Q1 2025 Alaris Equity Partners Income Trust Earnings Call
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Operator: Good day, and thank you for standing by.
Speaker Change: Good day, and thank you for standing by and welcome to the <unk> Q1, 2025 earnings Conference call release Conference call.
Operator: Welcome to the Alaris Q1 2025 Earnings Conference Call, 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. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again.
Speaker Change: At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message advising that your hand is raised to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now.
Operator: Please be advised that today's conference is being recorded.
Amanda Frazer: I would now like to hand the conference over to your first speaker today, Amanda Frazer, Chief Financial Officer. Please go ahead. Thank you, Tanya. Thanks, everyone, for joining us this morning.
Speaker Change: Like to hand, the conference over to your first speaker today, Amanda Frazier Chief Financial Officer. Please go ahead.
Speaker Change: Thank you Danielle.
Speaker Change: Thanks, everyone for joining us joining.
Amanda Frazer: Here with me is Steve King, President and Chief Executive Officer. Before 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. This 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 headings Forward-Looking Statements and Risk Factors, copies of which are available on CDAR at CDARplus.com, as well as our website.
Speaker Change: Joining us this morning I'm here with me is Steve King President and Chief Executive Officer before.
Speaker Change: Before 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.
Speaker Change: Looking information is based upon a number of important factors and assumptions.
Speaker Change: And therefore actual results could differ materially additional information concerning the underlying factors assumptions and risks.
Speaker Change: In last Night's press release and our MD&A.
Speaker Change: Under the headings forward looking statements and risk factors.
Speaker Change: Copies of which are available on SEDAR at SEDAR com as well as our website.
Amanda Frazer: Non-IFRS 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 these non-IFRS measures.
Speaker Change: Non <unk> data is also presented it may differ from the way other companies.
Speaker Change: As with the forward looking statements. Please refer to last night's press release, and our MD&A for more clarification regarding these non <unk> measures.
Amanda Frazer: Now for the Q1 results, net book value increased by $0.12 per unit to $24.34. This increase was driven by $0.50 per unit of earnings offset by a $0.34 per unit distribution to shareholders. partner distributions and transaction fee revenue of $43.7 million was ahead of our previous guidance of $42.5 million and 13% higher than Q1 of 2024. The guidance beat was driven by higher than expected foreign exchange rates and common distributions. As compared to the prior year, the increase was driven by the new and follow-on investments made over the last 12 months and an overall 4% increase in preferred distributions due to the reset metric.
Speaker Change: Now for the Q1 results.
Speaker Change: <unk> increased by 12 per unit to 24 and 34. This increase was driven by 50 cents per unit earnings offset by a 34 cents per unit distribution to shareholders.
Speaker Change: Partner distributions and transaction fee revenue of $43 7 million was ahead of our previous guidance of $42 5 million and 13% higher than Q1 of 2020 for the guidance beat was driven by higher than expected foreign exchange rates and common distributions as compared to the prior year the increase was driven.
Speaker Change: And by the new and follow on investments made over the last 12 months and an overall, 4% increase in preferred distributions due to the reset metric.
Amanda Frazer: Net distributable cash flow for the quarter increased by 19.1% to $30.4 million or $0.67 per unit from $25.5 million or $0.56 per unit in the same period of 2024. In addition to the $0.34 per unit dividend as part of the NCIB, approximately 219,000 units were repurchased and cancelled for an average price of $19,000. Inclusive of the NCIB repurchases, the actual payout ratio for the quarter was 59%.
Speaker Change: That distributable cash flow for the quarter increased by 19, 1% to $30 4 million or 67 per unit from $25 5 million or <unk> 56 per unit in the same period of 2024.
Speaker Change: In addition to the 34 cents per unit dividends Thats part of the M. CIBC approximately 219000 units were repurchased and cancelled for an average price of 1960.
Speaker Change: Some of the N CIB repurchases the actual payout ratio for the quarter was 59%.
Amanda Frazer: With regards to partner updates, as a result of a recent third-party equity transaction entered into by Shipyard, the multiple of earnings used in our fair value calculation was adjusted to reflect this recent market data. The business, driven in part by their acquisition of Fulgrin-Mortine in 2024, has increased in size, as well as expanded their service offerings and their customer base. This adjustment increased fair value of the common equity by $8.3 million U.S.
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Speaker Change: with regards to partner updates as a result of recent third party equity transaction entered into by shipyard. The multiple of earnings used in our fair value calculation was adjusted to reflect this recent market data.
Amanda Frazer: Sodebello has been impacted by softening in consumer discretionary spending, as well as continued higher customer acquisition costs. Given the current market uncertainty and recent trends, we have adjusted the forecast earnings for 2025, as well as the exit timeline reflected in our fair value model. The impact of these adjustments was a decline of fair value of $13.7 million U.S. For Ohana, growth in memberships at mature clubs, as well as the membership ramp at their new locations, has increased both revenue and EBITDA, resulting in a fair value increase of 5.9 million U.S.
Speaker Change: Sonabello has been impacted by softening and consumer discretionary spending as well as continued higher customer acquisition costs Given the current market uncertainty and recent trends we have adjusted the forecast earnings for 2025 as well as the exit timeline reflected in our fair value model the impact of these adjustments was a decline of fair value of 13.7 million US [inaudible]
Speaker Change: For Alana, growth in memberships at Misher Clubs, as well as the membership ramp at their new locations has increased both revenue and EBITDA, resulting in a fair value increase of 5.9 million U.S.
Amanda Frazer: Subsequent to the quarter end, FNP was notified of the suspension of certain key contracts, primarily due to significant reductions in U.S. federal spending and the cancellation of numerous government contracts. The suspension is expected to have a material adverse impact on FNP's near-term financial performance and outlook. As a result, we do not expect them to maintain distribution payments for the remainder of the year. FNP's management is actively evaluating mitigation strategies, and we continue to assess the impact on the company's fair value based on its long-term business outlook. Despite the recent loss, F&P is expected to achieve positive EBITDA and cash flow on a pro forma basis and the company's lack of debt is expected to support its recovery.
Speaker Change: The suspension is expected to have a material adverse impact on FNPs near-term financial performance and outlook. As a result, we do not expect them to maintain distribution payments for the remainder of the year.
Speaker Change: FMP's management is actively evaluating mitigation strategies, and we continue to assess the impact on the company's fair value based on its long-term business outlook.
Speaker Change: Despite the recent loss, FMP is expected to achieve positive EBITDA and cash flow on a pro-forma basis, and the company's lack of debt is expected to support its recovery.
Amanda Frazer: Despite the adjustment to below 1 for FNP, the portfolio has maintained its weighted average ECR of approximately 1.5 times, with 10 of 20 partners continuing to be above this threshold. Of our 20 partners, 12 either have no or less than one turn of debt as compared to EBITDA. Based on our current evaluation of the portfolio, no other companies have significant risks as a result of the changes in U.S. procurement policies or the U.S. tariffs. While Edgewater's business does have exposure to government contracts, this area has not been a primary target of DOGE, and they have not seen any negative impact to the business or their related contracts.
Speaker Change: While Edgewater's business does have exposure to government contracts, this area has not been a primary target of doge, and they have not seen any negative impact to the business or their related contracts [inaudible]
Amanda Frazer: Our current outlook calls for $41.4 million of revenue in Q2. After reflecting the expected deferral of the F&P distribution, our 12-month outlook for revenue is now $178 million and includes $19.1 million in expected common distribution. We anticipate this change. to take our payout ratio. up just slightly to between 60 and 65 percent. As a result of the accounting standards requirement to revalue the U.S. acquisition entity at the quarter-end foreign exchange rate, the portfolio is subject to swings caused by unrealized foreign exchange gains and losses. During the quarter, book value was impacted by a foreign exchange loss of $0.11 per unit as compared to a gain of $1.35 per unit in Q4 2024.
Speaker Change: Our current outlook calls for 41.4 million of revenue in Q2. After reflecting the expected deferral of the FNP distribution, our 12-month outlook for revenue is now 178 million and includes 19.1 million in expected common distribution.
Speaker Change: As a result of the Accounting Standards Requirement to Revalue the US Acquisition Entity at the
Amanda Frazer: This sharp decline in the Canadian dollar over the course of Q4 and its offsetting recovery to date in 2025 is expected to create unrealized fair value losses which will impact net book value. In its source currency, we expect continued portfolio performance and net book value growth from the U.S. acquisition entity, but our anticipating volatility in the U.S.-Canadian exchange rates will cause some noise in our financial reporting in the coming quarters.
Speaker Change: This sharp decline in the Canadian dollar over the course of Q4, and it's offsetting recovery to date in 2025 is expected to create unrealized fair value losses, which will impact net book value and its source currency. We expect continued portfolio performance and net book value growth from the U S acquisition entity, but our.
Speaker Change: Anticipating volatility in the U S. Canadian exchange rates will cause some noise in our financial reporting in the coming quarters.
Amanda Frazer: On a similar note, in April, the Senior Credit Facility was amended to convert the facility from $500 million Canadian to $450 million U.S. This change allows for easier management of the facility by removing the FX impact of the recently rising and falling exchange rates. on outstanding draws, as well as providing incremental capacity of approximately $95 million U.S. or $130 million Canadian. We currently have $290 million U.S. drawn on the facility, leaving $160 million U.S. of undrawn capacity.
Speaker Change: On a similar note in April the senior credit facility was amended to convert the facility from 500 million Canadian to 450 million U S. This change allows for easier management of the facility by removing the FX impact of the recently rising and falling exchange rate.
Speaker Change: An outstanding draws as well as providing incremental capacity of approximately 95 million U S or 130 million Canadians. We currently have 290 million U S drawn on the facility, leaving 160 million U S of Undrawn capacity and on that note I will turn it over to Steve.
Stephen King: And on that note, I will turn it over to Steve for his comments. Great. Thanks, Amanda. Obviously, the key metrics for our company continue to be very strong in Q1, payout ratio below 60%, including the capital spent on share buybacks, strong overall portfolio health with weighted average ratio still at 1.5, even taking FMP into effect, and growth in distributable cash of 19% year over year, very strong numbers. Our defensive strategy as well as a diversified portfolio, very little debt in our operating companies, the required service nature of the industries that we're in, and the highly aligned owner-operator model continues to shield us from a volatile economic environment.
Steve King: Got it great. Thanks Amanda.
Steve King: The key metrics for our company continue to be very strong in Q1 payout ratio below 60%, including the capital spent on share buybacks.
Steve King: Overall portfolio health with weighted average ratio was still at 1.5, even taking F&B into effect and growth in distributable cash of 19% year over year very strong numbers.
Steve King: Our defensive strategy as well as a diversified portfolio very little debt and our operating companies.
Steve King: Required service nature of of the industries that we're in and the highly aligned owner operator model continues to shield us from a volatile economic environment.
Stephen King: Within that strong portfolio, there were two areas of softness that I'll highlight.
Steve King: Within that strong portfolio there were two areas of softness that I'll highlight the first being body contours, who operate in the cosmetic surgery industry <unk>.
Stephen King: The first being body contours, who operate in the cosmetic surgery industry. BCC has experienced a soft consumer market over the last several months that has impacted both their rate of revenue growth and their margins. The company is extremely well run and are operating well above industry metrics.
Steve King: <unk> has experienced a soft consumer market over the last several months that has impacted both our rate of revenue growth and their margins. The company is extremely well run and are operating well above industry metrics, but the current soft market will likely create a delay in the eventual exit because of a measured reduction and new location and product offering growth.
Stephen King: But the current soft market will likely create a delay in the eventual exit because of a measured reduction in new location and product offering growth. Eventual value is very much still intact, but likely pushed out a year, which is why the present value calculation resulted in a decline.
Steve King: Eventual value is very much still intact, but likely pushed out a year, which is why the present value calculation resulted in a decline.
Stephen King: As discussed on our last call, FMP in Washington was the one company in our portfolio that had risk of doge cuts. After feeling like they had weathered the storm, the company was hit by these cuts literally just a couple of days ago. It's far too early to speculate on the quantum and timing of replacing those lost contracts, but all of these following facts give us significant optimism for a full recovery. The company is exceptionally well run with industry leading professionals and decades long track record. FMP has zero debt and has cash on the balance sheet that will give them ample time to pick up new work.
Steve King: As discussed on our last call F&B in Washington was one of <unk> was the one company in our portfolio that had a risk of Deutsche got after feeling let's say weathered the storm. The company was hit by these cuts literally just a couple of days ago.
Steve King: It's far too early to speculate on the quantum and timing of replacing those lost contracts, but all of these following facts give us significant optimism for a full recovery.
Steve King: Our company is exceptionally well run with industry, leading professionals and decades long track record.
Steve King: He has zero debt and as cash on the balance sheet that will give them ample time to pick up new work.
Stephen King: At current revenue levels, the company is still profitable and has a solid platform to build off of. Doge caps are also creating opportunities for FMP with affected government contractors that need the exact human capital expertise that FMP provides to navigate through this volatile period. Letting go of extraneous staff while retaining the right people is right in FMP's core competency and they've already put out large bids on contracts that would go a long ways to building back their book of business. History has also shown that cuts of this magnitude are typically followed by smaller amounts being added back by the government as they realize that some of the things that they cut are actually needed.
Steve King: Current revenue levels. The company is still profitable and has a solid platform to build off of.
Steve King: The <unk> are also creating opportunities for F N b with affected government contractors, but maybe the exact human capital expertise that F&B provides to navigate through this volatile period.
Steve King: Letting go of an extraneous stuff, while retaining the right people is right in F&B is a core competency and they've already put out large bids on contracts that would go a long ways to building back their book of business.
Steve King: History has also shown that cuts of this magnitude are typically followed by smaller amounts being added back by the government as they realize that some of the things that they cut are actually needed.
Stephen King: Also, I would say that the beauty of our model is that while the hit to FMP is short-term and not material, it is everything to the people that own and operate FMP, needless to say, they are on it. Just as we did with BCC, OHANA, and LMS when those businesses were hit with temporary external shocks, Alaris will do the right things by FMP and preserve long-term value by giving them the flexibility that's needed. We have full confidence that this asset will have a full recovery. Extremely important to note that the weighted average coverage ratio and our corporate payout ratio include the impacts of FMP's situation, and because of the well-diversified nature of our business, there is very little impact on our overall portfolio and particularly on our dividend stream.
Steve King: Also I would say that the beauty of our model is that while the hit to F&B is short term and not material.
Speaker Change: Is everything to the people that own and operate F&B Needless to say they are on it.
Speaker Change: Just as we did with BCC Opana and LMS when those businesses were hit with temporary external shocks Polaris will do the right things by F&B and preserve long term value by giving them. The flexibility that's needed we have full confidence that this asset will have a full recovery.
Stephen King: On the positive side, the benefit of the current environment is really a plethora of opportunities for Alaris and high quality assets. Just as was the case coming out of COVID, our structured equity, which does not dilute business owners as much as traditional private equity, becomes highly sought after. Acquisition opportunities for our partners become more available and potential new deals are plentiful. We have bids outstanding that involve just Alaris as principal and also bids that include third party capital co-investing with us.
Speaker Change: Traditional private equity becomes highly sought after acquisition.
Speaker Change: Opportunities for our partners become more available and potential new deals are plentiful.
We have bids outstanding that involve just alero as principal and also bids that include third party capital co investing with us.
Operator: So, Latanya, I'll turn it over to you for any questions that there may be. Thank you. As a reminder, to ask a question, press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile our Q&A raw.
Speaker Change: So Tony I'll turn it over to you for for any questions that there may be.
Speaker Change: Thank you.
Speaker Change: As a reminder.
Speaker Change: To ask a question. Please star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: One moment, while we compile the Q&A roster.
Gary Ho: And our first question will be coming from Gary Ho of Desjardins Capital Markets. Your line is open. Hey, good morning, guys. Maybe it's just the first question on, let's go back to F&P here. So interesting to hear that even without the government contract, the company is still EBITDA and free cash flow positive. And sorry if I missed that, I think there's still no debt in the company.
Speaker Change: And our first question will be coming from Gary Ho of Desjardins capital markets. Your line is open Gary.
Speaker Change: Hey, good morning, guys.
Maybe just a first question on just going back to ethane here, so interesting to hear that even without the government contract. The company, it's still EBITDA and free cash flow positive.
Speaker Change: And sorry, if I missed I think theres still no debt in the company and maybe can you talk about any elaborate what other work that they can.
Stephen King: And maybe can you talk about and elaborate what other works that they can get on? Yeah, at the end of the day, when we had a big conversation with the owners of FMP the day after they got the news, I mentioned that this is the kind of fork in the road where you're forced into decisions that, you know, five years from now, you look back and say, you know what, this, this is probably the best thing that ever happened to our company. Because they've had more work than they could handle just from government agencies over the last several years, they've never diversified into other areas.
Dan: Hey, Dan.
Dan: Yeah at the end of the day, when we had a big conversation with the owners of F. N P. The day after they got the news.
Dan: I mentioned that this is the kind of fork in the road, where you're forced into decisions that five years from now you'll look back and say you know this is probably the best thing that ever happened to our company.
Dan: Because they've had more work than they can handle just from government agencies over the last several years, they've never diversified into under into other areas.
Stephen King: This is going to force that, and the easiest one right off the bat, as I mentioned, are government contractors in Washington, that most of them have been hit even harder than what FMP has. All of those people are going through their rosters of staff, laying people off, making sure that, you know, who they lay off doesn't cut into muscle in their companies and just gets rid of fat. And that's exactly what FMP does. So they've got some large contracts that have already come up through this process, and that's going to help them diversify as they, you know, build that out and also build back out the government contracts as well.
This is going to force that and the easiest one right off the bat as I mentioned, our government contractors in Washington that are most of them have been hit even harder than what the F. M. P has all of those people are going through their rosters of staff laying people off making sure that you know.
Dan: Who they lay off doesn't cut into muscle and they're in their companies and and just get rid of that and that's exactly what <unk> does so they've got some large contracts that have already come up.
Dan: Through this process and that's going to help them diversify as they build that out and also build back I would be the government contracts as well so.
Stephen King: So they will be just fine. They're going to make a full recovery. And, you know, as I mentioned, just like we did with BCC and Ohana in COVID, with LMS coming out of COVID, when you have some external shocks that a really good management team could not have foreseen, you want to be a good partner because the value is still there. It's still a great company, and they will be back in a very short period of time. Perfect, that makes sense.
Dan: They they will be just fine theyre going to make a full recovery and you know as I mentioned, just like we did with BCC N O Hana.
Dan: In Covid with LMS coming out of Covid.
Dan: When you have some external shocks that are really good management team could not have foreseen.
Dan: You want to be a good partner because the value is still there it's still a great company and they will be back in a very short period of time.
Dan: Perfect.
Gary Ho: Second question I have, sounds like there was an increase to your credit facility. So I think you mentioned the dry powder already, but just wondering if you can comment on the capital deployment pipeline that you have currently, the size, and sounds like it's still mostly in the US. Yes, everything in our pipeline is U.S. at this time, and we've got probably... probably more in our pipeline now than is normal, a huge amount of acquisition opportunities for our partners. I think we've got five or six that are working on acquisitions that would need our assistance in that.
Dan: Second question I have it sounds like there was an increase to your credit facility. So I think you mentioned that the dry powder already but just wondering if you can comment on the capital deployment pipeline.
Dan: That you have currently the size it sounds like it's still mostly in the U S.
Dan: Yes.
Dan: And our pipeline is as U S. A at this time.
Dan: And we've got probably.
Dan: Oh, probably more in our pipeline now than than than as normal a huge amount of of acquisition opportunities for our partners. I think we've got five or six that are that are working on acquisitions that would need our our assistance in that and then we've got a good a good roster of potential new deals.
Stephen King: And then we've got a good roster of potential new deals that are in process as well. So we do expect a very busy second half.
Dan: That are in process as well so we do expect a very busy second half.
Gary Ho: Okay, and then just lastly, maybe just going back to BCC, there was that fair value write down.
Speaker Change: Okay, and then just lastly, maybe just going back to BCC was that fair value write down.
Stephen King: Maybe can you walk us through kind of pushing out the potential monetization date and also the higher acquisition costs that there. Yeah, it really is. It's been an interesting year for BCC. The acceleration of GLP-1 weight loss drugs has been an interesting thing to monitor for the company. And this company is very heavy into data analytics and has broken things down and is extremely well managed. And I would have to say, too, that Brookfield has been a very supportive and constructive partner with us on BCC. And it now is very evident that the GLP-1s have not been a material negative drag.
Speaker Change: Maybe can you walk us through kind of pushing out the potential monetization date and also the higher acquisition costs that they're seeing within the business.
Speaker Change: Yeah. It really is a it's been an interesting year for BCC.
Speaker Change: The.
Speaker Change: The acceleration of G. L P. One weight loss drugs.
Speaker Change: <unk> has been an interesting thing to monitor for the company and this company has a very heavy into data analytics and Asbury broken things down and is extremely well managed and I would have to say to that Brookfield has been a very supportive and constructive partner with us on BCC.
Speaker Change: And.
Speaker Change: It now is very evident that the GOP ones have not been a material negative drag in fact, there's probably a slight positive from them.
Stephen King: In fact, there's probably a slight positive from them in terms of bringing people into the liposuction market after they've lost a large amount of weight. It's also introduced a new service offering of skin tightening, which didn't really exist before. But now with so many people having lost enormous amounts of weight, that's now a pretty large market, which didn't exist even two years ago. But what's really evident is the consumer discretionary spending in the U.S. has been in a recession for a number of months, probably a full year. And that has been what has made their acquisition costs higher and revenue, I would call it stagnant.
Speaker Change: In terms of bringing people into the liposuction market after they've lost a large amount of weight.
It's also introduced.
Speaker Change: A new service offering of skin tightening.
Speaker Change: Which didn't really exist before but now with so many people having lost enormous amounts of weight, that's now a pretty large market, which didn't exist even two years ago.
But what really are evident as you know the consumer discretionary spending in the U S has been in a recession for a number of months, probably a full year and that has been what has made their acquisition costs higher and.
Speaker Change: In revenue I would I would call it stagnant.
Stephen King: CareCredit is one of the companies that provides credit to health care patients in the U.S. They're the biggest one, including Sonobello patients. And comments from them anecdotally are that all of their client companies that they provide third-party financing for. The whole industry, including even things as easy as med spas, are down around 20 percent. BCC is not down 20 percent, just their growth rate has been paused. So we're feeling very good about where we stand in gaining market share during this period of time, but it's there. The consumer spending is definitely down, and it will come back.
Speaker Change: Care credit is one of the companies that provides credit to health care patients in the U S. They are the biggest one.
Speaker Change: Including a son of Belo patients and comments from them anecdotally are that all of their client companies that they provide third party financing for the whole industry, including even things as easy as med spas are down around 20%.
Speaker Change: BCC is not down 20% just their growth rate has been has been paused. So we're feeling very good about where we stand and gaining market share during this period of time, but.
Speaker Change: Is there the consumer spending is definitely down and it will come back. So the only thing that really impacts in terms of our value of that investment is the timing as you pointed out so it's probably going to be a year later probably 2028.
Gary Ho: So the only thing that it really impacts in terms of our value of that investment is the timing, as you pointed out, so it's probably going to be a year later, probably 2028. And things like, you know, expanding the breast augmentation division, we've kind of put that not on hold, but just slowed that down. But on the flip side, we have skin tightening coming in, which wasn't expected. So still a wonderful company, highly, highly profitable under Levert. And you know, I don't have any change in my exit valuation expectations for BCC. Perfect.
Speaker Change: And things like expanding the breast augmentation division.
Speaker Change: We've kind of put that not on hold but it just slowed that down.
Speaker Change: But on the flip side, we have skin tightening coming in which wasn't expected. So still a wonderful company highly highly profitable under levered and.
Speaker Change: I don't have any change in my exit valuation expectations for BCC.
Gary Ho: Okay, always appreciate your comments, Steve.
Speaker Change: Perfect Okay.
Gary Ho: That's it for me. Thanks, Greg.
Speaker Change: Appreciate your comments, Steve that's it for me.
Speaker Change: Thanks, Greg.
Jeffrey Fenwick: And our next question will be coming from Jeff Fenwick of Cormac Securities. Your line is open. Good morning, everybody. So, Steve, I wanted to follow up on Sonobel there. One of the other points that stood out was they exercised the PIC option on their payments, I think, through the quarter. Can you just remind us on the terms around that? Is it just a portion they can pay PIC? Is it all? What are the expectations going forward? Yeah, it's a portion of the payment. They, a lot of our picks are deferrals, cash deferrals, and we, you know, collect the cash at a later point in time.
Speaker Change: And our next question will be coming from Jeff Fenwick of Cormack Securities. Your line is open Jeff.
Jeff Fenwick: Hey, good morning, everybody.
Speaker Change:
Speaker Change: So Steve I wanted to follow up on something about their own one of the other points.
Speaker Change: Instead, it was the exercise of the pick option on their payments I think for the quarter can you just remind us on the.
Speaker Change: The terms around that is it just a portion of them. They can pay taxes at all and what are the expectations going forward there.
Speaker Change: Yeah, it's a portion of the payment.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: A lot of Opex or deferrals cash deferrals, and we collect the cash at a later point in time, it's a bit different for P. C C.
Stephen King: It's a bit different for BCC. They truly are paying in kind. So we're being issued incremental equity. It's increasing our investment and it immediately increases the cash pay for the next quarter. So that is reflected in revenue. And then it does go through into our investment in BCC. They don't expect, I think they can pick up to... 50% above. Yeah, and we don't expect them to use that for long, it's a very conservative management team. They actually have a large cash position on their balance sheet, but in an environment like this, they like to use all the levers that are at their disposal and act with ultimate caution.
Speaker Change: They truly are paying in kind, so we're being issued.
Speaker Change: Incremental equity or increasing our investment in it immediately increases the cash pay them right.
Speaker Change: The next corner.
Speaker Change: So that is reflected in revenue and then it does go through into our investment in <unk>.
Speaker Change: C C.
They don't expect.
Speaker Change: I think they can pick up too.
Speaker Change: He presented at all thanks.
Speaker Change: So yeah, yeah, and we don't expect them to use that for long, it's a very conservative management team.
They actually have a large cash position on their balance sheet, but you know in.
Speaker Change: In an environment like this they are they like to use all the levers that are at their disposal and act with ultimate caution so.
Jeffrey Fenwick: So it does, at the end of the day, increase our expected returns on this investment by them using the PIC, because we're getting more equity units issued to us. That's helpful. Thanks.
Speaker Change: It does at the end of the day increase our expected returns on this investment by them using the pick because where we're getting more equity units issued to us.
Speaker Change: Okay. That's helpful. Thanks, and then.
Jeffrey Fenwick: And then, back to FNP, probably challenging to come up with a fair value on that particular investment at this point in time. Doesn't sound like you're expecting it to be too greatly impaired. But again, how do you sort of handicap that? Like, what are you going to look at under your accounting model when you go to approach that for the end of the Yeah, we've been, our current fair value model has been based on a multiple cash flow, which obviously, you know, we're probably shifting that to more of a DCF model, and part of that shift is really building out what that outlook looks like, and that's really what management is focused on right now, what contracts, you know, are in the near-term backlog that won't be affected, what are the opportunities for new things to bid.
Speaker Change: I guess back to F N T.
Speaker Change: Probably challenging to come up with is it a fair fair value on on that particular investment at this point in time.
Speaker Change: It doesn't sound like you're expecting it to be due to greatly impaired, but again, how do you sort of handicap that like what are you going to look at under your your accounting model. When you get when you go to a pro stopped for the end of this coming quarter.
Speaker Change: Yeah, we've we've been their fair value or credit for really a model that's been based on a multiple of cash flow, which obviously.
Speaker Change: Probably shifting that to more of a DCF model and part of that shift is really building out what that outlook looks like and that's really what management is focused on right now what contracts.
Speaker Change: You know are in the near term backlog that won't be impacted affected what are the opportunities for new things to bed. So as we work.
Stephen King: So, as we work through the next few weeks, we'll be building out sort of what does the remainder of the year look like, and then going forward, how do we think that will play out so that we can sort of come up with that valuation. It's not zero. We, you know, there's EBITDA and cash flow to the business, so, you know, there is value here.
Speaker Change: Through sorry in the next few weeks, we'll be building out sort of what's the remainder of the year looked like and then going forward. How do we think that will play out if we can sort of come up with that.
Speaker Change: Shouldn't it it's not zero, we you know theres EBITDA and cash flow to the business. So you know there is value here. It's just a matter of it was very difficult to put a range together without this information and having it happened. So recently the management team is obviously focused.
Stephen King: It's just a matter, it was very difficult to put a range together without this information, and having it happen so recently, the management team is obviously focused on more immediate concerns within the business than sitting down with us to sort of build out that forward-looking model for the next couple of years. Yeah, but we do know that they have some large bids already out there for these government contractors, so by the time we report our next quarter, I'm hoping we have some results on some of those bids, and that'll really help Amanda and her team kind of formulate that valuation.
Speaker Change: On more immediate concerns within the business and sitting down with US just forgot about that forward looking model for the next couple of years, but we do know that they have some large bids already out there.
Speaker Change: For these government contractors. So by the time, we report our next quarter I'm, hoping we have some results on some of those bids and that'll really help them out and her team kind of formulate that that valuation.
Jeffrey Fenwick: And then maybe from a tax perspective. under your under your investment structure that you operate now, when you experience a fair value loss like that, what's the impact of cash taxes? Is it deductible? Or just wondering from a little matter from a free cash flow or distributable cash? Yeah, because it's an unrealized loss, it doesn't create any current tax impact, where that impact is really in our deferred tax number. So as we have increases in fair value, you'll see that deferred tax number push up and then as we have declines in fair value, it just turns around some of that deferred tax liability.
Okay and then.
Speaker Change: Maybe from a tax perspective.
Speaker Change: And under your under your investment structure that you operate now.
Speaker Change: You experience a fair value loss like that what's the impact of cash taxes, as a deductible or anybody I'm just wondering from a because it'll matter from a free cash flow or distributable cash perspective.
Speaker Change: Yeah, because it's an unrealized loss it doesn't create any.
Speaker Change: Current tax impact where that impact is really in our deferred tax number. So as we have increases in fair value, you'll see that deferred tax number of push up and then as we have declines in fair value. It just turns around some of that deferred tax liability.
Speaker Change: Okay great.
Jeffrey Fenwick: And then you did a little bit of share buyback in the quarter there, Steve. So what's the thinking? It sounds like you've got quite a full pipeline, so I can't imagine that buybacks are a priority for you. I guess if there's some share-based competent there and you want to sort of counterbalance that or what's the thinking on that front? Yeah, I mean, we'd like to buy back as much as possible, obviously, when we're trading below book value. But you're right, I mean, we have some really great, you know, investment opportunities out there that have high IRRs attached to them.
Speaker Change: And then you were you did a little bit of share buyback in the quarter are there Steve So what's what's the thinking and it sounds like you've got quite a full pipeline so I can't imagine that.
Speaker Change: But buybacks are a priority for you is this just sort of absorbing.
Speaker Change: There's some share based comp out there and you went out and they sort of counterbalance that or what's the thinking on that front.
Speaker Change: I mean, we'd like to buy back as much as possible, obviously, when we're trading below book value, but you're right. I mean, we have some really great investment opportunities out there that have.
Speaker Change: High IRR is attached to them so.
Stephen King: So but so does our current portfolio, which, you know, if you can buy our current portfolio at below book value, you're, you're going to win. So, you know, the dollar values that we've, you know, attributed to our NCIB aren't ones that are going to move the needle on our deployment spending. You know, if we're looking to spend 200 million over the next, you know, over the next year, spending an extra five to 10 on on NCIB isn't gonna, isn't really going to change much. So we'll, we'll continue to do that. I think we've, we've spent five or six million to date this year.
Speaker Change: But so does our current portfolio, which are you know if you can buy our current portfolio at below book value your youre going to win so.
Speaker Change: The dollar values that we've.
Speaker Change: Attributed to our NCI b are ones that are going to move the needle on our deployment.
Speaker Change: Spending you know if we're looking to spend $200 million over the next.
Speaker Change: Over the next year spending an extra five to 10 on an N CIB isn't going to isn't really going to change much. So we will continue to do that I think we've spent a five or $6 million.
Speaker Change: To date this year and the last batch was at 17 50 ish. So we think that was a that was a heck of a buy and we'll continue to do so.
Stephen King: And the last batch was that, you know, 1750 ish. So we think that was, that was a heck of a buy and we'll continue to do so.
Jeffrey Fenwick: Okay, great. Thanks for that.
Speaker Change: Okay, great. Thanks for that I'll get back in the queue.
Jeffrey Fenwick: I'll get back on the queue.
Operator: As a reminder, to ask a question, please press star 1 1 and wait for your name to be announced. One moment for our next question.
Speaker Change: Great.
Speaker Change: As a reminder to ask a question. Please press star one one and wait for your name to be announced one moment for our next question.
Zachary Evershed: Our next question will be coming from Zachary Evershed of National Bank Financial. Your line is open, Zachary. Good morning, everyone. Thanks for taking my questions. Morning, Zach.
Speaker Change: Our next question will be coming from Zachary <unk> of National Bank Financial Your line is open Zachary.
Zachary: Good morning, everyone. Thanks for taking my questions.
Speaker Change: Okay.
Stephen King: Could you give us an update on your expectations for LMS given the steel tariffs? Yeah, so LMS right now are unaffected. They get their steel from actually various countries. They're quite well diversified. None from the U.S. other than for their own U.S. operations. So there is some risk that Canada might impose some tariffs on steel being imported from from Asian countries and all other foreign countries. There is language in their contracts that all of that gets passed on to their customers. So they won't be affected on current contracts.
Speaker Change: Could you give us an update on your expectations for LMS given these steel tariffs in place.
Speaker Change: Yeah, So LMS right now are unaffected.
Speaker Change: They get their steel from actually various countries are quite well diversified.
Speaker Change: From the U S other than for their their own U S. Operations. So there is some risk that Canada might impose some some tariffs on steel being imported from from Asian countries and that will all other foreign countries. There is language in their contracts that all of them.
Speaker Change: That gets passed on to their customers.
Speaker Change: Don't they.
Speaker Change: They won't be affected on current contracts the only risk longer term would be if if real estate developers.
Stephen King: The only risk longer term would be if real estate developers, you know, just find it too expensive and mothball projects. So right now no impact, still a huge backlog of and high margins. They're doing extremely well as you've seen in the numbers. But that's something that we and obviously management are keeping an eye on. Thanks.
Speaker Change: You know just find it too expensive and mothball projects. So right now no impact still a huge backlog of business and a high margins there they're doing extremely well as you've seen in the numbers, but that's something that we're that we and obviously management are keeping an eye on.
Speaker Change: Got you. Thanks, and then we had a F N P talked about telling us still terrorists BCC evaluating G. L. P. One risks any any other kind of tail risks to partners that could have an outsized impact.
Stephen King: And we had FNP talked about LMS still tariffs, BCC evaluating, GLP-1 risks. Any other kind of tail risks to partners that could have an outsized impact?
Stephen King: A lot of people have been asking about Edgewater, our nuclear engineering company out of Tennessee. They have several hundred nuclear engineers that work for mostly Department of Defense and Department of Energy in the U.S. So those areas at this date have been unaffected, and in fact, they've got the biggest backlog of bids outstanding in those two areas that they've ever had. So there is an acknowledgment by the Trump government on the increase in spending on DOD. And the nice thing about that business is whether you're dismantling nuclear arms or expanding them, it requires just as much work from nuclear engineers.
Speaker Change: A lot of people have been asking about edgewater.
Speaker Change: The nuclear Engineering company.
Out of Tennessee.
Speaker Change: So they have several hundred nuclear engineers that work for mostly our department of Defense and Department of energy in the U S. So those are those areas.
Speaker Change: At this date have been unaffected and in fact, they've got the biggest backlog of bids outstanding.
Speaker Change: Those two areas that they've ever had.
Speaker Change: So there is.
At acknowledgment by the Trump government are on the increase in spending on Vod and.
Speaker Change: The nice thing about that business is whether you're dismantling nuclear arms or expanding them. It requires just as much work from nuclear engineers.
Stephen King: And then I think it's fairly obvious as well that the use of nuclear energy for the DOE is expanding as well. So a wonderful company.
Speaker Change: And then I think it's it's fairly obvious as well that are that the use of nuclear energy for the D. O E is expanding as well so a wonderful company. They are one of the ones that are looking at an acquisition right now.
Stephen King: They are one of the ones that are looking at an acquisition right now. They are a high-growth company for us, and we haven't seen anything negative from them at all, just positive.
Speaker Change: Are a high growth company for us and we Havent seen anything negative from them at all just positive.
Zachary Evershed: Thank you very much.
Operator: I'll turn it over. Great, thank you.
Thank you very much I'll turn it over.
Speaker Change: Great. Thank you.
Trevor Reynolds: And our next question will be coming from Trevor Reynolds of Acumen Capital. Your line is open. Morning. I was just wondering if there's any update on where Heritage is at. Heritage has made some very good improvements actually, they've worked through all of the negative margin contracts from the last two years that we're entered into. Our management team that we brought in has really improved the back office and bidding kind of processes. So yeah, we see some good improvements there, still work to do, but yeah, they've got a good building backlog and we expect that one to start showing some good progress throughout this year, so we're quite pleased there.
Speaker Change: And our next question will be coming from a Trevor Reynolds of acumen capital. Your line is open Trevor.
Speaker Change: Yes.
Speaker Change: Good morning, I was just wondering if theres any update on where heritage that.
Speaker Change: Heritage has made some very good improvements actually they've.
Speaker Change: Worked through all of the negative margin contracts from the last two years that were entered into.
Speaker Change: Our management team that we brought in has really improved the the back office and.
Speaker Change: Bidding kind of processes.
So yeah, we see some good improvements there are still work to do but yeah, they've got they've got a good building backlog and we expect that one to two a start showing some good progress throughout this year. So we're quite pleased there.
Stephen King: Is there any expectations around them returning to distribution? Probably not within the year. They're in the The heart of their busy season, you know, coming out of spring and going into summer. So they have a lot of capital investing into working capital. They're in the in the process of bringing on a new bank and revolver to sort of fund that ebb and flow of working capital. So we probably will see them invest in working capital back onto the balance sheet from the the effects of last year.
Speaker Change: Is there any expectations around them returning to distribution.
Speaker Change: Probably not within the year, there and the.
Speaker Change: The heart of their busy season.
Speaker Change: Coming out of spring and going into summer. So they have a lot of capital investing into working capital there and are in the process of bringing on a new bank revolver to sort of fund that ebb and flow of working capital. So we probably will see them invest in working capital back onto the balance sheet from me.
Speaker Change: The effects of last year, and so we'd probably look to see a return to distributions sometime in 2026.
Stephen King: And so we'd probably look to see a return to distributions sometime in 2026. Great.
Stephen King: And then just to clarify on F&P, have they officially cut distributions or just maybe just kind of how best to model that out? Yeah, we cut them. So just like with during COVID, when a shock like this happens, there's there's no point in, in trying to drain cash out of out of a company, we're going to want to preserve long term value and keep working capital on their balance sheet, so they can actually grow out of this. So yeah, we, we, we told them to stop paying us. And we'll pick that back up when when they've replaced those contracts and are and are ready.
Speaker Change: Great and then just to clarify on F&B.
Speaker Change: Officially.
Speaker Change: Cut distributions or.
Speaker Change: Maybe just kind of how how basketball that open.
Speaker Change: Yeah, we got them, so just like with <unk>.
Speaker Change: During COVID-19 when a shock like this happens there's no point in trying to drain cash out of out of a company. We're gonna want to preserve long term value and keep working capital on their balance sheet. So they can actually grow out of it. So yeah. We we we told them to stop paying us.
Speaker Change: And we'll pick that back up when when they replace those contracts and are ready. So exact same thing we did with <unk> with sort of Belo with.
Stephen King: So exact same thing we did with with Sotobelo with with Ohana and with LMS. All of those companies have repaid every single penny that we deferred and we expect the exact same with FMP. So that I mean, that that is the beauty of what we've built here is that over time, you're going to have some of these external shocks, we've got a really well diversified portfolio, we're managing over $2.3 billion of capital here. So having a small company like FMP go through this really is, is not a material event for us. As I mentioned to somebody yesterday, we get so much mileage out of situations like this, where we're bidding on, you know, five, six new companies at any given time, I'm going to have every single one of them call Aaron at FMP to talk about how Alaris was when, when, when it hit the fan and how we were as partners so that this, this task will have more value than than what anybody knows.
Speaker Change: With <unk> and with LMS all of those companies have repaid every single Penny that we deferred and we expect the exact same with F N b.
Speaker Change: I mean that is the beauty of what we've built here is that over time youre going to have some of these external shocks that we've got a really well diversified portfolio, we're managing over $2 $3 billion of capital here. So having a small company like F&B go through this really is is not a material event for us.
Speaker Change: As I mentioned to somebody yesterday, we got so much mileage out of situations like this where we're bidding on you know five or six new companies at any given time I'm going to have every single one of them call Aaron.
Speaker Change: <unk> to talk about how it was win win when it hit the fan and how we were as partners. So what this does to US we'll have more value than.
Trevor Reynolds: So Great, thanks for taking my question.
Speaker Change: [laughter] than what anybody knows.
Speaker Change: Great. Thanks for taking my questions.
Operator: And I'm showing no further questions at this time.
Steve King: Thanks, Trevor and I am showing no further questions at this time I would now like to hand, the call back to Steve for closing remarks.
Stephen King: I would now like to hand the call back to Steve for closing. Great. Thanks, Tanya, and thanks, everybody, for tuning in. As always, if there's any follow-up questions for myself or Amanda, please give us a call anytime, but until then, we'll talk to you in July.
Speaker Change: Great. Thanks, Tony and thanks, everybody for tuning in as always if there's any follow up questions for myself for Amanda Please give us a call anytime but.
Steve King: Until then we will talk to you in July.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. FUNKY MUSIC
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Steve King: Okay.
Steve King: Yeah.
Steve King: [music].
Steve King: Yeah.
Steve King: [music].
Steve King: Okay.