GLADSTONE INVESTMENT CORPORATION\DE(GAINZ)Q4 2024 法說會逐字稿

Greetings, and welcome to the Gladstone Investment Corporation Fourth Quarter and Year-End Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Okay. Thank you, Latoya. That's a very nice introduction, and good morning to you all. This is David Gladstone, Chairman of Gladstone Investment. This is the fourth quarter and fiscal year-end March 31, 2024, earnings conference call for shareholders and analysts of Gladstone Investment. We are listed on NASDAQ with the trading symbol GAIN for the common stock, and we have 3 preferred stocks GAININ, GAINZ, and GAINL, along with 3 other registered notes. I'll turn it over now to Michael LiCalsi, our General Counsel, who will provide some important warnings. Go ahead, Mike.

Thanks, David. Good morning, everybody. Today's call may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties, along with other factors, even though they're based on our current plans, which we believe to be reasonable. 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 risk factors listed on our Forms 10-Q, 10-K, and other documents we filed with the SEC. These can be found on the Investors page of our website, gladstoneinvestment.com, or on the SEC's website. 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 not a guarantee of any future results. Also, take this opportunity to visit our website; you can sign up for our email notification service there, and find us on Twitter @GladstoneComps and on Facebook at Gladstone Companies. Today's call is simply an overview of our results through March 31, 2024, so we ask you to review our press release and Form 10-K, both issued yesterday for more detailed information.

Mike, thanks very much, and good morning to everyone on the call. Obviously, we are very pleased that we're able to report that GAIN produced very good results for the fourth quarter and for the fiscal year ending March 31, 2024, which follows on the previous solid first three quarters we had for this fiscal year. For the fiscal year, which ended 3/31/24, we generated adjusted NII of $1 per share and increased the total fair value of our portfolio to $921 million, significantly up from $754 million at the prior year-end. This growth is mainly due to increasing our assets through new buyout activity and incremental financings for add-ons to existing portfolio companies. However, it was reduced by one successful exit where we generated a significant realized capital gain of $43.5 million. For fiscal year '24, to reach that net number, we invested a total of $184 million, up from $134 million in the prior year.

Approximately $61 million was invested in 2 new buyouts, while an additional $123 million was allocated for add-on investments or recapitalization events at some existing portfolio companies. For clarification, these recap events were not for negative reasons; they were actually opportunities for us to take some capital gains, generate a bit of income, and still maintain a significant ownership interest in those particular portfolio companies. We were able to source add-on opportunities that allowed us to increase our investment in companies where we know the management teams well and have a strong belief in their future. We expect to continue pursuing these add-on opportunities. During the year, we maintained our monthly distribution to shareholders at $0.08 per share or $0.96 per share on an annual basis. Additionally, we paid a total of $1.24 per share in supplemental distributions, resulting in aggregate annual distributions to shareholders of $2.20 per share for the fiscal year.

These substantial supplemental distributions, which we've been building on over the years, demonstrate our success with the buyout strategy, allowing us to reward shareholders with these distributions from realized capital gains on exits, alongside the regular income from monthly distributions. Since inception in 2005, we have invested in 58 buyout portfolio companies for an aggregate of approximately $1.7 billion, exiting 31 of these companies, resulting in our total assets growing to the $921 million previously mentioned and generating around $290 million in net realized gains and about $42 million in other income on these exits. Our strong balance sheet and low leverage will be discussed in detail by Rachael in a moment. We will continue supporting our portfolio companies with interim financing if needed, while growing assets through new buyouts. Looking at the outlook, deal flow is strong, and the backlog of new opportunities has been building.

We've received insights from investment bankers indicating that backlogs are increasing. We're actively working on some new buyout deals, including add-ons, currently in various stages of our buyout process. We expect to close something substantial within the next three months. The conversation around liquidity is favorable, and the competitive environment is strong. As we know, we have been conservative in our approach over the years, and we intend to maintain that stance. While we will aggressively compete for new acquisitions, we will carefully assess the values we are willing to pay. Having a strong portfolio allows us to make these careful decisions. In summary, we believe that the state of our portfolio is solid, with a liquid balance sheet and active buyout activity, along with good earnings prospects for the next year.

Thank you, David, and good morning to everyone on the call. Reviewing our operational performance, we finished fiscal year 2024 strong, generating total investment income of $87.3 million, an increase from $81.5 million in the prior fiscal year. This growth was driven by a higher weighted average yield on our debt investments at 14.4% for the year, as well as the interest income from new investments made during the year. This increase in interest income was partially offset by lower dividend and success fee incomes, which can be variable in timing and due to amounts that did not recur in the current year. Additionally, we ended the year with adjusted net investment income of $34.5 million or $1 per share, which is a slight decrease from $36.7 million or $1.10 per share in the previous fiscal year, but still sufficient to cover our annual regular monthly distribution of $0.96 per share. For the fourth quarter of FY '24, we generated total investment income of $23.6 million, compared to $23.1 million in the previous quarter, mainly due to an increase in success fee income.

The net expenses for the fourth quarter were $18.3 million, up from $13.3 million in the prior quarter, primarily due to a $4.1 million increase in accrued capital gains-based incentive fees. This led to net investment income for the quarter of $5.3 million compared to $9.7 million in the prior quarter. The adjusted net investment income for the quarter was $8.8 million or $0.24 per share, a slight decrease from $9.1 million or $0.26 per share in the prior quarter. We believe that adjusted net investment income is a useful indicator of our ongoing operations. During the quarter ended March 31, 2024, the number of portfolio companies on nonaccrual dropped to 2 companies from 3 following the dissolution of one investment. We will continue working with the remaining 2 companies to regain accrual status when possible. Maintaining liquidity and flexibility to support and grow our portfolio is key to our success.

With our 3 public note issuances, we have secured long-term fixed-rate capital. As of yesterday's release, we had $135 million available on our $200 million credit facility. Furthermore, we successfully raised approximately $19 million in net proceeds from our common stock ATM program, selling over 1.3 million shares of our common stock, with all shares being accretive and above NAV. Our leverage remains low, with an asset coverage ratio as of March 31, 2024, of 219%, providing ample cushion above the required 150% coverage. Our NAV increased to $13.43 per share compared to $13.01 per share in the prior quarter, primarily driven by $0.88 per share of net unrealized depreciation of investments and $0.15 of net investment income, partially offset by $0.41 per share of realized losses on investments and $0.24 per share of distributions paid to common shareholders during the quarter. Consistent with prior quarters, distributable book earnings to shareholders remains strong.

We ended the fiscal year with $20.1 million or $0.55 per share in spillover, while our monthly distribution remains consistent at $0.08 per share for an annual rate of $0.96 per share. During the fiscal year, we distributed an aggregate total of $1.24 per share in supplemental distributions. Therefore, we paid an overall $2.20 per share in regular monthly and supplemental distributions during the fiscal year, yielding about 15.5% based on yesterday's closing price of $14.16.

Thank you, Rachael, for your comprehensive report, and thank you to Dave and Michael for their insights. The information shared here, along with our 10-K filed with the SEC yesterday, should bring shareholders up to date. The team has delivered solid results for the quarter and the year ending March 31, 2024, highlighting our exit activities and realized gains. We believe the team is well-positioned to continue this success into the next fiscal year, which is less than a year away. We consider Gladstone Investment an attractive option for investors seeking both monthly distributions and potential supplemental distributions from capital gains. We hope to continue delivering strong returns moving forward.

Our first question comes from Mickey Schleien with Ladenburg Thalmann.

Dave, your fund reported a very nice unrealized gain of $0.88 per share apart from the reversal for the Mountain. Can you highlight what drove that? And are there any themes that could help us understand the appreciation?

Sure. Mickey, I'll let Rachael respond first, and then I'll provide my thoughts.

Sounds great. Looking at the portfolio as a whole, the unrealized depreciation is primarily due to performance at many of the portfolio companies. We observed decreased multiples across the portfolio, which was offset by decreased performance at several companies. However, it's largely about performance driving the unrealized depreciation. The reversal of unrealized depreciation in the Mountain also contributed as we realized that this quarter with the final dissolution. Overall, the performance of many of our companies played a key role.

Yes. As we reported in our K, where we broke down the individual portfolio companies for the year ended, you'll notice many appreciated quite significantly. There are a few that are down by 1 million here and a couple of million there, but most are performing well. Based on my personal involvement with these companies, I'm confident that the majority of those slightly down are improving and moving in the right direction. However, as Rachael indicated, some issues relate to EBITDA being down in some cases, while multiples have also been affected. Overall, there are no major problems; just a solid performance. Many of these companies are showing strong individual net gains.

Thanks for that, Dave. Given what you've outlined with strong performers in the portfolio, it's reasonable to assume you'll be harvesting some of those unrealized gains.

You raise valid points, Mickey. When we consider exiting a business, much of it is driven by the management teams we work with. If they express the need for liquidity or feel the time is right, we listen to their insights. However, our structure allows us flexibility in holding these companies. If we exit a company with a good realized gain, we face the challenge of replacing it. Therefore, we approach exits cautiously. We need to consider the call we get from investment bankers and the reinvestment decision carefully. While generating realized gains is important, we also want to maintain our income level from monthly distributions.

That's really enlightening, Dave. Lastly, could you provide an update on Edge and Hobbs, both of which have had some challenges?

Certainly. Starting with Hobbs, as addressed in our last meeting, we have a capable management team onboard. They experienced rapid growth but faced issues related to some fixed-price contracts, resulting in losses on a few projects. We believe we've resolved many of these issues, and although revenue is currently lower compared to a year ago, the margin and EBITDA are improving. We're optimistic about returning to accrual status in the near future. On the other hand, Edge has some components we’re actively working on, but I can't provide further details at this time. However, we are making changes and hope to see some positive results soon.

Congratulations to you and your team on ending a successful fiscal year for Gladstone.

Thank you, Mickey. I appreciate it, and I hope to see you soon.

We have a question from Bryce Rowe with B. Riley.

David, can you expand on your earlier comments regarding the volume and quality of opportunities? What specifically seems less attractive?

Thanks, Bryce. I'm glad you could join us. The investment banking side has seen companies that were on hold towards the end of last year beginning to come back. We're seeing several new deals and need to be selective on which ones we pursue. The opportunities we're interested in are generally around 6x to 7.5x EBITDA. However, we often face competition where offers are around 8x to 9x, which makes us reconsider. While many of these companies look good, we find it challenging to justify such multiples because of inconsistencies in their size or performance.

Additionally, we've noticed a rise in independent sponsors entering the market, leading to inflated valuations on deals we may not trust or view as sustainable. Inflation is also playing a role in potential capital gains; as values can go up in the long term.

Are there any further questions in the queue? If not, I will turn it back for closing comments.

Thank you, Latoya. It seems you all didn’t have enough questions this time. Please work on that before our next call. Thank you very much for attending, and that concludes today's conference call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.