American Capital's CEO Discusses Q2 2011 Results - Earnings Call Transcript

American Capital (ACAS)

Q2 2011 Earnings Call

August 03, 2011 11:00 am ET

Executives

Samuel Flax - Chief Compliance Officer, Executive Vice President, General Counsel and Secretary

John Erickson - Chief Financial Officer, Principal Accounting Officer and President of Structured Finance

Pete Deoudes - Director of Equity Capital Markets

Malon Wilkus - Founder, Chairman, Chief Executive Officer and Chairman of Executive Committee

Analysts

Vernon Plack - BB&T Capital Markets

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Daniel Kim - JP Morgan Chase & Co

Greg Mason - Stifel Nicolaus

Joel Houck

David Chiaverini - BMO Capital Markets U.S.

Jared Cohen - J.M. Cohen & Co.

Matthew Howlett - Macquarie Research

Unknown Analyst -

John Hecht - JMP Securities LLC

Presentation

Operator

Good morning. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to American Capital Second Quarter Earnings Call. [Operator Instructions] Thank you, Mr. Pete Deoudes of Equity Capital Markets, you may begin.

Pete Deoudes

Thank you, Susan. Thank you, everyone for joining American Capital Second Quarter 2011 Earnings Call. Before we begin the call, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contain statements that to the extent that they are not resuscitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of American Capital. All forward-looking statements included in this presentation are made only as of the date of this presentation, and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in our periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

An archive of this presentation will be made available on our website, and the telephone recording can be accessed through August 17 by dialing (855) 859-2056. The replay passcode is 83124239. To view the Q2 slide presentation that correspond to this call, turn to our website, americancapital.com, and click on the Q2 2011 earnings presentation link in the upper right-hand corner of the homepage. Select the webcast option for both Slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call.

Participating on today's call are Malon Wilkus, our Chairman and Chief Executive Officer; John Erickson, President, Structured Finance and Chief Financial Officer; Sam Flax, Executive Vice President and General Counsel; Rich Konzmann, Senior Vice President, Accounting and Recording; and Tom McHale, Senior Vice President, Finance.

With that, I'll turn the call over to Malon

Malon Wilkus

Pete, thanks. Appreciate everybody joining us today. We had very good quarter. We produced a $0.20 net operating income for the second quarter of 2011. That's about $71 million. Approximately $12 million or $0.03 of that was a decrease that occurred relative to the Q1 2011 associated with some additional non-recurring income recorded in the first quarter relative to what occurred in the second quarter. We had $0.49 realized loss, that's $177 million. However, on our bottom line, our net earnings was $1.13 or $410 million, which is a 38% annualized return on equity. Over the last 8 quarters, as a result of this quarter at end of the last 7, we produced $2 billion of net earnings. That's since the gross domestic product of the U.S. started to turn positive, and we produced a 33% annualized return on equity.

If you to the next, slide, 4, that rose our net asset value to $13.16. That's $5.74 or $0.70 -- 77% growth within our NAV over the last 8 quarters. And relative to the first quarter, it was a 10% increase, a $1.19 increase, and it brings our NAV to $4.5 billion. At the and of the second quarter, we had $1.6 billion of debt outstanding, and that debt is on a weighted average basis, is costing us about 4.8%, on average, given the quarter. We paid down, in the quarter, another $100 million, but that was paid -- that paid down our securitization debt. And so the schedule of the maturity of our $700 million secured debt, which is due in 2013, continues to be fundamentally at the end of the 2013 year. And that $700 million we did not voluntarily paid down in the second quarter. But as a result of all the movement in our balance sheet and the paydown of this debt, we now have a 0.4:1 debt-to-equity ratio, and that of course is something we feel very good about considering the volatility in the market and the economy and some of the uncertainties that are out there.

A very good note for the second quarter was the increase of our assets under management to $52 billion. That's a $36 billion or 222% increase over the second quarter of 2010. And to remind everyone, $6 billion of that is assets that we internally managed at American Capital on our balance sheet, and then $46 billion is externally managed in 4 private funds and 1 public fund. And the bulk of that, well, I'd say all of that increase was due to the raising of new equity and the subsequent assets that we raised and managed for American Capital Agency, which is the public fund that we're discussing, and which has had just tremendous performance over the last 3 years. It is one of the best performing dividend stocks, I think, in those last 3 years.

If you turn to Slide 5. You can now see our earnings are $410 million of earnings in the second quarter of 2011 relative to the U.S. GDP growth, and that shows a 1.3% growth in the second quarter of 2011. And as we pointed out in the past, we continue to correlate well with the changes in growth of the GDP. And again, we believe the economy performs and our portfolio will perform since we've been deleveraging some of those at American Capital. And that our portfolio companies -- a decline in the economy will have less of the kind of radical impact that it had in this last recession. So we are not at a much a levered play to the company as we might have been entering into this last recession. Nonetheless, we seem to be quite correlated with the GDP growth.

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