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Good day, ladies and gentlemen, and welcome to the Crown Capital Second Quarter 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 or achievements to be materially different from the estimated future results, performance or 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 for Q2 2023 at SEDAR or on the company's IR website.
For your information, today's conference is being recorded. And at this time, I would like to turn over to your host today, Mr. Chris Johnson. Please go ahead.
We are experiencing technical difficulties. Please stand by. We will resume shortly. We thank you for your patience. We will resume shortly. We thank you for your patience.
I would now like to turn the call back to Mr. Chris Johnson. Please go ahead.
All right. Well, thank you, operator, and sorry for the wait. Internet connection in the office here just at that exact moment cutout. So I'm on my cell phone, I apologize for the poor audio. So good morning, everyone.
The network services and distribution services segments of our company that are now by far the two biggest drivers of our business today, and we continue to advance their growth initiatives in the second quarter, which will translate into meaningful increases in revenue profits over time. In the near term, however, we are expecting continued very billing results as we still build in ramp-up mode on both segments.
The revenue from our Network Services group was up slightly year-over-year represented 37% of Crown's total revenue in Q2. While still profitable in the quarter and year-to-date operations, we've seen some near-term reduction in this segment in income due to both the ongoing retraction of WireIE's business. To remind you, this is a somewhat legacy technology, microwave as fiber continues to expand, which we're seeing in our other Community Network Partners. The WireIE businesses is contracting because of that. as well as we have seen some movement in the high-margin contracts at Galaxy.
Offsetting these factors, we are continuing to see the growth in community partners as we brand the high-speed Internet to small underserved communities in Canada. We've had some modest scheduled slippage in Ontario Connect, the network we're building on Ontario, but overall, things going well. The engineering designs for our first sublot have been approved and the construction is scheduled to begin later this month with additional sub-blocks close behind. This is a very significant milestone for our team and we're excited to kick off our marketing efforts over the next few weeks.
On the Brooks project Alberta, construction is presiding well, and network is performing as expected. We have a strong backlog of customers away in their connections and the team is working diligently to commit -- connect as many customers as we can this fall. That's have a seasonal aspect unlike Ontario, where most of our infrastructure is on poles, aerial construction and in Brooks, it's all buried. So when the frost sets in, we have to suspend the drops for the season.
Also in the quarter, we closed on a new partnership with the region of York to invest and help build out the YorkNet, a fiber-to-the-premise network throughout the York region. Crown will be investing $15 million alongside an investment of more than $100 million contributed by York region, [indiscernible] Canada in the [indiscernible] material. We're expecting to gain upwards of 14,000 subscribers on this network. Overall, we continue to build a very significant pipeline of fibre projects as they are constructed will drive revenue and earnings for our business.
Our Galaxy subsidiaries continues to launch upgraded services using new satellite infrastructure. These are the lower orbit satellites we've talked about previously. We've successfully deployed infrastructure in the first five communities in support of our Internet network in Nunavut. We've also been successful with major customer RFPs for this service in the North as well. As the large customers integrate these services in the networks and a -- it's more of a commercial offering, sales efforts to take place in those five communities.
We expect to see a significant growth in 2024. The largest contributor to total revenue is our distributed services platform, namely Go Direct. This segment now represents just over 50% of our total revenue in Q2 and was up 6% over the previous quarter, mainly due to the increased capacity utilizations that were filling facilities that we opened last year.
The segment did contributed net loss in the period, but with a clear line of sight to increase profitability as we're actively adding new customers. These translate directly into revenue and profits. Current profits are not indicative in our operations, and we expect to see that essentially the first full quarter after achieving full capacity.
In addition to filling capacity, at our primarily Columbus and Reno facilities. We focused on just process improvements, getting more efficient as we go and more profitable and creating some IP around some of that. It's operating, but it's also technology. We're utilizing for that, and we intend to use this across all of our facilities.
Within our distributed power platform, we had 6 operating projects quarter and additional 700 development, fairly disappointed with the speed at which projects are moving, but they're all very, very close. We're expecting these to become operational through the rest of 2024 primarily. We're excited to -- we're in the final commission of the largest project in the pipe, and it's going to be a very significant profit generator, particularly at current power and gas prices. And with that, we'll be able to resume distributions in the Crown Partners Fund later this year. As we bring more of these products across the finish line, we continue to evaluate our static options, which does include the sale of some or all of the assets.
In our real estate development side at equity, we extended development contracts with the project in London. Ontario, which continues -- is a continued source of strong revenue for PenEquity. We also were successful to increase the maximum permitted density at our multicounty site in Barrie, Ontario. And we are now exploring strategic options for this site, including the sale of the property.
On the alternative lending side, there was good progress made in Q2 on winding down the Capital Partners Fund. With retainment on one loan and the liquidation of the warrants from another loan. The loan previously repaid a couple of years ago, when we held warrants that had an excess price of $0.25, and we sold at $3.25. So it was a very strong exit. There are only 2 loans remaining, the largest of which is working through a restructuring process. We continue to monitor this process closely and hopeful that the management can deliver on your term profitability and debt reduction. Those are the major initiatives.
So with that, I'll turn the call over to Mike to review the financials.
Right. Thank you, Chris. Good morning, everyone on the line. Q2 financial statements and MD&A were all filed last night. So again, I'll keep this brief. I'll start with revenues. Compared with the same period last year, total revenue for Q2 was up significantly to $17.3 million with that increase due almost entirely, of course, to the addition of our distribution services business, Go Direct, which had a very minimal contribution to last year's Q2 numbers based on the timing of the acquisition late in that quarter.
Distribution Services was actually the largest contributor to Q2 revenue, as Chris mentioned, with revenue of $8.9 million in the quarter. That's up 6% compared with Q1 of this year. So again, as Chris mentioned, we are seeing ongoing growth in that business. From a profitability perspective, the segment had a net loss before income taxes of $1.2 million in Q2. That includes depreciation expense of $1.3 million and $0.5 million related to Go Direct Supply Chain Solutions, the legacy business in [indiscernible].
As capacity utilization increases during 2023 and ongoing productivity improvements recently implemented to take hold, we are expecting to see ongoing improvement in both revenue and profitability from this line of business.
Network Services as a segment is our second largest source of revenue. And in Q2, revenue was just a little bit better than flat, compared with Q2 of last year, which, as Chris mentioned, was the result of a growing contribution from community network partners being offset by an anticipated decline of revenues from WireIE and the wind down of certain high-margin contracts at Galaxy.
For the quarter, Network Services segment contributed net income before income taxes of $0.5 million, including depreciation expense of $0.7 million, that was down from net income before income taxes of $0.8 million in Q1 and $1 million in last year's Q2. Although we're navigating some near-term variability in the results, the segment continues to be well positioned for expansion in both top and bottom line based on a good pipeline of large fibre optic and satellite-based projects.
As for the other revenue categories, interest revenue, which now solely includes revenues from Crown Power Fund was just over $600,000 in the second quarter, up from about $350,000 last year, and fees and other income were $1.4 million in the quarter. It's more than double, the $606,000 of last year with that increase due mainly to the addition of property development revenues at PenEquity, which, as Chris mentioned, acquired a significant development contract from the old PenEquity Realty Corp during the quarter in exchange for a reduction in the loan payable by PenEquity Realty to Crown.
For Q2, our share of earnings of Crown Partners Fund totaled $0.9 million versus $0.3 million in last year's Q2. Our investment in Crown Partners Fund decreased to $24 million at quarter end from roughly $35 million at year-end. Again, that reduction is due entirely to distributions being paid out by the fund, the flow-through of the proceeds in turn, has received from the repayment of loans, sale of certain equity investments. All of this amounted to a net loss in the quarter of $1.2 million or $0.21 per basic share, compared with net income of $0.5 million or $0.08 per basic share in the same period last year.
Total equity at quarter end was $48.6 million. That's down from $50.7 million at the end of 2022, reflecting the net loss attributable to shareholders and total equity per share decreased to $8.66 per basic share from $8.98 at year-end. At quarter end, on a consolidated basis, we had cash of $13 million and the balance outstanding on the credit facility was $25 million and net of the unamortized deferred financing cost, we report that as $24.2 million. Our operating loan remains undrawn at this point.
Lastly, we completed an important process in May with the approval of a package of amendments to our convertible debentures including an extension of the maturity date to December of 2024, an increase in the interest rate from 6% to 10%, a removal of conversion rights and a removal of our ability to repay principal through the issuance of common shares.
I think that sums it up. So in closing. Thanks again for your time and continued interest in Crown. We look forward to developing -- updating you on our developments with Q3 earnings in November.
And so with that, operator, I'm going to turn it over to questions, please.
[Operator Instructions] And we have a question from Mr. Nick Corcoran from Acumen Capital.
The first question is just on distribution services. Can you give any details on where you're at with capacity in each of your warehouses?
Yes. Nick, so going from fullest to at least full Toronto facility is -- actually remains over 100% capacity today. The Calgary warehouse has been running overcapacity. And actually, if you remember, when we opened it last, was a little slow, but got into an overcapacity scenario in earlier this year and the project distribution has been expanded in that marketplace. So just -- we'll be adding capacity later this fall. But yes, that's a very profitable market for us today. . The facility in Columbus is -- really is 2. It's one facility, but we look at it as 2, because we have one customer, who we have cost-plus contract that takes about 40% of the building. And then the other 60% is diversified. So of the 60%, we're, I think, a little bit half on that. I will just note that some of that is not the most ideal clients for us. Like if capacity is only one measurement we look at. The -- I think that client specific is more of a storage client, and we don't get as many outbound fees and freight fees and kitting jobs and all the other places we make money at. So it's just probably a customer we'll be turning over as we continue to sell out that facility.
And Reno is around 30%. But again, similar to Columbus, we have at least one of those customers would fit that definition of more of a temporary client we're going to likely change over. We are in the process of onboarding 4, but there's really 3 decent-sized clients, 4 smaller client right now in August. That's about the maximum that we can manage to onboard at a single time. Just think through the there's an IT integration that has to happen when you brand and under the physical receiving of goods and put away that happens in training. So that is going to stress teams. Those clients are going into Reno and into Columbus over the course of the next month.
So we are going to see that capacity will up a fair bit. And then when we start outbounding is when we will see the more of the fee generation, we make money on receiving, we make money on storage, but if you look through the -- where we make money is the activity of processing orders and sending orders where we make actually more money.
And can you give any indication when you expect to be profitable in distribution services?
This quarter, for sure. I already see it like even we saw some good progress in all the 3 main facilities. I'd say the main, because Reno's still expected to be in the building phase. But yes, I think June and July, we're speaking to pivot come already. There's work we would have added in the early part of the year and just the growth of existing clients. And the fourth quarter is generally busier just as -- effectively, we're part of the COGS that supports the retail channels, all of them. So the fourth quarter is always busier.
So yes, it's -- we'll see positive and cash flow from this division in Q3 and hopefully, really good levers going forward in Q4.
Good. And then switching gears to Network Services, Ontario Connect. I think you had indicated that you'd expect shovels in the ground in the second quarter. Is it fair to say you're about a quarter behind?
I think it's maybe even as much as 2 quarters behind. The -- it's -- the delay has been in engineering and approval of engineering design. This is not a [indiscernible] partner's problem alone. This is something that's affecting all of the participants of Ontario Connect so much so that infrastructure Ontario, who is the government sponsor, who's behind this program has twice now held meetings with the participants in Hydro One to figure out how they would speed it up. As far as we're told, we're amongst -- they tell us where the facts is are almost far along, which we have a hard time believing, but let's just say we're amongst the most farthest along. And there's a recognition that unless the process changes, the thing we'll never get built in the time frame they're looking for.
So I think a couple of things are happening. One, I think we are doing the best we can to navigate the challenges to get on other fuels infrastructure. But secondly, I think the, call it, if there ist any account, really, it would be the government of Ontario, they're the sponsor. So they are changing the process for everybody. And I think we are expecting that to accelerate the other sublots we have. So we have a couple that are starting imminently, and then we have another bunch that are kind of in the next Q to go through approval. So, yes, we are going to catch up.
And is that something you expect to provide an update on next quarter?
Yes. This is a big -- this is part of the biggest initiative in the company, which is to build earnings from the fibre to the premise business. And obviously, we can add customers till built. So we are very excited to take -- this is look at what our -- to bring our broadband project we built last year and very well received in the community. Initial penetration rates were over 60% and continue to add from there. That's very, very strong. And just to highlight the need for good quality broadband Internet in these communities.
So the customers are waiting. We certainly want them, and we just got to get -- and they're not -- some of these are not complicated construct. It's complicated in the sense there's a lot of pole attachments, but some of our sublots get built in 10 days. It's not like we're talking about months long. Building infrastructure, we're attaching wires to poles. So it's -- and dropping electronic equipment. And so it's like we are very -- we do think next year will be very exciting to add. And even this year, we'll see some customers on that network.
Good. And then you mentioned York is in the pipeline as well. Can you give any indication on the time line to convert that to revenue and...?
Yes, I think we'll see some progress this year. We're not -- like we're not "developer" in that one, we're just a participant. I say just because we're very active in that project. But like we are working together a partner in York division of York Region. So it takes -- it's a little bit -- in one sense, we're not -- it's a varied project, so it doesn't rely on third-party infrastructure like the Hydro One poles. So 1 sense, it's more controllable, but it's a big project. It's a big construction project. That one is a big construction project, and there's a lot of other people around to do it.
So YorkNet's been building their network for years already. They're just expanding them now. So there are some sections we can jump off on that we're trying to operationalize now. they're obviously not the connections to the people's home yet. And -- but in terms of backbone infrastructure, a lot of it is in place. And now we just got to get the electronics and the drops and some of the kind of connections completed. But yes, we're expecting to see some action and customers on that network this year.
Our next question comes from [ Brad Conacher ] from Richardson Wealth.
Just could you touch base on your intentions on the redemption -- the early redemption of the debentures. In the press release, announcing the proposed amendments, stated clearly that you're intention was to redeem them as soon as possible with $13 million on the balance sheet there, I would have thought maybe we might see something there. If you could just give me your comment, thanks?
Sure. Why don't I take that, Mike. Brad, the -- yes, so clearly, you got the right details there. We did mention that we are looking anxious to prepay it as quick as we can. It is a $2 million [indiscernible] company and we're selling with $13.5 million of cash right now. So we're trying to square away still. The other moving pieces are what cash is coming in from our residiaries, which cash is going on our projects and where we're going to be at in the bank ratio. As you can see from -- do the calculations, we are close to limits in terms of bank ratios, and we were on site in Q2.
But we are in discussions in terms of what happens if we slip over and -- so it's -- we have to get all those things in alignment before we can do it, but we have cash and also reading through my notes, we have a couple initiatives underway in our power division and our real estate division that are going to be free and some cash, and we are still continuing to free up cash in our debt fund as well. All those sources are pointed at the convertible debenture.
So it's just -- I think we just need a little bit more time to sort of see how things are going to settle out this quarter and get the feedback we need and then we'll be starting to chip away at that.
Okay. And then any -- one other question, any nimbles or any progress on the Barrie property sales as that would sort of see things I would assume?
Well, it's for sale. So it's I don't want to sort of move too far in detail on that. But it is for sale. It is a very good property. It's -- it is getting a fair bit of interest and exposure in it. And yes, I think the macro I perceive is that this I don't know how you live in Ontario, and don't know the housing crisis going on, and Barrie is a very strong market for that. They're one of the principal layers that is very underbuilt in terms of their planned population. And I think -- so I do think it's going to garner a reasonably good interest, and it will be sold.
[Operator Instructions] And at this moment, I show no further questions in queue.
All right. Well, thanks, everyone. And as always, please don't hesitate to reach out to either Mike or I. We look forward to talking to you next quarter. Thank you.
Thank you.
Ladies and gentlemen, this concludes your conference. Please disconnect your lines.