U.S. markets closed

Edited Transcript of CRN.TO earnings conference call or presentation 13-Mar-20 12:30pm GMT

Q4 2019 Crown Capital Partners Inc Earnings Call

TORONTO Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Crown Capital Partners Inc earnings conference call or presentation Friday, March 13, 2020 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Allen Johnson

Crown Capital Partners Inc. - CEO, President & Director

* Michael John Overvelde

Crown Capital Partners Inc. - Senior VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst

* Trevor Reynolds

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Q4 2019 Results Conference Call.

Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian securities legislation. Forward-looking statements involve known and unknown risks and uncertainties as well as other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements.

For a description of the risks associated with Crown's business, please refer to the company's filings for Q4 2019 as well as at AIF at sedar.com.

Chris Johnson, Chief Executive Officer, you may begin your conference.

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [2]

--------------------------------------------------------------------------------

Great. Thank you, operator. And good morning, and welcome to today's call. I'm joined as usual by Michael Overvelde, our Chief Financial Officer. I'll start today's call with a few comments on last year's results and progress results on our 2 main financing platforms. Mike will review the financials, and then we'll open up for questions.

2019 was a bittersweet year for the company as the progress we made transitioning the company to a more diversified financing platform was hampered by start-up pains in launching new business platforms as well as the previous disclosed loss on our loan to Solo Liquor. A massive amount of work went into these in 2019. And we're happy to put that behind us and focus on generating new business in 2020. Despite the global economic concerns are intensifying by the day, which I'll speak to in a moment, the outlook for our business is very positive.

We're leveraging our core capabilities in alternative finance to develop new revenue streams that are both highly profitable and scalable and where Crown can act as both a direct investor and asset manager of capital pools, our focus on markets where we can generate long duration, recurring cash flows from high-quality assets. We're confident that our actions will expand our market opportunity and increase the earnings for Crown over the long term.

Our well-established alternative corporate finance platform remain core to our business, an important source of new investment ideas, investor relationships and earnings. In 2019, this business grew modestly despite elevated competitive pressures from traditional finance providers. We had new investments totaling approximately $74 million and repayments of $57 million. Some of the capital is put to work in follow-on investments in our portfolio of companies. In the fourth quarter, we advanced an additional $27 million to 3 portfolio companies. For this month, we advanced an additional $6.1 million to VIQ Solutions, increasing that term loan to $15 million. We currently have approximately $220 million invested in that fund.

Separate from the level of investment activity, we're also pleased with the underlying performance of the fund, reabsorbing the loss of Solo Liquor with previously accumulated fund profits, and the fund's gross IRR remains in the mid-teens.

Another highlight in Q4 was the expansion of the credit facility of the fund with the introduction of 2 new senior lenders, increasing the facility from $25 million to $50 million and extend the term to mid-2023. Adding to this facility increases the overall efficiency of our balance sheet, and it's accretive for shareholders.

We're already seeing a moderation in the credit cycle in late 2019, and this has been accelerated significantly in 2020. We've become hyper-diligent in volatile economic conditions, but generally, these markets are very favorable for alternative finance platforms such as Crown. We're actively monitoring the COVID-18 -- sorry, correction, 19 pandemic and the related economic impacts on the health of our portfolio companies. In addition, market share tactics by major oil-producing countries has exacerbated an already weak pricing environment, resulting in significant decline in the price of oil.

Fortunately, Crown's energy clients have substantial natural gas exposure, which is expected to provide stability to these companies, but we remain concerned for many of the businesses operating in Alberta where the fallout of lower capital spending will be painful. It is not clear at this time the extent to which our diversified portfolios will be impacted by the economic volatility, but we presently believe the impacts will be generally minor.

While we managed through some start-up challenges in the distributed power business, there are several important milestones in 2019 and locked the foundation building. In addition to the successful initial fundraising at the start of the year, we had 3 new operating partners, bringing the total to 5. This includes our first offer in Alberta, which provides a strategic foray into on-site power projects in that market.

Partners commenced construction on 4 new projects last year, increasing the total number to 10 at year-end. In December, the fund achieved a key milestone as we commissioned the first project, the manufacturing facility in Alberta outfitted with a 150-kilowatt cogeneration unit with a 20-year power purchase agreement.

As we look ahead to 2020, we expect accelerated progress and growth. The pipeline of potential transactions, including prospective projects that are already in the planning stages, vibrant and accelerating, supported by already positive backdrop.

As we discussed in our prior call, we are also in the early stages of developing a third fund platform, a broadband network infrastructure, which we entered through the acquisition of WireIE. As with distributed power, this market has investment characteristics that we're looking for, long duration, recurring cash flows from high-quality assets. Our near-term focus is leveraging the management talent and existing asset base at WireIE while we evaluate opportunities to bring together other network service companies and create a capital pool around this investment concept.

With that, I'll turn the call over to Mike, who'll review the financial results.

--------------------------------------------------------------------------------

Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [3]

--------------------------------------------------------------------------------

All right. Thanks, Chris, and good morning to everyone on the line. I'm just going to quickly cover the financial highlights for the fourth quarter, and then I'll elaborate on a few of the items that are new, a little bit exceptional compared with previous quarters. It's just a little bit of new complexity in the financial results following the acquisition of WireIE here in the quarter.

Total revenue in Q4 was $10.3 million. That's comparable to the $10.4 million recorded in Q4 of last year with the help of $2 million of network services revenue this year, and it's also $2.3 million better than in Q3 with that improvement due to improve net investment gains compared with Q3.

If we look at the components of revenue, interest revenue decreased from $7.5 million last quarter to $7 million this quarter. Recall that in Q3, interest revenue had benefited from about $1.3 million of bonus interest in relation to loan repayment -- prepayment that we partially made up for in Q4 through an increase in the average level of interest-yielding investments following additional advances we made to Rokstad Power in the quarter.

Fourth quarter fees and other income were $0.7 million. That's down from $1.5 million last year, but up from Q3, mainly due to the inclusion of fees recognized in relation to new loan investments. I would note, as in most quarters, we did also receive fees that's in relation to amortized cost loans that are not recognized in these revenues. These decreases were partially offset by the inclusion of $2.1 million in network services revenue from WireIE. That's up a bit from the contribution of WireIE in Q3, mainly because Q3 was not a full quarter's worth of contribution from that acquisition. And of course, the net investment gains line always varies from quarter-to-quarter. We had a net gain of $0.4 million in Q4 compared with a net loss of $2 million in Q3 and a net gain of $1.5 million in the same quarter last year.

It's worth reiterating here that in terms of operating revenues and costs from WireIE, we report all of its revenues in the network services revenue line and its costs are included in various expense categories. For the period, since acquiring it in July until the end of 2019, WireIE's operations generated a net operating loss of $0.9 million, which is obviously a drag to our overall reported corporate profitability, but we do know that this operating loss includes $1.9 million of depreciation, which includes depreciation of transaction-related intangibles. I break this down into the Q4 elements. The operating loss of WireIE was $0.3 million. That included depreciation expense of $0.7 million.

Our full year total revenue of $25.2 million was lower than $32.7 million in 2018. We've talked about the main factors driving that variance in previous earnings call, but I'll just reiterate, the primary reason for the year-on-year decline was the $10.1 million realized loss we incurred at the Crown Partners Fund level in relation to the Solo Liquor investment earlier in the year.

On the positive side, interest revenue, which is our largest revenue category, increased by just over 6% compared with last year due to higher contributions from Crown Partners Fund as well as from our own balance sheet investments in Crown Private Credit Fund. And I'll also highlight that we are beginning to recognize, of course, a growing level of interest income contribution from Crown Power Fund as those assets continue to grow.

As you review our expense items, keep in mind that total expense amounts include amounts, again, in relation to WireIE from July this year. And we've also had a bit of staffing level increase year-over-year from comparing to 2018, which does support the growth initiatives that we have here at Crown, including both the build-out in Power Fund and, obviously, the oversight of this new network services business line.

G&A was $0.8 million, compares to $0.5 million last year. Note that $0.2 million of that increase comes from WireIE. Net salary increased in Q4, also increased over last year, again, primarily due to the addition of WireIE, also due to increase in headcount at the Crown level and due to a difference in timing and the accrual of our annual bonuses. Finance costs of $1.2 million were up over last year's $0.8 million in the quarter. That reflects higher average levels of debt, as you'll see from the balance sheet, in particular in relation to increase at the fund level as we take advantage of that Crown Partners Fund credit facility, which is new this year.

I'll also highlight that interest income, unlike 2018, is including interest under IFRS 16 in relation to these leases, much of which comes from WireIE.

Other things to note in the expense category that are a little bit different than usual are: one, we had an increase in our provision for loan losses. As you'll read in the MD&A, we're just noting a general increase in credit risk. We have transferred some additional loans from the Stage 1 to Stage 2 categories for purposes of determining credit losses, and that's resulted in a bit of an uptick in that loss category this quarter; two, a small equipment impairment charge of $0.3 million was recognized in the quarter related to some valuation adjustments made to equipment in each of the power and telecom businesses; and three, the gain on acquisition that we recorded for the WireIE transaction you see, it was about $85,000. If you look back to our Q3 statements, you'll see that on -- the initial estimation was a loss on acquisition of $0.2 million. We -- over the course of the year, following that acquisition, we'll continue to reestimate the -- I guess, the valuation of that transaction and all the elements that went into that, the assets and liabilities. I doubt we'll have made changes, if any, from here. But certainly, in the first quarter following, we made some revaluations resulting in that slight change from loss to gain. That contributed $0.3 million to pretax earnings this quarter, and you'll find some details in Note 15 of the statements.

Our adjusted funds from operation, $3.4 million, $0.36 per basic share in the quarter. It's down a bit from $3.9 million or $0.41 in Q4 of last year. I would note that we have revised the AFFO calculation slightly, if you're kind of comparing to previous disclosures. All we've done here is we've added back the provision for credit losses attributable to shareholders, which we probably should have been doing all along, since it's consistent with our treatment of unrealized gains and losses on investments. And I'd also highlight, it's consistent with our treatment of realized gains and losses, which we do bake into AFFO at the time that they're realized.

Net income in the quarter, $1.1 million. It's down from $2.4 million a year ago, but up from $0.5 million in Q3. Again, note that, that does include net operating loss of $0.3 million in relation to WireIE.

If I look at the balance sheet, total assets of the year, about $300 million, that's up from $276 million a year ago. Our primary change is an addition of about $18 million related to the assets of WireIE, a lot of property and equipment and including lease property for which there's an offsetting liability and associated intangibles. Also contributing to asset growth, of course, was the addition of about $4.6 million of property and equipment in Crown Power Fund. You're going to find those amounts spread amongst 3 different balance sheet categories beginning this quarter. We've got a distributed power equipment under development, which speaks for itself. In terms of what that is, we've got some in the property and equipment category, which is equipment acquired for that business that is not currently associated with a particular project. And we had our first project become operational, that's now in the leased equipment category.

On the liabilities side, I'll highlight a new item, promissory notes payable, it's $8.5 million this quarter. Recall, in 2018, we restructured the Crown Partners Fund to make its term extendable annually by year at a time. This involved a mechanism to provide liquidity to smaller limited partners that might need an exit since this fund was becoming evergreen potentially in nature, that was a required feature. At year-end, the fund did redeem 13,600 of its 300,000 units in exchange for these promissory notes, which will be repaid by the fund in 2019. The offset from Crown's perspective is that with fewer units outstanding in the fund, our percentage ownership in the fund increased from 37% to 38.8% (technical difficulty) December 31. And our percentage share of earnings, of course, will be commensurate with that going forward.

Cash and equivalents stood at $8.4 million compared with $11.3 million at the end of 2018. Equity at $97 million or $10.38 per basic share, compares with $10.91 per basic share at the end of last year. That change primarily reflects a combination of a modest net loss of $0.2 million in the year. We paid dividends of $5.7 million. We repurchased shares totaling $1.8 million and 236,000 shares. It was the number roughly under the NCIB.

In addition to the dividend we paid in November, we did declare another $0.15 per share dividend yesterday. That will be paid in the last week of March. In 2019, we paid a total of $0.60 per share in dividends, which was consistent with 2018.

I'll also note that we have a -- continue to have a reasonable amount of capital available to fund opportunities as they arise. At year-end, we had access to approximately $132 million to fund additional investments. That includes our working capital, about $82 million of committed capital available to our 2 funds from third parties, plus about $46 million in undrawn amounts available under the credit facilities.

So with that rundown, and thanks for your patience in getting through all that with me, I'm going to turn it over to Chris for some closing remarks.

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [4]

--------------------------------------------------------------------------------

All right. Well, thanks, Mike. Well, 2019 had some challenging periods. We expect 2020 to be characterized by growth and profitability on all fronts. While the current economic environment is highly uncertain and concerning, we are comforted by the quality of the businesses in our portfolio and the diversification they provide us. We've got multiple milestones and catalysts in the coming quarters as we build out each of the financing platforms.

On the alternative finance side, our pipeline is expanding, and we are focused on originating high-quality, recession-proof new transactions. In our distributed power business, we expect accelerated growth in the pipeline of projects and the ramp-up of operating assets. And finally, with the foothold we have in the broadband network side, we look to accelerate the WireIE projects as well as bring new development partners on to the platform.

With that, we look forward to updating you at the release of Q1 in May and now open the call for questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Chris Murray with AltaCorp.

--------------------------------------------------------------------------------

Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [2]

--------------------------------------------------------------------------------

Just, Chris, maybe going back to the WireIE and the telecom opportunity. Can we talk a little bit about what you guys see in 2020 in terms of opportunity pipelines a little more in detail? And what I also would be curious -- I mean, just trying to understand because of the way that you own that, what's your actual kind of cash draw to Crown itself and not necessarily in the fund or the LPs? Essentially, what -- I guess, what I'm trying to understand is what your real kind of capital spending might look like in terms of the year?

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes. So I can't give you a ton of guidance on that, Chris, cause we're still working through it, like the -- like one of the things that we took it on, like we were an investor of the company for a year and a bit before, taking on the ownership. And our money was going towards building new circuits that would get leased or under contracted the major carriers in Canada and under that would typically be a major customers, such as Germany, Canada or Ontario or a major bank or something. These are pretty high-quality cash flows the company is creating. The -- as we get into it, we're still -- we're looking to leverage the existing infrastructure as one step. And not sure exactly what the capital is, but we've got about 100 communities that we're servicing with the existing infrastructure and very low densities in that -- those areas. So one of the goals is to increase density, and frankly, that's really high-margin payback stuff. So we may be able to accelerate with very low capital deployment. Clearly, we'll continue to support as government of Canada particularly is rolling out broadband requirements to their various agencies across the country, whereas remote servicing is required by companies like WireIE. Those are great contracts, and we'll put the money up to build those as needed.

So I just don't have a strong view of that right now, because it is, again, we're just getting our arms around it. The other part of it is we have a lot of other initiatives underway right now. And as I made note, we're seeing this as the incubation formation stage of the fund. It's a little unclear how much money we're going to need to finance those things. Probably the high-end number is going to be in the low tens of millions of dollars, not in the kind of 50 range. So it's within the capacity we have of our capital to make these things -- move these things forward.

--------------------------------------------------------------------------------

Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [4]

--------------------------------------------------------------------------------

Okay. Sounds fair. And then one of the questions I had, I mean, even before you folks were a public entity, you've had -- we've gone through these kind of cycle loan uncertainty before, call it, different epidemics, different downturns or recessionary conditions. What's your thinking? And how -- what's your experience been, I guess, in the portfolio that gives you the comfort that -- so far, you see -- you made the comment that you don't expect any material impact at this point. What gives you sort of the confidence that there won't be anything like that at this point? I mean, if you've got any historical precedence to refer to that might be useful too.

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Well, I think the -- we generally finance really leading companies in their industry. So short of the industry going away entirely, we expect these companies, as they have in the past, to get through this cycle and pay their debts as they go. I look specifically at our -- for example, the energy companies, which are taking it generally, like, big, big, anything that's big oil exposures taking immediately on the chin to the extent -- a lot of the guys have hedges. Those might go out a year. But after that, then you're sort of in the current soup. But again, the strength in the natural gas market is last year has been a bit of a godsend for those companies. While guys who are liquids-rich gas producers, which got them through the low gas cycle, will now gas markets, you can hedge through those pretty well for the next several years.

I did make the remark and something that we're quite concerned about, just generally, Alberta is going to be impacted. Like, by the hour, we're seeing major capital spenders in the province just rolling back their budgets. And that has to have a knock-on impact. But we do think that if you have positions in some of the leading companies, they will get through this. And so that's our general confidence. Like most of the companies we have, have been through the 2008 cycle. And so we just expect that they have that resiliency to be able to survive a major shock.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Trevor Reynolds with Acumen Capital.

--------------------------------------------------------------------------------

Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Research Analyst [7]

--------------------------------------------------------------------------------

Just wondering about what the deployment looks like this year for the Power Fund? I know you've been tracking a little bit behind where you originally expected to. And just kind of what your sense is looking forward here?

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [8]

--------------------------------------------------------------------------------

Yes. So maybe just to set expectations, we closed the fund and we're -- have enough based upon the pipeline that was shaping up with an operator who ended up having to terminate. So that was -- which we've spent a lot of time talking about, have financial results to show for it. That's behind us now. So what we have today is a pipeline of something greater than 20 transactions and well over $100 million. And I mean that's a qualified pipeline of deals that are in some level of contract and technical review.

The outer pipeline, which is just things that are shaping up and we're negotiating, would be several hundred million dollars. Like this is going to be, I think, a very significant year in terms of acceleration on that front. It's whether or not it hits our assets or it just hits the queue in which it'll hit our assets, that's going to be harder to predict. But yes, I think this is going to be a very strong year for the growth of that business.

--------------------------------------------------------------------------------

Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Research Analyst [9]

--------------------------------------------------------------------------------

Okay. And are you able to provide any insight into where those -- I guess, the $100 million and the $700 million is kind of located? Is it primarily split evenly between Ontario and Alberta? Or is there -- focused in those areas?

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [10]

--------------------------------------------------------------------------------

Yes, it's several hundred -- not $700 million, but the -- it is split pretty evenly. I think dollar-wise, like in terms of the number of projects split evenly. Dollar-wise, Alberta is bigger just because the plants there are bigger. In this environment that's just setting in right now, I think, is ideal for us. Like you have to think that companies are going to have, particularly the major gas plant operators are going to have to be -- figure how to save expenses pretty quickly. And our solutions can save not immediately, but as soon as we install it, it's immediate savings. So that's, we think, will accelerate things on that front. But we're seeing Ontario, like there were some small adjustments that the progressive government did in Ontario to unwind some of the Liberal Fair Hydro Plan stuff on the residential side, and that's resulted in the acceleration of projects on the multi-res side. And we've done a little bit of prospect in other jurisdictions as well, and we're seeing some deal flow shape up in Eastern Canada. And once we get our base here kind of established, there's some core markets in the U.S. we're quite interested in going and doing -- replicating the growth in those markets. So it's going to be Ontario and Alberta out of the gates. But by the end of the year, we hope to see a lot of other markets shifting those projects.

--------------------------------------------------------------------------------

Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Research Analyst [11]

--------------------------------------------------------------------------------

Good. And that $100 million, what -- how much of that is kind of already under construction versus is still waiting to be confirmed?

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [12]

--------------------------------------------------------------------------------

Well, so I would say 1/3 of it is in the process of being constructed. Now that doesn't mean there's -- that would include engineering, and it's more of an installation than it is a full-out construction. So we're past the technical review. It's in flight. It'll be installed and operating within, say, 6 or 9 months.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

There are no further questions at this time. Please proceed.

--------------------------------------------------------------------------------

Christopher Allen Johnson, Crown Capital Partners Inc. - CEO, President & Director [14]

--------------------------------------------------------------------------------

All right. Well, I appreciate everybody joining this morning. Obviously, lots of craziness out there, and look forward to updating everybody at the end of Q1. Thank you.

--------------------------------------------------------------------------------

Michael John Overvelde, Crown Capital Partners Inc. - Senior VP & CFO [15]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.