Earnings call transcript: Onex Q4 2024 sees stock dip amid modest outlook

Onex Corp (ONEX) reported its Q4 2024 earnings, highlighting a strategic focus on capital returns and structured credit growth. Despite these positive developments, the company’s stock fell 2.78% following the earnings call, closing at $107.05, down from the previous close of $110.12. This decline comes as investors digest guidance indicating modest Fee Related Earnings (FRE) for 2025. According to InvestingPro data, Onex trades at an attractive P/E ratio of 8.49 and maintains a "GOOD" financial health score, suggesting strong fundamentals beneath the recent price movement.

Key Takeaways

• Onex returned 3 billion dollars of capital to investors, a significant increase over the previous year.
• Structured credit fee-generating AUM rose by 34% year-over-year.
• The company repurchased nearly 30% of its shares over five years, enhancing shareholder value.
• Challenges persist in healthcare and consumer segments, impacting overall outlook.
• Guidance for 2025 suggests positive but modest FRE growth.

Company Performance

Onex Corp demonstrated solid performance in its financial services and industrials sectors, contributing to a 15% return on Canadian dollar investing capital over the past year. The company has effectively managed its capital, returning a substantial amount to investors and reducing shares outstanding significantly. However, challenges in healthcare and consumer segments pose ongoing concerns.

Financial Highlights

• Investing capital per share: $113.7, up 6% year-over-year.
• Total (EPA:TTEF) share repurchases in 2024: 5.7 million shares.
• Current liquidity: 1.6 billion dollars, representing 19% of investing capital.

Market Reaction

Following the earnings call, Onex’s stock price decreased by 2.78%, reflecting investor concerns over the company’s modest outlook for 2025. The stock remains closer to its 52-week high, indicating some resilience but also highlighting market caution. InvestingPro analysis suggests the stock is currently undervalued, presenting a potential opportunity for value investors. Two key ProTips highlight the company’s strong cash flow coverage and impressive 39-year dividend payment history, with additional insights available through the Pro platform.

Outlook & Guidance

Onex expects positive but modest Fee Related Earnings (FRE) in 2025, with the credit platform targeting a 55 million dollar run-rate FRE by year-end. The company anticipates continued capital returns from its OP and ONCAP platforms, focusing on generating shareholder value through competitive opportunities. With a gross profit margin of 80.5% and strong liquidity metrics, the company appears well-positioned to execute its growth strategy. Discover more detailed financial analysis and forecasts with InvestingPro’s comprehensive research tools.

Executive Commentary

CEO Bobby LeBlanc emphasized transparency and responsiveness, stating, "Our objective is to be transparent and responsive in our engagement with you." CFO Chris Gavin highlighted the cash-generative nature of certain business segments, noting, "If you include any meaningful carry, that part of our business is cash generative and adding value."

Risks and Challenges

• Healthcare and consumer segment challenges could impact overall performance.
• Modest FRE growth guidance may dampen investor enthusiasm.
• Potential impacts from NAV discount and cyber incidents need careful management.
• Broader macroeconomic pressures could affect market conditions.

Q&A

During the earnings call, analysts inquired about the impact of a recent cyber incident, which the company expects to be minimal. Discussions also covered the NAV discount and potential secondary market opportunities, as well as continued activity on the Normal Course Issuer Bid (NCIB).

Full transcript - Onex Corp (ONEX) Q4 2024:

Bobby LeBlanc, Chief Executive Officer, Onex: Thank you

Conference Operator: for standing by, and welcome to Onex Fourth Quarter Earnings Results Conference Call. At this time, all participants are in listen only mode. After the speakers’ presentation, there will be a question and answer As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Jill Homenick, Shareholder Relations and Communications at Onex. Please go ahead.

Jill Homenick, Shareholder Relations and Communications, Onex: Thank you. Good morning, everyone, and thanks for joining us. We’re broadcasting this call on our website. Hosting the call today are Bobby LeBlanc, Onex’s Chief Executive Officer and Chris Gavin, our Chief Financial Officer. Earlier this morning, we issued our fourth quarter and full year ’20 ’20 ’4 press release, MD and A and consolidated financial statements, which are available on the Shareholder section of our website and have also been filed on SEDAR.

A supplemental information package is also available on our website. As a reminder, all references to dollar amounts on this call are in U. S. Unless otherwise stated. I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward looking statements contained in today’s presentation and remarks.

With that, I’ll now turn the call over to Bobby.

Bobby LeBlanc, Chief Executive Officer, Onex: Good morning, everyone. Onex had a solid fourth quarter, wrapping up a year of significant progress across all our platforms. Our private equity team delivered a meaningful return of invested capital to our investment partners, while also achieving fundraising success. Our credit platform had an excellent year, outperforming our expectations on capital raised, while continuing to attract new investors with our consistently strong performance. We ended 2024 with the completion of our substantial issuer bid or SIB.

We bought back 2,300,000.0 shares under the bid, adding meaningfully to our overall buybacks for the year. While the amount tendered was below what we had originally allocated, we view this as a positive statement for shareholders. Like us, many see ongoing upside for share performance beyond the upper range of the $117 per share offered. Turning to our businesses, starting with private equity. In total, across our PE platforms, we raised $1,500,000,000 in 2024.

This was accomplished through a broader range of initiatives, including contingent co investment partnerships. The teams are working hard to expand our client base, which creates more opportunity for fundraising outside of traditional fund formats. 2024 was also a positive year for our PE teams in returning capital to our limited partners. OOP and ONCAP together returned over $3,000,000,000 of capital to investors, including $1,000,000,000 to Onex. This was 2.5 times more than what we achieved in 2023, a differentiated achievement and evidence of our ability to deliver positive realizations across multiple investments and vehicles.

ONIX Partners has successfully completed fundraising for its opportunities fund, reaching total commitments, including affiliated vehicles of $1,200,000,000 Across OP5 and the opportunities fund, OP invested $1,200,000,000 of capital in 2024 across four companies, all within our core areas of specialization. Three were owner managed or complex carve outs and for all four, the team has differentiated value creation strategies. ONCAP accounted for more than $500,000,000 of the return of capital to investors. In fundraising, momentum for ONCAP V remains positive and we expect a final close at the end of Q1. The fund has already completed three investments with a total of approximately $400,000,000 invested.

The pipeline for new investments is good and the fund is off to a very good start. In total, the team has raised over $700,000,000 of capital in 2024. Our credit team had another active quarter, capping off a banner year. For 2024, we ranked as the number seven issuer of global broadly syndicated CLOs. Overall, the team executed 30 transactions last year, raising or extending $13,000,000 of fee generating AUM, and they’ve already priced three transactions this year.

We’re confident the team will deliver another successful year in 2025, including substantial FRE growth. Across the broader credit platform, we are actively pursuing new opportunities to generate increased revenue. As an example, we recently closed on a $775,000,000 tactical allocation commitment with a large institutional investor. These types of commitments leverage the full breadth of talent across our credit team and products and will contribute to the scale required to continue to grow fee related earnings. In these instances, the incremental revenue is highly accretive to bottom line profitability.

Overall, I feel good about what our teams achieved in 2024 and how we are positioned to drive growth in 2025 and beyond. Over the last couple of years, our portfolios have weathered uncertain and sometimes challenging conditions, but I’m confident that the investments we have will drive long term investing capital growth at returns consistent with our objectives. In the meantime, we’re making the right operational decisions to optimize resources across the firm and roll out a performance compensation structure that is aligned to shareholder interest. You will read more about this in our upcoming informational circular. Before turning over to Chris, I want to thank our team for their hard work and our shareholders for their continued support.

Our objective is to be transparent and responsive in our engagement with you, and I appreciate your ongoing feedback. Our team is committed to driving more shareholder value in the years to come. Now I’ll turn it over to Chris.

Chris Gavin, Chief Financial Officer, Onex: Thanks, Bobby, and good morning, everyone. Onex ended Q4 with investing capital per share of $113.7 up slightly in the quarter and up 6% from a year ago. In Canadian dollars, investing capital per share generated a 15% return over the past year. The increase reflected portfolio gains, accretive share repurchases and a strengthening of the U. S.

Dollar. While our U. S. Dollar return was below target this year, over the last five years, U. S.

Dollar investing capital per share has a compound annual return of 13%. As Bobby mentioned, we completed the substantial issuer bid and repurchased a total of 2,300,000.0 shares in Q4, bringing our total repurchases for the year to 5,700,000.0 shares. Over the last five years, Onex has repurchased approximately 28,000,000 shares and reduced our shares outstanding by almost 30%. We’ve been able to do this while building our PE portfolio, supporting the growth of our credit franchise and maintaining strong liquidity, which today is about $1,600,000,000 or 19% of investing capital. Looking at our investing returns, our PE portfolio returns were impacted by unfavorable foreign exchange in the quarter from a strengthening U.

S. Dollar, driving a mark to market loss of about $60,000,000 on the roughly $900,000,000 of non U. S. Dollar investments. Returns in the quarter and for the year reflect generally solid returns across our financial services and industrials verticals, offset by challenging results at a few of our healthcare and consumer companies.

But it’s important to remember that returns in any quarter or year will vary across verticals and businesses. However, each investment benefits from a long term value creation plan. Our PE teams remain focused on their operating companies and delivering attractive returns over time in line with our targets. Turning to credit results, our credit investments delivered a $16,000,000 net gain or 2% return in Q4 and a 9% return for the year. The net gains were driven by our structured and opportunistic strategies with the CLO returns aligned with the leveraged loan market.

On the asset management side of the business, Onex ended the year with just over $35,000,000,000 of fee generating AUM. The 3% increase in the quarter reflects new commitments made to ONCAT V and the Onex Partners Opportunities Fund, as well as new CLOs in both The U. S. And Europe. In total, Onex raised approximately $2,800,000,000 of FGAUM in Q4 and $8,800,000,000 for the year.

Our structured credit business had an outstanding year and another active quarter. Q4 included the pricing of two new U. S. CLOs and one new Euro CLO that were part of a quarter where $4,300,000,000 of FGA AUM was raised or extended. Fee generating AUM in our structured credit business increased 34% in the last twelve months, contributing to a CAGR of 16% over the last four years.

With about $90,000,000 of run rate management fees, the structured credit team has done a great job building the franchise over the last few years. And as I pointed out before, this growth has been achieved while significantly improving the platform’s capital efficiency. Since 2020, Onex’s ownership of the platform CLO equity has decreased by more than half from 87% to 41%, making the platform’s growth all the more impressive. As I mentioned last quarter, the team’s done a great job managing the portfolio this year with 90% of the CLO AUM in its reinvestment period at year end compared to 63% at the beginning of the year. Furthermore, the weighted average reinvestment period now ends in March 2028, over two years longer than where we stood a year ago.

The team’s success has laid the groundwork for strong recurring fees, while we continue to grow the broader credit platform. Turning to fee related earnings, we reported a modest FRE loss of $1,000,000 for Q4 with a $6,000,000 contribution from the asset management platforms. This reflects increased fees from ONCAT V and structured credit, the beginning of the OP opportunities management fee period and the continued impact of cost management initiatives. You’ll note in our disclosures that we’ve begun to break out earnings from our structured credit products to give you insight into the contribution from this part of Onex credit. FRE from structured credit was $12,000,000 in Q4 and $44,000,000 for the year, representing a full year increase of roughly 45%.

And with management fees from new CLOs closed in 2024, fully online for 2025, structured credits run rate FRE contribution is about $50,000,000 at year end. Before moving to questions, I wanted to provide a brief update on our twenty twenty three Investor Day targets. Based on its strength and momentum, we’re confident the overall Onex Credit platform will achieve its target of twenty twenty five year end run rate FRE of $55,000,000 As I pointed out before, Onex credit is a valuable business and as you know an asset not reflected anywhere in our NAV. Looking at the rest of our operations, which are our PE platforms and Onex’s investing in public company costs, we do not expect to reach our goal of a breakeven run rate contribution this year. In Q4, these operations contributed a combined FRE loss of $7,000,000 And while the PE teams are making progress developing new sources of fees, we do expect some decline in existing management fees over the course of the year from realizations.

However, I think it’s worth noting what the net cost of our non credit operations represents for shareholders. Using very simple math, if you annualize the $7,000,000 of net costs and compare that to the almost $6,000,000,000 of Onex’s invested capital managed by the PE teams, you get an implied annual management fee expense ratio of around 50 bps during Q4, a very low cost per PE where fees can approach 200 basis points on invested and committed capital. And that’s all before the meaningful net carry opportunity Onyx enjoys from PE. When you include any reasonable additional contribution from carry, Onex’s PE capital is actually being managed for free, a good position for shareholders while we continue to build our PE fee streams and overall profitability. As Bobby indicated, there has been positive activity across all Onex platforms in 2024 and we’ve entered the New Year in a strong position.

Our focus continues to be generating shareholder value through opportunities where we have a right to compete and win. That concludes the prepared remarks. We’ll now be happy to take any questions.

Conference Operator: Certainly. And our first question comes from the line of Nick Pree from CIBC (TSX:CM) Capital Markets. Your question please.

Nick Pree, Analyst, CIBC Capital Markets: Yes, thanks. Just following on that last comment from Chris. Appreciate the outlook for FRE across the various platforms. I guess when you tie it all together, can you just talk a little bit more about the outlook, I suppose, for consolidated FRE in 2025? Like would the objective be to sustain neutral FRE margins?

Or do you think there’s the possibility of a more meaningful positive FRE contribution in the year ahead?

Chris Gavin, Chief Financial Officer, Onex: Yes. So Nick, I think we’re really excited and optimistic about the performance at credit as we’ve articulated. And we expect that business to contribute meaningful growth in their FRE during 2024 sorry, 2025. I think full year 2024 was about $25,000,000 from credit, exiting $25,000,000 at a run rate of $55,000,000 You can kind of guess that the $2,025,000,000 dollars actual will be somewhere closer to run rate than $2,024,000,000 dollars actual. So that’s in a really good position.

In our PE business, it’s a little more difficult to predict because fundraising is more episodic and difficult to predict when assets will come online. And as I mentioned, we’ve got a little bit of headwind likely from realizations that will decrease fees in the rest of our operations. But we still expect to get to a positive FRE contribution overall in 2025, but not meaningful. It’ll be slightly positive. But I think it’s really important to remember, especially for our PE business, kind of stopping at FRE is really just short changing the value of that platform given the real meaningful carry opportunity.

So although we’re not going to be positive FRE for PE and the public company combined, If you include any meaningful carry, that part of our business is cash generative and adding value.

Nick Pree, Analyst, CIBC Capital Markets: Yes, okay, fair enough. And then just on the comments about realizations in the PE portfolio, you were hearing talk from other alternative asset managers about the expectation for greater velocity of transaction activity in the private market space. I guess, in your pipeline, do you see maybe a few items that could be actionable in the first six months? Or was that just kind of a general comment about how there will be kind of gradual attrition as a part of the normal course activity?

Bobby LeBlanc, Chief Executive Officer, Onex: I think it’s Bobby. I think it is a general comment, but I also think you should expect to see return of capital this year from both our OP and non cap platforms. There are specific plans in place. I mean, obviously, always market dependent, but I expect us to be active on that front this year.

Nick Pree, Analyst, CIBC Capital Markets: Okay, very good. And then just last one, I want to ask for an update on PowerSchool. And I know you recently sold half of your interest. I think the investment is only about 3% of your NAV, so it’s pretty small. But I was wondering if you could elaborate on some of the action being taken by the team there just to address the cyber incident and just maybe give an indication on kind of expected scale of potential earnings impact or whether you and your partner would maybe anticipate the need to downstream any capital to that business?

Bobby LeBlanc, Chief Executive Officer, Onex: No. And again, I won’t get into too much specifics, but I think the management team has done a very good job communicating with all of its customers as to what happened and the limited aspects of risk around that data. It’s always concerning like if you’re in a sale process for a particular product that somebody will try to use that against you, but I don’t anticipate any capital need for that business related to that event.

Nick Pree, Analyst, CIBC Capital Markets: Okay, very good. That’s it for me. I’ll pass the line. Thanks.

Conference Operator: Thank you. And our next question comes from the line of Graham Riedy from TD Securities. Your question please.

Bobby LeBlanc, Chief Executive Officer, Onex: Good

Graham Riedy, Analyst, TD Securities: morning. Just looking at your discount to NAV, do you believe that if you can be active this year on the portfolio realization activity within your PE business that that will help maybe validate sort of the value within your NAV and help to tighten the discount? And then maybe the second part to that, beyond buybacks, what else are you focused on here to tighten the discount?

Bobby LeBlanc, Chief Executive Officer, Onex: Yes. So obviously selling things at or above NAV will always help validate that the discount doesn’t make sense. As I’ve tried to point out consistently, there’s also a secondary market for our PE assets that trades well, well above the implied discount on the PE if you give proper credit for cash and our credit products. So that arbitrage today is sort of 30 to 40 points of discount, which really makes no sense to us, hence the SIB and the other share buybacks that we’ve been doing. Again, to create value on top of that NAV, like again, I’ll I’d point back to credit, that like Chris just did.

Again, that business did $25,000,000 of FRE last year. It’s run rating $39,000,000 going into the year on things that have already been done in 2024. And the spread between structured credits profitability and the rest of the business that’s scaling also has decreased meaningfully on a run rate basis between 2024 actual and 2024 run rate. So as we and we’ve already done three new CLOs and closed that $780,000,000 institutional deal and that institutional deal utilizes those subscale products and every dollar of revenue from those products is accretive. So, I pointing towards that credit business and getting people to understand it, I think should be a true source of shareholder value above and beyond what people are looking at today on the NAV.

And not to mention all the carry opportunity and everything else that Chris pointed out. On top of that, I’m spending a lot of time on general capital allocation and what to do and how to invest the $8,500,000,000 over time as it comes back. I don’t have much to say on that now other than the fact that it’s getting a lot of my mindshare.

Graham Riedy, Analyst, TD Securities: Okay, excellent. Just on the fundraising side, can you maybe articulate what your plans are or your targets are perhaps for 2025 for CLOs and otherwise? Yes, I won’t

Bobby LeBlanc, Chief Executive Officer, Onex: get into specific targets, but we expect structured credit overall, which would include Osco and ONTAP. And that’s the product that the institutional investor just put the $780,000,000 to actually have another very good year. Obviously, the ops fund and ONCAP are both wrapping up fundraisings for their platform. So they’ll be in market like just preparing for future fundraisers. But I think most of the new incremental capital will come from the credit business next year.

And by the way, that could also be CVs and other type of things that Chris mentioned that would come out of the PE business, but it wouldn’t be a new fundraise. It would be things like that.

Graham Riedy, Analyst, TD Securities: Okay, understood. And then just my last question, you’re still sitting on what looks to be a fairly healthy amount of cash at $1,600,000,000 Should we expect you to continue to be active on your NCIB or would you consider another SIB? Maybe where’s your preference on the count

Chris Gavin, Chief Financial Officer, Onex: of the 100%,

Bobby LeBlanc, Chief Executive Officer, Onex: you should expect us to be active on the NCIB, one hundred percent. And as far as the SIB is concerned, we’ll continue to always look at that. And if we see an opportunity to do that given other competing uses of the capital, we’re open to buying shares back anywhere near these levels.

Graham Riedy, Analyst, TD Securities: Okay. That’s it for me. Thank you.

Conference Operator: Thank you. This does conclude the question and answer session of today’s program. I’d like to hand the program back to Bobby LeBlanc for any further remarks.

Bobby LeBlanc, Chief Executive Officer, Onex: Thank you all for your time. Again, if you have more questions, feel free to reach out to Jill and her team or to Chris or to me to answer the questions. We hope you have a nice weekend and look forward to talking to you either during the quarter or on the next earnings call. Appreciate it. Bye bye.

Conference Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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