Q2 2022 Gladstone Investment Corp Earnings Call

Greetings and welcome to the Gladstone investment third quarter earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

A reminder, this conference is being recorded.

Now my pleasure to introduce your host David Gladstone. Thank you David you may begin.

Well, Thank you Paul and good morning to everybody. This is David Gladstone Chairman of Gladstone investment and this is the second quarter of our fiscal year ending March 31 2022.

And this is a conference call for shareholders and analysts of Gladstone investment and listed on NASDAQ under the trading symbol G. A I N and we have some registered notes as well.

Thank you all for calling in we're always happy to provide updates for our shareholders and analysts and provide our view of the current business environment on two goals today of course are to help you understand what happened.

And also give you our view of the future we always start out with our general Counsel and Secretary Michael The Kalsi go ahead Mike.

Morning, everybody today's call May include forward looking statements under the Securities Act of $19 33, and the Securities Exchange Act of $19 34, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties and other factors, even though they are 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 listed.

<unk> 10-Q, 10-K, and other documents that we filed with the SEC you can find them all on the investors page of our website.

Ww that Gladstone investment dot com or on the SEC's website, which is www dot FCC.

<unk> that we undertake no obligation to publicly update or revise any of these 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 or market information is never a guarantee of any future results of.

Please take the opportunity to visit our website once again Gladstone investment Dot com sign up for our email notification service you can also find us on Twitter at Gladstone comps and on Facebook keyword. There is the Gladstone companies and today's call is an overview of our results through 932021. So we ask that you review our <unk>.

Press release and Form 10-Q, both issued yesterday for more detailed information and with that I'll turn it over to the president of Gladstone investments, David Zalman, Dave Hey, Mike. Thanks.

Morning, shareholders analysts and interested parties.

I'm happy to report another very good quarter for this second fiscal quarter.

The operating results from our portfolio companies have been encouraging and I'm really pleased with the quality of the portfolio at this point.

So while some of our companies have made progress towards pre Covid operating status. We are certainly very mindful of the challenges that our economy still faces such as due to supply chain issues, which you've all heard a lot about and obviously clearly inflationary trends.

But with all of that though we ended the second quarter of fiscal year 'twenty two with adjusted NII of <unk> 23 per share, which continues to improving trend of the previous three quarters, where are we at reported adjusted NII per share of <unk> 20.

24, <unk> 24, respectively.

Going from the earliest to the most recent quarter.

So we are encouraged by these results as they do reflect the previously mentioned improvements in the operations and the health of our portfolio of companies and certainly the prospects for future earnings.

In addition, our net asset value per share increased from $12 66 at 630 21 to $13.27 at 930, 21, and our assets increased to $746 million from 713 million over the same period. This is in large part.

Due to the continued recovery of the values of our equity portions of our holdings, which obviously is very important to us and which actually make up about 26% currently of our portfolio at cost.

As a result, and subsequent to the quarter end, we did increase our monthly distributions to shareholders by 7%, which is seven and a half cents per share or effectively 90 per share on an annual run rate basis. We also paid a supplemental distribution of <unk> <unk> per share in September 2021.

And declared another supplemental distribution of <unk> per share, which will be paid in December of 2021.

During the second quarter of fiscal 'twenty, two we made one new buyout and this was of a company that's been around for quite a while very good company a family owned for many many years and this is actually related to infrastructure expansion. We also made incremental investments in existing portfolio companies in support.

Of some add on acquisitions, which actually is an area of focus for us.

Does it prevents presents opportunities to keep building value in the existing portfolio of companies.

Our buyout strategy continues to successfully generate both income from monthly distributions to shareholders and capital gains on equity, which allows for these aforementioned supplemental distributions.

Our balance sheet continues to be very strong with very low leverage and a very positive liquidity position. So this allows us to continue providing the support which our portfolio companies will need for these add on type acquisitions and value building as well as interim financing if the need arises and this should all while obviously were.

Actively seeking new buyout opportunity. So we can continue to grow our assets.

So briefly from an outlook looking forward the flow of buyout opportunities is continues to be strong however, purchase price expectations out there still remain pretty elevated and as a result of this dynamic we really need to remain patient and selective in our due diligence and review process and Thats one of the air.

Areas that we stress with.

Our team and the way in which we look at it which way in which we evaluate and then ultimately devote time to potential add on acquisitions and new new acquisitions. So in summing up the quarter. The state of our portfolio is very good we have a strong and liquid balance sheet and active level of buyout activity and the prosper.

<unk> continuing very good earnings and distributions during this fiscal year. So now I'll turn it over to Julia Ryan our CFO. So she can give you some more details Julia.

Thanks, Steve as far as operating performance second quarter.

As I reported last quarter, we continued to see improvement after the initial impacts of the pandemic, we generated adjusted NII at $7 8 million 23 cents per share as compared to the adjusted NII $8 million or 24 cents per share in the prior quarter. We continue to believe that this metric is a very useful and representative indicator of.

Yeah.

Investment income increased quarter over quarter, primarily due to other income.

Prior quarter interest income with net debt by the collection of past due interest, which did not recur to the same extent this quarter.

We added one loan to non accrual this quarter, which part of the decline in interest income. We believe it will be a relatively short term change at 921 three of our portfolio companies were on non accrual net.

<unk> expenses decreased by $4 million this quarter.

Mainly driven by a $4 7 million decrease in the capital gains based incentive fee, which is due to the net impact of realized and unrealized gains that current this quarter, which was lower than the prior quarter.

Given the issuance of our new 2028 note interest expense increase but that increase was offset by a decline in dividend expense due to the redemption of our series E preferred stock and we used proceeds from the note issuance to detail.

We believe that maintaining liquidity and flexibility to support and grow our portfolio of key elements of our success with the successful issuance of our 2020 and the related redemption of the theory E. This quarter, we had new long term capital in place and significant availability under our line of credit.

Our NAV increased to $13 27 per common share this quarter and primarily related to the net unrealized depreciation on our portfolio consistent with prior quarters distributable book earnings to shareholders remains solid, especially when considering that book earnings have been reduced by $28 3 million of capital gains.

Base incentive fees accrued under GAAP, which equates to about 85 cents per common share which are not currently do are deductible for tax.

So with that in mind and as previously announced in October 2021, our board of directors increased our annual distribution run rate to <unk> 90 per common share and declared another nine supplemental distribution to common shareholders to be paid in December of 2021.

Assuming the current monthly distribution run rate of <unk> 90 per share per year, and estimating <unk> 18 per share in supplemental distributions, our annual distributions with total about $1.08 per common share or roughly.

Just shy of 7% yield on the closing price of our stock. So this covers my portion of today's call and back to you David.

Alright. Thank you Julia that was a very nice report had a nice report from Dave and Michael.

The information that we've given to our shareholders I hope Brian.

Jeff today that presentation that we just made in the 10-Q filed yesterday with the SEC should bring everybody up to date, where we are now.

The team of course since reported solid results for the quarter, including a buyout investment in financial transactions.

The team is in a great position to continue these successes through the remainder of fiscal year ending March 31 2022.

Just so you know we always look to sell some portfolio companies and I'm sure we'll find some to sell in the future and we don't have any way of sort of knowing what that's going to be until it gets very close.

Gladstone investment is an attractive investment for investors seeking continuous monthly distributions and then they do supplemental distributions, mostly from potential capital gains and other income.

The team hopes to continue to show you some strong returns.

And now, let's stop and have some questions from the analysts and others, who follow us Paul if you'll come on and tell them how they can ask questions.

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.

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One moment, please while we poll for questions.

Okay.

Okay.

Thank you. Our first question is from Mickey <unk> with.

Ladenburg. Please proceed with your question.

Good morning, everyone.

Dave I wanted to ask you mentioned the supply shortage problems in your prepared remarks.

And given your business model I would like to understand how you're seeing your portfolio companies deal with those shortages and are they also being able to pass on the inflation, they're experiencing in their inputs to their customers.

Hey, great. It's a very good question and obviously one that a lot of companies are obviously working through and focusing on.

I would say from a general perspective, our companies are able to deal with it fairly well some of them because of the nature of their let's call. It seasons or what have you actually were somewhat ahead of the of the game if you will.

And so it had product coming in early we have some others that.

Big problem of course is the stacking up of the containers and we do have a few companies that are subject to that.

And then obviously the increase in prices of those but as you suggest we have gone out with those companies and worked with their customer base.

And have indeed been able to get price increases.

Not necessarily totally.

Covering all the relative cost necessarily but indeed have been able to pass through price increases and some more so than others. So overall I'd say from those companies in the portfolio that are impacted by by the supply chain shortages and the potential increases in prices that they've been able to do a pretty.

Decent job.

We will probably see a little bit of a tightening of margins in a few of those companies, but on average we think we're in pretty decent shape. The other obvious area of course is is labor.

And Thats, one that we work, obviously as well hard on and trying to be sure. We can get people to work prices and costs are going up there in some cases, so trying to get pretty creative with what folks are doing and how to not only get labor, but to keep labor.

And Thats, a continuing operating challenge frankly, having said all of that we've had a number of our companies that actually have performed actually above what we might have expected during the whole COVID-19 situation you have seen that I'm sure with other companies, where it actually increase their their activity and we've certainly seen that as well so and those of our companies that did.

See an initial.

The decrease in revenues and so on early in Covid.

<unk> certainly seen a very nice bounce back and that's why as I mentioned, our operating results look very good and we're starting to see those those.

Increases in results come through and it's certainly impacting our valuations.

Sort of a positive way.

David if I could follow up.

J R. Hobbs has an HVA C company, if I'm not mistaken.

Hey.

Are the issues that they're facing related to supply shortages or or something else going on there that you can tell us.

Again, it's a good question their issue is more to do with their cost.

Ironically, they've got a very very large backlog, probably the largest we've ever seen.

Their customer base are by and large general contractors.

<unk> two multifamily construction and now some industrial commercial and so it's related to shortage in the sense that some of those.

Buildings, if you will have been been pushed back a bit.

And thats slowed down for the first part of this year, but now is picking back up again, so indirectly impacting but more because of a of a pushback on activities and didn't lose any business. So we now have a pretty significant.

If you might imagine backlog, which will have to work through the company will work again, which is a positive thing going forward. So it's put some strains on working capital on companies like that but by and large it's.

Self is not necessarily had any any shortages.

So just to make sure I understand.

Our hubs customers are delaying construction projects is that due to the ongoing labor shortages or something else.

That I Couldnt tell you I think a couple of different things probably they are in turn as we all know early on in the cost of lumber for argument's sake right in the supply of lumber so that slowed down some projects that were either waiting to try to get price.

Prices coming back down or what have you I think it's more due to that than anything else that I'm aware of at this point okay.

Just a couple more sort of modeling.

Modeling questions you had another very strong quarter.

Unrealized appreciation and congratulations on that.

Just.

Curious was that due more to valuation multiples and spreads or to performance of the companies themselves.

And I'll, let Julia jump in here and add some color to that I would say very quickly it was a combination.

Certainly improvement in operations.

EBITDA improvements if you will which is obviously very important.

Not much in the way of increase in multiples, but Giulia do you want to.

Have a shot at that.

Yes, Youre right combination Nicky butt.

Our key performance uptake outweighed uptake and multiple.

Thank you and Julie one last question did you reverse any previous income accrued for Jay or hubs.

Previous quarters or just.

Sure.

We did not a significant amount by any means but that question brand through bad debt expense.

Okay. Thank you for your time this morning I appreciate it.

Next question please.

Okay.

Thank you there are no further questions at this time I would like to turn the floor back over to David Gladstone for any closing comments.

Well. Thank you all for calling in it's been a wonderful quarter for us and we hope to duplicate that in the next two quarters as well so as a result, it should be a wonderful year, but there are no guarantees in this world and thank you all for calling in and we'll see you in a month or two.

At the end of this.

Okay.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.