Duke Capital (LSE:DUKE) — Interim Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the DUKE Royalty Limited interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please 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 of the questions submitted today and publish responses where it is appropriate to do so.

0:32 Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Neil Johnson. Good afternoon, sir. Good afternoon. And thank you everyone for attending this this podcast or webinar, I guess, for the interim results for DUKE Royalty. I'm Neil Johnson, the chief executive officer joined by Hugo Evans, the the financial director. So Oh, no. No problem. We have we let's let's get started, and thanks thanks again. So I will start with just an overview of what we do and what DUKE Royalties does in a nutshell.

1:20 We provide hybrid capital to private companies. These are usually owner operated. They have long standing profitable businesses. And and and what and what corporate royalties are. We'll get into corporate royalties in a second, but it really a hybrid between private credit, like debt, and private equity. And we'll show you what that means for investors. I wanna talk about the three pillars of what DUKE royalty provides for investors and what we think about when we're doing a transaction. Number one, capital preservation.

2:05 You know, we have a long term investment horizon. These are senior secured loans. We have alignment with the business owners, but the business owners keep control keep equity control of their business. They're not selling their business to us. It's their business, but we we structure our long term participating loans as as above sitting above equity in the capital stack. The second bucket is what we provide to investors an attractive dividend yield. So we have quarterly dividend payments. And and what we've done since inception in 2017 is is give investors quarterly dividends.

2:53 What we try to do is a combination of the free cash flow per share going up that allows us to increase our dividends as well as we want the reducing payout ratio, which which is the the ratio of our dividends to our free cash flow generation of our business. Our current annualized dividend is 2.8 p, which gives around an 8% dividend yield right now. The third bucket is is this kinda hybrid between private equity and private credit. And if you've been a a shareholder for a long time and heard our presentations, you know, this is something that unless you had a mature portfolio, unless we had a mature portfolio, we didn't really talk about. And this is this is how we structure, and we've been doing this since day one. But the the buyouts when when the business owner wants to refinance us out or sell his company or her company.

3:54 There is, in every one of our transactions, a built in buyout premium in every case. And and, again, more and more, we are talking about minority equity positions that that really are a sweetener for investors that that we do. So that those buyouts will typically increase DUKE's internal rate of return from each investment when they get bought out. It is part of the model. We've always talked about it. But now, actually, there are some pretty significant potential buyout premiums and and and NAV increases with with embedded within our portfolio. So that's the third bucket that that we'll we'll talk about today.

4:44 And then other things that that I want you to know, and we'll we'll talk about the portfolio, diverse. We have actually 56 operating entities underlying our 14 royalty partners because we do a lot of buy and builds in conglomerates. And and that's the focus on an acquisition capital as it says. We're we're really proud, and I'm gonna hand over to to Hugo when we do the numbers. Is just our record revenue, our strong fundamentals. We're focused on free cash flow per share, and and and we're not reinventing the will the wheel. Royalty investing has been around mostly in North America because we're the European leader, and you can tell where I'm from from my accent.

5:32 I don't have the accent. You have the accent, but we we we won't go there. But that's the royalty investing that has been around for decades. And then and then this is this is also something that 2023 has come to the forefront, but has been embedded in our the way we invest since day one, and really it's revenue linked. So this makes our product inflation hedged. And as inflation increases the revenue of our underlying royalty partners, that adjusts DUKE's distributions or our revenue up to a maximum of 6% each year. And Hugo will go on to that. That has been a tenant of of how we've invested since day one. It's just inflation is now here, and and we're excited to to to show how that protects our investors, you know, from from that depreciation of of inflation.

6:35 So without going too far into what exactly we do, because probably some of you have heard this before, we think of corporate royalty as distinct from other types of royalties like mining royalties, and and now there's there's music royalties. And what is really important that we we try and invest is in corporate and long standing profitable private businesses. So they have a history of growth. And embedded in every one of our investments, we want growth over the long term. If we do our job right, that's the revenue linked and the royalty that we can continue to grow.

7:22 You know, oil and gas and mining, you know, you're gonna run out of gold or or oil down in a down in a oh, no oil well eventually. They're depreciating assets. You can say the same thing about about music song play. You know? They they degrade over time. If we do our job right, that's really one distinction of of what we do as corporate royalties, although the umbrella is is is really revenue linked. And so we we have, you know, an alternative finance for SME businesses, basically. But why do the company owners want to deal with us? Well, they get to keep control of their business without refinancing risk, and that's important. What we do is we stretch the amortization of this loan over thirty years, but it's not a straight, loan because of that hybrid between just a loan and being an equity investor.

8:25 We can adjust once per year. We do

8:28 adjust once per year of of the the cash flow that we receive based on the revenue the audited revenue number from the company last year versus the year before. And then every year, we look back and see how the business did. Now that does, like in 2020, mean that we take pain. We are you know, we take risk that that revenue falls and revenue goes up. And and you'll see that in our portfolio that of of what kind of companies attract us. I will tell you that they're traditional companies, they're old economy businesses. Some can say them boring, but boring is the new exciting to to Duke royalty. So that's that because there's fluctuations over market cycles. You know, most of our portfolio has been thirty year or more companies that have that that that, have been in business for thirty years or more.

9:30 A couple other things I wanna talk about, you know, what, corporate royalties give for both investors and business owners is that, you know, our obligation will always can always be serviced out of the current cash flow of the business. So we don't need an exit event, and the company can always pay our our distributions and our revenue. So there's there's a lot of risk that taken out of that business of trying to get our capital back. Now the company, you know, no company that I've that I've seen has a thirty year business plan that knows exactly what they're gonna be doing in 2050. So what they what they what attracts them is that they're in control of any refinancing event. They may have a five year business plan. They might wanna get from a to b. They might say this is the best partner for us to get to the next stage of our business. We're fine with that because they can buy us out. And, you know, circa three years is our is our minimum, you know, call you know, non call period.

10:41 But that's the the genius of this model is when when we have the when when when they have this refinancing event, they know exactly what they're going to pay us. It's a bio premium, as I talked about in the previous slide, is a bump in in in in the return for for DUKE and our shareholders, and and and everything's in control of the of the company. So there is not a poison pill. You know, buybacks can be granted, you know, even in that non call period. So we're a we're a we're a very long term and and silent investor. However, you know, you can you can imagine with senior securities, we have events of default. We have covenants.

11:31 We we we ensure that that the companies have adhered to that and and keep paying us our our monthly payments. Okay. And then lastly, before Hugo gets into the the numbers is is really what we've built since we since we listed in 2017. So we're in you know, we just passed our fifth year of building, you know, what we have become as the European leader in in corporate royalties. I can kinda say we're in we're in two phases and basically pre COVID, which was really us establishing our presence, focusing on cash. We we we paid a dividend day one, but we had to build the portfolio.

12:25 We had to build the equity base. And and we, you know, we had to build the the OpEx, which operating leverage is part of this this this model. But Hugo will tell you what we've been done since the second second phase, which is really COVID and and last year, which really demonstrated for our our investors, you know, our downside protection. You know, we talk about senior secured, but what happened in COVID? Well, we grew our cash flow is what happened in COVID. So it also demonstrated the life cycle of investments because we had some buyouts. And we really we really define the market segment, and we solidified our our our our lead and and and our our our our our the way we invest both for investors and for business for business owners because they they understood, you know, what it meant to to be a have a partner for the long term and not ask for for their money back when you break a covenant, well, you know, day one of COVID and be into a, into a mess. And we can we can get into, you know, recessions and everything like that, in the future. I'm I'm sure there'll be a question or two.

13:43 Right now, what we're focusing on is solidifying our first major advantage. We have the the market segment. We have the the market to ourselves. But for investors, it's all about that operational leverage now, increasing the free cash flow per share, which is a great segue back onto, Hugo. And I'll turn it over to you, Hugo. Thank you. Yeah. Thank you, Neil, and afternoon, everyone. So, obviously, I'm gonna talk to you about, DUKE's, financials over the last six months, and, obviously, it gives me, you know, a lot of delight really to to talk about these results. You'll you'll see, you know, significant increases in really our our our core metrics across the board in the last six months.

14:29 For those of you that that don't know us that well, cash cash flow generation is is fundamental to this business. We are a quarterly dividend payer. We and I measure the majority of my core metrics on on cash flow rather than the income statement. And I I can talk a little bit about that later, but mainly to avoid all the fair value accounting movements that that the auditors like to put in. I'll start with with, obviously, top line cash revenue, increased, interim period on interim period up to 10,400,000 from 7.8.

15:03 Free cash flow increased, So 60% from 4,600,000, 6,600,000, both really driven by, the the increase in deployments, that we saw in the in the latter half of, well, throughout f y, '22, to be honest. You know, historically, the business has always, put out about 25,000,000, of new deployments a year. Last year, we did 75,000,000, alone. So, you know, a significant increase in in deployments would obviously, lead to a to an increase in that top line cash revenue. But, also, it's not just the the sort of the top line. You know, I'm very proud of the fact that while all our top line metrics are increasing, it's really the per share metrics, which ultimately are even more important.

15:54 And you can see that, you know, total cash revenue per share has increased, by sort of 20% up to 2.7 p. Free cash flow per share has increased again from 1.4 to 1.7, continuing the increase in the prior period. And, again, even, you know, while I while I wouldn't normally sort of focus on the income statement, I think it is always important to show the the metrics across the board. So net income has obviously gone up to 10,300,000, but adjust as adjusted earnings per share. Now this is this is an important metric because it it does remove the the fair value movements across the portfolio. So it gives you a sort of true flavor of the of of of the operating performance of the business. So, yeah, as you can see, metrics across the board, top line and per share all increasing, again, driven by that that that increased deployment.

16:45 And I would expect that to continue into the next two or three quarters as the business grows.

16:55 Focusing really just on that top line cash revenue, as I said, you can see that quarter on quarter since q one FY twenty one, which was actually the start of COVID. It was sort of the April to June quarter when when we hit lockdown. You know, naturally, you would expect a a drop off in our revenue at that point when, you know, a lot of companies you know, we all experienced lockdown. A lot of companies' revenue fell off, very sharply.

17:21 And, as you may remember, we allowed, or we gave forbearance to a number of our our our companies to alleviate some short term liquidity. But ever since then, you can see every single quarter, top line cash revenue going up as we deploy more capital.

17:37 But what I'm really proud of is the fact that we have a a largely fixed operating cost base. So what that means is that we are, as we grow our revenues, and we're able to to keep the the cost base largely fixed, it means our operating leverage improves. So, you know, back in well, I mean, taking out those half of of of COVID, you can see q three f y twenty one, q four f y twenty one, we were running at about a 20 operating average, I e, operating costs were 20% of total cash revenue. That's now down to to circa 10%, in in the two quarters of FY twenty three in this interim period. So, you know, really important. Why does that help? Well, ultimately, as a as a as a dividend paying business, you know, we wanna do two things. We want to increase our dividends steadily over time to to to pay more to our shareholders, but we also wanna be able to, you know, over time, try and reduce that payout ratio, why you pay less dividends as a percentage of our free cash flow because that will allow us to reinvest more of our free cash flow back into the portfolio. And I'll I'll comment on that in a minute. But, ultimately, you know, very, pleased with the slides showing that operating leverage, and and and, hopefully, we can continue that again through through the rest of the year.

19:02 So just really sort of talking about the free cash flow. As I said, you know, starting with the portfolio cost, obviously, you know, top line cash revenue and free cash flow is all all driven by us being able to deploy more capital. FY '22 was a was a fantastic year. As I said, you know, we deployed 75,000,000 of capital. FY '23 has been has not been as as strong, but, really, that's more from, we took a view given the macro environment that to pull back speed of deployments. You know, businesses everywhere have found six months and indeed, I'm sure will continue to do so for the next six to twelve months as we enter into recession. So, you know, we are being very careful about how we deploy our capital.

19:49 We raised 20,000,000 of capital back in end of May. And as I said, we deployed well, in the interim period, 6,500,000. We obviously did another you may well have seen another new deployment into a company called Newpath foreign security in November, which million. But we've only deployed 11 and a half million year to date, as I said, against the 75,000,000 that we deployed last year. But, you know, that's a a sort of intended consequence of of what's going on at the moment in the world. But as you can see, the the the increasing portfolio cost cost leads to increased total cash revenue. As I said, because of that largely fixed cost base, it allows us to grow that free cash flow per share. And you can see that very clearly increasing from interim '20 one, 22, 23, and then annual dividend per share going back up. And as I said, you know, that that is our aim is to to be able to steadily increase that quarterly dividend while reducing the the payout ratio. You can see, as Neil said, we're we're currently sitting at a 2.8 p annualized dividend,

20:54 and we've paid over 30 well, we've paid exactly 13.7 p of of dividends since since inception. Just touching on the balance sheet as well. You know, I've I obviously focus on cash flow for a reason, and we've touched on on the income statement. But, the balance sheet, I don't generally tend to sort of, focus too much on on NAV, mainly because we are, you know, a dividend paying business. And over the last sort of four, five years, we've paid out a significant portion of that, of cash flow out as dividends. And therefore, you wouldn't naturally expect to see significant increase in our NAV per share. However, you can see the balance sheet clearly, getting a lot stronger. Royalty investments have increased over two years from 80,000,000 to a 171,000,000.

21:42 A lot of that obviously driven by by the fact that we are raising capital in the in in the equity markets and drawing down our debt facility, which allows us to to

21:53 invest a lot more into our royalty loan royalty investment book. That actually is also you'll see, is slightly driven by increase in fair value over the last twelve months, you know, as, there were significant write downs following, the COVID

22:10 sort of period. We saw bounce back in those fair values the year after. And, again, the last twelve months have seen our all our underlying businesses have strengthened. And as a result, the fair values are now sitting just above cost, only about 2%. And and the great thing about our business is that you will never see while we you know, there are mark to market movements, you will never see outside of a sort of black swan event like COVID. You shouldn't normally see significant swings in that fair value. You also won't ever really see the fair value going, significantly above cost. We have redemption buyback premiums attached to all of our investments, and and therefore the fair value will never go above cost plus buyback premium, which generally ranges from sort of 20 to 25%.

23:04 You'll also see actually the significant movement on the balance sheet is in from just under 5,000,000 to to over 11,000,000. Equity investments, as Neil sort of talked about, you know, we've become a sort of a hybrid between private credit and private equity, and we we have started to place more emphasis on trying to obtain, equity, small minority equity stakes, wherever possible. We currently have 10 equity stakes in the portfolio.

23:30 And as the as our businesses start to mature and, and strengthen, you will naturally obviously see those equity investments start to increase in their fair value. We we use a very substandard way of valuing those. You take a a forward looking EBITDA forecast number and and apply it to a sort of a a market multiple, which significantly discounted on the back of the fact that we're investing into SMEs. But really just so you can see so you can see the net assets have have increased, but our net asset value per share is increasing year on year as the strength of the of the investment portfolio increases. So just to summarize overall, you know, it's been a very strong six months for us. You know, we've got record cash flows, quarter on quarter cash flows. We we are the operating leverage is kicking in as we try and manage them and keep that cost base largely fixed as much as possible.

24:24 That's leading to increased sort of cash flow generation going down to sort of filtering down to our free cash flow, which in turn can obviously help to to to increase that dividend going forward while at the same time seeing our balance sheet strengthen.

24:41 Neil, I'll pass it back to you for the for some of the portfolio highlights. Great. Thank you, Hugo. And I wanna save some time for questions. It's 11:25, so we have we're 04:25. So So we'll I want to go through the portfolio. I'm gonna keep my eye on the questions as well. But, you know, as a summary for our portfolio, I think the portfolio is in in great shape. It's never been better. We look at, you know, not only the portfolio book cost, which increases as we deploy, but, you know, the single name exposure, which is obviously diversification of our revenue streams will reduce the risk on any one royalty partner.

25:28 So we have we have declining there. We also, as you can see, you know, one of the metrics that is is can be can be tied to the health of the portfolio is the contractual payments made. And, of course, the the year end of 2021 is our fiscal year, which was 04/01/2020. So that was the COVID year, But it runs above ninety percent in in in normal years, and and we haven't seen that degrade in in 2020 you know, fiscal twenty three.

26:04 And the portfolio net leverage. So this is this is our our amount of of long term debt over the EBITDA of the company. So that is also at at lows. And the debt service coverage, so this is the cash flow that services our payments, and we like to take a minority of the cash flow. And that means that in a in a portfolio that if it's over two, if that number is over two, then there's there's more than twice the amount of debit for our payments. So that means we're taking half less than half. Sorry. So so we've seen that post COVID.

26:49 And and the average portfolio cash yield, so this is going back to the inflate inflation hedge point and and how much of of our initial portfolio book cost that is in in cash yield. And so with positive resets that we have that we have had this year is is at all time highs. And I think one of the questions that I can that I can talk about right now is is really, you know, what are we doing in this higher inflate higher interest rate environment to to have what was the question? It was something around, you know, what what what how have we changed what we what we do in in our in our interest rates averse and how that impacted the IRR hurdle for our new loans.

27:48 Yes. And and we have always have always done the same thing. I mean, I think that's a recurring theme. You know, we we took a model that has worked for forty years. It worked in the eighties. It worked in the high inflation, high interest rates in the eighties, worked through 2008, and the the boom years and the bust years. And so we don't have to change what we do. What we have there we we talk about us being a flexible solution, and so there are different levers that we can pull and push to get our our stated IRR goals, which which are in the high teens on a normalized basis. And one of those, of course, is the entry entry.

28:33 You know, it's not a coupon. It's it's all encompassing distribution, but the coupon of the loan. So we've always said, you know, the distribution is between twelve and thirteen and a half, 14. You know, we have done as as we're gonna talk about our latest new royalty partner, we're at at the high end of that range. And we have lowered that back in in other in other years because we've we've pulled another lever on the back end to when when when we get bought out, there'll be higher buyout premiums, for example. And we're hoping that just like we we we have experienced this year, that a 13% this year becomes a 13.8 next year because it's a it's a positive 6% adjustment off of that 13%.

29:26 So all our 13 percents are now 13 eights. Our new deals are 13 and a half starting and and and hopefully going up from from there. But but as I just as I just mentioned, you know, our portfolio across the portfolio is 13%. So And you know, can I just just try chime in just briefly just to put some numbers into that? Neil's talked about the the adjustment factors and how we're we're inflation hedged. During the interim six month period, we've had five of our of our royalty companies. The adjustment factors

30:01 have come up for review, and and all five of them have been plus six adjustments. So you can see how that sort of inflation hedges actually kicking in now. This is our royalty partner portfolio right now. I wanna go to another slide, but what we're what we'll talk about here is just, you know, the use of our capital. The use of our capital for acquisition capital, debt refinancing.

30:30 There's there's management buyouts that that we like as well. So, you know, for for companies and and business owners who wanna keep control, having a a minimally dilutive solution that keeps them the equity control while they're acquiring new businesses, for example,

30:50 Or in MEO situation, the the management team that has that has created these profitable businesses for years now have the opportunity to become owners. There's a real incentive for them to have the majority control of the company and and us having a minority stake. Fabricat is is one that that that you may recall.

31:14 A very industrial business doing lampposts and guardrails for for councils across The UK. The the three the three people who own the business now, two of them have have been with the business over thirty years, and and it's a great story. We're gonna talk more about that as as as as we go through 2023 because it's a it's a really great story. I had dinner with them two weeks ago in London, and and I was just heartwarming to hear their story of now this changing their life because they're now the owner of this business. And and the and the and the results have been fantastic for for for everyone this year. We like industrial businesses. Say we like business services, and so we spread out the diversification over companies in in industry, geography, even currency.

32:13 So we we have a a broad base of diversification and and different transaction types. And one of the things, as I said, you know, that we're looking at is is not just the 14 businesses that that that pay us, but but now we have exposure to 56 underlying operating companies. And so we're gonna get to new path,

32:40 which is it's just a roll up, but we see that in in tech that you may recall. You've seen that in LIMITED, which is a five year royalty partner. Now we bought eight different companies in UK and and and in Western Europe. So we love these type of businesses. We can we can continue to invest in the same royalty partner. It diversifies the revenue. It's the same return, but a lower risk because we know the counterparty. So we're really excited about how our portfolio shaping up. New path, as I said, you can see the term, the initial obligation is 13.5%.

33:25 So as I said, really the top end of the range, which now we're not budging on.

33:32 The annual adjustment is the same. A buy and build transaction type. So it really ticks a lot of boxes and diversifies our our our risk. And and quite frankly, this is a b to b business. Everyone you know, there's other there's other questions about, you know, prolonged recession, which I I know is a is a big is a big concern. We have business to business portfolios. We're not immune, of course, to the consumer not spending money. But for example, like Newpath, these are businesses that have fire and security that they will be paying this maintenance and these and security systems on a monthly basis, and you're not gonna you're not gonna stop paying for for your fire fire and security services.

34:29 So we we like the defensive nature of this company. We like the management team. We we invest in in people. So management team is very important. Andrew has has done a a roll up before owned by a private equity. Private equity loves, you know, roll ups. He he did this with with with some of his own capital for himself. Now he is the majority owner, and he found DUKE, actually, a podcast that I that I did called buy and build in The UK. And and it's like, wait. I get to own the company, and you can continue to invest and buy these companies if if we have the same criteria.

35:17 And and I'm continuing control, and and this is is exactly what this is all about. He's been successful before. We can back this, this owner. And, and as as he grows, we will continue to to improve that investment and improve sorry. Not improve. The you know, increase that investment and hopefully improve it. But that's that's our latest royalty partner and ticks a lot of the boxes of of what DUKE royalty is is looking for. And and as you guys have have heard us before, I'm really excited about this because it's it's a it's it's very in in line with, how we invest.

36:09 Hugo, you wanna take this one? It shows our our our shareholder listing. That's something we're very proud of. You know, we've got a lot of very strong blue chip shareholders there, you know, M and G, Columbia, Threadneedle, Gresham. Shareholders we're very proud to have, and they have been shareholders with us for for a very long time. But at the same time, you know, you'll see a number one shareholder there, Hargreaves, and number three, Interactive. So, you know, we place a lot of importance on our on our retail shareholders. And and I believe, you know, we have a historically, we've had a very good following and is the exact reason why we, you know, we'd like to do the IMC and and and other retail webinars as and when we can. And and but also, you know, down there in the bottom right, directors, management, shareholders hold 3%. So, you know, it's you know, the DUKE management, the DUKE board has skin in the game. You know? We we want to be aligned with our shareholders.

37:03 We want our shareholders to benefit from the success of DUKE, and and having sort of management ownership is important in in that alignment. Yep. We've invested in every round, alongside, some of you, and and and and we always we always write a check, and that's that's important. You know? It's it's important for us to have that alignment for our royalty partners. They have skin in the game, and and they lose they lose everything before we lose a dollar in in in their case. So we know their minds are focused, but but it is it's important, for that alignment to have, to have money at risk and, so so we look for as well. Couple of post end post period end highlights, and then I can sort of pass back to Neil for, to to to summarize.

37:55 You know, from a finance perspective, you you you may have seen we we released the trading updates last week on the back of our interims. Q two, which we've obviously reported on, was a record 5,300,000, and we expect to continue that increase in in top line cash revenue to to 5,500,000 for for q three. In terms of the portfolio, as Neil's just talked about, we've we've made a new 5,500,000 investment into Newpath foreign security. You know, we're excited about that one, and we hope that that's, you know, a fairly, historically low, or smaller investment for us or initial investment. But, the great thing is it should provide us with, you know, plenty of follow ons over over the next two years. And, again, as I've as I've talked about, you know, increasing average cash yield across the portfolio as those adjustment factors take place.

38:46 In terms of pipeline, I'll come on to this again because there are a couple of questions that have, that have been submitted talking about interest rates and pipeline. But suffice to say, you know, we've got a we've got a very strong pipeline under review at the moment. We have a a a couple of, opportunities and exclusivity. And while we've taken a very prudent approach, to to deployment given the the macro headwinds, you know, I'm confident, hopefully, you'll you'll you'll see some new, some news from us over the next three or four months in terms of deployments. You know, I I'm just gonna I'm just gonna say it it really it's funny how people interpret the, our trading updates. And and when we said this is, this is a question, so I'll, it relates to this. It says, well, your latest trading update says, you know, we're taking advantage of the current market when we're seeing other lenders pulling back from making new investments, which I thought was a positive, but but it could be construed as as this a reader says is, you know, are such opportunistic investments of lower quality given that the lenders aren't investing in them.

39:51 So it does it does beg that question that I didn't think about when I when I read that when I wrote that. But, really, what that means is especially in Ireland. Okay? I was out in Ireland in in October sitting down with people, and there's the Bank of Ireland in AID, and and they do a lot of loans. But, you know, they're you know, when the market's good, they're gonna they're gonna invest, you know, at an EBITDAs of three three and a half percent. They're never at what we're doing, but they will pull back to to two to to two and a half of a of a business because their outlook. How banks and bank managers, for example, bank managers are the ones who are on the hook for for this loan.

40:40 And what they what they are are are incentivized about is getting fees off off the loans and, and returning the capital and then re refinancing that, getting more fees, and and it's a short term it's a very short term mentality. So when, something like this comes along in a in a recession and and in interest rates, they're worried about their existing portfolio. They're worried about, you know, how they're gonna get their their fees and and the and the money back. And, and that's and that is different than than than us in in one important way. And this is goes to the heart of what the trading update was trying to say, which was we invest over the long term.

41:29 So in in a recession, private equity can't borrow all this money from a bank because they're worried about, you know, near term. We only have to do six deals a year. You know, those £75,000,000 of of deployments last year was five new royalty partners and a bunch of a bunch of follow ons. And so now that's because we're so focused that we can we can really get exposed to a lot of more businesses, but but keep the quality very, very high in the the the high bar as I as I said, you know, in in this in this fiscal year, we're gonna we're gonna make sure that we we have a high bar because there are gonna be more opportunities.

42:19 So we're looking at different things. When I say banks and other lenders, we're looking at different things. We're looking at we're not all things to all people. We're we're we're one slice of of this massive pie. And and when short term uncertainty hits the market, both the banks and the business owners, you know, the business owners are looking for long term partners, and we are the only long term solution out there for these people. And that's why I'm excited about, you know, we did this. And listen, 2022 felt a lot like 2020. And sometimes and I say it's even worse. In 2020, coming out of COVID, and I think coming out of of of this, you know, in inflationary and and high rising interest rate period, you know, we're we're also going to have, you know, a lot of market opportunity coming to DUKE. And, again, we don't need to we don't need to do a lot of different deals. That's why, you know, I'm excited about this opportunity and not that we're going to now do the deals that that the banks aren't going to do. So I hope that answers that question.

43:33 Just before we move on, I just wanna summarize where we are as a company and and our excitement about the future. You know, we're the only corporate royalty company listed in London. We've we've pioneered this in The UK, but it's been around for decades in in North America. You know, you can you you we're evident in the downside protection. I hope we've conveyed that today in the capital preservation from for what we do. We've increased the dividend yield over the last twelve months sorry, increased the dividend and while reducing the payout ratio. We we do believe that there are buyouts coming in the in the next couple of years because believe it or not, there are some some companies that are benefiting in this in this current market environment.

44:31 So buyout buyouts, you will see in the next twelve months. But our core business, it's all about the operational leverage, the cash operating costs coming down as a percentage, our revenue going up through deployments, but also the embedded adjustments and once a year inside our portfolio, which is different from any other royalty company that you will see. And we've talked about the pipeline as we're not spreading corn on the field. This is always going to be something that we would like to build to about 20 different companies, you know, in the near term over the next couple years. There's different ways to grow non dilutive to to the shareholders, you know, after that. But, you know, we've done the same thing for five years. It's worked. We're we're we're extremely happy about these last six months and the out and the outlook. And and so that's what I'll leave you with, and we can get to questions. Look at that. You know, forty five minutes just as we drew it up, you go.

45:45 Well done. Well done. Well, why why don't I take the first question then, which is there have been a few questions about sort of rising interest rates, the effect on our portfolio, specifically, you know, how it affects DUKE's business development pipeline. Well, you know, Neil's already touched on this. You know, we've always sort of said our our our starting yield is between 1214%. That's definitely we're looking at the higher end of that at the moment given the environment, but we are long term investors. You know, our our product is a thirty year investment, so we take a much longer term view than than all other lenders. And therefore, we've decide you know, we don't want to increase our starting position. If you take the view that interest rates will will hopefully normalize, you know, in in eighteen to twenty four months, then we're we're pricing ourselves out if we go too high. And, actually, what that's meant in terms of the pipeline is is the DUKE as a product is becoming more and more competitive because, you know, mezzanine lending and bridge loans, etcetera. They're all that type of debt has has gone up significantly, and people are starting to look longer term.

46:50 And we just look at our our our pipeline at the moment and and especially in in, you know, North America. That's that's sort of as strong as it's ever been on a you know, partially on account to the fact that we are now a more competitive product. I think I think there are a a number of questions that's that that go to the heart of of shareholders, which is the stock price, and and comment on on what we see and and that, you know, I think, listen, I I I spent my life as or a a previous chunk of my career as a as a as an investment banker and investment bank. So stock prices are always the the barometer.

47:37 But as a CEO, what I'm focused on is is long term cash flow and long term growth of our NAV and our and our cash flow per share. So, you know, the the day to day stock price is is not what we're what we're looking at or what we're concerned about. However, it it does merit the the comment that, you know, we our our stock price has always been around five to 6% dividend yield. Okay? And as we increase the dividend, staying the same dividend yield, our stock price will increase. And we we have done that. But last year, at this time, I noticed that that our stock price was over 40. It was, like, 44, 45 p, and that has to do with the risk free rate. So you can get, you know, 3% from your bank. You know, you're not gonna you're not gonna buy the DUKE at 5%.

48:38 So, so that has, increased our dividend yield because the risk free rate is is so much higher than it was, twelve months ago. And I think that is is, is is gonna be like every one of your other investments that is, that is a dividend paying stock. You know, the that that that will affect all the boats in the entire market. I think what what we can offer is, and this has been proven again through market downturns, is, you know, in a in a in a in a bear market, in the stock market, you know, royalties actually are really good place to to put your money because because of the because of the cash flow.

49:24 You know, the DUKE royalty is is is our cash flow per share because we're our revenue is a percentage of someone else's revenue, not their EBITDA. Our EBITDA is is is is staying the same, and and, ultimately, ours is increasing. So but you've seen that in other royalties and other in other jurisdictions and other stock markets in in other, recessions. So, you know, we're not immune to what's, happening in the broader market. Who we invest in, think there's, there's there's obviously, some, questions around, you know, what's happening in a prolonged recessionary investment. And we're five years old five years old as a company, So we don't have a lot of track record to prove what happened in o eight, but but but we so there there will be some shareholders that, you know, are are not buying our stock because of the because of the uncertain short term outlook.

50:33 So all we all we can do as businesses as a business and a and a public company is continue to do what we tell you we're going to do. One of the things that is going to get to, you know, our how we're investing in our IRRs is to lower our cost of capital in our borrowing, which is something that we've we've told investors before and things like that that that we are working on. And and so we have been working on that to both increase the size of our of our of our debt as well as the cost of of new capital coming into to DUKE. So we have been there's nothing to announce right now, but but we have been working on that.

51:22 That's part of the strategy to to increase the per share metrics because that'll be nondilutive new capital for us to invest at at our at our at our initial rates that we're talking about. So those are the things that we can do. The stock price, a reflection of of the market uncertainty, and and all I can say, you know, is I hope DUKE is is is one of your better performers in your portfolio. If you think about the 14 p that we've been able to to give back to shareholders in the last five years, you know, that that that adds to the return that that you have. So it's not just a a stock price.

52:11 I said probably a couple of questions I can ask quite quickly. You say DUKE is the only UK listed royalty business. Do you not count Trident royalties? Focus here is on on a corporate royalty company, not not I believe Trident royalties is a mining royalty company. There are a few oil and gas. Yeah. There you go. So we are the only corporate royalty listed corporate royalty business. Yeah. And there's and there's the song royalties. There's Silver Wheaton as a mining big mining royalty company that's that's now listed in London. But as I said, those are all the kind of the traditional IP based depreciating assets. So they their revenue is gonna go down. They have to keep investing and keep, you know, supplanting that lost revenue with more revenue to keep growing. And and our what we've been able to show is there's embedded growth within our portfolio, which is which is which is unique.

53:07 Andrew, how do you calculate the NAV? Well, the the the NAV is simply the the the net assets of the business or the balance sheet, the net assets, and and NAV per share, obviously, net assets divided by the the total share count. So and and and, really, what drives that is is really on the balance sheet perspective. If think about it, it's really two things. It's the it's the the fair value of the investment portfolio, which I talked about, as well as, you know, how much additional free cash flow we generate on top of of what we know what we pay out in dividends. So those are the two things that really will drive that NAV up is is increase in the value of the investment portfolio. And as we lower that payout ratio, we will we will sort of deploy more back into the portfolio.

53:55 And, hopefully, as Neil's talked about, the life cycle of the investments as we get significant buybacks, that's when, hopefully, you will start to see, significant sort of material increases in NAV as and when those buyback happens, especially in the ones where we have, decent equity stakes. There was there was a question from Vivian about, do you pay for the equity stakes taken? You know, we it's a very minimal, cost that we attribute to the to the equity stakes. Sometimes we took equity in in lieu of, our cash payments, and that was through COVID. So you'll see UGG, United Glass Group, we got 30% through that mechanism and whatnot. But, Hugo, you might want to to just comment on how do you go about valuing them on the at the point of purchase and and attribute on your balance sheet.

54:52 Yeah. Well, the point of purchase is very often we we you know, for instance, we take equity stakes, as I said, where we can. But if you as as an example, if there's an NBO, the NBO team will pay will be paying a price for for the equity. And if we join them on that, we'll come in at at at the same price. So, you know, generally speaking, the type of business we invest, there isn't a huge amount of equity value on day one. You know, they're taking our capital to build that equity value, and hence why it's, you know, generally good for us to try and get in early. I've touched upon, earlier how we how we value that. I I look at those on a on a six month basis. They're audited once a year by my auditors. I take a a forward looking EBITDA multiple, which is based off, you know, management estimates, management forecasts, which, you know, DUKE has a lot of involvement in.

55:44 And then I apply a market sector multiple to that, but discount it pretty heavily. And you can always imagine, you know, I discount it, and then my auditors come in with a knife and discount it more. So I think, you know, I I I genuinely believe that the the valuations that we've got at the moment are are a fair reflection of of the equity portfolio as it stands. I I wanna touch on one one one line of questioning, around the kind of level of losses and and and what and how do we think about, you know, expected loss ratio and and things like that. I think that really is a is a is a good kind of loan portfolio type question, which which which the way we invest and which is why we're not a we're not a a a, you know, a a loan.

56:31 We're not term loans, and that's kind of the the the very much bank manager mentality of the loan loss ratio. You know, we we we safeguard ourselves from losses as through through our payout ratio and dividends. We're protecting our dividends so it we don't have to cut our dividend. By lowering our payout ratio, that means that, you know, we'll be in the seventies. We've always said, you know, we want the the run rate revenue sorry, the payout ratio on a normalized basis to be between 6080%. And when we were building the company, you know, on that phase one, we were we were much higher than that.

57:18 We were paying out mostly all of our free cash flow. And now we are much more safeguarded against some losses. What we do and goes to a couple other questions, you know, in in a prolonged recession is what we did in the in COVID is we can afford to, in a long term loan and a long term partnership if their their cash flow is being squeezed. And remember, you know, we're only taking half of the cash flow, less than half of the cash flow right now. But for those companies that are on the higher end, you know, we can forego payments. And we talked about it's not a 100%. We've talked about this before. TRI MITE, which is one of our earliest investments, is only paying us half. And that's a they are restructuring their business, and we are accruing the other half of the payments. But we are getting paid by that by them, but but only half of what we're due.

58:16 They will have to make that up. In COVID, we also equitized some of our payments that I I mentioned before. And so we believe that that these companies that, again, have been around for decades and seen lots of recessions in their time frame, and we invest in people that have have been the ones that created this cash flow and understand the dynamics of the business that we that we back them over the long term. So if we have to take we have to pull back the the the cash, it will not affect the dividend, and that's that's what we're gearing towards. We have that buffer. The loss of cash may may be short term.

59:01 They bring it back up, and and that's the way we think of losses. But but we are preserving that capital. And the five buyouts that we've had, four have been in the 20% IRR and one was negative two for long term shareholders. Of course, Riverboats, that was our first ever investment. We got our our capital back after a 100% decrease in the entire industry of of fairing 80 year olds up and down Central Europe in in close quarters in riverboats in summer twenty twenty was not a was was not something that was expected. And but we got out of that investment in a negative 2% IRR. So, you know, we have proven the way we invest is is geared towards capital preservation.

59:58 The cash flow is king as as Hugo had mentioned, and that's the way to value us or or or or, you know, measure us as as what we do, and and we're at record cash flows currently. Hugo, you got time for one more? We're we're out of time. I was a bit worried we're out of time. I I can see that I can answer one very quickly, do you have a target level of gearing? We set ourselves, generally speaking, internal limit of 4040% LTV. We don't wanna overgear the business. We're we're currently, at around 30%, I think. So so, you know, we've we've we've got plenty of room, but you you won't see us going above 40%, Gary, certainly not in the short term.

1:00:47 No. Hugo, perhaps, now would be a good time for me to jump back in, and thank you very much indeed for your presentation and for addressing all of those questions that came in from investors this afternoon. And, of course, we will give you back all of the questions that were submitted, today, and we'll publish all those responses where it's appropriate to do so on the investment company platform. Neil, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great. Yes. Closing comments. Thank you for your time. Thank you for being shareholders of those who you are. We we do these to to really connect with all shareholders. I think it's very important part of of what we do is to to keep, communication, direct communication.

1:01:34 Love your feedback, your questions at any time, not only, IMC, but, but anytime. And, we're just, we're just very pleased that that we we've been able to tell our investors we've been able to deliver on. And I think that's that's that's what we cannot predict the market, the interest rates, global pandemic, what we what we can commit to is is doing what we say we're going to do in the face of an ever increasing set of global curveballs that that may come from left field. So we appreciate you being shareholders.

1:02:20 I hope you're long term shareholders because we're building up a great company for the long term. Neil, that's great. And, Hugo, as well, thank you once again for taking the time to update investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This might take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of DUKE Royalty Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all. Thank you, everyone.