Flow Capital Corp. (FW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Flow Capital's Earnings Call for Q3 2024. [Operator Instructions] I would like to remind everyone that today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Flow Capital's risks and uncertainties related to these forward-looking statements, please refer to the Q3 2024 company's Management Discussion and Analysis, which is available on SEDAR. Today's call is being recorded on Wednesday, November 20, 2024. I would now like to turn the conference over to Alex Baluta, Chief Executive Officer of Flow Capital. Please go ahead.

Thank you, operator. Good morning, everybody, and thank you again for participating in today's call. I'm joined by Michael Denny, our Chief Financial Officer. After the close of market yesterday, we released the financial results for the quarter ended September 30. Details can be found on our website, which is a new website, by the way, or as filed on SEDAR. I will keep my comments brief as I normally do, but I do want to focus on some highlights. I won't, as is typical for our calls, be going through all of the full financial statements as you can read them when you have time. Loan interest revenue for Q4 (sic) [ Q3 ] was $2.5 million. That's up over 46% to the prior year and up 18% from the prior quarter. That is a very strong quarter for us, in fact, a record quarter. Our total reported revenue under IFRS was actually $1.25 million in the quarter. I pointed this out on every call before, and please note that IFRS revenue can be slightly distorting and hard to follow as under IFRS, changes in balance sheet items need to flow through the income statement, which can lead to things like negative revenue in the quarter and making it hard to track the real performance of our core business. That's why we talk about loan interest revenue and/or recurring free cash flow, which we believe are better metrics to track. In terms of recurring cash flow, defined as loan interest revenue, less cash expenses and less cash interest cost was $638,000 in Q3. That's up 169% from Q3 a year ago when we generated $237,000. From a profitability perspective, Q3 marked the 19th sequential quarter that we've been free cash flow positive going back all the way to Q1 2020. Needless to say, we've been efficient operators, and we will continue to improve our efficiency every quarter as we scale our business. I do expect we'll remain profitable even as we grow our top line. In terms of capital deployment, during the quarter, we deployed just over $10 million. Overall, in terms of capital deployment, we've had a very strong year, deploying approximately $29 million in the past 12 months and $26 million year-to-date. It should be noted that from a repayment perspective, we had approximately $14 million in repayments. So our net new deployments is over $12 million in the year-to-date. As a result, our total assets are up to $71 million or up 12% in the year. Our book value per share was down slightly in the quarter at $1.22 per share, down from $1.25 and immediately preceding Q2. This is driven by 3 factors. Primarily, most of the revision was driven by the lowering of a few of the valuations in our warrant and equity portfolio. We had a small increase in ECL in one of our portfolio names and finally some FX swings. It's worth lingering on the warrant and equity valuation issue. As you know, we need to value our equities or warrants every quarter, essentially we mark-to-market. To do that with our private holdings, we use either the most recent valuation from an arm's length-based financing that the company may have done, which generally for us recent is within the last 12 months or we use market comparables. So the downward revision this quarter in those valuations is primarily because broadly speaking, market comparables for private positions and equity valuations continue to be materially down from 2023. OpEx has remained consistent at approximately $3.2 million per year, plus or minus $100,000 for almost the past 5 years. Over that time, going all the way back to Q1 2020, we've grown quarterly revenue from approximately $1 million to $2.5 million, that's up 150%. And we've grown book value per share by almost -- by just over 160%. So I think that over the last 5 years, we've handily outperformed pretty much any relevant benchmark. I just want to reiterate, that's revenue up 150%, cost flat, cash flow positive for 19 quarters. And if you look at our recurring cash flow for the year, we're on track for somewhere between $1.5 million to $1.9 million in terms of recurring free cash flow for the year. Very proud of that performance and expect to continue to work hard to continue those -- to continue to deliver those kind of results over the coming quarters. The portfolio continues to perform well. We've had no new nonperforming loans. Our portfolio IRR or at the top level IRR, I should say, the portfolio level IRR for the past 6.5 years is approximately 25%. You may recall, last year, our IRR was in the 30% range. It's down primarily because of the volume of new investments that we've made so far this year as new deals tend to pull down IRR. We think 25% is a great number. We work hard to keep it at that level, and our long-term target is somewhere between the 22% to 26% range over time. So we continue to be at the top of our target. This IRR performance is the result, I think, of a deeply ingrained focus on deal quality and risk mitigation. Philosophically, I've said this before, we target zero 0s, as in zero defaults, which is a shorthand way of reminding everybody on our team more broadly, our stakeholders, that it's hard to make up a capital loss with a net spread on the rest of your portfolio, although warrants can, over time, help make back some of those losses. We, therefore, do extensive due diligence and are very, very picky in the deals that we do. Now this pickiness does mean that we close less than 1% of the deals that we see at the top of the funnel. And then even after signing a term sheet, we only closed on 1/3 of the deals that we signed the term sheet for. But in spite of that, we've had a record deployment in terms of total capital deployment over the past 12 months. So what we're seeing is relative strength over the last 3 quarters in our pipeline. By the end of the year, we expect to have seen approximately 1,200 leads at the top of the funnel. That's up from 900 last year. While this is a nice increase, this really is well below what we're targeting. And we need to grow that top of the funnel dramatically on the order of 2,000 to 3,000 leads next year is what we need to generate in order to sustain our growth, and we have a lot of initiatives in place to make that happen. Finally, a quick update on our NCIB. In our normal course issuer bid ending November 2024, we repurchased 1.6 million shares for approximately $800,000 at an average price per share of approximately $0.51. I want to point out that over the past 6 years, we've repurchased approximately 17.5 million shares and spent approximately $7 million doing so at an average price per share of below $0.40. From our perspective, this represents a very significant return of capital to our shareholders. And as we said in the past, given the continued market discount of our share price relative to book value, we will continue to buy back our stock, essentially buying, as our Chairman likes to say, dollars for $0.50, and we fund that through our strong cash flows. So with that, I'd like to wrap up. Strong quarter, and I look forward to continuing to generate this kind of performance in coming quarters. Operator, I'll turn it back to you to see if there's any questions.

[Operator Instructions] We currently have no questions at this time. I would like to turn it back to Alex Baluta for further remarks.

Thank you, Ludy. Well, I appreciate everybody who might listen to this recording off our website and appreciate everybody who tuned in. Thanks very much for your ongoing support, and I look forward to speaking to you in a couple of months on our year-end results. Thank you, operator. Thank you, everybody.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.