Q1 2021 Onex Corp Earnings Call
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Welcome to Onyx first quarter 2021 conference call and webcast. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session with prequalified analysts 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 and operator. Please press Star then zero as from either this conference call is being recorded I will now turn the conference over to Jill <unk>, managing director of shareholder Relations and communications at 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 Gerry Schwartz, our founder and CEO, Bobby Le Blanc on X with President.
And Heather on ex partners, and Chris, Kevin and our Chief Financial Officer.
Earlier. This morning, we issued our first quarter 2021 press release, and DNA and consolidated financial statements, which are available on the shareholders section of our website 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 are U S. Unless otherwise stated I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward looking statements contained in today's presentation and remarks.
With that I'll now turn the call over to Jerry.
Thank you Jill.
Hi, everyone and thanks for joining us today.
<unk> delivered strong first quarter results extending our recent momentum.
Investing capital per share, sometimes referred to as net asset value per share.
Grew for the fourth straight quarter, ending the quarter at U S $78 33.
Private equity results were good.
With both <unk> four and <unk> five.
And to generate positive returns.
Our next credit is also seeing progress with its new strategies, which will drive AUM growth.
We continue to see meaningful value and Onyx and investment and.
And great potential and our businesses.
Bobby and Chris are going to give you more detail on our performance.
As we look at the operating environment.
Although we know there are still challenges and opportunities to come.
We feel renewed confidence the brighter days are ahead.
With the economic recovery accelerating and much of the developed world.
We continue to see star.
The strong value propositions across our portfolios.
Over the past year.
We've made a number of strategic additions at onyx investing and areas to support future growth.
We've also invested and areas that we know are critical to our partners and stakeholders.
Definitely including our shareholders.
These include.
Diversity.
Inclusion and ESG.
We've been a successful investor for over 37 years.
By being a responsible investor.
Today.
We're adding more structure and intention.
Behind these various initiatives.
As an example, Bob who's going to talk to you about our DNI leadership Council.
How we operate is very defined by our shared values.
These include entrepreneurship.
Intellectual honesty and ownership mentality and respect.
These are the values.
That influence everything we do as a team and business and we look forward to sharing more with you about these values.
And our progress.
At our upcoming Investor Day on September 30.
With that now let me turn it over to Bobby for more on the quarter Bobby.
Thanks, Gerry and good morning, everyone.
Earlier today, we reported and segment net earnings per share of $5 12.
And net earnings per share of $4.59.
It was another strong quarter for <unk> with good progress across key financial and investment performance measures.
Investing capital per share was up 7% from Q4.
Since year end 2019.
The pandemic began.
Investing capital per share is up 26%.
Our business units have whether the pandemic oil.
And we're seeing good performance across our investments.
Gross private equity returns for on at four 8% and the quarter.
Our next partners four and five returned 10 and 6% respectively and are on.
On capital and returned a collective 13%.
Based on our current March RPE platforms now of unrealized carried interest attributable to Onyx of 183 million and increase of $96 million from Q4.
As Chris will discuss in further detail. This increase is largely due to <unk> four being a catch up position this quarter.
Over the last 12 months on its partners made five investments each within one of our core industry verticals, which our industrials business services and software and healthcare and financial services.
And all five instances, we identified various opportunities to add meaningful value.
We'll continue to see quality of batch within our current pipeline.
With our targeted focus our pipeline is more concentrated on high conviction and investment opportunities that are squarely within the themes we follow.
As we mentioned last quarter with uncapped for now, 70% invested and we'd expect to be and the market with our next on cap Fund later this year.
Followed by and large partners, which is expected to fund raise in the latter half of 2022.
With an average credit we're seeing positive momentum with the new strategies that we outlined last quarter.
And AUM growth will accelerate throughout the year as we closed on more third party capital.
We recently announced the pricing of our 21 U S CLO.
Approximately $510 million.
Consistent with our strategy to make the CLO business less capital intensive.
Two thirds of the equity was purchased by third party investors.
<unk> two our last U S CLO.
Across our teams, we're benefiting from stronger integration and knowledge here.
And as an example, with 150 investment professionals and both private equity and credit and the teams regularly leverage each other's expertise and sectors views and evaluating investments.
Last quarter, we spoke specifically about increased collaboration between the investment teams of on X credit and Gluskin Sheff.
We continue to formalize that relationship with both investment teams now reporting to Jason New.
Our head of on X credit.
The gluskin Sheff client wealth management team remains focused on forging and building client relationships.
Client assets at Gluskin grew 4% and the quarter.
And with good client inflows driving stable net assets.
On our strategies continue to generate interest from Clos from clients.
$860 million invested and our products and increase of almost 10% and the quarter.
Overall, we feel confident with the team's progress and expect to see positive net flows for the remainder of the year.
And it is also making advancements with organizational initiatives that we know are important to our shareholders clients and communities and employees.
While diversity and inclusion has always been core to our culture. We recently added organizational infrastructure with the formation of DNI leadership Council, which I co chair, which Youll homework.
The Council has representation from every group with an on X.
Our approach incorporate the principles, we've always believed and with an enhanced commitment to achieving measurable outcomes.
Separately, we're also expanding our ESG program and look forward to sharing more with you throughout the year, including a near term announcement of a new head of ESG for on X.
Overall I am pleased with the progress, we're making and the position we're in.
And we look ahead and we see good potential from the investments we've made both within our portfolios and across our team.
As Jerry mentioned, we look forward to our Investor day on September 30.
It will be and opportunity to provide our shareholders a more detail on our business strategies and future performance expectations.
I'll turn it over to Chris.
Thanks, Bobby and good morning, everyone.
We had a solid start to the year with segment earnings of $5 12 per share.
Largely reflecting the continued strength and diverse diversification of our portfolio, which drove both our investing and asset management earnings.
Our portfolio companies and their management teams ability to navigate the evolving landscape.
And on an underlying improvement and the financial markets with the S&P 500 up 6% and the CS leveraged loan index, returning 2% and the quarter.
I'll start by looking more closely on X <unk> PE portfolio.
The quarter included net gains from private equity of $269 million, reflecting an underlying 8% gross return.
These private equity results continue the trend of steady gains since the lows reached at the outset of the pandemic.
With on X is private equity portfolio, returning 63% growth over the last year.
If you go back a quarter further so as to eliminate the COVID-19 bounce back on.
<unk> gross returned from P/e is still an impressive 34% over those 15 months.
With 39 separate businesses across eight key sectors of the economy. The diversification of our portfolio has been and important part of the story.
Including during this past quarter.
Although all industry segments contributed positively to Q1 returns performance was led by the segments that were hardest hit by the pandemic.
We saw these businesses start to turn a corner, particularly in economies that are beginning to reopen.
And market valuations followed suit.
These valuations reflect and underlying rotation and the equity markets that as highlighted when we pivot and breakdown our portfolio by COVID-19 exposure.
The seven business is directly impacted by the pandemic returned 16% growth and the quarter.
<unk> the recovery of ground lost during the first half of 2020, and finishing up a $105 million or 12% from pre pandemic levels.
In fact, all of our industry segments now reflect positive returns from December 2019 marks.
Okay.
We continue to watch the pace and with vaccines rollout.
<unk> reopen and ultimately a new normal emerges.
These factors will drive continued improvement and the directly exposed businesses.
Along the way the portfolio company management teams and partnership with our investment professionals will continue to adapt to the changing landscape.
Overall Q1 was a very good start to the year and P/e and and we expect to build on this throughout 2021.
Turning now to credit investing.
Our credit portfolio returned 7% and the quarter.
Selecting continued strength and the underlying loan market with that index returning 2%.
These results include $41 million of net gains from CLO.
On X and CLO investments have now returned 16% from their pre pandemic marks.
And despite significant market volatility early in 2020.
All our CLO stayed on side their covenants and on X continued to receive regular quarterly distributions.
The market turmoil of 2020 serves as a good reminder of the benefit of non mark to Mark covenants, and the resulting resilience that attracts investors to CLO.
Overall investing capital per share was up $4, 72, or 7% and the first quarter.
Adjusting for the capital we use to acquire Falcon at the end of 2020, that's up 47% over the last 12 months.
And more importantly, as Bobby mentioned up about 26% from December 2019, pre pandemic levels.
The increase in the quarter was driven by the investment gains and both private equity and credit that I touched on earlier.
As well as a meaningful contribution from the asset and wealth management segment, including $96 million of unrealized carry.
At March 31.
And 87% of our investing capital was invested and at work up from 80% at year end.
Although mark to market gains contributed to this shift the larger factor was a net deployment of about $430 million.
With over $900 million of cash and near cash on X remains well positioned to invest going forward.
While having 87% of our capital in the ground and that work, which by the way is about a 10 plus year high.
Provides the foundation for strong NAV growth going forward.
Lastly, a few comments on the asset and wealth management segment.
Which generated earnings of $148 million or $1 61 per share and Q1.
The year over year increase was driven by PGE in particular, a significant contribution from carried interest.
As I noted last quarter, we expect to see outsized impacts from carried interest relative to the gross returns and <unk>, while we're on the catch up zone.
During this time 32 cents of every incremental dollar of LP profit above the hurdle rate.
Accrues to on X.
With OPEC, four up 10% and the quarter well above the 8% annual hurdle rate.
On <unk> benefited from a sizable carried interest accrual.
Value created and <unk> five and on cap III also contributed to carry on the quarter.
As a reminder, <unk> is just about 50% invested so I won't be surprised to see some fluctuation and carried interest from quarter to quarter, while that fund matures.
Looking at the credit manager as Bobby mentioned earlier, we are seeing positive momentum with the new strategy is being launched and continue to focus our attention on growing AUM as a precursor to improving our margins, which currently reflect the upfront investments we've made and growth.
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.
First question comes from the line of Nick <unk> from CIBC capital markets. Your question. Please.
Yes. Thanks.
So it looks like growth and the private marks was once again this quarter driven by strong recovery and the group of businesses that had more of a direct.
Impact from COVID-19 implications.
At a high level.
Let me just talk about how you would approach valuing that particular category of investments just given that I would think that a multiplier approach and kind of a trough earnings period would be a bit less relevant. So you relied more on a kind of a DCF style or protection of run rate earnings just some color around how you arrive at the fair value estimate for that group and <unk>.
And so would be helpful. Chris are you there.
Let me take that one.
Okay go ahead.
Hey, good morning.
We try to triangulate devaluations from various forms DCF is obviously on one of them and market Comparables.
And as another.
And a lot of the businesses, where we had sort of a direct hit from the pandemic.
And the best comps for those businesses that are public have traded up meetings.
Meaningfully and some cases above pre pandemic levels.
We havent move March that aggressively we'd like to make sure the summers more normal and things open up.
But we do look at various ways and put different weightings on them and we've been consistent on non approach.
And all depend on it.
Okay.
And then.
Just given the fluctuating currency values subsequent to quarter and I was wondering if there is any sort of very rough sensitivity you can provide on investing capital and I don't know.
And are to assume that the significant majority of your NAV, including corporate cash balances with the U S dollar denominated or would that be and over simplification.
No Thats a fair simplification in terms of our cash balance Nick we typically are running only about $50 million Canadian dollars.
Captain and Canadian currency interest debt.
Data point.
So the cash and think about as U S GAAP.
Gets more complicated when you think about the private equity portfolio, because obviously, we have global businesses, whose we might measure their income and U S dollars, but they do have exposure to currency throughout the world, but for the most part like think of it as a U S portfolio and private equity there are some exceptions with some European exposure.
And in particularly on the on GAAP portfolios and Canadian exposure.
And then for the most part our credit portfolio. You would also think about as a pure U S dollar exposure.
Yes, Okay makes sense.
And then in your prepared remarks.
You mentioned, how you expect credit AUM to accelerate throughout the year and I'm just wondering how your NAV mix might evolve.
Just given that Im looking at your current allocation to credit of 13% is above your long term target slightly.
And so do you still think 10% is a reasonable long term allocation to credit.
Yeah, I think long term it gets a little bit more difficult to predict I think near term.
As Bobby has mentioned and I've mentioned on prior calls we do we do expect our CLO business to continue to grow but to grow with a lower contribution of on X equity.
And so I think.
The gross amount of credit exposure may pick up a bit over the next year or two as we do see some new funds.
But it's going to be at a lower rate and much lower rate than the AUM growth in that business. So is it going to be 12% a year from now maybe but it's not going to be 2025%.
Got it understood. Okay. That's it from me thank you.
Thanks, Nick.
Thank you once again and if you have a question at this time. Please press Star then one our next question comes from the line of Geoff Kwan from RBC capital markets. Your question. Please.
Hi, Good morning. So my first question maybe following up on one of next questions is on that COVID-19 had bucket you talked about not moving up as aggressively as the public comps when.
When the asset values are going down is also fair that you were that you were not moving down the valuations of those investments and as aggressively as what the market was implying.
No.
Actually we did mark down.
And aggressively when the multiples went down and the EBITDA wasn't there because were and such.
Such an unknown situation that we decided to take the conservative approach.
Again, we havent been as aggressive on the on the upside and I think youll see those valuations continue to improve if we don't have another serious about of COVID-19 over the coming months.
Okay. So there could be some more to come and see if the public comps those valuation multiples and seeing themselves. Okay.
And just maybe in light of just looking at the current market environment, where asset values seem to be pretty favorable right now and I'm. Just wondering have you has that had.
Thinking about monetizing some investments maybe a bit earlier than you would've originally thought just essentially.
Opportunistically take advantage of.
And the window being open right now.
Yeah again, we're always looking at what we own and what we should be monetizing based upon our investment thesis I Wouldnt say were doing anything differently than we have historically done you'll remember last year, we were pretty balance we deployed the same amount of capital and that we return pretty much was on those almost even I can't.
Really predict what's going to happen. This year. The pipeline is decent from a from a new deal point of view and we're going to we're constantly looking on what we should monetize but I don't want to put a prediction out there.
Okay and just my last question is on the share buybacks. So you bought back 10% of your stock last year and <unk>.
And still trading at and seen a.
A big discount to NAV.
Yet you guys have been putting up some really good and UV growth numbers. So just.
I wanted to get a sense, given where your cash position us to day or essentially cash usage, how youre thinking about that versus stock buybacks versus new acquisitions.
Yeah, Jeff it's really the same as always I'll say, we're always looking at that balancing act of what opportunities we have through our investment operations to put capital to work versus the opportunity to buy back our stock and trying to strike a balance there.
Discount to NAV is an important consideration, but not the only consideration.
And and I would say to you that debt.
As Bobby said I think we're very comfortable with the way we mark our portfolio. So the fact that it's I'll say run up.
Doesn't cause us to be less aggressive on you made the right point, it's still trading at a very significant discount.
Two its value and that's the way we think about it.
With 900 plus million of cash and near cash I think we still have a lot of room.
To be flexible and buyback some stock.
And we'll monitor that throughout the year as other investments are made and as you suggested is any realizations come in and so we're still we're still interested in buying back our stock.
And I would add it's not just <unk>, we look at like we do pick a different loans on the managers and the market seems to be giving us credit for and <unk>.
AUM growth as we do expect that manager to be valuable and for people to recognize it and so we put that and our calculus as well.
Okay perfect. Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Gerry Schwartz for any further remarks.
Thank you.
Thanks, and thanks to everybody for participating in today's call.
And we truly appreciate the confidence and support of our shareholders.
Pandemic was a pretty tough time and.
And having your support really meant a lot to us and.
On the knowledge that and a very real way for you.
And I also wanted to thank Bobby and all of the on X employees, Chris and their teams for their dedication and perseverance really sticking with it over this really demanding last year.
I want to wish all of you the very best for a brighter summer, we think its coming and we look forward to speaking with you again in August.
And at our September Investor Day, Thanks, everybody Bye.
Thank you, ladies and gentlemen for your participation on today's conference. This does conclude the program you may now disconnect good day.
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