Q2 2025 Gladstone Capital Corp Earnings Call
Speaker Change: Greetings. Welcome to Gladstone Capital Corporation, 2nd quarter earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded. This now my pleasure to introduce Mr. David Gladstone, Chief Executive Officer. Thank you, sorry you may begin.
Speaker Change: Well, thank you, Sherry. This is David Gladstone Chairman and this is the earnings conference call for Gladstone Capital.
with a quarter ending March 31st, 2025.
Speaker Change: Thank you for calling in. We always have to get talk to our shareholders and analysts who follow us and welcome the opportunity to provide an update on our company in.
Speaker Change: Maybe give a little information about where we're going and now we'll start out with Eric Helmut. He's standing in for Michael LaCalsi.
Speaker Change: on our general counsel side and I'm going to give us some information about forward-looking
Speaker Change: Thank you, David, and good morning. Today's report aimed forward looking at statements of the Security's Act of 1933, Security's Exchange Act of 1934, including those regarding our future performance.
Speaker Change: These forward-looking statements involve certain risks and uncertainties that are based upon our current plans which we believe to be reasonable.
Speaker Change: Manufacturers may cause our actual results to be materially different from many future results expressed or implied by these forward-looking statements, including all risk factors in our forms. Thank you, Tenkei, and other documents that we file with the SEC.
Speaker Change: Those can be found on the Investor Relations page of our website www.glets.capital.com, where you can also sign up for our email notification service or on the SEC's website at www.suc.gov.
Speaker Change: We undertake no obligation to publicly update or revise any of these four-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
Speaker Change: Today is called an overview of our results, so we asked you review our press release and form 10Q issued yesterday for more detailed information. Again, those can be found on the Investors page of our website.
Speaker Change: Now I'll turn the call over to Gladstone Capital's president Bob Marcotte. Thank you Eric. Good morning and thank you all for dialing in this morning. I'll cover the highlights of the quarter ended March 31st and a few subsequent events before concluding with some comments on our near term outlook for the company.
Speaker Change: Beginning with last quarter's results, fundings totaled 46 million including two new private equity sponsored investments in the semi-conductor infrastructure and food products sectors.
Speaker Change: Exit and Repayments remained elevated at $81 million as we exited two investments as anticipated so net originations were negative $35 million.
Speaker Change: However, excluding the equity investment proceeds in the period are yielding debt investments declined by 20 million compared to the prior quarter end.
Interesting come for the period was unchanged to 21.3 million.
Speaker Change: As the 6.3% increase in the average earning assets was offset by the decline in the weighted average portfolio yield which fell to 12.6% for the quarter due primarily to the 36 basis point decline in the average sofa rates for the period.
Speaker Change: Interest in financing costs rose 5.4% with higher average line borrowings.
Speaker Change: Net Management fees declined slightly and included a $1.4 million in centipede credit and lower professional fees and other expenses declined by a half million, leading to net investment income of $11.2 million for the period.
Speaker Change: Net-realized gains came in at $7.7 million for the quarter with the equity investment exits, and Net-realized and unrealized depreciation on the balance of the portfolio was $2.2 million bringing our ROE to 18.6% for the TTM period.
Speaker Change: With respect to the portfolio, the portfolio turnover for the period did not have an material impact on our investment mix.
Speaker Change: As our senior debt portfolio represented 71% of the fair value of the portfolio and total debt holdings were just over 90% of the portfolio fair value.
Speaker Change: As of the end of the quarter, a non-earning asset investments were unchanged at four companies totaling 53.7 million at cost, or 29.8 million, or 4.3% of assets at fair value.
Speaker Change: The bulk of the realized appreciation for the quarter was led by a $4.7 million gain on our equity, co-investment, and so-called, which was sold to a strategic buyer shortly after the end of the quarter.
Speaker Change: The net unrealized appreciation for the period was concentrated in three investments.
Speaker Change: in the lab testing, circuit board manufacturing, and precision metal product sectors, which experienced softer Q4 results. However, following these situations closely, they expect each to see improving results over the balance of 2025.
Speaker Change: Following the end of the quarter, we exited a large senior debt investment of 42 million in space co, otherwise known as Carmen Aerospace, following the company's IPO and debt recapitalization.
Speaker Change: Also, as expected, we completed the restructuring of our investment in EG's and most of our exposures has been restored to an earning asset status.
Speaker Change: And reflecting on our outlook for the next quarter or two, I'd like to leave you a couple of comments.
Speaker Change: We've absorbed much of the anticipated surge in portfolio liquidity events, which if you're keeping a tally has totaled 289 million since 930, roughly 36% of the portfolio that's been
Speaker Change: That said, our current pipeline expected fundings is very healthy and should easily outpace anticipated to repay the repayments to put us back on track to grow our portfolio.
Speaker Change: Given some of the recent market volatility, we expect the certainty of private credit solution approach to the market.
Speaker Change: and in fact we're in the process of closing several deals with new sponsors.
Speaker Change: In addition to recycling the wave of investment exits of the last couple of quarters, we expect to continue to benefit from our incumbent position as the originator, lead lender, and in some case equity co-investor in the newer vintage growth going to business closed recently as they look to grow through acquisition or expansion.
and support the appreciation of their equity position.
Speaker Change: We ended the quarter with a conservative leverage position with debt at 62.5% of NAV, and the bulk of our bank credit facility available to support the growth of our earning assets and shareholder distributions in the coming year. And now I'd like to turn the call to Nicole Schaltenbrand, Gladstone Capital CFO to provide some of the details on the results of the quarter.
Nicole Schaltenbrand: Thanks Bob, good morning. During the March quarter, total interest income was unchanged at 21.3 million as the weighted average yield on our intersparing portfolio declined from 13.1% to 12.6%.
Nicole Schaltenbrand: Mainly with the 36 basis blade decline in the average sofa rate from last quarter, which was offset by a 6.3% increase in average earning assets for the period.
Nicole Schaltenbrand: Total investment income was 21.6 million, which was down 400,000 or 1.8% from last quarter, with reduced level fees and other income for the quarter.
Nicole Schaltenbrand: Total expenses declined 400,000 quarter over quarter due to lower professional fees, other expenses, and net management fees.
Nicole Schaltenbrand: This was slightly offset by a 300,000 increase in interest expenses with higher average bank
Nicole Schaltenbrand: Net investing income from the quarter was unchanged at 11.2 million or 50 cents per share.
Nicole Schaltenbrand: that met increasing net assets resulting from operations was 8.8 million or 39 cents per share for the quarter ended March 31st, as impacted by the realized and unrealized valuation depreciation covered by bomb earlier.
Nicole Schaltenbrand: Moving over to the balance sheet, as of March 31st, total assets declined to $777 million, consisting of $763 million in investments at fair value and $14 million in cash and other assets.
Nicole Schaltenbrand: My ability to climb 37 million to 299 million as of March 31 and consists primarily of 255 million of senior notes and as of the end of the quarter advances under our 294 million line of credit of 25.1 million.
Nicole Schaltenbrand: As of March 31, net assets declined $2.3 million or $478 million from the prior quarter end.
Nicole Schaltenbrand: with the unrealized appreciation and now for Schaar fell 10 cents from 2151 to 2141 as of March 31st.
Nicole Schaltenbrand: Our leverage as of the end of the quarter declined to 62.5% of net assets with the reduced bank
Nicole Schaltenbrand: After the end of the quarter, we received 42 million from the payoff of our debt investment in the space go as covered by law.
Nicole Schaltenbrand: With respect to distributions, monthly distributions for May and June will be 16 and a half cents per common share, which is an annual run rate of $1.98 per share. The board will meet in July to determine the monthly distribution to common stockholders for the following quarter.
Nicole Schaltenbrand: At the current distribution rate for our common stock and with the common stock price at about 25, 26th for a share yesterday, the distribution run rate is now producing a yield of about 7.8%.
And now I'll turn it back to David to conclude. Thank you, Nicole. Bob and Eric and Nicole, you all did a great job in forming our stockholders and the analysts that follow us.
David Gladstone: How are we doing? In summary, I think it was another solid quarter for Gladstone Capital. This team maintains its...
David Gladstone: Mayor Holt Porfolio and as well as putting new deals on the boats.
David Gladstone: also managing leverage as well as pricing disciplines on each thing that we close.
David Gladstone: Couple of good deals, that 46 million that Bob mentioned, I think those are going to be great performance for us and a good backlog as well.
David Gladstone: The company has a very, very strong balance sheet when compared with others in the industry.
A healthy backlog of deals.
David Gladstone: We think we know how to price and we're doing a good job. So in summary, we're going to keep up the good work and keep going. The company continues to stick with its strategy of investing in growth oriented, the lower middle market businesses with good management.
Speaker Change: and it's a key to the future of this company. Any of these investments?
David Gladstone: are in support of mid-sized private equity funds that are doing buyouts or just needing to grow an existing portfolio company that they have, and they are looking for experience partners to support the acquisitions and growth in the future.
Speaker Change: So, we follow along and have some really good people that we work with.
Speaker Change: This gives us an opportunity to make attractive interest paying loans and small equity investments along the way and support the ongoing commitment to pay cash distributions to our stockholders.
Speaker Change: That's first and foremost in our mind of keeping those dividends going out to shareholders.
Speaker Change: and now operator, if you'll come on and tell our callers how they can ask some questions about the company.
Speaker Change: Yes, of course. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tool will indicate your light is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue and for a participant choosing speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment, will we pull for questions?
Speaker Change: Our first question is from Mickey Schleien, with a lot of work done, and please proceed.
Mickey Schleen: Yes, good morning, everyone. Bob, I want to start by asking you how do you see the portfolio and NAV performing with both the broadly syndicated loan and private credit spreads widening in April .
Mickey Schleen: You know, most of the widening has happened at the more competitive edge of the market. You know, the upper middle market or folio spreads had really compressed.
Mickey Schleen: Frankly, beyond what I think the returns would support as indications of deals clearing in the low fives or high fours, spreads over, over so far, and given that the
Capital Market Spreads, it backed up somewhere between 60 and 100 basis points.
Mickey Schleen: That just didn't work anymore so if that end to the market that I think is backed up more from our perspective
Mickey Schleen: The deals we closed last quarter averaged north of 7 over, so we were a couple hundred basis points wide of the market to begin with, an average leverage continues to be well under
Mickey Schleen: We're not expecting much of a degradation and value given the spreads that we currently have or the leverage profile of our portfolio.
Mickey Schleen: and frankly, I'm more broadly speaking with the exception of a couple of names that I cited. We're still looking at an average yield that's well-morth of most of our BDC peers and an average level that's significantly lower.
Mickey Schleen: I don't think we're going to see quite the same degradation or marks on a value perspective that I think you're expecting from some of the other large or participants in market.
Speaker Change: That's good to hear Bob. I appreciate that. A couple of questions on tariffs. How do you see a seedling and RPM freight performing as tariffs are starting to impact shipping volumes?
Good question and very insightful targets.
Speaker Change: Generally speaking, we've been, you know, obviously concerned about, you know, what this is going to mean Um,
Speaker Change: It's actually turned out to be somewhat different than we expected.
Speaker Change: Customer-centric focuses, very responsive and able to change and evolve their operations, frankly, are almost advantaged in this marketplace.
So in the case of...
Speaker Change: They are able to morph their operations, grow their domestic capacity and take on things that they might have been producing in China that they now can produce here and the customers are willing to accept a higher price as a result. So what we're finding is
Speaker Change: Service providers that can help them deal with the shift and so we are seeing even in some of our other auto related businesses, there's one other of note.
Speaker Change: We're seeing big guys call us and say, can you help us? Can you take on this business? It's actually an advantage right now for some of these businesses because they have capacity and they're focused on this business.
Speaker Change: and the big guys have a hard time adjusting to the changes as quickly as the market's shifting.
Speaker Change: Well, that's really welcome news and a little surprising. How about within the manufacturing segment of the portfolio, could you give us a sense of how much direct exposure there is there to tariffs?
Um.
Speaker Change: I'll use two examples. One, we closed a dental labs business last year, a very well-run company, a number of manufacturing facilities in the US.
Speaker Change: It was a business that was building up their domestic manufacturing capacity in the industry that traditionally has outsourced some of that production to China.
Speaker Change: because this company had manufacturing capacity, was focused on domestic, was growing their business, and is proportionally greater
Speaker Change: but comparatively are doing pretty well. So from a manufacturing perspective, given the fact that we predominantly focus on domestic operations and we're very supportive of adding capacity because of the accreted benefits and margin that that generates,
Speaker Change: That business is doing very well and will likely acquire other operators to continue to scale.
Speaker Change: in terms of other manufacturing businesses. Again, it's the same kind of situation. Everyone is trying to find ways to manufacture things domestically to grow their business.
Speaker Change: and our plants and our backing of some of these capabilities are going to add additional customers as part of the process.
Speaker Change: It's just, it's going to be a lift. I think the only challenge we see on the tariff side is if we are importing finish goods.
We are hopefully equally exposed to that.
Speaker Change: If all of the industry is importing offshore, using an example, not relative to our portfolio, but if everybody is importing sneakers,
Speaker Change: Everybody is going to have the same issue with respect to pricing, the bigger question is going to be how much is the market going to contract when the pricing of those products has to change.
Speaker Change: is a relatively small cogs component. The tariff is not going to make as meaningful a difference in the purchase price for that product.
Speaker Change: focused on domestic, focused on high margin, it's not going to be as dramatic as it gets to the retail price and the impact for the underlying market.
Speaker Change: What that means is relative to recession, what that means is relative to overall, not clear but we're feeling at the moment in a relatively safe spot on the whole tariff question.
Speaker Change: That's excellent. One last question for me, just a housekeeping question. Is the EG's restructuring going to generate a realized loss for you?
as you will note our...
Mark Downs on that one last quarter were fairly meaningful.
Speaker Change: and we anticipated where it was likely going to go. The business is performing pretty well so it's going to be a very small loss. We will have a significant equity investment on a go-forward basis but very minor on the loss.
Speaker Change: and I think you said the debt's going back on the cruel if I heard correctly.
Yes.
Speaker Change: Okay, I appreciate it. That's it for me this morning. Thank you very much.
Speaker Change: Thanks, Mickey. Okay, next question. Our next question is from Eric Swick with Lucid Capital Markets, please proceed.
Eric Swick: Thanks and good morning everyone. I wanted to start with a question. I guess maybe if you could provide an update on the pipeline as it stands today and kind of particularly interested in that the size today relative to maybe three months ago, I'm curious if the volatility and uncertainties of markets have impacted that and also curious about the mix between new and add on opportunities. Thank you very much.
Speaker Change: Thanks for calling in. In terms of the backlog, we're probably as healthy in the backlog as we've been in quite some time.
Speaker Change: You know, order of magnitude that could be the 100 to 150 million of total aggregate volume. If you look back at what we've been closing on a quarterly basis.
You know, the last couple of quarters, I think.
Speaker Change: Part of the December surge. Q1 is always a light quarter, which is obviously why the numbers were down a bit.
in a healthy quarter.
Speaker Change: I think we're in pretty good stead to hit that kind of benchmark this quarter.
Speaker Change: The organic growth of the existing portfolios is a little bit more modest. There are a couple of add-ons that we are currently tracking, but I would probably say right now it's probably 80% new.
Speaker Change: You know, I would expect that add-ons to grow over time, but you know it always takes a little while before they get past the first.
Speaker Change: Some of the new vintage assets are probably still a little early before they're going to take on some of the expansion opportunities.
Does that help?
Yes, that was great. Thank you
Speaker Change: Next switching gears a little bit. You've addressed kind of tariffs quite a bit. I'm curious if you have any portfolio companies that have exposure to
Government contracts, just with regard to, you know, those cuts reduction the size and employees of some government agencies. Do you have any exposure there? And so, you know, how what actions do you take a, you know, mitigate or, you know, kind of work work through those?
Um, um,
Speaker Change: Let me quickly run through it. The areas where things are getting hurt most would be services or staffing oriented contract or businesses.
And we really don't play in that sector.
Speaker Change: That's not in a tends to be a relatively low leverage situation.
Speaker Change: We don't have many of those. The government contracts that we would see would probably come through some of the defense oriented supplier businesses.
Speaker Change: So we're really not seeing anything on that side. The last piece that I would say is we do have some exposure in the healthcare world, Medicare and CMS are still a big player in the overall healthcare field.
Speaker Change: but at this point, you know, no read on what that's likely to mean or whether there's any fundamental changes and obviously most of our healthcare related businesses are modest in their margins. And so at this point,
Speaker Change: We haven't seen much coming out of those contract or terminations.
Speaker Change: That's helpful. Thank you. And last one for me, you mentioned the unrealized gains in the quarter were primarily driven by
Speaker Change: 3 investments, but what did you expect, you know, improvements in their operating results over the rest of the year? Just curious kind of what you're seeing if it's company specific for for each of those three just given, you know, I think there's some concern that the economy's weakening, weakening. So, you know, curious, what drives your confidence in the improving results there?
Speaker Change: A lot of hard work and focus on what's going on. I would say, you know,
Often times, these smaller businesses
Speaker Change: You know, face a couple of key issues. One is they have customer concentrations.
Speaker Change: So if they lose a customer, it will take some time to replace a customer. They obviously have production capacity, they have efficiencies, they have capabilities, but replacing a customer can be fairly meaningful. And that was probably a big piece of a couple of those deals. Secondly,
There's also, you know,
The Kaisley Management Turnovers
Speaker Change: adding sales resources as part of the equation to continue to get past the J-curve in the investment in some of these businesses.
Speaker Change: There are some management turnover changes and supplements happening in the couple of those portfolio companies and then we look at you know investments. Us as well as others coming in to continue to invest and grow at the business.
Speaker Change: Most of the business that we focus on have a long-term growth opportunity. They just may not have had a very good quarter relative to that long-term growth opportunity. [inaudible]
Speaker Change: So, based upon the trend lines of the three businesses, we feel very good that they are attacking those three issues.
Speaker Change: The Outlook is positive. They are currently servicing all of their deaths and there is a reason for their being and their growth opportunities on the horizon.
Speaker Change: Those are the three factors that I would focus on and I don't see in any of those three cases.
Speaker Change: tariffs or near-term economic factors fundamentally changed them. I mean, you think about precision manufacturing, my earlier comments, I think, cold. And you think about...
Speaker Change: Circuit Board Manufacturing, it's all coming back from Asia and they are currently looking at a number of additional programs to add.
and in terms of lab testing.
Speaker Change: There are still stresses that come from the market and drug treatment facilities that's not going away either. So those three facets I think have an underpinning to the long-term and broke the profile.
Speaker Change: I appreciate that the commentary there looks very helpful. Thanks for taking my questions.
Thank you for calling in. Okay, next question.
Speaker Change: Our next question is from Heli Sheath with Raymond James, please proceed.
Heli Sheath: I wish I could say there's been a, you know, fundamental shift. I think, you know, we have to look away the market is evolving and where the opportunities are.
Heli Sheath: I think we've always had some health care. I think we've always had precision manufacturing because of the customer relationships and the revenue visibility. I don't think that there's really been a fundamental change. I think more recently we've probably done a little bit more in the way of services.
. . . . .
Heli Sheath: I think that's a more active marketplace. We are also seeing, you know, ships in the marketplace, not that we're necessarily focused on them, but there's in the law a lot of...
Heli Sheath: But at this point, that's not a primary focus for us.
Heli Sheath: We are looking for revenue visibility and long-term sustainability and some of those contracting businesses can be short cycle type businesses where you may not have that long-term view and the competitive barriers may be more limited so
Heli Sheath: I think we're seeing some of that change, but it's not affecting our portfolio nor is it affected our strategy at this current time.
Speaker Change: Understood, thanks. And then just one more quick one for me. Where do you see leverage going for the rest of the year? Do you still expect to move the leverage up in the last two quarters of this year despite the level of repayment activities as far?
Speaker Change: We're working as hard as we can to get it back up again. We really feel like we've gotten past.
Speaker Change: really feel like we need increased leverage. Ultimately, the company needs to get towards a billion dollars of total assets under management for a variety of reasons.
Speaker Change: And I think we have the equity base to support it. We just don't at this point have the assets and the leverage profile that that are going to get us there. And so we're going to work as hard as we can to get to those.
without sacrificing our yield and our leverage, our leverage disciplines.
Speaker Change: It's hard to make it up in Q1, that's not a big quarter for us [inaudible]
Speaker Change: but we think over the balance of the year that we can do that. Obviously the gulf between where we are today and 90 to 110, which was our target, is gotten further and further away. You know, if we could find...
Speaker Change: If we could find 150 to 200 million of net originations and get our leverage up to 90 to 100 percent I'd love to do it but it's probably going to be two or three quarters before we get up to that range.
Speaker Change: Just looking at it from what the government is doing, too, is that ensuring which was announced at these two years ago, we started to move away in all of our business.
Speaker Change: from things that were manufactured in China and other places. We had one shoe company. I remember was very nice company, but they were making all their shoes in big time.
Speaker Change: And I turned that one down because I didn't want to be against what's going on in the marketplace that is all this on shoring as they're going through now.
Speaker Change: that's right into what we were thinking then as well. So I think we'll make a meaningful increase over the next six months.
But that's the only big change going on.
That makes sense. Thank you. I appreciate the power.
Thank you.
Speaker Change: There are no further questions. I would like to hand the conference back over to Mr. Gladstone for closing remarks.
David Gladstone: Well, we had another good quarter and we appreciate all of you coughing in and we'll see you next quarter. That's the end of this message.
David, Michael LiCalsi, Unknown Executive,
David Gladstone: Thank you. We will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
Michael LiCalsi, Unknown Executive, Nicole Schaltenbrand, Michael LiCalsi, Unknown Executive