Q3 2020 Onex Corp Earnings Call
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Welcome to Onyx third quarter 2020 conference call.
During the presentation, all participants will be in listen only mode afterward.
Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press star one on your telephone keypad.
If at any time during the conference you need to reach the operator. Please press Star then zero.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to Ms., Jill home and managing director shareholder Relations and communications and Onyx. Please go ahead.
Thank you good morning, everyone and thanks for joining US we're broadcasting this call on our website hosting the call today are Bobby Labonte and as for shareholder calls since being named Onyx President in August and Chris Kevin Our Chief Financial Officer. Other members of the team are joining for the Q and and recession earlier. This morning, we issued our.
Third quarter 2020 press release, Mdna and consolidated financial statements, which are available on the share holders section of our web site and have also been filed on SEDAR. Our supplemental information package is also available on our website.
As a reminder, all references to dollar amounts on this call, our and U.S. unless otherwise stated and.
Must also point, everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward looking statements contained in todays presentation and remarks with that I'll now turn the call over to Bobby.
Good morning, Thank you for joining us and welcome Joel to your first Onyx shareholder cool.
On a reported net earnings from the third quarter.
101 million or earnings per share of $5 and turning on search.
Net earnings on a segment and basis were 515 million or $5.39 for sure.
Overall, it was a very good quarter for on it and.
On an operating environment that continues to adapt to the evolving Colby and 18 situation.
Investing capital per share grew 11% quarter over quarter.
And is now 8% higher and where it was at the end of 2019.
This increase reflects the strength and diversification of our investment platforms.
The continued recovery and both are PE and credit portfolios.
As well as the attractive investment, we've made and buying back our shares.
Across all Onyx platforms, we are executing on targeted strategies.
Setting us up well for strong future investment and financial performance.
We are focused on value generation for our shareholders limited partners and clients, who invest with us.
I'll now provide some highlights from each of our business segments.
Within private equity we are actively working with other companies, while continuing to look for opportunities to create value and deploy capital.
Where we see long term growth potential, particularly in our core verticals.
This quarter.
Oh before and extended this recent momentum.
Ending the period with a net IR or 7%.
We are steadily approaching the threshold well will start earning value from carried interest.
This quarter's progress was driven by strong performance at our public companies as well as parking and Powerschool.
Opie five deployment is on pace at 43% invested.
With two recently announced investments both and areas leveraging onyx is sectors range.
In October we announced the pending majority investment and one digital.
From a market, leading employee benefits insurance broker for small and medium sized businesses in the U.S.
One digital operations in an industry that we know well and.
And we were impressed with management's ability to continually growth.
This transaction is expected to close and Q4.
Similarly in September.
We closed on our acquisition of independent clinical services.
I see us and another good example of Onyx investing and a sector, where we have broad and deep experience.
Operating a business with a strong and proven value offerings.
Turning to our team.
We were pleased to announce the promotions of Nigel right and topic properties to senior managing directors of Onyx partners and recognition of their investment track Records leadership qualities and longstanding contributions congratulations to both of them.
Before moving to our credit business I wanted to touch quickly on our travel events and leisure investments.
All of these businesses have made tough but necessary decisions in recent months to reduce their operating costs and improved our liquidity during a period of unprecedented uncertainty caused by the global pandemic.
We are grateful for their efforts and remain confident and their prospects as conditions recover.
And our credit business growth areas that we identified prequaled, including opportunistic credit.
Have increased and relevance with the current market environment.
We have made a number of senior hires and we'll continue to have select hiring and targeted areas contributing to future and you and growth.
The margins of the credit business will be muted as we build out the team.
However, as our volume grows and the segment you should expect to see our margins improved substantially.
Credit markets continue to recover and the third quarter with both the high yield and leveraged loan indices recouping almost all of their losses from the first quarter.
Contributing factors to this recovery, where the continued monetary and fiscal support.
Solid earnings from issuers, and both markets as well as investors searching for income due to lower investment grade and government bond yields.
On as credit continues to add new investors across strategies.
Recently.
We price our Twentyth you will see a low.
And the transaction was supported by a diverse global group of more than 20 investors, including three new equity investors.
Almost two thirds of the CLO equity was taken up by third party investors.
Which meaningfully improves on taxes all in return on capital.
Our wealth management team and Gluskin has also been investing for the future.
Just as we've added new capabilities by hiring new team members.
We continued to deliver increasingly in demand alternative strategies to our clients.
Thanks to our ability to leverage the broader onyx platform.
Plus and clients allocation to Onyx credit strategies, and private equity totaled 570 million by quarter end.
On a corporation balance sheet remains strong.
As always we maintain liquidity to fund future commitments on.
And having the flexibility to be opportunistic and agile and other areas of deployment.
And this quarter, we returned more capital to shareholders through buybacks repurchasing over 6.3 million shares at what we believe is a very attractive valuation.
While we remain and what is largely a work from home environment. Our team continues to demonstrate the flexibility and entrepreneurial spirit that is core to Onyx is culture.
I'm proud of how the team has adapted and also and how we're supporting our communities.
Through Onyx cares our employee directed donation program.
We have donated approximately $1.1 million to more than 130 charities since the start of coated.
In summary, Q3 was a good quarter products building on our momentum from Q2.
And I feel confident and our team's ability to deliver strong performance and recovering economic environment.
We do plan to provide additional details on performance expectations across our platforms. During our Q4 call as we look ahead to 2021.
With that I'll pass it to Chris from on the financials.
Thanks, Bobby and good morning, everyone.
Onyx reported net earnings of $501 million or $5.29 per share in Q3.
Bringing us into a net earnings position on a year to date basis.
At $133 million or one dollar and 36 cents per share.
Q3 segment earnings were $515 million or $5.39 per share and $152 million or one dollar and 55 cents per share for the nine months ended September thirtyth.
Our segment results were driven by our investing segment, which contributed $492 million in this quarter.
Onyx results in Q3 reflect both improved underlying equity and credit markets with the S&P 500 up nearly 9% and the sea EPS leverage loan index, returning over 4%, but also importantly, the strength and diversification of our underlying portfolios and.
The ability of our portfolio companies and their management teams to navigate market conditions.
Let's start by looking more closely at on Axis PE portfolio.
Q3 included a net mark to market gain from private equity investing a $457 million.
This gain represents a gross quarterly return of 14%.
Reflecting value increases across much of the portfolio.
As was the case with public the public markets in Q3 value increases in our portfolio were broad based.
As a reminder, onyx and PE portfolio is made up of 38 separate businesses with no cross Collateralization.
This slide details the allocation of the portfolio by industry segment at the end of Q3.
Of these eight segments five contributed double digit returns in the quarter.
The strong portfolio performance in the quarter was led by the business services segment with a 24% mark to market gain and the quarter contributing over $260 million to segment income.
Additionally, our industrial portfolio companies continue their strong recovery from Q1 loads led in the quarter by an increase in the six share price per Jelled one.
As well as positive contributions across the entire industrial portfolio.
You'll notice that we've once again provided a breakdown of our PE portfolio by coal and exposure.
We continue to see strong value gains in the low to positive exposure category by far the largest by value.
This quarter. We also saw good performance and the demand supply headwinds category with the group now down only 11% year to date.
And we're seeing overall stabilization and the direct exposure group.
With value up 11% this quarter.
Although there continues to be uncertainty across many sectors and the economy, particularly with the recent escalation and co. The cases in North America and Europe.
We feel confident knowing almost 60% of on axis PE exposure continues to be in businesses, where we believe the pandemic has either a low or positive impact.
The nearly $2.5 billion at work and these investments continues to provide on X a meaningful hedge against Colgate related headwinds.
Our credit investments had modest mark to market gains in the quarter following a big bounce back in Q2.
For the first nine months of the year, our credit investments continued to be down about 11% on a mark to market basis relative to a 1% decrease in the CS leverage loan index rose.
Reflecting the structural leverage employed and our strategies.
In light of the Cove and related impacts on the underlying portfolio loans, we no longer expect our current COO investments to reach the low double digit IR ours originally targeted.
However, we do expect these close to provide a meaningful positive return overall and certainly attractive forward returns from today's marks.
We continue to watch our clothes exposure to Triple C rated loans and the resulting impact on the interest diversion test.
The underlying metrics continue to stay well above low was experienced at the end of April and all our clothes met the test for purposes of the upcoming Q4 distributions.
Q3 also brought some early signs of the AUM growth expected from the meaningful investments we've made in the Onyx credit team this year.
We completed fundraising for the on X senior loan opportunity fund and launched a strategy focused on investing and third party close.
Onyx participated in both committing $150 million in aggregate.
We're excited about the opportunities deploy on excess capital alongside our limited partners in these new strategies managed by a team with a strong track record in the space.
Overall shareholder capital was down from December 2019 in absolute terms, but much of that decrease reflects $441 million used to repurchase on X shares.
On a per share basis.
Shareholder capital was up over $4.50, driven by 8% year to date increase and investing capital per share.
The composition of on excess capital has remained relatively unchanged this year with private equity credit and cash representing 63, 10, and 26% of hard and Avi respectively.
Very similar to the allocation at year end.
The stable allocation was primarily the result of realizations from private equity being deployed to repurchase shares.
Year to date realizations totaled just over $580 million from our private equity investments primarily from secondary sales of ESI GE and clarity.
And our credit investments returned $60 million, including $50 million of regular quarterly cash flow distributions.
On the investing from we've put $325 million to work and attractive PE investments post covance.
Including an incremental investment and our ESG of $108 million as well as investments and Emerald and I see us via Onyx partner spot.
Through on tax credit, we put just over $110 million to work in the first nine months of the year, including 55 million and Siloed and related warehouses as well as $47 million in the newly launched strategies I described earlier.
Throughout Q3, we continued to buy back on X shares at an attractive discount driving incremental value for our continuing shareholders.
In total during Q3, we utilized about $300 million to repurchase over 6.3 million shares at an average price of just under Canadian $63 per share.
Giving full value to our cash and publicly traded investments our average repurchase price implies a discount to the private investments of about 55%.
And thats without giving any value to the asset manager.
The discount and which we bought back the shares immediately benefitted our continuing shareholders, resulting in a 2% increase and investing capital per share in the quarter.
On a year to date basis, our share buybacks resulted in a 4% increase and investing capital per share.
Lastly, before turning the call over to Q and eight I'll spend a few minutes on the asset and wealth management segment.
It generated net earnings of $23 million or 22 cents per share in Q3.
The year over year increase and net earnings was driven by PE and in particular on net improvement and carried interest income on a mark to market basis of $34 million.
This was partially offset by a reduction in PE management fees, which trended down as realizations reduced the fee basis and are fully invested funds.
As Bobby mentioned.
Okay before is getting very close to the threshold to generate carried interest.
And with $3.6 billion of LP capital carried interest from Opie four could be a meaningful contributor to segment earnings in the coming quarters.
Contributions from our credit manager and the wealth management business were both impacted this quarter by continued investment and strategic growth.
Which we expect to benefit future segment earnings.
The credit manager contributed $1 million and Q3, continuing to reflect upfront investments, we're making to build out the team and position the platform to meaningfully grow outside of Ceos and senior loans.
As we raise fee paying capital across these new strategies, we expect credits profit margin to trend towards historical levels.
In wealth management.
The net contribution decreased by $6 million year over year.
In addition to investments made earnings were impacted by lower a use them as well as lower management fees. As we can you continue to align rates to be more competitive.
On an LTM basis.
Asset and wealth management segment earnings increased by $29 million year over year or 29 cents per share.
This was primarily driven by the full year contribution from Gluskin chef.
And a lower net reversal of carried interest.
Looking forward on Axis run rate annual management fees are $294 million.
$183 million from private equity.
$59 million from gluskin public equity and debt strategies.
And 52 million from on ex credit.
We'd now be happy to take any questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Nick pre from CBC. Your question. Please.
Okay. Good morning slid to go back to the buyback discussion I think you've repurchased about 10% of your stock year to date.
The average price is being in the low $60 range.
So is the inference there that we should expect this pace of buybacks to continue or would you be kind of constraint at some point based on either your commitment to the fund or targeted cash balance at the corporate level.
Anthony humor and handle on that one.
Sure. So so the governor on our share purchasers and purchases are.
Dictated by the rules regarding the sex buyback.
And in terms of percentage of float agreed we have the ability to buy back and.
10% and Merck slowed in any given year as.
As you may recall, the commencement of our NC IB is April 17th that's when we renew our debt sit here and its outstanding for.
The whole year from that point and so we are limited.
Beyond what Weve purchased to date to approximately just under 600000 shares and then come next share Wolverine annuity can and will be subject to the to the room and then for the following 12 month period. So that's essentially how you should think about it.
Okay. Okay.
And just going back to.
The investment returns and the credit business I think Chris you indicated that your returns on CLO equity are no longer expected to achieve that low double digit return that you'd initially targeted so.
What are you modeling or expecting internally there how big should we expect the variance to be relative to that previous target.
Yes, Nick.
Nick I think where we're where we're headed is expecting kind of ultimate returns from that portfolio to be now in the mid to high single digits.
And sort of think seven 8%.
Based on our current modeling on our current marks on.
Versus about 12% that we would have originally targeted and modeled across that portfolio.
And of course, as you know Thats and Thats just purely the return on equity on the equity investment and you think about the return on net on the capital, including the fees. Its obviously much more attractive than that.
Got it Okay, and then what about the performance of the credit platform on a relative basis like it looks like the default rate has predictably increased in the leverage loans market.
I presume, there's been a concentration of diesel since spaces like energy and retail, which I think you've avoided in the past can you just give us a read on the relative performance and your credit strategies through so you know the stressed environment.
Sure I think on the back way to think about that really is in the performance of the underlying COO on portfolio and.
I think interesting on this.
Hi into the lower returns on equity to some extent.
We had our I think a very well managed and and relatively creditor friendly.
Portfolio, which is part of the reason our equity returns have been dampened on.
Let me know wasnt as aggressive on portfolio as perhaps some others. So there are industry rankings out there on per COO managers and and when you look at that those rankings like today.
And now.
Our tax credit in the second quarter mile in terms of.
And the percentage of their portfolio that are rated triple C or worse and.
And there from the first quarter mile as it relates to the actual number of defaults over time so.
So we think that you know obviously and so its a stressed environment our has been on stressed environment for senior loans.
But on a relative basis.
Our portfolio and holding up.
Got it okay thats it from me thank you.
Thank you. Our next question comes from the line of Jeff Kwan from RBC capital markets. Your question. Please.
Hi, good morning.
First question was just DLP for IR.
It's been ticking up nicely just wondering if theres any comments you have on on how that's stacking up.
Versus peers I can appreciate you may not have any sort of numbers around Q3, yet, but just how that other units a quarter mile percentile trend has been in recent quarters.
And Jeff I think isn't what's important that we get those numbers on because some of the PE firms that were competing against obviously may have more consumer facing Ics.
Exposure than than we do.
But really what im most focused on and making sure we get we get to earn the carry and that funding and we're getting we're getting really close to that as Chris and I, both mentioned and our remarks.
Okay and then my second question was just on on Slide 18, where you show the returns for your different coven buckets.
On a quarter over quarter basis, I mean, the low positive impact was up 18% from was 11% up for direct explosion and 9% and for those that had tomorrow.
And demand supply headwinds now when I kind of look at that data points on.
You know what kind of I think the low positive bucket includes and some businesses evidently would have done well in Q3, given the recovery, but I'm. Just wondering is the way to think about why the gains were lower for the company's most impacted by Colby just because even though there were reopenings and economic growth was improving.
Businesses that you would have a net bucket are ones that wouldn't ask not necessarily participated and early stages of this recovery I.
I think thats exactly right like so if you think about on an asset on Emerald right.
Even though the economy is picking up there they are actual businesses have and we're and occasional partying once the parks open and the they began generating.
Very good revenue and profits and they would be a contributor to.
Uh huh.
Our positive growth this quarter, but by and large the businesses are directly impacted they haven't really gotten the benefit of the recovery.
Okay, Great and just my last question just going back to the CLL expected low returns on him.
I suspect it doesn't change your appetite in terms of doing is close but does that.
Impact your appetite in terms of how much and.
And do you plan to invest in the equity tranche. This deal is because I think with the regulatory changes.
I think last year, you don't have that requirement that you would have had enough from two to three years ago.
Yes, so our most recent share low single low 20 in the U.S.
We actually syndicated two thirds of the equity upfront.
So in terms of the return on invested capital there. If you take into account the fee income that ought to be debt ought to be really attractive and that doesn't mean, we're.
Moving on to syndicate, the equity every time, but right now just looking at the market and the pricing in the market. We thought that made sense I do think overall, the shale and business will become less capital intensive overtime and we'll we'll do a better job taking advantage of syndicating net equity and creating a better ROI for that business.
Okay, great. Thank you.
Thank you and and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes from the line and Scott Chan from Canaccord Genuity. Your question. Please.
Yeah. Thanks, a lot good morning, everyone, Bobby talked setup for and performance.
Performance and that's on the public marks that we see.
On the call Bill.
And our school, but I'm, just wondering kind of.
Post quarter and now with the second wave.
Perhaps and outlook on those two businesses right now.
So partying essentially shuts down their parks. This time of year. So I don't anticipate a second wave here, having any meaningful impact on what we normally do and that business and the off season is capex projects from maintenance projects and things like that which I think will still be able to do so very little impact on.
And the same and Powerschool I don't anticipate a second wave two to hurt power schools and matter of fact in terms of it is.
And the school.
Education tools and might actually be better because I believe that's what we saw.
And the first weighted recovered and just generally speaking I think we're more prepared.
For a second wave overall, and our businesses and we would have been in March.
We have the protocols and plans in place hopefully it doesn't the waivers and.
During this time, but if it is I think will be and we'll be more prepared this time around and less time relative to those two business, particularly I don't see it getting having a negative effect.
And just maybe moving over to gluskin shaft and when you acquired the from the on the annual net income.
At the time was substantially higher than what you did this quarter.
You kind of talked about lower fees to make a more competitive hospice and then now but how do you generate better earnings.
Wealth management part of the part of the business.
I think the way you earn better.
And the way you improve your energy, we got to grow at you and right and the way we grow a U.M. is by having on.
We're having great product offerings and pivoting towards to wealth management strategy all of our efforts right now or are trying to build that business and to not only and asset manager, but a bunch and world class wealth management firm and the Canadian market and Thats going take some time, it's going to take some investment and technology.
But that is the plan and I think the Canadian market is on.
Is right for offering like that.
And independent wealth management from.
So absent paying that and I think we'll get back on track and we're going to you and growth.
And maybe just lastly on that Bobby.
In other cross selling and Brian has been pretty good I said from the start I think you know the 500 million odd.
Today, but.
If I look at the flows this quarter the net outflows of almost 200 million and that that's almost like on a double digit annualized rate.
On to something in particular happened this quarter on the clientele or just.
Just kind of getting a read through on a on a non visibility on on future flow traction.
And there was nothing unusual this quarter and ill and a lot of the dollars that we did lose were not high fee paying dollars are relatively low fee paying dollars on but there is nothing I can point to as a cause or cause for that on the reaction nothing unusual.
Okay. Thank you very much.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Puppy Love Love for any further remarks.
Thank you very much for participating today, obviously, if you have any questions feel free to feel free to follow up a jill.
And I hope you Elevenx weekend. Thank you.
Thank you, ladies and gentlemen for your participation on today's conference. This does conclude the program you may now disconnect now this good day.
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