when you step back and look at our portfolio as a whole we have 17 partners and the degree of success of they've had over this period is quite incredible.
12 of the partners of at very strong performance with no disruption distributions no material change their risk profile going forward and in fact, the majority of those 12 companies have continued to grow.
And included in that list now is his body onto ours is a.
As Dan said at the close all of their locations.
In March and April and are now are operating at record levels.
Two of our partners federal resources, and Kimco have hugely benefited.
That leaves three companies that have been negatively impacted by the lock down in Providence Cc comment planet fitness, the first two or longer term recoveries, but planet fitness is ahead of forecast and their reopening and we have full confidence not only in them restarting distributions, but also catching up on everything that was met during this time.
So for US this unusual successes as may infrastructural benefits of our investment model, even more obvious and during the good times.
The vast majority of our portfolio have several things in common.
The company that provide required services the adult fluctuate greatly with the economy.
Very low and in most cases no senior debt.
They have very low required capex to maintain their operations have a large cash flow buffer to withstand unexpected volatility and their business.
Finally, they have skilled management teams that are fully intended as long term equity holders. So all those things have come home to roost here in an extremely positive way during that this pandemic.
It's also been a great example of our value to our private company partners and their entrepreneurs. So during the past times like this entrepreneurs don't want to put a value on there on their business, but by the same token would love to access capital to take advantage of unique opportunities and they're in their industries.
I also don't want to share and all the upside as they came out of a trough so bidding on new deals.
We're at a distinct advantage versus our common equity peers.
And with our limited participation preferred shares.
Autozoners are allowed to accomplish all of their goals and not give up control or all of the upside.
Also.
Speed and flexibility and helping owner partners has led to several as to any opportunities in this current one with federal as our so the Darren described now most of the top of that list.
We've done over the years.
Federal nurses came to US just a few days ago as a matter of fact with this opportunity.
They had the largest PBM contract in their history in one of the biggest and American history.
More than 4 billion gloves.
Part of their supply chain had lost their financing and required and the required fulfillment cycle was a very short period of time, so they could not.
You know really go to anybody that would have to start from scratch and need various levels of approvals through in a big banks and whatnot. So.
This was a super important deal for federal resources financially. It's also as I mentioned, the largest contract and their history. It's also vital one.
For them, because if you aren't able to perform on something like this year chances of getting other large contracts with the government would be severely limited and finally as an important one for the American people.
Globus medical that was of the count.
Hi, this thing too to acquire because of a shortage of rubber. So this one was that was extremely important for a number reasons. We were very very happy that we could have stepped in and we'll be well compensated for doing so.
[noise] so looking forward.
We're seeing several actionable items.
To deploy more capital in this environment, both with our current partners and also for new partnerships as well.
Transactions similar to the one we close of carry electric carry that 97 year old family owned business in a required industry required service industry.
It was able to grow nicely through the locked down there are several of those types of opportunities for us to pursue.
But that will win those mandates and as we have for for years now so a radical I'll turn it over to you to add to take questions.
Thank you very much.
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Your first question comes from just said wait.
The company core Matt.
Please go ahead.
Hi, good morning, guys.
Good morning.
So why do we start with federal resources and that agreement there.
Help me understand as this is effectively a working capital line for the for them is that how it's structured but you guys.
It's not really Jeff and because of the sensitivity as of the contract.
And to the end user is we can't go into a huge amount of detail on it.
Obviously, we'll we'll see the.
Revenue and earnings show up.
Over the next couple of quarters here, but we essentially took place of of someone in the supply chain directly.
And used our balance sheet, obviously thought it was our so the expert in this industry. So we don't have any.
Any additional things that we need to do here, but but yes, it's not a traditional financing per se.
Okay, but I guess at the end of the day, the U.S. government the counterparty and it's sort of mitigates I guess the risk of doing that it's fair to say.
The its a guaranteed government contract the the dollars already and then account waiting for delivery.
Yeah, Okay and.
Granted I understand you can't really disclose a lot of the terms year, but like in terms of the economics is this.
Sort of in the ballpark of the sort of returns that you tend to target normally or is this just more about being a good partner and it'll it'll help the overall revenue picture in the subsequent resets for you.
So we're getting paid on a on a per box. So we're getting we're getting a margin on the product as opposed to our return on our capital so that.
The returns on the outlay will be.
If all goes well significantly higher than than what we're used to but the number one thing was to the facility. This order and I have helped by the company that's been an absolutely booming through this.
Through this pandemic.
Okay and I guess you said this is a 10 week contract sounds like it's already kicked off.
Just to clarify that you said this was not included in your Q3 partner revenue guidance.
Yeah, Yeah, that's correct. So yeah, we made our first deposit but.
It was so fresh we're just not sure we're actually even talking with our accounts, we're not sure how we're going to account for it when it comes in.
Lots to be sorted through.
But so our guidance on the 22.8, it's just our regular preferred distribution revenue and interest from our partners and just the way the way I look at this one is obviously this is not something that is going to be repeated often.
So we offer for years or anybody else's model. This is not something that you would annualize obviously, so really what we're looking out here is some hopefully some unusual profits they will pay for some of our future deployment without needing to raise it through debt or equity.
That makes sense and.
As far as are getting back to work here it looks like getting distributions and back online.
Thoughts about how you structure that jumped teams in the future or they just with the sort of rolled in and.
We had around warranty period or what kind of options. We are you looking at in terms of how you can structure those.
Yeah. It seems like both with body contours, then planet fitness at their their cash flows dreams.
Such large buffers.
Pandemic and are expected to get back to that and body contours is already asked that that we can probably make this up.
You know fairly quickly over the next few months.
I had a fitness is a little tougher because it got a senior lender.
That means.
That needs to be looked after so that one's going to be a little longer but again I don't think if it's going to be too complicated.
No I think it'll just be almost like a cash flow sweep.
Going forward and hopefully pay back in a relatively short order.
Okay, and I didn't want to ask us to bet that senior lender at planet fitness and on the path that's been a bit.
Obstacle to to negotiating working with your partners.
What's the sort of that look in terms of how willing there to play ball with you as this one of those ones that you did structure at the time with them to do have a little more flexibility in how you relate to that lender or what's the status there.
Yes, I'd say, it's a senior lender we have a that does the lead senior lender is a bank we have a long term relationship with.
As I had been the lender on a number of different files. It is one of our more favorable.
Covenant situations.
But we do need we do need all of those locations to be open I mean, they were they were at in February at an all time high revenue and EBITDA and so it.
Really is sort of quite tragic the timing but.
This is a great business people have been coming back to Jim's in the U.S. certainly the class it as ones certainly that low cost $10 a month.
They can operate at 50% capacity, because they've never they've ever been full.
And so this is a business that we do expect to return back to to close to normal and as far as a senior lending relationship. It's certainly not not a lot by any means but we're having regular conversations and it's a it's a group that we're familiar with and that we're hopeful but we need we need the business to be.
To have older locations open and and showing the bank that their cash flows are returning to normal and then will be good ago. Yeah. We thought it was an interesting thing one of the counties in Florida that they have just one location and they actually re closed last month.
Reopening within two days thereafter.
It's proven to be a very difficult thing in the us to the close things down again, and they certainly don't see that happening so.
Our where we're cautiously optimistic that we'll get all there although gems reopened here over the next.
A few weeks and and be able to have that negotiation with the back to the see when we can restart our distributions and also start repaying the ones that were best.
Okay, great. Thanks for that color I'll re queue.
Great. Thank you. Thanks.
Thank you very much. So your next question comes from Gary.
Calling from additional debt capital markets.
Hello.
Good morning, just.
Going back to federal resources as well maybe can you talk about one of the risk that this might carry that we might not be aware of.
Option B.
Yeah I think.
The.
The main risk is probably at the very front end terms of the the supplier manufacturing adequate quality gloves, but the nice thing there is that.
We will have only pay but the small deposit down by the time, we've seen the quality of those gloves. So.
The rest happens.
After inspection. So we think the risk is a is fairly low, but I think that would be the main risk in the supply chain.
Got it and then I think you guys mentioned and the total commitment being used 100 million less.
And Mike how much higher is that more than 100 million does that or should we just kind of think about 100 million as the purchase order size.
Yes, it's not higher than 200 and Theres a 100.
[laughter] pretty pretty close yeah. There you go okay. Okay, and then maybe just staying with that with federal resources, given that they're doing really really well in this environment was no risk and then potential.
Redeeming here with this partner.
No we don't think so.
Yes, I stepping up like this has really.
Establish the value of having a partner like us, they're getting bigger and bigger contracts and Oh. This is a company that is.
Now sitting at a more than triple what they would have been last year in terms of both revenue and EBITDA. So.
[music].
If so if you look at it from a few different angles. One is having a up close partner that can act as quickly as we have four unusual circumstances.
The one is if they would have had a common equity partner in play and to have this kind of growth.
Capital would have been enormously expensive.
For them as they would have grown as everything we are we're going to grow by a modest amount this year with federal as ourselves. So yes. If anything this is really showing them the value of of our partnership.
Needless to say they could not be happier with us right now.
Okay perfect.
Then Steve just on the capital deployment side, what are you seeing you seeing more opportunities I know theres travel restrictions in place.
Yes, maybe follow on opportunities any comments on this front.
Yeah. So a follow on opportunities obviously are.
Our preferred.
Deployment right now because of what you mentioned with the travel restrictions.
We'll never invest in a company that we don't spend time with face to face.
So we're coming to grips with that right now I'm trying to figure out.
Probably who in the office is going to be the Guinea pig too.
To go down to the U.S., and then ethic warranty and all the way back.
Because there there are new opportunities that are coming to us.
In this environment as as I mentioned in my Doctor.
If you're a company coming out of a time like this you really don't want evaluate your business in a trough.
Full they're down sometimes the Companys earnings have been have been muted by the endemic so it's just not a time that you want to issue common equity, but our press allow them to raise equity and pursue their opportunities without doing that so it really has a great environment for us.
We've got opportunities on the table that we can execute on but.
We're going to need to.
But some people down other states and have them quarantined on the way back because I don't see the that order rules changing anytime soon.
Okay and these follow on opportunities should we think pine timeline wise later this year or are they more kind of 2021.
Ladies.
Although the 2020 for sure.
Okay, and then we can sneak one more in Darren.
Can you give us an update on that consolidated TCR that you guys published a quarter two quarters ago.
Yes, we are still still above one on a half Gary it.
Improved over last quarter, but there are some you know like the fr Federal resources alabaster couple of gone through the roof and so.
We try to cap the big ones at a certain amount what were.
'cause it can skew the information so, it's a little bit better and still above one and a half.
Okay got it thanks, that's it for me thanks.
Okay.
Okay.
Your next question comes from Anthony Sandler The company Mackie Research. Please go ahead.
Hi, guys. Thanks for taking my questions.
First one is your DNA is up fairly significantly over last year.
Okay.
It's really didn't comment on that please.
Yeah, you bet as I mentioned on on the call any M&A.
Million and a half.
As gone in this quarter loan to a the trust conversion and so thats legal and accounting, it's a very expensive transaction that you need to make sure you do it right. So that is absolutely one time.
On a regular DNA is actually well off where it is as far as.
Idle corporate office I think was 400000 compared to a million. It's a all really on that legal and accounting line related to a two to the trust conversion for most part.
Excellent. Thanks, So just like you can hear me, Matt and.
Just you Didnt get double hit.
Tax issues with both the U.S. IRS MCR a.
We have swung would you feel that those appeals going to work for CRH.
Is there anything as of June June decisions you IRS.
Yeah. The CR this year two very different deals. So after the CRM is one that.
I mean, we were audits gosh, Scott would be six seven years ago now.
It's been held in advanced there's a whole bunch of other.
People ahead of Us Theres a couple of.
Cases in particular that are at a in appeals court at the moment that there I think CRP is waiting to see how those go before they they will deal with the rest of us that are in advance.
We remain very confident.
That we've done everything correctly and will be successful.
But we haven't heard from the CRM and in a very long time on that and I really don't expect to until those other deals are sorted out.
From the our standpoint, it's our view that we can go ahead and file based on.
Using the interest deductibility.
Under the guidelines in 2019.
KPMG did require us to make a provisional so hence that big accounting entry and in that Q2.
Again, it's our view.
I will be we will be successful and with that application or without filing.
Having said that on the IRS standpoint, the the downside as we go an extra 1.8 million and and tax and so it's really not a significant debt deal weve.
Paid through installments and have other.
Opportunities and as it said that minimizes the exposure on the IRS and the fixed.
Thanks very much.
Yes.
Thank you very much ladies and gentlemen, the reminder, should you have a question. Please press the star followed by the one.
Your next question comes from Zachary reshape.
The company National Bank financial Please go ahead.
Thank you.
Good morning, everyone. Congrats on court.
Most of my questions have been answered so just a couple of housekeeping issues first off if all goes well with the trust conversion given the timing there how should we approach your tax rate in the third quarter.
Excuse me back to where we were so when the low twentys.
I would say effective September 1st we will have a couple of months for Q3 were operating at a higher tax rate for a floor July and August.
Assuming that trust conversion goes through on the first to September our go forward tax rate will be overall in the I'd say, 20% to 23% range.
Thank you and one last one Youre office costs as you mentioned are way down due to cope with.
With no partners Conference for example.
Do you see some of those costs coming back on the other side of Cobiz or are the out forget.
No I know that that.
Our conference we have is a really important invaluable event that we hold each year, where all of our.
Couple of people a executives of each of our partners common and.
We all assemble somewhere fun and Steve sets it up like a wedding planner and we put groups together that that have common.
Business issues or opportunities are or maybe just the same personal hobbies and it's it's a really valuable that so that will certainly come back in that 2021, but we obviously pulled the pen this year.
As far as our ongoing travel costs. So I do think it will be less well informed you know we've done a ton of our marketing with institutional and retail investors Bioglue meetings, and I know I think we still will get out and see people face to face in Montreal in Toronto, and Vancouver, and New York, but.
You know I.
I think companies will probably save a little cash on travel by doing more of these oh, just for the zoom or Microsoft teams me.
All right. Thanks, very much I'll turn it over.
Exactly.
Thank you very much. Your next question comes from a new pretty hard calling from the company lifestyle. Please go ahead.
Hi, Good morning. During just two quick ones for me you expect to them more common dividend.
Yes.
Oh, the we haven't put it into our run rate we do it. So we do expect it but we just because we Miss Q1, we thought we wouldn't put it into the run rate until we had a regular track.
A trend again, so while we do expect it not a big amount it's their intention to pay one but we'll we'll put it in one state had three or four more general yeah. They they've asked us to be cautious and our expectations there.
They're feeling good about things, but just like everybody in the world I think right now everybody wants to this just because.
Okay. So.
Just on the proposed increasing dividends and 29 cents of 31 cents.
Subsequent to the approval of the conversion can you start a little about the rationale behind that.
So sure it really comes down.
Makeup of the distribution to shareholders going to get in September well I guess October when we pad is going to be different than the one. They got last time. You know this one is is 100% dividend well the future wells will be accommodation of dividends trust distributions and return to capital. So they will have a different type.
Tax.
Profile I suppose and so this increase is basically the make shareholders I, even Stephen at the end today. It allows us to even with that increased and distribution and keeping shareholders whole. It allows us to retain more capital in the business and lower our payout ratio because of the Dick.
Greece in the U.S. tax rate.
Great. Thank you.
Thank you very much. Your next question comes from Murali, calling from CNBC. Please go ahead.
Hi, guys just a quick one for me anything local marketing covered in terms of the deals well what are some of the sectors that that I'm better. So in the most promise that you're looking at in terms of that deal pipeline.
[noise] as usual and it's completely all over them out we've got a deal that we're looking at the in an industry that.
We've never seen before and I and our 16 years, we've got.
You know something that would be.
Similar to add to carry electric.
Kind of required service type businesses.
There is in a in the healthcare services space. So yes, it's a it's a very diverse pool of opportunities right now.
Hey, guys it doesn't mean.
Yes. Thanks.
Thank you very much. Your next question comes from Trevor renewal.
Acumen capital. Please go ahead.
Hey, guys. Most my questions have been answered, but just quickly on this a federal resources deal. When do you expect to to realize the revenue from that as it is all going to be in Q3 or does that spill into Q4, just a little bit commentary on that.
It will be mostly Q3 a into Q3 early Q4 is the timing.
So we yeah, we there's a it's all its all the way throughout a ill start shortly but I think it ends.
Middle of October I think as end of our.
Horizon on that one.
Thanks, and then like do you expect to be able to release any more details on that or is it something that we're just going out the wait and see what what pops out in the M. DNA and financials in Q3.
Yeah, I think that probably is going to be the case, obviously, it's it's very sensitive, especially when you're dealing with PB equipment I don't think anybody wants to brag about profit or something like that.
Got it thanks.
Thank you for sure.
Thank you very much ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by one year.
Your next question comes from Zachary reset from National Bank Financial. Please go ahead.
Thank you quick follow up on the deal.
I was under the impression that the payment the onetime 15 days following the final delivery so will that actually the.
Payment received throughout the 10, we contract.
Yeah. So.
The order is so large there's a there's multiple orders on multiple shipments.
Basically every week.
Between now and then so our our that's why are you know that our cash outlay at any given time is much smaller than that total because we're getting cash in almost on a weekly basis. So yeah. It's a.
There's 10 different 10 different orders in total.
Oh I understood. Thank you.
Yeah.
Oh.
Thank you very much Steve King there no further question at this time. Please proceed.
Great. Thank erotica, thanks, everybody for tuning in and.
I would say for those of you out any follow up questions. We're happy to take them directly and we look forward to coming back with more updates throughout the quarter end and after our Q3. Thank you very much.
Ladies and gentlemen, this concludes your conference call for today, we thank you.
Operating and ask that you. Please disconnect your lines. Thank you.
[noise].