Alaris Equity Partners Income Trust

Good day and thank you for standing by. Welcome to the Alaris first quarter 2023 earnings release conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amanda Fraser, CFO.

Thank you, Josh. We appreciate everyone taking the time to join us this morning as we present our Q1 results. I'm joined on this call by Steve King, President and Chief Executive Officer of Alaris. Before we begin, I'd 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. This forward-looking information is based upon a number of important factors and assumptions. and therefore 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 under the headings Forward Looking Statements and Risk Factors, copies of which are available on CDAR at cdar.com as well as our website. Non-IFRS data is also presented and may differ from the way other companies present such data. As with the forward-looking statements, please refer to last night's press release and our MD&A for more clarification regarding non-IFRS measures. Our Q1 revenue of $36.7 million was just shy of our $37 million guidance and represents a 7% decrease over the prior year. In the quarter, LMS deferred $1.5 million of distributions, which contributed 3.5% to the year-over-year decrease. As discussed in previous quarters, as a result of the increase in steel prices, LMS's margins have been compressed and gross profit has declined. Although LMS has worked to include steel price escalation features in new contracts, they still have to work through current lower-rate contracts and on-hand higher-priced steel in inventory. The latter half of the year, where projects will include lower-priced inventory and higher-priced contracts is expected to improve gross margins and return LMS to paying current distributions. make-up payments on the deferred amounts are expected to begin in 2024. Also contributing to the decrease was the previously announced strategic transaction involving BCC and Brookfield. The newly acquired convertible preferred units provide a minimum 8.5% yield, which is $12.3 million U.S., on convertible preferred paid quarterly. with the ability to participate in common distributions in excess of 8.5% if paid, as well as an annual $1.5 million transaction fee. Cash from operations prior to changes in working capital of $17.5 million decreased 50% as compared to the prior period, primarily as a result of an accrual for the litigation relating to sandbox transactions. While we continue to believe we would have ultimately prevailed in the litigation, Given the inherent risks associated with the process, its protracted nature, and associated legal costs, which were approximately $4 million in the 12 months ended December 31, 2022 alone, the decision was made to proceed with settlement discussions. After excluding all legal fees and costs associated to the sandbox litigation in the respective quarters, cash from operations prior to changes in working capital decreased by 15% as compared to Q1 2022, as a result of lower revenue and higher G&A. Aside from the litigation-related costs, the increase in G&A is primarily driven by the timing of expenses incurred with $900,000 of an increase in G&A due to a change in the mechanics of the bonus calculation. Bonus accruals are now being made quarterly and driven by a percentage of total cash flow available for distribution, as well as $160,000 related to the timing of travel and donation expenses. Another $350 of incremental costs related to the amortization of insurance premiums purchased in Q3 2022 drove up G&As in this particular quarter. Q1 is generally a quiet quarter for fair value adjustments given the proximity to our year end. The Trust had a net unrealized and realized gain from investments in Q1 2023 of $0.8 million. The main driver is the increase of $4 million USD in the fair value of fleet. Fleet's backlog of syndication work for 2023 and into 2024 continues to increase with new contract wins. This growth in backlog and its impact to Fleet's outlook, coupled with strong results during 2022 and Q1 2023, continue to increase fair value. The increase was partially offset by less significant decreases to fair value of Planet Fitness, as it remains the most sensitive of our partners to continued rate increases. as well as Axient as they adjusted their outlook for a slower 2023 than previously forecast. We deployed a further $36.5 million USD in the quarter to new partner FMP and currently have $203 million of senior debt outstanding, resulting in $247 million of available capacity for new transactions. Our portfolio continues to perform well and has maintained a weighted average ECR of over 1.6 times following the revision to BCC based on the new transaction. 11 out of 19 of our partners have an ECR over 1.5 times and 7 of those are over 2 times. LMS is the only partner below 1 and as mentioned earlier, we expect them to be back above 1 in the latter half of the year and expect payment of deferred distributions in 2024. Our current outlook calls for $36.1 million of revenue in Q2 and a 12-month run rate of $156.7 million. Our G&A expectations have decreased from $17.5 million to $16.5 million to reflect the expected reduction in ongoing legal fees. This amount is expected to continue to decrease as we wrap up the settlement agreement. I will turn it over now to Steve for his further comments.

Great, thanks Amanda. The focus for Alaris remains on the health of our portfolio and I'm very pleased to say that we're seeing still very good strength across the board. Some small themes that investors may be interested in, we've seen some low-level weakness in our business services companies particularly in our IT consulting businesses. Part of this may be a tightening of corporate budgets in America but I believe that more of it is actually just the reflection of a record year that they're all coming off of for 2022. Current performance is still very strong in comparison to previous years, including before the pandemic. On the flip side, we're seeing very strong performance from several of the companies in our portfolio. They were showing weaknesses a few years ago. Brown and Settle, Edgewater, Fleet, Heritage, all putting up excellent results. This is exactly why we create a portfolio. You're going to have different kinds of companies doing better and worse at different times. Two of our largest investments, BCC and Planet Fitness, are still showing very strong results in the personal care space, likely powered by very strong employment data in the U.S., and both of them being at low price point providers. Having an ECR across the portfolio of 1.6 times, which is what we were last quarter as well, and steady results coming in for early 2023, we feel very comfortable with where we're sitting with our portfolio. As Amanda mentioned, we made the move to voluntarily defer LMS's distributions this quarter to ease the burden for them while they work through their high-priced inventory. LMS has been a partner of ours for 16 years and has an outstanding track record of working through the inevitable ebbs and flows of their business. We are highly confident that they are on a visible path to resuming and catching up on payments and as we see record levels of daily volumes and a record backlog that goes out for many, many months. We were very pleased to finally close the FMP transaction recently. We had actually closed this transaction in escrow in December but it had to wait for a final US government approval before making it official. The delay in receiving FMP distributions impacted our results in Q1 as we were not quite able to replace the lost revenue from redemptions from late last year. We are still sitting on a large amount of capital in our debt facility that we expect to deploy over the coming months which will have a positive impact on our go forward results. The private equity market remains relatively slow in the kind of deals that we're looking for. There are many deals in the market but most of them are PE companies looking to sell or refinance their holdings because of the inability to refinance the debt that they have put on these companies over the last five years, typically in very large amounts which are no longer available. The US debt markets are extremely tight which is absolutely a huge benefit to Alaris. I remain confident that we'll exceed last year's deployment of $150 million. So we're happy to open it up to questions at this point, Josh.