Alaris Equity Partners Income Trust

Good day, and thank you for standing by. Welcome to the Alaris Q1 2025 earnings conference call, 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 will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Amanda Frazier, Chief Financial Officer, please go ahead.

Thank you, Tanya. Thanks, everyone, for joining us this morning. Here with me is Steve King, President and Chief Executive Officer. 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 cdarplus.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 these non-IFRS measures. Now for the Q1 results. Net book value increased by 12 cents per unit to $24.34. This increase was driven by 50 cents per unit of earnings offset by a 34 cent per unit distribution to shareholders. Partner distributions and transaction fee revenue of $43.7 million. was ahead of our previous guidance of $42.5 million and 13% higher than Q1 of 2024. The guidance B was driven by higher than expected foreign exchange rates and common distributions. As compared to the prior year, the increase was driven by the new and follow-on investments made over the last 12 months and an overall 4% increase in preferred distributions due to the reset metrics. Net distributable cash flow for the quarter increased by 19.1% to $30.4 million or $0.67 per unit from $25.5 million or $0.56 per unit in the same period of 2024. In addition to the $0.34 per unit dividend as part of the NCIB, approximately 219,000 units were repurchased and canceled for an average price of $19.60. Inclusive of the NCIB repurchases, the actual payout ratio for the quarter was 59%. With regards to partner updates, as a result of a recent third-party equity transaction entered into by Shipyard, the multiple of earnings used in our fair value calculation was adjusted to reflect this recent market data. The business, driven in part by their acquisition of Fulgren Mortine in 2024, has increased in size as well as expanded their service offerings and their customer base. This adjustment increased fair value of the common equity by $8.3 million U.S. Sonobello has been impacted by softening in consumer discretionary spending as well as continued higher customer acquisition costs. Given the current market uncertainty and recent trends, we have adjusted the forecast earnings for 2025 as well as the exit timeline reflected in our fair value model. The impact of these adjustments was a decline of fair value of $13.7 million U.S. For Lohana, growth in memberships at mature clubs, as well as the membership ramp at their new locations, has increased both revenue and EBITDA, resulting in a fair value increase of $5.9 million U.S. Subsequent to the quarter end, FMP was notified of the suspension of certain key contracts, primarily due to significant reductions in U.S. federal spending and the cancellation of numerous government contracts. The suspension is expected to have a material adverse impact on FMP's near-term financial performance and outlook. As a result, we do not expect them to maintain distribution payments for the remainder of the year. FMP's management is actively evaluating mitigation strategies and we continue to assess the impact on the company's fair value based on its long-term business outlook. Despite the recent loss, FMP is expected to achieve positive EBITDA and cash flow on a pro forma basis, and the company's lack of debt is expected to support its recovery. Despite the adjustment to below one for FMP, the portfolio has maintained its weighted average ECR of approximately 1.5 times, with 10 of 20 partners continuing to be above this threshold. Of our 20 partners, 12 either have no or less than one turn of debt as compared to EBITDA. Based on our current evaluation of the portfolio, no other companies have significant risks as a result of the changes in U.S. procurement policies or the U.S. tariffs. While Edgewater's business does have exposure to government contracts, this area has not been a primary target of DOGE and they have not seen any negative impact to the business or their related contracts. Our current outlook calls for $41.4 million of revenue in Q2. After reflecting the expected deferral of the FMP distribution, our 12-month outlook for revenue is now $178 million and includes $19.1 million in expected common distribution. We anticipate this change to take our payout ratio up just slightly to between 60 and 65%. As a result of the accounting standards requirement to revalue the U.S. acquisition entity at the quarter end foreign exchange rate. The portfolio is subject to swings caused by unrealized foreign exchange gains and losses. During the quarter, book value was impacted by a foreign exchange loss of 11 cents per unit as compared to a gain of $1.35 per unit in Q4 2024. This sharp decline in the Canadian dollar over the course of Q4 and its offsetting recovery to date in 2025 is expected to create unrealized fair value losses which will impact netbook value. In its source currency, we expect continued portfolio performance and netbook value growth from the U.S. acquisition entity, but our anticipating volatility in the U.S.-Canadian exchange rates will cause some noise in our financial reporting in the coming quarters. On a similar note, in April, the senior credit facility was amended to convert the facility from $500 million Canadian to 450 million U.S. This change allows for easier management of the facility by removing the FX impact of the recently rising and falling exchange rates on outstanding draws, as well as providing incremental capacity of approximately 95 million U.S. or 130 million Canadian. We currently have 290 million U.S. drawn on the facility, leaving 160 million U.S. of undrawn capacity. And on that note, I will turn it over to Steve for his comments.

Great. Thanks, Amanda. Obviously, the key metrics for our company continue to be very strong in Q1. Payout ratio below 60%, including the capital spent on share buybacks. Strong overall portfolio health with weighted average ratio is still at 1.5, even taking FMP into effect. And growth in distributable cash of 19% year over year, very strong numbers. Our defensive strategy as well as a diversified portfolio, very little debt in our operating companies, the required service nature of the industries that we are in and the highly aligned owner-operator model continues to shield us from a volatile economic environment. Within that strong portfolio there were two areas of softness that I will highlight. The first being body contours who operate in the cosmetic surgery industry. BCC has experienced a soft consumer market over the last several months that has impacted both their rate of revenue growth and their margins. The company is extremely well run and are operating well above industry metrics, but the current soft market will likely create a delay in the eventual exit because of a measured reduction in new location and product offering growth. Eventual value is very much still intact, but likely pushed out a year, which is why the present value calculation resulted in a decline. As discussed on our last call, FMP in Washington was the one company in our portfolio that had risk of DOGE cuts. After feeling like they had weathered the storm, the company was hit by these cuts literally just a couple of days ago. It's far too early to speculate on the quantum and timing of replacing those lost contracts, but all of these following facts give us significant optimism for a full recovery. The company is exceptionally well run with industry-leading professionals and decades-long track record. FMP has zero debt and has cash on the balance sheet that will give them ample time to pick up new work. At current revenue levels, the company is still profitable and has a solid platform to build off of. Doge cuts are also creating opportunities for FMP with affected government contractors that need the exact human capital expertise that FMP provides to navigate through this volatile period. Letting go of an extraneous staff while retaining the right people is right in FMP's core competency and they've already put out large bids on contracts that would go a long ways to building back their book of business. History has also shown that cuts of this magnitude are typically followed by smaller amounts being added back by the government as they realize that some of the things that they cut are actually needed. Also, I would say that the beauty of our model is that while the hit to FMP is short-term and not material, it is everything to the people that own and operate FMP. Needless to say, they are on it. Just as we did with BCC, OHANA and LMS when those businesses were hit with temporary external shocks, Hilaris will do the right things by FMP and preserve long-term value by giving them the flexibility that is needed. We have full confidence that this asset will have a full recovery. Extremely important to note that the weighted average coverage ratio and our corporate payout ratio include the impacts of FMP situation and because of the well diversified nature of our business, there is very little impact on our overall portfolio and particularly on our dividend stream. On to the positive side, the benefit of the current environment is really a plethora of opportunities for Alaris in high quality assets. Just as was the case coming out of COVID, our structured equity, which does not dilute business owners as much as traditional private equity, becomes highly sought after. Acquisition opportunities for our partners become more available, and potential new deals are plentiful. We have bids outstanding that involve just Alaris as principal, and also bids that include third-party capital co-investing with us. So, LaTanya, I'll turn it over to you for any questions that there may be.