Fidus Investment Corp (FDUS) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation's fourth-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jody Burfening. Please go ahead, ma'am.

Thank you, Danielle. Good morning, everyone. Thank you for joining us for Fidus Investment Corporation's fourth-quarter and full-year 2014 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer.

Fidus Investment Corporation issued a press release yesterday afternoon with details of the Company's quarterly financial results. A copy of the press release is available on the Investor Relations section page of the Company's website at FDUS.com.

I'd like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the Company's website following the conclusion of this conference call.

I would also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included in the earnings release. The conference call today will contained certain forward-looking statements including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Fidus Investment Corporation.

Although management believes the statements are reasonable based on estimates, assumptions and projections as of today, March 6, 2015, these statements are not guarantees of future performance. Time sensitive information may no longer be accurate at the time of any telephonic or webcast replay.

Actual results may differ materially as a result of risks, uncertainties and other factors including, but not limited to, the factors set forth in the Company's filings with the SEC. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody. Thank you and good morning, everyone. Welcome to our fourth-quarter and full-year 2014 earnings call. I will start our call by highlighting our results for the fourth quarter and full year, followed by a discussion of our investment activity and the performance of our investment portfolio. Then Shelby will go into more detail about our financial results and liquidity position. After that we will open up the call for questions.

Starting with the fourth-quarter and full-year highlights, Fidus capped the year with a strong fourth quarter during which we generated net investment income of $6.7 million or $0.42 per share. Our adjusted net investment income, which we define as net investment income excluding any capital gains, incentive fee attributable to realized and unrealized gains and losses, was $6.8 million or $0.43 per share this quarter.

For the full year we reported net investment income of $23.3 million or $1.62 per share. Adjusted net investment income for 2014 was $22.6 million or $1.57 per share. As of December 31, 2014 net asset value was $15.16 per share.

For 2014 Fidus paid a total of $1.72 per share in dividends, consisting of our regular dividend of $1.52 per share and a total of $0.20 per share from three special dividends. At December 31, estimated spillover income or taxable income in excess of distributions was $13.4 million.

For the first quarter of 2015, as previously announced, the Board of Directors has declared a regular quarterly dividend of $0.38 per share which is payable on March 26, 2015 to stockholders of record on March 12, 2015.

In the fourth quarter we made debt and equity investments totaling approximately $87.2 million, a record amount for Fidus including investments in eight new portfolio companies. Several of the new portfolio company investments took longer than usual to close. This fact coupled with the normal yearend push resulted in a back end loaded year in terms of investments. To put this in perspective, the fourth quarter accounted for 58% of the $149.8 million we invested in 2014.

It isn't unusual for investment levels to fluctuate from quarter to quarter, but this year's deal flow was uncharacteristically back end weighted. As we have discussed in the past, M&A-related transactions, which generally have longer investment closing cycles than pure debt refinancings or recapitalizations, [do have] high levels of activity in our target lower middle market and for Fidus throughout 2014.

The eight new portfolio Company investments that were made in the fourth quarter were consistent with our strategy investing in debt and, to a lesser extent, equity of companies that operate in industries we know well that generate excess free cash flow for debt service and growth and that have positive long-term outlooks.

Other transaction or Company characteristics that we look for include moderate leverage profiles and strong yet defensible market positions. Let me give you a brief description of these portfolio Company investments.

We invested $6 million in senior secured notes of Plymouth Rock Energy, a leading retail energy marketer for the domestic natural gas and electricity industries.

$10.5 million in subordinated notes of Grindmaster Corporation, a leading global manufacturer of commercial beverage dispensing and complementary Food Service Equipment.

$7.2 million in subordinated notes in common equity of FDS Avionics Corp., a leading designer, developer and light manufacturer of avionics focusing on cabin electronics for business and commercial aircraft and ruggedized special mission monitors and other retrofit solutions for military aircraft.

$12.8 million in subordinated notes in common equity of Carlson Systems Holdings, Inc., a leading distributor of fasteners, packaging supplies and specialty tools for the construction and industrial end markets.

$14.3 million in subordinated notes and common equity of Allied 100 Group, Inc., a leading distributor of automated external defibrillators, or AEDs -- AED replacement parts and accessories and related training products, as well as a provider of medical direction and AED training services.

$6.5 million in senior secured loans and preferred equity of Inflexxion, Inc., a developer of scientifically-based interactive technologies to collect data regarding health status, health behaviors, health benefits and health outcomes.

$10 million in subordinated notes of Toledo Molding & Die, Inc., a leading manufacturer of highly engineered thermoplastic components and assemblies for automotive interior and air and fluid management system applications.

And lastly, $12.3 million in subordinated notes in common equity of the Virginia Tile Company, LLC, a leading independent distributor of tile products and related installation and maintenance materials to the residential and commercial construction markets.

Proceeds from repayments and realizations totaled $29.3 million for the fourth quarter. Our investments in FCA, LLC were repaid when the company was sold to a private equity group and our debt investments in Focus Vision and Premium Franchise Brands were refinanced by senior debt providers with strong performance by both companies being the primary driver of their refinancings.

Also in the fourth quarter we realized the losses on our investments in Avrio, which was fully written down in the second quarter. For the full year repayments and realizations totaled $62.6 million, which includes full repayments of investments in five portfolio companies and two additional debt repayments.

At December 31, 2014 the fair market value of the portfolio was approximately $396 million, which equates to approximately 101% of cost and represents a 24% increase on a cost basis year over year. We ended the year with debt and equity investments in 42 portfolio companies with equity positions in roughly 86% of them.

As we have highlighted in the past, our portfolio is structured to provide high levels of current income from debt investments and potential capital gains from our equity-related investments. Our view is that creating a high-quality equity portfolio can provide not only incremental profits but also a reasonable margin of safety for Fidus. This margin of safety, coupled with our strategy of maintaining a diversified portfolio, can also help us mitigate the risk of write-downs and losses. At December 31, 2014, we had no debt investments on nonaccrual status.

Turning to portfolio performance, we tracked several quality measures on a quarterly basis to help us monitor the overall stability, quality and performance of our investment portfolio. In the fourth quarter these metrics remained strong and in line with prior periods.

First, we track the portfolio is weighted average investment rating based on our internal system. Under our methodology a rating of 1 is outperform and a rating of 5 is an expected loss. As of December 31 the weighted average investment rating for the portfolio was 2 on a fair value basis, in line with prior periods.

As many of you know, from a debt structuring perspective we look to maintain significant cushions to our borrowers' enterprise value in support of our capital preservation and income goals.

One metric we track is the credit performance of the portfolio, which is measured by our portfolio company's combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the fourth quarter this ratio was 3.2 times compared to 4 times for the same quarter last year.

The third measure we track is the combined ratio of our portfolios company total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. In the fourth quarter this metric was 3.7 times compared to 2.9 times for the same quarter last year.

Both the leverage and interest expense coverage measures have been moving in a positive direction, reflecting both the performance of our investment portfolio and the overall leverage profile of our 2014 vintage investments. When evaluating our portfolio as a whole, we remain pleased with both its overall quality and construct and also believe the metrics I just mentioned reflect our continued deliberate and disciplined investment approach.

As a management team we continue to focus on the long-term, working to position both our investment portfolio and our liabilities to withstand economic and market volatility.

We have entered 2015 with approximately $121 million in available capital to invest. Assuming the US economy continues on its current path of slow steady growth, we believe deal flow in 2015 will remain very solid in our target lower middle market, after we go through the typical slow period in the early part of the year.

The continued aging of private equity portfolios, the strong liquidity position of the financial sponsor community and debt capital availability should continue to drive relatively healthy levels of M&A activity. With this market opportunity as a backdrop, we continue to focus on our competitive advantages: relationships, industry knowledge and the ability to offer flexible capital solutions.

Our goal for the year is to continue to grow and to further diversify our portfolio in a very deliberate manner with an acute focus on capital preservation and the generation of attractive risk-adjusted returns. To this end we are focused on continuing to grow the portfolio in excess of repayments and realizations that we expect in 2015.

In closing, while building a track record of portfolio growth and diversification since our IPO in June 2011, we have consistently covered our regular quarterly dividend from earnings even as the Board increased our quarterly dividend three times since the IPO to currently at $0.38 per share. We have paid -- we have also paid five special dividends.

We are very proud of our portfolio performance and NAV growth to date and the earnings growth generated by our investments, which has allowed us to generate attractive risk-adjusted returns for our shareholders. Now I will turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

Thank you, Ed, and good morning, everyone. I will review our fourth-quarter results in more detail and close with comments on our liquidity position. Similar to last quarter, I will be providing comparative commentary versus the prior quarter Q3 2014.

Total investment income was $13.7 million for the three months ended December 31, 2014, an increase of $2.3 million over the $11.3 million of total investment income for the third quarter of 2014 due to $1.2 million incremental and interest income and $1.2 million in incremental fee income related to increased investment activity.

Total expenses were $6.6 million for the fourth quarter, an increase of $1 million versus the prior quarter due to a $0.1 million increase in interest expense, a $0.7 million increase in management incentive fees and a $0.1 million increase in incremental professional fees incurred in the fourth quarter primarily related to the timing of yearend audit work.

In the fourth quarter of 2014 we accrued $0.1 million of capital gain fees verses a reversal of $0.1 million in Q3. Excluding capital gains incentive fees, expenses increased by $0.8 million in Q4. Interest expense includes the interest paid on Fidus' SBA debentures and line of credit as well as any commitment and unused line fees. As of December 31, 2014 the weighted average interest rate on our outstanding debt was 4%.

Net investment income, or NII, for the three months ended December 31, 2014 was $6.7 million or $0.42 per share versus $0.41 per share in the third quarter. Adjusted NII was $0.43 per share in Q4 versus $0.40 per share in Q3. The quarter-over-quarter increase was driven by an increase in assets under management and strong Q4 investment activity resulting in higher interest income and transaction fees in Q4.

Adjusted NII is defined as net investment income excluding any capital gains incentive fee expense or reversal attributable to realized and unrealized gains and losses on investments. A reconciliation of NII to adjusted NII can be found in our earnings press release that was issued yesterday afternoon and is also posted on the Investor Relations page of our website.

For the three-month ended December 31, 2014, Fidus realized losses of $12.3 million related to the write-off our investment in Avrio. Recognizing the loss on Avrio resulted in realized losses which are offset by the reversal of unrealized depreciation on Avrio and $0.7 million of appreciation on the remainder of the portfolio. As a result, in Q4 Fidus recorded a net gain on investments of approximately $0.7 million versus a net loss of $0.3 million in Q3.

Our net asset value at December 31, 2014, was $15.16 per share which reflects payment of a $0.38 dividend and a $0.10 special dividend in December.

Turning now to portfolio statistics. As of December 31, our total investment portfolio had a fair value of $396.4 million. Consistent with our debt oriented investment strategy, our portfolio on a cost basis was comprised of approximately 70% subordinated debt, 19% senior secured loans and 11% equity and warrant securities.

Our average portfolio Company investment on a cost basis was $9.3 million at the end of the fourth quarter. We have equity investments in approximately 86% of our portfolio companies with an average fully diluted equity ownership of 8.7%.

Weighted average effective the yield on debt investments was 13.4% as of December 31. The weighted average yield is computed using the effective interest rates for debt investments at cost including the accretion of original issue discounts and loan origination fees, but excluding investments on non-accrual, if any.

Repayment activity over the past 18 months has impacted the portfolio yield as some higher-yielding loans have been paid off and replaced with loans priced at current market rates which are lower than the rates on the more mature loans.

Now I'd like to briefly discuss our available liquidity. In December we increased our line of credit from $30 million to $50 million. I am pleased to announce that we syndicated the incremental $20 million to EverBank Commercial Finance, Inc. in February.

As of December 31, our liquidity and capital resources included cash and cash equivalents of $29.3 million, unfunded SBA commitments of $51.5 million, and $40 million of availability on our line of credit resulting in $121 million of liquidity at year end. Available cash was used to make additional investments subsequent to year end.

Now I will turn the call back to Ed for concluding comments. Ed?

Thanks, Shelby. As always, I would like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call back over to Danielle for Q&A.

(Operator Instructions). Bryce Rowe, Robert W. Baird.

Ed, I wanted to first touch on yields. You guys noted some yield compression within the portfolio as newer investments kind of cycle on at lower yields. Just curious whether -- we have seen some market volatility in the last quarter or so affecting the larger leverage loans market more than the lower middle market. But wondering if you are starting to see some firming in yields on new investments?

It is a great question, Bryce, and I think your last statement is exactly how I would characterize the market that we are participating in. I think stabilization or a firming of yields took place in the fourth quarter from our perspective. Right now I think that will stick, so that is good.

Have they increased just slightly? That is a possibility, but I think it is too early to say that. I mean there is still, as you know, available capital out there from a variety of sources. But I do think that yields have kind of firmed up here a little bit, which is a good thing for all of us.

Okay. And then maybe an unrelated follow up. Can you talk about maybe the leverage profiles of recent -- of the more recent deals and how they compare to what you have seen in the past? Just kind of curious as to what current M&A multiples are looking like today versus maybe -- versus recent history? Thanks.

Sure, sure, absolutely. As you know, a tougher one, at least for us, to answer -- I think leverage profiles for the market -- I don't think the lower middle market is different than the broader market and the leverage profiles I don't think have gotten nearly as high as really they did in the past pre-2007, but clearly nearly as high as the broader market.

For Fidus the leverage profiles that we invested in in 2014 -- I will touch on that first and then touch on the first quarter here in 2015 -- was actually relatively low. The weighted average leverage profile of our investments in 2014 was in the 2s. And so, what that tells you is we are -- it reflects our focus on risk-adjusted returns, we are -- certain businesses can handle 5 times leverage and certain businesses should be leveraged more like 2 times.

And so we very much structure our investments to both the Company and the situation. But that is kind of what transpired in the fourth quarter and also really throughout 2014. Here in 2015 thus far, the investments we've made, the investments have been in the 3s, so low to mid 3s I think if I am thinking about it correctly.

So I don't think there is any big change from our perspective, meaning Fidus' perspective on the leverage front. And again, we continue to look at it more on a risk-adjusted return basis as opposed to what is the market. We will leverage something 5 times if it is something that is worth 8 to 10 times. But at the same time if it is not worth that then we are going to have a different answer. So, hopefully that is helpful.

That is super helpful. Thanks, Ed.

Vernon Plack, BB&T Capital Markets.

Ed, I was looking for some of your thoughts on how you plan on drawing additional borrowings at this point. Will it come mostly from the SBA availability or will you be drawing down more on your revolver or will it be a combination of the two? Just interested in your thoughts there.

Sure, absolutely. Great question, Vernon. I think we still have a fair bit of availability under our SBIC license if you will -- or the second license we have. And when -- we are going to utilize cash I would say first as we move forward. And then if an investment qualifies for our SBIC funds we will then quickly use those dollars first as opposed to a revolver.

Clearly we are making some investments in companies that don't qualify as an SBIC investment and in those cases obviously we then move to the revolver. There are cases where maybe we are making a little bit larger investment and we will split the investments, but generally speaking, if it fits the SBIC and we've utilized our cash then we are going to move to that -- those funds.

Okay, great. And one big picture question. As you look at the underlying trends that you are seeing in your individual portfolio companies, both on the top line as well as the bottom line, what is that telling you about the direction or the shape of the overall economy?

Great question, Vernon. Fortunately, at least what we are seeing, is continued slow growth from both -- in our portfolio from both a revenue and an EBITDA perspective. Within that, as you know, we have outliers on either end, some that are underperforming and thankfully more that are exceeding expectations or at least growing both at the revenue and EBITDA line.

So what I would say is it is slow to moderate growth in our portfolio and pretty stable as well. So we feel very good about the overall health of our portfolio.

Okay, that is very helpful. Thank you.

(Operator Instructions). Robert Dodd, Raymond James.

If I remember right, and I might be getting the timing off a little bit here. About six months ago, as you said, you were seeing a lot of deals, but the credit quality was poor. And that might have been the first quarter -- the second quarter of last year. Obviously a record amount of deployments in the fourth quarter here and attachment points look pretty low as well.

So could you give us any color -- I mean what really changed over the course of six, nine months or whatever where you went from a lot of deals at poor credit quality to a lot of deals that look like very, very good credit quality? Could you give us any more color on that?

Sure, I am sure I said that as part of a -- one of our calls. What I would tell you if I look back on 2014, deal flow was pretty strong throughout the year. The first quarter was a little slower than usual I would say -- or not usual, actually just a little slower than the rest of the quarters.

Clearly in the second quarter there was a point in time, and I told this story recently, we thought there were six transactions -- six or seven transactions that could potentially close in that quarter and we ended up closing one for a lot of different reasons.

And so, the year ended up being very, very back end weighted. And many -- several of the deals actually just took more than six months to actually come to fruition. So I thought deal flow was spotty as always. I don't remember it being awful in the second quarter. But in the third quarter deal flow picked up to a pretty good extent.

And then I think the stars aligned for us somewhat. There was -- as you know, relationships matter. We had a lot of deal flow from places where we have very good relationships. We had industry knowledge in a lot of the investments -- or very good industry knowledge and the investments that we made in the fourth quarter. And I think all those things helped in trying to make investments.

So we were busier than I ever would have anticipated, but we tried to take advantage of the opportunity set that was presented.

Perfect, thank you. Just sticking kind of with the leverage, I mean you said 2014 average attachment point -- kind of 2 times. Historically if I remember that is kind of the ballpark where guys start getting refied out by senior bank lenders.

So could you give us any more -- I mean obviously you mentioned that some businesses shouldn't carry much more leverage than that. I mean is there a characteristic difference that is driving that? Are they asset light businesses that banks are hesitant to lend to? Or any more color on that?

Because obviously 2 times in that quarter (inaudible) and a significant drop and improvement in interest coverage over the year, I mean the credit quality looks very, very robust at this point.

Sure. Well just to make sure I clarify. So the attachment point was probably in the 1's actually, but the detachment, meaning our leverage profile for the investments we made in 2014 was below 3 times, but it wasn't 2.

I would say from a -- again, we are focused on high free cash flow businesses, so we are clearly cash flow and enterprise value investors and trying to invest with a pretty large margin of safety with regard to equity cushion.

So in some of these deals when we invested at 2.5 times leverage for instance, they are probably companies that will be sold for 5 times or 4.5 to 5 times. And then there are others that are leveraged higher and they would be potentially sold for 7, 8, 10 times.

And so, it really -- I think what we are focused on is very prudent capital structures, sustainable cash flows and high free cash flows to pay down our debt and derisk our investments. And so, I think that is the opportunity set that we were presented and how it kind of played out. I don't think there is anything -- anything more specific than that.

Okay, great. Thanks. If I can one housekeeping one. You said obviously the deployments in 2014 were back end loaded. Can you give us -- for the fourth quarter were all -- record levels of deployment, were all of those back end loaded within the quarter as well, i.e. didn't benefit the quarter very much in terms of coupon fees -- yes, coupon (inaudible). Can you give us any color on when they rolled in during the quarter?

Sure. I think if my memory serves me correctly we had made three investments prior to the last call. And so, we made five investments post November 5, if you will, I think that was the call date. I think a couple of those were in November and then there was three investments made in December.

Okay, got it. So [roughly even].

Correct, correct.

Got it, thank you.

Thank you. And I am not showing any further questions in queue at this time. Actually we do have a follow-up from Bryce Rowe, Robert W. Baird.

Sorry to prolong the call. Ed, obviously you finished the year with no non-accruals now that you have exited Avrio investment and you are sitting on quite a healthy amount of spillover income. Appreciate the conservative approach you guys have taken with respect to distributing that. So any thoughts on how you go about managing it over the course of 2015? Thanks.

It is a great question, Bryce. And as you know, we have talked about in the past, I think it is worth just touching on our overall approach and then I will hit the spillover as well. But we are focused on being pretty balanced from a dividend perspective.

First and foremost trying to deliver long-term value in the form of stable and growing quarterly dividends. Making periodic special dividends is clearly something we have done over the last two years and it is something that is top of mind as well for the Board. And what I would say is it is a big discussion topic every time we get together.

Balancing that is we also have a goal of growing our NAV on a per share basis over time. We believe here at Fidus that that is a winning long-term strategy and we are very focused on both the near-term and the long-term and a declining NAV makes performing well much more difficult. And so, the NAV also creates a balancing act for us.

And lastly, we are pretty conservative and we intend on continuing to manage the business with a high margin of safety. And that is obviously both an offensive, it gives us available cash to invest and grow, but it is also a defensive in -- if we enter tougher times. And so, being both offensive and defensive there and having some surplus makes good sense to our Board.

So I think we will -- we are going to continue to consider the spillover position every time we get together. It is a big topic and you can be assured that we are focused on doing the best we can for our shareholders but being conservative in nature as we move forward. Hopefully that is helpful, Bryce.

It is, thank you, Ed.

Rob Brock, West Family Investments.

Hi, Ed, it is Jim Young actually. I was wondering could you talk about your expected pace of repayments in 2015? Thank you.

Sure. It is a very good question. Our investment -- our repayments here in 2014 were about $63 million. What I would say is as we look at it our initial analysis or initial thoughts here in 2015 would be our repayments will be higher this year. So I think as we look at it we see a solid investment environment in M&A market in 2015 absent something changing. But we do anticipate repayments being a little bit -- well, being higher.

Not what is that number going to be, it is going to be unpredictable. And it always is, you get surprised usually once a quarter on something coming back that we didn't think was. So it is a very good question, but I would say our analysis is that repayments will be a little higher than last year. Hopefully that is helpful.

Thank you. And I am not showing any further questions at this time. I would like to turn the call back to Ed for any further remarks.

All right, well, thank you, Danielle, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our first-quarter call in early May. Have a great day and a great weekend.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.