Alaris Equity Partners Income Trust Q1 2023 Earnings Call

Good day and thank you for standing by welcome to the <unk> first quarter 2023 earnings release Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.

Fraser CFO .

Thank you Josh.

Everyone, taking the time to join US. This morning, as we present, our Q1 results I'm joined on this call by Steve King President and Chief Executive Officer, and all that.

As we begin I'd like to remind our listeners that all amounts.

Given are in Canadian dollars unless otherwise noted listeners are cautioned that comments made today may contain forward looking information forward looking information is based upon a number of important factors and assumptions and therefore actual results could differ materially.

Additional information concerning the underlying factors assumptions and risks is available in last night's press release, and our MD&A under the heading forward looking statements and risk factors copies of which are available.

SEDAR at SEDAR Dot com as well as our website.

So when I reference data is also presented and may differ from the way other companies present such data.

As with the forward looking statements. Please refer to last night's press release, and our MD&A for more clarification regarding non <unk> measures.

Our Q1 revenue of $36 7 million was just shy of our 37 million guidance and represents a 7% decrease over the prior year and the quarter hour less deferred $1 5 million of distributions.

Which contributed <unk>.

Three 5% to year over year decrease.

Discussed in previous quarters as a result of the increase in steel prices elements as margins have been compressed and gross profit is declined.

Although I wouldn't ask this work to include steel price escalation features a new contracts they still have to work through current lower rate contracts.

On hand, higher priced steel and inventory.

The other half of the year, where projects will include lower priced inventory and higher price contracts is expected to improve gross margin and return elements to paying current distributions.

Makeup payments on the deferred amount.

<unk> are expected to begin in 2024.

Also contributing to the decrease was the previously announced strategic transactions involving BCC at Brookfield, the newly acquired convertible preferred units provide a minimum of eight 5% yield which is $12 3 million U S. Unconverted preferred paid quarterly with the ability to.

Participating common distributions in excess of eight and a half per cent if paid.

As well as an annual $1 5 million transaction fee.

Cash from operations prior to changes in working capital of $17 5 million decreased 50% as compared to the prior period, primarily as a result of an accrual for the litigation relating to sandbox transaction.

Well, we continue to believe we would have ultimately prevailed in the litigation given the inherent risks associated with the process, it's protracted nature and associated legal costs, which were approximately 4 million in the 12 months ended December 31.

2022 alone the decision was made to proceed with settlement discussions.

After excluding all legal fees and costs associated to the sandbox litigation in the respective quarters cash from operations prior to changes in working capital decreased by 15% as compared to Q1 2022, as a result of lower revenue and higher G&A.

Aside from the litigation related costs.

Increase in G&A is primarily driven by the timing of expenses incurred with 900000.

Of an increase in G&A due to a change in the mechanics of the bonus calculation bonus accruals are now being made quarterly and driven by a percentage of total cash flow available for distribution.

As well as 160000 related to the timing of travel and donation expenses.

Another 350 of incremental costs related to the amortization of insurance premiums purchased in Q3 2020 to.

Drove up G&A in this particular quarter.

Q1 is generally a quiet quarter for fair value adjustments given the proximity to our yearend. The trust had a net unrealized and realized gain from investments in Q1 2023 eight.

$8 million.

The main driver is the increase of 4 million USD and the fair value of fleet fleets backlog of syndication work for 2023 and into 2024 continues to increase with new contract wins this growth in backlog and its impact of fleets outlook, coupled with strong results. During 2022 in Q1 2023 continue to increase there at all.

Yeah.

The increase was partially offset by less significant decreases to fair value of planet fitness as it remains the most sensitive of our partners to continued rate increases as well as axiom test they adjusted their outlook for a slower 2023 than previously forecast we.

We deployed a further $36 5 million USD in the quarter to new partner F. N P. And currently have 203 million of senior debt outstanding, resulting in $247 million of available capacity for new transactions.

Our portfolio continues to perform well and has maintained a weighted average E. C. R of over 1.6 times following the revision to basically see based on the new transaction.

11 out of 19 of our partners have an ECR over one five times and seven of those are over two times LMS is the only partner below one and as mentioned earlier, we expect them to be back above one in the latter half of the year.

Specced payments are due.

If our distributions in 2024.

Current outlook outlook called for $36 1 million of revenue in Q2 in a 12 month run rate of $1 $56 7 million or G&A expectations have decreased from $17 5 million to $16 5 million to reflect the expected reduction in ongoing legal fees. This amount is expected to continue to decrease as we wrap up.

Settlement agreement.

I'll turn it over now to Steve for his further comments.

Great. Thanks Amanda.

The focus of <unk> remains on the health of our portfolio and I'm very pleased to say that we're seeing still very good strength across the board.

Some small themes that investors may be interested in.

We've seen some low level of weakness in our business services companies, particularly in our IP consulting businesses part of this may be a tightening of corporate budgets in America, but I believe that more of it is actually just the reflection of a record year that they're all coming off of for 2022.

Current performance is still very strong in comparison to previous years, including before the pandemic.

On the flip side, we're seeing very strong performance from several other companies in our portfolio. They were showing weaknesses a few years ago Brown and settle Edgewater fleet heritage all putting up excellent results. This is exactly why we create a portfolio youre going to have different kinds of companies doing better and worse at different times.

Two of our largest investments BCC and planet fitness are still showing very strong results in the personal care space likely powered by very strong employment data in the U S and both of them being a low price point providers.

Having an ACR across the portfolio of one six times, which.

As what we were last quarter as well and steady results coming in for early 2023, we feel very comfortable with where we're sitting with our portfolio.

As Amanda mentioned, we made the move to voluntarily defer lms's distributions this quarter to ease the burden for them, while they work through their high priced inventory LMS has been a partner of ours for 16 years and has an outstanding track record of working through the inevitable ebbs and flows of their business. We're highly confident that they are on a visible path to resuming in catching up on payments.

And as we see record levels of daily volumes and a record backlog that goes out for many many months.

We were very pleased to finally close the F&B transaction recently, we had actually close this transaction in escrow in December but I'd have to wait for a final U S government approval before making it official the delay in receiving F&B distributions impacted our results in Q1, because we werent quite able to replace the lost revenue from redemptions from late last year.

We're still sitting on a large amount of capital and our debt facility that we expect to deploy over the coming months, which will have a positive impact on our go forward results.

The private equity market remains relatively slow in the kind of deals that we're looking for are there are many deals in the market, but most of them are PE companies looking to sell or refinance their holdings because of the inability to refinance the debt that they had put on these companies over the last five years typically in very large amounts which are no longer available.

The U S debt markets are extremely tight which is absolutely a huge benefit tulare us I remain confident that we will exceed last year's deployment of $150 million.

So we're happy to open it up to questions at this point Josh.

Thank you.

A reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Okay.

Okay.

Our first question goes from Zachary <unk> with National Bank Financial you May proceed.

Good morning, Thanks for taking my questions.

Yes.

So obviously the first question is on the sandbox settlement if.

If you could give us more color about how youre evaluation under litigation risk evolved over the course of the past three years.

And then tell us if the settlement is fully reflected or whether theres more to come in terms of the financials.

We can't talk too much about the settlement as we mentioned in our press release.

The final documents have not been signed and there is a non disclosure agreements involved in this so we cannot get into any detail. The one thing in terms of color I would say.

To investors.

Yourselves that are.

As to why this is very unique for US is that typically we're a noncontrolling passive investors and we would not be subject to these types of situations for sandbox, we had actually taken control.

Of the business.

There was a there were no.

Usually in sale transactions, there is something they call a.

Rapid warranty insurance, which covers off.

Situations like this in this particular case for variety of reasons that was not available. So those two things combined.

<unk> are very very rare in our business over 19 years.

This is very much in my mind.

One off and obviously isn't material to our business but.

Kind of the cost of doing business in the U S. Private equity market. This is not this is not unusual for a four for that industry.

Gotcha.

And then on LMS, you've got a line of sight on margins improving by Q3 do you think distributions will resume in Q3 or should we think more about Q4, and then how should we think about catch up payments.

As we reported it disclosed we do anticipate catch up payments to begin in 2024.

We are expecting margins to return to normal in Q3 and as cash flows resume normal based I'll turn on payments. So we'll continue to monitor it.

And see when that tipping point at constant.

That's great. Thanks, that's all I had I'll turn it over.

Great. Thank you.

Okay.

Thank you and as a reminder to ask a question. Please press star one on your telephone.

Our next question comes from Fernando Torrealba with Cormack Securities You May proceed.

Yes, hi, Thank you for taking my question I was hoping to ask about fair value changes.

If I look at the MD&A on page 11, the changes one for value if I add them all up they walk to about an increase of 600000 U S.

Can you help me square that with what I see on the income statement, our loss of $11 7 million.

Recorded there thank you.

So thats whats actually the movement from BCC in Q4.

2022, we had an unrealized gain of.

About $9 3 million U S.

In Q1 that was realized when we converted BCC through the special.

Transaction, so there wasn't unrecorded.

Loss, but that's offset by the realized gain of about 12 and a half you see there. So you really have to look at them that it's just a bit of accounting noise that's created.

Got it thank you that's perfect.

Yeah.

Thank you.

Our next question comes from Trevor Reynolds with acumen you May proceed.

Hey, guys just wondering if you've ever seen a similar situation with LMS and kind of your 16 year history with the.

With the change in steel prices like this.

We did see something in 2008.

So.

15, 15 years ago, where they had a.

Almost the.

The opposite issue where in the great recession steel prices plummeted.

And.

They had.

Quite a few projects that were backed by a Lehman brothers in the Vancouver area.

Lehman partner.

And so when Lehman went down.

Those projects actually got padlocked and.

There is deal that they had already purchased got given back to them. So they actually have to work through steel that they had bought at a higher price and thought was already in the <unk>.

Project and they got it back and our projects are being bid at much lower levels. So it was it was a similar kind of phenomena.

For very different reasons, obviously, but.

But yes. They have worked through this company has been around for more than 30 years very experienced team.

Know how to get through these things they've they've put more money in themselves do to help.

With these with these situations so everything that you could ask for for a partner that's why we've been with them for so long and hope we're with them for a lot longer we are going to see a really nice.

Whipped back here. This is our only investment that doesn't have a collar on it.

So we are going to get a slightly less of a decrease than we expected. This year from LMS, which is a good thing, but we still expect a very nice bounce back for next year in oncology. So it will be.

Fairly material increase to our overall distributions next year.

And are there any senior lenders in front of you on.

That name.

The only they don't have any term debt they do have.

Basically working capital inventory, that's attached to specific steel inventory so no no term debt at all.

Okay great.

On the weakness in the some of your key names just maybe a little more color like do you think those are.

Kind of bottomed out in your view or do you think there is.

What's the trend there do you think.

Yes, we are seeing like I mentioned, some softness it's too early to tell.

Whether it will continue or not all of those companies have significant buffers on our cash flow and almost all of them have no debt. So.

So we're certainly not worried about them, but just an.

An interesting trend a lot of people asked me, if we're seeing things that.

They can use in their own investment their own economic thesis.

They are still at historically very high levels, just not quite as high as they were in 2002. So yes too early to see if things will continue down for them.

These are typically services that are very much required by by companies regardless of what the economy is doing.

So yes, we don't expect and again these are companies. If you look at other cycles in their past all of these companies have been around for a long time.

None of them have had significant drops at all which is why we invested in them.

Great and then just just on the sandbox, but there is no other companies.

Then you've taken over I don't think in my recollection, but just wanted to confirm that's the case and there is no other.

Outstanding potential cases like this in the portfolio investor.

Correct.

Okay. It for me thanks.

Thanks Carter.

Yes.

Thank you and this concludes the Q&A session I would now like to turn the call back over to Steve King for any closing remarks.

Great. Thank you very much Josh and thank you all for tuning in we look forward to Q2, obviously it's.

For me, it's a very good thing to have gotten rid of that that sandbox situation we were.

We're tired of being 4 million bucks in legal fees and having our people tied up for so many hours on something like that so it's good to have that behind us youll see.

Good improvements on our G&A is Amanda mentioned and onto another hopefully successful quarter of <unk>.

Showing the strength of our portfolio and hopefully having a more fair value write ups in the next quarter. So.

Please call us if you have any questions and thanks again.

Yeah.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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