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Edited Transcript of GEC earnings conference call or presentation 10-Feb-20 1:00pm GMT

Q2 2020 Great Elm Capital Group Inc Earnings Call

REDWOOD CITY Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Great Elm Capital Group Inc earnings conference call or presentation Monday, February 10, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam W. Yates

Great Elm Capital Corporation - Portfolio Manager

* Peter Andrew Reed

Great Elm Capital Group, Inc. - CEO & Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Great Elm Capital Group, Inc. Second Quarter 2020 Financial Results Call. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Adam Yates. Please go ahead, Mr. Yates.

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Adam W. Yates, Great Elm Capital Corporation - Portfolio Manager [2]

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Thank you, Carol, and good morning, everyone. Thank you for joining us for Great Elm Capital Group's Second Quarter 2020 Earnings Conference Call. As a reminder, this webcast is being recorded on Monday, February 10, 2020. If you'd like to be added to our distribution list, you can either e-mail investorrelations@greatelmcap.com or sign up for alerts directly on our website.

The slide presentation accompanying this morning's conference call and webcast can be found on Great Elm Capital Group's website, www.greatelmcap.com under Events and Presentations. A link to the webcast is also available on this section of our website as well as in the press release that was disseminated to announce the quarterly results.

I'd like to call your attention to the customary safe harbor statement regarding forward-looking information. Also, please note that nothing in today's call constitutes an offer to sell or solicitation of offers to purchase our securities.

Today's conference call includes forward-looking statements and projections, and we ask that you refer to Great Elm Capital Group's filings with the SEC for important factors that could cause actual results to differ materially from these projections. Great Elm Capital Group does not undertake to update its forward-looking statements unless required by law. To obtain copies of the SEC filings, please visit Great Elm Capital Group's website under Financial Info and select SEC filings.

Hosting our call this morning is Peter Reed, Great Elm Capital Group's Chief Executive Officer. I will now turn the call over to Peter.

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Peter Andrew Reed, Great Elm Capital Group, Inc. - CEO & Director [3]

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Thank you, Adam, and good morning, everyone. Thank you for joining us today. I am joined this morning by our President and COO, Adam Kleinman; our CFO, Brent Pearson; 2 senior members of our investment team, Adam Yates and John Ehlinger. We will walk through an update on our operating companies, investment management, real estate and general corporate business segments as well as their associated financials. Where relevant in our prepared remarks, we will point you to the corresponding slide in the presentation that Adam referenced.

Please turn to Slide 5. During the quarter ended December 31, 2019, we reported consolidated revenue, net loss and adjusted EBITDA of $16.6 million, $2.0 million and $3.4 million, respectively. We are intently focused on growing both revenue and profitability across our verticals.

Please turn to Slide 7 to discuss drivers of shareholder value. We have clear objectives in each of our verticals. In Operating Companies, we're focused on acquiring under-capitalized companies with significant growth potential, both organic and through M&A. In Investment Management, we seek to increase assets under management in both GECC and in other investment vehicles managed by GECM. In Real Estate, we're interested in partnering with owners and lessees to utilize our substantial tax assets.

On a consolidated basis, our goal is to generate increased free cash flow through fiscal year 2020. We intend to achieve this goal through continued growth at Great Elm DME and Investment Management, enhanced by reduced corporate overhead.

Please turn to Slide 8. It is very important for us to maintain long-term alignment with you, our shareholders. Our team collectively owns approximately 2 million shares or 8% of the company. Including our Board of Directors and their funds under management, insiders collectively own circa 19% of the shares outstanding. We believe this fosters a significant and long-term alignment of interest amongst employees, directors and shareholders.

Let's turn to Slide 10 for an overview of our operating company activity. Since the formation of Great Elm DME, Inc. in September 2018, we've been pleased with the business' rate of organic growth. DME generated $14.4 million of revenue and $3.5 million of adjusted EBITDA during the quarter. We're experiencing meaningful growth in all major product categories, including new PAP and ventilator patient setups, each hitting new highs this quarter. As we grow, we're investing heavily in people, processes and technology to increase the scalability of the DME platform. For example, we've successfully consolidated the billing platform and implemented financial management software that will strengthen operations as we scale. Furthermore, we anticipate continued growth in both revenue and adjusted EBITDA during this fiscal year, supported by strong KPIs.

Please turn to Slide 11 to discuss our plan for inorganic growth at DME. DME intends to acquire complementary patient-focused businesses and integrate them into the existing platform. The respiratory-focused durable medical equipment industry is fragmented and ripe for consolidation. DME seeks to pursue an expansion strategy that targets tangential or overlapping markets to our existing geographical footprint in Arizona, the Midwest and the Pacific Northwest. In addition, we're exploring complementary product lines and services that utilize the company's valuable assets and infrastructure.

Please turn to Slide 12 to walk through the financial update for our DME segment. Total revenue for the quarter was approximately $14.4 million. Adjusted EBITDA for the quarter was approximately $3.5 million. As you can see, a healthy portion of DME's cash flow was reinvested in the business as we develop a scalable platform capable of supporting organic growth and acquisition opportunities. Specifically, we invested $311,000 during the quarter to upgrade sleep equipment, including beds at our sleep centers. We expect these types of enhancements to occur roughly twice per decade. Consequently, levered free cash flow was $2.1 million, aided by low maintenance capital expenditures necessary to maintain operations.

During the quarter, we were able to pay down a meaningful portion of the debt at Great Elm DME with a combination of free cash flow and existing cash on hand. Furthermore, as adjusted EBITDA continues to grow, we anticipate growth in free cash flow at DME.

Please turn to Slide 14 to discuss the Investment Management vertical. We believe Investment Management is an attractive business for Great Elm due to its scalable business model, high margins and the potential for significant free cash flow generation. In the near term, we plan to grow our investment management business in 2 ways. First, by opportunistically issuing additional debt at Great Elm Capital Corp., which would increase GECC's assets and thus management fees for Great Elm. Secondly, we plan to grow our investment management business by increasing assets under management, either through BDC M&A or in other investment vehicles. With significant embedded operating leverage and an established infrastructure, we believe the investment management business has the potential to generate substantial free cash flow on a meaningful scale.

Turning to Slide 15. Management fees were approximately $760,000 for the fiscal second quarter, largely in line with management fees in recent quarters. Management fees increased as the fair value of GECC's diversified portfolio increases. The longer-term trend points towards continued management fee growth as we deploy capital into both niche syndicated leverage credit and potential specialty finance investments.

On Slide 16, we break out the segment financials for Investment Management. Total revenues, which include both management fees and administration fees, were approximately $889,000 during the quarter. GECM earned, but did not recognize incentive fees in the amount of $610,000, which per changes in accounting standards, we have not added back to adjusted EBITDA. Consequently, adjusted EBITDA was approximately $323,000 in the quarter. The positive trend in management fee revenue, coupled with the termination of the Full Circle consulting agreement leads us to believe this segment is poised for continued free cash flow generation.

Please turn to Slide 18 to discuss Real Estate. We continue to target credit tenant lease financings and ground lease structures across commercial, government and other property types, seeking to find situations in which we can use GEC's substantial tax assets and deal structuring expertise to be a value-added partner or lessor. To date, we have found a very limited number of attractive real estate opportunities in what we believe to be a relatively overheated market.

Let's turn to Slide 19. As you see on the chart, assuming no appreciation in the property value, GEC's equity in the Fort Myers investment will continue to grow between now and the lease expiry in 2030. As cash flows from the rental stream are utilized to amortize debt, equity grows from 1x our investment in acquisition is greater than 7x in 2030, all without deploying any additional capital.

Turning to Slide 20. Let's walk through the segment financials for Real Estate. During the second quarter, we generated approximately $1.3 million in rental income, $60,000 in net income and $1.15 million of EBITDA. While not generating levered free cash flow for Great Elm, as we discussed on the prior slide, we continue to build equity value in this investment through the amortization of debt.

On Slide 22, we have a review of Great Elm's General Corporate segment financial detail. This quarter's net loss was in large part driven by an unrealized loss on the investment in GECC shares, offset in part by dividends from those GECC shares and prudent management of operating expenses.

Beyond the financial review on Slide 27, we have a summary of how we plan to continue to drive shareholder value. To reiterate, our goal is to generate consolidated free cash flow throughout fiscal year 2020. We intend to achieve this goal through continued growth at Great Elm DME and Investment Management, enhanced by reduced corporate overhead.

That concludes our review of Great Elm's fiscal second quarter. Let's open up the call for Q&A.

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Operator [4]

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(Operator Instructions) I'll turn things back to Adam Yates for closing remarks.

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Adam W. Yates, Great Elm Capital Corporation - Portfolio Manager [5]

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Thank you again for joining us this morning to discuss Great Elm Capital Group's second quarter 2020 financial results. We appreciate your support, and we look forward to creating long-term shareholder value together. Please do not hesitate to reach out to us if we can be helpful with anything in follow-up, and have a great day.

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Operator [6]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.