Duke Capital (LSE:DUKE) — Full Year Results

0:01 Good afternoon, and welcome to the DUKE Royalty Limited full year results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the q and a tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Neil Johnson, CEO. Good afternoon to you, sir.

0:32 Good afternoon, and good afternoon, everyone. Glad to be with you and present our fiscal year twenty twenty three financial results with me and the chief financial officer, Hugo Evans. Good afternoon, everyone. Let's skip to some slides, and, hopefully, we have some shareholders that have been with us before in in previous IMC events and other women webinars. And so we'd like to start with a little bit of the corporate overview and what exactly we do for any newcomers. You might have seen these slides before, but what I'm actually wanting to do is is is overview overlay verbally, you know, some of the things that are that are new that we're seeing, the trends in the industry, and and where DUKE royalty fits into into the into the the universe of alternative financing.

1:32 So the overview right here is really that what we call corporate royalties, and we'll get into the product in a second, are really a hybrid between private credit and private equity for SME businesses. And we're looking for owner operators who want to maintain control of their businesses, but they're long standing profitable companies, but have a need for capital. What this means for our investors and our shareholders is that we we look at life with three pillars of what we're trying to achieve. The number one pillar is capital preservation. So we are senior secured loans to these companies and we we have alignment with the owners and we'll get into that. But we really take this is one of the the unique aspects of the DUKE royalty model is that we have a long term investment horizon.

2:35 The second bucket the second pillar of our of our investment thesis is our attractive dividend yield. And then some of you may say that's the first the first thing that you that you like. But, you know, for us, we get paid from month one, and we have a quarterly dividend payment. We have since our inception over six years ago, and our current annualized dividend is 2.8 p, which gives us an over 8% dividend yield. And third, and something that as the company has matured and as our portfolio matured, we've talked more about is is not just a credit portfolio. We're not just a lender. We we want this hybrid. We want this private equity kickers to our to our NAV, and that comes from the buyouts.

3:32 And this is going to be a feature that, occasionally, companies will buy out and refinance DUKE out of their capital stack. But what happens is we have a buyout premium, a cash kicker, some call it a fee. And and then we also are building a portfolio of minority equity positions in some of the companies. And Hugo will go into how we account for that and and and how they're valued. So that's the product and and and why the investment thesis is so is so promising. And and the other things I'd like to touch on is we have 62 now operating companies underlying our 14 royalty partners.

4:24 And so we we one of the use cases is buy and builds for companies. In fiscal twenty twenty three, we invested £26,000,000 in the portfolio. We added two new royalty partners and, you know, that was cautious deployments based on, you know, the the economic headwinds and everything that all investors have had to live with over the last twelve months. We're really proud of of this set of results because our they are record results in a lot of our KPIs. You know, we've had 11 quarters in a row of increasing recurring cash flow. In fiscal twenty three, so our recurring free cash flow up 51% and up 30% per share.

5:16 Inflation is a big topic. We have annual adjustments on the cash that we receive from our royalty partners, And that is based on their revenue performance, which is the the nod to royalties. And and in fiscal twenty three, of a possible sorry. Out of 10 adjustments that we had, the new ones, of course, don't don't adjust right away. And we saw eight adjustments at the maximum possible adjustment, which is 6% of their cash that we we got plus 6% adjustment. So unlike other forms of royalties, we actually if we do our job right and and, you know, so far so good, we have an accretion of of of and and appreciation in our in our valuations.

6:15 And and and unlike other forms of royalties like mining and oil and gas, eventually, you run out of run out of oil in the ground. They are depreciating assets. We actually have appreciating assets as we can show you today.

6:35 So you may have seen this before. We call it, you know, a long term participating loan. So let's not confuse what we do with with traditional or or IP royalties. We're an SME lender, and what we like to say is that, you know, we have two features to to the capital that we give to business owners. Number one is a corporate mortgage. You're taking out a mortgage on your corporation just like homeowners, you know, leverage their house and take out a mortgage. Over thirty years, you're paying down amortization and and interest.

7:20 And and after the end of the mortgage, the end of term, which is a very, very long time, you own your house. There's no bullet repayment. We have done the exact same thing for for business owners, and and that is a real key feature that that no one else that we that we bump into in the The UK and Irish market is doing. But we're not just a lender. So the second component, again, this hybrid between credit, not as a credit product. A hybrid of private equity is our is our variable returns and our royalty, our adjustments based on revenue.

8:06 So we have the second component, which which we believe, and and Hugo will go into, you know, how that manifests for our investors is is that annual adjustment that we win and take risk with the business owner that we will we will win. If their revenue goes up, we we also participate in in that growth. And and as a as an equity as an slight equity owner, we also will reduce our payments in in troubling times if their revenue goes down. So that is a collar of plus or minus 6%. So we don't take a one for one. If a company is growing 20, for example, we would cap out our adjustment factor plus 6% in currency terms.

8:58 But what it means for our investors and and and all of us here on the phone because I'm a big investor myself and Hugo, we're incentivized to to to grow with the companies. We're partners. We call them royalty partners because for a long period of time, we're like permanent capital to them, and we we we succeed with them, including our equity stakes. So that is that is the the product. You know, couple things that that that everyone asks is, you know, just like your your home mortgage,

9:36 you the bank only only provides you the capital that that that you can afford to pay. We we do the same thing, and we typically have a a four times EBITDA coverage ratio, which means that we're taking half or less of the cash flow of the business. So again, we're not gonna be 90% of the cash flow. We want to be partners with these business owners. And if it's half and half, you know, they got a they get the capital they they need to keep growing. And we'll talk about some of our portfolio companies and what they've done with our capital. The second thing and last thing I wanna I wanna say is just like your home mortgage, you don't have to live in your home for thirty years. You can actually buy us out.

10:23 And and we we ask for within the first three years, you don't buy us out unless you're selling your company. But after three years, for any reason, we we just like your bank loan, you can you can refinance us out. That triggers the buyout premium. That triggers the equity stake sale, but they're it's and it's always in the control of the business owners. So they they love the control that we give them on the on on their business. And and and, ultimately, we don't ask for our capital back, which is just very important. And this slide tells it all, you know, that right in the middle there, that refinancing risk row, none. You know? No refinancing risk for royalties.

11:17 You know? Just like debt, we have events of default and covenants on on what they can do and can't do because we are a senior secured loan, but the other all other debt providers are show short term. That means within five years, they're gonna they're gonna ask for their capital back. They you need to give them back, you know, their £10,000,000 or whatever you borrowed from them. And that is a significant risk for business owners, especially in these times. Think about, you know, all the headlines right now in The UK mortgage mortgage when you're coming up for refinancing your mortgage. You know, refinancing risk for business owners who've lived through o eight, o nine, lived through COVID. They realize that the banks, you know, aren't there for them when when when times get tough and what they want is their capital back, which really which really exposes business owners and and is a is really a risk for them losing their company.

12:23 And and on the private equity side, you know, if you're selling your business, you wanna sell your business, we don't want to to buy your business. You know, we wanna partner with those successful business owners who actually don't wanna sell their business. And and so that's another feature for for for DUKE royalty. Again, this this term this this this slide, I'm I'm actually proud to say has not changed in in six years. You know, we're still looking for the same things. We still have this, you know, the the preferred sectors where it's service oriented, where we have, you know, old economy businesses, been around for a long time. No startups, no risk in in in in biotech and the next big thing that that nine out of 10 times won't won't happen. You know, these these businesses and business owners have lived through ups and downs in the economy, and that's why, you know, when we get to our portfolio, we're pretty happy that that they are that they are weathering this latest storm.

13:30 I wish I wish one of these presentations, I could say there isn't a storm. We're we're still looking forward to those those days, but but, you know, we're we're happy with our portfolio when we get to it. I I would say on this slide again, something different is our initial cash distribution, and we've always had this this range. You know, we aren't because, you know, the the bank rate now is is 5%. You know, we haven't just said, oh, by the way, you know, instead of saying 13%, we're now saying 18% as an initial cash distribution. Like a lot of our competitors, like a lot of business owners, we'll go to other alternative finance, and and they have this leverage. You know, we have equity, and we're in it for the long term. So we're at the top end of that range, but that range has not has not changed.

14:31 And, you know, we we can get into that with from questions and whatnot, but that's that is what's very I'm proud to say has given us big competitive edge in the market today. Lastly, before I turn it over to Hugo, is we're we're here and, you know, we we wanted to, you know, reiterate how our model benefits investors and why why why buy DUKE royalty? At the end of the day, there's a lot of companies to buy. And in in the in the AIM market, you know, there's there's there's not too many that have that have outperformed us. But I I'd tell you the the key tenants of of what we're trying to achieve.

15:25 And and and the first one is this annuity like revenue stream, and and that pays the dividend. That is what we're trying to get at very visible long term revenue stream from our royalty partners. And I'm gonna steal Hugo's thunder here, but, you know, what we have now is £800,000,000 of contractual revenue from those 14 companies over the twenty seven years. That is the

15:58 sum of every corporate royalty that we that we have that is going to come back to us if they don't buy it out. And Hugo will go into that. The second is, as I said before, these are not depreciating assets. We have a compounding opportunity through the participation in the growth. That is the equity private equity side. You know, we have we have a little bit of credit, and we have a little bit of equity. I won't steal Hugo's thunder on the operational gearing, but we're very proud of what we've been able to achieve in reducing the the percentage of our op cost. Occasional buyouts, we're gonna get to that and what that means for investors as our portfolio matures and we get buyouts.

16:49 But, again, diversification of risk is something, you know, I did not want to start a company that is only only investing in one sector mining. You know, if if gold goes up and gold goes down and all we have is gold, you know, it's it's there's there's there's something that is outside of outside of the management's control. So we have a diversification of industries, diverse a diversification of countries, even a diversification of currencies. And and so that is a buffer, and that is that is a good portfolio management for all the portfolio managers out there. We're pretty proud of of where we've gotten the portfolio diversified.

17:36 And the last thing is that we're committed to a healthy quarterly dividend. Our goal is to is as we grow and we're gonna get to the numbers, but we want to increase that dividend over time while still decreasing the payout ratio. And right now with 13 consecutive increases in the Bank of England rate, and we have some leverage on our portfolio, that is impeding our ability to to to increase the dividend every quarter. But I wanna get to the the numbers. We're we're we're very proud of them. They're record numbers. And so why don't we do that now, Hugo? Over to you. Thanks, everyone.

18:25 Thank you, Neil. Yeah. So I'll I'll go through the the finances with you. I think it's fair to say f y twenty three for us was a was a strong year without being spectacular. But I think in the in the current macro headwinds, I think it was very important to exercise caution. But I think you'll see in the results that, you know, as Neil said, we've got a lot of record KPIs across the board. Our balance sheet strengthened. Cash flow is good, and the dividend is is well covered. For those of you that don't know us or don't know me and haven't heard me speak before, I will always focus on cash flow KPIs really for two reasons. First of all, one, the income statement is skewed by sort of fair value and marked part movements on the royalty portfolio.

19:14 And so in our opinion, it doesn't necessarily provide a true indicator of of the operating performance of our business. And secondly, obviously, Neil's talked about our our quarterly dividend, which we're very proud of. And, really, it's the cash coverage that provides that quarterly dividend. And and, really, that for those two reasons why I tend to focus specifically on on the cash KPIs, as well as, obviously, we'll come onto the balance sheet as well. But I I don't generally tend to go into any detail regarding the income statements. So as you'll see on this slide, f y '23 cash KPIs all, you know, very, very steadily increasing, all except that that one metric on the top right hand side, free cash flow per share, which I'll come on to, in in in a minute. But, obviously, you can see here, total cash revenue up from 18.4 to 21,900,000.

20:01 But probably more importantly is the recurring cash revenue has increased 50% from 14,900,000 to 21,800,000. And, really, it's actually this year that you could start to see the importance of that recurring line. And we've never really seen it before, but last year, we had 3,500,000 of buyout premiums and equity realizations. So despite that, you can see the top line cash only has gone up, but the difference in the in the recurring cash revenue is is significant. And I think that really shows that, the strength of the financial year that we've had. Moving on to the free cash flow. You can see free cash flow, which ultimately is what pays our dividend, increasing from 12.1 to 13.1. You'll see free cash flow per share has dropped a little bit from three and a half p down to 3.3 p. Now really two reasons for that. First is I said the buyout premium. So we took 3,500,000 of of buyout premiums and equity realizations in f y twenty three and none in f y twenty two, sorry, but none in f y twenty three. So that's three and a half p, 3,500,000 equates to almost one p, of of free cash flow. So removing that, you'll see, and I'll come on to the recurring why the recurring free cash flow has gone up. But, also, I can't hide from you know, we can't shy away from it.

21:12 As Neil mentioned, we do have leverage in the portfolio, and and the Bank of England interest rates have gone up significantly.

21:18 So we have had a little bit of of of margin squeeze there. But the the main reason for that drop in free cash flow per share is that lack of buyout premiums. And that's really why the bottom two right hand charts, the recurring free cash flow and the recurring free cash flow per share are so important because it's really that that does drive our dividend. It's what we base our dividend on. So to see those increasing significantly, year on year, is very important. And, certainly, it's those two charts that actually I'm probably most proud of for FY '23.

21:51 Neil touched briefly on the operating leverage of the business, and I'm sure those of you who have seen this before would have seen a slide similar to this before. But, really, what I wanted to just focus on was that continuing reduction in the operating leverage. We're a fairly small business in terms of headcount. There are only nine of us in the business, and yet we and as a result, we we maintain a fairly healthy margin. You can see, though, those operating costs fixed operating costs as a as a percentage of recurring cash revenue falling significantly over the last four years, now down to 11%. I would expect that to fall below 10%, in f y twenty four. And just touching on that, really, I could also expect, you know, going forwards, what what will you see? Well, I genuinely believe and Neil believes that, you know, we can double that recurring cash line up to, you know, 40,000,000 with only having to put a small amount of additional OpEx onto that line. So really, really highly operationally leveraged.

22:52 And it that leads on, obviously, to being able to pay out a large portion of our cash as dividends, and you'll see the stats at the bottom there. We've currently, to date, paid out 15.1 p of dividends, as Neil said, at 2.8 p annualized dividend currently. And we would like to see that increase, steadily over the next two or three years. Again, Neil's mentioned the the Bank of England interest rates probably the the high level slightly negating the ability to to increase that dividend in the short term. But we are a long term we take a very long term horizon. You know, we are loans are thirty

23:27 years, and we take a much longer term horizon on this as well. So I think you could expect to see further increases in the dividend when the Bank of England interest rates finally stabilize and and possibly start to reduce. Moving on to the balance sheet. You'll see the the the fair value of the royalty portfolio and the equity portfolio increasing. Now, of course, you'd expect to see a degree of increase given that we we did raise 20,000,000 of equity capital during the financial year back in May 2022. But that is also driven by by a small amount of fair value uplifts. And, actually, I'll note there was a pre submitted question saying that we, had taken negative 9,100,000 of of fair value movements. Actually, it's the opposite. We took positive 9,100,000 of fair value uplift of which, part of that was on the on the royalty portfolio, circa 7,000,000 and and the remainder on the equity portfolio.

24:22 That's really driven by what Neil sort of talked about, the those plus six positive adjustments, 6% positive adjustments on eight out of the 10, royalty portfolios. There was also a bit of currency movements in in the US dollar denominated, investments, but fairly steady. We're only the the fair value of the portfolio is now sitting about 6% above cost. You'll never see outside of a black swath event like COVID. You'll never see significant mark to mark movements, on the portfolio. They're generally sort of small 3% max each year, up or down depending on on how the the portfolio is performing. But as I said, this year, we took 7,000,000 of of uplift on the royalty portfolio and a small uplift in the equity portfolio as well. And we're sort of starting to show we now have 11 equity stakes, actually, in the portfolio.

25:14 So I think over time and a lot of those are in these buy and build businesses, which actually don't have very much equity value on day one. But over time, you'll start to see that, hopefully, see that equity value, grow. Net assets, net asset value per share obviously increased. We finally got about 40 p, which is which is, very pleasing. Somebody also submitted a question asking how we how we value our NAV. Well, the NAV is simply just the net assets of the business, and the NAV per share, obviously, just the the net assets divided by the number of shares. So, you know, very positive to see that NAV per share increasing, along that continue. Gonna introduce a couple of new slides now, which I haven't shown before. Neil talks about at the beginning that, you know, DUKE is a is a sort of a hybrid between private credit and private equity, and this slide really tries to put that into numbers. You'll see the private credit side comes from the the cash return to date. So across the current portfolio, we've currently received almost 60,000,000, of revenue against a 180,000,000 of capital investors.

26:18 So almost over 30% of the, apologies. That's, my doorbell. Over 30%, of the portfolio cash return to date. We're currently running at about, I think q one, we did 6,000,000 of quarterly revenue. So annualized, that's 24,000,000 of annualized cash revenue. So on that run rate, it would only take another five years for for the current portfolio for cash to be fully returned. Then on the private equity side, we talk about the buyout premiums, and and sort of the uplift that we get at the end when these investments exit. So not only can you see the unrealized fair value currently on the royalty and equity portfolio is 203,000,000, but we have 40,000,000, plus of buyout premiums currently on the on in the current portfolio that aren't valued in our NAV. So there's significant equity upside as and when these investments exit. It's also worth noting that actually the the the royalty portfolio is is fairly well discounted.

27:15 The average discount rate is actually about 16 and a half percent. So a fairly prudent approach to to valuing the the royalty portfolio. Just to touch quickly on the equity portfolio, I value that based on a on a forward looking EBITDA against the market multiple. So very similar to sort of how private equity would value their investments. And then lastly, looking at really sort of our our growing cash revenue, you know, what can you expect, you know, for the next year or two? The line you'll see is the is the level of deployments. Now as we talked about, we have taken a fairly cautious approach to deployments in in f y twenty three given the the macro headwinds. We deployed 26,000,000 of capital against 75,000,000, the year before. Obviously, there was a bit of COVID bump, in f y twenty two.

28:07 But the current liquidity of the business is circa 50,000,000. So if we were to deploy all of that, you can realistically expect f y twenty four to be in the region of about 28,000,000 of cash revenue. But, actually, on an annualized basis, that will look closer to 30,000,000. So as we deploy and we're we're we're sort of hopeful of a of a more positive level of deployments this year as our pipeline is looking strong given the the increase in interest rates. And then really is that Neil actually did steal my thunder annoyingly because I wanted to leave you with these two numbers actually. So in the current portfolio, we have over 800,000,000 of contracted revenue back to us over the next it says here twenty seven plus years. It's over over thirty years from obviously, the most recent investment. That's 800,000,000 of contractual cash revenue.

28:57 And then if we were to fully deploy, down on our liquidity and and invest the remaining 50,000,000, that would equal over 1,000,000,000 of contractual contractual revenue. Revenue. So I think it's fair to say, all being well, our dividend is fairly well covered for the next thirty years. So that's all from the, from the finance stuff. I will, pass you back over to Neil to to run through some portfolio highlights.

29:23 Thanks, Hugo. Must be commented how focused you were during the when your doorbell was going off. So, yep, well done. Yeah. Many apologies, sir. You know, another want to give you some highlights of our of our royalty partners and and really just talk about, you you know, the state of the portfolio. I think the first thing that we've that we've said in our in our public statements, so we're getting paid by 94% of our contractual revenue right now. So that actually hasn't changed in a couple years. Why it's not a 100% is is Trimite.

30:08 And, again, if you've been with us before, you know, there are during COVID, there was four forbearance agreements that we entered into. Happy to say that, you know, three of them are out. TriMite is only paying us half of what they what they should. We are accruing the balance, so we feel that it's stored value, not lost value. But the the issue that TriMITED is has been faced with is they were in the middle of a consolidation from a different plants. This is an industrial coatings company that's been around for eighty years. They used our capital to buy another plant, and and we wanted to consolidate the operations and and COVID has

30:59 has delayed the doing that. Now having said that, everything is coming to is doing the consolidation is happening right now. It should be complete by September, but this is mission critical coatings for a very big industrial companies, including Perkins and Cummings, and and, you know, we paint jet engine airplanes. I'm on the board of the company.

31:29 So we're very involved in ensuring that, you know, there's no disruption to the customer as we're as we're moving equipment around. And so it's but that that is being executed right now. And and TriMite is is scheduled to go back up to full payments in due course. So you know? But but overall, you look at our portfolio and and, you know, we are in defensive. We're in business to business industries,

32:07 not a lot of consumer facing, you know, UK facing consumer industries. The one that that would be closest is is Myriad. Just to refresh everyone's memory, Myriad is The UK's largest distributor of RV and caravan parts. There's over 18,000 parts they have in a in a big warehouse in The Midlands.

32:34 They they service both OEMs. So for new builds, and they also provide second secondary products for existing, you know, individuals. They can buy, you know, new new kit for their their caravans. And so Myriad does both.

32:57 And right now, you know, discretionary spending in in this industry is low. So, you know, they're they're trending under their their their budget for this year. They certainly had a very good COVID bounce, the kind of the sugar rush after COVID, the staycations, they did very, very well. So what we're seeing is a reversion to the mean. They have a lot of buffer to pay us. Again, they're paying us a 100%. There's no credit risk in in this company or across the portfolio that we see. So, again, you know, those pillars of what we're looking for as long as we're the senior secured that mortgage, and I think so one of the one of the new questions was about, you know, do you take general security or is it specific? No. It is it is general. We are fixed and and floating secured over the over the assets of the the business.

33:56 When there when there is other debts in the in these companies. It's for the the the inventory lines, very cheap capital across the inventory. If they do have mortgage, you know, real mortgage against a piece of property, that is also but we have inter creditor agreements, and they're the ones that are only on a specific asset. And we have, you know, the general the general security. So that that is where we find ourselves. We where we are certainly like business owners, and you can see the percentage of equity stakes. We have something in most of these companies. You know, we get monthly management accounts.

34:45 We hold board calls, and we sit on the boards of these companies or observer rights. So we and and through COVID, you know, we did the exact same thing. This this is like a slow moving train. It's like something it's like a a normal a normal economic downturn. And, again, these these business owners have been through things like this before. So there's no surprises here. The everyone, even the Bank of England is is worried about how long inflation is at these elevated levels and and what that means for our economy. I can tell you that, you know, we have been working with all these business owners for two years now.

35:33 We we had supply chain issues in 2021. We had inflationary issues in 2022. You know? And what they love about our capital is even though, you know, inflation meets means that this year, they were they were up 6%. You know? We aren't choking these companies by, you know, doubling their interest costs if we were like any other lender. So we we feel that it's a long term partnership. We have good controls, good information in these businesses when we have to get active like TriMite. You know, we we were instrumental in in changing a couple of the senior senior leaders like the finance function. It's very important to to get that right.

36:23 But but again, you know, the the portfolio is is stable. We we are we're not worried about the credit risk. We have these companies paying us and we look, as I said in the annual report, cautiously optimistic. No one can predict the future, but as we've seen through COVID, as we've seen for the last six years of us building this business, we are able to withstand economic downturns and and, you know, we're we're happy when our portfolio is performing like this. We're in a business to business mission critical.

37:09 One of the new companies this year, I should mention, NewPath Fire and Security. You know, those are business security monitoring of the business, the fire regulations, fire extinguishers supplying, all these for businesses that are mission critical, and they're regulated. So we we have companies like that that we feel very good about. Tristone is in specialist care. They're being paid by the the councils. And so that is that is an essential service. And and and on and on we go, we you know, most of these companies have been around us as you can see in our portfolio for two plus years.

37:56 And so we're we're happy where the the portfolio is right now. Our couple other slides is it's not just 14 companies. A company like LIMITED that we've been partners with since 2017 has nine different companies in all different industries and even has some Danish exposure, UK exposure, and all business business companies. And so there there are a number of different industries that we're exposed to. And I better let let Hugo talk about these numbers. So go ahead, Hugo. Yeah. Thanks, Neil. Really we added in this slide a lot of of our investors have sort of been asking to see, you know, what is the life cycle of the investment and, you know, how have your your your exits sort of returned.

38:55 So, really, we we've had six exits to date, and as you can see, a range of IRRs. What you would generally expect to see from from our portfolio is if an investment was held to term and just pay us our our our monthly coupon for thirty years, you would expect an IRR of of around 16%. Then when we add a buyout premium on top of that, you would hopefully push that up into sort of the into sort of circa '20, early twenties. And then all being well, as I said, a lot of these, we have equity premiums on, equity stakes in, and that hopefully should juice the return at the end even further up into sort of the high twenties. Now, obviously, a lot of that sort of the the degree of, I I suppose, how good the IRR is depends on on the sort of how quickly really that buyer happens. The earlier the buyer happens, really, the higher the IRR.

39:46 But, really, what you can see from these accesses is that actually happening. Barclays, where we just had the royalty, 16.2% IRR, going up to 22% on on extreme push. But, actually, extreme push, to be fair, is the only one where we have held a a warrant in the business despite the excess. And then the two orange ones, WellTel and BHP, both of those, we did have equity in. Both of those, have returned over 25% IRRs, which is great. The two sort of outliers, Tamarca was a Dutch riverboat cruising business that was one of our first investments. Seemed like a great investment at the time, and then COVID sadly hit. And as you can imagine, you know, not a great business to be in with COVID when, you know, the the the whole sector shut down for twelve months. But as senior secured lenders, we were able to step in, take ownership of, of those riverboats, and we sold them onto the the largest riverboat operator in in Europe, and actually came away with just a negative 1.4% IRR. And, actually, to be honest, that's probably one of the investments we get the most credit for.

40:47 So so good. I'll let Neil explain in store, for you given that was his rather short lived investments, but, obviously, a very, very healthy return. But, again, it's an outlier, not really indicative of of what we'd expect from from our portfolio. Yeah. Thanks, Hugo. That was our second new royalty partner in the fiscal twenty twenty three. And we had we had got introduced to the company late last year. And what had actually happened, which which needs some explaining because we we don't like and we and we keep repeating that we are not used as bridge loan lenders. It does look like we only had a a two or three month investment in in store, but it it it all makes sense.

41:38 When when when this is explained, we facilitated an a management buyout. And the CEO that was the CEO from 2014, five years later, which is 2019, four years ago, wanted to buy the business. And the and he struck a deal with the with the owner that ended up, you know, like, not, you know, pulling back and not having day to day involvement in the company. That deal was struck in 2019. The deal that they that they had was that the purchase price would be out of the profits of the business for, you know, a long period of time.

42:24 2020 looked like a good deal, but actually what happened to the company now that Jack, the CEO, had full control over over the company, he brought in a partner, and they actually established a very good growth trajectory, 2021, 2023, '22, and this year as well. Late last year, it became apparent to to to Jack, and that was that was relayed to us that he would like to accelerate this long tail of buyout and just give a just consummate the the transaction, get his hands on a 100% of the shares by paying out quickly the the 2,019 purchase price.

43:13 So that's what happened earlier this year. We all thought, you know, we're, again, patting ourselves in the back what a great what a great deal this is because it was so profitable. What what what what came next was that Jack had someone wanting to buy the company, a private equity wanting to buy the company, and I believe it was at a multiple of of the $92,019 purchase price. So, you know, he he he got control of the company. Everyone acted morally that that that that deal was done, and and that that deal was consummated. Jack then as with our with our with our capital, he is free to, you know, control the company, sell the company, and and he acted on that private equity buyout that returned us, you know, as it says over 200%.

44:12 We had a £1,800,000 buyout premium coming back to us with our with our existing with with our whole principal. So it was a great deal for us, but it it only makes sense in the context of that was four years in the making. And and I would expect four years, you know, the the sweet spot for building equity value in any one of our companies is going to be four to seven years. So we believe that exits will be a feature and and maybe one and possibly two in 2024. I think the the global economy has to normalize and because a lot of the companies that we are going to that are gonna sell out of our portfolio are gonna be bought by private equity or trade buyers.

45:07 And so everyone needs to feel confident about the future before a lot of transactions are gonna happen. So we don't we're not in control of the exits. But again, as Hugo said, you know, normalized what we'd what we would see is is that our credit product and our hybrid private equity product will bump those IRRs into the low to high twenties. And, you know, I I'd say, you know, from from our we're demonstrating what we said at the at slide one, which is protect your capital, give people a dividend while we're while we're all waiting for the the heydays and the good days and and build that equity in this private equity hybrid model that we have and and show some show some good IRRs and growth in our NAV. So we're we're we're happy we're happy for everyone in the in store transaction, including our shareholders.

46:13 Looking to future, what we already have announced, Q1 of fiscal twenty four, which has ended June 30, of course, because we have a March year end. So the last three months was again another record. And this time passing, you know, £2,000,000 a month of recurring revenue. Again, you know, you're looking out that for three eighteen months, you know, is is is very pleasing and and very, very visible to all our shareholders. We talked about the in store. We're dividend. We can talk about that when we get to the questions and and and the pipeline. Everyone asks about the pipeline.

47:03 There's some good questions about why aren't we increasing our headline rates. And to be to be assured, the headline rate is only one of a number of levers that we can and do negotiate with business owners. And and one that is a is a is a one off. And we actually we actually didn't insist on arrangement fees, and this is pretty typical if you if you have your if you're a business owner and and no refinancing fees and you've got exit fees, you've got an arrangement fee at the front. You know, bank managers, that's how they get paid as they as they give you fees every time you wanna you wanna do something else. We've traditionally not done that. But to, you know, to supplement in this rising interest rates, arrangement fees of one to 2% are normalized across the industry, and we've implemented those to supplement, you know, the the the the discrepancy between our our debt costs and and and our initial rate.

48:12 Now we also we also think of the thirty year product, you know, we are going to get those adjustment factors, and that that 13 that 14% entry rate will go up to 14 over 15 in a couple years. So we're we're we're very confident about that. And then we also will ask for other cookies on the back end and the and the buyouts to to really enhance the returns that all DUKE shareholders will get, you know, in the life cycle of these investments. So I say, you know, the headline rate is only one one component. I say that, you know, competitive our competitiveness in in that will give us bigger and better breadth of of companies to invest in.

49:03 We will be be investing more. All things all things being equal, what we're seeing right now is we're more confident in in distribute in distribution and in deployments in fiscal twenty four than we were in the outbreak of the of the war and the and the rapid escalation of of interest rates from the Bank of England, you know, everyone was cautious and we're no different, and that's because we're a good shepherd of of your capital. You know? But we have an opportunity here. Our product is is is designed for bad times and good times. And and we believe that we'll we'll we'll put more deployments out to keep increasing that cash generation and that recurring cash flow.

50:00 We're proud of all our shareholders and we do things like this because individual shareholders are very important to us. You can see how Landsdown, Hardgrove Landsdown and Interactive Investor are are an increasing percentage of our of our of our shareholder base, you know, mixed in with, you know, maybe some names that you've heard of from all the onsen, M and G and and Axo Framington and Premier Mike. And then so we're we we we need to cater to all the investors. You know, we there was a question about, you know, how fast are we going to increase the dividend? Where do we think the dividend is? Is, you know, the the increase of of our of our debt cost. When we get to a £100,000,000, if we had a risk free rates of zero, we could put another pence of of dividend and still have a lower dividend payout ratio than we do now. So that is that is the cautionary tale. When those interest rates go down, it'll be it'll be reversing where we are. The free cash flow will will will accelerate.

51:14 Right now, it's being it's being, you know, curtailed by this increasing in the in the bank main run rate. But, yep, we still have £50,000,000 of of free dry powder to to invest and we're and we're looking forward to to accelerating our deployments. Fairfax, if if anyone doesn't know, that is an insurance company. This is from Canada, right down the street from from from me in Toronto here. They are $7,095,000,000,000 pounds or 90,000,000,000 of assets. They are long term and very supportive capital provider to us, and and we really think of them as a as a strategic partner of the company.

52:10 Finally, before we turn it over to questions, again, we're not going to belabor this. Capital preservation is number one. We don't see credit risk in our portfolio. We have dividend yield. We have maintained it. We haven't cut it. Our dividend payout ratio was going down. So that gives us a buffer and and more strength to increase that in the future. The upside from buyouts, you've we've demonstrated that this year within store. Hugo talked about our high operating leverage. So now this year, we'll be under 10% of our recurring cash flow, and and we love that we love that number. We're gonna get to a billion pounds of recurring contractual revenue here, hopefully, this time next year, and that's due to our strong investment pipeline. So thank you very much, everyone, for your attention, and we can turn it over to the moderator for for questions.

53:13 No. Hugo, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen. So just while the company take a few moments to review those questions that have been submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, we've received a number of questions throughout today's presentation. And if I could just hand back to you just to read out those questions and give response to it as appropriate to do so, I'll pick up from you at the end. Yeah. Thanks, Ali. As you as you said, there are a number of questions. We I we won't have time to answer every single one. But, of course, once this is finished, we'll we'll ensure we do answer all the questions fully. I can probably just touch on a few of them quickly, and cover off some of the shorter ones. Chris, since rates starts to rise in the autumn, have you seen a change in inquiries, straight pipeline?

54:03 In simple terms, yes. I think as, Neil touched on, we haven't necessarily increased our base rates. And as a result, I think we've come increasingly, more and more competitive, against the other products that are in the market. So naturally, as you could expect, you know, the pipeline is is is a lot fuller. We've had a lot more inquiries and hence why we're confident that we'll be able to push out more money, and deploy more capital in f y twenty four. Also, Peter also, do you have any, board seats? Does this depend on the equity holding? Not really. We we yes. We do is the is the simple answer. We have board seats on pretty much, I think, all bar one where we have an observer status, but we we insist on absolute minimum observer status on the board. But generally speaking, yes, we have board seats across the portfolio.

54:52 We have great visibility over, you know, management's accounts and forecasts, and and our interaction with with the underlying royalty partners is is very close. You know, we we see ourselves as a strategic partner with them, not just as a as a credit lender. I've got one here, Paul l. Says, where are you finding opportunities you haven't before? Business area or geography. So, Paul, you will you will notice that that in store and Creo, Atlas were all US based companies. We have actually, over the last couple of years, done a lot of business development in The US where our initial portfolio was very UK centric and Ireland.

55:39 You know, we have had a concerted effort now since 2021 to to bring US deals into our into our company. And and I think that's really paying dividends right now. Sorry for the pun. But but, you know, The US economy is is a lot stronger than The UK. We have we have another another opportunity that we are pursuing in in The US. So watch this space would be my my comment. And we're we're not we're not looking at any other business areas. These are service companies, kind of asset light, but long standing profitable companies. Yeah. There's one here from Kenby. I believe that DUKE is the largest shareholder, at least one of the partners. It's it's not creating a conflict of interest.

56:32 We are we are not the largest shareholder in any of these businesses. We we we always maintain that we are minimally dilutive. We'll never take anything more than 30% at the absolute max. So we're we're never the largest shareholders in these businesses. We we don't we make a point. We don't want to control these businesses. We want the owners to stay in control in control of the exit, in control of the the strategic decisions. We're just there to sit in the background and help, where needed. Mark Mark b. Yeah. Just a question on the clarifying the 13 and half percent repayment. Yes, Mark. Well, welcome to DUKE Royalty presentation. It is something that that that does need to explain. Please go to our website and when we have different explainer videos and whatnot.

57:21 But but, ultimately, 13 and a half, there is an there is an amortization schedule that does not change. So that uplift is additional interest, you would you would say, because the principal amortizes at the exact same rate. So so it is it is that that cash adjustment without changing the base kind of corporate mortgage product. And and then, you know, when it goes down, you're not accelerating the payments or delaying the payments. It it'll always be thirty years. You can always get out of it after thirty after three, years noncall. And, and so that extra 6% is really, you know, profit for for us and our shareholders.

58:13 And then just a few more. Quite a few questions from Peter. I'll thank you for these. You've asked just following up on what Neil was talking about in terms of our starting rate. You've asked, is it sustainable given the increase in the margin of the interest rates? But we as I've said, we are a we see ourselves as a long term partner. You know? Our product is thirty years. We take a much longer term view. Yes. Interest rates have risen fairly aggressively, in the last twelve months, but we don't see this as a sort of long term, increase. I mean, it seems to change every day, but, you know, all being well, we'll see interest rates come back down. Probably not back down to what they were, but certainly sort of 3% maybe in the next couple of years. Now if we increase our rate up to 15% and then we get two or three positive adjustments, suddenly, we're sitting at 18%, which just isn't sustainable, and we'll see a slew of of buybacks across the portfolio, which while give us a bit of a sugar rush and a and a a and a kicker at the end, it's not. You know, we are a long term partner. So, really, it's for that reason that we we we haven't increased the interest rate. Rather, we prefer to become more competitive, and deploy more capital at the higher end of our of of our range, which is sort of 13 and a half, 14%.

59:25 And and I think we're gonna we're gonna conclude here, but I there's there's been a couple things that I'd like to touch on. It's just the disconnect between the share price and the improving fundamentals of the company. And I I I I I I do identify with that and something that, you know, as a CEO, all I can control and what we do every day is control what we can control, and that is the fundamentals of the business, the increasing cash flow and and and ensuring that those that those building blocks that we talked about, you know, are are are, you know, are following through. You know, the when it's a risk free rate goes up, you know, our dividend yield, which I think is one of the key drivers of our of of our day to day share price, our dividend yield will go will go up as well. So we have been trading historically at five to 6% dividend dividend, the yield, and and now it's it's a plus.

1:00:30 I think I think that disconnect will you know, as it's as we have or we are right now, I think what our our our thought process is is that, you know, that will unwind itself when when interest rates go down, when when there is more confidence about about the future, the economy, and and and interest rates coming down. So we're not we're not living in a bubble. You know, there's there's a lot of different competing investment products out there. And and, you know, as it pains me to to to know, you know, I think our our our good efforts will be rewarded, but it does depend on a number of factors outside our control.

1:01:21 But I think just like Canaccord's target price is over 50 p a share, I think, you know, we are we will be rewarded in the long term. Up until then, we are going to continue to pay us our dividends and pay all our shareholders the dividends every quarter. And and and you get paid to wait for for better time. So we're really proud of these results. We're very happy that that you all are shareholders. And any other questions that that can get you to be shareholders, please put it in the q and a. And we'll see you again next time. Thank you so much. Thank you very much, everyone. Perfect. Neil Hugo, thanks for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

1:02:15 This will only take a few moments to complete, and I'm sure it'll be greatly valued by the company. On behalf of the management team of DUKE CAPITAL LIMITED, we'd like to thank you for attending today's presentation, and good afternoon to you all.