GAIN - NASDAQ

Greetings. Welcome to the Gladstone Investment First Quarter Earnings Call. Please note, that this conference is being recorded. I will now turn the conference over to David Gladstone, Chief Executive Officer. Mr. Gladstone, please go ahead.

All right. Thank you, Rob. Nice introduction. This is David Gladstone, Chairman of the Gladstone Investment. This is the first quarter for fiscal year 2023. It ended June 30, 2022, earnings and conference calls for shareholders and analysts. Gladstone investment is listed on NASDAQ under the trading symbol GAIN, and that's for the common stock. We have two preferred stocks. One is GAINN, and the other is GAIN

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. So 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 listed on our Forms 10-Q, 10-K and other documents we filed with the SEC. You can find these on the Investors page of our website, gladstoneinvestment.com. You can go to the SEC’s website at sec.gov. And 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 not 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 @GladstoneComps and on Facebook, keyword there is, The Gladstone Companies. Today’s call is an overview of our results through 6/30/22. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Let's turn it over to David Dullum, President of Gladstone Investment, Dave?

Hey, Mike, thanks very much and good morning, again to everyone on the call. And we are really feeling good and pleased to report that GAIN did produce very good results for this first quarter of the fiscal year '23. And that's following on from the previous pretty solid fourth quarter that we had -- fourth quarter fiscal year '22. These results I really believe reflect on the stability and the strength of our portfolio companies, given that we certainly have as a lot of other folks, these continuing challenges such as inflationary costs, and supply chain disruptions affecting a number of our portfolio companies. We actually ended this first quarter of 6/30/22 with adjusted NII of $0.25 per share. Total assets of about $743 million, which is up slightly from about $740 million at the 3/31/22 quarter. The good news to the quarter was quite busy. Certainly from a deal activity standpoint, we ended up making one new buyout investment of $21 million, which was right at the quarter and literally on June 30. And then subsequently, though, like the next day, as I say the first week of July, we made a further investment to that. So this was all planned. Further investment of about $39.1 million in the equity to acquire a company called Dema Plumbing, and we therefore created what is now a new portfolio company called Dema Mai. So even though some of that activity ended up literally at the right end of the quarter, the balance of it was at the immediate beginning of the following quarter. During the quarter, though, we also made an investment of about $6.4 million to -- for an add-on acquisition to another one of our existing portfolio companies. And that was planned because that's one of those sort of platform investments that we have, and we'll keep growing that platform. And then we also successfully exited one of our portfolio companies, meaning generating both capital gains and income. We did maintain our monthly distribution to shareholders at $0.075 or $0.90 per share on an annual basis. And we also paid a supplemental distribution of $0.12 per share, and that was in June of 2022. We certainly anticipate being able to continue funding these future supplemental distributions as we do recognize realized capital gains on the equity portion of our portfolios we make future exits. We are pleased that our buyout focus strategy continues successfully generating both income for these monthly distributions to shareholders as well as certainly the capital gains on the equity, which allows us to make these supplemental distributions. We do continue to experience improving valuations at most of our portfolio companies. And it really is important, I've said before, to note that the impact of the changes in equity value certainly relative to the debt security values of our portfolio is important because there's a high correlation to the overall portfolio value, given that approximately 27.1% of our assets at cost our equity securities, generally at most quarter ends. And that again, is part of our strategy. Our balance sheet continues to be strong, with very low leverage, a very positive liquidity position with significant availability on our credit facility with syndicate of banks. And as of 6/30, we had no outstanding balance on that credit facility. This allows us to continue providing support to our portfolio companies for add-on acquisitions and any interim financing if the need does arise, while obviously actively seeking new buyout opportunities and thereby growing our assets. Looking forward, there does seem to be some moderation of buyout values. The market though is still very competitive, deal flow and buyout opportunities are strong. And as a result, we have to remain patient and selective in our due diligence and our review process, while of course, obviously aggressively seeking new acquisitions, that's the day in and day out slog for our team. Subsequent to and very shortly after 6/30/22, we also invested $30 million and recapitalized our investment in one of our portfolio companies, which is called Horizon Facilities Services. So we did not exit this company. It's a very good business. We actually did this recapitalization. This will have a positive impact on our current quarter, and results recognize -- and it did result in recognizing dividend and success fee income of $4.8 million, a realized gain of $2.2 million, return of some preferred equity investment of $10.1 million. And thereby once the dust is settled increased our investment in Horizon to $57.7 million. So again, even though this occurred shortly after 6/30, the impact of what I just mentioned will be on the current quarter that we're in does not impact the current quarter just ended. So in summing up the quarter and looking forward, we believe the state of our portfolio is very good. We have a strong and liquid balance sheet and active level of buyout activity and continued prospect we believe a good earnings and distributions over the next year. So with that, I'm going to turn it over to our CFO, Rachael Easton, and she can give you a bit more detail. Rachel?

Thanks, Dave, and good morning, everyone. I'll start with a summary of the fund's operating performance for the quarter ended June 30, 2022. In the first quarter of the fiscal year 2023, we generated adjusted NII of $8.3 million or $0.25 per share. This was a decrease of $8.7 million -- from $8.7 million or $0.26 per share in the prior quarter. We continue to believe that adjusted net investment income which is net investment income exclusive of any capital gains based incentive fees is a useful and representative indicator of ongoing operations. Total investment income increased quarter-over-quarter to $19.3 million from $19.2 million, primarily due to an increase in dividend and success fee income in the current quarter. For comparative purposes, in the prior quarter, we did collect some past due interest income from a portfolio company that was previously on nonaccrual status. No such collection took place in the current quarter. Consistent with prior quarter at 6/30/2022, three of our portfolio companies were on nonaccrual status. We are working closely with those companies and currently anticipate one company is on track to be of nonaccrual in the near-term. Net expenses decreased by $0.6 million this quarter compared to the prior quarter, which was primarily driven by a decrease in accrued capital gains based incentive fees due to the net impact of realized and unrealized gains as required under U.S GAAP. And this was partially offset by an increase in estimated excise taxes. We believe maintaining liquidity and flexibility to support and grow our portfolio are key elements to our success. We have long-term capital in place and at 6/30 have the full availability under our credit facility. Our leverage is low with an asset coverage ratio at 6/30/2022 of 261.9%. Our NAV per share remained fairly consistent at $13.44 per share at 6/30. This is compared to $13.43 per share at 3/31/2022. The increase was primarily due to $12.5 million of unrealized appreciation of investments, $7.4 million of net investment income and $4.5 million of realized gains on investments. These amounts were partially offset by $12.3 million related to the reversal of unrealized appreciation on exits and a $11.5 million of distributions paid to common shareholders. Consistent with prior quarters, distributable bulk earnings to shareholders remain strong. Assuming the current monthly distribution run rate of $0.90 per share per year, and $0.12 per share in supplemental distributions that have been paid to date, noting that this only represents the amount paid during the first quarter of this fiscal year and may not be indicative of what is ultimately declared. Our fiscal year distributions would total $1.02 per common share, or yield about 6.9% using yesterday's closing price of $14.87. This covers my part of today's call. I'll send it back to you, David.

All right. Thank you very much. Very nice report Rachel and a good one from Dave and Michael. This information to our shareholders, that presentation combined with the 10-Q filed with the SEC yesterday should bring everybody up to date. We are in a great position to move forward. Team has reported solid results for the quarter ending including a new buyout investment and an exit. We believe the team is in great position to continue these successes through the remainder of our fiscal year ending March 31, 2023. As I say every time, we believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions, and supplemental distributions from potential capital gains and other income. The team hopes to continue to show you strong returns on the investment of our fund. Now let's have Rob come on, and we can get some questions from our analysts and shareholders.

Thank you, Mr. Gladstone. Thank you. We have a question coming from line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question. I'm sorry about the technical issue there. Please go ahead, sir.

Dave, can you hear me?

Yes, Mickey.

Yes, Mickey.

Good morning, everyone. I just want to start out by congratulating you, Dave, on a -- and your team on a really good quarter in what's been a pretty dismal quarter for the BDC sector, in general. Dave, I just have one high-level question, I wanted to ask you, given your long experience in this -- in the buyout sector, we're experiencing this volatility in the economic environment that we haven't seen in a long time. And I'm curious how you're seeing the pipeline develop and how buyers and potential sellers are behaving and whether that's going to be a tailwind for you, or is it going to be more of a headwind?

Yes, Mickey, that's a great question. It's interesting, I feel right now compared to let's say, roll the clock back 3, 4 months ago, when we all obviously believed and felt like we're in somewhat of a, either certainly recessionary type, or certainly somewhat of a slowdown, we certainly see that through some of our portfolio companies and all the stuff we read, and obviously, the inflationary costs. Having said that, we saw kind of an activity level that was ramping up on the buyout side. It feels right now based on our pipeline, and what we're looking at, like its slowing down a bit. But honestly, I will tell you that we have seen and we're working on three or four really good companies with add-on acquisitions. And frankly, we did not get there in the final analysis because of valuation. So that says that there are still folks out there, as I sort of alluded to, that are willing to pay up for companies at multiples that, truthfully, we feel are a little bit aggressive. Given all as you say, what I do think are clearly going to be headwinds for the results of most of the types of companies that we look at. And you don't have to have much of a headwind to help knock off a $1 million or $2 million of EBITDA off of a $10 million to $15 million EBITDA company and obviously have an impact on valuation, going forward and certainly returns. So I guess my way of saying it is I think that it's going to be a bit of a headwind. And I think I would expect that we might see some moderation in valuations going forward. And to the extent though, that, our model fits some of those kinds of deals. And because again, we bring our own capital, we have a bit more flexibility than a typical buyout fund that's going to go and raise the capital and the leverage from banks might get tighter, frankly, and obviously more expensive, that might give us a bit of an advantage. Is there a huge advantage? I'm not sure because I still think there is aggressiveness in the buyout funds, wanting to just get deals done truthfully. So long way of saying it. As of right now, I'd say it's more of a neutral to potentially a slight opportunity for us looking forward.

And Dave the follow-up, just think in terms of the sellers mentality. I'm curious whether all the volatility we're seeing is causing some of them to say, I'm at a certain age, I built this business, I'm tired of dealing with problems. Is this a catalyst or time to sell? And secondly, are they being realistic in terms of their ask, or the bid ask spread is still really, really wide? And it's tough to discover the right price to get a deal done.

Yes, I know, I think for family type businesses, and where you might have a couple of people that do own it, I think there is some of what you're saying. I think they look forward and see that, they've come off, obviously, in some companies really got a big boost from COVID, which is probably one of the biggest issues, right? You look at some of these companies, and you look at their history, you roll it back to '18 -- 2018. 2019, which we obviously do, because 20 -- at the end of '19, 2020 and even some at '21 is just not realistic, right? So where you find, I think your point that the contrast in bid ask spreads, to some degree comes from the negotiation over? Well, you've got this big COVID boost. And it's not going to be true and going forward in 2022. And by the way, what -- some of the games that these sellers are playing, and obviously, I don't mean this in a bad way and the investment banks who are working for them, obviously urge them, they do these adjustments to EBITDA and in pro forma and what they're trying to do is say, look, what, we have these expenses to do with increased container costs as an example, or shipping costs, and they try to build that back in to the EBITDA and say, you normalize that it's not as bad as it looks, right. So , yes, some effort on the seller side to get out currently. And then at the same time, the pushback from the buy side on those unrealistic kinds of numbers. So, yes, it's a bit of both of those. And that's why I say, I think going forward, the really good companies and better companies that have gone through this period was still hold up pretty well, will probably still get pretty good valuations, we have some of those ourselves, frankly. And we're kind of getting a sense of what it looks like from the buy side where we're on the sell side. And if the companies are solid, management's are good, they're still going to get a pretty decent relative valuation, because there is a demand out there for good companies to acquire.

Yes, I understand. Dave, my last question, I mean, the Fed to tackle inflation is just going to have to meaningfully impact the consumer given how much discretionary spending, or consumer spending in general represents as a percentage of our GDP. How exposes your portfolio to that end market and do you have any concerns about weakness in the consumer for the rest of this year and next year?

Yes, clearly we have a portion of our portfolio are consumer products. We call them specially consumer products. We have not seen a lot of effect right now. We are seeing a little bit of a slowdown for some of those companies that sell some product to people like Walmart, obviously Bed Bath and Beyond, which has its own set separate set of issues beyond just the consumer demand. Target, for instance, and so on. So, yes, I think we're going to see some slowdown of portfolios in general, the ones of ours that do sell into that category, we'll definitely see some slowdown. But fundamentally, they're still pretty strong, reasonably well diversified. And each one is kind of a unique set itself. So, yes, I think we'll definitely see slowdown and, I don't know I hope the Fed doesn't keep raising rates too much higher because I don't think that's the problem. I think the issues are more fundamental in supply chain and other costs that we should be trying to rein in not just drive up interest costs. That's a whole different topic.

Yes. Okay. That's it for me this morning. Again, congrats on a solid quarter. And appreciate your time this morning.

Yes, thank you. Appreciate your time.

Mickey, just one tag on to that. There are two groups of consumers out there. One, of course at the lower end with less money. And the middle class, I'll say is still got a really strong balance sheet, and they're using that to buy what they want. So there's two pieces in that and you see that in-housing, all the startup housings, the new houses. At the lower end, the demand has just evaporated there. In the middle side, there's still demand there for houses. So I'm not sure the numbers we're seeing out of one consumer is going to settle this. So anyway, Rob, can you come on in? Let's have the next question.

And Mr. Gladstone, we have a question from Mark Ferron, a Private Investor. Please go ahead, sir.

Good morning, guys. Fabulous quarter as always. I've got a question that goes back to your long-term stockholders. Has there been any progress on the IRS refunds of the deemed distributions of $1.52 a share. And I guess that was 2019. And then the second deemed distribution in 2020, although you qualified plans. Any insights into that? I know that I've been trying to work with Fidelity and I get zero response. Thank you,

Mark -- hey, Mark, this is Mike LiCalsi. As you know, we've spoken several times I have not heard anybody other than those at TD Ameritrade from getting those refunds from the IRS in IRA type of accounts. We have folks who work here and own shares in several different brokerage firm accounts, and no one has gotten refunds other than those who have their accounts at TD Ameritrade. But I can give you another call off offline to see if we can try to make some hey with Fidelity, but you're certainly not alone.

All right, buddy. Thank you and congratulations on a great quarter guys. Keep up the good work for us little guys. Thank you. Okay.

There are no further questions. There are no further questions Mr. Gladstone.

Okay. Well, thank you all for calling in, and we appreciate the support you've given us and keep the faith. We're going to continue to grow this thing, and Dave Dullum and Rachael has done a good job of keeping everybody informed. So, thank you very much, and we'll see you next quarter. That's the end of this call.