Alaris Equity Partners Income Trust

for standing by and welcome to the Alera second quarter 2025 earnings release conference call at this time all participants are in listen-only mode after the speaker's presentation there will be a question and answer session to ask the question during the session you'll need to press star 1 1 on your telephone if your question has been answered and you'd like to remove yourself from the queue simply press star 1 1 again As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Amanda Frazier, 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 CDAR at cdarplus.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 MDA. 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-right 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 77 cents from Q1. We saw 59 cents per unit in earnings growth, offset by 98 cents 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 34 cents per unit. Revenue and operating income grew approximately 21% year-over-year to $34.5 million, driven by strong performance from nine partners, resulting in a $25.5 million net unrealized fair value gain that was offset by the impact of a $14.6 million U.S. 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 $21.5 million U.S. follow-on preferred equity investment in the shipyard, bringing our total shipyard investment to $108.5 million U.S. 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 nine of our partners, supporting improved revenue and operating income. Our weighted average earnings coverage ratio remains healthy at approximately one and a half times, with 13 out of 20 of our partners maintaining no debt or less than one time 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 cancelled 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 have 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. They did not need to defer as much of our distributions as expected. They are 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 it's a company with no debt, no capex, and a world-class management team. So we're very confident there. BCC, Sunabello, had their most profitable quarter in their company's history for the quarter ending June 30th. 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 is very much a long term trend. 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. Overall, a very good environment for us. You know, 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 X that out when they look at our results. So, Jonathan, we're happy to open it up for questions.

Certainly. And as a reminder, ladies and gentlemen, if you have a question, please press star 11 on your telephone. Our first question comes from the line of Gary Ho from Dijardin Capital Markets. Your question, please.

Great. Thanks. Maybe for Steve, you just mentioned Sonobello and the record quarter this quarter. So it sounds like there were location ads and you talked about the increased dollar per procedure. I know last quarter you pushed out the monetization expectation, the timeframe. 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 the 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?

Yeah, Cressa is a company that is, is acquisitive and is working on things. PEC, one of our newer partners, the electrical contractor out of Boston, they will be acquisitive as well. We actually have, I would say, probably six to eight 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 and or new partners that you're looking at?

Yeah, we expect a healthy dose of both. So, you know, as I mentioned, you know, you never count your chickens because, you know, 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 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.

Okay, great. Those are my questions. Thank you.

Thanks, Greg. Thank you. And our next question comes from the line of David Pierce from Raymond James. Your question, please. Morning, guys.

Just going back to Sonovello, 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 one-to-one, 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 timeline slightly last quarter, not just for some softness that we saw in the market for Sona 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. You know, we'll continue to see how they roll out that new program. I don't know, Steve, if you want to add.

Yeah, and on the ECR, David, 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 yeah, that would likely be the reason there.

Okay, thank you. And just when I think about the balance sheet, like when you look at leverage internally, are you viewing it 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 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, we have $200 million of room on the current credit facility, 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. You know, between all of those avenues, I think that we're well positioned to, you know, to meet the requirements of the pipeline that we see ahead of us.

Yeah, I'm pretty happy right here, David. Having 200 US of capacity is a good place for us. It'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 five years. But if you look at our... kind of timeline as a company. We started common equity investments along with our prefs about six years ago. And so, you know, using kind of a typical six-year hold, which we've had, you know, 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, you know, use of capital and cost of capital. So, you know, that's something that we monitor all the time. And, you know, it's a bit of a 12 ring circus where you've got, you know, a lot of deployment opportunities and 20 companies in our portfolio that, you know, 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, you know, obviously they've had to manage through the Doge impact, but at least my initial thoughts are the business is probably performing well. better than expected given what happened. You pointed to distributions coming back in January. You've been talking with them in the background. Is it too early to give any estimate around the potential size of that or will that be dependent on how the business performs in the interim?

We currently have 1.2 million Canadian reflected in our outlook for the next 12 months. That's sort of a baseline low estimate. We think that they've dropped during this quarter. September is fiscal year end for the federal government, so we're hoping to get some more information as we get through that period as far as contracts and spending. outlook for the coming year, but we think that, you know, from the information we have right now, that that, you know, 1.2 million Canadian is a fairly conservative estimate that will, you know, 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.

Thank you. That's helpful. I will pass the line. Thanks, David.

Thank you, and as a reminder, ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Nathan Poe from National Bank Financial. Your question, please.

Good morning, guys. Morning. 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 NCIP spending this year. How are we feeling about that given Q2 seems just a bit, a touch muted versus Q1?

Yeah, 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 FNP, you know, just 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.

Gotcha. That's helpful. And I noticed the commentary on the seasonality of common dividends. Can you get some color on how you see that seasonality going forward, especially as you're Q3 revenue guide was strongly lifted by such dividends?

So Fleet does pay a healthy dividend that, you know, last year I think that was about $14 million Canadian. 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, you know, 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. Yeah, so I don't know if that gives you some color. The other three quarters are a little harder, but Q3 is generally about 50% of that common estimate for the year.

Gotcha. So it's just in particular Q3 and Q1 more so than, you know.

Yeah, then Q2 and Q4. Depending on timing. I mean, it's hard to predict and driven by, you know, the different shareholders and how well the business is done and how comfortable they are with their cash balances and how, you know, when they decide to declare that. But that's how it's played out the last couple years generally.

Okay. Thank you. That's very helpful. And moving on to the EFL partners, so commentary on Sanobello 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 for the beat of their budget and their record quarter. It is not just the GLP-1s, they have added some other products as well. They have got just a wonderful management team that has been so proactive and adding new procedures. The skin tightening, the breast augmentation, I won't go through all of them, but yeah, it's a high-growth story and certainly a very, very well-managed company.

Gotcha. I appreciate that color. And just one last one. So circling back on that consumer sentiment and 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 are watching closely is LMS out of Vancouver. They are the largest installer of rebar in Western Canada, also have operations in California and the steel tariffs that Carney 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 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 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 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.

Great color. Thank you very much. I'll turn it over.

Thank you, and our next question comes from the line of Trevor Reynolds from Acumen Capital. Your question, please.

Hey, guys, just a couple quick questions here. I was wondering if you could provide an update on Heritage and where that sits today.

Yeah, 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, yeah, we're cautiously optimistic there. I think we're on a nice path. No debt. and, uh, and now profitable. So, uh, now it's just going to take time to get the company into a position where, you know, we either, we either decide to put it on the market and, uh, and sell it or, uh, or if we just want to hold it long-term, but either way, we're, we're in control of that company and, um, uh, things have progressed quite nicely.

Okay, great. And, um, Sona Bello, uh, elected to, uh, 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.

Yeah, 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 pick kind of accordingly. So, yeah, they do expect to pay all cash in Q3.

Great. And then I think last one here, just on FMP, the contracts that are... are coming back, are those through the government or are they finding new contracts outside of those government ones that they had previously?

These are government contracts. kind of anecdotal example, you know, some of the contracts were, you know, taken down instead of seven consultants in the department, they took it down to one and then a couple of months later they said, geez, you know, there's still work that actually needs to be done here and they added back, you know, two or three people. So, you know, 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, you know, 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 cancelled on them are seeing that.

Great. And actually, just squeezing 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. 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, you know, 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 one or two 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.

Great. Thanks for taking my question. Thank you. And our next question comes from the line of Jeff Fenwick from Cormac Securities. Your question, please.

Hi. Good morning, everyone. 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 looked like they were going to boost the performance this year. But what's the update there?

Yeah, 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 yeah, things 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. Does it net out to the same bottom line results or are you going to be a little higher or lower versus the prior presentation?

The main shift was just how we present the working capital versus cash. 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, you know, 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?

Yeah, 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 return. So there was a bit of it from a cash basis, some extra payments that went out 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.

Okay, great. That's all I have. Thank you.

Thank you. 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.