Great Elm Group, Inc. (GEG) Q1 2023 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Great Elm Group Fiscal 2023 First Quarter Conference Call. [Operator Instructions] Adam Yates, Managing Director. You may begin.

Thank you and good morning, everyone. Thank you for joining us for Great Elm Group's fiscal first quarter 2023 earnings conference call. As a reminder, this conference call is being recorded on Tuesday, November 15, 2022. If you would like to be added to our distribution list, you can e-mail investorrelations@greatelmcap.com or you can sign up for alerts directly on our website, www.greatelmgroup.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations. A link to the webcast is also available on our website as well as in the press release that was disseminated to announce the quarterly results. Today's conference call includes forward-looking statements and we ask that you refer to Great Elm Group's filings with the SEC for important factors that could cause actual results to differ materially from those statements. Great Elm Group does not undertake to update its forward-looking statements unless required by law. In addition, during today's call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable financial measures are included in our earnings release. To obtain copies of our SEC filings, please visit Great Elm Group's website under Financial Information and select SEC Filings. Great Elm Group is a diversified holding company that is building a business across two operating verticals investment management and operating companies. In Investment Management, we seek to drive sustainable growth in assets under management across Great Elm Capital Corp.; a publicly traded BDC; Monomoy REIT and other investment vehicles. In operating companies, we manage Great Elm Durable Medical Equipment, DME, a distributor of respiratory care equipment and sleep study services. Hosting the call today is Peter Reed, Great Elm Group's Chief Executive Officer. I will now turn the call over to Peter.

Welcome, everyone and thank you for joining us today. I am joined this afternoon by our President, Adam Kleinman; and our CFO, Brent Pearson. In the first quarter of fiscal 2023, we generated strong growth across both of our operating segments. Investment Management revenues were up nearly 90% year-over-year. Assets under management were up 3% during the quarter to $624 million as of September 30, 2022. Fee-paying AUM grew by 5% during the fiscal first quarter to $428 million. At Monomoy, we maintained a strong backlog of transactions that have the potential to provide further growth. And at GECC, we are focused on prudently deploying rights offering proceeds, both of which are expected to lead to increased AUM and related fees. Yesterday, GECC announced that it launched Great Elm Healthcare Finance with an affiliate of Berkadia Commercial Mortgage, its strategic minority partner, to offer a wide range of capital solutions to U.S.-based health care operators. We believe ongoing initiatives to further diversify GECC's portfolio to generate attractive returns across cycles will enhance growth and as a result, GEG's management fees. Stepping back, we remain focused on our long-term strategy of managing a scalable and diversified portfolio of long-duration permanent capital vehicles that generate fee revenue and we continue to invest in the business to drive sustainable growth. Our diverse investment vehicles are well positioned to deploy capital into attractive credit specialty finance and real estate investments in dislocated markets. As our investment management business continues to scale, growth in AUM will drive increasing management fees and profits, reflecting high incremental margins. A higher interest rate backdrop also bodes well for performance fees which are typically based on excess returns above a fixed rate hurdle. In addition, we maintain a strong and liquid balance sheet enhanced by our recent fixed rate, long duration bond offering in June 2022. We intend to continue to make strategic growth investments into existing funds and acquire management rights to long-duration asset management business that utilize the expertise of our Board of Directors and management team. Turning to our results for the quarter ended September 30, 2022. We posted strong financial performance, highlighted by consolidated revenue growth of 12% on a year-over-year basis. Investment Management revenue grew by approximately 90% versus prior year quarter driven by higher AUM and management fees related to GECC and Monomoy. Next, our durable medical equipment business continued to deliver strong growth in revenue and profitability. For the fiscal first quarter of 2023, revenues were up 7% year-over-year with adjusted EBITDA up 19%, excluding benefits from government stimulus payments. Beyond our strong fundamentals and constructive growth outlook, we maintained two important differentiating factors from a financial and shareholder alignment perspective. As of June 30, 2022, we have approximately $821 million of net operating loss carryforwards which yield future earnings from federal income taxes and enhance the financial attractiveness of potential acquisitions of other long-duration capital vehicles. In addition, Great Elm employees and directors, including funds under their management, collectively own or manage approximately 42% of GEG's outstanding shares which reinforces the strong alignment of interest between management and shareholders. With that, I'll turn it over to Brent to discuss our financial results for the quarter in more detail.

Thanks, Pete. I'll provide a brief overview and of course, welcome all of you to review our filings in greater detail or to reach out to our team with questions you may have. During the quarter ended September 30, 2022, we reported consolidated revenue of $18.6 million, a net loss of $8.5 million and adjusted EBITDA of $2.7 million. For the same period last year, we reported consolidated revenue of $16.5 million, net income of $0.1 million and adjusted EBITDA of $4.3 million. Great Elm reports the results of each of our two operating segments, including Investment Management and Durable Medical Equipment as well as unallocated general corporate activity. We'll begin the review with investment management. For the fiscal first quarter, Investment Management reported total revenue of $1.9 million compared to $1.0 million during the same period in the prior year. Increase primarily related to the recently acquired management agreement with Monomoy. For the quarter, Investment Management reported a net loss of $6.0 million in comparison to a net loss of $0.1 million in the prior year period. The variance was primarily a function of higher losses on GECC shares. This impact was partially offset by increased dividend income as compared to the prior year period. Adjusted EBITDA was $279,000 in fiscal 2023 1st quarter compared to $140,000 during the same period in the prior year, with higher revenue, partially offset by higher operating expenses. Next, turning to Durable Medical Equipment. For the fiscal first quarter, DME generated $16.7 million in revenue compared to $15.6 million for the same period last year. This increase was driven primarily by organic growth and resupply revenue, a full quarter of contributions from the MedOne acquisition in August 2021 and improved revenue reserves despite ongoing global supply chain issues. Great Elm's DME operations reported net income of $6.8 million in comparison to $2.1 million in the prior year period. The year-over-year increase primarily reflected the contributions of the higher revenue as well as a $7 million benefit in the most recent quarter related to the fair value adjustment of an embedded derivative which is eliminated in consolidation and compared to a $0.5 million benefit in the prior year period. This increase was partially offset by the absence of employee retention tax credits, a form of government stimulus that was received in the prior year period. Adjusted EBITDA was $3.4 million for the fiscal first quarter compared to $5.1 million in prior year period. The decrease was primarily related to the $2.3 million in government stimulus recognized in the prior year period. And excluding such benefits in the prior year period, segment profitability significantly improved year-over-year with adjusted EBITDA up 19%. Moving on to our General Corporate segment. For the fiscal first quarter, Great Elm's General Corporate segment recorded $200,000 in revenue compared to $240,000 during the same period in the prior year. General Corporate revenue consists of consulting fees charged to subsidiaries and are eliminated in consolidation. For the fiscal first quarter of 2023, General Corporate reported a net loss of $9.3 million compared to a loss of $1.8 million in the prior year quarter. The year-over-year variance primarily related to the $7 million charge on the embedded derivative valuation adjustment which eliminates in the DME segment combined with higher interest expense associated with our recent public notes offering. As a reminder, in the prior quarter, we issued a promissory note as part of the noncash upfront consideration for the acquisition of Monomoy as well as 5-year notes with the proceeds earmarked for strategic growth investments into Monomoy and other opportunistic investments. General Corporate adjusted EBITDA for the current quarter was negative $0.9 million compared to negative $1.0 million in the prior year period. Finally, in terms of our balance sheet, we ended the quarter with a healthy liquidity position of $23.3 million in cash exclusive of liquid investments. This concludes my financial review of the quarter. And with that, we'll turn the call over to the operator to open for questions.

Thank you again for joining us today and we look forward to speaking with you in the future.

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