Gladstone Investment Corporation (NASDAQ:GAIN) Q2 2024 Earnings Call Transcript

Gladstone Investment Corporation (NASDAQ:GAIN) Q2 2024 Earnings Call Transcript November 2, 2023

Operator: Greetings and welcome to the Gladstone Investment Corporation Second Quarter Earnings Conference Call. [Operator Instructions]As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Please proceed, sir.

David Gladstone: Thank you, Latonya and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment and this is the second quarter end in our fiscal year that in March of 2024. The quarter that we’re talking about, though, is the 1 that ends in September 30, 2023. So we’re bringing everybody up to date. And Gladstone Investment is listed on NASDAQ and has the trading symbol GAIN, for the common stock. And then we have 3 preferred stocks that are out there and those are registered notes. Thank you all for calling in. We’re always happy to 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. 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.

Michael LiCalsi: 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. And 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 Form 10-Q, 10-K and other documents that we filed with the SEC on the Investors page of our website, www.gladstoneinvestment.com and the SEC’s website which is www.sec.gov.

And we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future or otherwise, except as required by — please also note that past performance or market information is never a guarantee of any future results. We ask everybody to visit our website, once again, gladstoneinvestment.com, sign up for email notification service. You can also find us on Twitter at Gladstone comps and our Facebook keyword there is, the Gladstone Companies. Today’s call is an overview of our results through September 30, ’23 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.

Dave Dullum: Thanks, Mike. So good morning, everyone. We are happy to report that Gladstone again produced very good results for the second quarter of fiscal year ’24. This ends March 31, ’24 and this is following on the previous really solid first quarter of this fiscal year. We ended this second quarter with adjusted NII of $0.24 per share, total assets of $928 million which is up from about $847 million at the prior quarter end. So deal activity is obviously important to us. And for this quarter, we invested approximately $65 million and that was between 1 new buyout investment and we made an add-on acquisition to 1 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 the management team, 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 actually in this regard and subsequent to the quarter end, we invested an additional $65 million to fund another add-on acquisition to another 1 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. We also, though, did have a successful exit of 1 portfolio company and this generated a meaningful realized capital gain of around $43.5 million [ph]. So again, we continue to make new acquisitions, add-on to our existing portfolio companies and likewise, exit companies when it makes sense and that, of course, generates some capital gains.

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 — per share to be paid incrementally in November and December. So in aggregate, it will be $1 [ph] 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 a meaningful 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.

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 of companies for these add-on acquisitions — and also any interim financing if the need arises, of course, why we continue to actively grow our assets through new sales. In that regard and looking forward, currently, deal flow seems to be picking up sellers who have been holding back in the past 8 months, I believe, are 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 that the backlog of new opportunities seems to be building.

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 a specific new potential add on — a 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 prospects of very good earnings and distributions over the next year. So with that, I’ll turn it over to our CFO, Rachael Easton, for some more details.

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Rachael Easton: Thank you, Dave and good morning. Looking at our operating performance. In the second quarter of fiscal year 2024, we generated total investment income of $20.3 million, consistent with the prior quarter. while total investment income in the aggregate did not change quarter-to-quarter, there were fluctuations components, including increased interest income driven by new debt investments — and increased SOFR as well as lower dividend and success fee income which is variable in timing and did not reoccur in the current quarter. Net expenses as of September 30, 2023, $22 million, up from $11.9 million in the prior quarter. This was primarily due to a $9.7 million increase in accrued capital gains-based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP as well as an increased margin.

This resulted in a net investment loss of $1.7 million for the quarter, primarily due to the large accrued capital gains-based incentive fees recognized during this period. Adjusted net investment income which is net investment income or loss exclusive of any accrued capital gains-based incentive fees for the quarter was $8.1 million or $0.24 per share, down just a penny from $8.5 million or $0.25 per share in the prior quarter. We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. Consistent with the prior quarter, at September 30, we continue to have 3 portfolio companies that are on nonaccrual status. And we will continue working with those companies to get back on accrual status.

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 million available on our newly amended and extended $135 million credit facility. Additionally, during the quarter, we raised approximately $4 million 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 — providing plenty of cushion to the required 150 coverage. Valuation to the aggregate were up $48.7 million, 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. 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 distribution and $0.05 per share of net investment loss. Consistent with prior quarters, distributable book earnings to shareholders remains strong. We started the fiscal year with $32 million 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 per share. During this past quarter, in September 2023, we paid a $0.12 [ph] 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 and December 2023. We look to continue funding future supplemental distributions, as we recognize realized capital gains on the equity portion of our exits. Using the monthly distribution run rate of $0.96 per share per year and $1.24 per share in supplemental distributions [indiscernible] in the fiscal year 2024. Aggregate estimated fiscal year distributions would total at least $2.20 per common share or a yield of about 16% using yesterday’s closing price of $13.74. This covers my part of today’s call. Back to you, David.

David Gladstone: Okay. Thank you. Very nice, Rachael. Well, actually wonderful news for everybody, a 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 should bring everyone up to date. 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 17 distribution is $0.12 per share and December 15 distribution is $0.88 a share. So aggregate supplementals for the quarter ending December 31 will be $1 per share.

And then if you include the distribution declared — is $0.24. That’s $1.24 for the quarter. So please be aware that the record date for the November supplemental distribution is November 7. So you have to buy before then. And the 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 and get out and buy some shares so that you get those supplemental distributions. 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 continue these successes through the remainder of the fiscal year ending March 31, 2024.

And 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 an attractive investment for investors seeking continuous monthly distributions and the supplemental distributions from potential capital gains and the other income that we generate. The team hopes to continue to show you a –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’re ready for you. So — would you come in and tell them how they can ask a question.

Operator: We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

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Q&A Session

Mickey Schleien: I want to start by congratulating you on the sale of Counsel 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 cyclical. 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?

Dave Dullum: Mickey, good. Thanks for the question. Yes, you’re right, E3 is a little better 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. 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 sought to blow, right? And the way they mechanically do it, have done it for many, many, many years, is literally have somebody take and go internal ranch and relieve a valve and it can be very dangerous. What these guys have developed over the last number of years is a system that sits on a skid about the size of a decent-sized table, if you will, that actually control 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’d call it, some proprietariness to the system. 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 building them as fast as they can make them. So that’s kind of a high level. And you’re right, it can be cyclical 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 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 CEO. We brought him in. So I think we’ve got a really great management team that knows the industry.

Mickey Schleien: That sounds really interesting, Dave. My other question is about SSCG which is, as you know, an electrical manufacturer and that can also be cyclical. But in this company, you’re in the second lien. So 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 first lien that’s ahead of you.

Dave Dullum: Okay. SFEG, I want to be sure we’re on the same page, it’s not an electrical business really. It really is a combination of a couple of other 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, SFEG which is based in Houston and we acquired a company called Climax which is actually based in Portland, Oregon that has operations, frankly, throughout the world. And that’s SFEG — by the way. 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 million in revenues and a very significant EBITDA sort of close to 20% EBITDA margins.