Dundee Corp

TSX:DC.A

Earnings Call Transcript

[Operator]

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dundee Corporation Q1 2018 Conference Call and Webcast. [Operator Instructions] Mr. John Vincic, you may begin your conference.

[John Vincic]

Thank you, operator. Good morning, everyone, and welcome to Dundee Corporation's 2018 First Quarter Results Conference Call and Webcast. The company's financial results were issued this morning and are available on our website at dundeecorporation.com.Before we get started, please be advised that the information discussed today is current as of March 31, 2018, unless otherwise indicated, and the comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and as such, actual results may differ materially from the views and expectations expressed today.For further information on these forward-looking statements, please consult the company's relevant filings on SEDAR. Also, please be reminded that all currency amounts discussed on today's call are in Canadian dollars unless otherwise stated.Our presenters today are Jonathan Goodman, Dundee's Executive Chairman; and Lucie Presot, Vice President and Chief Financial Officer. Joining them for the question-and-answer session following the conclusion of the formal remarks will be Mark Goodman, President; and Richard McIntyre, Executive Vice President and Chief Operating Officer.And now I'd like to turn the call over to Jonathan Goodman. Jonathan?

[Jonathan Carter Goodman, Executive Chairman]

Thank you, John, and thanks to everyone for joining the call this morning. Today's comments and discussion will be brief as we recently reported our results in late March. There will be ample time for Q&A following our remarks.Before we review the performance for the first quarter, let me begin by addressing the executive changes announced today. I'd like to start by expressing a heartfelt thank you to Lucie Presot. Many of you on this call today know Lucie and have had interactions with her over the years. For more than 3 decades, she's been a dedicated employee at Dundee. Her commitment to Dundee has been unwavering and she has served the company's shareholders well. As she prepares to embark on her retirement, I'd like to express my gratitude and personal thanks to Lucie for all she has done for Dundee. Lucie, thank you, and I'm glad you'll be helping us in an advisory capacity to transition into your retirement.Next, let me welcome Bob Sellars to the executive leadership team. Bob is a long-time Dundee employee who has held many senior finance roles within the company since 2000. Prior to that, he was CFO at First Marathon Corporation, a well-known and highly regarded independent firm that was acquired by National Bank Financial. He knows many aspects of our business intimately, and his knowledge and wisdom will be a welcome addition to the executive leadership team. Bob will be instrumental in helping us in the pursuit of our revised corporate strategy.

[Robert Mark Sellars, Executive VP & CFO]

Thank you, Jon. I look forward to working with you and the rest of the executive team as we continue to move forward with the company to roll out our strategic initiatives. I also look ahead to dealing with the many constituents that are part of Dundee Corporation. Thank you.

[Jonathan Carter Goodman, Executive Chairman]

Thanks, Bob. Now let me turn to a review of our business in the first quarter. During the first quarter, we continued to focus on rationalizing our portfolio, and we generated nearly $43 million in proceeds from the sale of assets we believe to be noncore to our longer-term strategy. A portion of these sales proceeds, $17.4 million, were invested in Parq Vancouver, one of our cornerstone assets. This is part of a total investment of $33.4 million at Parq Vancouver, with the remaining $16 million to be invested by our partner, PBC Group. Our third equity partner in the project, Paragon Holdings, chose not to participate in this investment, and as a result, will see their equity ownership diluted. The initial ramp-up of Parq Vancouver is proceeding slower-than-anticipated due to a variety of factors. However, we remain optimistic and continue to believe this is a world-class asset. It is a unique, one-of-a-kind urban resource in one of North America's most popular destinations. As we look ahead, we are forecasting improved operating results from the second and third quarter of this year, which are traditionally the strongest period of the year for tourism in Vancouver.In this quarter, we also took steps to enhance our existing Dundee Securities platform with the creation of an industry-focused capital markets group that will provide advisory and investment banking services to its clients primarily in the resource sector. As we've previously noted, we added 4 seasoned investment banking professionals to our team in Vancouver, and to date, they've already begun to win mandates that are aligned with our new strategy. To support their efforts, we'll be adding to our sales capabilities by hiring individuals in Vancouver and Toronto. This will add an important element to our platform and will allow us to tap into international networks to increase participation in financing and transactions our team is involved with. And finally, we continued to take steps during the quarter to lower our overall expense profile at the corporate level. This included additional headcount reductions and the continued consolidation of our real estate footprint in Toronto. We expect the real estate reduction to be largely completed in the second quarter and we'll continue to review our personnel needs as our strategic shift and focus continues to evolve. Now I'd like to turn the call over to Lucie Presot for the financial review. Lucie?

[Lucie Presot, Consultant]

Good morning, everyone. Given that we released our annual financial performance just about 6 short weeks ago, my comments today will be brief and will center on some of the key aspects of the company's operating performance during the first quarter of this year as they're reflected on the financial statements that we released earlier this morning. We're reporting a loss for the quarter of $25 million, including a loss of $8.8 million that resulted from lower market values for some of our portfolio investments. This compares unfavorably to net earnings of $28 million earned in the first quarter of last year, during which we realized market appreciation in our portfolio of investment of $57.4 million.As we've indicated in our previous reports, these changes, which are driven by trends and information in equity and capital markets, will continually cause substantial volatility in our operating results. At March 31, 2018, the value of our investments was $352.3 million, of which $184.9 million was in publicly traded securities. At our last conference call, management indicated that it was their intent to continue to rationalize our portfolio holdings, and in fact, during the first quarter of 2018 and as Jon previously noted, we generated proceeds of $43 million from the sale of investments that were considered nonstrategic, including $29 million from the sale of publicly traded securities, another $9 million from the sale of investments in private entities and yet another $5 million was received in settlement of a debt instrument. We used approximately $17.4 million of the proceeds to reinvest back into the portfolio and again, as Jonathan noted, all of this relates to our injection of cash in the Parq Vancouver project.At March 31, 2018, our equity accounted investments had an aggregate carrying value of $95.8 million, that's excluding real estate joint ventures. And during the quarter, we're reporting losses from these investments of $10.2 million, including a loss of $13.8 million from Parq Vancouver, offset by a mark-to-market gain of $3.3 million relating to our investment in Union Group.Just a few brief remarks to outline the operating loss at our Parq Vancouver project. During the first quarter of 2018, Parq Vancouver incurred a net loss of $37.5 million, of which our share is the $13.8 million that you see reported as an equity loss. As previously indicated on this call, the initial ramp-up of operations was slower-than-anticipated due to a number of factors. Operations represent about $7 million of the net loss. Also included in the first quarter loss is interest expense on existing debt of $23 million. Interest on the debt prior to the commencement of operations was capitalized and therefore added to the cost of the project itself. Finally, our investors are keenly aware that the debt financing for the Parq Vancouver project is denominated in U.S. dollars, and this subjects Parq to operational performance volatility in foreign exchange translation rate between the Canadian and the U.S. dollar. Parq's operating loss include almost $15 million of foreign exchange losses in the first quarter, although this is partially mitigated by an $8 million gain in derivatives designed to hedge gains due to FX changes. A key aspect of the corporation's investment in Parq Vancouver is the refinancing of existing debt, with an interest burden that's more commensurate with an operating entity and free of construction risks. And we caution that until current debt arrangements are refinanced, Parq Vancouver may require additional injections of cash from its equity partners in order to fund shortfalls in its operation. The corporation continues to carefully monitor its investment in Parq Vancouver.Just a brief comment on our investment in Union Group. You will recall that we impaired this investment at the end of 2017 to recoverable amounts equal to Union Group's investment in 40 million shares of ICC Labs, less the 30% discount to reflect escrow arrangements and possible costs associated with the investment. Increases in the trading price for the shares of ICC are the basis for the recognition of a $3.3 million gain from this investment that you see during the quarter.Our operating subsidiaries incurred losses of $5.3 million in the first quarter of 2018 compared with losses of $8.1 million in the first quarter of the prior year. There are perhaps a few items to note in these results. Our 2 financial services subsidiaries, Goodman Investment Counsel and Dundee Securities Ltd., incurred losses of $2.7 million in the first quarter of this year compared with losses of $0.6 million in Q1 of 2017. Prior year results resulted from a $3.7 million investment banking revenues for transactions that had been initiated prior to the sale of the capital markets division to Eight Capital. AUM grew to $210.8 million at March 31, 2018, including $30.6 million raised in the launch of CMP 2018 resource limited partnership. We continue to streamline this business line in light of the shift of our business strategy. And in that regard, we anticipate that during the second quarter, we will be transferring about $130 million of AUM to other third-party investment platforms.In terms of our resource-based subsidiaries, you will note that we're reporting a $6 million gain relating to our investment in United Hydrocarbon. Virtually all of the gain relates to mark-to-market changes in the fair value of both the anticipated first production bonus payment and the royalty interest that we received as part of the 2017 transaction with Delonex Energy. At this time, we have not changed any of the underlying probabilities or expectations of our valuation model, but since year-end, the gain results from increases in the price of oil as well as from the effect of the passage of time on the discounted cash flow values.For those of you that may be following our investment in Dundee Energy and Dundee Energy's investments in the Southern Ontario producing assets, Dundee Energy has announced that it has found a potential buyer for the asset. However, the transaction is subject to court approval under CCAA requirements.Blue Goose is reporting losses of $6.4 million in the quarter compared with losses of $1.9 million in the first quarter of 2017. Just to be clear, these losses do not include any of the operations of the chicken processor plant that had been operating as Tender Choice, as those operations have been reclassified to discontinued operations in the financial statement. The significant swing is due primarily to changes in the fair value of livestock. In the prior period and as the herd size was growing, these gains were over $5 million. In the current quarter and partially in an intended strategy to control herd size as we've struggled with feed issues following the 2017 wildfires in British Columbia, our herd size has not experienced the same growth, and hence, we are only reporting a fair value gain in livestock of $1.5 million in the current quarter.Dundee 360, our real estate subsidiary, is reporting losses of $1.7 million this quarter compared with earnings of $0.2 million in the first quarter of last year. The volatility in earnings is driven principally by real estate project management activities, which in turn are driven by specific projects.At the head office level, we continue to see the results of our cost containment effort. G&A costs, excluding stock-based compensation, decreased to $4 million in the first quarter of 2018 compared with costs of $4.3 million in the comparative period. Cost containment is one of our key strategies going forward, and as we reported to you at the end of the year, we expect to see further reductions in G&A going forward, principally as we rationalize our footprint. While this is already happening in the physical sense, with the relocation of our office premises, the benefit in our financial statements will likely not be seen until the third or fourth quarter of this year. Therefore, our guidance remains unchanged at approximately $16 million to $18 million per annum. In addition, we continue to have about $13 million of interest and dividends to pay primarily in respect of our preference share arrangement.With the sale of some of our noncore assets, we ended the quarter with cash on hand of $37.2 million and with a portfolio of publicly traded securities of $184.9 million. As we've done each quarter on these conference calls, allow me to walk through the significant changes in our cash position during the quarter. So we started the year with cash of $40.5 million. Operationally, we paid $4 million in operating costs and we paid another $4 million in income taxes. Our interest costs were $1.4 million and we paid another $1.8 million in dividends. That's primarily on our Series 5 preference shares, which are treated as debt in our financial statement, and in respect to the preference shares, Series 5, in January of this year, we expended $7.6 million to partially redeem some of these shares under their respective terms.As we indicated to you previously, we generated proceeds of $43 million from the sale of investments that were noncore. We invested $17.9 million back into the portfolio, including the $17.4 million invested in Parq Vancouver. And finally, as you will see from the segmented cash flow continuity that we are providing in the MD&A, we funded almost $10 million to our subsidiaries this quarter, most of which related to the operations of Blue Goose. Some of these monies were directed to pay down debt arrangements in this subsidiary in order to alleviate concerns over possible debt covenant breaches. This leaves us with cash resources at the end of the quarter of about $37 million at head office and no debt other than our existing Series 5 preferred shares. You will have noted, we have temporarily extended our bank line for a 2-month period, during which we will transition the management team and introduce them to our banking partners.This concludes our quarterly financial review, and we'll now turn the call back over to Jon. Jon?

[Jonathan Carter Goodman, Executive Chairman]

Thank you, Lucie, for that thorough update. Before we move on to the Q&A portion, let me provide a brief summary of some of the things we expect in the near term. As noted in our news release this morning, during our second quarter, we expect to streamline our private client business. As part of this process, we expect that approximately $130 million of AUM, assets under management, in private client assets and alternative investment products will be transferred to other investment platforms. Goodman & Company Investment Counsel will continue to manage approximately $80 million in assets under management.The continued build-out of our capital markets platform remains a key focus this quarter and beyond. As noted earlier, we're adding talent to our team with the addition of dedicated salespeople in Toronto and Vancouver, and we are seeing encouraging deal flow, with our team currently involved in 2 deals. This is evidence that our strategy is well timed and that we have the right team in place to deliver results. And finally, we are maintaining a rigid focus on capital allocation. This is all-encompassing and includes everything from our ongoing portfolio rationalization to expense reduction to managing our capital structure. It also plays a role in how we evaluate future investment opportunities.It has been nearly 4 months since I returned to Dundee, and I'm pleased with our progress in such a short period of time. More work remains to be done, but I believe we're headed in the right direction and I believe we have the right team in place to move our business forward. Now we'd be happy to answer any questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Stephen Boland of GMP Securities.

[Stephen Boland, MD & Equity Research Analyst]

I guess, first question, Jonathan, just on the sale of the $43 million of security sales, was that -- was there concentration there or is there sort of a mixed bag of equities and/or bonds?

[Jonathan Carter Goodman, Executive Chairman]

I think it's fair to say that it was a mixed bag. I mean, to the extent that I think we have more equities than we have bonds, the sale was more equities than bonds. But it was a mixed bag across the board.

[Stephen Boland, MD & Equity Research Analyst]

Okay. And just on the casino, do you anticipate any more capital calls or any more future capital injections into that investment?

[Jonathan Carter Goodman, Executive Chairman]

Well, at some point in time the balance sheet of that investment has to be restructured. So the answer is yes, but that's a tabular -- we're having a lot of discussions with many different parties right now. And it's not necessarily going to -- all going to come from -- certainly not all going to come from us.

[Stephen Boland, MD & Equity Research Analyst]

Okay. When would you anticipate that process to be completed?

[Jonathan Carter Goodman, Executive Chairman]

It's hard to say. It could, on a long shot, be completed this quarter, but it could -- most likely it will be concluded in the third or fourth quarter.

[Stephen Boland, MD & Equity Research Analyst]

Okay. That's it for me. I just want to say congratulations on your retirement, Lucie. Thanks for your help over the years.

[Operator]

Your next question comes from the line of Brett Reiss of Janney Montgomery Scott.

[Brett Reiss]

Lucie, good luck in your next fork in the road.

[Lucie Presot, Consultant]

Thank you very much, Brett.

[Brett Reiss]

The continued use of cash at Blue Goose. At some point, do you draw the line -- a line in the sand and just say enough is enough and kind of just walk from this? What are your intentions with Blue Goose?

[Jonathan Carter Goodman, Executive Chairman]

I think we're -- as we said last quarter, we're doing a strategic review over the whole portfolio, and that certainly includes Blue Goose. We're looking at not just Blue Goose but all of the different divisions of Blue Goose. We're looking at them. Can they be turned profitable, what type of capital they require or whether or not they can -- they will be sold. That process is not yet complete, but certainly the status quo is not one of the alternatives.

[Brett Reiss]

Right, right. And did I read in the M&A, we had to extend money to Eurogas, $5 million? Did I read that right?

[Lucie Presot, Consultant]

No. I don't think that, that's right. I'm not sure where you're reading that, Brett.

[Brett Reiss]

Okay, forgive me for that. Now just I -- the net debt from Dundee Energy and Blue Goose, which is nonrecourse but it still shows as a liability on the balance sheet. I know you've walked me through this, but just say again why it really isn't debt and yet it still appears there.

[Lucie Presot, Consultant]

Okay. So first of all, let's just be very clear. So the debt in Dundee Energy shows up as liabilities held for sale. It doesn't appear as debt in the financial statement under the corporate debt line. The debt in Blue Goose does, however. So the reason that they do not have recourse to Dundee Corporation is because in the terms of the debt and the contract with the banks, the arrangements were such that the entities that were borrowing were not permitted to look up the chain in the event that they were unable to pay. So that's written into the contract. Notwithstanding, accounting has a different framework that you need to work in, and from an accounting perspective, when we consolidate those entities, we have to consolidate their debt. So there is an inconsistency between what the financials say and what the legal contractual arrangement is with the banks.

[Brett Reiss]

Okay. Now this potential -- the potential sale of the assets for Dundee Energy, is there going to be any residual value for us after this sale?

[Lucie Presot, Consultant]

That would be highly unlikely, Brett. While we can't obviously disclose any of the terms until the courts have approved it, it would be highly unusual to see the monies coming in under a CCAA in excess of the value that we carry it as. Otherwise, the bank wouldn't have called the loan.

[Brett Reiss]

Right. Is it important for us, for any reason, that this potential acquirer -- in effect, acquire the assets?

[Lucie Presot, Consultant]

I'm not sure that I understand the question, Brett. Can you ask it perhaps in a different way?

[Brett Reiss]

Well, if there's no residual value to or very unlikely that we'll see residual value. Why was it even mentioned on the call that these assets are going to be potentially sold?

[Lucie Presot, Consultant]

Because the assets are in a separate entity. Remember, they're not in Dundee Energy directly. They're in a subsidiary of Dundee Energy, which then means that Dundee Energy is -- becomes the shelf.

[Brett Reiss]

Okay. In terms of -- can you give us a -- just an estimate on an aggregate -- the potential sales of additional assets, is there a number of -- is there like a pipeline number that you can give us?

[Lucie Presot, Consultant]

I don't...

[Jonathan Carter Goodman, Executive Chairman]

It's Jonathan, I'm going to step in here, Brett. The question is, do we have it? Yes, we certainly have had a target on what we're trying to do. But obviously, we can't really talk about things until they're completed, so -- and so certainly don't have a pipeline number off the top of my head. But we're in a precarious position where you can't really pre-announce what you're doing because it'll affect you in a negative way.

[Brett Reiss]

Right, right. Now the -- just one more, and I'll drop back into queue. The partner in the casino project that elected not to make the additional investment, is there anything I should read into that if you were in my shoes?

[Jonathan Carter Goodman, Executive Chairman]

No, I would not read anything into that. Everybody's got their own liquidity constraints and concerns and has to manage it. I know they're a big supporter and a big believer in the operation. And I would not read anything into that.

[Brett Reiss]

Okay. Once again, Lucie, thank you for all your help over the years. I appreciate it.

[Lucie Presot, Consultant]

Thank you very much, Brett, and it's been my pleasure and my honor.

[Operator]

[Operator Instructions] There are no further questions in the queue. I turn the call back over to the presenters.

[Jonathan Carter Goodman, Executive Chairman]

Well, first of all, thank you again, everyone, for joining today's call, and we look forward to updating you again at our Annual General Meeting on June 4 in Toronto. Thank you very much.

[Operator]

This concludes today's conference call. You may now disconnect.