Gladstone Investment Q2 2024 Earnings Call Transcript

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November 2, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Gladstone Investment Corporation Second Quarter 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

David Gladstone, Chief Executive Officer. Please proceed, sir.

Speaker 1

Thank you, Latonya, and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment, and this is the 2nd quarter end in our fiscal year that In March of 2024, the quarter that we're talking about though is the one that ends in September 30, 2023, so we're bringing everybody up to date. And Gladstone Investment is listed on NASDAQ The trading symbol GAIN for the common stock and then we have 3 preferred stocks that are out there and there is a registry notes. Thank you all for calling in. We're always happy to talk and provide updates to our shareholders and analysts that are following us and Provide a view of the current business environment, a little bit about the future hopefully.

Speaker 1

Two goals is to help you understand what has happened and give you a current view of the future. And now I'll start out with our General Counsel, Michael LiCalsi.

Speaker 2

Thanks, David. Good morning, everybody. Today's call may include forward looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties and other factors, even though they're based on our current plans, which we believe to be reasonable. The many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, Including all the risk factors in our Forms 10Q, 10 ks and other documents we filed with the SEC, you'll find them on the Investors page of our website, www.gladstoneinvestment.com or the SEC's website, which is www.sec.gov.

Speaker 2

And we undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please also note that past Performance and market information is never a guarantee of any future results. We ask everybody to visit our website, once again, gladstoneinvestment.com, Sign up for our e mail notification service. You can also find us on Twitter at GladstoneComps and on Facebook, keyword there is The Gladstone Companies. Today's call is an overview of our results through ninethirtytwenty 3.

Speaker 2

So we ask that you review our press release and Form 10 Q both issued yesterday for more detailed information. And with that, I'll turn it over to Dave Dullum, President of Gladstone Investment.

Speaker 3

Thanks, Mike. So good morning, everyone. We're happy to report that GAIN again produced very good results for the Q2 of fiscal year 'twenty four. This ends threethirtyonetwenty 4 and this is following on the previous really solid Q1 of this fiscal year. We ended this 2nd quarter with adjusted NII of $0.24 per share, total assets of $928,000,000 which is from about $847,000,000 at the prior quarter end.

Speaker 3

So deal activity is obviously important To us, and for this quarter, we invested approximately $65,000,000 and that was between one new buyout investment And we made an add on acquisition to one of our existing portfolio companies. As we've said before and we'll continue forward, we will continue to seek These add on opportunities as they do allow us to increase obviously our investment in companies where we know We know the business and we have a strong belief in that company's future and therefore we can and do generally build incremental equity value. It's a good way of continuing the growth of our assets and the underlying fundamentals of the business. So In this regard and subsequent to the quarter end, we invested an additional $65,000,000 to fund another add on acquisition to another one of our existing portfolio companies. So following in the same vein and we find that this sort of activity these days is actually A good area for us to look at as we continue to build overall incremental value in the portfolio.

Speaker 3

We also though did have a successful exit 1 portfolio company and this generated a meaningful realized capital gain of around $43,500,000 So again, we continue to make new acquisitions, add on to our existing portfolio companies and like We also maintained our monthly distribution to shareholders At the $0.08 per share, which is $0.96 per share on an annual basis and then paid a supplemental distribution of $0.12 per share in September of this year, 2023. Subsequent then to the quarter end, we declared aggregate supplemental distributions of Dollar per share to be paid incrementally in November December. So in aggregate, it will be a dollar being paid between those 2 months. Now this fairly large supplemental distribution highlights the strength of our buyout strategy and our ability to reward our shareholders with Full supplemental distributions from these realized capital gains, which are generated on the equity portion of the exits. So in addition, of course, to the income which we generate on a monthly basis to be able to fund the monthly, at least currently $0.08 per share.

Speaker 3

The balance sheet, of course, is important and that continues to be strong. We have low leverage, pretty positive liquidity position with additional availability on our credit facility. So we obviously continue to provide support to our portfolio companies for these add on acquisitions I mentioned and also any interim financing if the need arises, Of course, while we continue to actively grow our assets through new buyouts. In that regard and looking forward, Currently, Dealflo seems to be picking up. The sellers who had been holding back in the past, say, 6 months, I believe we're starting to test the market and we do hear from a lot of the merger and acquisition and the sell side investment bankers that we deal with The backlog of new opportunities seems to be building.

Speaker 3

There is obviously continues to be significant liquidity with buyout funds That we compete with, which reinforces a strong competitive environment, so we must remain value sensitive While aggressively competing for new acquisitions, one thing we should note in this environment, of course, with interest rates being relatively high with somewhat Lack of liquidity in the debt side from the commercial banks, which generally provide the leverage To the traditional private equity fund who we compete with, we have the benefit of providing both the debt and the equity when we make an acquisition. So we believe that Looking ahead that we have somewhat of a competitive edge because we are the supplier of the debt and the equity when we do compete for Specific new potential add on new potential investment. So in summing up the quarter and looking forward, We believe the state of our portfolio is very good. We have a strong liquid balance sheet. We have an active level of buyout activity and continued prospect Very good earnings and distributions over the next year.

Speaker 3

So with that, I'll turn it over to our CFO, Rachel Leeson, for some more details.

Speaker 4

Thank you, Dave. Good morning. Looking at our operating performance, in the Q2 of fiscal year 2024, we generated total investment income of $20,300,000 consistent with the prior quarter. While total investment income in the aggregate did not change quarter to quarter, there were fluctuations in components, including increased interest income, driven by new debt investments Net expenses as of September 30, 2023 were $22,000,000 up from $11,900,000 in the prior quarter. This was primarily due to a 9 $7,000,000 increase in accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.

Speaker 4

Yes, as well as an increase in operating costs. This resulted in a net investment loss of $1,700,000 for the quarter, primarily due to the large accrued capital gains based incentive fees recognized during this period. Adjusted net investment Which is net investment income or loss, exclusive of any accrued capital gains based incentive fees, for the quarter was $8,100,000 or 0.24 We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With our 3 public note issuances, we have long term fixed rate capital in place. And as of yesterday's release, we had approximately $66,000,000 available on our newly amended and $135,000,000 credit facility.

Speaker 4

Additionally, during the quarter, we raised approximately $4,000,000 in net proceeds under our common stock ATM program, all sales of which were above NAV. We anticipate continuing to be active in the ATM program. Overall, our leverage remains relatively low with an asset coverage ratio at September 30, 2023 of 211%, providing plenty of cushion to the required 150 percent coverage. Valuations in the aggregate were up $48,700,000 Driven by unrealized gains at a portfolio company that was marked up to reflect the fair value of the expected exit, which took place in October, as well as higher valuation multiples across the portfolio and increased performance at many of our portfolio companies. Our NAV increased to $14.03 per share compared to $12.99 per share at the end of the prior quarter.

Speaker 4

The increase was primarily driven by $1.44 per share of net unrealized appreciation of investments, partially offset by $0.36 per share of distributions paid to common shareholders during the quarter, of which $0.12 per share related to a supplemental And 0 point 0 $5 per share of net investment loss. Consistent with prior quarters, distributable book earnings to shareholders remained strong. We started the fiscal year with $32,000,000 or $0.95 per share in spillover and our monthly distribution remains consistent at $0.08 per share for an annual run rate of 0.96 During this past quarter, in September 2023, we paid a $0.12 per share supplemental distribution. And as you heard in October, we declared an additional aggregate $1 per share supplemental distribution to be paid in November December 2023. We look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of our exits.

Speaker 4

Using the monthly distribution run rate of $0.96 per share per year and $1.24 per share in supplemental distributions

Operator

paid over the shares

Speaker 4

so far in the Fiscal year 2024, our aggregate estimated fiscal year distributions would total at least $2.20 per common share Order yields of about 16% using yesterday's closing price of $13.74 This covers my part of today's call. Back to you, David.

Speaker 1

Okay. Thank you. Very nice, Rachel. Well, actually wonderful news for everybody and very nice report by Dave and Michael, information for shareholders, I think this completes everything in terms of the past. This call and the 10 Q filed by the SEC yesterday to the SEC yesterday should bring everyone up to date.

Speaker 1

So for the quarter ending September 30, 2023, the company paid a regular distribution of $0.08 per share Per month or $0.24 per share for the quarter. Now skipping ahead and looking at the quarter ending December 31, 2023, The company also has declared but not yet paid 2 more supplemental extra distributions. The November 17th distribution is $0.12 per share and December 15th distribution is $0.88 a share. So aggregate supplementals for the quarter ending December 31st will be $1 per share. And then if you include the distribution Declared our regular is $0.24 That's $1.24 for the quarter.

Speaker 1

So Please be aware that the record date for the November supplemental distribution is November 7th. So you have to Buy before then and same thing is true for the December supplemental distribution is December 5. So you need to own the stock before those dates in order to get the supplemental distributions. So get busy, get out and buy some shares so that you get those The team has reported solid results for the quarter ending September 30, 2023, Including buyout investments, exit activity and associated net realized gains, we believe the team is in a great position to I'll say this again, I keep saying it, and for those of you who have listened to me, you've gotten some real good extra dividends. We believe Gladstone Investment is attractive investment for investors seeking continuous monthly distributions And the supplemental distributions from potential capital gains and the other income that we generate.

Speaker 1

The team hopes to continue to show you a strong one, but I'm going to stop at this point and let's get some questions from our analysts. Some of you teed up really early this morning, so We are ready for you. So Tanya, would you come in and tell them how they can ask a question?

Operator

Thank you. We will now conduct a question and answer One moment while we poll for our first question. Our first question comes from Mickey Schleien with Ladenburg. Please proceed.

Speaker 5

Yes. Good morning, everyone. I want to start by congratulating you on the sale of Counsyl Press, Which is a very impressive outcome and I'm sure shareholders are going to be very pleased with the dividends that are related to that. Dave, I wanted to ask you about a couple of investments. First, E3 operates in the oil and gas sector, which is obviously So I want to know what is it about this company and the deal structure that gives you comfort ahead of a potential slowdown In the economy and making an investment in a cyclical sector?

Speaker 3

Hey, Mickey, good. Thanks for the question. Yes, you're right. E3 is a little bit out of the norm for us in that regard. What they do though, they mainly provide a, I Call it a product, that goes mainly to the guys that do the fracking.

Speaker 3

So if you Understand where you go from the well to the pipeline coming out from a fracking situation. You have Times when these valves that they have will basically, the pressure gets too high and they sort of Blow, right? And the way they mechanically do it have done it for many, many, many years, excuse me, is literally have somebody take And go and turn a wrench and relieve a valve and it can be very dangerous. What these guys have developed over the last number of years It's a system that sits on a skid about the size of a decent sized table, if you will, that actually is electronically, so it understands pressure building and has a relief. And they've got some technology In the valve system itself that allows for, I would call it, some proprietariness to the system.

Speaker 3

So they are Really in a position where as long as you're doing some of the fracking and unless that business completely went to 0, They're going to have still have a very substantial opportunity. They rent their product. The payback literally is like less than 4 months On what they rent and they are billing them as fast as they can make them. So that's kind of a high level. And you're right, it can be cyclical.

Speaker 3

But given the profitability, given the level of cash that they have, We believe even if we had somewhat of a slowdown, we would be in really good shape going forward. It's a pretty unique situation, frankly, yes. And by the way, run by very experienced folks, and we went out and brought in some very experienced Management to the deal guy came in from Halliburton, who is the actually the CEO. We brought him in. So I think we've got a really great management team that knows the industry.

Speaker 5

That sounds really interesting, Dave. My other question is about SFEG, which is, as you know, an electrical manufacturer and that can also be Cyclical. But in this company, you're in the 2nd lien. So could you tell us The nature of the add on acquisition, what's giving you comfort to be in a second lien in a cyclical business And also, who owns the 1st lien that's ahead of you?

Speaker 3

Okay. So SFEG, I want to be sure we're on the same page, is not in Not in the Electrical business really. It really is a combination of a couple of our companies that provide product, like welding devices, Cutting and so on, going to pipelines and what have you, which is broader than certainly oil and gas as well. So we had the base business, FFEG, which is based in Houston. And we acquired a company called Climax, Which is actually based in Portland, Oregon, but has operations, frankly, throughout the world, and that's as SFEG does, by the way.

Speaker 3

We made an acquisition with them In France, about 2 years or so ago, that expanded our product line. We also have operations in the U. K. So the combined entity today, by the way, is something in excess of $100,000,000 in revenues and with a very EBITDA, sort of close to 20% EBITDA margins. So collectively, They have a very broad suite of products going to mainly pipeline, Both in terms of field operations as well as in the manufacturing process and again, a very strong management team.

Speaker 3

And so we like the whole thing. It's very strong. We put in a significant amount of money. It's a big investment for us. We have significant ownership.

Speaker 3

And in our general structure, even though we might have a second lien, A lot of times, the first lien is going to be the lender or the bank who we bring in as a Revolving line of credit, and so that's not unusual, frankly, that we would have someone in a 1st lien position above Our debt, which looks in other language might look more like a mezzanine or what have you. But again, of course, we own significant portion of the equity. Hope that helps or not.

Speaker 5

Just to make sure I understand, the first lien then is a bank revolver probably With accounts receivable and inventory as a collateral and you have claims on the rest of the company's assets. Is that correct?

Speaker 3

Correct. Yes.

Speaker 5

Okay. That's helpful. I appreciate it.

Speaker 3

And again, that's not unusual, right, for us in some cases and certainly bigger companies, yes.

Speaker 5

Sure, I understand. That's all my questions. And again, congratulations on

Speaker 3

Great. Thanks, man. Good quarter. Great to seeing you recently, by the way. Thanks

Operator

Our next question comes from Bryce Roe with B. Riley. Please proceed.

Speaker 6

Thanks. Good morning and congratulations On the exit, David, wanted to first ask about The level of spillover, Rachel, you did hit on what spillover was as of the last End of the last year, can you give us an update as to where that sits now? And if you could give it to us, pro form a for the dividends declared for the December quarter, As well as this gain that you just realized.

Speaker 4

Hi, Bryce. Thank you for your question. So that is correct. We I mentioned in my prepared remarks, we started the year with that $32,000,000 or about $0.95 share in spillover. We do not provide updates during the Quarter, but I think given that we plan to declare a regular monthly distribution of $0.08 per month, Coupled with the dollar that we declared supplemental and an additional $0.24 in supplemental, you can see we have Well made our way through that spillover that we started the year with.

Speaker 4

I can tell you that is amount we are comfortable with Rolling into next year, but I cannot unfortunately give you an update kind of mid quarter and where we are.

Speaker 6

Understood. Figured I'd try. Let's see, in terms of The fair value marks within the portfolio in the quarter here, Dave, I mean, obviously, they reflect the council press Exit, but also as you noted in your prepared remarks, good upside From several different investments in the quarter, you mentioned higher multiples As well as better company performance, can you could you maybe expand on that comment a bit?

Speaker 3

I'll take a shot and then certainly Rachel, Please feel free because you, Yvel. I would say that of all of the portfolio companies, there are The majority of them were benefited by a little bit of up in multiple EBITDA as well as up in EBITDA. And then some of the others, which are still fundamentally very strong companies, just quarter to quarter, even though they were slightly off EBITDA wise, Slightly up with multiple. And so there were some changes in probably 6 So so of the portfolio companies where we had a slight, again, change downwards from the prior quarter, but nothing where I am Certainly concerned about from just a valuation perspective. Rachel, you got any you want to add to that?

Speaker 4

I don't think so. And if there's something specific you'd like to call out. I think we saw some really great Unrealized appreciation at companies like Educators, Brunswick Bowling, Nth Degree and SSEG, which Dave you touched on earlier.

Speaker 6

Okay. That's good color, helpful.

Speaker 3

Yes. I think, Bryce, again, without going through each company per se, what have you, I don't see any significant change. And as you know, quarter to quarter, months to months, Just because again, as you know, it somewhat gets magnified, right? If you have a 7 or 8 times multiple and you get a modest Change in EBITDA, that multiple can have a little bit of $1,000,000 as an example. I'm making that up of a reduction in An evaluation on something that might be worth $30 plus 1,000,000 I mean, so again, I don't see any significant Concerns relative to the few that we did have on a slight decline valuation wise.

Speaker 6

Okay. That's helpful. And then last one for me is looking at the balance sheet structure. You're using the Credit facility a bit more with portfolio growth set and if I heard you correctly, dollars 65,000,000 Into SSEG, would likely kind of call into using that even a bit more Unless you access other sources of capital. So if you could just speak to your comfort with the capital structure at this point, would you look And add more notes like you've done here recently, are you comfortable with where the balance sheet structure is or the capital structure is at this point?

Speaker 6

Thanks.

Speaker 3

Yes. Well, again, I'll have Rachel add in here. But that amount that we have currently available on our line, of course, is the net amount currently based Upon the cash coming in from, say, Council Press, etcetera, the new investment, etcetera. So as of where we are today, That certainly is available capital for anything net new that we plan to do. We also, obviously, Generally, we're in the market sometimes looking to exit certain of our portfolio companies.

Speaker 3

And as some of that might occur over the next, Say, 6 months or so, that capital will likewise will obviously come in. So short answer is right today. Yes, we feel pretty good about where we are. We always will continue, obviously, exploring the idea of going out and doing another, say, baby bond. And as we look forward to our deal flow and the opportunities coming forward, we certainly would look to potentially access That market and have the availability then on our line to provide the ups and downs.

Speaker 3

So today, I think we feel we're in good shape, Rachel.

Speaker 4

No, I completely agree, Dave. And I think one other thing to add to that is continuing to use our ATM program when

Speaker 3

Right. Yes, certainly supplement, but we don't certainly not concern about anything from a ratio perspective in terms of The fixed asset or the asset coverage ratio, and again, we are pretty active in Keeping in touch with what's going on in the market. So, if we need to do something, we'll do it. But right now, we feel pretty good.

Speaker 6

Thanks, Troy. Thanks a lot.

Speaker 1

Take your question, Tanya.

Operator

Thank you. Our next question comes from Derek Summers with Jefferies. Please proceed.

Speaker 7

Hi, good morning. I wonder if you could shed a little more light on the macro picture As we approach year end and navigate budget projections for 2024, are any sectors seeing more headwinds than others? Or Are any sectors or end markets seeing pushback in passing price through to customers? Thank you.

Speaker 3

Sure. No surprise, perhaps, the companies that we own that are in the, say, consumer product space, I would say we've obviously seen a little softness in some of those, nothing of any great significance at this point. But we certainly have been able to pass through any cost increases that we were having. A lot of it, as you know, coming from the earlier Increases in supply chain, transportation costs, etcetera, we've seen that come down pretty significantly, and that's A positive thing. So in terms of as we look forward, even though in a few cases, we might be seeing some softness at the retail Level in terms of revenue, likewise, we've been able to offset that to some degree with lowering our own costs.

Speaker 3

So from a margin perspective, we've actually seen a few cases where margins have improved even though overall volume has gone down. So Net net, I think we're not seeing any right now any big issues there, but clearly anticipating there could be A bit of a slowdown in some of the consumer type product areas from the some of the business service areas, and we have a Fairly significant investment in that category, as you might know. Most of those companies are Pretty much operating according to plan. 1 or 2 might see a little bit again Of a slowdown depending on what the sectors are in, but again, everything seems to be holding up fairly well. And as we look forward, Obviously, with our portfolio companies, we're trying to be conservative.

Speaker 3

They're wanting to be sure that they maintain margin, Not just look to the top line. So all in all, I think we feel we're in reasonable again, good shape going forward.

Speaker 7

Got it. That's all for me. Thank you.

Speaker 1

Okay. Tanya, any other questions?

Operator

There are no further questions in queue at this time. Mr. Gladstone, I'd like to turn it back to you for closing comments.

Speaker 1

All right. Thank you all for calling in. It was Good quarter last quarter and this quarter that we're in, it looks like a super quarter. So we're all feeling good today and See you next time. That's the end of our comments.

Operator

Thank you. This does This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.

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Key Takeaways

  • Strong Q2 results: Adjusted net investment income of $0.24 per share and total assets rose to $928 M at 9/30/23, fueled by $65 M in new buyouts/add-on investments and a portfolio exit realizing ~$43.5 M in gains.
  • Robust distributions: Continued $0.08 per share monthly payments, paid a $0.12 supplemental in September, and declared $1.00 per share in November/December supplementals—supporting at least $2.20 in total FY24 distributions (~16% yield).
  • Strong liquidity & leverage metrics: Asset coverage at 211%, $66 M undrawn on its credit facility, plus $4 M raised via ATM above NAV, ensuring ample capacity for portfolio growth.
  • Market advantage: Ability to fund both debt and equity in acquisitions amid high interest rates and reduced bank lending enhances competitiveness for new deals.
  • NAV appreciation: Unrealized valuation gains of $48.7 M lifted NAV to $14.03 per share (from $12.99), driven by multiple expansions and performance improvements across key holdings.
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Earnings Conference Call
Gladstone Investment Q2 2024
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