Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Emma Thompson – Vice President-Investor Relations

Gerald W. Schwartz – Chairman, President and Chief Executive Officer

Donald W. Lewtas – Chief Financial Officer

D. Michael Lay – Managing Partner-ONCAP Investment Partners, Inc.

Analysts

Bert Powell – BMO Capital Markets

Paul Holden – CIBC

Scott Chan – Canaccord Genuity Corp.

Geoffrey Kwan – RBC Capital Markets

Onex Corporation (OTCPK:ONEXF) Q3 2013 Earnings Conference Call November 15, 2013 11:00 AM ET

Operator

Welcome to Onex Third Quarter 2013 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 will now turn the conference over to Ms. Emma Thompson, Vice President, Investor Relations. Please go ahead.

Emma Thompson

Good morning, everyone, and thanks for joining us. We’re broadcasting this call live on our website. On the call are Jerry 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 Onex’s capital on a per share basis. The third quarter MD&A and consolidated financial statements are now available on our website and have also been filed with SEDAR. As always, we welcome your feedback on our disclosure, so feel free to contact us anytime.

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 this call to CLO offerings by Onex 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 would also add that we are prohibited from providing any further commentary at this time regarding our current fundraising efforts beyond our prepared remarks.

I’ll now turn the call over to Gerry.

Gerald W. Schwartz

Thanks, Emma. Good morning, everybody. It’s a pretty busy year for us and it continues to be. In the last few months we sold two of our private companies. We’ve completed another $0.5 million CLO and sold almost $0.5 million of shares in Allison Transmission. We’ve discussed most of this in calls before and we focus on applying our consistent approach to private equity investing.

We pursue global businesses with world-class capabilities, usually also means a pretty large market share and strong free cash flow characteristics where we’ve identified an opportunity, not just on our own, but a partnership with the operating company management to build future value regardless of the macroeconomic conditions. An example of that’s TMS. An example of us is private equity investors that are achieving good results in difficult times. When we acquired TMS in 2007, it was the largest provider of outsource services to steel mills in North America with a burgeoning, but not large international presence.

Our investment thesis recognized the company was not actually dependent on the price of steel, but had a built-in protection against steel production declines and the business has strong free cash flow could be selectively reinvested to expand internationally. That serves pretty well.

During the global credit crisis steel prices dropped precipitously and steel production declined to 15-year lows. While the past six years have been a pretty bad time for investors exposed to the steel industry, we remained focused on implementing our simple investment thesis and during our ownership EBITDA generated outside North America grew to almost 30% and just 2% at the time we took over the Company. Revenues and EBITDA both increased by 8% for year on average, during the period of declining steel production. Following an IPO two years ago, Onex Partners II sold its remaining stake in TMS last month, despite the pretty awful macroeconomic conditions. Frankly, far worst than we had ever expected, through discipline implementation of our investment thesis, we still doubled our money. This is a pretty good outcome in the face of a very challenging environment.

In August and again earlier this week we took advantage of strong equity markets and sold down our ownership positions in Allison Transmission. Upon the closing of this weeks announced sales OP II will have received total proceeds of $619 million and our limited partners who participated in the Allison co-invest, will also have received a further $168 million. And yet we will continue to own 31% of the company, as our partner Carlyle, will also continue to own 31%.

Moving onto ONCAP, we are actually thrilled with the pending sale of Caliber Collision. One of the largest collision repair centers in United States. Closing that transaction is expected in the next few weeks. So the fast five years ONCAP has work closely with management, will execute its add-on acquisition strategy for Caliber and in that add-on strategy they acquired 91 Collision centers and integrated into eight new geographic markets, the successful execution of on ONCAP investment thesis. We’ll have resulted in a return of approximately 7.5 times of capital invested and net proceeds of $170 million to Onex.

We are delighted to found an excellent partner in Steve Grimshaw, the Company’s CEO. We wish him and the management team, at Collision very well and continued success they will enjoy in the next phase of their growth with new owner. So many examples on going initiatives to create value to other companies, including realizations and distributions of $644 million. Value of Onex Partners and ONCAP’s company grew by 25% during the first nine months of 2013.

Turning now to take a look at our investment pipeline. Over the past few months, we’ve actually seen it growing quite a bit. It is actually becoming encouraging from the low level was earlier in the year. Our team is quite busy evaluating a number of potential acquisitions. And there are various signs of diligence, various stages of diligence actually,

We tend to get excited about the opportunities that will leverage our active ownership capabilities. And well that not as easy to find they are the ones that we continue to focus on. With $1.5 billion of cash and near-cash and no debt at the parent company today, Onex is in a very strong financial position, a position from which we can move quickly when investing opportunities arise.

In addition to our own cash, we are also have about $1 billion of undrawn committed capital from our limited partners.

With Onex Partners III almost 90% invested, we officially launched fund raising for Onex Partners IV, very late in third quarter. We are targeting $4.5 billion of total committed capital of which Onex will commit $1.2 billion.

As Emma mentioned, we are very limited to what we can see this time about our fund raising efforts. But we look forward to sharing more with you in the coming quarters.

Turning to take a quick look at Onex Credit Partners, we are continuing to grow that platform. In October OCP closed its fourth CLO, raising $514 million including a $40 million investment from Onex. We are very pleased with the team success in CLOs today.

In total, OCP has raised $1.8 billion before offerings, growing capital under management in total to $3.3 billion. As this investment platform continues to grow, so too was the growth in the recurring management teams and this will create additional value to our shareholders.

Last and importantly, I’d like to remind you that the key tenant of Onex’s investment velocity is the alignment of our team, our shareholders, of our limited partners. The team shares in the success or failure of our operating companies through our significant individual investments in everything that we own. I should say everything that Onex owns. Today, the value of the team’s investment, Onex shares and its business is about $1.7 billion.

That’s it from me and I am going to turn it over now to Don Lewtas, who will cover the financial highlights of the quarter. Don?

Donald W. Lewtas

Thank you Gary and good morning everyone. Onex’s consolidated financial results and MD&A were filed yesterday evening on SEDAR. The 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 operating companies and varying business cycles.

The first 10 pages of the quarterly report provide a good overview of our business initiatives, growth activities within our companies, distributions and realizations so far this year. My comments this morning will primarily focused on how we’re invested scheduled that is on Page 2 of the report attached to the press release and also provided on our website.

The schedule shows Onex’s total capital at September 30 is $5.45 billion or $47.19 per share on a fully dilute basis. I will just note that all the dollar amounts are referred to will be U.S. unless otherwise stated.

Overall, Onex’s capital on a fully diluted per share basis grew by 4.2% during the third quarter and 14% since the year end. On a 12 months basis, Onex’s capital per share increased 20% compared to our stated goal of growing our capital per shares by at least 15% per year.

Every quarter, I like to walk you through the change in our cash position which is presented on Page 49 of the MD&A. Onex’s cash and near cash at September 30 totaled $1.38 billion, which was down from $1.44 billion at June 30. The most significant factors in the change for the quarter were the receipt in July of the remaining $56 million on the recapitalization of Carestream, $84 million received from the August sale of a portion of our shares of Allison Transmission, less $14 million to repurchase 262,000 Onex shares in the quarter at an average cost of CAD53.67 per share and less $209 million for options exercised in the quarter.

Options issued to management of a 10-year life and almost all of the option that is exercised were to expire in early 2014. At September 30, Onex’s fully diluted share count is a 118.3 million down from $124.5 million shares at June 30 due primarily to the option exercises. The effect of the options exercised in the quarter was a reduction of $0.20 in Onex’s fully diluted capital per share.

I do want to point out September's cash and near cash number $1.4 billion doesn't include the $172 million Onex received in October on the sale of TMS or the $58 million including carry Onex’s to receive on the recent sale of Allison shares, as well Onex is expected to receive approximately $170 million upon the completion of the sale of Caliber Collision scheduled to close later this month.

As you know, Onex generates value in two ways; as an investor of our own capital, and as a manager of third-party capital. Well that how we are invested schedule and our capital pressure performance gives 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 include estimated unrealized carried interest through to Onex of $144 million based on the quarter end valuation.

What it doesn't include is any value for management fees or for a potential carried interest from future value creation at our companies. Over the last 10 years, we received carried interest of approximately $30 million per year on average. For the first nine months of 2013, Onex has received $58 million of carry from the various realizations and distributions and will receive a further $14 million from the recent TMS and Allison transactions.

The six acquisitions completed over the past 12 months with $1.3 billion of capital subject to carry will help to build our potential during carried interest over the next several years as we work with the management teams to grow the values of these businesses.

Today we managed $11 billion of capital on behalf of other investors. The level of management fees Onex’s receives is depend upon the investment status of the particular funds. In December, as the original commitment period of Onex Partners III expires. The fee basis for that fund will change from 1.75% of committed capital to 1% of invested capital resulting in $17 million decrease in the semiannual management fees.

We have received a six-month expansion to the investment period for Onex Partners III to allow us to invest the remaining $580 million of uncalled, committed limited partner capital. While we can’t say when the next investment will be made. Once Onex Partners III is no longer open to new investments, we expect to be begins investing and growing management fees from our successor fund. A new fund also adds the potential to carried interest on invested limited partner capital. Onex’s limited partnership agreements typically have a 10-year term and thus provide predictable management fees from assets under management.

One comment on our consolidated financial statements. As a result of recent changes to tax flow regarding the treatment of upstream loans, Onex determined that its previously recorded non-cash deferred tax provisions for previous accounting gains on disposition to outside of Canada are no longer required.

As a result for accounting purposes Onex recorded a non-cash recovery of deferred interest income of $526 million in the third quarter. This recovery had no impact on how we’re investing the schedule and in fact brings our accounting for taxes more in line with that schedule.

Onex’s shares have performed well year-to-date. As of yesterday’s close Onex’s subordinated earning shares were up 35% since the beginning of the year compared to the S&P 500 being up 26%, with S&P/TSX being up 8%.

That completes our comments or my comments and we’ll now be pleased to answer questions.

Question-and-Answer Session

Operator

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

Bert Powell – BMO Capital Markets

Thanks, Gerry you’ve talked about the increase in investment pipeline I’m wondering if you can just give us a little bit more clarity around how that’s looking for OP type investments versus ONCAP type investments?

Gerald W. Schwartz

Bert, the pipeline is better in both sides. ONCAP has couple of things that are more interesting, that are far from coming to fruition but have doses worth well along. The same thing is true at Onex Partners OP funds.

Bert Powell – BMO Capital Markets

Okay, so and just going back to the extension of the commitment period for OP III, is that really a commentary around the fact that the opportunities have ramped and you just want to keep that open a little longer or is it telling something about OP IV, I just want to make sure, I’m interpreting what you’re doing there correctly?

Gerald W. Schwartz

It’s Schwartz speaking.

Bert Powell – BMO Capital Markets

Hey, Schwartz

Gerald W. Schwartz

Hi, how are you doing?

Bert Powell – BMO Capital Markets

Good.

Gerald W. Schwartz

No, simply reflection of the fact that we got about $500 million of commitments undrawn capital in that fund, and we and rest of the limited partners would like to get it all invested before we start investing from Fund IV, so really nothing more than that, and that’s as simple as that.

Bert Powell – BMO Capital Markets

And just last question, over the last couple of quarters there was some commentary on OP I and OP II, and the wording was along the line that there was kind of approximately $300 million of uncalled capital for further investing in management fees. And this quarter the commentary around further investing has been dropped and it’s basically $370 million in OP I and OP II that’s largely reserved for future funding of management fees. I just wonder if you can help me understand maybe the timing around that or the mechanics of exactly how that works would be helpful. Thank you.

Gerald W. Schwartz

It’s just a reflection that – each quarter we go through and look out what the likelihood of add-on acquisitions and obviously looking at Fund I where we have two public remainder stakes left in that fund and I think two private companies’ Warranty and Carestream. It was our assessment given their stage of development that it was unlikely that they would need to follow on acquisition capital. So as that falls away, the remainder of the commitment is just available to service ongoing expenses in management fees.

Bert Powell – BMO Capital Markets

Okay. That helps. Thanks.

Donald W. Lewtas

That’s ResCare, not Carestream.

Gerald W. Schwartz

Sorry, ResCare as well in Fund I.

Operator

Your next question comes from Paul Holden of CIBC.

Paul Holden – CIBC

Thank you. Good morning. You had a couple take wins now in the ONCAP portfolios this year. So wondering if Michael Lay is available to talk about the ONCAP funds little bit more. It’s not certainly one of these conceal end, but Michael had mentioned at your Investor Day that it was a good year to sell assets and that certainly proved out. So wondering that if that view has changed at all whether it’s becoming a better time to invest versus sell or maybe it’s better time just for both.

Gerald W. Schwartz

Paul, Michael is here and I’ll let him answer that directly, but be careful what you say about it because it’s going to go to his head.

D. Michael Lay

We continue to believe that it is a good time to look for selling businesses. I mean some of the companies on ONCAP II we’ve grown for five, six, close to seven years and so we’re constantly evaluating opportunities to consider sale of those companies. With respect to new opportunities, though Jerry mentioned that we do have two businesses that we have spent a considerable amount of time on in diligence and in one case we are the only firm that they are talking to. And the other case I think there’s two other firms. So we are hopeful that we will at least have something to show for our efforts. So it is a good time to sell, but we’re also able to find interesting opportunities to deploy some of the remaining capital we have in Fund III.

Paul Holden – CIBC

Okay. And then in terms of the investment opportunities, are you doing most of your work in the U.S. versus Canada or has there been any geographic shift in where you’re finding the opportunities?

D. Michael Lay

We have a North American focus. We do not target Canada over the U.S. or vice versa. I would say right now though we are seeing more interesting opportunities in the United States.

Paul Holden – CIBC

Okay. Good. And then final question maybe for you would be the gross IRR for ONCAP to including Caliber. Would you have a number on that or maybe you want to wait until the deal actually closes

Gerald W. Schwartz

Hello…

Operator

Hold for a moment please. Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today’s conference call. Please hold and the conference will resume momentarily. Thank you for your patience.

Emma Thompson

Hello?

Operator

Thank you for your patience. You may now resume today’s conference.

Gerald W. Schwartz

Thank you. Are we back with everybody? Paul, are you listening?

Paul Holden – CIBC

Am I on the line?

Gerald W. Schwartz

You are on the line.

Paul Holden – CIBC

I thought I was asking for many questions and I didn’t expect get cut-off – I don’t know if you caught my last question, but it’s…

Gerald W. Schwartz

No. Just repeat again.

Paul Holden – CIBC

Okay, sure. If you have a gross IRR for ONCAP II including the disposition of Caliber, that number would be great.

Gerald W. Schwartz

I don’t have that with me, Paul. We can provide that, but I do not have that information with me.

Paul Holden – CIBC

Okay. That will be fantastic. And then final question would be maybe an update on Tomkins. Saw a nice increase in the LTM EBITDA quarter-over-quarter and paydown of net debt show some nice progress there at Tomkins.

Gerald W. Schwartz

Yes, this is Schwartz. I’m happy to say that the management team there has done a great job and now we’re starting to see the fruits of that effort principally in reductions in SG&A that have started to flow through to the bottom line. And on cash flow, we have been consuming some working capital in the first couple of quarters and that’s now ended. So you are going to start to see better cash flow numbers going forward. So I think it’s the manifestation of work that’s been done over the last year finally they are dropping to bottom line.

Paul Holden – CIBC

Great. Thanks it for me.

Operator

(Operator Instruction) The next question comes from Scott Chan of Canaccord Genuity.

Scott Chan – Canaccord Genuity Corp.

Hi, good morning.

Gerald W. Schwartz

Good morning.

Scott Chan – Canaccord Genuity Corp.

Thanks Michael for an update on the investment opportunities on ONCAP. Maybe Gerry, maybe or anyone else just on OP, if I look at your holdings, your private companies you guys are situated in very strong sectors where you’ve seen multiple ratings. Are you seeing more of the opportunities within sectors or is there any other new types of businesses like consumer that seem attractive right now?

Gerald W. Schwartz

I think all of the sectors seem to have some opportunity in them. I don’t want to comment much on the prospect of acquisition targets. We’ve always kind of declined to speculate about when and what.

Scott Chan – Canaccord Genuity Corp.

Okay. And just a follow-up to Bert’s question on timing of management fees. So the way I look into – looking into 2014, with the reduction on OP III, how does the mechanics work on the OP IV fundraising with the committed capital? Once it’s committed are you automatically earning the 1.75 post-OP III closings, there might be a timing issue. I’m assuming in 2015 that’s all going to be normalized, but 2014 will probably be lower on a year-over-year basis?

Emma Thompson

Yes, so as Don said, the fee for OP III will drop down to 1% on invested capital in December. We can’t comment on when we would expect to start drawing fees on OP IV. We’re very restricted in terms of any commentary around the fundraising. So you should assume that 17% drop. When we’re able to start drawing fees on OP IV we will draw them on the committed capital at the full fee. But you should just assume that going into 2014 there will be a drop until OP IV kicks in. And as Schwartz mentioned, we do have little south of $600 million actually left to invest in OP III.

Scott Chan – Canaccord Genuity Corp.

Right. And maybe just based on the OP III in terms of the fundraising process, do you have like a sort of breakdown in terms of how – like the timing of the committed capital like most of it the end of it or lot of existing guys commit right away.

Emma Thompson

Well, I won’t again talk about the specifics. Typically in a fundraise you hold various closings and LPs will come into those various closings, but I wouldn’t speculate on when we would expect certain percentages of capital in the various closings.

Scott Chan – Canaccord Genuity Corp.

Okay. Fair enough. Thanks, guys.

Operator

Your next question comes from Geoff Kwan of RBC Capital Markets.

Geoffrey Kwan – RBC Capital Markets

Hi, good morning. First question I had was just with the cash levels that you all guys have and the track record you guys have, I’m just thinking further down the road, do you feel that maybe you – I know you’ve talked a little bit before, but to branch out into some other industry verticals. Now I know you stay away from stuff like resources and energy and what not there, but is there a thought around finding additional investment opportunities by looking at some areas, other parts of sectors you already look at, but may not look as closely from new sectors. I know that I think when I talked with you guys kind of more mature tech might be a possibility. So I’m just trying to get a sense as to how you guys are looking at that?

Gerald W. Schwartz

A couple of things. First of all, we have always been open to any good idea for an acquisition, whatever field we’re in and that’s how we’ve got into some fields that we’re in now, that we weren’t in five or 10 or four years ago. So I don’t feel that because we have verticals. So verticals really give us real expertise in those areas and real relationships, particularly with the bankers and senior executives with the industry, but we are perfectly opened to any interesting transaction that meets the kind of criteria that we are looking for.

We are looking to buy companies that have good fundamental businesses that are well managed or we can bring that management to it and where there is something about that business that we can differentiate and do differently in the future than it’s operated on in the past and basically I don’t want to say a fix the business, but improve it.

Geoffrey Kwan – RBC Capital Markets

Okay. And the other question I have was just wondering if there is any sort of update on I think you guys are taking a look at the real estate part of your business, I’m not necessarily specifically what you guys are going to be doing, but maybe just what the [indiscernible] is there and maybe the types of things that you guys are considering whether or not it’s certain parts of real estate versus other?

Gerald W. Schwartz

Well, we are not looking at any real estate investments and we are concentrating on cleaning up what we do have.

Geoffrey Kwan – RBC Capital Markets

Okay. So it’s just more dealing with what you have right now rather than exploring different ways that you can do real estate investing that’s perhaps a third party capital?

Gerald W. Schwartz

We are not actually doing that today. It is something we might look at in the future, but right now.

Geoffrey Kwan – RBC Capital Markets

Okay, thank you.

Operator

That concludes our question-and-answer session. I will now turn the conference back to Gary Schwartz.

Gerald W. Schwartz

Thanks very much operator and thank you everybody for being on the call. If there are any other questions you have that arise later in the day or over the next few days, feel free to call particularly Emma, who is knowledgeable and can give you prompt answers to your questions. Thank you.

Operator

Thank you ladies and gentlemen. This will conclude today’s conference call. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Onex's CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts