May 15, 2015
Executives
Emilie Blouin - Manager, Investor Relations Gerry Schwartz - Chief Executive Officer Chris Govan - Chief Financial Officer
Analysts
Paul Holden - CIBC Scott Chan - Canaccord Genuity
Operator
Welcome to Onex First Quarter 2015 Conference Call. During the presentation, all participants will be in listen-only mode.
Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.
I'll now turn the conference over to Ms. Emilie Blouin, Manager, Investor Relations.
Please go ahead.
Emilie Blouin
Good morning, everyone, and thank you for joining us. We're broadcasting this call live on our website.
With me on the call are Gerry Schwartz; Chris Govan; and a number of our Managing Directors. The first quarter MD&A and consolidated financial statements are on our website and have also been filed on SEDAR.
Our press release and quarterly report include the How We Are Invested schedule. This is a good financial summary of our investments and includes Onex's capital on a per share basis.
Our schedule of fees and expenses is also on our website. As discussed on our year end call, we are now providing a schedule each quarter with LTM information.
It should give you greater visibility into the revenue and expenses in our asset management platforms and the parent company. And just as a reminder, all references to dollar amounts on this call are in U.S.
unless otherwise stated. I want to remind everyone of the usual forward-looking statements disclaimer and I’d also point out that all information relating to the fair value of our private companies is a view of Onex's management.
In addition, we will refer later in this call to collateralized loan obligations or CLO offerings by Onex Credit. We are required to remind you that these offerings are made solely to qualified institutional investors and to certain non-U.S.
investors in private transactions not requiring registration under U.S. Securities Laws.
The securities are not and will not be registered under U.S. Securities Laws and cannot be offered or sold in the U.S.
without registration or exemptions. I would also like to remind everyone of our upcoming Investor Day, which is taking place in Toronto on June 4th and will be webcast live.
I'll now turn the call over to Gerry.
Gerry Schwartz
Thank you, Emilie. Good morning, everybody.
I will talk about our activity in the first quarter and a couple of updates since then. But, first, let start with taking a quick look at what we are seeing in the marketplace.
Globally, the number of leverage buy outs, the LBOs, done in Q1, were down about 20% compared to the prior quarter. The dollar value was higher but it's almost entirely due to the large clients cracked deal being labeled as a private equity transaction, which, I am not pretty sure that applies to it.
Strategic M&A in North America over the last couple of quarters has been more active than financial sponsor M&A. Unfortunately, corporate carve-out activity remains pretty slow, as many corporate sellers don't have good near-term alternatives for the cash proceeds, so they are simply not willing to undertake allowing carve-outs.
In the credit markets, rates remained low and CLO issuance remains at the record pace established last year. There seems to be developing consensus that we will see a rate rise increase in the U.S.
later this year, as well the fed is increasingly aggressive in its review of bank lending for LBOs, of course, that's really important to us and that's having the effect moderating overall leverage levels and has a direct impact on the likelihood of the transactions being done by private equity firms. Moving on to Europe, the equity and leveraged loan markets there are in fact very robust.
The equity markets are clearly outperforming U.S. indices, which has led to the strongest first quarter IPO market since 2000, 15 years ago.
But like in North America, corporate carve-outs remains slow. Quantitative easing in Europe has driven rates lower even negative in a few government market causing investors to look to the leverage loan and bond markets for yield.
The technical aspects of the market are strong now and are expected to stay that way without rate increases, I would guess, well into next year. For us, Europe has been a really bright spot.
In March, we invested $1.5 billion of equity to acquire two European headquartered businesses, SIG Combibloc and Survitec. Onex's share of these investments -- these equity investments was $478 million.
This includes our investments as a limited partner in the fund as well as our $274 million co-investment in SIG. Recently, we’ve taken advantage of these strong credit markets.
Just this past week, we repriced SIG's euro and U.S. dollars nominated loans that we had raised only a couple months ago.
This repricing -- quick repricing reduced the variable rate of SIG's term loans by 1%, resulting in approximately $20 million per year in pretax annual savings. The cost of debt refinancing allowed us a one-year payback.
That’s remarkable, in a short-time that we’ve owned saying it’s remarkable in short-time we’ve owned any investment. Additionally, in March, ResCare paid $105 million distribution as a result of increase in some loan.
We agreed to sell Tropicana for $360 million, of which Onex’s share will be about $50 million. This investment has clearly fallen short of our expectations.
Over a six-year ownership period, we completed a total physical and operational restructuring and repositioning the property to appeal to middle market customer. Nevertheless, gaming revenues and hotel room rates never recovered to the extent that we had anticipated when we made these investments.
Other than Tropicana, the investments on Onex Partners III are performing well overall. Moving onto Onex credit, we completed our eight CLOs in April for $764 million and established a warehouse in anticipation of our first European offering.
Since launching our CLO strategy a couple of years ago, we’ve issued more than $4.5 billion in eight CLOs, representing an average of about three a year. We now manage $5.8 billion in our credit platform and our goal is to grow AUMs to $10 billion by the end of 2017.
To reach that target, we will continue with CLO offerings and our focus on laying the foundation for growth in our hedge fund strategy. We’re confident that credit will continue to grow and be part -- an important part of our story.
This has always been the case. We continue to build alignment with our investors.
In the first four months of this year alone, Onex management has invested almost $150 million in SIG, Survitec and Onex credit. With that, now let me hand the telephone mic over to Chris Govan for his first call as our CFO.
Chris, thank you very much for taking on these additional responsibilities and taking them on well, smoothly, having a great transition from Don Lewtas. Go ahead.
Chris Govan
Thanks, Jerry and good morning everyone. And thank you for those comments.
With this being my first call as CFO, I have to start by thanking Don Lewtas for his mentorship over my 17 years here at Onex and in particular, his support and guidance during the transition. So, thanks Don.
My comments this morning will focus on the How We Are Invested Schedule and the Schedule of Fees and Expenses that Emilie referenced earlier. So first looking at the, How We Are Invested Schedule, there are a few significant changes from year end I’d like to highlight.
As Gerry discussed, Onex Partners had a busy quarter deploying capital, with Onex Corporation investing $478 million in Survitec and SIG. These transactions drove our investment in the Onex Partners private companies to almost $2.3 billion at quarter end.
The remainder of the increase to this balance reflects 4% quarterly growth in the value of the underlying businesses, net of our $20 million share of the ResCare distribution. Onex also puts some cash to work through the Onex Credit platform with these investments increasing to $430 million at quarter end, as we continue to allocate capital to support the growing CLO business.
In Q1, this met funding warehouse facilities for CLO eight which closed in late April and for the expected first European CLO. The first quarter is typically a weaker quarter for overall growth in our hard NAV due to timing of variable compensation payments.
2015 was no exception. Overall, Onyx's capital decreased during the quarter by a little less than 2% or about a $100 million.
As the payment of 2014, variable compensation in January offset the value created in our private equity investments. As such, we did not make progress in Q1 towards our goal of compounding capital per share at 15%.
But remember, this is a long-term goal. If we look at the five years ended March, Onyx's capital per share has compounded to 12% or 17% in Canadian dollars.
Well, the How We Are Invested schedule and the changes in Onyx's capital per share over time are a good measure of Onex’s investing activities. They do not reflect the enterprise value of our asset management activities.
Platforms that manage approximately $15 billion of our investor’s capital, most of which is committed by long-term institutional investors. The Schedule of Fees and Expenses is one measure of the contribution that Onex Corporation and its asset management activities make over and above the performance of our invested capital.
Focusing on this schedule and our private equity platforms specifically, we saw management fees increased by 18% to $84 million, driven by the additional quarter of fees from Onex Partners IV. As you will recall, our fees fell last year when we extended the investment period to fund III and deferred calling fees from fund IV until August.
As this one-time decline fully rolls off in Q2 and Q3, we expect our reported PEC revenue to approach our current run rate of just over a $100 million. Partially offsetting the $13 million increase in fees was a net $5 million headwind from lower realizations.
With no meaningful realizations in Q1 of this year, carried interest fell by $16 million in the LTM period. But as you would expect, this was mitigated by lower variable compensation.
In total, our private equity asset management platforms contributed $92 million in the March LTM period versus $83 million in calendar 2014. An Onex Credit, the steady growth of the CLO platform and the associated fees continued with LTM fees rising to $30 million.
In fact, Credit exited the quarter with run rate fees of $35 million. This growth allowed the credit manager to contribute $12 million in the last 12 months compared to $9 million during calendar '14.
In addition, the return from our CLO investments improved slightly, reflecting weaker Q1 2014 performance rolling out of the LTM results. Although the CLO returns on this schedule are presented on a mark-to-market basis, it’s important not to lose sight of how the CLOs are performing from a cash flow perspective.
Looking at our six CLOs that begun making equity distributions, we received $11 million of distributions in Q1 or about 24% on an annualized basis when compared to our year end investment. Now stepping back and looking at the schedule as a whole, you will see that the total contribution from the parent company and our asset management platforms in the March LTM period was $61 million, or about $0.50 per share, but these numbers do not capture the whole value of our franchise.
Remember the schedule of these and expenses includes 100% of the cost of running Onex Partners, ONCAP, Onex Credit and the parent company, but it includes no revenue from than $4 billion of private equity capital we manage on behalf of Onex shareholders. Despite this mismatch, we expect our asset management activities as reflected on this schedule to be profitable over the long term with the results tied to our investment performance and our ability to attract capital, which brings me to our second long-term goal, growing fee generating capital by 10% per year.
As we discussed on these calls before, we would advise against focusing on the short-term performance relative to this goal. Two of the biggest factors affecting performance here private equity fund raising and realizations are episodic and lumpy.
So while fee generating capital decreased slightly in the 12 months ended March, we are pleased to have exceeded our goal over the past five years growing at a 12% per year. Our overarching objective is to have Onex’s share price reflect both the growth and the value of our investments and the growing contribution for managing the capital of others.
This is supported by a longstanding quarterly dividends and the stock buyback program. In the first four months of 2015, we remained active with buybacks, repurchasing more than 1.1 million shares at a cost of C$82 million or an average cost of C$71.82 per share.
I am also pleased to report that yesterday our Board of the Directors approved the 25% increase in our annual dividend to $0.25 per share. This followed similar increases in 2013 and '14.
That completes my comments. And we would be pleased to now take any questions.
Operator
[Operator Instructions] And the first question comes from Paul Holden with CIBC.
Paul Holden
Hi, thank you. Good morning.
Gerry Schwartz
Good morning.
Paul Holden
I want to ask a question on Tropicana. So understand the explanation on the gaming revenues and hotel occupancy for the industry.
But if I go back to sort of one year primary investment philosophy to invest for the factors you can control and then if there is macro factors that work in your favor than it just provides incremental return. So wondering if there’s maybe some things that are specific to the Tropicana investments itself that didn’t go quite as planned or maybe this was a different case where you took more of a bet on a turn in the macro factors?
Gerry Schwartz
Tim Duncanson is on the line. Tim has the most handling of these investments.
So I’ll ask Tim to comment. I would just say in leading into it that it’s interesting part is the exact opposite for you just as that happened.
It’s the macro economic factors that turned out to be the problem. With some exceptions, the repositioning of the hotel was done well.
The refurbishment of the entire property was carried out pretty much on time on budget. But it was the big downturn starting in 2008 of Las Vegas in total that really was the most costly aspect of this.
The other think I would comment on is that you’re really asking the question, how does this end result look compared to your thesis going into it? And the principal aspect of our thesis going into it was that we would protect ourselves on the downside with the land value.
And well, there was all this far from satisfactory. We have an awfully big place for just fixing the operation.
What we really sold was the land and that is what protected the downside. Tim, do you want to add to that?
Tim? Maybe you lucky that I did answer [Technical Difficulty] that Tim was on the line.
Paul Holden
Okay, okay. If I guess part of the nature of my question to …
Tim Duncanson
Sorry, Gerry, I was on mute. I apologize.
So you started talking and then I realize you guys couldn’t hear me. Paul, Gerry’s comments are correct.
The macro environment was much more severe and took a lot, so much longer for Las Vegas to turn around. It really still hasn’t and so we got that part of it wrong.
We thought this would be similar to other recessions and that you’d be back, kind of, not a peak but into sort of a very status quo sort of situation in the couple of years. That still hasn’t happened in Las Vegas.
Some new supply came on the stream as well at the high end and that also kept run rates down. We did execute well on the room side and the hotel side on factors we could control.
We intended to build a network of other casinos to help drive business to Tropicana that was a hub and spokes sort of thesis. And then when we weren’t able to execute on other casino operations, we emulated that with the hopes on franchise agreement, which was really frankly accrued and that really has driven run rates up lately and convention business, it was a key factor in getting a good sale price.
Where we did fall down a bit was on increasing gaining revenue in excess of how the market improved. And so your comment is correct that we usually try to control factors and drive the businesses from their own merits and that's one thing we weren’t able to do.
And that was part of our thesis. And I think we just didn't get some of the operating and promotional and marketing efforts correct.
But otherwise, those are the only things I would kind of add to Gerry’s comments. Apologize for being on mute there.
Paul Holden
Okay. That's helpful.
With the specifics regarding Tropicana and I guess, the other part of my question was trying to suggest, if maybe there’s any lessons learned from the Tropicana investment, in terms of how you would apply it to future investments, if I am getting the sense maybe not?
Chris Govan
I don’t think so, Paul. I don’t think there is an overarching lesson from it.
Paul Holden
Okay. Okay.
Good. And then my next question, I guess, would be on Emerald Expositions, so some positive developments there, revenue up 19% year-over-year, cost of sales down 6%, we are seeing some good expansion in gross margins and EBITDA there?
Maybe you can talk about that the progress with them a little bit more?
Chris Govan
Sure. It’s actually a consequence of the couple tuck-ins that we did and just stayed quadrangle in the business, volumes up and the price is up, that's it, they are doing a good job.
Paul Holden
Okay. And then I assume then if costs are down with those acquisitions and you have been extracting cost synergies at the same time?
Chris Govan
Some of the synergies that we are realizing now were a consequence of the GLM acquisition last year. We closed about a year ago.
Paul Holden
Okay. And then in terms of ONCAP III, with the acquisition that’s expected to close in Q2, what percentage of the fund would be invested at that point?
Gerry Schwartz
Paul, I believe would be approximately 65%.
Paul Holden
65%, okay. And then again fund raising potentially would start for the next fund at around 75% mark is that?
Gerry Schwartz
That’s what we are permitted to do under the limited partnership agreement. Our focus as you would expect today is managing our existing businesses and investing the remainder of capital on ONCAP III.
Paul Holden
Okay. Got it.
And then with that investment in ONCAP III, the pending investment, that's also a partial ownership investment. Seems like we are seeing a little bit more of that type of structural like we saw with the ATI and then a few years ago with the JELD-WEN?
Do you anticipate that type of structure to become more frequent, is that an ongoing trend we should expect?
Gerry Schwartz
From ONCAPs perspective, we have -- we are always on the lookout for opportunities to partner with strong management teams and like-minded business owners and entrepreneurs. So we have considered in the past and we’ll continue to consider in the past situations where we are a significant minority owner.
So we are not exclusively looking for situations where we can have a controlled ownership position. So it really is a case-by-case situation and I don’t really view it as a trend from a non-GAAP perspective.
Paul Holden
Okay. And then final questions related to Onex Real Estate Partners, maybe just the progress up there in terms of when you think you’ll be able to wrap up that investment?
Gerry Schwartz
You’re really asking us to predict future transactions. And as you know, we’ve had a permanent policy of simply not commenting on potential transactions.
Paul Holden
Okay. That’s it for me then.
Thank you.
Operator
[Operator Instructions] And there are no further questions. This concludes our question-and-answer session.
I will now turn the conference back over to Gerry Schwartz.
Gerry Schwartz
Thank you. If somebody has questions that haven’t been asked here, please feel free to call Emma or Emilie or any of us in fact.
Operator
Excuse me, sir. There is a question coming in from Scott Chan.
Gerry Schwartz
Yes. Go ahead.
Scott Chan
Good morning. Sorry just hopped on.
Gerry you talked about the pipeline being a bit challenging year-to-date. What are some of the challenges and what are some of the issues that could kind of improve that outlook on the large cap side?
Gerry Schwartz
Scott, I think it was really talking about the industry being a bit challenged in tough time. In fact, our own pipeline, what we are looking at seriously is as fulsome is probably it’s been in a long time.
Scott Chan
Okay. So you’re talking about the industry in terms of carve-outs?
Gerry Schwartz
Yes.
Scott Chan
Yes. Okay.
Gerry Schwartz
In particular in terms of LBO activity.
Scott Chan
Okay. And then Michael, is there any comment on the pipeline on the ONCAP side, is it still strong?
Gerry Schwartz
Yes. We are very busy.
We’re looking at new investment opportunities, but also very active in add-on acquisition opportunities for out existing businesses. So the ONCAP team is quite busy right now.
Scott Chan
Okay.
Gerry Schwartz
And generally that’s pretty reflective of the larger cap opportunities right now too?
Scott Chan
Okay. Thank you very much.
Gerry Schwartz
Thanks.
Operator
Okay. Gerry, so you may conclude.
Gerry Schwartz
Thank you again, everybody. Good morning.
Operator
Thank you. This concludes the conference call.
You may now disconnect.