Nov 14, 2014
Executives
Gerry Schwartz - Chairman, CEO, Toronto Don Lewtas - CFO, Toronto Bobby Le Blanc - Senior Managing Director, New York Seth Mersky - Senior Managing Director, Toronto Anthony Munk - Senior Managing Director, New York Kosty Gilis - Managing Director, Toronto David Mansell - Managing Director, Toronto Tawfiq Popatia - Managing Director, Toronto Emma Thompson - Head of the Funds Group, Toronto
Analysts
Geoff Kwan - RBC Capital Markets Scott Chan - Canaccord Genuity Paul Holden - CIBC
Operator
Welcome to Onex Third Quarter 2014 Conference Call. During the presentation, all participants will be in a 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. Emma Thompson, Head of the Funds Group.
Please go ahead.
Emma Thompson
Good morning, everyone, and thank you for joining us. We're broadcasting this call live on our Web site.
On the call are Gerry Schwartz, who is joining us remotely, Bobby Le Blanc, Don Lewtas and a number of our Managing Directors. 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. The third quarter MD&A and consolidated financial statements are now available on our Web site and have also been filed on SEDAR.
I want to remind everyone of the usual forward-looking statements disclaimer and I would 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 the call to collateralize loan obligations or CLO offerings by Onex Credit.
We're 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'll now turn the call over to Bobby.
Bobby Le Blanc
Thanks Emma and good morning everyone. I'm going to talk to you about our activity in the third quarter and provide a few more recent updates.
This summer was our busiest period ever for realizations. We have some great results with the sales of the Warranty Group, Gates and Mister Car Wash creating value after years of building these businesses.
We also sold our remaining stakes in Allison Transmission and Spirit Aerosystems. Onex's overall share realizations including carried interest is about $1.9 billion so far this year already making 2014 the highest level of annual proceeds in our 30-year history.
We are very happy with the volume and success of our recent realizations. Our challenge today remains finding great companies at reasonable prices.
We have seen a lot of good in businesses lately. In fact, I haven't seen our team this busy evaluating new investment opportunities in quite some time.
With a robust pipeline, and the recent volatility in the debt markets, we are hopeful to find a few good investments in the near term. Given the environment, we are glad we found York Risk Services Group, which closed in early October.
And just two weeks ago, we invested in Mavis Discount Tires through ONCAP. Mavis is a leading tire retailer operating in a highly fragmented $32 billion industry.
We are investing along side an experienced management team in the automotive aftermarket industry, a sector which we have historically prospered in. Mavis is an excellent platform to build an industry leader.
Our growth thesis is very similar to those of Mister Cash Wash and Caliber Collision where we partnered with sophisticated management teams in a fragmented industry and leveraged their operating models to drive growth in both existing and new markets. The first couple of years of ownership are often the busiest for us, as we work closely with our management teams to implement and execute our business plans.
Both York and Mavis provide opportunities for organic growth and tuck-in acquisitions. As we have done many times before, we will work with management to build stronger leaders in their respective industries.
For companies, we still own, there are many ongoing initiatives to create value. For example, since our acquisition of USI less than two years ago, the team has successfully completed 20 accretive tuck-ins to augment this organic growth as well Jeld-Wen's under the leadership of our new CEO Kirk Hachigian, it's quickly improving its margins through cost savings and other opportunities.
You will see on How We Are Invested schedule that Jeld-Wen's LTM EBITDA is up 20% since last quarter. These types of activities have contributed to the value of Onex's interest in our private equity funds growing by 4% in the past quarter and 24% during the last 12 months.
Moving on to Onex Credit. We recently established our London office to expand our platform to Europe.
And in November, we priced our 7th CLO offering of $514 million. Onex Credit now manages more than $5 billion, an 80% increase in the past year.
Our goal for this platform is to grow assets under management to $10 billion by the end of 2017. Critical to our overall success is financial alignment amongst our shareholders, our team, our limited partners and our operating companies.
We share in the success and failure of our investments through the team's significant financial commitment to everything that we buy. Today, Onex management owns Onex shares and investments in its private equity and credit fund valued at $1.9 billion.
We continue to believe we are better positioned than ever for continued growth. Our pipeline is strong and we have a stable and experienced team with the financial resources to take action.
I will now ask Don to provide the financial highlights for the quarter.
Don Lewtas
Thank you, Bobby, and good morning everyone. As Emma mentioned, the MD&A and IFRS consolidated financials are on our Web site and SEDAR.
The MD&A provides a complete commentary on the consolidated financial results. My comments this morning will primarily focus on the How We Are Invested schedule on Page 3 of the report and attach to the press release.
All references to dollar amounts will be U.S. unless otherwise stated.
At Onex, we have two long-term goals. We've talked about the first for several years now to grow our capital per share by 15% per year.
At Investor Day, we added a second long-term goal to grow our fee generating capital by 10% per year. Fee generating capital will certainly fluctuate as new funds are raised and existing investments are realized.
But, we hope that by continuing to successfully raise new private equity funds as we did earlier this year with Onex Partners IV and by growing our credit business, we can achieve this goal over the long-term. A growing capital base provides two significant benefits to Onex.
First, Onex is entitled to receive a committed stream of annual management fees; the current annual run rate is approximately $130 million. And second, Onex has the opportunity to sharing the profits of its limited partners through the carried interest participation creating additional value per shareholders.
Carried interest received by Onex this year to September 30th for $169 million. And so in terms of our first goal, Onex's total capital at September 30th was $5.9 billion or $52.77 per share on a fully diluted basis, which is up 4% since year end.
On a Canadian dollar basis that is 59.10 per share. On a 12 month basis, Onex's capital per share in U.S.
dollars increased 12% which compares to our first goal of growing our capital per share by 15% per year. There were value increases across a number of our businesses we acquired over the past 24 months as we continued to build those companies and transform operations.
Since 2009, when we started publishing our marks, Onex's capital per share has increased anywhere from 8% to 23% per year. While our considerable cash balance will impact our near-term performance relative to this goal, we could not be better positioned to take advantage of great investment opportunities.
Now on to our second goal of growing fee generating capital by 10% per year over the long-term. In the last 12 months, Onex's fee generating assets have increased by 36% as a result of the recent success in raising Onex Partners IV and CLO issuances and partially offset by realizations due to the episodic nature, private equity fund raising, which typically occurs every few years, we expect that growth measure to be relatively inconsistent year-to-year.
If we look back over the last five years, our fee generating AUM has grown at a compound annual growth rate of 14%. Each quarter, I would like to walk you through the change in our cash position which is also presented on Page 57 of the MD&A.
Onex's cash and near cash at September 30th totaled $3.1 billion which is up from $2.0 billion at June 30th. The main drivers in the quarter were the proceeds received from the asset sales of Gates, TWG, Cypress, Mister Car Wash and the share sales of Allison Transmission and Spirit Aerosystems.
The investment in York, which closed on October 1st, and the investment in Mavis Discount Tier as well as share buybacks has since reduced Onex's cash and near cash position to $2.9 billion. While the How We Are Invested schedule and our capital per share performance give a good snapshot of Onex's net assets.
They don't fully reflect the enterprise value of our asset management business. Onex's capital does not include estimated carried interest due to Onex of $98 million based on the quarter end valuations.
What it doesn't include is any value for management fees, which on an annual run rate as I mentioned was $130 million including the recent Onex Partners IV capital raise and/or for potential carried interest from future value creation at our companies. In the first nine months of this year, as I mentioned Onex had received $169 million of carry from realizations.
This is significantly higher than prior years and reflects a growing amount of third party cap at work and a number of strong realizations this year. This demonstrated the value to Onex shareholder – shareholders who are managing third party capital.
And there is more opportunity to earn carry, in the last two years we have invested $1.5 billion of capital, which is now subject to carry. In addition, we have a further $3.8 billion of third party capital to invest from our recent fund raise of Onex Partners IV, which will also be subject to carry once invested.
If we are successful in achieving our goals over the long-term, we believe Onex's shares will reflect both the growth and the value of our investments and the growing contribution for managing investments for our limited partners and other investors. This is supported by a longstanding quarterly dividend and a stock buyback program.
In the first 10 months of 2014, we were quite active with buybacks repurchasing about 2.2 million shares at an average cost of Canadian 63.29 per share. As we have indicated before, our consolidated financial results will be lumpy as we acquire, build and subsequently realize on the businesses as we own.
Onex's net earnings of $388 million for the third quarter of 2014 include earnings from discontinued operations of $365 million. This was driven by the gain on the sale of the Warranty Group which is $368 million.
In spite of the recent fluctuations in the stock market, Onex's shares have performed well year-to-date. Yesterday, our shares closed at 63.30 which would represent increase of 10% and 11% since the beginning of the year and over the last 12 months respectively.
This compares to increase – in the SMP 500 and the SMP TFX composite index of 10% and 9% respectively year-to-date and 14% and 11% respectively over the last 12 months. That completes my comments, we now be pleased to take questions.
Question-and-Answer
Operator
[Operator Instructions] And your first question is from the line of Geoff Kwan [RBC Capital Markets].
Geoff Kwan - RBC Capital Markets
Hi. Good morning.
First question I had was, I mean it sounds like the pipeline is getting a bit better but and I know you generally don't talk about at the industry level. But, I'm wondering if you might be able to provide a bit of color kind of stratifying by deal size in other words ONCAP versus within the Onex Partners a typical deal sizes that you have done in the past?
And then also potentially larger sized deals that which are cash positioning and the co-investment ability some deals that you might look at today that you might not have looked at a few years ago?
Bobby Le Blanc
We can't get too specific Geoff. But, the pipeline is better at both Onex Partners and at ONCAP.
And for Onex Partners, the size of deals runs again, but to some that could be fully funded with Onex Partners IV and some that could have a co-invest opportunity. But, we really can't get into specific about the industries.
Geoff Kwan - RBC Capital Markets
Okay. And then maybe just going down to actual investment levels, how the deal pipeline or the deal activities happening for some of the investments that you have done that have a bit more of a industry consolidation type seen like USI and Emerald and that sort of thing?
Bobby Le Blanc
Yes. So for USI, as I stated in my comments, they have actually completed 20 tuck-in acquisitions since we bought the business less than two years ago.
And at York, which we just closed on October 1, we have already completed two tuck-ins there which led about $20 million EBITDA that will be highly accretive to the platform. Kosty, do you want to?
Kosty Gilis
Sure. On Emerald, I characterized the acquisition activity as more episodic, which is consistent with what we expect.
We did complete the GLM acquisition last year and we evaluated a number of last year for rider we haven't done on and currently has always have a large pipeline of very small tuck-in opportunities that were continuously evaluated.
Bobby Le Blanc
And David you might want to chat about SGS?
David Mansell
Sure. In SGS, which go in for approximately two years, we have done four tuck-ins.
I don't think any of them were done in 2014 same as cost value added a number of them but they haven't hit our hurdle rates either financially or for strategic reasons. But the other pivotal activity continues source tuck-ins for SGS.
Geoff Kwan - RBC Capital Markets
Okay. And one last question I had for you Bobby is on Carestream, can you remind me where that revenue mix is today on the digital versus home?
And then remind me where that was about say call it five years ago?
Bobby Le Blanc
Yes. When we bought the business the mix was 78%, so I believe, today we are about 50:50, a little better than 50:50 from the visual side.
I would actually even be less than that if it weren't for film prices being strong in some areas of the world.
Geoff Kwan - RBC Capital Markets
And how is change been gradual or is it accelerated over the years?
Bobby Le Blanc
Depends on the geography, I mean less developed country the film business is actually growing Geoff, in more developed countries we are seeing the decline rate anywhere from the mid-single digit to low double digit.
Geoff Kwan - RBC Capital Markets
Okay.
Bobby Le Blanc
Slightly worse for dental in developed countries in medical film.
Geoff Kwan - RBC Capital Markets
Okay, perfect. Thank you so much.
Bobby Le Blanc
Welcome.
Operator
And your next question is from the line of Scott Chan [Canaccord Genuity].
Scott Chan - Canaccord Genuity
Good morning. Just a general question, with Europe just slowing down a little bit, can you generally comment on how it maybe impacting some of your private companies down there?
Bobby Le Blanc
As I think about our portfolio and where we have multinational companies, I don't think Europe is having a particular positive or negative impact outside for any of our businesses right now and everybody around the room seems to be agreeing for their portfolio companies.
Scott Chan - Canaccord Genuity
And just with the European CLO platform, you stated that you have an office down there; do you need the same infrastructure that you have in the U.S. to build that platform over time?
Bobby Le Blanc
Michael or Seth for you?
Seth Mersky
You don't need the same level of infrastructure because they will share analysts and portfolio managers that are already based in the United States and often look at U.S. dollar credits that have euro tranches.
So we might end up adding another analyst, but the incremental burden at least in the initial years will be very modest.
Scott Chan - Canaccord Genuity
Okay. Thanks a lot guys.
Bobby Le Blanc
Thank you.
Operator
[Operator Instructions] And your next question is from the line of Paul Holden [CIBC].
Paul Holden - CIBC
Thank you. Just continuing on the topic of the European CLOs that roughly how long do you think it would take to execute on your first CLO issuance in the European market?
Gerry Schwartz
The timeframe for gathering assets and raising liabilities stack for European CLOs won't be materially different than the U.S. We will start-off no doubt slower but you will recall that we have done about three a year in the United States as we've gotten going that might be ambitious initially for the first year or two in Europe.
But, one would hope that we would eventually get there as the European recovers sufficiently.
Paul Holden - CIBC
Okay. So four to six months is a reasonable expectation?
Gerry Schwartz
Yes. That's probably about right.
Paul Holden - CIBC
Okay, good. And then with respect to Europe, the way I maybe thinking about it is because economic issues have flared up there a bit, again, are you seeing more opportunities in your acquisition pipeline in Europe specifically?
Bobby Le Blanc
Paul, I think that the change that we have seen in Europe over the last few months that the IPO market has slowdown which for the extent that was an avenue for liquidity for sponsors or owners of businesses thinking of exiting their investments. That now is coming more towards options and sale processes.
So I would say that the only real change, valuations are maybe a little bit more reasonable than they were earlier in the year when there was an expectation in the markets that there was going to be a significant sharp recovery in the European markets which hasn't come of anything. So valuations are perhaps a little bit more reasonable but those are the only changes.
Paul Holden - CIBC
Okay. So that sounds like an incremental positive though more coming auctions and better price so…?
Bobby Le Blanc
Yes. I mean I would say all in all, we are seeing more activity out of Europe right now.
Paul Holden - CIBC
Okay, good. And then maybe a couple of questions on Jeld-Wen's since we saw a big improvement on the LTM EBITDA as highlighted maybe you can talk a little bit more about the cost improvements that have been executed.
And then second maybe talk about the strategic initiatives whether it's cost execution or otherwise, that still has to be executed going forward?
Anthony Munk
The way I think about Jeld-Wen is as follows; there are four areas that I see that will contribute to the improvement of the results of Jeld-Wen. One is overall pricing in the industry and as you have probably seen from Masonite, Ply Gem and ourselves.
We have been able to put forth and they have stock to-date decent price increases. So that's obviously contributing to the results that you are seeing this year and we hope to see that continue for some time to come.
The second area of improvement would be just overall productivity running the operations and manufacturing better. And I would say that we are in a very early innings in that area we have seen some modest contribution all this year, but it's not enough to really move the needle.
But we do anticipate more to come in the following year to 18 months. Third area is just overhead -- general overhead and we have made some improvement there and some progress in that area.
That would have contributed to the results that you have seen this year. And we continue to believe that there is more to come maybe less incrementally than we saw this year, but more to come.
And then the last area is just overall volume. And obviously, that of the four areas of improvement that one is out of our control, first three are within our control that volume has been muted to North American volumes have been slow and I know I think that's partly as a result of the recovery in housing starts not been as strong as people expect.
But also we have been quite aggressive on pricing improvements and that resulted in – of share and we need to find that right balance between keeping our customers and getting our costs prices coming stepping in and coming through. So I'm hopeful that this cycle will result in a longer period of recovery it won't be as exaggerated as some of the prior cycles where you saw sharp rebounds coming out of the downturn.
Current starts are still well above where they have been historically. And so we are hopeful that this cycle should last for sometime to come.
Europe recovery has been like also quite muted, so we don't think that that's going to end any time soon. And then Canada has been soft again hopeful that will continue to get better.
And Australia has been also relatively soft and again, hopeful that the economy will improve there. So I would say all in all from a top-line perspective, we are hopeful that we have quite a bit more run way there as well.
And we are trying to run this business based on current volumes. We are trying to get our costs in line with what activity levels are today and to the extent that we get an improvement in the top line that's going to have a meaningful impact on the bottom line.
Paul Holden - CIBC
Got it. It's a lot of operating leverage there.
Anthony that was very helpful. One final question, we have seen a couple of transactions I think this year in the aviation, finance base any updated thoughts on BBAM and would you consider growing that platform through acquisitions or is it going to come organically?
Tawfiq Popatia
BBAM in many way -- this is Tawfiq, BBAM in many way is similar to what we do Onex's and asset manager, so the primary growth strategy there is to build BBAM's AUM assets under management, we think aircraft are in the – in pre-early stages of emerging it's a bona fide asset class. Not like where real estate would have been maybe 30 years ago, infrastructure 15 years ago, and have some of the attributes that lend themselves to being pretty interesting parts of institutional investment portfolio.
So the strategy of BBAM is to continue to introduce the asset class to more and more folks and grow the AUM.
Paul Holden - CIBC
Interesting. Okay.
Thank you very much for your time.
Bobby Le Blanc
Thank you.
Operator
That concludes our question-and-answer session. I would now turn the conference back to Bobby Le Blanc.
Bobby Le Blanc
Thanks everyone for participating in this call. Please feel free to call Emma or Emily, if you have any questions.
And I hope you all have a great weekend. Bye-bye.
Operator
This will conclude today's conference. You may now disconnect.
Speakers please hold the line.