Meaghan Mahoney - Investor Relations Peter Reed - Chief Executive Officer Adam Yates - Portfolio Manager John Ehlinger - Portfolio Manager.

Barry Bergman - Alba Investments.

Good morning. My name is Melissa, and I will be your conference operators today. At this time, I would like to welcome everyone to the Great Elm Capital Group, Inc. reports First Quarter Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session [Operator Instructions]. Thank you. Ms. Meaghan Mahoney, you may begin your conference..

Thank you, Melissa and good morning everyone. Thank you all for joining us for Great Elm Capital Group, Inc.'s first quarter 2019 earnings conference calls. As a reminder, this webcast is being recorded on Friday, November 9, 2018.

If you'd like to be added to our distribution list, you can either email investorrelations@greatelmcap.com or sign up for alerts directly on our Web site. The slide presentation accompanying this morning's conference call and webcast can be found on great own Capital Group, Inc. Web site, www.greatelmcap.com under events and presentations.

A link to the webcast is also available on the section of our Web site, 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 Statements regarding forward-looking information.

Also, please note that nothing in today's call constitutes an offer to sell or a 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, Inc.'s filings with the SEC for important factors that could cause actual results to differ materially from these projections. Great Elm Capital Group, Inc.

does not undertake the update is forward-looking statements unless required by law. To obtain copies of the SEC filings, please visit Great Elm Capital Group, Inc.'s Web site under financial info and select SEC filings. Hosting our call this morning is Peter Reed, Great Elm Capital Group, Inc.'s Chief Executive Officer.

I will now turn the call over to Peter..

Thank you, Meaghan and good morning everyone. Thank you for joining us today. I'm joined this morning by our President and COO, Adam Kleinman; our Chief Financial Officer, John Woods; two senior members of our investment team Adam Yates, and John Ehlinger; and Meaghan Mahoney, our Head of Investor Relations.

We will walk through an update on our recent acquisition of Valley Healthcare and Northwest Medical, as well as a brief update on the investment management and real estate verticals and their associated segment financials. We're relevant in our prepared remarks. We'll point you to the corresponding slide in the presentation that Meaghan referenced.

Please turn to Slide 5. Over the course of the past two years, we've been working to transform Great Elm Capital Group, Inc. into a diversified publicly traded holding company across three business verticals; investment management, real estate, and operating companies.

As discussed on our acquisition call in September, we are pleased to say that we have now successfully completed a significant transaction in each of these three verticals. Please turn to Slide 7. First and foremost, we would like to again underscore the importance to us of our long-term alignment for the interest with you, our shareholders.

Our team collectively owns over 1.8 million shares or 7% of the Company, including our Board of Directors and their funds under management. Insiders collectively own approximately 17.5% of the shares outstanding. We believe this fosters a significant and long-term alignment of the interest amongst employees, directors and shareholders.

Let's turn to Slide 9 for a brief refresher on our most recent transactions.

For our operating company vertical, our team had explored a significant volume of deal opportunities over the past year with a keen focus on acquiring growing businesses with a demonstrated history of generating meaningful earnings that are high returns on the capital employed by the businesses, all while paying what we do to be a reasonable multiple of those earnings.

In September of 2018, we believe we accomplished just that with the acquisition of Valley Healthcare Group and Northwest Medical.

Valley Healthcare and Northwest Medical are both leading regional providers of sleep and respiratory focus, durable medical equipment and services, and serve a combined 70,000 patients annually across five states and 28 locations. We acquired an 80.1% stake in the combined companies at an enterprise value of $63.6 million.

This enterprise value represented a 4.9 times multiple of the LTM pro forma adjusted EBITDA for the period ended June 30, 2018 and a 4.5 times multiple of the LTM pro forma adjusted EBITDA for the period ended September 30, 2018.

In addition to the financial metrics, we believe we have partnered with an experienced and aligned management team with significant skin in the game through their retained 9.9% equity ownership in the combined businesses, incenting them to focus on both organic and acquisitive growth opportunities.

Turning to Slide 10, we received a number of questions post closing about the terms of the capital structure. Slide 10 outlines the sources and uses of capital for the deal, as well as the terms of the revolving credit facility, term loans and qualified preferred stock. Turning to Slide 11 for a snapshot of the summary of progress post closing.

On the financial front, the business has demonstrated growth in both EBITDA and revenue, as well as the potential for a significant free cash flow generation.

On the operational front, the team is focused on implementing best practices in an effort to improve the patient experience and ultimately drive referral growth to increase re-supply revenue and to reduce purchasing cost through renegotiating vendor agreements.

In terms of potential M&A, the management team is in preliminary dialogue with a number of acquisition targets, seeking to grow the platform not only organically but also through M&A. Please turn to Slide 12 to walk through the financial update for Valley Healthcare and Northwest Medical.

For the last 12 months ended September 30, 2018, Valley Healthcare and Northwest Medical would have generated $14.1 million in pro forma adjusted EBITDA, growth of 9.3% over the LTM figure as of June 30th.

Additionally, the combined businesses would have generated $47.7 million of combined revenue, representing 1.3% growth over the LTM period ended June 30th. For the month of September 2018, the combined businesses generated $4.1 million in total revenue and $1.3 million in adjusted EBITDA with approximately $490,000 of CapEx.

This translates into $830,000 in unlevered free cash flow and $587,000 in levered free cash flow. Driving the growth during this quarter were increases in active rentals and new patient setups coupled with stability and referrals across all regions.

Slide 13 lays out the partial period for Valley Healthcare and Northwest Medical and what we view as impressive free cash flow generation. Total revenue for the period was $4.1 million against total OpEx was $3.8 million, resulting in operating income of $293,000. Adjusted EBITDA for the period was $1.3 million.

Net of CapEx and interest expense, levered free cash flow was $587,000. Turning to Slide 14 to discuss M&A, we've used the opportunity to partner with this experienced management team to pursue acquisition opportunities and consolidate this fragmented industry, it's one of the most compelling investment characteristics to this platform.

The Valley Healthcare in Northwest Medical management team is in preliminary dialogue with multiple acquisition targets, both in existing geographies and new potential markets. The targets have EBITDA ranging from $500,000 to $3 million.

We will be seeking to pay less than 5 times of sellers' EBITDA to acquire these businesses and expect that we would blend down that acquisition multiple through driving significant cost synergies.

Away from the DME platform, the Great Elm team continues to evaluate and diligence a number of other operating company opportunities across multiple industries. Turning to the investment management vertical, please turn to Slide 17.

During the course of the last 12 months and the most recent quarter, we’ve grown our investment management business both in terms of assets under management and associated management fee revenue.

During the last 12 months, we grew the investment portfolio of Great Elm Capital Corp by 33% and GECM’s quarterly management fee revenue for managing GECC by 40%.

Additionally, we recently filed for a baby bond offering, which once effective will allow us to continue the trajectory of growth for both the investment portfolio and associated management fee revenue from GECC.

Given the high margins and highly scalable nature of the investment management business, we continue to pursue growth both organically and through M&A.

We launched the Great Elm opportunities fund one in July, creating a vehicle for investors to target the type of asymmetric risk and return co-investment opportunities on which our team is historically focused. We look at this vehicle as an attractive area of growth for our investment management vertical.

Turning to Slide 18 to discuss the segment financials for investment management. During the quarter, we generated $940,000 of total revenue, adjusted EBITDA of $612,000 and negative $8,000 of free cash flow. Importantly, we believe there are several near-term drivers of incremental free cash flow.

First, as previously reference, incremental capital raise will allow us to grow GECC’s investment portfolio, which will drive incremental management fee revenue. Additionally, when the full circle consulting agreement concludes in November 2019, this annualized expense of $800,000 will roll off, that’s also increasing free cash flow.

Lastly, we believe we will be collecting part one incentive fees from cash in GECC in fiscal year 2019 in accordance with the terms and conditions of its investment management agreement. The annualized amount of unrecognized incentive fee income from this most recent quarter was approximately $2.2 million.

On the real estate front, we continue to see significant deal flow post the announcement of the Fort Myers transaction in March, expanding our opportunity said.

In terms of the type of real estate transactions that we focus on, we continue to target credit tenant lease financings and ground lease structures across commercial government and other property type. Seeking to find situations in which we can use GEC substantial tax assets and deal structuring expertise to be value added partner or landlord.

Let's turn to Slide 21. As you see on the chart at right, assuming no appreciation in the property value, GE sees equity value in the Fort Myers property will continue to grow between now and the lease expiry in 2030.

Its cash flows from the rental stream are utilized to amortize debt, growing from one times our investment acquisition to 7.1 times in 2030. This growth is achieved without deploying any additional capital into this investment. Turning to Slide 22 to walk through the segment financials for real estate.

During Q1 2019, we generated approximately $1.4 million in rental income, $51,000 in net income and $1.1 million of adjusted EBITDA. While not generating free cash flow for Great Elm as we discussed on the prior slide, we continue to build equity value in this investment to the amortization of debt.

With this review of the business highlights and quarterly financial results concluded, let's now open up the call to Q&A..

Thank you [Operator Instructions]. Your first question comes from the line of Barry Bergman from Alba Investments. Your line is open..

Sounds like everything's going on great. A quick question on the slide you mentioned, what I would call, you have that opportunities fund that would allow you to do investments.

Could you talk about how much capital you guys have in there? Is it ceded by the company? Just can you give us a little bit of background on what's going on there?.

So the company has not ceded it with any capital at this point. You probably expect to think of it as a series of discrete co-investment opportunities. And we launched the fund to align with the first opportunity, in which we partnered with outside investors to buy a pretty small piece of performing but stressed secured bank debt.

And that's a position that's also in Great Elm Capital Group. So there's not much capital in it at the moment but it is a vehicle that's designed to respond to compelling opportunities on a one-off basis, leveraging historic partnerships that we've developed and nuance that we're working on developing..

Okay, so there's partnership, so you just set up the deal structure as -- or they already yield a general template for deal structures, because everything will be a one -- like separate LLCs, if you will, at least it will be separate and distinct?.

I think each deal will be separate and distinct. I don't think the form is in LLC, I think it's a partnership but….

No, I don’t think it that way. I mean you don't have a fund structure each one will be a sidebar as it relates to individual investment. .

I think each investment is separate series within the broader fund..

Can you talk about also your plans? I think that sleep business is really interesting. Can you talk about -- I know we've adjusted pro forma, or that sort of stuff.

What are the actual numbers and hat's the magnitude and the nature of the adjustments that you are making? Unfortunately, I don’t have the slide deck up, maybe that's on there, but on the pressure it isn’t in really that way.

But I'd just love to get some granularity as to what is adjusted pro forma speak to?.

The adjusted EBITDA pro forma primarily has some transaction costs added back in it and associated with doing the deal. And there are some run rate synergies in there that we've achieved as a result of the management team doing a couple of things, but the biggest component of which is effective day one.

The combined companies were purchasing equipment at a lower price than they were apart. So annualizing that new run rate amount of purchasing savings is also embedded in the adjusted EBITDA calculation..

So for example, company A, had a better purchasing model than company B, and you're just adjusting company B for those savings.

Is that what it is?.

That and the company A as a result of being bigger is buying equipment cheaper than it was on its own..

And can you help me understand -- so you actually buy equipment and it's a buy and lease model. Is there a financing vehicle that you use from a bank or inside, outside? And if we look at that you own a business and how fast you depreciate the equipment and what usually happens at the end.

Can you just help me understand a little bit of that?.

So the equipment is depending upon the type of equipment is sold or leased. And that's primarily determined by the payor, so it’s not really determined by the company. Each payor has a different arrangement with the company for a specific piece of equipment.

To the extent that -- and so depending upon the type of equipment, the depreciation schedules could be 13 months or they could be three years. But we are not currently using externally sourced financing for the equipment that is leased. So equipment that we're buying and leasing, you see that embedded in the CapEx figure the chart on Slide 13. .

And what's the payback on that? Is it disposable equipment and do you know what the process is or I know what -- is it the CPAP machines type of thing or….

Yes. So that the biggest item there would be CPAC machine. And then associated pieces of supply that go along with it hose, mass, tubes, et cetera. So the machine itself is a one-shot transaction but that typically creates recurring re-supply revenue in the form of other items, which need to be changed out with some frequency..

So I guess you expense those. And then the CPAC machine at the end, do you own it or does it go back or -- if you buy it and you own it. Is there any terminal value it has to offer or….

In the terms of the lease they transfer to the customer at the end of the lease..

Well, it's not even like a car lease, because the customer owns the equipment at the end. So you don’t have any risk on that..

Correct..

That’s not the least. But what if you have to buy it or does that lead you to lease up to the client, or you guys own it when you buy it? You said there's some core systems….

We buy equipment. And depending upon the relationship with a payor, we either sell it in which case we don’t own it or we lease it, in which case that the client or the patient owns it at the end of the period of the rental term..

I just want to understand, I mean I don’t know -- there’s sometimes gain on those sales of equipment or can you reuse it, or does the technology go so fast that you can’t reuse it? I know things are moving quickly in any medical space or any technology space. So just I’m wondering if….

So we have pretty high velocity of turnover. So we’re not particularly concerned about are we going to end up owning equipment that we can’t sell, because we’re not gaining tons and tons of it on hand. And then at the end of the lease, we don’t own it any way..

I have so many questions I am just trying to understand. I guess, I really think that’s an interesting business.

Is this management team -- do you think it’s -- as I remember reading the first press release on the acquisition that’s really less cost oriented? Is this a roll up thing that you go on to do -- what’s the nature of the investment and the management team and everything else?.

So the management team that we’re backing, led by Ron Evans and Chad Vance. We’re backing them. This is their eighth acquisition. And we’re in dialogues to do a number more. So yes, we do think it is a roll up. Geographically, they have operations in Arizona, and Nebraska, and Oregon, and Washington and Alaska.

So, I would say most of the near-term acquisition targets that we’re speaking to are in markets that are either in market or tangential to existing markets. But overtime, we'd expect to broaden out..

And those multiples, because they're tack-ins to existing operations you have at SG&A and everything.

What multiples do you think you end up buy in those at, the tack-ons?.

Yes. So we’re -- I think it is Slide --. In short, we think we’re going to pay 5 times sellers' EBITDA or less, which is some place in our debt, Slide 11 as well as later in the deck.

And then just like as in with this transactions, in which there’s significant cost synergies, we expect most of the acquisition targets that we’re talking to, we would have significant cost synergies.

So our buyers' EBITDA, if you will, would be meaningfully higher than the sellers' EBITDA and our effective multiple would be meaningfully lower than 5 times, even though at 5 times the sellers' cash flow..

One quick question and then I’ll slide back up. How did you go about compensating management and everything else on the purchase? Maybe do they own equity -- I think there is some rollover. I think you own 80 or something 20….

Yes. So we bought two different companies. The management team that we’re backing owned the vast majority of the equity in their own business. So they paid off some debt. They took some cash home and they rolled over a significant amount of equity. So they have rollover equity, as well as base and bonus that incent them to grow cash flow..

[Operator Instructions] There are no further questions at this time. Ms. Mahoney, I turn the call back over to you. And pardon me we do have a question from the line of [John Old] from [Long Metal] Investors. Your line is open..

So could you just maybe go through what you think the organic growth of the DME business would be? And do you think that $14 million of EBITDA, pro forma EBITDA, is that a fully maximized number? Or is there room for more synergies and improvements? So that feels like a good run rate going forward..

We do not view that as maxed at all. We view this as a business with significance organic growth potential. In particular, at Valley Healthcare over the years, it's developed a series of best practices to drive, among other things, resupply revenue.

But you might think of that as recurring, hoses, mask, tubes, et cetera, that go along with CPAP machines as an example. And as the team is implementing those best practices at Northwest Medical, we would expect to see a significant uplift in their revenue of that type.

On top of that, we think that both businesses have organic growth opportunities, both because the market is growing, as well as the potential to edge out or expand from existing markets. So, we would expect organic growth on the revenue side to it some point pick up from what we saw in September.

And we expect to continue to work on driving cost synergies and costs out of the business, so that adjusted EBITDA growth at a much higher cliff than the revenue growth, which we think will be significant..

What would be a good estimate for organic growth, like 5% to 10%, something like that?.

I don't know. I think it's a little too early. We only have one month of numbers to report. But we do expect it to be better than what we've shown in this month as there's still significant activity to integrate the two businesses going on..

And so the free cash flow that’s generated, I mean, do you plan to just deploy that into acquisitions or pay down the debt? Or how do you see that playing out?.

So I think our first choice would be acquisitions. Probably the second choice would be we've got some debt obligations, both in terms of amortization, as well as excess cash flow sweeps. But given that the interest is relatively expensive, that's pretty accretive to our free cash flow to be retiring net debt.

And under certain circumstances, we might take cash up to the parent company to use elsewhere. But right now given the opportunities that we see we are hopeful that that will be deployed into further M&A..

And what are you seeing in the investment management area in terms of deal flow, or what things that you're trying to focus on?.

We continue to be in dialogue with a number of different BDC managers, in particular, given what we view as the attractive nature of those contracts. They are rather tricky transactions to get done. So it's really tough to forecast that timing of when something like that might happen.

But it's not a massive universe and we try to maintain a pretty active dialog with a number of managers and hopefully that will translate into tangible transaction opportunity..

And do you see any possibility for getting additional one-off accounts like the $33 million that you achieved earlier this year, are you looking for some big portfolios?.

I think that we do. I think one of the reasons why we launched the opportunities fund is that it seems like one-off opportunities to larger institutional investors are a good gateway into developing a bigger and broader relationship.

So now we have the fund structure in place to execute against attractive opportunities, and hopefully turn those into a broader deeper relationship..

So you like co-invest, let's say, a private equity fund or a private equity -- a big fund manager and that could correlates often to mandates for managing additional pools?.

Exactly..

There are no further questions at this time. Ms. Mahoney, I turn the call back over to you. .

Thank you, Melissa. Thank you again all for joining us this morning to discuss an update on the different business verticals in which we are pursuing growth, as well as an update on our recent acquisitions of Valley Healthcare and Northwest Medical in the quarterly financials.

We appreciate your support and we look forward to creating long-term shareholder value together. Please do not hesitate to reach out if you need any help anything in follow-ups and have a great day..

This concludes today's conference call. You may now disconnect..