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Edited Transcript of AD.TO earnings conference call or presentation 7-May-19 3:00pm GMT

Q1 2019 Alaris Royalty Corp Earnings Call

CALGARY Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Alaris Royalty Corp earnings conference call or presentation Tuesday, May 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Curtis James Krawetz

Alaris Royalty Corp. - VP of Investments & IR

* Darren Driscoll

Alaris Royalty Corp. - CFO

* Stephen Walter King

Alaris Royalty Corp. - CEO, President & Director

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Conference Call Participants

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* Brenna Phelan

Raymond James Ltd., Research Division - Equity Analyst

* Brian D. Pow

Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst

* Derek Spronck

RBC Capital Markets, LLC, Research Division - Analyst

* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Jeffrey Michael Fenwick

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

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Presentation

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Operator [1]

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Hello and welcome to Alaris Royalty Q1 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Curtis Krawetz, you may begin.

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [2]

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Thank you, Twanda. Good morning, ladies and gentlemen, and welcome to Alaris Royalty Corp's conference call and webcast to discuss the financial results for the 3 months ended March 31, 2019, as well as a brief corporate update. I'm Curtis Krawetz, Vice President of Investments and Investor Relations and I'm joined on the call today by Steve King, President and Chief Executive Officer of Aleris; as well as Darren Driscoll, Chief Financial Officer.

After a short presentation from Steve and Darren, there will be a question-and-answer session, the lines will be placed on mute until then to avoid background noise. Before we begin, I would like to remind our listeners that all amounts given are in Canadian Dollars unless otherwise noted. Listeners are cautioned that comments made today may contain forward-looking information. The forward-looking information is based on a number of important factors and assumptions. And as a result, actual results could differ materially. Additional information concerning the underlying factors assumptions and risks is available in last night's press release and our MD&A for the period under the headings forward-looking statements and risk factors, copies of which are available on SEDAR, and as well as our website.

Non-IFRS data is also presented, it may differ from the way other companies present such data. As with forward-looking statements, please refer to last night's press release and our MD&A for the period for more clarification regarding non-IFRS measures.

I'll now pass the call on to Darren Driscoll, Chief Financial Officer.

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Darren Driscoll, Alaris Royalty Corp. - CFO [3]

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Thanks, Chris and thanks everyone for joining our call. To start with some brief highlights from the quarter, revenue of $27.7 million. We've guided to $27.4 million at year-end and that's compared to $23.6 million in Q1 last year and $25.3 million in Q4 of 2018. So up 17% on a per share basis over the prior year period and up over 9% from the most recent quarter. New deployment in the back half of 2018, obviously, the main reason was the GWM and BCC, plus another tremendous weighted average performance reset of approximately 4.5% that took effect January 1. And normalized EBITDA in the period of almost $25 million, compared to $20.1 million in Q1 last year and $20.1 million in Q4 of '18.

Net new deployments in the quarter of USD 13 million, a couple of small follow-on investments in -- actually it's just Sandbox. Our cash G&A expenses of $2.5 million compared to about $2.75 million in Q1 last year. Bank covenants all in great shape and currently about $120 million to deploy on our balance sheet. So pleased to get on another financially sound quarter. I'd like to address Providence early on in my comments, as it was extremely unfortunate how this news was digested by the market. Providence is a company that has made considerable amounts of money over the past few years. A significant portion of that was made from a single customer that wasn't even a customer when we first invested 3 years ago. That customer was dropped by Providence after the customer got in some financial trouble, and Providence assuming that customer for accounts receivable that represents just a fraction of the amount of business they did with them over the past few years.

Without that customer, our EBITDA started to drop rapidly as has our ECR. The business has a senior lender, who issued a notice default over material adverse effect as a result of that customer loss, but didn't issue that until late March, which resulted in our distributions being blocked. We put that information in our AIF, as it was received just days before the AIF was filed and we determined it was appropriate to put it in that report. Given the track record of management, and the cash position of the ownership group, at no time was this viewed to be a material event or even one that would result in a complete lay off of long-term disruption and distribution.

Steve King and I immediately met with management ownership and the bank and recently received formal sign off on a new arrangement for distributions for the next 2 years. The owners putting a material amount of equity back in the company to repay a portion of the debt outstanding, with the rest to stay in the business to ensure that the business has adequate working capital to accomplish its goals over the next couple of years.

The bank will forebear for 2 years and allow annual distributions to Alaris of approximately $2.4 million, in each of the next 12-month periods, compared to scheduled distributions of $4.4 million. So total revenue for Providence in 2019 will be just under USD 3 million as they did pay the full amount in Q1. The unpaid distributions will be collected, and paid at a future date, but you won't see those recorded as revenue on our statements until we actually receive that cash.

The monthly distributions have already commenced, the April distribution has been received. So not a single monthly payment was missed. Reduction in current pay impacts our fair value calculation and resulted in a USD 5 million reduction in the fair value of Providence, about 1% of our total book value. We'd like to thank management of Providence, their lenders for working diligently to a positive resolution for everyone on a real -- very timely basis. One other fair value adjustment to mention in the quarter, as LMS' audit came in better than expected and a 7.5% increase in gross profit resulted in $1.8 million increase in the fair value to the LMS units. I have known LMS after a huge start in 2019, our only uncolored investment.

So for the quarter, net fair value adjustments for the quarter, $5.1 million just over half of 1% of our total book value. 2 other companies that drove attention from analysts with ECRs of less than one are [CCCAM] and BCC. Both companies have no senior debt, which leaves Alaris and management full control of distributions. Both companies have sufficient cash in the business to continue to pay distributions. BCC being the newer and larger one, I'll add a couple of more comments, have results certainly have not materialized as expected, with a substantial number of new clinics opened in the past 2 years, execution by the sales team in certain locations haven't met BCC's internal standards and resulted in these sales opportunities. Management has identified and addressed the issue and after meeting with management last week, we were as comfortable as ever, with the long-term prospects of the business.

The ECR at year-end was just below one at approximately 0.95. It did drop a couple of points to 0.90 at February and increased with March results but not quite back to 0.95. So technically it was down, but again, just under one and the business with a ton of cash on the balance sheet, the management, it does expect the ECR to be above one in the second half of 2019. But this is one we are not at all concerned about their ability to pay the distribution. I'd also add that BCC has not, nor that even planning to use the 2% pick option they have due to their current cash position and visibility on their business.

Now we've dealt with the ones that get all the attention, I'd like to remind everyone of a few others, the companies we have in the portfolio, Planet Fitness, up 4 straight top of collar reset of 5% at January 1, Federal Resouces, the third straight top of the collar reset of 6%. SBI collar, early on its top line was down and the ECR has dropped under 1.2. They just finished their first year with us with an 8% top of the collar reset, and another $1.2 million of new revenue. Heritage and Unify, both top of the collar resets and net positive resets of close to $3 million of new revenue and a weighted average reset as I mentioned of just over 4%, about $0.08 per share.

I had a couple of inbound calls last evening around some new disclosure on our tax number and I just wanted to clarify a few things. First of all, amount of changes, the proposed changes in the U.S. are final. So we don't have a determined a time or period where they take effect. Secondly, the amount of tax totaled $2.8 million for the quarter is a bit messy, as it does include a portion of deferred taxes. So just to clarify the changes around potentially disallowing our intercompany interest deduction through our international structure, which would take us from about a 20% effective tax rate on our U.S. income to 26% or 27%, a difference of about $3.5 billion on our run rate. Now that number is the worst-case scenario and assumes we don't actually adapt our tax structure, which we most certainly will do. So the likely impact will be somewhere in the middle and we will advise as soon as we have more clarity, but are actively managing with our tax advisors. The outlook for 2019, Q2 includes $27 million of revenue. Current revenue run rate of a $107.7 million and a payout ratio of about 92%.

So those are the comments I had. I'll pass it over to Steve King, our President and CEO.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [4]

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Great, thank you Darren and thanks everybody for joining us. Obviously as a -- the high dividend paying company like Alaris to be able to produce results like we have in this quarter and other quarters, well above average revenue and earnings growth is very satisfying. 17% revenue growth, nearly 24% growth in our normalized EBITDA, are certainly numbers that we're very proud of.

As we continue to point out these results and the results we have been putting up for 15 years now are not just a result of our unique business model. They are also the result of having built a large diversified portfolio. So on any given quarter, one or more companies may and really should given the facts of life, have a setback. That's part of being an equity investor in generating the kind of equity returns that we have which now, over 15 years we've generated a 17% IRR, which is exceptional.

But overall, our portfolio has shown the ability, not just to withstand these setbacks, but in aggregate, shown very good growth and stability, and we will continue to let our quarterly numbers speak for themselves.

Darren has already spoken about the positive outcome when Providence, but I'd also like to add more color on it as it relates to their performance. After we already partnered with Providence, they were given the opportunity with a new partner that had a new customer that has a very high growth profile. That growth ended up being much bigger than anybody could have imagined with Providence becoming by far our largest partner in terms of revenue and earnings, truly a once in a lifetime opportunity for the company.

In order to satisfy this customer, essentially all of the corporate resources had to be diverted to meeting their needs, while everyone involved knew that this business could be temporary, the magnitude of it was too great to pass up. So while the transition has happened faster than expected, now that, that customer has gone and no way would that a bad decision for that company, with the amount of money that they were able to earn in this very short period of time. This company has a tremendous management team, with very good relationships with its early customers and that management team just engendered a significant amount of capital into the business, when they certainly could have walked away with the amount of money that they've taken out.

So I don't think we need to say anything more than that about something that obviously is not material at 1% of our book value. But I just wanted to give a little bit more color on the situation. Of equal importance, probably larger importance going forward as Darren mentioned, LMS out of Vancouver compared to that, we've had for 13 years now with a very strong year of up 7.5% and as Darren mentioned, their early 2019 results plus, I guess more importantly, backlog for the next 18 months, showing the bad performance could be even larger than that and should lead our performance for our entire portfolio to another record year .

Looking forward, we are working on several good size transactions that have presented themselves to us. There hasn't been a real change in the competitive landscape, it's still extremely competitive and we're still able to win deals because there are unique offering. But I do expect us to use common shares, as we've talked about for the last -- over a year now in addition to our traditional preferred shares as we try to a, deploy more capital into great companies, b, increase our expected returns on our transactions and c, increase on an average hold period with the common shares that do not have a call option on them, like our preferred shares do. So you can look to our next couple of deals at least having a small component of common shares, relative to the preferred shares that we typically do.

So Twanda, I'll throw it back to you to open the session for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Gary Ho with Desjardins Capital Markets. Your line is open.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [2]

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Just a quick follow-up on the Providence, perhaps you can tell us what the owners are doing or pivoting to replace some of the loss revenue and maybe link it to why you're comfortable with only a USD 5 million write down for that final piece?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [3]

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Yes, Gary, really it's re-engaging with the customers that they had when we first invested in the company. The -- obviously, as you know, the retail industry, especially for clothing continues to change dramatically. It's one of the reasons we really liked Providence in the first place. This is a very forward thinking, very smart management team that is kind of at the forefront of those changes, including going much more to direct to consumer, sales, compared to what has happened in the past. We've done a really innovative strategy that they have developed that they're bringing to several of their retail customers and are working on some pretty significant contracts with them in the short term. So we're very confident in this group.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [4]

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Okay and then just overall, there were 4 increases in the ECR ranges, offset by 2 decreases in the quarter. I'm not sure if you have this number handy, but perhaps, so then follow-up, but what would be an asset weighted ECR look like across the entire portfolio?

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Darren Driscoll, Alaris Royalty Corp. - CFO [5]

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Yes, Gary, that's a number we'll work on for disclosing next quarter, it is -- we do have some significant outliers. I think Providence for one would have been a number that would have skewed the numbers to the positive, with a coverage ratio that was massive a while ago, so that's not something I have handy. I would estimate it, somewhere, probably in the 1.4, 1.5 range, but that's something that we will look to have in our disclosures next quarter.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [6]

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And then just lastly, Steve, a bit of a slow start in terms of capital deployment, and you kind of mentioned it a little bit just now. And I think these could be quite lumpy. How does the pipeline look for the rest of this year? Any color would be helpful here.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [7]

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Yes, we only ever have visibility for the next 90 days. And as I mentioned, we've got some, some things in the works for that, for that period of time. Obviously, any deal has the ability to drop off through due diligence or other issues that come up, so nothing can be guaranteed, but we do have multiple transactions that kind of are on our radar and that we're working on. After 90 days, it's really just clicking back, and historically, the last 3 years have been close to $200 million in deployment. So you just -- for the second half of the year, that's always kind of our target on an annual basis, but the companies that are in our pipeline right now would hopefully put us above that.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [8]

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Okay. So it sounds like the one that you guys are working on the larger size deals and not on the smaller ones?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [9]

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Yes, we've got some of each, but more on the large side.

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Operator [10]

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Our next question comes from the line of Jeff Fenwick with Cormark Securities. Your line is open.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [11]

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So Steve, just a question for you. I noticed SBI had a nice reset for you in the quarter, but then they've indicated they're going to pay back the $10 million of redeemable notes that they have. So what is the timing on that look like and is that factored into that run rate revenue number that you gave us in the quarter here?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [12]

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Yes, no, it is -- it's not factored in and we do expect it obviously -- it does need to get closed, we were expecting it sometime in May, that will increase the payout ratio by about 1.5%, but obviously decrease our debt by I guess $13 million, $14 million. So that was kind of as planned. It's always easier when we close the deal without a senior lender and we've done it on a few occasions where we have, Unify, we did the same thing where we'll close on the entire piece, give them the flexibility of that redeemable piece and their numbers are well within that where we're comfortable putting that $10 million. So it's -- this is a rating for management to do and we do expect it in the next 30 days.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [13]

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Okay. And I think that helps me a little. And I'm just trying to also understand the buildup in the quarter now, going forward on the run rate payout ratio as you mentioned, it was 73% on an actual basis, you're moving towards 92% on your run rate. So is that just a combination of rising OpEx, a little bit less -- the lower payout from Providence. Is there anything else there that I'm missing?

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Darren Driscoll, Alaris Royalty Corp. - CFO [14]

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That 73% is really, it's heavy tax and depends on when we pay the cash taxes, so that the payout ratio we reported of that 73% comes right off our cash flow statement. So there's all sorts of swings in AR and AP, but the tax is the biggest frame. So really from our run rate, we've included that table for a number of quarters now. That's the one to look at, that is basically for the next 12 months, this is what we're expecting from a revenue cost interest and taxes.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [15]

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And absent new items --

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Darren Driscoll, Alaris Royalty Corp. - CFO [16]

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New items yes, new revenue, new deployment a number of different things.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [17]

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Got you. And then you had suggested I think last quarter that you might see some incremental redemptions out of the portfolio this year as well -- that's still something that you think is likely to happen?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [18]

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There is, there is one that would, I think we talked about last quarter with the Sandbox that I think is a strong possibility for this year. There isn't anything else kind of on the horizon other than that, for this calendar year. So not to say that it can happen, several partners have the right to do so, but that's the only one that we can actually say with some kind of certainty that is a possibility for this year.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [19]

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Sure. And then one last one if I may, here that's just maybe a little bigger the picture. I know you've been getting a bit of criticism of late just around some of the deals you're doing where you're providing some liquidity to the founder or the entrepreneur there. And can you offer sort of a comment about when you're doing that, how you think about that in the context of your investments. And is there typically a limit that you would set in terms of the percentage of ownership stake that you might cash out for somebody?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [20]

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Yes, when I started this 15 years ago, Jeff, one of the key factors for me was that, we really wanted the entrepreneurs to have always going to be aiming us, just as an investor to -- particularly as a more passive investor than a traditional PE firm that's very important. So we do stick to that, particularly when it comes to partial liquidity events for our partners. So if we are looking at funding and acquisition or supporting a management team on a management buyout, buying the company back from private equity, then we don't mind being a little bigger part of the cap stack. But yes, it's a partial liquidity event. They have to have more of the economics going forward than we do.

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Operator [21]

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Our next question comes from the line of Derek Spronck with RBC. Your line is open.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Just with regards to the payout ratio, just thinking about the potential Sandbox redemption, a little bit higher tax rate and just your investment opportunities, are you comfortable with the 90%-ish payout ratio and any thoughts around where the dividend could go over the next 12 months?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [23]

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Yes, I think Derek based on what we see in front of us, we see more deployment coming in before any potential Sandbox redemption. So that should be kind of eaten up before it happens in terms of our payout ratio. We do expect more resets, positive resets from our portfolio of companies, but without a doubt, our main goal here at Alaris is to reduce that payout ratio. So -- and I've talked about this in other quarters, you will see much more of a focus on the reduction in the payout ratio than you will in growing the dividend. So I would assume the dividend stays the same this year and every piece of incremental cash flow goes to reduce that payout ratio.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [24]

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What's your, what payout ratio do -- is kind of the most comfort, is it below 80% is kind of what you're looking for or?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [25]

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It is, yes it is. That's been our target and there's ideally, I'd like to go even lower than that over the long term. But but yes, I would say over the next, over the next year or 2, we'd like to get down to that 80% or below range.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [26]

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And then just quickly on Providence, is there any conditions such that the full distributions can resume or is the 50% distribution kind of locked in now for the next 2 years?

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Darren Driscoll, Alaris Royalty Corp. - CFO [27]

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So for the next 2 years, as this sounds, that's under our guaranteed minimum we didn't pay for anything, should it be better than that, I do expect it would be a negotiation between us and the bank who would get portions, but what we really wanted to do is just to sort of establish a plan where the business could pay us a reasonable distribution and give the company lots of runway to get back to the business, where -- back to where it was. So I don't think there is no cash flow sweep like we've got in some other areas, but if they turn the business around sooner, that the debt is not a significant amount. So it wouldn't be a big hurdle for us to get over if the business was making enough to pay more distributions, say in the following year.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Okay. I got it. And just one last one for myself, with regards to potential investment opportunities, with the health of the U.S. economy, is that still the target market that you're focusing on and in terms of FX play into it at all, in terms of your decisions?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [29]

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It doesn't, we lock in our currency when we close the transaction. So no, we don't make decisions based on where we think the currency is going. It's the market for what we do is kind of steady eddy old economy businesses looking for private financing is just far, far bigger in the US. With that being said, one of the companies in our pipeline is a Canadian company and it would be on our first Canadian deal in 5 years. So a good company is a good company, we don't want to move outside of North America, just for practicality reasons, in terms of building relationships and monitoring the companies, but yes, we do expect the vast majority of our transactions to still be in the U.S. for sure.

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Operator [30]

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Our next question comes from the line of Brenna Phelan with Raymond James. Your line is open.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [31]

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So I was just hoping to follow up on the BCC commentary, could you just give us some little -- a bit more color on the challenges with their sales performance, if revenue is flat, but EBITDA is down, is this related to sales concessions and what they're doing to rectify this going forward?

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Darren Driscoll, Alaris Royalty Corp. - CFO [32]

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Sure, Brenna, it's sales conversions that are hurting. And so as they grow -- sorry that were hurting, as they were growing, they were -- they outsourced their hiring of sales consultants and as people could truly understand selling somebody on $5,000 or $6,000 [LIFO] section procedure, is -- it takes a certain kind of sales person, there you have to have a balance of empathy and the ability to close, and that's something that they let get out of their control and they have taken that back and hired a VP talent, who has made recent hires. When we sat with them in Seattle last week, they have a heavily stats-driven business and they've got stats on every single sales person and where they think they should be. And their recent hires, since they made the change back a few months ago, has produced tremendous results. So that's our expectation, that those numbers will get back to where they should be and BCC will be back on track in a very short period of time.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [33]

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So when they don't convert the sales though that gets picked up in revenue or revenue is just flat versus the year ago quarter?

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Darren Driscoll, Alaris Royalty Corp. - CFO [34]

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So revenues should be higher because they've added so many clinics. And so it's again, it's really the expenses have really stayed the same, but the revenue has not grown like it should have, with their new locations. So it's sales conversion issue, it's not a - it's a growth issue, not a business issue, as I mentioned in the MD&A.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [35]

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And then just in terms of the financial targets, they have to meet in order to qualify for the incremental deployment from you guys, are there any goal posts, you can give us, so we can kind of track progress towards those.

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Darren Driscoll, Alaris Royalty Corp. - CFO [36]

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It's an EBITDA level that would be roughly about 50% of what we started. So they're off from the start. So they've got some work to do, but when we sat with them last week, they do expect to hit those targets sometime in 2020. So that's obviously pushed down a little further than what we guided to before, but it is our expectation that they will hit that and again those targets will allow sufficient and a real strong ECR. And so we'd be happy to make those follow on contributions.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [37]

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And then in terms of our deployment targets, we're still very comfortable with our targets without that follow-on for BCC.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [38]

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And then turning to interest revenue. Is there anything onetime in that $1 million this quarter and can you remind us of any loans, which are currently not accruing interests?

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Darren Driscoll, Alaris Royalty Corp. - CFO [39]

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I think everything we've got on our books is paying active interest, nothing one-time, the only loan we expect repayment of it in the near-term would be the Sandbox loan, and that would go alongside their redemption at some point in 2019.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [40]

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So sometime in 2019 for Sandbox. Okay and then lastly on the tax structuring in the US. So what could you do to change your structure that would help mitigate the impact of that potentially higher tax rate?

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Darren Driscoll, Alaris Royalty Corp. - CFO [41]

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Well, that's, it's a conversation with people much smarter than me, but there are a number of different options, different jurisdictions that we can use. Currently, we have a subsidiary in the Netherlands between the -- based on the tax rate between (inaudible) U.S. and the Netherlands, it's been the most efficient path for us and there are other international avenues available to us. There are simply -- simplest things as borrowing in the U.S. and having an interest deduction on our senior in the US, there is a number of different things. So as I mentioned that, we will adapt if they do change those guidelines and again, the answer will be somewhere in the middle as we sort of find a better way to structure business.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [42]

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So somewhere in the middle of $3.5 million annually to zero?

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Darren Driscoll, Alaris Royalty Corp. - CFO [43]

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Zero. Yes, depending on where we land, what we can do, it's something that we've been actively discussing for a year now. And we'll continue to as, as we get more clearly down the road.

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Operator [44]

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Our next question comes from the line of Brian Pow with Acumen. Your line is open.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [45]

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Most of them been answered, but just in terms of deployment, is there any potential within the existing partners or when you look at the next 90 days, is that likely will be some new partners you're going to bring on board?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [46]

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A mix of both Brian that we do have one fairly significant follow-on opportunity with one of our partners that we're evaluating and a couple of new partners as well. So yes, a good mix of the 2.

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Operator [47]

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Our next question comes from the line of Scott Fromson with CIBC. Your line is open.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [48]

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Brenna asked most of my questions on the BCC. But just a quick follow-up, has there any -- been any change in the market dynamics, like -- thinking about things like competition?

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Darren Driscoll, Alaris Royalty Corp. - CFO [49]

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Not that we've seen, no, they are the largest of their kind in North America. And yes, this is a very, very senior management team led by people that have done at multi-location rollouts for Starbucks and others. So we've got a lot of faith in these people there. We have not seen any change in the market, this was just a business decision they made on the outsourcing that they've had to retreat from and seems to have corrected the issue.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [50]

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So the sales challenges are kind of due to managing the growth profiles, is that fair?

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Darren Driscoll, Alaris Royalty Corp. - CFO [51]

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Go ahead, Curt.

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [52]

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Yes, Scott, this is Curtis, I was just going to add that leads are significantly up in this business. So the interest in it and the procedure is still there, it's just a matter like Darren said the conversion rates have not been where they need to be to drive the dollars per procedure, that they use for their metric, but they're the only ones in the business doing this on the scale they are, and we're confident in their ability to execute the sales growth that we need.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [53]

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Are they seeing any change in the use of financing structures, is that some of the [entertainment] stuff?

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [54]

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No, they're not wasting their time.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [55]

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Okay, that's great. And just a quick one if -- then -- -and it sounds like there's a lot of growth there and I recognized that they're using their acquisition line, but just wondering if there's any additional investment opportunities for you guys there?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [56]

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There is, yes, they keep on, they are one of the top, if not the top Planet Fitness franchisee. And so they get approached by other franchisees and also by the master franchise or with opportunities on a very regular basis, so that is definitely a candidate for follow-on investment.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [57]

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So you could see like a bit of a roundtrip going on there?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [58]

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Yes.

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Operator [59]

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(Operator Instructions) Our next question comes from the line of Jaeme Gloyn with National Bank Financial. Your line is open.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [60]

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A couple of quick ones here. First question is related to the D&T distribution, I'm just curious, revenues were up for D&T where the distribution is down. I'm just wondering if you can explain that diversion.

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Darren Driscoll, Alaris Royalty Corp. - CFO [61]

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On year-over-year revenue was actually off, I think it was on an unaudited basis it was off 1%. I think the TTM, the revenue would be up and EBITDA would be down. So that's a reset was down, like 1%, but again, their profitability is impacted by the increasing costs, wet dirt is harder to move than dry dirt. And that's -- it's really going to cost materials issue that has put a little bit of pressure on the coverage ratio, but there is still a good coverage there with this a significant number of millions in buffer paying our distribution, again that's one that doesn't have any debt. And so we are in full control of that vantage situation.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [62]

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Just like to --

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [63]

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Yes, just to clarify, the revenue was up for the first 2 months of '19 as disclosed in the MD&A, but they aren't set for the year, it was down, the 1%, that's the reason the distribution was down --

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Darren Driscoll, Alaris Royalty Corp. - CFO [64]

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Got it. This is not a troubled partner at all.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [65]

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And with federal, just wanted to get a little bit more color on this one around the timing of certain orders, is that something that's pipeline related and it's just going to hit in I guess the future months in 2019 or was it something related to maybe inflated 2018 results for those first 2 months?

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Darren Driscoll, Alaris Royalty Corp. - CFO [66]

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No, that -- this business has always been, I believe, that's not the first time, we would have said that, this business is always a little bit lumpy quarter over quarter depending on timing of -- mostly different government contracts some things like that. So they are actually ahead of their budget and we are expecting tremendous 2019 federal resources.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [67]

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Just one question on the BCC. I think I or -- I thought I heard that Curtis mentioned the outsourcing of the sales staff, is the entire sales staff outsourced? Is that a -- is the change that has been made to shift that, or was there an agreement to another sales company? I guess, maybe a little bit more color around how that's setup?

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [68]

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Yes, they -- the thing that's outsourced is the -- that they outsourced was the hiring function. All these sales people are employees of BCC and so when they were growing rapidly, they tried to I guess save some time internally by hiring a recruiting firm to do the recruiting, they have reversed that and this is a business that the monthly slide deck we get from them is -- has more detail than any of our other businesses. We can see exactly what happened with certain salespeople that were hired and where their results were from a dollars per show and where they are now starting to get with their new hires. So we can see a very -- evident form that the numbers are turning, again this wasn't something that dropped off a cliff, they are just under one, they've identified the issue, we can see it and that we can see it improving on a monthly basis.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [69]

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And that -- this issue is focused in the new locations. This isn't necessarily an issue with the existing locations, like if you were to give us a, like a same-store sales growth number, is that something that you're able to provide or so that we can maybe look to offline?

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Darren Driscoll, Alaris Royalty Corp. - CFO [70]

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It's an issue for the people, the sales people they hired over the last 4 or 5 months. So some were at new locations, some were at old locations. So it's just -- it was the outsource, it's simple as the outsourcing of salespeople or hiring salespeople didn't work, they've changed that and it's working again.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [71]

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Okay. And is there any, is it just sales or is there any other issue with the recruitment of talent within with BCC, like with the doctors or nurses or technicians, right from a lot of those sides?

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Darren Driscoll, Alaris Royalty Corp. - CFO [72]

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No issues with doctors, nurses, it is as we've said, just an issue with the sales conversion of their salespeople.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [73]

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Shifting to Providence, I guess the first question is how did the -- how did all the stakeholders arrive at that $195,000 per month distribution tool to Alaris, can you just sort of walk us through some of the metrics or measures that were at play?

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Darren Driscoll, Alaris Royalty Corp. - CFO [74]

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So I think, there were a couple of options here, Jaeme for us. One was to take the bank out entirely and stop our distributions that we would get whatever distributions as soon as the business could pay distributions. The problem is, as you are ramping back up, they need working capital. And so by far the best resolution for us was something that maintained a decent level of distribution, we asked for 50% and they gave us a little bit more. And then that guided the amount of money that the management team put in. So they wanted to -- the bank needed a small repayment, basically to keep them happy, the business needed a certain amount of working capital and we needed a certain amount of distribution. And so it wasn't perfectly scientific, but those were kind of the main drivers to that decision.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [75]

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I think just to add a little more color too, this is a very senior management team, that has shown a really incredible ability to make money over long period of time. The bank, while Providence was making incredible amounts of money over last 3 years, asked not to be taken out, they had a cash flow sweep, that they specifically asked to not be used, and so that they could pay in with this company, and that exists to this day. So between us and the 3 owners of Providence, we offered to take them out and they asked to stay in. So I think that should give you a sense for, not just our confidence in this company, but the banks as well. And that's very unusual, a bank -- they're not making equity returns like we are, they're just getting their interest, but they still wanted to stay in and retain this client.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [76]

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Okay. And in terms of the profitability of the company when do they expect to return to profitability? And I guess on that front, is it really sort of backfilling revenue or is there an ability to cut staff, to cut the facilities other overhead expenses, what's the ---

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Darren Driscoll, Alaris Royalty Corp. - CFO [77]

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They have been nimble on their on their overhead. The company is still profitable today, but just not enough to cover our full $4.4 million distributions and the interest servicing. So hence the coverage ratio below one, so the company is profitable. They have adjusted the expenses. They've done everything we've asked them to do and more and again we remain very supportive of this management team and based on their forecast, expect that coverage ratio will be above one in the next handful of quarters.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [78]

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Sorry, I just wanted to follow up on that, the strategy to bring it back into profitability, is it really more backfill revenue or is there --

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [79]

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Yes, revenue they have made a lot of adjustments as Darren just mentioned are already on the cost side, there's still probably some more to go. But the vast majority of the improvement will need to be on the revenue side, and they've got lots of (inaudible) for that.

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Darren Driscoll, Alaris Royalty Corp. - CFO [80]

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Yes, we've already seen conversion of new contracts with people just in the last 30 days.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [81]

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And last one for me is just around the interest expense or the interest rate. Was there anything one time in that interest rate related to drawing on funds or anything along those lines or is that just a backup in sort of BA rates recently?

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Darren Driscoll, Alaris Royalty Corp. - CFO [82]

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Yes -- it's, we're basically borrowing on a U.S., U.S. rate because we're borrowing in U.S. and so the average rate was just a little bit over 6% I think for the period which is -- and it will take a whole lot different than previous quarters, maybe a little bit higher, nothing one time in there.

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Operator [83]

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We have a follow-up question from Brian Pow, your line is open.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [84]

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Just on Kimco, just a little bit of clarification. I know your outlook for run rate distributions doesn't include chemical, but when I look at the commentary around ECR, you mentioned ECR to move back to 1.1, above one, using a partial distribution for the -- of the corporation of $1.2 million. So are you expecting to see our payments to start there again or what are you thinking with Kimco?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [85]

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Yes, we are thinking, in Q3 we should restart those distributions is the guidance that we've been given and based on their internals, that looks to be very, very likely. The other one I would point out is SCR, that isn't paying us full distributions right now, they are doing extremely well. And while they need most of their capital right now for working capital given their growth rates, we expect for that to increase in the near future as well. So we're seeing some very good results from some of the companies that, you know that we needed to see some recovery from and where we're getting just that. So we're quite pleased with those 2.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [86]

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So, sorry, just a clarification on the SCR, than you noted in the MD&A, that it's going from $100,000 to $150,000, are you saying it could be higher than that later in the year?

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Darren Driscoll, Alaris Royalty Corp. - CFO [87]

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Yes, it went from $100,0000 to $150,000 almost a year ago, I think it was last April that it moved up to $150,000. And so that's our plan, as to gradually sort of tick up that monthly amount. We do have a cash flow sweep in place, but it requires a certain amount of liquidity and because of the working capital needs, right now the best thing to do is to leave that money with the business as they continue to wrap things up. But we're seeing really exceptional results in the last 4, 5, 6 months.

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Operator [88]

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I'm showing no further questions at this time, I would now like to turn the call back over to Steve King for closing remarks.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [89]

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Great, thank you Twanda and thank you everybody for participating. Obviously it was a -- it's been a very active last few months for us. We expect the next few months to be even more active and we're very, very proud of the way our portfolio is performing and there's still nobody else in North America that we've seen or the world for that matter, that offers exactly what we do to entrepreneurs and we continue to win transactions, that are highly sought after with companies that don't want to give up control and don't want to give up the upside. So we don't see anything changing in that competitive environment or in our ability to deploy capital. So thanks again for tuning in and we'll talk to you next quarter. Thank you.

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Operator [90]

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Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone have a wonderful day.