Litigation Capital Management Limited (LIT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Litigation Capital Management Annual General Meeting. I'd now like to hand the conference over to your first speaker today, Chairman, Jonathan Moulds. Thank you. Please go ahead.

Thank you. Well, good morning. This is Jonathan, and I'm Chairman of Litigation Capital Management. Firstly, I have the pleasure, obviously, of welcoming you to the LCM's 2020 AGM. As you're obviously aware, for the first time for LCM, we're holding the hybrid meeting, both in person, obviously, in Sydney, and online. Given the current travel restrictions, as I'm sure you'd be well aware, a number of us were unable to be in Sydney. So we're attending the meeting, well, certainly, I am, in the U.K. and other director from the U.S. So we appreciate your patience here, and there's nothing I would have liked more to be with you in Sydney today, I have to say. But obviously, circumstances didn't allow that. We have a quorum of shareholders, and I'm pleased to declare the meeting formally open. Firstly, let me introduce you to my fellow directors: Patrick Moloney, obviously, our CEO, Managing Director who you all know is attending the meeting in person in Sydney; Dr. David King who is with Patrick in Sydney; Nick Rowles-Davies who's attending the meeting from the U.K.; and Gerhard Seebacher who is attending the meeting from the U.S. I welcome Gerhard to his first AGM as a Director and delighted to have him as part of the Board. Also present, our Chief Financial Officer, Mary Gangemi, attending from the U.K.; Company Secretary, Anna Sandham, attending in Sydney; and Geoff Edwards, our auditor from BDO, attending from Adelaide. Geoff, obviously, is here and available to answer any questions you may have about the conduct of the audit. So with that, I'll now ask Patrick to give shareholders -- to give you a brief update on the company's activities. So over to you, Patrick. Yes?

Yes. Thank you to the shareholders who've attended the meeting here in Sydney despite restrictions of COVID and also the number of shareholders that are joining through the audio link in the United Kingdom after hours. I'll just propose to go through a short presentation, just to give people an update as to where the company is at, at the end of the financial year 2020. 2019 was very much a year where LCM grew out its platform and positioned itself for significant growth. 2020, by contrast, was the year that the company leveraged that platform and grew very significantly. So touching upon some of that growth during the 2020 year. We launched our first third-party funds and launched our asset management business. By 30 June, that fund was 47% committed, and that fund only closed in March, so a very significant progress with respect to our asset management business. By September of this year, it was committed to 61%. So we're making tremendous progress with respect to asset management. Secondly, revenue grew during 2020 despite the headwinds experienced with COVID-19. So we're up at $38 million against the revenue from the previous year. Increases in applications over the 2020 year compared to 2019 were up a significant amount, 25% on the previous year. Most importantly, our assets under management, when I talk about assets under management, I mean litigation funding agreements entered into by LCM either in the asset management business or through our direct investments on the balance sheet increased very significantly from the year prior. So as of June 30, we had assets under management of $250 million and, by September, were up $304 million, so very significant increases with respect to assets under management of the year prior. We had a significant increase in, actually, deployment of capital into investments. So that was up 87% on the year prior, a significant increase in, actually, putting LCM and fund capital to work. We've strengthened our referral sources with a number of strategic alliances entered into in 2020, most significantly, the very innovative strategic alliances with global law firm DLA Piper. We continue to build out the corporate portfolio strategy that LCM is very much pioneering globally. And we did our largest corporate portfolio transaction this year in the building construction sector, a 20-plus disputes portfolio with a capital commitment of up to USD 34 million. If we look at the measures of growth during 2020. We had capital commitments in that year of $147 million as against $98 million the year before. Capital invested during the 2020 year was $52 million against $27.8 million the year prior. Revenue was up, notwithstanding COVID, so $35 million the year prior to $38 million. And again, the number of applications up from 419 in 2019 to 522. We've continued to perform at a very high level in terms of performance metrics. So our 9-year cumulative portfolio of return on invested capital is running at 134% inclusive of losses. And our cumulative IRR across the entire portfolio of matters completed in the last 9 years is still running at a very healthy 78%. If I can turn briefly to LCM's business model, which changed during 2020. So previously to that and during its history, LCM had made investments directly from its balance sheet. In 2020, we launched our first third-party funds. So we're now running 2 business models. We're running our direct investments from balance sheet, which formed -- which are in 2 areas: firstly, it is 100% investments where LCM is providing all of the capital necessary to pursue them as disputes; and secondly, with co-funding with our asset management business. And the second business model we're running is the asset management business itself, and that was launched during 2020, so a significant development there in LCM's business model. In terms of the full year financial results, revenue -- gross revenue was up. Gross profit down slightly -- sorry, gross profit up on the previous year, 7%. The adjusted profit before tax was slightly reduced from 2019 as a consequence of a number of things but, predominantly, the development of LCM's business as an asset manager. If I can move on to LCM's balance sheet. In terms of its capital invested during 2020, it was up a significant amount of $41.3 million against $27.8 million the prior year. Cash generation was again up from $26 million to $35.3 million. Total equity up at $82 million against $76 million the year prior. Net cash was slightly down, but that's a reflection of LCM putting its capital and its cash to working investments directly, all of those things very encouraging. If I can turn now to looking forward and the outlook for the next financial year, which we're in. There's 2 particular dynamics that LCM has the advantage of moving forward. And the first one is the uncorrelated nature of LCM's investment class. So at a time like this where we have inflexibility in global markets generally, that investors tend to look at the nature of their investments as to whether they're correlated to the instability. And LCM, as we know, invest in disputes globally. Disputes fall into a, really, interesting and uncorrelated investment class. And by that, I mean judges or other [ traders ] don't apply different legal principles towards the adjudication of disputes, simply because there's political unrest or because there's economic instability in the markets globally. So we're very well placed in an uncorrelated investment class. The second dynamic, which is really important in terms of LCM's business looking forward, is the countercyclical nature that it tends to provide. And that manifests itself in 2 ways. Firstly, in terms of our corporate portfolio strategy, it tends to drive corporate users of litigation finance products to look more readily to broad sources of capital to fund its disputes out of the balance sheet. So in times of economic turmoil or instability, corporations tend to focus their capital on core business and look for alternative [ on noncore business when ] funding disputes. Secondly, inevitably, there's going to be a significant increase in the number of insolvency events and restructuring. And LCM, given its vast experience in all of the markets in which it operates in terms of funding disputes arising out of insolvency and restructuring, is incredibly well placed to take advantage of those opportunities as we go forward. So those 2 particular market conditions place LCM in a very good strategic position looking ahead. If we look at our strategic priorities. Moving into the financial period ahead of us, we should expect to launch further third-party funds, which will extend our asset management business. Alternatively, we will look to increasing the size of our existing funds, depending upon what we intensively achieve given our inability to travel and do road shows and capital raises in the way that we did prior to COVID, but we should -- you should expect that LCM will be looking to doing that in the early part of the next calendar year. We're looking to increase the number and quality of applications, and we do that through a number of means, not the least of which is to create new strategic alliances with law firms and other referral sources globally. In relation to law firm alliances, as I said, we entered into an incredibly innovative arrangement with a global law firm this year, furthering that strategic alliances globally to 3, which provides LCM with a very important source of referrals across all of our networks. Moving to increasing the number of portfolio of transactions and investments. In 2020, LCM did its largest ever corporate portfolio transaction. LCM continues to lead this part of the market globally. It's, by far, the largest part of the available markets of litigation financiers, and we continue to pursue that strategy with something bigger. We are expecting to get further traction with respect to that part of the market given the prevailing economic instability moving forward. And finally, we'll look to expand into new regions when -- where that's permissible. Investors and shareholders should expect that we would do that with the same disciplined approach that we've expanded into markets in the past. And finally, I want to touch upon the significant growth that LCM has achieved just in maybe the 3.5 years since we did our first IPO here on the Australian Securities Exchange compared to where we are at -- were at 30 June this year, at the end of '20 financial year. If we look -- if we compare the total portfolio of assets under management when we did our IPO in Australia, it was $33 million. As at 30 June, it was $250 million; and by September, it was $304 million, so it's astonishing growth we've achieved in the sector of the portfolio of assets under management. Operating capital when we did our IPO in Australia was $16 million. At 30 June, it was $92 million. The number of applications received at the time, during the 12 months prior to our first IPO in Australia, it was 98. At the end of last financial year, 522. If we look at capital committed during the period, we did $6.25 million during the year we existed in Australia. We committed $147 million in the financial year 2020. Capital investment, $7.2 million, when we came to market in Australia; $52 million at the period just ended. And importantly, and finally, OpEx as a percentage of our total portfolio at the time we did the IPO was 13%. And at financial year 2020, we got that down to 4%. So not only have we grown the business and the portfolio of assets under management exponentially, at the same time, we created efficiencies, reducing our OpEx against that growth. So that is a brief update as to where we -- how we performed during 2020 and what we're looking at and what we're focused on moving forward. Thanks, Jonathan.

Thank you, Patrick. So we're now moving to the formal part of the meeting. Just to be pragmatic here and efficient, I think it makes sense to hand over the Chair of the meeting to Dave King who, as you know, here in Sydney, is attending the meeting in person with you. So Dave, can I hand over to you, yes, for the formal part?

Thank you, Jonathan. As Jonathan said, we'll move now to our formal business of the meeting. The Notice of the Meeting, which sets out the formal business, was dated 21st of October 2020 and was circulated to our members. I will take that Notice of Meeting as read. All resolutions at the meeting today will be presented by a poll. This will enable everyone attending the meeting either in person or online to vote at the meeting. Please note that only shareholders, proxy holders or shareholder company representatives may vote. Shareholders attending in person here should complete the poll card which they received when they registered [ online ]. Shareholders who are attending off-line can cast their votes through the electronic voting cards received for the off-line registration for voting. Please refer to the virtual and online portal guide and use the help button specified [ in regards to that process ]. I will put each resolution to the meeting in turn, and shareholders will be given the opportunity to ask questions or make comments in relation to that resolution. After that, the voting or poll will be taken. I'll provide an opportunity for shareholders to ask questions of the more general nature after all the resolutions have been taken. Shareholders here in the room wishing to ask questions should just raise their hand in a normal manner. And shareholders attending online should click the ask the question button to ask your questions [ and we'll take it from there ]. I encourage shareholders attending online who have questions to send their questions as soon as possible. I'll now move on to the formal business of the meeting. The 2020 annual report contains the financial report, and director's report and independent auditor's report. A copy of that report was made available on the company's website [ and presented to the ] shareholders who requested it. Financial statements have been audited by BDO and approved by the directors. This item of business is received and on consideration of the reports of LCM and is not in resolution prior to the vote. I note that the auditor has not received any other questions prior to the meeting. I will take the reports as read and would like to take any general questions or comments about the reports or for the auditor. Are there any questions?

No questions online, Chairman.

Thank you. So I'll now move to the resolution of the Notice of Meeting. These are all important resolutions and require a vote of the majority. Resolution 1 of the meeting is the reelection of Jonathan Moulds as a Director of the company. Are there any questions in relation to this resolution?

There are no other questions from the floor, Chairman, and I'll just confirm that there are no questions online.

Okay. Proxies received are as follows: for the resolution, 100%; against, 0%; open votes, 0%; abstain, 0%. If there's no further discussion, I'll put this resolution to the meeting, please now record your votes. [Voting]

Thank you. For the next item of the business, it's my own reelection as a Director of the company. Therefore, I'll turn over the Chair to Patrick.

Submitting the resolution of David King, are there questions in relation to that resolution?

There are no questions from the floor, Patrick, and I'll just -- give me a minute, there are no questions online.

In receipt of that resolution, in terms of proxies, 85.9 have voted in favor; 14.09, against; there are no open votes; and no one has abstained. I now put this resolution to the meeting, please record your votes. [ Voting ] So I'll hand back to you, David.

Thank you, Patrick, and thank you to those shareholders who voted for me. The next resolution is the reelection of Gerhard Seebacher as a Director of the company. Are there any questions about Gerhard's reelection as a Director?

There are no questions from the floor, Chairman, and there are no questions online.

Thank you. Proxies received in relation to this resolution are as follows: for, 100%; against, 0%; open, 0%; abstain, 0%. I will now put this resolution to the meeting, please now record your votes. [Voting]

Thank you. The next resolution is reelection of Nick Rowles-Davies as a Director of the company. Are there any questions in relation to Nick's reelection?

No questions from the floor, Chairman, and there are no questions online.

Thank you, Anna. The proxies received in relation to this resolution are: for, 100%; against, 0%; open, 0%; and abstain 0%. I put the resolution to the meeting, please now record your votes. [Voting]

Thank you. This is the final resolution of the meeting, it's seeking the approval for the disapplication of preemptive rights of the constitution. Are there any questions in relation to this resolution?

There are no questions on the floor, Chairman, and there are no questions online.

Thank you. Proxies received in relation to this resolution are: for, 99.98%; against 0.02%; no votes open or abstained. And I put this resolution, please now record your votes. [Voting]

Thank you. That concludes the formal business of the meeting. Are there now any questions of a general nature that you'd like to [ direct ] to Patrick?

There are no questions on the floor, Chairman, and there are no questions online.

Thank you very much. So if there are no more questions, that concludes the business of the meeting set out at the Notice of Meeting [ that required a vote ]. Thank you all for attending.

Chairman, I'll just say that for those shareholders attending online, the poll will remain open for 5 minutes following the conclusion of the meeting. So please make the vote.

And the votes, we'll release on the exchange.

On the [ exchange ], yes.

On the exchange.

Yes.

Thank you.

Thank you. Appreciate it. Thank you.