Gladstone Investment Corporation\De Q4 FY2025 Earnings Call

Greetings and welcome to Gladstone Investment Corporation's Fourth Quarter and Year-End Earnings Conference Call. All participants are currently in listen-only mode, and a question-and-answer session will take place after the formal presentation. This conference is being recorded. I am pleased to introduce your host, David Gladstone, Chief Executive Officer. Thank you. Please go ahead.

Well, thank you, Donna, and good morning to everybody out there who is listening to this. This is David Gladstone, Chairman of Gladstone Investment. This is the earnings conference call for the fourth quarter and fiscal year end March 31st, 2025 for shareholders and analysts of Gladstone Investment listed on NASDAQ under the trading symbol GAIN or capital gains for us for our common stock. And then we have some preferred stock GAINN and GAINZ and GAINL and GAINI. And these are the four registered notes that we have. And thank you all for calling in. We're always happy to provide updates to our shareholders and analysts and provide our views on the current business environment. The two goals for this call are to help you understand what happened and also give you some current views on what I think the future will be like. Now we hear from our General Counsel and Secretary, Michael LiCalsi. Mike?

Yes, that's right. Speaking of the future, 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, although 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 that we have in our 10-Q, 10-K and other documents we file with the SEC. You can find them all on the investors page of our website that's gladstoneinvestment.com or you can even find them on the SEC's website which is sec.gov. Now 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 any past performance is never a guarantee of future results. We ask that you visit our website, once again it's gladstoneinvestment.com, sign up for email notification service while you're there. You can also find us on Twitter, keyword there is GladstoneComps and on Facebook the keyword is The Gladstone Companies. And today’s call is an overview of our annual results through March 31, 2025. So please review our press release and Form 10-K for more detailed information. With that, I'll turn it over to Dave Dullum, he's the President of Gladstone Investment. Dave?

Hey, Mike, thanks very much, and good morning to everyone. We are again pleased to report that GAIN did produce very positive results for the fourth quarter and the fiscal year ended March 31, 2025. For the fiscal year, we generated adjusted net investment income of $0.97 per share, which is covering our $0.96 per share annual dividend. We also increased the total fair value of our portfolio at March 31, 2025, to $979 million, which is up from roughly $921 million at the prior year end, though slightly lower than the $1.1 billion at the end that we reported at the end of last quarter. Now this slight decrease quarter-over-quarter in assets resulted from a couple of positive things. One, we had an increase in assets from new buyouts that we made, but then we reduced that by the successful exit of one of our existing portfolio companies, which actually reduced our assets but generated significant realized capital gains of $19.8 million. We also had some movement in the net valuation of our portfolio, certainly year-to-year and quarter-over-quarter, a number of which were a function of some increases in the multiple and slight decreases in EBITDA, but all of those movements were certainly all positive in some regard. During the year, we did add experienced talent to our investing team, which is in support of our continuing portfolio growth and our ability to help manage our current portfolio of 25 operating companies. For the year, we invested a total of $221 million, which is up from $184 million in the prior year. This included investments in four new portfolio companies, some add-on investments, and we also completed a dividend recap, which was a positive thing of one of our portfolio companies, Educators Resource, which generated both dividend income and provided for an additional interest-bearing investment in that company. Throughout the year, we maintained our monthly distribution to shareholders of $0.08 per share, aggregating to an annual total of $0.96 per share as I mentioned. We paid a supplemental distribution of $0.70 per share and then another $1.66, which aggregated to $1.66 per share for the year. Further, in April, subsequent to the year end, we declared an additional $0.54 per share supplemental distribution. These supplemental distributions are a direct result of our buyout strategy and the goal of rewarding our shareholders with meaningful supplemental distributions from the realized capital gains, which are generated on the equity portion of our exits, while we still maintain and try to grow our monthly distributions from operating income. Since inception in 2005 and through March 31, 2025, we've invested in 62 buyout portfolio companies for an aggregate of approximately $2 billion, exited 33 of these companies. This resulted in total investments which are currently valued at $979 million, while generating approximately $353 million in net realized gains and another $45 million in other income on exit. Turning to the outlook, which is obviously important these days. From our perspective, there continues to be good liquidity in the M&A market. It is a very competitive environment, and though we have now added variables regarding tariffs, which are impacting the analysis when we evaluate a new opportunity. We are competing effectively for new acquisitions that we believe fit our buyout model while we're being careful in assessing that risk and forecasting the tariff impact on costs, customer demand, and supply chain dynamics. Not every business is affected in the same manner, and that of course creates both opportunity and adds to the uncertainty. With that said, we are very far along and expect to close two new acquisitions shortly, if not by the end of this quarter. We are also in various stages of review and diligence on a number of new opportunities and I am cautiously optimistic for our new buyout activity during the year. Looking at our existing portfolio, we do have a few companies that are consumer-focused, and while they've had very good results to date, we are cautious due to the tariff costs on the ultimate consumer prices that may have to be passed through, impacting demand and margin on those companies. We are working with all of our companies in evaluating supply chain alternatives and various production strategies to navigate the current environment. The recently announced pause on tariffs does bring some relief, but we have to see what the permanent solution will be. We will continue to be cautious, but we believe we have a handle on how it impacts our existing portfolio companies. In summing up the quarter and the fiscal year looking forward, our current portfolio is in good shape. We have a strong liquid balance sheet, a good level of buyout activity, and the prospect of continued good earnings and distributions over the next year, albeit having to navigate the challenges we face due to the economic landscape. So I'll turn it over now to our CFO, Taylor Ritchie to go into more detail on the actual results. Taylor?

Thank you, Dave, and good morning everyone. Looking at our operating performance, we had a strong finish to the fiscal year, generating total investment income of $93.7 million, up from $87.3 million in the prior year. This increase was primarily the result of a $4.5 million increase in dividend and success fee income following the successful exits of two portfolio companies, as well as a $1.8 million increase in interest income. The increase in interest income was primarily due to the increased weighted average principal balance of our interest-bearing portfolio, partially offset by a decrease in the weighted average yield. Additionally, we ended the year with adjusted net investment income of $35.5 million or $0.97 per share, up slightly from $34.5 million or $1 per share in the prior fiscal year, fully covering our annual regular monthly distribution of $0.96 per share. Focusing on the fourth quarter results, we generated total investment income of $27.5 million, up from $21.4 million in the prior quarter, primarily due to an increase in dividend and success fee income, as a result of the exit of our investment in Nocturne and our recapitalization of Educators Resource, as well as an increase in interest income. Net expenses for the quarter were $20.3 million, up slightly from $20.2 million in the prior quarter. This increase was primarily due to an increase in interest expense and a decrease in credits to fees from Adviser, driven by the significant new investment activity in the prior quarter. Additionally, base management fee expense, income incentive fees, and bad debt expense increased compared to the prior quarter. These expense increases were partially offset by a decrease in capital gains-based incentive fees resulting from the net impact of realized and unrealized gains and losses during the quarter and accrued as required under US GAAP. This resulted in net investment income for the quarter of $7.2 million compared to $1.2 million in the prior quarter. Adjusted net investment income, which is net investment income or loss exclusive of any accrued capital gains-based incentive fees for the quarter was $9.4 million or $0.26 per share, up from $8.6 million or $0.23 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. Consistent with the prior quarter, as of March 31, 2025, we continue to have four portfolio companies on non-accrual status. Overall, there are no portfolio-wide credit concerns and we are closely working with these companies and their management teams to get them back on accrual status or exit the investments when possible. We are seeing improvement in two of these portfolio companies as they are back to generating profit. Excluding the $24.3 million reversal of unrealized appreciation upon the exit of Nocturne, valuations in the aggregate were up $14.1 million across the portfolio. This unrealized appreciation was driven by higher valuation multiples across the portfolio and increased performance at a number of our portfolio companies, which was partially offset by decreased performance at a few of our other portfolio companies. Our NAV increased to $13.55 per share compared to $13.30 per share at the end of the prior quarter. The increase was primarily the result of $0.57 per share of net realized gains and $0.20 per share of net investment income. These increases were partially offset by $0.28 per share of net unrealized depreciation and $0.24 per share of distributions paid to common shareholders during the quarter. We believe that maintaining liquidity and flexibility to support and grow our portfolio is key to our continued success. During the year, we issued $126.5 million of publicly traded notes and completed the upsize of our credit facility to a total commitment of $270 million. As of yesterday's release, we had $214 million in availability on our line of credit. Additionally, we raised approximately $2 million in net proceeds under our common stock ATM while prices were accretive to NAV. We believe that the recently issued notes, the additional available capital from our line of credit, and the ability to raise equity capital through our common stock ATM will allow us to drive portfolio growth as new buyout opportunities emerge and weather any potential economic slowdowns due to tariffs or other economic uncertainties. Overall, our leverage remains in a strong position with an asset coverage ratio as of March 31, 2025, of 204%, providing a cushion to the required 150% coverage ratio. Consistent with prior quarters, distributable book earnings to shareholders remained strong. We ended the fiscal year with $55.3 million or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 and the recently declared $0.54 per share supplemental distribution to be paid in June. We will look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year and $0.70 per share on supplemental distributions paid in the fiscal year 2025, our aggregate estimated fiscal year distributions would yield about 11.3%, considering yesterday's closing price of $14.05. This covers my part of today's call. I'll now hand it back over to you, David, to wrap us up.

All right. Taylor, very nice. You and Dave and Michael, good information to the shareholders that you've been delivering in this call and the 10-K filed with the SEC yesterday should bring everyone up to date. The team has reported solid results for the quarter ending March 31, 2025, including new investment activity, and significant realized gains generated during the year. We believe the team is in a great position now to continue these successes. I often ask myself, I wonder if anyone knows that there's a $0.54 dividend, that record date is June 4th, and the payment date is on June 13th. When you add that to what's being paid as the monthly distribution, you get a great return. I believe Gladstone Investment is an attractive investment for anyone seeking continuous monthly distributions and supplemental distributions from the potential capital gains and other income generated by this company. The team hopes to continue to show you a strong return on your investment just like we did last year. But now let's stop and ask the operator, Donna, to let some people come in and ask us questions. We welcome all your questions, Donna?

Thank you. The floor is now open for questions. Our first question comes from Mickey Schleien of Ladenburg. Please go ahead.

Yes, good morning everyone. Dave, I appreciate your comments on the tariff issue, but I was hoping you could give us some sense of, on a quantitative basis, how much of your portfolio does have exposure to tariff risk?

Yes, I guess, Mickey, the correct answer is probably most of them in some regards. I mean, certainly, we have a couple of companies that currently produce and manufacture a good part of their product in China, some of that's already being shifted; we've been working on that. That's a relatively small portion actually of the portfolio that are directly affected that way. The others that could be impacted were obviously things around steel, issues like that. So I guess, again, in saying fairness, the majority of them, but frankly with the exception of one or two, none that we are overly concerned about. Those that have that direct impact again have already been working on advancing product ahead of the tariffs to some degree. So there's been a buildup of inventory, which obviously affects working capital, but in a positive way before some prices hit. And then obviously ultimately how the supply chain as things start to hopefully unravel here over the next number of months. So long answer, but again, everyone is going to be impacted in some regard, but the ones where they're producing a product almost exclusively in China, those are just a few companies and we've been taking steps to help that. And these companies are doing well regardless and actually performed very well going into the year. So I'm not overly concerned per se about those, but we have to be sensitive to it and consider alternatives.

Okay. I think I understand. Thanks for that. And Dave, in the consumer sector, how much exposure does the portfolio have to lower income customers, which seems to be the group that are the weakest?

Lower income. I wouldn't honestly know how to answer that question. I mean when you look at the consumer type products we have, things like specialty toy products that go through companies like Walmart, I wouldn't necessarily classify those as higher income or lower income per se. So I don't think we have any that I would really consider as being focused on lower-income consumers. These are more normal types and maybe some discretionary to some degree, which would affect various folks. But again, the movement in tariff costs to our companies that might or might not get passed through is relatively small in a sense. Even I know 145% tariff sounds high, especially if we go back to a 40% tariff for products that we might be selling at $10 now it's going to be more like $12 to $14. So it's not like we're talking about items that are going to be just egregiously overpriced and therefore, no one is going to buy them.

I understand. Dave, a couple of quarters ago, you were somewhat optimistic on the outlook for Hobbs going back on accrual around now. Obviously, that hasn’t happened yet. I think there may have been something in the prepared remarks, but there was some background noise. So it was hard to hear. Could you update us on the outlook for Hobbs and maybe your other non-accruals?

Yes, so I think the comment that was made that Taylor made is that we still have four companies on non-accrual and actually three of them are all profitable, including Hobbs. Hobbs has continued to improve its profitability. We are still optimistic we're going to be able to bring them back on to accrual probably, again, things do move around a bit but they're actually performing well, so I'm hopeful we might bring them back on accrual by the end of this year. Two of the other companies are profitable and moving in the right direction and some progress is being made with those companies. If not back on accrual, they're certainly not getting worse, in that regard. So, yes, I continue to be optimistic, but overall, it’s not impacting the results of the portfolio overall and the results we achieved in spite of that.

And Dave, when you talk about profits, are you referring to EBITDA, net income, or operating income? What are you referring to?

Yes, we look at generally EBITDA because that's an important metric. So I look at that because that's cash flow for these companies. So when I refer to profitability, yes, that’s gross margins improved. Overall operating income has improved, but the key metric is EBITDA as it impacts actual cash flow, which indeed is also what allows for the payment of our interest and what have you. As we look at a company like Hobbs as it continues to improve, in fact, we even think about some add-on options for Hobbs. So fundamentally, yes, it’s well managed and performing very well. I believe it's going to be good over time.

So generally optimistic on the non-accruals, but on the flip side, what's going on with Horizon still marked at a fairly distressed level, doesn't seem to be going in the right direction?

No, actually, Horizon is very profitable and its EBITDA has continued to improve. Remember, Horizon services clients like Hertz in the car rental space. We did see some drop-off in EBITDA comparatively but it's still positive. We've been working on adjusting the leverage scenario that was established when we took the dividend recap, to help the company grow and perform as we like it. Yes, it did face some challenges due to market conditions, but overall, it's performing well under the circumstances.

Understand. Those are all my questions, Dave. Thanks for your time this morning.

Yes, sir. Thanks.

Hey, Donna, do we have another question?

We do. The next question is from Erik Zwick of Lucid Capital Markets. Please go ahead.

Thanks. Good morning, everyone. Wanted to start with just a follow-up to one of your prepared remarks where you indicated that you're cautiously optimistic for buyout activity in the current year. I’m wondering if you could address the two components of that. One, what you're seeing that gives you some optimism. And two, what gives you a little bit of a cautious stance, whether it's more than just the current market volatility and economic uncertainty?

Sure. Thanks, Erik. Glad you are here. So the cautiously optimistic viewpoint is based on the fact I mentioned in my remarks. We have a couple that we're close to closing, which is a good sign. Secondly, our backlog of companies under initial review indicates a solid pipeline. We’ve initiated interest in several, met with management, and are moving forward to potential due diligence. The activity level in this funnel is key and we're feeling good about that. The caution comes from the valuation perspective—the companies we're looking at are affected by economic uncertainty and tariffs, but we are actively working to analyze these factors. We're not backing away just because there is a global issue; we need to be vigilant in ensuring the valuations make sense. Our acquisition targets typically don’t number in the dozens during a year; we'll focus on quality and aim for a few successful investments. If we can maintain investment levels as we did last year with a few hundred million in new investments, we’d consider that a success. So, that's why I feel optimistic. We're working aggressively on several opportunities.

Yes, no apology needed. That was very thorough. I was going to ask about the impact of the current market volatility on valuation and you addressed that as well, so thank you. Maybe moving to Educators Resource and the dividend recap there, could you walk me through the rationale for why this is the right time and strategy, what the new capital will help them to do? Also, are there any other dividend recap opportunities that you see in your portfolio today?

Yes, regarding the last part of the question, I don't see any other potential recaps at this time, but we're always evaluating opportunities. When we do a dividend recap, it typically involves a management team invested in the company who seeks liquidity. We have strong fundamentals to support the decision. We see this as an opportunity to generate income and potential leverage in our investment. With Educators Resource, the management team that led the company has been very experienced and we believe in their capabilities. We were initially considering exiting the company but chose to reinvest due to the positive trajectory we’ve observed. So, we opted to recapitalize, provide liquidity for management while retaining our stake.

Excellent. And last one for me, Taylor, I think you mentioned the current spillover amount, and I neglected to write that down fast enough. Could you repeat that, please?

Sure. We ended the year with $55.3 million of spillover, which is currently $1.50 per share. This amount covers the current run rate for the monthly distributions of $0.08 per share, totaling $0.96, and the recently declared $0.54 supplemental distribution to be paid in June.

Perfect. Thank you so much for taking my questions today.

Thanks, Erik. Just to make one point here, we talk about buyouts. We're not really in that giant buyout game, which seems to be stalled due to a lack of exits in the public marketplace. Others have investments in large buyouts that aren’t liquid, but we typically sell what we put up for sale quickly. That's just the fundamental difference between our business model and the larger buyout business.

None at this time, sir. I would like to turn it back over to you for closing comments.

Okay. Thank you all for listening to our report. Unfortunately, we don't have enough questions. We wish you would think of more questions for us to answer. We are pleased to provide answers and thank you so much for attending this meeting. We'll see you next quarter. That's the end of this call.

Ladies and gentlemen, thank you for your participation and interest in Gladstone Investment. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.