Onex's (ONEXF) Management on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: Onex Corporation (ONEXF)

Onex Corporation (OTCPK:ONEXF) Q2 2014 Earnings Conference Call August 13, 2014 11:00 AM ET

Executives

Donald Lewtas - CFO, Toronto

Robert Le Blanc - Senior Managing Director, New York

Emma Thompson - Head of the Funds Group, Toronto

Michael Lay - Managing Partner, ONCAP

Andrea Daly - General Counsel, Toronto

Analysts

Geoff Kwan - RBC Capital Markets

Paul Holden - CIBC

Gordon Lawson - GMP Securities

Scott Chan - Canaccord Genuity

Operator

Welcome to Onex Second 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'd now like to 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 Bobby Le Blanc, 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 second quarter MD&A and consolidated financial statements are now available on our Web site and have also been filed with 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 Partners. We're required to remind you that these offerings are 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'll now turn the call over to Bobby.

Bobby Le Blanc

Thanks Emma. Good morning everyone. It continues to be a very busy year for us. We are very pleased with York Risk Services Group, an acquisition we announced a few weeks ago.

Let me spend a bit of time on York and what excites about this new investment. As you know, we like businesses related to the insurance industry that has success finding and building great businesses in the sector most recently with USI. York is the third largest third-party administrator of workers compensation and property casualty claims in the U.S. The company which is a fee for service business provides a full suite of claims management, managed care another risk management services to public entities mid-size businesses and insurance carriers across the country.

York has many attractive attributes. It's an industry leader that combines a nation-wide platform with leadership positions in each of the specialty market it serves. It has a stable recurring cash flow with revenue retention rates of 98% as well as low CapEx and working capital requirements. It had the strong track record of strong and consistent organic growth and participation in industry that's highly fragmented giving York many opportunities to invest its cash flows and tuck-in acquisitions that are accretive.

Last but not least, we are partnering with a fantastic management team led by Rick Taketa, York CEO. Rick and his team have outlined a clear strategy for growing their business and we are excited to work with them. We expect to complete the acquisition of York later this year. We have been active sellers of businesses weary of credit value over many years. In the last couple of months, we completed too many full sales, Gates and TWG, which generated about $923 million in total proceeds to Onex included, carried interest of $103 million.

Other significant realizations have come from the share of Allison Transmission and Spirit Aerosystems and refinancings at Res-Care and PURE Canadian Gaming totaling about $700 million to Onex including carried interest of $63 million. We have also had a great development with Mister Car Wash. ONCAP has agreed to sell the business for net proceeds for about $380 million and Onex shares of that will be about $150 million.

ONCAP acquired Mister Car Wash in 2007 and worked along side the management team to build a much larger, more diversified business through new store openings and expanded service offering and accretive acquisitions. Over the course of our ownership, ONCAP and its partners with the business from 39 locations to more than 130, establishing itself as a number one player in the United States. The sale resulted in a multiple of capital of 8x will be the most profitable in ONCAPs history, congratulations to the entire ONCAP team.

Including all of these transactions, we are set to realizing about $5.9 billion of sale proceeds this year together with our Limited Partners. Onex's share of those realization will be about $1.8 billion which makes 2014, the highest level of annual proceeds in Onex's 30-year history.

For companies we still own, there are many examples of ongoing initiatives to create value. Notably, we continue to execute a number of tuck-in acquisitions and cost save opportunities across our operating companies. USI has already executed 18 tuck-ins in the first year and a half of our ownership. And JELD WEN, the world's largest window and door manufacturer has continued to build on its cost savings and productivity improvement initiatives including reducing overhead and excess layers in the organization as well as benefiting from price increases.

Overall, the value of Onex's interest in Onex Partners and ONCAP private businesses grew by 10% in the first half of the year and 27% during the last 12 months. If you include our public companies, the value of all of our operating business and our funds increased by 9% in the first half of the year and 26% during the last 12 months.

Moving on to Onex Credit Partners, we continue to enjoy a solid growth at this platform mainly driven by CLO offerings. Recently Michael and his team completed their largest CLO which was to-date offering about $1 billion in securities and loans in a private placement transaction that included a $90 million investment by Onex.

Onex Credit now manages approximately $4.7 billion, a 66% increase over the prior year. Our goal for this platform is to grow assets under management to $10 billion by the end of 2017.

At Onex, we have two long-term goals; we have 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 just did 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 and second, Onex has the opportunity to sharing the profits of its Limited Partners through carried interest participation. In a few minutes, Don will discuss how we are performing relative to these two goals.

Critical to our overall success, this financial alignment among our shareholders, our team, our LPs and our operating company management. We share success and failure of our operating companies through the team's significant investment in everything that we buy. Today, the value of the team's investment in Onex's businesses and its shares is almost $2 billion. For Onex Partners IV, we have committed almost 8% to each investment this year and collectively – we remained a larger shareholder of Onex which is the largest Limited Partner in every front.

We continue to believe, we are better positioned than ever for continued growth. We have stabled experience team, our entrepreneurial culture is engrained throughout the organizations, our investments are performing well. And we have 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 financial statements in our Web site and SEDAR. The MD&A provides a complete commentary on the recent transactions and our consolidated financial results. My comments this morning will primarily focus on the – how we are invested schedule on Page 2 of the report and attach to the press release. Our references to dollar terms will be U.S. unless otherwise stated.

Onex's capital at June 30th was $5.9 billion or US$52.72 per share on a fully diluted basis, which is up 4% since year-end. On a 12-month basis, Onex's capital per share increased 16% 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 continue to build those companies and transform operations.

Our second goal is to grow our fee generating capital by 10% per year. In the last 12 months, Onex's fee generating assets have increased by 57% as a result of the recent success in raising Onex Partners IV and CLO issuances. We have now begun drawing fees from Onex Partners IV.

As Bobby mentioned, due to the episodic nature of private equity fund raising which typically occurs every few years, we expect that growth measure will be relatively inconsistent year-to-year. Each quarter, I like to walk through the change in our cash position, which is also present on Page 51 of the MD&A. Onex's cash and near cash at June 30th, totaled $2 billion which is up from $1.8 billion at March 31st.

The main drivers in the quarter were the proceeds receipt from the sale of Allison Transmission and Spirit Aerosystems shares partially offset by investments in SITEL, Flushing Town Center, Onex Credit VI CLO and share buybacks.

The June 30th, cash figure does not include proceeds from post quarter asset sales of Gates, TWG, Cypress and the remaining Spirit shares generating just over $1 billion of additional cash. And further $150 million is anticipated on the sale of Mister Car Wash. The pending investment in York that Bobby mentioned as well as share buybacks executed post quarter will reduce Onex's cash position.

Well the how we are invested schedule on our capital per share performance gave a good snapshot of Onex's net assets they don't fully reflect the enterprise of our asset management business. Onex's capital does include estimated unrealized carried interest due to Onex of 216 million based on the quarter end valuation. What it doesn't include, is any value per management fees or for potential carried interest from future value creation at our companies.

In the first six months of this year, Onex received $52 million of carry from the realization of Allison Transmission and Spirit following quarter end Onex received a further $114 million of carry on the post-quarter realizations of Gates, TWG and Spirit. In the last two years, we have raised $1.3 billion of capital which is now subject to carry. Sorry, we have invested $1.3 billion of capital which is now subject to carry. In addition, we have our pending investment in York and 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 value of our investments and the growing contribution from 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 seven months of 2014, we were quite active with buybacks repurchasing almost 2 million shares at an average cost of Canadian 63.66.

As we have indicated before our consolidated financial results will be lumpy as we acquire and subsequently realize on the businesses we owned. The consolidated net earnings of $39 million for the second quarter of 2014 was an improvement of approximately $750 million over the same quarter last year driven in part by a gain of $310 million from the sales shares of Spirit.

In spite of the recent fluctuations in the stock market, Onex's shares have performed well year-to-date. Yesterday, our shares closed at 62.85 Canadian, which represents increases of 10% and 21% since the beginning of the year and over the last 12 months respectively. This compares the increases in the S&P 500 and S&P/TSX Composite Index of 5% and 12% respectively year-to-date and 14% and 22% respectively over the last 12 months.

That completes my comments, we now be pleased to take questions.

Question-and-Answer Session

Operator

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

Bobby Le Blanc

Good morning, Geoff.

Geoff Kwan - RBC Capital Markets

I just have one question. We saw in the news recently about some of your U.S. peers having settled some lawsuits about alleged collusion on private equity deals. And I just wanted to get your view on whether or not, do you think – are there any sort of implications kind of broadly speaking for the industry if any?

Andrea Daly

It's Andreas Daly, I'm General Counsel here. I don't think there are any implications for the industry. This has actually been floating around since 2007 when the DoJ started this and they got a bunch of press ban and again a few years ago. I think it's not a new issue, happy to say we have absolutely nothing to do with it and never have. So it's just something that we're watching with everybody else and let's see where it goes, but we have nothing to do with that.

Geoff Kwan - RBC Capital Markets

Okay. Thank you.

Operator

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

Paul Holden - CIBC

Thank you, good morning. Couple of questions for Bobby specifically to start, with the York acquisition, are there any kind of synergistic type benefits with the USI, i.e., can you refer business or refer business I guess from York to USI or vise versa?

Bobby Le Blanc

As you can imagine, I've already had Mike and Rick together looking at that exact that question. I think there will be some benefits; I don't expect them to be meaningful. But I would expect them to be able to help each other out during our ownership period.

Paul Holden - CIBC

Okay. So wasn't really part of the investment, but could be incremental?

Bobby Le Blanc

Yes. I think there will be some benefits on the margin for sure.

Paul Holden - CIBC

Okay, okay. And then just wondering if you can provide us an update on the Flushing Meadows project given the additional capital investment in the quarter?

Bobby Le Blanc

Yes, sure. So we invested about $95 million in Flushing last quarter and Onex's share that was $84 million. We expect to recoup that investment through the sale of medical condos as some brownfield tax credits within this first year to 15 months, since we wrote that check. And then from that point forward what we'll have is the retail platform of them all which has an NOI of about $17 million now that we think is going to go up to about $20 million in the second phase of the condos.

Paul Holden - CIBC

So when you say expect to recoup that check in the next 12 to 18 months from the sale of condos, is that recoup plus an adequate return?

Bobby Le Blanc

No. The adequate return will come post the first 12 to 18 months. But to get that initial investment, I expect to have back the sale of the actual non-medical condos will be where – and the retail will be where the profit comes from that will take more than 12 to 18 months is my guess.

Paul Holden - CIBC

Got it. Okay. And then a broader question to the whole team, whoever wants to answer it, just starting to really see a pick-up and announced M&A say over the last six months or so that's clearly a positive driver of investment opportunities for Onex that might be early because this is really I guess more announced deals versus closed, but are you starting to see early indications that there might be a more carve-out opportunities?

Bobby Le Blanc

Yes. It's funny I think even since our last call, we have seen a meaningful pick-up in our pipeline including carve-outs in that pipeline. Too early to tell how that will translate into announced transactions, but we certainly like the activity we see today relative to a year ago and even three months ago.

Paul Holden - CIBC

Okay. Good to hear. And then wasn't sure if you have mentioned, if Michael Lay on the call or anyone from ONCAP team, but is there anyone from…

Michael Lay

It's Michael Lay, I'm here Paul, go ahead.

Paul Holden - CIBC

Okay. Hey, Michael. Did you mind answering sort of may be the same question not truly related to M&A, but just the ability to find attractive investment opportunities in general?

Michael Lay

I would say that our pipeline right now is reasonably active. It's a challenge to find good value, but we have got lots of interesting businesses to look at. So I would agree with Bobby that our pipeline is quite active today.

Paul Holden - CIBC

Okay. And that's all the questions I had. Thanks for your time.

Bobby Le Blanc

Thank you.

Michael Lay

Okay.

Operator

Your next question comes from the line of Gordon Lawson, GMP Securities.

Gordon Lawson - GMP Securities

All the transactions thus far in 2014, what is the year-to-date carry that Onex will be able to book and can you provide some guidance for the remainder of the year?

Don Lewtas

I will just provide that. Let me take you through in a couple of pieces, the carry up to June 30, was $52 million that we received. Subsequent to that on Gates, TWG, and Spirit, the final sales Spirit, we added another $114 million. So that would bring us to $166 million of carry year-to-date. In terms of what we might be anticipating going forward, we have no other transactions that are announced at this point in time. And so I can't speculate on anything else further.

Gordon Lawson - GMP Securities

Okay. Thank you.

Operator

(Operator Instructions)

Bobby Le Blanc

Hey, I think there isn't any other question. So thanks everybody for participating in the call.

Operator

Yes, sir. You do have questions.

Bobby Le Blanc

I'm sorry. Go ahead.

Operator

We have a question from Scott Chan, Canaccord Genuity.

Scott Chan - Canaccord Genuity

I don't know if you addressed this, but in terms of Nigel Wright joining the London team European markets getting – seriously under performing, I guess, in the last three months. Maybe just provide an update on potential opportunities and maybe how Nigel might fit in?

Bobby Le Blanc

So we are continuing to build the European office and it's a big market. And we are building a team over there. Anthony Munk is one our Senior Managing Director all of you know oversees our London office. Now, we have three MDs over there, working at London with Tony Morgan, David Hirsch and Nigel. And they will each take on certain sector of coverage responsibilities and they are working closely with the investment professionals here in New York and Toronto on opportunities that they find in Europe. But we're building a real team over there and we expect there to be good opportunity over time.

Scott Chan - Canaccord Genuity

Okay. Thanks a lot.

Operator

Thank you. There are no further questions at this time. I would like to thank everyone for dialing in for today's conference. This does concludes the conference. Please disconnect.

Bobby Le Blanc

Thanks everybody. If you have any questions feel free – contact Emma. Thanks a lot.

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