Safeguard Scientifics' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Safeguard Scientifics Inc. ( SFE)

Q4 2011 Earnings Call

February 29, 2012 9:00 am ET

Executives

Peter Boni – President, Chief Executive Officer

Stephen Zarrilli – Senior Vice President, Chief Financial Officer

James Datin – Executive Vice President, Managing Director, Life Sciences Group

John Shave – Vice President, Business Development &Corporate Communications

Analysts

Greg Mason – Stifel Nicolaus

Matt Dolan – Roth Capital

Paul Knight – CLSA

Nick Halen – Sidoti & Co.

Roy Studness – First Manhattan

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Safeguard Scientifics Fourth Quarter and Year-End 2011 Results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions following at that time. If anyone requires assistance, please press star then zero on your touchtone phone. As a reminder, this conference call is being recorded.

And now I’ll turn the conference over to your host, John Shave. Please begin, sir.

John Shave

Good morning and thank you for joining us for Safeguard Scientifics’ 2011 Year-End Conference Call and Update. Joining me on today’s call are Peter Boni, Safeguard’s President and Chief Executive Officer; Steve Zarrilli, Senior Vice President and Chief Financial Officer; and Jim Datin, Executive Vice President and Managing Director with responsibility for leading our deal team professionals.

During today’s call, Peter will review fourth quarter and 2011 highlights as well as other developments, then Steve will discuss Safeguard’s financial results and strategies. After that, we will open the lines for your questions.

Before we begin, I must remind you that today’s presentation includes forward-looking statements. Reliance on forward-looking statements involves certain risks and uncertainties, including but not limited to the uncertainty of future performance of our partner companies and the risks of acquisition or disposition of interests in partner companies, capital spending by customers, and the effect of regulatory and economic conditions generally, as well as the development of the life sciences and technology markets and other uncertainties that are described in our SEC filings. During the course of today’s call, words such as accept, anticipate, believe and intend will be used in our discussion of goals or events in the future. Management cannot be certain that financial outcomes will be as described today. We encourage you to read our filings with the SEC, including our Form 10-K which describes these risks in details. The Company does not assume any obligation to update any forward-looking statements made today.

Now here’s Safeguard’s President and Chief Executive Officer, Peter Boni.

Peter Boni

Thanks John, and thanks to all of you for joining us today for updates on Safeguard Scientifics and our partner companies. Results for the fourth quarter and year ended December 31 were distributed at close of market yesterday. 2011 was an exceptional year of value-creating activity at Safeguard. We executed two well-timed exits with net proceeds of $182 million, including escrowed amounts, booking at cash-on-cash returns of 4 times and 14 times on the sale of our positions in Portico Systems and Advanced BioHealing, respectively.

Safeguard’s deal teams deployed $69.4 million of capital in seven new partner companies and made three follow-on deployments in existing partner companies for $14 million. The strategic and operational support of Safeguard’s partner companies drove aggregate revenues to increase 27% year-over-year. We also launched Penn Mezzanine, Safeguard’s first platform expansion initiative in alternative asset management through which we expect to generate management fee and interest income, as well as profit participation opportunities. The repayment of $31 million in corporate debt bolstered Safeguard’s balance sheet, improving the Company’s ratio of total debt to equity year-end to 1:8. In short, the team is executing a focused and disciplined strategy which is enhancing Safeguard’s brand as the preferred catalyst to build great companies, ultimately boosting the Company’s financial strength, flexibility, and driving value for our shareholders.

Our momentum is strong and I find our prospects really quite exciting. This year is off to a very promising start despite the macroeconomic environment where geopolitical headlines disrupt global capital markets and our domestic economy’s growth is tenuous and politically charged. For those who are new to the Safeguard story, I’ll review the hallmarks of our strategy which are built on three pillars: focus, discipline and execution.

Focus is the first pillar of Safeguard’s strategic foundation. We deploy capital to high potential businesses in specific segments of life sciences and technology industries that exploit five strategic growth driving themes: maturity, migration, convergence, compliance, and cost containment. In life sciences, we target opportunities in the areas of lower relative technological and regulatory risk, not in new therapeutics but rather in molecular and point-of-care diagnostics, medical devices, specialty pharmaceuticals, and some selected healthcare services. In technology, we pursue transaction-enabling applications with a recurring revenue business model in Internet and new media, financial technology, healthcare IT, and other selected business services.

Safeguard’s discipline complements our focus. We will not deploy capital or pursue exits simply for activity’s sake. If an opportunity clears our strategic growth and return hurdles, we will respond appropriately.

Now while Safeguard’s deal team evaluates over 1,000 proposals annually, we remain disciplined in our capital deployment process. Today we hold interest in 17 partner companies. We have typically deployed up to $25 million in growth capital per company. We will time our exits from ownership positions in these companies to achieve targeted risk-adjusted returns on capital of 3 to 5 times over three to five years. As background, for all deployments since January 2006 than have been realized, written down or written off, Safeguard has realized aggregate cash-on-cash returns of 2.4 times. By way of comparison, according to Cambridge Associates, U.S. venture capital investments made since 2006 generated average cash-on-cash returns of 1.2 times. Now, based upon our evolving diversified deployment strategy, equity and debt in companies at varying stages, we believe that our aggregate returns on total capital deployed could reach 2 to 4 times over that three to five-year period.

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