© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Crown Capital Q1 2023 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 achievements to be materially different from the estimated future results, performance, achievements expressed implied by those forward-looking statements.
For a description of the risks associated with Crown's business, please refer to the company's most recently filed annual information form and its filings from Q1 2023 at SEDAR or the company's IR website. For your information, today's conference is being recorded.
At this time, I'll turn the call over to your host for today, Mr. Chris Johnson. Please go ahead.
Thank you, operator. Good morning. Welcome to today's call. I'm joined as usual by Michael Overvelde, our Chief Financial Officer. It was a solid start to 2023, and we made good progress across all our operating divisions. Revenue from our Network Services group was up 8% over the previous quarter and now represents 43% of Crown's total revenue in the period. The main driver of the revenue was the increase in the network build and community network partners. We are bringing high-speed Internet to small underserved communities across Canada. Our largest project is the network we build in Northern Ontario under the Ontario Connect program and partnerships with the government of Ontario.
Work on this project continues to move ahead with the engineering design for the first phase wrapping up and field activity is ramping up. Good construction weather has also returned to Alberta, and we look forward to completing construction in Reno [indiscernible] this year. Our subsidiary Galaxy continues to see year-over-year growth in revenue from enterprise customers and increased interest with the newer satellite infrastructure. Galaxy is developing world leadership in the development of low-earth orbit satellite technology as well as industrial applications with 5G connectivity.
In Q1, Galaxy secured capacity on OneWeb low-earth orbit constellation, which is a vital component of delivering new advanced Internet services in Nunavut. Related to this, in late April, Galaxy announced its participation in InukNet, a partnership with an indigenous own telecommunications company. InukNet ambitious plan to have all 25 communities of Nunavut connected by the end of 2023. The largest contributor to total revenue in Q1 was our distribution services platform, Go Direct. This segment represented 49% of revenue in Q1 and strong sales growth in this period, up 28% over the previous quarter, mainly due to increased utilization at our newer facilities. [indiscernible] in Calgary that opened in Q3 '22 was essentially empty at the end of 2022 and is now at full capacity and we are assessing options to expand this market.
Reno that was opened in Q4 2022, that was also essentially empty at the end of the year, is steadily adding customers, and we anticipate this will also be at capacity by the end of the third quarter of 2023. And finally, our [indiscernible] that opened in 2021 is also anticipated be at capacity by the end of Q3 2023. Because this business is in a ramp-up phase, profit levels are not indicative of normal operations, which are expected to occur in the quarter following achievement of full capacity.
With our distributed power platform, we had 6 operating project at quarter end, and 7 still under development, expected to become operational throughout the year at different times. Our focus remains on completing the project under development and optimizing the ones that are. As we near completion of projects under development, we continue to review strategic options to this platform, which does include the sale of some or all of the assets. As for the real estate platform and equity, the management company is now a subsidiary of Crown umbrella after restructuring at the end of last year. As part of this process, the new company was formed and acquired the key staff and property management contracts. As we move forward, we're securing other management contracts in addition to pursuing income from our own development projects. We achieved a major milestone with our Barrie project having recently received city council approval for additional density. We believe there's a chronic shortage of house in Ontario, most notably in the affordable category, and our site in Barrie is well situated to serve this segment.
We're now looking to advance this project, which includes reviewing strategic options. On the alternative lending side, good progress is made on the wind down of Crown Partners Fund, with repayments from 3 loans and liquidation of warrants from another previously paid out deal.
There are now our 3 loans remaining, the largest of which is still undergoing in business restructuring, as discussed at our last quarterly call. We believe this business has strong fundamentals and deeply committed and confident management team. So we are hopeful that the situation will be resolved and possibly reverse the loss we incurred the provision, I should say, not the loss, we incurred in 2022.
With that, I'll turn over the call to Mike to review the financials.
Thanks, Chris. Good morning, everyone on the line. Our Q1 financial statements, MD&A were all filed last night. Chris has already touched on the notable developments for Q1. So I'll stick to highlight here as usual. Starting with P&L. Just to remind everyone that we acquired Go Direct in late Q2 of last year. So that business was not in our Q1 2022 numbers, and that is the main reason that total revenues in several expense categories are so much higher on a year-over-year basis this quarter.
Looking at revenues. Our Distribution Services segment was the largest contributor in Q1, with revenue of $8.4 million. It's up 28% quarter-over-quarter, which, as Chris highlighted earlier, was due to an overall increase in capacity utilization and also to some inflationary price increases that came into effect at the beginning of the year. From a profitability perspective, the Distribution Services segment had a net loss before income taxes of $0.9 million in Q1, which includes a nonrecurring gain of $0.6 million that relates to the remeasurement of the long-term debt of one of the Go Direct subsidiaries. I'll note that this segment's pretax loss does include $1.3 million of depreciation expense and $0.4 million of finance costs. As a management team, we're keenly focused on generating improved profitability and cash flow from the Go Direct platform, which we expect will be achieved throughout 2023, largely through increased capacity utilization across the network, which is well underway. Our other main source of revenue as Chris noted is Network Services revenue that increased by 8% year-over-year, by 10% quarter-over-quarter. The year-over-year growth mainly attributable, as Chris mentioned, to the commencement of new projects of Community Network Partners, and that more than offset a decline in the contribution of WireIE, which as you'll recall, experienced a net cancellation of customer contract in mid-2022.
In Q1, this segment contributed net income before income taxes of $0.8 million. That includes depreciation expense totaling $0.7 million. That's down from net income before income taxes of $1.3 million in Q1 of last year, but it's higher than in Q4 was $0.2 million before decommissioning costs. Based on the multiple growth initiatives that Chris highlighted, this segment is well positioned for meaningful top line expansion this year and beyond. As for the other revenue categories, interest revenue is comprised primarily of interest earned by Crown Power Fund, was $542,000 in Q1, up from $319,000 last year. That's on a higher average level of yielding investment in the fund. And fees and other income increased from $451,000 a year ago to $883,000 in Q1, and that's due mainly to the addition of property management revenues earned by our new subsidiary, PenEquity Inc., which again acquired the property management contracts, PenEquity Realty Corp effective at the beginning of the year.
For Q1 2023, our share of Crown Partners Fund earnings totaled $1.4 million. That's a fairly normal or average level, especially compared with the $4.4 million loss that we recorded as our share last year. I will note that the carrying value of our investment in Crown Partners Fund decreased by $7.5 million in Q1 to $27 million, and that this decrease was due to loan repayments received by the fund and distributed out to its limited partners, including Crown. Our share of distributions from the fund in Q1 was $8.9 million. And of course, that more than offset our $1.4 million share of its earnings. All of this amounted to a modest net loss in the quarter of $0.7 million or $0.13 per basic share compared with a loss of $2.6 million or $0.38 per basic share in the same period last year. Total equity at quarter end, $49.9 million at $8.85 per basic share, down slightly from $8.98 at year-end. As previously announced during Q1, we entered a new senior secured corporate credit facility with Canadian Western Bank. It's up to $40 million, includes up to $30 million of term debt and up to $10 million on our revolving credit line, plus a letter of credit facility. And this replaced our previous credit facility and effectively doubled our credit capacity for $20 million to $40 million. As of the end of Q1, we had $25 million drawn against the term loan, representing our initial advance and nothing drawn on the operating loan. We also had a cash balance of $16.8 million on a consolidated basis, of which $2.5 million is the property Crown Power Fund.
We were carrying more cash than usual at the end of Q1 for 2 reasons. One, that $25 million loan advance provided us with a surplus cash balance after repaying our previous corporate loan; and two, is that we received a sizable distribution from Crown Partners Fund close to quarter end, representing the pass-through proceeds it received from some loan repayments. On the subject of liquidity, I'll note that in April, we announced that we're seeking approval from debenture holders to amend certain terms of our convertible debentures, including extension of the maturity date of the debentures from June 30 this year to December 31, 2024, plus an increase in the interest rate from 6% to 10%. And the details of the proposal and the benefits for debenture holders are well laid out in our filings on this. For Crown, an extension of the maturity date of the debentures will improve our near-term liquidity, while providing us with additional time to raise capital from the wind down and/or sale of noncore assets, the proceeds of which will be available to help fund the cash repayment of the debentures. Special meeting of the debenture holders in respect to this proposed amendment is next week, May 16, after which we plan to issue a release announcing the results.
In closing, thank you again for your time and continued interest in Crown. 2023 is shaping up to be a year of strong growth for our company, driven by the initiatives Chris highlighted in our 2 main segments, and we look forward to updating you on developments with our Q2 earnings in August. So with that, operator, we'll turn it over to questions.
[Operator Instructions] Your first question comes from Nick Corcoran from Acumen Capital.
My first question is on the Network Services. Is this progressing as you expected? And when do you expect shovels be in the ground?
Yes, it is. Well, I didn't have much of an expectation when we first were awarded the contracts. But as we got the project management teams up and running and got a scale of how much engineering and design had to go into it, absolutely, what's happening now is meet our expectations and shovels will go in the ground imminently. These -- it's not few -- many different components to each segment of the build. So with the view that we're going to get this built and turned on as quickly as humanly possible. So ground work can start imminently and others will kind of take place over July maybe to finish it.
And how should we think about the revenue build as the project kind of progress through the phases.
I think it should build pretty like -- it could be literally to the house we're passing. I think in the markets we're going in, the penetration rates are fairly predictable. So it's just -- it's a question of as we pass, make available houses, we expect the customers to be there in a certain percentage. I don't have the exact schedule in terms of how many turn on by month or even by quarter for this year. It's just -- it starts relatively small, and then really it's through 2024 is the bulk of the connections are being passed and then falling into 2025.
That helps. And then maybe thinking about distribution services. Is there any seasonality in that business that we should think about?
Some. I would just say, some customer seasonality like there's -- and some overall macro like you're essentially tracing a retail cycle somewhere through it, not that we're fulfilling retail, but customers are buying things in the same cycle that affects retail. So definitely, the Q4 is the busiest and there's a bit of a shadow period in Q1. And then you have certain customers who are highly seasonal, like that if one -- for example that we see a bump around Mother's Day, and we see a bump around Christmas, and they're pretty quiet throughout the rest of the year. And there's others who just are very, very consistent that it's more of a commodity product that their consumers buy on recurring fulfillment, re-fulfillment basis. So it's pretty steady. So if you look across the business, it's going to have a bit of a wave up in Q4, down in Q1, but the rest of it should be pretty steady.
That helps. And then in that businesses, the warehouses still up, how should we think about the fixed versus variable costs and the underlying profitability?
Well, the fixed cost is really just lease cost and a bit of SG&A. We've definitely scale now that the SG&A is not really a mover. So as we incrementally open warehouses, it's just that fixed cost of lease. It varies by the customer mix and what you're doing and how you look at your full cycle revenue of storage versus packaging versus freight revenue. But I would say, on average, 50% give or take, gets you to breakeven and you start making money. So clearly, in my remarks, like still warehouses, that's not full revenue, like what you'll end up having is a loading in phase of customers you're receiving, but they're not processing orders out of there, so we're not able to pick up the service and the freight revenue. Once we're full, then your, a, you're getting 100% of your storage revenue, but you're also likely fully operational on your service revenue and your freight.
And think about the 3 warehouses you talked about in Calgary, Reno and the other one. Where -- or sorry, Columbus. Are you processing orders in all those warehouses or are you just kind of the loading phase?
Yes. So Reno still in loading phase. Calgary flipped in April to fall both ways. That won't happen very quickly, but we were -- it was loading fairly slow, and I just got land, and then we've got a lot of other market appetite for that for Calgary. So we are very, very full -- over full there right now. Reno, as it is still loading, and Columbus has been doing -- it's a combination. It's a big facility. Like, it's -- by comparison, Columbus is 250,000 square feet, Calgary is 50 and Reno is 100 approximately. And so it's just -- Columbus is -- it's been doing both ways for a while.
Okay. Then you talked about potential expansions in Calgary. Can you give a little bit more detail on the timing about?
Yes, we're looking. It's just a general theme across North America's distribution, housing and logistics space is very, very tight. So it is -- from when we signed our lease last year, this year, we've seen a move. We've seen a move in every one of the markets we've been in except in Reno, which is pretty reason, just rates up significantly. So we are dealing with that, and space options are not plentiful. But I do think that we'll probably end up finding short-term solution for just the current -- is on a sort of month-to-month payable basis before we make plans to do a significant scaling in that market, which may happen by the end of the year.
[Operator Instructions] And there are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.