Alaris Equity Partners Income Trust (ADUN) Earnings Call Transcript
August 8, 2025
Earnings Call Speaker Segments
Thank you for standing by, and welcome to the Alaris Second Quarter 2025 Earnings Release Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Amanda Frazer, Chief Financial Officer. Please go ahead.
Thank you, Jonathan. Good morning, everyone, and thank you for joining us today to discuss our Q2 results. I'm joined on the call today by Steve King, our President and CEO. Before we begin, I'd like to remind everyone that all financial figures discussed are in Canadian dollars unless otherwise indicated. Please note that some comments made during this call may include forward-looking statements. These statements are based on current assumptions and involve risks and uncertainties. So actual results may differ materially. For more detailed information on the factors, assumptions and risks involved, please refer to our press release issued last night and the management discussion and analysis under the headings Forward-Looking Statements and Risk Factors available on SEDAR at sedarplus.com and on our website. We will also be referencing certain non-IFRS financial measures, which may be presented differently than similar measures by other companies. Additional information and reconciliations related to these measures can be found in the press release and MD&A. With those preliminaries covered, let's turn to the highlights. Our second quarter reflected solid operational performance across most of our partner portfolio, continued growth in our run rate revenue and ongoing capital deployment despite the noise from a stronger Canadian dollar. Let's start with the highlights. The net book value per unit was $23.57 at quarter end, down $0.77 from Q1. We saw $0.59 per unit in earnings growth, offset by $0.98 per unit in unrealized foreign exchange loss from the Canadian dollar's 4.5% appreciation against the U.S. dollar, along with our quarterly distribution of $0.34 per unit. Revenue and operating income grew approximately 21% year-over-year to $34.5 million, driven by strong performance from 9 partners, resulting in a $25.5 million net unrealized fair value gain that was offset by the impact of a USD 14.6 million write-down at FMP following the loss of certain key contracts due to changes in U.S. federal procurement policies, along with an expected deferral of distributions. Run rate revenue reached $183 million, up 12.5% from last year and up from $178 million last quarter. Year-to-date, we've deployed about $154 million into our portfolio, including a USD 21.5 million follow-on preferred equity investment in the shipyard, bringing our total shipyard investment to USD 108.5 million. We also issued $92 million in convertible debentures using the proceeds to strengthen the portfolio and fund growth. Through our NCIB program, we repurchased and canceled 133,600 units in Q2, bringing the year-to-date total to 352,500 units and adding approximately $0.04 per unit to book value. Turning to our portfolio health. Our portfolio showed solid operational strength this quarter. The majority of partners delivered year-over-year revenue and EBITDA growth, highlighting the quality of our investments and driving fair value increases across 9 of our partners, supporting improved revenue and operating income. Our weighted average earnings coverage ratio remains healthy at approximately 1.5x with 13 out of 20 of our partners maintaining no debt or less than 1x senior debt to EBITDA. Overall, the portfolio fundamentals remain robust, positioning us well for stable returns and future opportunities. On the financial side, earnings and comprehensive income for the quarter were a loss of $17.9 million compared to a gain of $31.7 million last year, almost entirely due to the $44.8 million of unrealized foreign exchange loss from marking our U.S. dollar portfolio to the quarter end exchange rate. Net distributable cash flow was $17.9 million, down from $26.3 million in Q2 2024, mainly due to the timing of cash tax payments and transaction costs. Looking ahead, we expect Q3 partner revenue of approximately $56.9 million, up from Q2 due to expected incremental common distributions from select partners. Our run rate payout ratio remains in the 60% to 65% range based on our current revenue expenses and capital structure. And on that note, I'll turn it over to Steve for his comments.
Great. Thanks, Amanda. Interesting, when going through our portfolio with our monitoring team over the last few weeks, I'm not sure there's been a period in our 20-plus year history where our companies have had such explosive results. And that may surprise some people. It's not like the economy is that buoyant in the U.S. But we have not just a few, but many companies that are up more than 20% year-over-year in their earnings. So while our prefs are capped typically at 7% or 8% a year growth, the thing that's exciting for that is that it really magnifies the returns on the common equity, which we have on most of our investments now. So a really tremendous quarter for our portfolio. I'll touch on a few kind of key companies that people will have questions about, starting with FMP. Obviously, we discussed this last quarter. They had some significant contracts canceled and diminished because of the doge process in the U.S. The nice thing is many of those contracts have actually come back, not in full form. but they've been added to since we spoke last quarter. So the company is feeling much better. They definitely have hit a trough and are working their way back out of that. So they didn't need to defer as much of our distributions as expected. They're in a strong cash position. And starting in January, we'll start with a new distribution program for FMP that mirrors their recovery. Keeping in mind this is a company with no debt, no CapEx and a world-class management team. So we're very confident there. BCC, Sono Bello had their most profitable quarter in their company's history for the quarter ending June 30. GLP-1 patients, which anybody that reads the paper or watches TV knows is a booming industry. Those patients need not just lipo, but also skin tightening at the end of their GLP-1 journey. And this has led to a record dollars per procedure performance for the June quarter, and that's very much a long-term trend. Fleet, you'll see came down this year. Fleet can be a lumpy business with kind of large batches of trucks, contracts coming in and out of backlog. So that's not unexpected for a business like them, but their backlog indicates solid growth moving forward. So again, no issues there. From an outlook standpoint, I would say it's a very buoyant deal flow market for us. We did walk away from a couple of deals in the quarter, which gave us some expenses from them without the deployment, which is always unfortunate, but part of the business. But we also do have several deals in process. So we weren't afraid to walk away and have significant deployment opportunities. So overall, a very good environment for us, noise from the currency this quarter. We expect that to reverse a little bit in the coming quarter as everybody can follow. So hopefully, people are smart enough to that out when they look at our results. So Jonathan, we're happy to open it up for questions.
[Operator Instructions] Our first question comes from the line of Gary Ho from Desjardins Capital Markets.
Maybe for Steve, you just mentioned Sono Bello and the record quarter this quarter. So it sounds like there were location adds and you talked about the increased dollar per procedure. I know last quarter, you pushed out the monetization expectations and time frame. So with a stronger quarter now, does that change your views at all?
We've been pretty tight on 2028. But it's between us and the majority shareholder of BCC as well as Brookfield, our partner on that deal. So it always comes down to any kind of an exit opportunity trying to maximize your value. So you never this far ahead, say, okay, it's going to be on this date or anything like that. But 2028 is still when we are kind of loosely targeting.
Okay. And then second question, it feels like there's some of your portfolio partners have a path for greater maybe tuck-in opportunities such as shipyard. Is that the case? And what are others that you see could require some follow-on capital deployment? And is that something that you can pursue more closely looking out?
Yes. Cresa is a company that is acquisitive and is working on things. PEC, one of our newer partners, who is the electrical contractor out of Boston. They will be acquisitive as well. We actually have, I would say, probably 6 to 8 of our current partners that are acquisitive and keep our guys hopping and give us great deployment options within our portfolio.
And maybe related to that, in the back half of this year, can you talk about capital deployment opportunities, whether it's follow-on such as these or and/or new partners that you're looking at?
Yes. We expect a healthy dose of both. So as I mentioned, you never count your chickens because we've got very tight investment standards and aren't afraid to walk away, and we've done that many times in the last several years, including twice just in the last quarter. So you never -- it's never closed until it's closed, but we've got several new deals and several follow-on deals that we expect to close in the second half.
And our next question comes from the line of David Pierse from Raymond James.
Just going back to Sono Bello. The ECR declined slightly from last quarter. I know this was a record quarter for EBITDA. Now I know the ECR is based off LTM figures. So it's not 1:1, but if you could share any insights on the decline in ECR this quarter? And assuming EBITDA is trending the right way, is it fair to assume that, that moves higher again over the coming quarters?
We adjusted the time line slightly last quarter, not just for some softness that we saw in the market for Sono Bello in Q1, but also just for pushing out their new breast augmentation program and rolling that out, which we saw taking a bit longer. So we had pushed sort of the timing out about a year at Q1. We're probably not going to shorten it in near term. We'll continue to see how they roll out that new program. I don't know, Steve, if you want to add.
Yes. And on the ECR, David, the ECR calculation includes CapEx. So sometimes you'll get a lumpy CapEx spend in a quarter that will affect the ECR, which -- that includes some growth CapEx, too. So yes, that would likely be the reason there.
Okay. And just -- when I think about the balance sheet, like when you look at leverage internally, are you viewing this on a consolidated basis, including the convert or just on a senior debt basis, given that's what the covenant factors in? And then maybe following on from that, could you talk about your current balance sheet capacity for new investments over the next 12 months based off your current outlook and maybe assuming no redemptions in the portfolio?
So the leverage ratio that we report for each of the partners, is that the question on how -- what that includes?
No, it's your own -- sorry, Amanda. It's your own balance sheet, like just following the convert deal in May. I'm just trying to get a sense around how much capacity you have for new investments and just how you actually think about leverage internally?
Yes. So we have $200 million of room on the current credit facility...
U.S.
U.S., that's available to us. In addition, we could go back to the convert market to the extent that deployment exceeded that value. We also always have the possibility of redemptions as we look 12 months out that can also be an additional source of capital. So between all of those avenues, I think that we're well positioned to meet the requirements of the pipeline that we see ahead of us.
Yes. I'm pretty happy right here, David, having USD 200 million of capacity is a good place for us. That's a comfortable place. I don't want to have our debt too low, to be quite honest, because we will get redemptions. We haven't seen that many over the last 5 years. But if you look at our kind of time line as a company. We started common equity investments along with our prefs about 6 years ago. And so using a kind of a typical 6-year hold, which we've had over our 21-year history, we're going to start to see some of those companies come to the market over the next kind of 12 to 36 months. So I don't want to have our debt too low. I want to make sure that we've got an efficient use of capital and cost of capital. So that's something that we monitor all the time. And it's a bit of a 12-ring circus where you've got a lot of deployment opportunities and 20 companies in our portfolio that at any given time could be making plans to sell. So that's kind of the juggling act that we try and have with our balance sheet. And right now, I think it's in a kind of a perfect place.
And maybe if I could squeeze one more in. Obviously, it's early days with FMP in terms of -- obviously, they've had to manage through the DOGE impact. But at least my initial thoughts are the business is probably performing better than expected given what happened. It was interesting, you've pointed to distributions coming back in January. Obviously, you've been talking with them in the background. Is it too early to give any estimate around like the potential size of that? Or will that sort of be dependent on how the business performs in the interim?
So we currently have CAD 1.2 million reflected in our outlook for the next 12 months. That's sort of a baseline low estimate. We think that they've troughed during this quarter. September is fiscal year-end for the federal government. So we're hoping to get some more information as that as we get through that period as far as contracts and spending outlook for the coming year. But we think that from the information we have right now that, that CAD 1.2 million is a fairly conservative estimate that we will -- there's some opportunities that might get higher. But we thought that was the safest place to put a stick in the sand at this time.
[Operator Instructions] Our next question comes from the line of Nathan Poe from National Bank Financial.
A lot of my questions have already been answered. So I guess we'll start off with some housekeeping. Just checking in on the $25 million on NCIB spending this year. How are we feeling about that given Q2 seems just a bit a touch muted versus Q1?
Yes. So we're targeting really a 75% payout ratio, including the NCIB, and we hit that for the quarter. So with some of the timing of the tax payments, some higher transaction costs, the level that we spent during the quarter sort of brought us right to that 75% mark. So also with FMP delaying some distributions that also sort of fed into that number. So really, our target for the year is sort of that 75% mark as opposed to the $25 million.
Got you. That's helpful. And I noticed the commentary on the seasonality of common dividends. Can you give some color on how you see that seasonality going forward, especially as your Q3 revenue guide was strongly lifted by such dividends?
So Fleet does pay a healthy dividend. Last year, I think that was about CAD 14 million. They pay their dividend following their June year-end. So they have a fiscal June year-end. And then post audit, they generally declare their year-end distribution. So that -- the timing of that really does sway the overall -- our $20 million estimate of annual common distributions is very heavily weighted to that one payment, which generally happens in Q3. The other peak, I mean, much lower peak, let's throw out, I don't know, $4 million comes in Q1. So as a lot of our other companies are going through their fiscal year-ends, doing the same process around audit and declaring their year-end dividends and distributions from the common to shareholders. So we also see a bit of a bump up with higher common in Q1. Q2 and Q4 are generally lower. I think this quarter, we had $2 million. Yes. So I don't know if that gives you some color. The other 3 quarters are a little harder, but Q3 is generally about 50% of that common estimate for the year.
Got you. So it's just in particular, Q3 and Q1 more so than else.
Yes, than Q2 and Q4. Depending on timing, I mean, it's hard to predict and driven by the different shareholders and how well the business has done and how comfortable they are with their cash balances and how -- when they decide to declare that. But that's how it's played out the last couple of years generally.
Okay. That's very helpful. And moving on to the actual partners. So commentary on Sono Bello seemed to inflect very positively over the last quarter. What's driving that other than the rollout of the GLP-1 related procedures. Is there anything else behind that?
They continue to add new locations, probably at a slightly slower pace than they did a couple of years ago, just kind of with a nod to kind of the softer consumer spending market. But consumer sentiment in the States has improved quite a bit over the last few months. So that's a positive there. But really, it was dollars per procedure that was responsible for the beat of their budget and their record quarter. And it's not just the GLP-1s. They've added some other products as well. So they've got just a wonderful management team that has been so proactive and adding new procedures. So the skin tightening, the breast augmentation, I won't go through all of them but yes, it's a high-growth story and certainly a very, very well-managed company.
Got you. I appreciate that color. And just one last one. So circling back on that consumer sentiment. With the recent passing of the One Big Beautiful Bill Act, we've noticed through other channels that business sentiment might be improving based on that. In your experience, have you noticed any changes in tone or outlook within your partners?
Not really. The one company in our portfolio that we're watching closely is LMS out of Vancouver. They're the largest installer of rebar in Western Canada, also have operations in California. And the steel tariffs that Karnie has put in for Canada and the quotas for imported steel could be a longer-term issue there. They bought most of their inventory that they need to for their current projects. But going forward, those tariffs and higher costs on steel will have to be passed on to their customers, and that's in their contracts that does get passed on. However, over the long term, do people stop building buildings in Western Canada because of the cost of steel. And so I know there's many lobby groups talking to the Canadian government about that. They're trying to protect the Ontario steel industry. And in the meantime, there's really no steel producers in Western Canada for Western Canadian construction companies to get steel from. All of it gets imported typically from Asian countries. So they're really going to hurt the development industry in Western Canada. So we'll see what happens there. So that's something that we're keeping an eye on. But other than that, very little impact from the Big Beautiful Bill or tariffs within our portfolio.
I'd just add that the one positive to Alaris as opposed to the partners from the Big Beautiful Bill is it does move the interest deductibility back to EBITDA from EBIT. So that will be beneficial for us with regards to our future taxes.
And our next question comes from the line of Trevor Reynolds from Acumen Capital.
Just a couple of quick questions here. I was wondering if you could provide an update on Heritage and where that sits today.
Yes. Heritage has had a nice rebound actually. They've been cash flow positive since March. And we've been putting a lot of work into Heritage, including one of our former partners that now works for Alaris full time as a consultant, kind of a roving consultant to any of our companies that need help. He's been spending a lot of time with Heritage. We think we've got the management team sorted out there. They've got -- their bidding process on new work has improved considerably. That was the big problem a couple of years ago was bidding at what ended up being negative gross margins on new work. That's all sorted out. We've got a good backlog with really strong margins. And so yes, we're cautiously optimistic there. I think we're on a nice path no debt and now profitable. So now it's just going to take time to get the company into a position where we either decide to put it on the market and sell it or if we just want to hold it long term. But either way, we're in control of that company, and things have progressed quite nicely.
Okay. Great. And Sono Bello elected to pick their payments again this quarter. Just wondering if that's the expectation moving forward or maybe any info you can provide on that?
Yes. They've indicated that they will pay all cash in the next quarter. So we'll see how things continue. They're an extremely conservative company. They have a very large cash position, but they like to have that and use the PIK kind of accordingly. So yes, they do expect to pay all cash in Q3.
Great. And then I think last one here, just on FMP. The contracts that are coming back, are those through the government? Or are those -- they're finding new contracts outside of those government ones that they had previously?
These are government contracts. So just as a kind of anecdotal example, some of the contracts were taken down instead of 7 consultants in the department, they took it down to 1. And then a couple of months later, they said, "geez, there's still work that actually needs to be done here", and they added back 2 or 3 people. So you've seen contracts that either fully went away or almost fully went away, bring people back in, and that seems to be continuing where obviously, the current regime needed some big press clippings at the start, but there's work that actually does need to be done. And I think a lot of companies that had things canceled on them are seeing that.
Great. And actually, just squeeze in one more. I guess just on the redemption front, given the strength that some of these companies are having, like I know you guys had kind of bumped out the targets on some of the redemptions previously. Is it -- do you have any sense like is anything moving more near term based on the strength?
I wouldn't say near term. I think it would be tough being in August now, I think it would be tough to see things close before year-end. But I do think in the first half of '26, we'll probably see 1 or 2 redemptions there. And those would be ones that I would very much welcome because they'll show some really significant common equity gains in addition to great returns on our prefs and allow us to pay down debt, redeploy capital very profitably since so much of the income will come from the common equity side of it, which we're not really being valued for in the market today. So those are things that I think are going to be great catalysts for our stock.
And our next question comes from the line of Jeff Fenwick from Cormark Securities.
Steve, maybe one more partner update maybe here on Ohana. Could you give us a bit of an update there? It looks like they had a step-up in their ECR and top line and EBITDA numbers seem to be trending higher. And I know they had some initiatives underway there that look like they were going to boost the performance this year, but what's the update there?
Yes. Things are continuing to go extremely well at Ohana, couldn't be a more stable system. It's why so many private equity firms have tried to or do own Planet Fitness systems in their portfolio. The price increase has worked extremely well. So that is kind of filtering through as new people join. And so we're seeing a nice uptick in year-over-year EBITDA. They are looking at an acquisition right now as well. They've got excess capacity on their debt facility. So we probably won't need to put any more money in, but certainly would increase our expected returns as a large common equity holder when they do exit. So yes, things are going extremely well at Ohana.
Great. That's great to hear. Maybe one question for Amanda. I noticed you changed the approach to how you calculate your free cash flow or distributable cash flow this quarter. Maybe just a bit of color about why you made the change? And does it net out to the same bottom line results? Or will you be -- are you going to be a little higher or lower versus the prior presentation?
So the main shift was just how we present the working capital versus cash and to better align with how that distributable cash flow flows into the payout ratio. Previously, the payout ratio was on a cash basis. The distributable cash flow had a bit of working capital and just to better align that and be able to present it and have one roll directly into another is why we aligned the presentation. It does shift things a little bit. For instance, in the old presentation, the cash flow impact of, say, our bonus payment to staff, which gets paid out in March was hitting in Q1 of 2025 under this new presentation without contemplating the working capital and cash taxes, those will be sort of in the periods paid, if that makes sense.
Okay. And then just on the numbers you provided there, it does look like the payout ratio was relatively high in the second quarter. I think you called out maybe it was higher cash taxes, and I know you had some added transaction-related fees in there. Anything else that was at play? And can we expect those cash taxes then to dip down in subsequent quarters?
Yes. I think we had about $7 million of cash taxes sort of in the portfolio entities. Some of that was a catch-up for 2024 as we filed our Canadian returns. So there was a bit of a -- from a cash basis, some extra payments that went up from that standpoint. So I do think we'll dip down to sort of a more normal level. Also in Q1, we had a refund to come back. So that also on a cash basis for Q1 created a little noise in the distributable cash flow as well.
This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steve King for any further remarks.
Great. Thanks, Jonathan, and thanks, everybody, for tuning in and such great questions. Looking forward to next quarter already, obviously, with a better FX outcome than what we had this quarter, but hopefully, continued portfolio strength and deployment. So thanks again.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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