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Executives

Emma Thompson - VP, IR

Gerry Schwartz - Chairman & CEO

Don Lewtas - CFO

Anthony Munk - Senior Managing Director

Seth Mersky - Senior Managing Director

Analysts

Geoff Kwan - RBC Capital Markets

Paul Holden - CIBC Securities

Bert Powell - BMO Capital Markets

Onex Corporation (OTCPK:ONEXF) Q1 2013 Earnings Conference Call May 10, 2013 11:00 AM ET

Operator

Welcome to Onex First Quarter 2013 Conference Call. (Operator Instructions). I will now turn the conference over to Ms. Emma Thompson, Vice President, Investor Relations. Please go ahead.

Emma Thompson

Good morning everyone and thank you for joining us. We’re broadcasting this call live on our website. On the call are Gerry Schwartz, Don Lewtas and a number of our Managing Directors.

Our press release and quarterly report include that how we have invested schedule. This is a good financial summary of our investments and includes their proprietary capital on a per share basis. The first quarter MD&A and consolidated financial statements are now available on our website and have also been filed on SEDAR. We always welcome your feedback on our disclosures so feel free to contact me anytime with your comments.

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 CLO offerings Bionics’ credit partners. 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 assumptions. I will now turn the call over to Gerry.

Gerry Schwartz

Thanks Emma, hi everyone. I will cover our activity in first quarter and some updates since then. As we said in our last call a number of the acquisitions we completed in 2012 resulted from years of effort, evaluating and deepening our understanding of certain sectors and developing relationships with management teams. Our team is responsible for these recent acquisitions of been really quite active. It won't surprise us that for the first couple of years of ownership these are the busiest for us as we work closely with our managed teams to implement and execute our business plans. We usually have a business plan and thesis in fact we always have a business plan and thesis when we making acquisition. This may include manufacturing expansion or consolidation, sales reposition, supply chain modification, labor negotiations often adding depth and talent to the management team and to the executive forum or evaluating add-on acquisitions just to name a few of the opportunities that confront us with a new acquisition.

If we are successful at executing these plans we should be successful including value on these investments that certainly has been the history. For the companies we have owned for longer there are many examples of ongoing initiatives to create value. In the first quarter our business is raised or refinanced more than $3 billion of debt certainly taking some advantage of the wonderful credit partners that have existed in that quarter. We have continued to work cost sharing programs and integrated our recent add-on acquisitions as a result these and other efforts of value Onex’s interest and Onex partners and ONCAP’s private businesses grew by 5% and 4% respectively during the first quarter. We continue to look for opportunities to strengthen our businesses through organic growth, accretive acquisitions and operational improvements.

From time to time we consider which purpose is no longer benefit from our active ownership and so we look for opportunities to realize on some or all of the value created. After benefiting from Onex’s ownership our operating companies are often attractive not only in strategic and financial buyers but also to the public markets. So for this year credit markets are supportive of new acquisitions but and is usually a but, corporate dispositions are still not plentiful.

It seems that many business leaders have been holding on to their existing assets and are reluctant to sell even non-core assets. An offsetting trend or perhaps a reaction to that has been a dramatic increase in active shareholder activity demanding changes from corporate boards including the sale of non-core businesses. Corporate (inaudible) our favorite type of transaction are something where we have a long history of successful transactions say for example emergency medical service and Allison Transmission, great examples. We look for wonderful businesses that are leaders in their industry by representing only a small part of the parent company.

And led by executives who are passionate about the business and have demonstrated his or her capabilities through historical performance. Consistent with all of these things we were delighted to find Nielsen expositions. The corporate carve out we announced earlier this week. This business was noncore to its parent representing only 3% of their revenues. Nielsen expositions is one of the largest producers of business to business tradeshows in the U.S. primarily selling booth space to exhibitions. We were attracted to the exceptional precash flow of this business and its strong growth potential both organically and through add-on acquisitions. (Inaudible) is here with us today led this transaction and he and his investment team did an excellent job of evaluating this business and developing a very strong relationship with the company’s management team.

Onex Partners III will invest about $350 million of which Onex’s share is $85 million. We expect this Nielsen transaction to close by the end of June. Including this pending acquisition, OP III, Onex Partners III will be more than 90% invested so we are in a position to begin fund raising for Onex Partners IV this year.

For Onex shareholders a new fund provides a meaningful source of annual management fees over the life of the fund and the potential to earn, carry interest on third party capital. Turning to our credit funds in March Onex Credit Partners completed its third CLO raising $512 million including $24 million in the equity from Onex. This increased OCP’s assets under management to $2.8 billion. Our five year goal of $4 billion to $5 billion that we mentioned at investor day last June is already well within reach. As market conditions permit we expect OCP to launch additional CLOs and we have already started to accumulate assets in an anticipation of our fourth offering later this year.

Looking ahead we are well positioned for continued growth, we have $1.3 billion of cash and near cash and the same amount of undrawn committed (ph) capital from our limited partners. As always we have the resources to take advantage of just about any opportunity. This includes periodically using our cash to co-invest in our acquisitions, in addition to our fixed commitment that we make through our funds. We have now co-invested about $325 million in three Onex Partners companies alongside almost $390 million invested in the same companies as a limited partner. Our strong financial position which we always had and I can assure we will continue to have. Positions us to make our favorite investment buying back Onex shares.

I’m also pleased to report that yesterday our Board of Directors approved a 36% increase in our dividend. This reflects Onex’s success and our ongoing commitment to shareholders. Let me now provide an update on our team, in March we hired Christian Rasmussen as a Director in our London Office. Previously Christian had experience with a private equity firm based in the UK for six years and before that he was with Morgan Stanley and their investment banking group. We now have three investment professionals based in London and we will likely add one or two more over the course of the balance of this year. We also look forward to welcoming five new associates in both Toronto and New York. So not in the each but in total. The quality of our team is simply the best there has ever been, as you might well imagine the hiring and development of our investment professionals is the most important thing that we do, is what ensures our continued success.

At our core we’re investors and that’s what we teach the younger members of our team. We all share the success and failure of our operating companies through the team’s significant investment in everything we buy, today the value of the team as an investment in Onex’s businesses and its shares is about $1.8 billion. For 2013 we have committed approximately 5% to each new investment and we remain the largest shareholder of Onex which is in turn the largest limited partner in every front. Let me now turn to the financials and I will ask Don to pick that up. Don?

Don Lewtas

Thank you Gerry and good morning everyone. As Emma mentioned the How We Are Invested schedule is updated and the MD&A and IFRS financials are now on our website and SEDAR. As shown on the How We Are Invested schedule and as Gerry noted earlier the value of Onex’s interest and Onex partners and ONCAPs private investments grew by 5% and 4% respectively during the first quarter. There are former valuations prepared each quarter for the private companies, with that growth you may be wondering why the schedule shows that the total value of the Onex partners private companies declined by a 115 million from December. That change is due to the sale of RSI which was carried at an 118 million at year end and the syndication of 84 million of our co-investment in USI to our limited partners.

Overall our proprietary capital grew by 3% on a per share basis. This includes the effect of earning a minimal return on about 900 million of cash placed at risk free, short term investments. The table on page 35 of our MD&A details a change in cash from year end. The largest cash inflows were from sale of RSI which was sold above our December mark and the syndication of Onex’s co-investment in USI.

Onex’s consolidated financial results may vary substantially from quarter-to-quarter and year-to-year due to acquisitions and dispositions of businesses, changes in the value of our offering companies and varying business cycles. The first 10 pages of our quarterly report provide a good overview of our business initiatives, our recent acquisitions growth activities and our company’s distributions and realizations. Onex generates value in two ways, as an investor of our capital and as a manager of third party capital.

While the How We Are Invested schedule and our proprietary capital per share performance gives a good snapshot of Onex’s net assets, they don’t fully reflect the enterprise value of our asset management business. Our proprietary capital does include estimated unrealized carried interest due to Onex’s of a 162 million based on our quarter end valuations. What it doesn’t include is any value for our management fees or for potential carried interest from future value creation at our companies. Over the last 10 years we have received carried interest of 24 million per year on average. Our five acquisitions over the past six months plus a pending Nielsen purchase will help to build our potential to carry their carried interest over the next several years as in work with the management team to grow the value of those businesses.

Today we manage 11 billion of capital on behalf of our investors and partners; the management fees Onex receives from that activity are predictable from quarter-to-quarter given the third party capital committed for initial terms of 10 years. Combined fees and carried interest offset our ongoing operating expenses last year. As a result shareholders capital was managed at no cost. While that may not be the case every year Onex has a business model that creates additional value for our shareholders. Our goal is to have the value of our investing and asset management activities reflected in our share price. This is supported by a longstanding quarterly dividend and a stock buyback program we renewed in April.

In the first four months of 2013 we were quite active with buybacks, repurchasing about 945,000 shares at an average cost of 44-41. Onex’s shares perform well in the first quarter with a 16% increase compared to 10% for the S&P 500 and 3% for the S&P/TSX. Yesterday Onex’s subordinate voting shares closed at 49.95 a 19% increase since the beginning of the year. In comparison the S&P 500 was up by 14% and the S&P/TSX was up by just 1%. That completes my comments and we now be pleased to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Geoff Kwan of RBC Capital Markets.

Geoff Kwan - RBC Capital Markets

I’m just wondering if you can provide an update in terms of how the progress is looking at acquisition candidates in Europe.

Anthony Munk

I would say that we are starting to see more opportunities than we have. There is clearly a number of financial sponsors who are owners of businesses that are finding it challenging to take those companies public and as a result they are pursuing the upright sales as business and we are looking at opportunities that made our criteria. I would say that we are focusing most of our energy and time on verticals where we have a strong presence and experience that we think is transferable to the European markets, so industrials and building products, a couple of healthcare opportunities or the source of ideas that we can pursue in over the last few months as you will see in the comments that Don mentioned we are, Gerry I guess mentioned we’re building up our team progressively in London and so as a results we’re seeing more contact clients and opportunities generally and I would say that we are seeing the occasional carve out opportunity as well in Europe which meets criteria of transactions that we like to see.

So you know to some it all up we’re certainly more active than we were earlier in the year and a lot more active than we were a year ago and hope so that trend will continue.

Gerry Schwartz

I would like to add a note of caution to that. This is a fairly new office; it's a very new office for us. We’re really stacking it up as Anthony mentioned and opening an office in this way is really by planting seeds and the seeds need time and opportunities to nurture and grow and so I would necessarily look for immediate acquisition opportunities that we can act on but rather we are build a team over there as building relationships there giving us some place to be sought out by the bankers, it's going to take time.

Geoff Kwan - RBC Capital Markets

Sure and maybe I think you guys had mentioned beforehand to was part of I guess that process was trying to get the introductions from the bankers that you deal with over here to the European counterparts, can you may be talk about the progress that’s been made on that front.

Anthony Munk

I think we have done what we can to leverage our relationships in North America but I will say the team there are also making a considered effort to develop their own relationships with bankers who have independent teams there and now that we are on the ground in London we have really made an effort to show that we’re in front of the right bankers who are leaving their verticals that we have an interest in and in countries that we have a particular interest in as well so that’s just part of what Gerry talked about is sort or an ongoing effort to establish ourselves in the community and ensure that we are in the flow of opportunities there.

Geoff Kwan - RBC Capital Markets

And the last question I had was and I appreciate you’re going to be limited to talk about any sort of fund raising with OP4 (ph) but this question I guess was more you’re experience with OP3, 2 and 1 is with the co-investment that you guys make into these funds with a third party investors how much you know is there a kind of specific dollar amount or percentage amount they would like to see you guys come into every fund just trying to get a sense and I suspect it's going to be vary by third party investor just if you’re able to generalize.

Seth Mersky

I wouldn’t say there is a specific target they have in mind but it's definitely a selling feature to our limited partners that Onex Core is largest LP in each of the fund platforms and that the Onex investment professionals are also significant investors I think around 5% give or take in fund three and then together with our interest collectively in Onex Corp you would see investing the investment professionals investing directly and indirectly almost 11% in fund three and that’s an enormous vote of confidence in our own capabilities in our own outlook for Fund III and we will do the same approximately on Fund IV I’m sure and I would expect the LPs will equally see that as a good sign Fund IV if they didn’t in Fund III. Did that answer your question?

Gerry Schwartz

I’m sorry I wanted to add to that answer which is remember that under the terms of the partnership agreement we don’t do co-invest unless the investment is over $400 million.

Operator

Your next question comes from the line of Paul Holden of CIBC Securities.

Paul Holden - CIBC Securities

So first question you fairly maxed out on OP III now to like there is room for both on acquisitions. So does this change the way you’re thinking about fund raising for OP IV i.e. you can’t really make any acquisitions right now so maybe you accelerate the process to the extent you can.

Emma Thompson

Paul unfortunately we can’t really get into any specifics around Onex Partners IV. I think as Gerry said in his comments we’re now, we have been more than 90% invested including the Nielsen exposition acquisition and obviously you have to keep mind any need for capital for our existing businesses and any potential acquisitions that as we said we will be in the market something this year but we can’t be specific.

Paul Holden - CIBC Securities

And it seems like today is a pretty good environment to be disposing of investment obviously to the RSI transaction but it's a little bit different because that was sold back to the family, but I haven't seen you file anything in the U.S. and correct if I’m wrong there. So I mean what are you seeing in terms of the opportunities to sell assets today?

Gerry Schwartz

We did if you remember we did pursue (inaudible) transaction for Allison and it just happened at the week that we get it was the week the market unraveled and then came back the following week but we withdrew that block (ph) because of the market conditions on that particular day and we’ve said that we are considering some alternatives on (inaudible).

Anthony Munk

I would like to just revisit something in the prior question that and I answered to make sure that we understood the question correctly. Were you asking about investment pace and whether or not our status and Fund III wasn’t effecting investing pace and add-on acquisitions?

Paul Holden - CIBC Securities

And was it going to be impacting your pace of fund raising for OP IV.

Anthony Munk

Okay super and I answered the question correctly. Thank you.

Paul Holden - CIBC Securities

And then final question now that you have raised the dividend, is this something we should look for to on a more regular basis, or put the question other way, how are you thinking about the dividend and potential growth going forward?

Don Lewtas

While we have already got a very aggressive and regular dividend increase every 11 years. We think the conditions are particularly right for shareholders but even works on a lot of money and not on high yield that we care about our shareholders and we care about the cash they get so we sign (inaudible) raise the dividend. We will consider the same thing in future years.

Operator

(Operator Instructions). Your next question comes from the line of Bert Powell of BMO Capital Markets.

Bert Powell - BMO Capital Markets

Just a question on OCP I’m just wondering what’s your interest in acquiring or the opportunity to acquire to grow that business given its scalability and given your ability to leverage the knowledge and relationships that Onex has.

Gerry Schwartz

We have looked at acquisitions from time to time for OCP but one of the critical factors we think to get right both in our business and their business is to make certain there is a really near perfect cultural fit between us and whomever we might consider acquiring, we really don’t want to have or foster two cultures within Onex. We’re proud of the firm that we have today, so that gives you a bias towards organic growth. We have looked in the past at run-off portfolios of CLOs that don’t have access to new capital, those are pretty straight financial trades and we just haven't found the pricing to our liking. We will continue to look but I wouldn’t put tremendous emphasis the likelihood that we make acquisitions to grow OCP I think we have given a choice, we would rather simply grow it organically.

Anthony Munk

That organically so far is growing at a rate that probably exceeds what we had indicated at the last investor meeting we would get.

Bert Powell - BMO Capital Markets

And just a curiosity on Nielsen was that an auction or were you able to bring something to the table that effectively precluded an auction?

Gerry Schwartz

It wasn’t auction but it came to us through one of the relationships that we built through our business service sourcing efforts, the auction was a (inaudible) limited and it was otherwise been because some of the owners of the public Nielsen were precluded from participating for obvious reason. But we found a business that was a small part of a larger entity and had gotten a lot of attention, had attractive characteristics and we were successful but it wasn’t Onex (ph).

Bert Powell - BMO Capital Markets

And just last question, is there any color you can give on the asset manager just from a fees cost earnings at this quarter?

Don Lewtas

We provide that information on an annual basis but actually there is different from what you see before.

Operator

That concludes our question and answer session. I’ll now turn the conference back to Gerry Schwartz.

Gerry Schwartz

Thanks everyone we really appreciate you taking the time for participating with us today. If you have any other questions or add-on information you want, please feel free to call Emma who is the fount of all knowledge at Onex. Thanks everyone.

Operator

This concludes today’s conference. You may now disconnect.

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