Mount Logan Capital Inc (MLCI) 2017 Q4 法說會逐字稿

Good morning, and welcome to the 180 Degree Capital Corp.'s Fourth Quarter 2017 Financial Results Call. This is Daniel Wolfe, President, Chief Financial Officer and Portfolio Manager of 180 Degree Capital. Kevin Rendino, our Chairman, Chief Executive Officer and Portfolio Manager, and I would like to welcome you to our call this morning. (Operator Instructions)

I would like to remind participants that this call is being recorded and that we will be referring to a slide deck that we have posted on our Investor Relations website at ir.180degreecapital.com under Calendar of Events.

Please turn to Slide 2 that contains our safe harbor statement. This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to the inherent uncertainty in predicting future results and conditions. These statements reflect the company's current beliefs, and a number of important factors could cause actual results to differ materially from those expressed herein.

Please see the company's filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the company's business that could affect the company's actual results. Except as otherwise required by federal securities laws, 180 Degree Capital Corp. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

I would now like to turn the call over to Kevin.

Thanks, Daniel, and good morning, everyone. I'd like to take you through a quick tour of the quarter, make some comments about our first full year results as the newly formed 180 Degree Capital, and then talk to you about some strategic imperatives for 2018.

Please turn to Slide 3. Slide 3 is a quick summary of our fourth quarter. If you recall back to our comments after the third quarter, where we had growth in our NAV of over 10%, I remarked, "Please don't annualize this growth." In fact, in the fourth quarter, we gave some back, with our NAV declining 3% from $2.68 to $2.60. More on the cause of that decline in just a second. I wouldn't annualize this quarter either.

The other 3 metrics we follow are, one, our share price, which gained 13% in the quarter, probably because of renewed investor confidence with our new strategy. We are committed to creating value for all common shareholders, so I'm pleased that our shareholders were rewarded in the quarter on this topic. Two, we believe, by turning more of our assets into cash and liquid securities versus our private equity assets, our discount to NAV would narrow. It has. At quarter-end, our discount to NAV narrowed from 35% to 25%. Three, while our cash and liquid securities are indeed significantly higher than they were a year ago, they did drop 7.7% in the quarter. Most of that decline in our cash and liquid securities came from decrease in the value of the Adesto. In fact, the entirety of our NAV decline in the quarter came from Adesto, which declined from $7.85 to a quarter-end $6.45. Given the stock started the year at just under $2 a share, I assume a pullback could be expected. The company is executing just fine. They recently posted another quarter 2 weeks ago of 30% top line growth. We remain optimistic about Adesto in 2018.

The other quick highlight showed our private portfolio and publicly held Mersana declined by nearly $500,000 in the quarter. Our most significant addition in the quarter, TheStreet, increased in value by $1.3 million. TheStreet was the first SPV we have done since our strategy change, and the first time in our company's history that we have managed an outside capital. More on TheStreet and outside capital in just a bit.

Please turn to Slide 4. This slide is a source of changes in our assets from Q3 to Q4. Starting with the blue bar on the left, our NAV started the quarter at $2.68. TheStreet added $0.03. That's the green bar. Next, the red bar, Adesto cost us $0.07. Our private portfolio declined by $0.01. Mersana cost us $0.01. Operating expenses, including accruing an annual compensation pool, reduced our NAV by $0.02. We ended at $2.60.

Please turn to Slide 5. We have touched on a couple of these already, and we'll be happy to talk about any of our holdings in the Q&A. It should be noted, we closed out our USA Truck position at literally -- or over 100% gain in just 4 months. Synacor continued its recent decline, following reduced revenue guidance, which we highlighted last quarter. The management team has limited credibility at this point, but we hope they have lowered the bar enough, as we head to 2008 (sic) [2018], enough for them to be able to jump over it. This company is, unfortunately in 2017, overpromised and underdelivered. We think, in 2018, they have set themselves up to do the opposite.

Please turn to Slide 6. This is our full year 2017 scorecard. Stock was up 43%. NAV was up 11%. We increased our cash and liquid securities by 40%. Our share price discount to NAV narrowed from 41% to 25%. We cut our operating -- ongoing expenses by 45%. We raised our reported capital. Not a bad year. Hopefully more to come.

Please turn to Slide 7. This is the same chart for the year, sources of change that we showed for the quarter. Starting with our beginning $2.34 NAV, our public portfolio added $0.38 to our NAV. Our private portfolio added just $0.03. We had a total of $0.10 of operating expenses, plus $0.05 of restructuring expenses. We ended the year with a $2.60 NAV. I'll touch on this in a second, but it should be noted that our new strategy basically provided 100% of the gain in our NAV for the entirety of 2017.

The next 2 slides are what drives us day-to-day. On Slide 8, this is a historic chart of our NAV. It has been 7 years since we have had an increase in our NAV. Let me repeat that. It's been 7 years since we had an increase in our NAV. Given the market has moved up significantly over that period, this chart is exactly why our business needed to change. We can't create value for investors with a declining NAV. In 2017, fortunately, we stopped this trend.

The next page shows 2 things. The orange line depicts our share price as a percentage of our NAV. When we first took over, 180 Degree was trading at roughly half the value of its NAV. Because our strategy is to increase cash and liquid securities as a percentage of our assets, we felt we can narrow that discount significantly. In 2017, we did just that. The gap was narrowed to 75%. The blue line implies our stock. Did you know that we have not had a calendar year increase in the price of our stock since, hold your breath, 2009? 2017 was different. Our share price rose 43%. You have heard me say countless times at every decision we make is done with shareholder interest in mind. Management is the significant owner of our stock. We know who owns this company. It's you, the shareholders. 2017 was a good start in bucking the trend and in our efforts to create value for you.

Please turn to Slide 10. Here is a snapshot of our new strategy, investing in public companies, while waiting for our private portfolios to play out. We achieved a total return of 67% from our stock selection in 2017. This page, as I said, was entirely responsible for nearly every penny of our NAV growth. To say we made a good decision to change our strategy is an understatement. On the one hand, we know we can't promise 67% returns every year. On the other hand, I look at what we own, and we think we own stocks that actually could double from where we are. Having a successful investment performance will determine whether we win or lose going forward. We have a very defined process for how we select stocks. Our performance showed that we can be successful in this arena in 2017, and we hope to take that to the market in 2018 in managing other people's money.

Please turn to Slide 11. Speaking of stocks that are undervalued, TheStreet, and how we can successfully manage other people's money. We spent a great deal of time on TheStreet in the late spring and early summer. They have B2B assets and B2C assets. They have well-defined brands like BoardX, RateWatch and The Deal, and they have the most monetizable asset on the planet in Jim Cramer. New management has made marked improvements in the business, but an overhang existed that prevented us from taking a significant stake. The overhang was a $55 million preferred stock with a senior liquidation preference. No matter what the company did to change its fortunes, all the money was going to accrue to the benefit of one shareholder, this preferred stock shareholder. Unfortunately, with this overhang in place, TheStreet was running its benefit for only the preferred holder, and we decided to work together with the company and the preferred holder to retire the preferred at a significant discount to its face value, albeit a premium to what the paper was worth if it was converted into TST stock at its November price. We believe the removal of the overhang would result in immediate appreciation in the price of the stock. We took a 16% stake in TST, half with our money and half with outside capital in a PIPE deal. 180 Degree took a seat on the board.

If you turn to Slide 12, most importantly than the pop we got that day, which was significant, we haven't really created any value in the stock. From an enterprise value multiple to revenues, TheStreet actually trades at the same price after the preferred stock overhang was removed than it was before. The removal of this overhang, however, was the catalyst for TheStreet to create long-term value for every common shareholder, not just one. For the first time in over 10 years, the company is free to buy back stock. For the first time in 10 years, the company is free to consider each and every alternative available to them for creating value. This simply was not the case before the overhang existed. It simply was hamstrung before. It isn't today. And here's what I know today in looking at this table, which we highlighted for you when we announced the deal versus my early thoughts now that I've been on the board for 4 months. I think the board is better than I thought. I think the management team is better than I thought. I think Jim Cramer can be monetized even better than he has. I think our brands are better than what we thought, and I'm excited for TST in 2017. I hope to be able to be wrong on this chart from the standpoint of being conservative, not aggressive.

Finally, on Slide 13, the sum of the parts chart that we have done for you before, we'll continue to do it. What we do here is strip out our cash and liquid securities and show what the effective price the market is paying for our private portfolio. Given that cash and liquid -- given cash and liquid securities its full value, the market is telling us that our private assets are worth $0.64 on the dollar. I hope the market is wrong, but it will be on us to prove that one way or the other over the ensuing years.

Let me turn the call now over to Daniel, and I'll come back with some final comments.

Thank you, Kevin. As Kevin mentioned, if you turn to Slide 14, you'll see that the private portfolio in our top 4 holdings that are most mature are worth about $31.1 million, and the entire private portfolio itself is being valued currently at $35.4 million.

If you move on to Slide 15, as we have discussed in prior calls, we have greatly reduced our operating expense, which will make it far easier to grow NAV than in past. Over the last 5 years, our operating expenses, excluding stock-based compensation and interest on outstanding debt, averaged approximately $1.6 million per quarter. In 2016, our ongoing operating expenses, again, not including stock-based compensation or interest on outstanding debt, averaged $1.3 million per quarter or a total of $5.2 million for the full year. This amount of ongoing expense equated to approximately 7.3% of year-end net assets. We are pleased to report that excluding stock-based compensation and restructuring costs, we completed 2017 with total ongoing operating expenses of approximately $3 million or 3.6% of year-end net assets. If you include the year-end bonus compensation that I will discuss shortly, we were still significantly below prior year expense ratios.

It is much easier for us to grow NAV when the expense hurdle rate is where it is today. We aim to decrease this expense ratio further. However, these decreases will likely come from an increase in net assets rather than further reductions from -- in operating expenses.

We note that we currently project our ongoing operating expenses in 2018 will increase modestly from those in 2017 as we invest some resources to grow our business into the future. We are not, however, returning to the historical expense ratio or anywhere close. We believe these additional resources will aid in our efforts to increase capital under management and our net assets in the relative near term. Kevin will comment more on these efforts shortly.

Please turn to Slide 16. We are proud of the steps we have taken to save shareholder capital through the reduction in our ongoing operating expenses. These savings were realized almost overnight when we shifted from the business -- from a business development company to a registered closed-end fund amongst other operational efficiencies we put in place simultaneous with this transition.

Please turn to Slide 17 and 18. As we discussed in last quarter's shareholder call, the Compensation Committee has established a framework for year-end compensation that we believe closely aligns the interest of shareholders and management. As of December 31, 2017, our NAV reflects a year-end compensation pool for management of $1.2 million, with 67% paid now and the remaining 33% paid out over the subsequent 2 years, but only if the individual and corporate performance in 2017 is persistent through 2018 and 2019. As of December 31, 2017, approximately $164,000 related to this deferred bonus was included in the accounts payable, which represents the time-lapsed portion of the deferred bonus accrued on a straight-line basis through the end of 2017 based on each metric measurement date.

Please turn to Slide 19. We would especially like to note that total compensation, including the deferred bonus accrual, was 2.9% of net assets. This percentage is 0.4% less than the comparable percentage of 3.3% in 2016 when our NAV and stock price declined materially versus substantial increases in both in 2017. Compensation expense, not including the pool, was substantially lower at 1 -- than the prior year at 1.7% of net assets.

I will now turn the call back over to Kevin.

Thanks, Daniel. Before we open it up to Q&A, let me share with you our strategic initiatives as we think about 180 over the course of 2018 and our goals for 180.

We are making progress on obtaining a broker-dealer license. We talked about that last quarter that currently target completing net license process in Q2 of 2018. This will enable us to compensate people for bringing in outside capital, which is going to be a key focus for us as we go forward. We expect to make other investments in our business in 2018 that can help us achieve our goals. So let me tell you what that means. We can sit here and twiddle our thumbs, hope for a faster success from our private portfolio, but I think we've all been down the road far too long in hoping and waiting. Hope is not a strategy, as most of you know, and I'm not going to sit around and twiddle our thumbs. We need to build girth in our business, and we are determined to do that in 2018. So what do we need? We need more capital, we need more ideas and we need more investment resources. We are having significant discussions with people who we think can help us drive significant growth, i.e. manage more people's -- other people's money.

We have laid the foundation in 2017, but I'm not satisfied until we're managing hundreds of millions of dollars and managing that money by creating alpha for other folks. We've built a well-defined investment process. We have a public company structure that allows us to set up different types of funds. We know how to help companies get from point A to point B. We know how to do board work in a collegial fashion. What we need are more ideas and more money. 2018 we're going to be focused on how do we do that in a way which we can go to TheStreet, no pun intended, and actually -- and start funds, whether they're SPVs or full funds.

Finally, our goals for 180. We want 180 to be known as a prominent and dominant leader in our world of public company constructive activism. We will continue to strive for excellence in our investment performance, and we want to be known as game-changers in helping businesses generate positive shareholder returns. It's only been about a year since we took over. I didn't necessarily know exactly where we were going, but we laid a great foundation and framework for success in the ensuing years. Now that I know what we have here, it's important and incumbent upon us, Daniel and myself, the rest of the management team and our board, to figure out ways to grow our business faster rather than just waiting for a private portfolio of company to monetize or waiting for 1 or 2 of our individual stocks to work.

Management is 100% aligned with the shareholders. We know we must increase the price of our stock to be truly successful, and we know all we have to do is to stare at the screen to see how we're doing on that front.

I'll stop there. Daniel, why don't we take questions?

Thank you, Kevin. (Operator Instructions) First question comes from [Dean Charpentier]. Dean?

Quick question. Could you talk a little bit about your...

Sorry, Dean. I'm going to move to the next in queue, and then, hopefully, we'll be able to get you through. Please go ahead.

This is [Al Shams] in Atlanta.

So, Al, hold on one second. Sorry. Al, go ahead.

Okay. So I've got a few questions to throw out at you. First of all, congrats on a pretty good year and getting some initiatives started. But can you -- do we have any additional capital that we're managing through that brokerage operation? Or is that still something that we're shooting for?

We don't have a brokerage operation, Al. We are setting up a broker-dealer license which will enable us to pay people, i.e. fund-to-fund folks, sales and marketing folks that we can bring internally to help us raise outside capital. That's the only purpose for having a broker-dealer license. We were very specific about that last quarter. The way we're going to access outside capital now is we're going to have a go-to strategy, we're going to show people what we've been doing. We have a year in 2017 of looking at our results. We have an SPV like TheStreet. And so we've shown how we can do PIPE deals. We need to do more of those types of deals, and we need to bring in an investment resource, which will enable us to manage more money and somebody that will have access to more capital. And so that's what we're focused on in '18.

Okay. Well, Kevin, what's the potential of approaching your old employer, BlackRock, and seeing if we can do a micro cap fund for them?

So BlackRock is not a fund-to-fund organization. I don't know if they necessarily seed outside managers. They manage their own money. They have their own micro cap. They have their own small cap funds. So they could certainly buy our operation if they wanted to. But in terms of us getting them to fund our business, there's different places to go, whether they're family offices or other fund-to-fund shops, education institutions, private wealth offices, wealthy individuals. There's going to be other places to go, but we're going to have a defined process for how we're going to do that. And we hope to be able to share with you some detail on adding some of those resources sooner rather than later.

Okay. I noticed that Cramer got a million shares of stock as compensation in TheStreet. Do think that was appropriate?

Jim Cramer is an -- I'm not going to -- Jim Cramer is an incredibly valued contributor to TheStreet. When we did our deal with them in November, I had many one-on-one conversations with Jim. His contract was up at the end of last year, and I told them that we are not going to be doing this deal at all ever with you, with the company, unless you sign a long-term contract. So that tells you what I think of Jim Cramer and his contributions to TheStreet. And of course, we were able to look at that contract and if I felt that if it was a contract that was untenable for the organization, I certainly wouldn't have become a 16% shareholder.

Okay, okay. Well, we've got some lofty goals. We're off to a good start, and I wish you guys the very best. And one last final question, is there anything more you can do to move some of these private companies along like DRAM and some of the others to try to monetize? I hope that we don't miss the boat with, say, something like DRAM, where others get into that business and we get out flanked and that value just melts away.

So D-Wave, a cloud computing company in Canada, I -- so look, my frustration is the same frustration that you have with our private portfolio. We've had it. These are significantly well-run businesses, but they're private equity assets, and we don't have controlling stakes in a company like D-Wave or AgBiome or HZO. So the conversations that we have with them, I would say, are very different than the conversations we had with them a year ago, i.e. there is no conversation we have with the chairman of D-Wave where we don't spend half the time talking about paths to monetization, that the venture equity world thinks that they can run their businesses forever, and they don't have the full appreciation that public market investors have for creating value. Their time lines are extended and take forever. Well, we're going to try and put as much pressure on these companies as we can to get them to a place where they will monetize sooner rather than later. Those conversations -- at least, we're having those conversations today. We couldn't have had them a year ago, but we can't move the needle on D-Wave. The way D-Wave is going to have -- is going to commoditize and for them to execute a couple more things they need to do in making their quantum computing IP more commercial and more cloud-oriented. If they can do that and the management decides and the board decides it's time, then there'll be companies like Google and Amazon and Microsoft and IBM and the rest that probably will clamor to own it. If they want to continue to think that they can become a $10 billion or $20 billion or $30 billion business by constantly waiting for Godot, and always waiting for something else to happen in order for that to happen, then those same companies that may be a buyer for that business are going to leapfrog them, and D-Wave is going to end up as an also-ran company. So the only thing we can do on behalf of you is to put pressure on these businesses, but it's not easy. As I said, hope is not a strategy. And while we're waiting for those businesses to monetize, we need to do other things to create value. If we didn't do what we did last year, our stock price would have another year of being down, and our NAV would have been down. So we have to focus on what we can focus on, which is more on the public side, while putting pressure on these companies to monetize.

(Operator Instructions) Please go ahead.

This is Tony Polak. In terms of the private portfolio, could you give us maybe a 1-minute synopsis of the 4 main holdings, where they stand in terms of, are they doing sales or do you see profits coming from them in the near future?

Yes, absolutely. So -- and the reason we highlight those 4 specifically is because they actually are relatively mature companies. And the fact that they have revenues, they have products on the market, their businesses in general are growing, and they're getting to a point where you can -- where they might have opportunities to think about various ways of generating the liquidity for their shareholders or additional value. AgBiome, they've publicly announced they got -- they've launched their first product, and they have multiple other ones coming on the market. D-Wave, we've talked about historically. They actually -- or they announced Oak Ridge National Lab signing up for the use of their systems via the cloud. I think you'll see more of that growing. I think that's really down the line the business model that you see this company really grow into, very similar to how Amazon Web Services works. HZO, their business is doing really well as they figure out how to scale. And it's a relatively capital-intensive business. So figuring out how to build it in a way that generates acceptable margins and good revenue growth, they're making good progress on that. And Nanosys -- I mean, if you go into any Best Buy or electronic store and you'd see the Samsung Q dot television, the higher-end ones that you see, also other brands that talk about quantum dot-enhanced LED TVs, that's Nanosys. That's their technology that's enabling all that. And so for that to really continue to grow, I think that they have to continue to decrease their costs and their price points and the television price points. But you really do have a significant competitor to organic light emitting displays, or OLEDs, with a much lower cost structure. And so that's why Samsung has bet on quantum dots, and I think you'll see more companies do the same. And again, that's all Nanosys' technology.

Are there any further questions? Hearing none, I'll then hand the call back over to Kevin.

Sorry about that little delay in the beginning. Thank you very much, everyone, for joining us this morning. We hope to have a lot more success stories like we had in 2017. We recognize, on the one hand, that it was a very successful year versus the prior years of our former company on the one hand. On the other hand, we recognize it was only a year. I'm not really interested in having a 1-year good record, and then sort of slipping back to where we were before 2017, which is why we're going to work on all these other initiatives that I highlighted. I wasn't joking when I said, what I said. I've never been a real vision guy in my years. I'm more of a tactical person, but I do think we have set the stage for this institution to become a preeminent and dominant leader in our world of small micro cap investing. And I'm determined to get us there. Thank you very much. Of course, if anybody has any follow-up post this call, you know where to reach us.

Thank you, everyone, and you can now disconnect.