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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Second Quarter 2018 Results Conference Call. Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian security legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. For a description of the risks associated with Crown's business, please refer to the company's filings for Q2 as well as its IAF at sedar.com. Chris Johnson, Chief Executive Officer, you may begin your conference.
Thank you. And good morning. Welcome to Crown Capital's second quarter 2018 results conference call. I'm joined today by Michael Overvelde, our Chief Financial Officer. I'll start today's call on the highlights of the quarter before Mike reviews the financials, then we'll open up the call to questions. The second quarter was the best quarter in our history we achieved in terms of the new capital deployed, in terms of also the total revenues. We completed four new loans for $57 million so we now have roughly $265 million at work in 16 investments. As Mike will review in more detail, the continued growth in our investments and fee-generating assets translate into record quarterly revenue and strong cash flow increases. In our Special Situations portfolio, we deployed $37 million in 2 new investments. We completed a $12 million term loan with DATA Communications, a company which provides integrated business communication solutions such as direct marketing and commercial print services. DATA is a well-established business with a diversified long-standing blue chip customer base and a history of strong free cash flow. DATA used the proceeds to acquire a company called Print Out Group, which is consistent with its strategy to expand through acquisitions and transition into a marketing communications focused provider. Also in May, we completed a $25 million term loan with Persta Resources, a Calgary-based natural gas and oil exploration company. Persta has first-class assets in an attractive region and a highly accomplished management team. Despite kind of well-known challenges in the market price for natural gas, Persta has been able to generate significant free cash flow due, in large part, to its low-cost production costs. The company has a low-risk repeatable development program and has project significant increases in production in the coming years. The second quarter also saw us complete several on balance sheet investments including 2 long-term loans and the establishment of the Crown Power Fund. We completed a $10 million term loan with Mill Street & Co. Mill Street acquires small- and mid-sized businesses primarily in southern Ontario. It's capitalizing on the growing market for private businesses seeking an experienced and reputable succession partner. The Mill Street team has built a diversified portfolio that generates strong and growing cash flow. We also completed our third long-term loan in May, a $10 million, 10-year term loan with WireIE, which develops and manages carrier-grade data networks to underserved communities in rural and remote areas. Recent government legislation has mandated high-speed broadband as an essential service, creating a significant market opportunity. WireIE builds, owns and operates the data networks for blue chip customers in the telecomm carrier, oil and gas, utility and government industries. Their business generates high-quality cash flow with significant revenue visibility, which created a unique opportunity to structure this transaction as an income streaming facility with another niche where we see substantial opportunity to deploy additional capital as WireIE builds out its business. A key highlight in the quarter was the launch of our new fund, Crown Capital Power Fund. Through the process of underwriting a potential long-term investment, we uncovered a tremendous opportunity to create a vehicle to provide electricity under long-term contracts to small- and mid-scale electricity users, essentially acting as a private utility. In doing so, we can build a portfolio of long-term contracts with profitable, well-established businesses that would deliver an attractive utility-like recurring cash flows. Over the past 10 years, commercial electricity users in numerous regions across North America have experienced substantial price increases. In Ontario, as an example, electricity prices have risen by over 70% in the last 10 years. Because of the aging distribution system and other factors, prices are expected to continue to increase, which creates challenges for commercial enterprises that are heavy users of electricity. To address this problem, private operators are building onsite integrated electricity platforms, or IEPs, to provide electricity at a lower cost and more predictable. These are onsite generation that can replace the public grid. The Crown Power Fund will only use IEPs and enter into long-term contracts, typically 15 years, to supply electricity to commercial users. Our model is to partner with experienced operators to manage the sales, installation and servicing of the IEPs, and Crown will act as defensive partner and funding platform as they scale their businesses. The fund's first operating partner is Oom Energy Group. Oom, O-O-M, is an early entrant into this private utility market and has established a solid reputation and significant expertise, having built and maintained over 40 IEPS ranging in size from 50 kilowatts to 40 megawatts. Crown has initially committed $15 million to the Crown Power Fund, which will be used to finance the near-term deployment of numerous IEPs. Oom has a robust and growing pipeline of projects, and we've also identified multiple other operating partners that would be suitable for the fund. Crown's investors in this private utility model offers a new growth channel. There are countless commercial targets in Ontario alone. The market needs capital and we believe Crown Power can supply it and generate very attractive returns for our shareholders as a co-investor and fund manager. We started the process of raising third-party capital from LPs and the early response has been very encouraging. The investment in Crown Power and the four deals we talked about earlier, we completed more than $70 million of new transactions in the quarter, make it the most active period in our company's history. In addition to deploying new capital, we're also pleased to announce the full repayment of our loan to Petrowest in the second quarter. While the liquidation of a company is disappointing and it's certainly an unfortunate outcome for many, we are committed to delivering superior results for our investment partners and our shareholders. We were pleased with the performance of our recovery and we generated gross IRR of more than 18% on the transaction. We've also been hard at work on continuing to develop our capital sources. During the quarter, we completed a $20 million convertible debt offering, which was used to fund a portion of the new investments. And last month, we announced a $75 million upsizing to our Special Situation Fund, bringing the current total capital to $300 million. We made 2 other significant changes in this fund. We extended the investment period to the end of 2019 and increased the maximum size of the fund to $500 million from $300 million previously. The returns to this fund have been impressive and we continue to see strong demand from our current and prospective limited partners. With that, I'll turn over the call to Mike, who will review the financial results.
Okay, Chris. And good morning, everyone on the line. I'll just quickly cover the highlights for the quarter here. As a reminder and as we discussed on our last call, we are now reporting under IFRS 9 and, as a result, some of our debt investments are now carried at amortized cost with other debt investments and all equity investments carried at fair value through profit and loss. Previously, you recall all our assets had been treated at fair value through profit and loss. Comparative periods prior to January 1st, 2018 were not restated for the impact of IFRS 9. So just a reminder as you're looking at the year-on-year comparisons. In addition, I'll just note that the financing fees earned in relation to debt investments carried at amortized cost are now deferred and amortized over the term of the related loans as part of the effective interest rate and are no longer recognized immediately in revenues. And in Q2, that applies to fees generated on the DATA Communications, Persta and the WireIE transactions as well as to certain other amendment fees that we received in the quarter. Revenues for Q2 reached a quarterly record of $9 million compared with $7.7 million in Q2 of last year mainly reflecting higher interest revenue resulting from the portfolio expansion activity that Chris has reviewed. While we continue to build a solid base of interest revenues as the portfolio grows, with interest revenue of $6.3 million in the quarter, up 12% from last year, you'll note that last year's interest revenue included about $1.1 million of interest earned from NCOF II, a fund that was wound down in the mid-2017, with pretty significant growth coming from our other investment pools. If you're looking year-over-year, the main difference in total revenue was a shift in net gains in fair value investments, which was a gain of $1.1 million in the quarter compared with a loss of $2.0 million last year. The most significant contributors to the net change in unrealized gains in the 3 months ended June 30th, 2018 were a net gain on the Touchstone royalty as a result of extending the terms of the royalty agreement by one year, partially offset by a decrease in the fair value of the Baylin warrant and modest increases across several of the other fair value carried loans. We also recognized a realized gain of $0.2 million in Q2 in relation to the repayment of the Petrowest loan, which had been carried at amortized cost. Fees and other income were $1.6 million in the quarter. That's down from $3.1 million last year. Again, prior to adopting IFRS 9, under the old accounting standards all the strong activity on the investment side in Q2 2018 would have resulted in materially higher revenue from this segment. I'll highlight that you can find some disclosures on the cash impact of the fees that we've received in the quarter in both the Statement of Cash Flows and in the Fee and Other Income table that you'll find in the MD&A. For Q2 2018, you'll see that we received finance fees of $890,000 in aggregate that had not been included in the revenue line for the period. Total expenses were $2.5 million in the second quarter. That compares to $3.0 million in Q2 2017. No material changes here to highlight other than some additional costs in G&A related to the formation of Crown Power Fund, which were absorbed in the quarter. Adjusted EBIT increased to $3.6 million in the quarter. That compares to $3.1 million in Q2 of last year. Total comprehensive income net of non-controlling interest was $2.0 million, or $0.21 per basic share, in the quarter, compared with $1.8 million, or $0.19 per basic share, in Q2 of 2017. Total assets at the quarter end increased almost $278 million. That's up from $229 million at year end including an increase in carrying value of investments to $243 million from $181.3 million. Total equity was $104.3 million or $11.03 per basic share. That compares with $10.88 per basic share at the end of last quarter. As Chris mentioned, the growth in our fee-generating assets drove strong increases in our cash flow. It provides strong support for the $0.15 per share dividend that we declared yesterday. At quarter end, we had access to approximately $55 million for additional portfolio investments including our working capital, about $11.5 million of committed capital available to CCF IV from parties other than Crown, and amounts available under our credit facility. As Chris highlighted, we completed the $75 million upsizing to Crown Partners Fund in July, which has further increased the capital available for investments. As this money is put to work in our portfolio growth, we'd expect to see a continued increase in interest revenue, although the impact in fees and other income might be muted a little bit compared with actual fees received and compared with how revenues might have been recognized prior to the adoption of IFRS 9. I'm going to turn the call back to Chris for his closing comments.
All right. Thanks, Michael. So looking ahead, we are well positioned for continuing the growth in the coming quarters. We've expanded the portfolio significantly over the past year and have increased our fee-generating assets, which has resulted in growing revenue base and cash flow. With the changes to our Special Situations Fund, we have substantial capacity to continue add scale and diversification through investments in high-quality mid-market companies. And demand for our non-dilutive capital is strong and is reflected in a robust pipeline across multiple sectors as this demand is matched by strong demand from institutional investors for exposure to private credit and direct lending strategies. In addition to expanding our existing business, our core business, we're very excited by the prospects for Crown Power Fund. We're starting to focus a significant amount of time and capital to build up this platform. We're at various stages of developing other investment funds with objective to build out new revenue streams and growth avenues for Crown across a broad set of offerings for institutional investors. We look forward to updating you with our release of Q3 in November. And with that, we'll turn over the call for questions.
[Operator Instructions]. And your first question is from Lovish Gupta from AltaCorp.
This is Lovish Gupta on behalf of Chris Murray. So congrats on the good quarter. My question was, with the upsizing of the Special Situations Fund, what is the base of investment growth we can expect for the remaining part of 2018 and '19? And do you see any change in the size of investments going forward? And how does your current pipeline look like?
Yes, sure. I'll answer them sort of out of order. The transaction size isn't going to change. Like our business is to fund transactions between, say, $5 million and $50 million with a sweet spot of really $15 million to $30 million. That's just where we find the companies that we find the best opportunities in. In terms of the pace for the remaining back half, in that specific strategy I think we can continue what we've been doing. Like 3 transactions in the first part of the year. I'm kind of hopeful we'll complete 3 more still this year in that fund bringing the total to 6. And next year, 5 or 6 again, is sort of our ongoing target. So everything is functioning as it should in that fund. The extra revenue and deal flow we have was really activation of the additional strategies beyond just the Special Situation. So we added a couple new long-term deals, and the Power Fund itself is a deal in itself that's going to grow.
Okay. Yes, thanks. That's good color. But you also increased your commitment to Crown Capital Partner Fund and now hold approximately 37% interest in the fund. So can we expect any dilution going forward?
Yes. That was really an insignificant increase. I think we were at 36.54% and now we're at 37.1%, round up to 1. That's just sort of rounding errors or rounding as you manage commitments through a closing process. So we don't see that being at all different than what it was before. Our decision was, is at this stage we didn't want to sell down or dilute our interest. We -- our business to get our capital to work and grow our company. So as we look to bring new LPs in, we will look to dilute, but it won't be from lack of [ wind-down ] on those assets.
Okay, perfect. And the last from me. Like we saw a couple of long-term investments in Q2, which is always a positive for the company. Can we expect you to have more of these in the coming quarters?
I think you'll see a lot in the Power Fund. Like this is coming on fairly rapidly for us and we're adjusting our daily workflows because of it. We see a tremendous opportunity in that industry and it's going to take a lot of capital to execute. And pound for pound, we think we'll make far more bottom line impact, that investing in our power assets than we will out of the long-term loans. So I think you'll see our capital prioritizing that on the long-term side than just more diversified deals.
Your next question is from Brenna Phelan from Raymond James.
So on the Crown Capital Power Fund, can you give your perspective on the Ontario power market subsequent to recent developments at Hydro One and how you see current provincial leadership influencing both the cost of power and the demand for private electricity?
That's a pretty big topic so I'll probably only weigh in partially on that. Like the Ontario power market is a structural problem, not a political problem. There's a lot of discussion and I dub rhetoric around what people would like to do, but what you can do is a wholly different matter. The backdrop to what we have as high power prices is years of entering into long-term contracts at fairly high rates as well as a depleting system and under-funded system. So it's going to take an awful lot just to address the gaps [indiscernible] to roll back prices. Any roll back in prices just is a shift of the burden from rate payers to tax payers and I'm not sure that's anybody's policy agenda either. So we see this as being a very sizeable problem. And that's just really talking about the price let alone the reliability. There is significant areas of the grid where population growth has exceeded the capital investments, where you're just at -- even if Ontario is over-supplied, generally there's pockets where there is substantial under supply of power restricting the ability of large users to grow their businesses. And then the third issue is just reliability. So while today you can still build the onsite generation that will be far superior in cost, it's far superior in terms of reliability and the access to the power they need. So we see that this is a very long-term trend where private companies are going to just choose this as an option. And as we mentioned earlier, the pipeline of our operating partners is enormous. So despite there is sort of -- it's moving around policy statements, I don't think it's going to change the underlying demand for private companies to secure a long term, lower-cost source of power.
Okay, thanks. That's really helpful. And then what would your target co-investment stake in this fund be given the great opportunity you see?
Well, that's a big question, too. Like we want to own as much of it as we can. We see this as being one of the big, big quantum shifts we're going to see at least in this sort of next horizon of time. But it's just practically speaking, the scale -- the size of the opportunity, there's no way Crown, with our sort of access to funds, is going to be able to keep up to it. So we're going to have to invite limited partners to come along. Like this thing could scale to billions of dollars. And so it's like clearly we today don't have access to that kind of liquidity. So like you're going to see us hanging in at the high percentage as long as we can, but it really is a function of how quickly the thing scales.
And do you intend to take equity stakes or some sort of equity-like agreement with some of the entities you partner with?
Yes. So the model we have rolled out is we will take substantial -- I think the first model we have is we own 50% of Oom. So what we do is we'll benefit from the growing profitability of Oom as well as what we expect to see as the valuation shift in the assets that -- in the early days, and you think of parallels to real estate infrastructure, cap rates are high and as the projects get larger and diversified and more established, the cap rates come down. So we see the operators being beneficiaries of that through the equity they're building in the power plants. So we would get the benefit through the ownership in both increases in operating cash flow as well as the cap rate compression.
Okay. And last one for me. The junior resource market, are you still really bullish on the opportunity to deploy capital here? Any intent to perhaps do a similarly focused fund on companies that play in that space?
Yes, we're very bullish. We think that you've already seen a fair bit of firming up on the liquids and the oil side. And then it's our view that you're going to see firming up on the gas price side this fall and next year as hedges roll off. There will be no change on the capital providing side. And while there's still a fairly wide open market, like the transaction we closed with Persta, it's very high-quality transaction that we'll leverage in reasonably strong pricing. And we expect to continue to do that. We are getting close to our concentration caps and what we define as our concentration desire targets in the fund and so we are looking at dedicated funds for that industry.
Your next question comes from Stephen MacLeod from BMO Capital Group.
I just wanted to get a little more clarity on liquidity. I mean I guess available capital is probably the best way to describe it. I think you said you have sort of $55 million for additional portfolio investments. And I'm just wondering if you can break down how that builds up to $55 million. And then the second part would be; how do you expect that deployment to evolve between special sits and long-term financing?
Sure. Hey, Steve. It's Mike. So that $55 million breaks down quite simply as follows. And this is all as of June 30th. At that point, we take a look at what had been committed to the fund by, I guess, limited partners other than Crown, that's where we have this $11.5 million number that we refer to in the MD&A of committed capital available to the fund from parties other than Crown. In addition to that, we do have the $35 million credit facility, of which we had drawn $14 million at the end of the quarter. So there is the remainder of that line to be drawn. And then in addition to that, very simply, the working capital, as we present in the MD&A, which I, without the number in front of me, I believe was order of magnitude about $22 million. Now that of course includes -- that's on a consolidated basis -- that includes working capital of the fund as well as of Crown itself. And when we're referring to liquidity available for additional portfolio investments, again we're looking at this holistically not just from a Crown shareholder point of view, but from the perspective of the fund in addition to Crown to be able to make those investments. And again, that was at June 30th. Subsequent to that, there was the $75 million lift in the committed capital to the fund, of which roughly, I guess, what is it, about 60-plus%. It wasn't exactly -- we ended up with a 37.1% ownership of the fund, but we took a little bit more of that subscription than that percentage, but the remainder is new capital available from other partners.
Okay. So that capital is effectively earmarked for the CCF IV. Is that the way to think about it?
Yes. Most of our capital is CCF IV right now that's committed capital. We are like -- we've just recently deployed an awful lot of capital in the long-term side so we're working on regenerating that right now.
Okay. That's helpful. And then just to circle back around on the Crown Capital Power Fund. I mean it obviously provides some attractive long-term investment potential. And I'm just curious if you can give just a little bit of color around how you expect that evolving in the near term.
Yes. I don't know how much we can give on near-term guidance because frankly we don't know ourselves. Like we have one operator we're working with. We've committed to -- there's 8 projects being constructed. As we go, we're closing on some senior financing. We see this as being a leveraged market opportunity here. And that's going to probably free up another, say, $40 million-$50 million of capital to go build projects. And so I think in the early days, it's going get a little -- it's going to take a little bit of time just as we get the pieces and blocks in place and then that's really going to start to accelerate through 2019. The key for us right now is to get those blocks in place, to get the capital chunks in place, to get the operators in place. Like there's a chicken and egg. Our business is chicken and egg and their business, where they want to go out and commit to customers to build projects. Well, until they know the money is there, they can't go and do that. So as we have opened up capital and open up more capital for them, they're bringing those deals forward. And some of them are national chains. So they're not onesie, twosies; they're dozens if not hundreds at a time. And so there's some very chunky projects that could hit. So what we're trying to do is build the widest bandwidth possible; that if a $200 million project rolled in we can close that and fund it. If a $300 million project rolls we'll close that one as well. So that's -- there's just a lot. We're focused more on the infrastructure and the development right now than to actually just trying to figure out exactly what we're doing this quarter.
Okay. And then when you think about how that evolves going forward, I think you said you had one operator right now. Is the idea that you would, through that one operator, try to get as many projects as possible? Or will you try to expand your so-called operator base?
Both. I think what we want to do is -- like the ethos at Crown is to enable entrepreneurs and that's essentially what we're doing with Oom. They're really an entrepreneur outfit. They want to grow their business as far as possible. The capital side is where they're probably the weakest and where we're the strongest. So our job is to knock those hurdles down and see them grow as quickly as possible. We recognize this industry is -- and it's not just Ontario -- exceeds the ability of any one operator to service. And everybody who is entering this industry is going to have the same problem, which is attracting capital. And the greatest competitive advantage each of them can have is the most abundant and cheapest cost of capital. So by pooling resources through us, we can deliver abundant capital at declining rates as they go, making them more competitive. So our view is, is multiple operators is better than sort of trying to, what, own the big piece of cake all to yourself rather than have small piece of a bigger piece cake. And so we actually have another operator in underwriting right now and we're still prospecting on others. And what we find is that they have slightly different market focuses like in terms of some might be more focused towards residential condos over plants, that kind of thing. So we think that having multiple operators is a better way to roll the model out.
Your next question comes from Stephen Boland from GMP Capital.
Sorry. I'm going to continue on the Power Fund structure a little bit more. I guess that $15 million, I just wanted to be clear that that's not going into the fund. That is that you bought 50% of Oom and that ownership will be in the fund. Is that the way to look at that $15 million?
Okay. So the $15 million does go into the fund. We're 100% fund right now. The ownerships were not bought. They were nominal -- they were just given to us as gifted positions. The equity and the debt, our equity and the debt stays in the fund and the power plants stay in the fund. And then we lease them down to the operating entities as they sign up individual contracts. The 50% we just sweep profits and there really is nothing for us to capitalize at the operator level.
Okay. So basically you're not going to be putting more equity into Oom. It is when they have a project or an IEP that is ready to launch or ready to manufacture, you're going to have some sort of structure that's going to fund that individual project.
Yes. So again, we've put no equity into Oom. And it is us along with other limited partners along with the senior debt we're going to raise is going to fund projects as they get tabled up by the operators.
Okay. And just on -- like now that you are partnering with the operators, I mean what's the -- I don't know if it's a counterparty risk. But Oom, they're the ones that are managing these projects on an ongoing basis. They're the experts. And running these. And if that expertise disappears somehow, where's -- is there a liability back to the fund or to you to maintain that electricity for those -- the people that have signed up for those long-term contracts? What's the, I guess, the protection, or where's the risk there, Chris?
Well, there's, like any management team, if they left it creates an issue. Like yes, they're an operator. There's nothing -- not to take anything away from them. I think they would say this too. There's nothing that unique or elaborate with the production of electricity from these plants. So there is replacement people if the Oom people just all of sudden their plane went down tomorrow. So I don't think that's a material risk to us. It also does sort of augur towards a multi-operator model where there is actually, inside the tent, some backup resources as needed. But really, it's -- I don't think we see it -- like Oom itself already has a succession plan in place for key people. And as each of these operators grows, they're going to grow to a couple dozen employees and they're going to have to have succession plans in place for their key people. So that's really part of our jobs, is to help develop the corporate structures and operating structures of these for our partners. So we're not hugely worried about that. Like the primary risk we have in these things is the counterparty risk of those people buying power from us. And if they decide to stop buying power even though they have a long-term contract. Well I think unlike a lot of other type of asset classes, this one is quite favorable because these things ultimately are relocatable. Like there's a soft cost element you would lose, but the key is, is that your primary equipment is sitting inside a box that can get craned up on a truck and delivered on your next project. We have an insurance policy in place that covers business interruption and creditworthiness so we're covered in large part there. And obviously we're focused very much on the counterparties that we're signing up and building plants for. That's essentially Crown's business again, is to underwrite cash flows. And so we're very sensitive to the quality of cash flows we're taking in. So we think this just has one of the better risk-return. [indiscernible] again the risk you mentioned the operator is a pretty low one.
And then can you just talk about what yields you're targeting? Or like is it --
Yes. So the un-leveraged returns in the early days are all north of, say, 12% un-leveraged returns. There's some higher than that. I won't get into specifics just given there's maybe a competitive issues for the companies. But that's the kind of level of return you're talking about for essentially utility-like cash flows. We think it's very strong. We think over time that will come down, but in the early days you can get very good returns.
And sorry, and last, I guess the last question on this. I mean is there a lot of -- I mean it's not an industry I know well. So is there a lot of Ooms out there that are competing for market share in this business?
There's not. So that's one of the issues. Like there are -- they have a handful of companies that are capable of building these plants, but they're -- some of them haven't sort of moved on to the utility model. They're more still in the contractor model. Like I said earlier, there's nothing new with this technology. Like there's been some advances in the technology that has made this more possible, but the newness is more the utility-like -- the combination of providing electricity and not requiring the counterparty to buy the plant themselves. They're just making a decision to buy their energy from a different company.
[Operator Instructions]. There are no further questions at this time. You may proceed.
Okay. Well, appreciate everybody's questions. I definitely feel the flavor of what we're going to do on future calls. But again on the forecast, it is just so new and we're very excited by it, and we'll certainly keep everybody up to date as we get more clarity in terms of how the Power Fund rolls out. But thanks again for your time and look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participating, and we ask that you please disconnect your lines.