Greetings and welcome to the Main Street Capital Corporation Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Roberson, Dennard Lascar Investor Relations. Thank you, you may begin.

Thank you, operator, and good morning everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2018 earnings conference call. Joining me on the call today are Chairman and CEO, Vince Foster; President and Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith. Main Street issued a press release yesterday afternoon that details the company's second quarter financial and operating results. This document is available on the Investor Relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until August 10. Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today, August 03, 2018, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied by these statements as a result of risks, uncertainties and other factors including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call including information related to portfolio of companies was derived from third-party sources and has not been independently verified. And now, I'll turn the call over to Vince.

Thanks, Mark and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend announcements and a few other recent developments and conclude by commenting on our investment pipeline. Following my comments, Dwayne Hyzak, our President and Brent Smith, our CFO will comment on our second quarter financial results, recent originations and exits, our current liquidity position and certain key portfolio statistics and other recent developments after which we will take your questions. We were pleased with our second quarter operating results. Our lower middle market portfolio, our primary area of focus, appreciated by $13.3 million on a net basis during the quarter with 19 of our investments appreciating during the quarter and 16 depreciating. Our middle market loans, private loans and our other assets collectively appreciating by $10.8 million on a net basis. We finished the quarter with a net asset value per share of $23.96, a sequential increase of $0.29 over the first quarter. Our lower middle market companies collectively continue to exhibit very conservative leverage ratios on a relative basis, which Dwayne will cover in greater detail. Earlier this week, our board declared our fourth quarter 2018 regular monthly dividends of $0.195 a share in each of October and November and December increasing our third quarter monthly payout rate. The ex-dates for these dividends are September 19, October 18 and November 19 respectively. We expect to ask our board to declare a $0.275 a share of semiannual supplemental dividend to be paid in December as well. We have continued to work closely with our industry association the Small Business Investor Alliance or SBIA on important industry issues that impact our constituents. Currently, our focus has been directed primarily on the Acquired fund fees and expenses or AFFE…

Thanks, Vince and good morning, everyone. We are pleased to report another quarter, during which we grew our total investment income and distributable net investment income, both in total and on a per share basis and generated record quarterly distributable net investment income per share. We were also able to generate a meaningful increase in our net asset value per share and we believe that our ability to consistently generate increases in both our net investment income and net asset value per share continuous to illustrate the unique benefits of our differentiated investment strategy and efficient operating structure. We are also pleased that our operating results represent a GAAP return-on-equity or ROE of 13.6 for the recurring 12 month period and 15.6% for the quarter ended June 30. ROE is our principal metric for evaluating our performance internally and we are pleased that our most recent results are in line with our stated long term goal of producing an ROE percentage in the low to mid-teens. We believe that these results illustrate the significant benefits of our unique investment strategy in the lower middle market, which combined with our efficient operating structure and other complementary investment and asset management activities continue to provide a value proposition that differentiates Main Street from other yield oriented investment options and generates the premium total returns realized by our shareholders. We believe that the primary driver of our long term success has been and continues to be our primary focus on the under-served lower middle market and specifically our investment strategy of investing in both debt and equity in a lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market portfolio companies and not just a financing source. Each quarter, we try to highlight…

Thanks, Dwayne. We are pleased to report that our total investment income increased by 19% for the second quarter over the same period in 2017 to a total of 59.9 million, primarily driven by an increase in dividend income of 5.6 million and an increase in interest income of approximately 5.2 million, partially offset by a decrease of 1.2 million in fee income. The total investment income includes $3.5 million in elevated dividend, income activity which may not be recurring at the same levels in future periods, partially offset by a decrease of 1.2 million related to lower, accelerated pre payment, repricing and other activity for certain debt investments when compared to the same period in 2017. Second quarter 2018 operating expenses, excluding non-cash share-based compensation expense increased by 3.1 million over the second quarter of the prior year to a total of 17.9 million. The increase was primarily related to a 2 million increase in interest expense and 1.1 million increase in compensation expense. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets, which we believe is the key metric in evaluating our operating efficiency, was 1.6% on an annualized basis for the second quarter compared to 1.7% during the same period of the prior year. Our increased total investment income and the continued leverage of our efficient operating structure resulted in a 18% increase in distributable net investment income for the second quarter of 2018 to a total of 41.9 million or $0.70 per share, which exceeded our recurring monthly dividends paid for the quarter by approximately 23%. The activities of our external investment manager during the second quarter and its relationship with the HMS income fund benefited our net investment income by approximately 2.7 million in the second…

Great. Thank you. [Operator Instructions]. And our first question here is from Robert Dodd from Raymond James. Please go ahead.

Hi, guys. Vince, you made comments at the beginning of the call that your lower middle market pipeline is above average. It sounds really good, obviously a great quarter, this quarter as well. Then the liquidity between the cash and the SBA, obviously you've got a lot of liquidity available in the revolver that you tend to not utilize that for the lower middle market piece of the portfolio, so do you think the existing liquidity that you do have plus obviously, the access to ATM facility which is accretive when you use it, is sufficient that the match up to the kind of low middle market pipeline that you see right now or you're going to have to take other steps?

Yes, Rob, that's a good question. Thanks for asking that. So if you think about a new lower middle market investment say it’s a $40 million investment and involves. Its round number of $10 million equity coinvestment and a $30 million unit trance, first lean. That first lean component is borrowing base eligible. So that can be financed out of our – the revolver to BDC level or if there's room, the SBIC, the equity has to be financed not out of the revolver, but either through our ATM program, a proceeds of our unsecured notes and if there's room down the SBIC. So if it was – we'd have problem at some point matching up potentially all we did was equity, right, that's borrowing base ineligible. Would you put in any other way Brent?

No. That's a good way to put it. We're fine putting the lower middle market debt investments in the revolver, some of it just timing, so later on when we do more investment grade notes, you kind of theoretically think about the revolver borrowing switching to that for the lower middle market debt investments.

So for us every Friday when I look at the revolver balance, it use to be – if it began with the three – when we really didn't want to get up pass 400 million that's when we start thinking about matching up the pipeline with available liquidity. And now because everything is kind of increased that would be if it began with the four. That would be kind of the signal that we need to term some of that out or maybe sell little bit more equity, but we're in really good shape now I would say for the next several quarters.

Got it. Got it.

Call away from, you know, maybe an M&A transaction where all that's robbed and we have to something.

Fair enough. Appreciate that. Then on the dividend income, obviously I mean this quarter a very high number, I mean, and to the point you say some of that might not recurring, but that's why you didn't expect it in the beginning of quarter, it did. Could -- question, how possible is that it could happen again? And two, I guess with some of the excess like Drillinginfo that you've now exited in this press release yesterday or day before yesterday. Was it – it's been a very successful long-term investment for you. Was that a big dividend pay or relatively big dividend pay? And is that a dynamic that's play in the dividend income?

Yes. Thanks Rob. I would say in the case of Drillinginfo that was C Corporation and as you've heard us talk about in the past, most of our dividend income will come from LLCs or other flow-through entities for tax purpose. Drillinginfo did make a distribution. I think it was third or fourth quarter of last year, I can't remember the exact timing, but outside of that, the value we've gotten out of Drillinginfo was really appreciation and now the realized gain. I think the change in our commentary this quarter versus last quarter on the dividends is we're always talking about the portfolio of companies and there has been some larger contributors to our dividend income in both Q1 and Q2 of this year, and as we look at those companies, I would say, we have a greater expectation this quarter than last, but some of that dividend that we had in Q1 and Q2 will not recur in Q3. But it just hard to predict, because it's contractual and we don't 100% control when those dividends get paid out and that what makes it hard for us to predict it purposes about future estimates.

Got it. Got it. And if I can cheat and get on more in, another kind of going back to the – you mentioned also in the prepared remarks here, some concerns out in the market, about elevated enterprise multiples. So I mean, some businesses are transacting high multiples out there, a great time to exit. The same time your pipeline looks really good. And you guys are not exactly known for paying big multiples for businesses. So, can you give us some more color on how that is, is that you're seeing a lot of it in your pipeline, but is there a big gap between what the seller wants and what you're willing to pay? Or how is that working out right now?

So Rob, I think as you probably heard us say in the past and what I try to address in my previous comments is when you look at – why we are comfortable continuing to invest in this cycle is that we're not competing just on value. Obviously we have a fair value, but what we're really from a competitive standpoint is by providing an option that's not otherwise available in the marketplace. I mean, that's why if you look at our deals we are commonly a meaningful equity participant but not always control. We do a lot of investments, where we're 30% or 40%, to 50% or 60%, so when we can go in and provide value maybe not the highest value, but a fair value, but also allow that management team and that ownership team to continue to have a significant ownership position going forward and provide a one-stop shop solution on the financing side. It really plays well in certain situations. It doesn't play well on every situation, if the owner of the business is just trying to maximize value and those are the transactions that we won't be successful on, but for a company that's looking for a long-term partner that provides fair value and some liquidity but also allows for the future upside, those are the transactions where our unique solutions is a very very good fit.

Okay. Got it. I appreciate it. Great quarter guys.

Thank you.

Thanks Robert.

Our next question is from Tim Hayes from FBR. Please go ahead.

Hey, good morning, guys. As it relates to the proposed tariffs on Chinese imports, do you expect there could be some supply chain disruption with your portfolio of companies? And have you see any – have you seen that drive any change in demand from portfolio of companies looking for capital?

Yes, Tim, thanks for the question. I'll say that, if you look at our portfolio, most of our companies are focused heavily on domestic activities both from a sourcing and a sales standpoint. We do have some companies that will have more interaction with the activity outside of the U.S. and we're in constant conversation with those companies, what's going on from a tariff and an international business activity standpoint. And I would say to-date while you're seeing some impact on steel prices and some other commodities, the feedback we're getting is that as long as they're managing their business well which is intend for these companies and that's why we're talking to them on a consistent basis, they are able to pass some of that on to customers. And for the others while they are actively monitoring the situation, to-date it has not been a significant disruption or issue in their businesses.

Yes. Look, I think it's fair to say, it probably has been a distraction, you know if you're a headline away from being impacted and it is causing some distraction out there but nothing -- not disruption yet for us.

Okay. So you don't expect really any meaningful kind of sector rotation in the portfolio to address the potential impacts there?

I would say, no, but I think that's probably because as I said earlier, our business is you know the vast majority are domestic-focused both on the sales and on the raw material or sourcing side of things. But it's fair to say, it’s a – maybe not a new diligent side among the checklist, but it's an enhanced one.

Okay. Understood. Thanks for the color there. And then just one more from me. How is the flow of potential M&A on portfolio sales and/or subadvisory opportunities been over the past few months? Have you seen more deals come your way and how many of those are really fitting your credit standards and return hurdles?

Well, I would say, its really kind of three different questions here with respect to the portfolio of companies sales. When you look at the 70, 75 lower middle market companies, we kind of expect on average once a quarter they're going to get a phone call from private equity that needs our company as a bolt-on to one of their platform companies, and they just needed to exit and put out a number that our management team find attractive and so we can't really control that but probably four, five companies a year will look to exit, because opportunistically they receive an unsolicited offer. This year, we had a determined effort to try to exit two or three of our companies which is kind of unusual for us and Dwayne can give you the background there.

Yes. I mean, I think its – when you look at obviously it’s a good M&A market, obviously the transaction that we announced yesterday morning we're Drillinginfo. It was a very good outcome. So I think you can see – continue to see that, but our goal with our portfolio of companies is to have a very long-term holding periods, so the driver of exit is very rarely going to be Main Street. So it really comes down to what other owners of the business and the management team wants to do.

I would say, in terms of the -- some of the investments that we thought we get a higher return elsewhere for that we've been in….

So if you look at our portfolio account you would see that we did exit a couple of positions. So one of the things that we're always looking at is, what's the return that Main Street getting on those investments whether its a scenario where its not producing enough current income or appreciation or there's a smaller investment where its taking significant amount of time and effort on our side and that's where you've seen us continue to focus on ways to redeploy those resources whether its capital or its people into new investments that they have an opportunity to provide additional value going forward.

And then you ask about subadvisory opportunities out there and I'll let Nick Meserve, who runs that part of the business for us, respond.

Thanks, Vince. On the subadvisory side we're always in the market, evaluating what's out there. I'd say, one thing we've done has been fairly sticky on what we'll enter into. We want to make sure that it's valuable to the shareholders and investors in those funds and also evaluate for us from a time perspective. Obviously, our partnership with Hines has been great on HMS income fund. We're still in the market there looking to do what's the next product and what's the best thing to move forward. I think there'll be news, hopefully, the next few quarters of what we do going forward. But we're always in the market there and evaluate different opportunities and find the right fit for us.

And then I think try and share the last part of my question is M&A opportunities generally. And I would say that in light of what’s happened this year and take [ph] out closing yesterday or today or whatever the schedule is. When you look to evaluations that are available for our BDC board to consider and you look at what I’ve kind of like to look at the favorable tax aspects to the buyer of potentially pick you know paying for an advisory agreement being able to deduct that payment, according to a ruling that came out of the IRS last year. You put all that together and it’s a very attractive time to consider doing something with an asset that might otherwise be considered underperforming and there’s some nice evaluations up there atleast if it’s a $1 billion on a leverage basis asset or maybe what we don’t know is what kind of evaluations you might expect if it’s $0.5 billion on a leverage basis, asset or atleast Nick, we haven’t seen many of those. We get those rumors but we really haven’t seen anything.

Yes, obviously [Indiscernible] closing this week or next. But other than that, we haven’t really seen any – come to the market that looks attractive to us or has really been out there. But we’re also obviously always keeping our doors open and see what comes in the market.

Okay guys, thanks for all the color there and for squeezing too many questions into one, on the last one.

Oh you have to keep the -- so you guys.

[Operator Instructions] And as there are no further questions, I’d like to turn the floor back over to management for any closing comments.

Well thanks for everyone that attended and we look forward to talking to you again in early November. Bye.