Q2 2024 Gladstone Investment Corp Earnings Call
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Sorry can I have your name please.
Hello Conference that Rick can I have your name please.
And now I'll start out with our general counsel, Michael the Cal C. Thanks, David Good 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 in our forms 10-Q, 10-K, and other documents, we filed with the SEC by them on the investors page of our website.
Www Dot Gladstone investment dot com or the Sec's website, which is www SEC <unk> 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 or market information is never a guarantee.
Do you have any future results.
We ask everybody to visit our website once again Gladstone investment dotcom 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. Today's call is an overview of our results through March 30, 23. So we ask that you review our press release and Form 10-Q.
Both issued yesterday for more detailed information now with that I'll turn it over to Dave <unk> President of Gladstone investment. Okay. Thanks, Mike So good morning, everyone.
Happy to report that gain again produced very good results for the second quarter of fiscal year 'twenty four.
And $331 24, and this is following on the previous really solid first quarter of this fiscal year.
We ended the second quarter with adjusted NII of <unk> 24 per share total assets of $928 million, which is up from about $847 million at the prior quarter end.
Deal activity is obviously important to us and for this quarter.
We invested approximately $65 million and that was between one new buyout investment and we made an add on acquisition to one of our existing portfolio of companies.
As we've said before and we will continue forward, we will continue to seek.
This 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. Its a good way of continuing the growth of our assets.
And the underlying fundamentals of the business. So im actually in this regard and subsequent to the quarter end, we invested an additional $65 million.
To fund another add on acquisition to another one of our existing portfolio of company. 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 <unk>.
<unk> of one portfolio company and this generated a meaningful realized capital gain of around $43 $5 million. So again, we continue to make new acquisitions add onto our existing portfolio companies and likewise exit companies when it makes sense and that of course generates.
Capital gains we also maintained our monthly distributions to shareholders at the eight <unk> per share.
Which is <unk> 96 per share on an annual basis, and then paid a supplemental distribution of <unk> 12 per share in September of this year 2023.
Subsequent to the quarter end, we declared aggregate supplemental distributions of $1 per share to be paid.
Incrementally in November and December so in aggregate it will be one dollar.
<unk> paid between those two months.
This fairly large supplemental distribution highlights the strength of our buyout.
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 eight cents per share the <unk>.
Alan 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 I mentioned and also any interim financing if the need arises.
That's why we continue to actively grow our assets through new buyouts.
That regard and looking forward.
Currently deal flow seems to be picking up.
The sellers, who had been holding back in the past say six 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 and 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.
We compete with which reinforces the 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.
We 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 a new potential investments.
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 are very good earnings and distributions over the next year, so with that I'll turn it over to our CFO Rachel leasing for some more details.
Dave and Mark.
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.
Total investment income in the aggregate did not change quarter to quarter, there where fluctuations components, including increased interest income driven by new debt investments you made on the partner an increase so far as well as lower dividend and success fee income, which is variable in timing and did not reoccur in the current quarter metrics.
<unk> expenses as of September 30, up 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 GAAP as well as an increase.
This resulted in a net investment loss of $1 7 million for the corner, primarily due to the large accrued capital gains based incentive fees recognized during the 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 <unk> 24 per share down just a penny from $8 5 million or <unk> 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.
It's just that with the prior quarter at September 30th we continue to have three portfolio companies that are on non accrual status and we will continue working with those companies to get back on accrual status.
Sure.
<unk>.
We believe that maintaining liquidity and flexibility to support and grow our portfolio are key element of our success.
With our three public note issuances, we have long term fixed rate capital in place and as of Yesterdays release, we had approximately $66 million available on our newly amended and extended a $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 32023 of 211%, providing plenty of cushion to the required 150% coverage.
Valuations in the aggregate were up $48 7 million driven by unrealized gains in our portfolio company that was marked up 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 <unk> per share compared to $12 99 per share at the end of the prior quarter. The increase was primarily driven by a $1 44 per share of net unrealized appreciation of investments, partially offset by 36 per share of distributions paid to common shareholders during the quarter of which 12.
Per share related to our supplemental distribution and <unk> <unk> per share of net investment loss.
Consistent with prior quarters distributable book earnings to shareholders remain strong we started the fiscal year with $32 million or <unk> 95 per share and spillover and our monthly distribution remains consistent at eight cents per share for an annual run rate of 96 cents per share.
During this past quarter in September 2023, we paid a <unk> 12 per share supplemental distribution and as you heard in October we declared an additional aggregate $1 per share supplemental distributions to be paid in November and December of 2023.
We look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of our access.
Using the monthly distribution run rate of 96 cents per share per year, and $1 24 per share in supplemental distributions.
So far in the fiscal year 2024, our aggregate estimated fiscal year distributions with 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 todays call back to you David Okay. Thank you very nice Rachel and well actually wonderful news for everybody.
Very nice report by Dave and Michael and information for shareholders. I think this completes everything in terms of the past this call and our 10-Q filed by the FCC yesterday to the SEC.
It should bring everyone up to date.
So for the quarter ending September 32023, the company paid a regular distribution of eight cents per share.
Per month, or 24 cents 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 two more supplemental extra distributions.
The November 17th distribution is 12 cents per share in December 15th distributions 88 cents a share so aggregates a supplemental for the quarter ending December 31, so it'll be a dollar per share and then if you include the distribution declared a regular.
24, since that's a download 24 for the quarter.
So please be aware that the record date for the November supplemental distribution is November seven so you have to buy before then and same thing is true for the December supplemental distributions as December 5th So you need to own the stock before those dates in order to get there.
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 32000.
Including buyout investments exit activity and associated net realized gains and.
We believe the team is in a great position to continue these successes through the remainder of the fiscal year ending March 31 2024.
I'll say this again I keep saying it and for those of you 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.
On the other income that we generate.
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're ready for you. So Tanya would you come in and tell them how they can ask a question.
Thank you we will now conduct a question and answer session. If you will.
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One moment, while we poll for our first question.
Our first question comes from Mickey <unk> with Ladenburg. Please proceed.
Yes, good morning, everyone.
I want to start by congratulating you on the sale of Counsel press, which was 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 east.
<unk> three up routes 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.
Hey, Mickey good. Thanks for the question, Yeah, you're right <unk> is a little bit out of the norm for us in that regard.
They do though they mainly provide a 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 <unk>.
<unk> coming out from our fracking situation you have times when these valves that they have will will basically.
The pressure gets too high and they sort of blow right and the way they've mechanically do it have done it for many many many years excuse me is literally have somebody take and go and turn a wrench in really the valve and it can be very dangerous, but these guys have developed over the last number of years is a system that sits on our skid.
But the size of a decent sized table if you will.
That actually is control electronically so.
Understands pressure building and has a relief and they have got some technology in the valve system itself that allows for I recall at some proprietary and as to the system. So they.
Are really in a position where as long as you're doing some of the fracking that's that business completely went to zero theyre going to have still have a very substantial opportunity. They rent their product. The payback literally is like less than four months.
And what they rent and they are building them as fast as they can make them. So that's a kind of a high level and youre 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.
And frankly, yes.
<unk> run by very experienced folks and we went out and brought in some very experienced <unk>.
Management to do 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.
That sounds really interesting Dave my other questions about <unk>.
Which is as you know in electrical manufacturer that can also be sick.
Cyclical, but in this company you are in the second lien.
So could you tell us the nature of the add on acquisition.
What's giving you comfort to be in the second lien in a cyclical business and also who owns the first lien that's ahead of you.
Okay. So SSE G.
One of the show around the same pages is 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 <unk>, which is based in Houston, and we acquired a company called climax, which is actually based in Portland.
The Oregon Red has operations frankly throughout the world.
<unk> by the way, we made an acquisition with them in France.
<unk> two 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.
We are very significant.
D a.
Sort of close to 20% EBITDA margins. So collectively they have a very broad suite of products.
Going to mainly.
Pipeline.
But both in terms of field operations as well as in the manufacturing process and again, a very strong management team and so we like we like the whole thing it's.
Strong we we put in a significant amount of money, it's a big investment for us.
Have significant ownership in.
And our general structure, even though we might have a second lien.
Lot of times that the first lien is going to be the lender of the bank, who we bring in as a revolving line of credit.
So that's not unusual frankly that we would have.
Someone in a first lien position above our our debt which looks.
The language might look more like a mezzanine or what have you, but again of course, we own a significant portion of the equity.
You know if that helps or not just to make sure I understand the first lien than as a bank revolver, probably with the accounts receivable and inventory as the collateral and you have claims on the rest of the company's assets is that correct, yes. Okay.
That's helpful. I appreciate it.
Again, that's not that's not unusual right for us.
There's certainly a bigger companies yes.
Sure I understand.
All my questions and again congratulations.
Great. Thanks, Brian that's a good great to seniors recently by the way thanks for coming.
Youre welcome. Thank you.
Next question Tanya.
Our next question comes from Bryce Rowe with B Riley. Please proceed.
Thanks, Good morning, and congratulations on the.
On the exit David.
Wanted to.
Wanted to first ask about.
The level of spillover Rachel you did hit on what spillover was as of the last.
At the end of last year can you give us an update as to where that sits now and if you can.
Could give it to us pro forma for the.
Dividends declared for the December quarter.
As well as this gain that you just you just realize.
Hi, Bryan. Thank you for your question.
That is correct. We I mentioned in my prepared remarks, we started the year with that $32 million about 90% share in spillover, we do not provide updates during the quarter, but I think you know given that we plan to declare regular monthly distribution of <unk>.
For months.
Coupled with the dollar.
That we declared supplemental and an additional 24 cents a supplemental you can see we have well made our way through that spillover that we started the year with I can tell you that that is the amount we are comfortable with rolling into into next year, but I cannot Unfortunately give you an update kind of mid quarter and where we are.
Understood figured I'd try.
Let's see.
And in terms of the.
The fair value marks within the portfolio and in the quarter here Dave.
And obviously they reflect the counsel press.
Exit, but also as you noted in your prepared remarks good.
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.
I'll take a shot and then certainly Rachel please feel free because.
I would say that.
All of the portfolio of companies. There are the majority of them were benefited by a little bit of up and multiple but 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 they were slightly off.
<unk> EBITDA wise slightly up with multiple and so there were some changes.
In probably six or 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 a just a valuation perspective, Rachel you got any you want to add to that.
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 depreciation at companies like educators at Brunswick bowling and.
Thats degree in SSG, which David you touched on earlier.
Okay. That's good color helpful. Yes, I don't yes, I think Brian again without going through each company per se what have you I don't I don't see any significant.
Change and as you know quarter to quarter month to month, just because again.
As you know is somewhat it gets magnified right. If you have seven or eight times multiple.
A modest change in EBITDA that multiple can can have a little bit of a.
A million Bucks as an example, I'm making that up.
A reduction in our evaluation on something that might be worth 30 plus million dollars I mean, so again I don't see any.
<unk>.
Concerns relative to the few that we did have on a slight decline valuation wise okay. Okay. That's helpful.
And then last one for me looking at the balance sheet structure.
Youre using the credit facility.
A bit more.
With portfolio growth.
If I heard you correctly $65 million into <unk> EG.
It would likely kind of call into using that even a bit more.
Unless you unless you access other sources of capital. So if you could just speak to your comfort with with the capital structure. At this point would you look to add more nodes like you've done here recently or are you comfortable with where the where the balance sheet structure is that the capital structure is at this point.
Yes, well again 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 counsel press et cetera, the new investment et cetera. So as of where we are today that certainly is available capital for anything net new.
<unk> that we planned to do we also obviously as I mentioned are generally we are in the market, sometimes looking to exit certain of our portfolio companies and is some of that might occur over the next say six months or so that capital. 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 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 airline to provide the ups and downs. So today I think we feel we're in good shape Rachael I completely agree Dave and I think one other thing to add to that is.
Continuing to use our ATM program.
Right, Yeah, certainly supplement, but we don't.
<unk> about anything from a from a.
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 will do it but right now we feel pretty good.
Thanks, a lot.
Question Tanya.
Okay.
Thank you once again to ask a question. Please press star one on your telephone keypad. Our next question comes from Derek <unk> with Jefferies. Please proceed.
Hi, Good morning, I Wonder if you could shed a little more light on the macro picture as we approach year end budget projections for 'twenty four or any sector is seeing more headwinds than others or are any sectors or end market seeing pushback.
And passing price through to customers. Thank you 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 is you know coming from the earlier increases in supply chain.
Transportation costs et cetera, we've seen that come down pretty significantly and thats been 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 cost 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 big issues, there, but clearly anticipating there could be a bit of a slowdown in some of the consumer type product area.
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.
One or two might see a little bit again.
Of a slowdown depending on what the sectors. They are in but again everything seems to be holding up fairly well and as we look forward.
Obviously with our portfolio companies were trying to be conservative there wanting to be sure that they maintain margin not just not just look to the top line. So all in all I think we feel we're in reasonable again, good shape going forward.
Got it that's all for me thank you.
Okay, Tania or any other questions.
Yeah.
There are no further questions in queue at this time, Mr. Gladstone I'd like to turn it back to you for closing comments.
Alright, Thank you all for calling in and there was a good quarter last quarter and this quarter that we're in and it looks like a super quarter. So we're all feeling good today and see you next time at the end of our comments.
Thank you this does conclude.
Concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.
Okay.
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