GOLUB CAPITAL BDC, Inc. Q2 FY2022 Earnings Call

Hello everyone and welcome to GBDC's Earnings Call for the Quarter Ended March 31st. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the home page of our website, which is www.golubcapitalbdc.com and click on the Events Presentations link. As a reminder this call is being recorded for replay purposes. I'll now turn the call over to David Golub, Chief Executive Officer of GBDC. David?

Thanks, Jon. Hello everybody. Thanks for joining us today. I'm joined here by Chris Ericson, our Chief Financial Officer; Greg Robbins, Senior Managing Director; and Jon Simmons, Managing Director here at Golub Capital. Yesterday, we issued our earnings press release for the quarter ended March 31st and we posted an earnings presentation on our website. We're going to be referring to this presentation throughout the call today. For those of you who are not familiar with GBDC, our investment strategy is to focus on providing first-lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. The headline for this quarter is that GBDC had another strong, consistent performance and that came despite a very challenging macro backdrop, which included rising interest rates, continuing supply chain issues, the Russia-Ukraine war, and the significant downdraft in equity and fixed income markets. For the March 31 quarter, adjusted NII per share before the capital gain incentive fee accrual was $0.30, adjusted EPS was $0.39, and ending NAV grew from $15.26 per share to $15.35 per share. During the quarter, GBDC made a quarterly distribution of $0.30 per share. We believe our results highlight the resilience of our strategy and we'll talk some more about that over the course of today's call. Now, I'll hand the floor to Gregory, Jon and Chris to elaborate on GBDC's performance for the quarter. And after that, I'm going to provide some closing commentary, talk about our outlook, and then I'll open the floor for questions. Gregory over to you.

Thank you, David. I'm going to begin on slide six, which describes two key themes that contributed to GBDC's success during the quarter. The first theme is strong portfolio performance. I call your attention to the Golub Capital Middle Market Report or GCMMR from March 31st, which we published several weeks ago. The median earnings growth rate in January and February from 2021 to the same period in 2022 was nearly 10%. Although GDP fell by an annualized 1.4% in Q1, in inflation-adjusted terms, Golub Capital portfolio companies continue to perform well. This has not only reflected in strong credit results, we'll take a closer look at the data later in the presentation, it is also reflected in the second key theme for the quarter, net portfolio growth. Golub Capital's origination was above our expectations. We expected the first calendar quarter to be slow. It typically is. And we expected that dealmakers would need to catch their breath after a really busy 2021. We were right in part. M&A was not particularly strong. However, Golub Capital's origination in calendar Q1 exceeded our expectations, primarily because our portfolio companies were playing offense. They were closing add-on acquisitions and executing growth programs which created new investment opportunities for Golub Capital. Origination in existing borrowers, what we call incumbency, across the platform represented over 70% of all originations this quarter. In calendar Q1 GBDC's net portfolio growth also had a tailwind from unusually low repayment. Moving on to Slide 7. This slide provides a bridge from GBDC's $15.26 NAV per share as of 12/31 to its increased $15.35 NAV per share as of 3/31. Let's walk through the bridge. Adjusted NII per share was $0.27, dividends per share paid during the quarter was $0.30 and adjusted net realized and unrealized gains per share were $0.12. Let's now take a closer look at our results for the quarter. And for that let me hand the call over to Jon Simmons to walk you through the results in more detail. Jon?

Thanks, Gregory. Slide 9 summarizes our results for the quarter and over the past several quarters. Gregory already discussed the results for the March quarter. This slide also shows GBDC's consistent and solid adjusted NII, adjusted NII before the capital gains incentive fee accrual, adjusted net realized and unrealized gains, EPS and distributions over the last several quarters. Moving to Slide 10. As Gregory noted, net originations exceeded our expectations this quarter. New investment commitments totaled $323.2 million. After factoring in repayments on investments of $122.2 million as well as unrealized appreciation and other portfolio activity, total investments at fair value increased by 5.4% or $279.4 million during the quarter. Also as of March 31, we had $40.6 million of undrawn revolver commitments and $203.2 million of undrawn commitments on delayed draw term loans. Each of these unfunded commitment amounts are relatively small in the context of GBDC's strong balance sheet and liquidity position. Finally, as shown at the bottom of the table, both the weighted average rate and spread over LIBOR on new investments remained consistent quarter-over-quarter. Slide 11 shows that GBDC's overall portfolio mix by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent approximately 80% of the portfolio at fair value. Slide 12 shows that GBDC's portfolio remained highly diversified by obligor with an average investment size of less than 40 basis points. As of March 31, 94% of our investment portfolio was comprised of first lien senior secured floating rate loans and defensively positioned in what we believe to be resilient industries. Turning to Slide 13. This graph summarizes portfolio yields and net investment spreads for the quarter. Focusing first on the light blue line. This line represents the income yield or the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium. The income yield decreased by 20 basis points to 6.9% for the quarter ended March 31. The investment income yield, or the dark blue line, which includes the amortization of fees and discounts decreased by 40 basis points to 7.3% for the quarter driven by an unusually low level of repayments. Repayments can be cyclical and we don't expect this low level of repayments to be sustained in future periods. Our weighted average cost of debt, or the aqua blue line increased by 10 basis points to 2.8%. Our net investment spread, or the green line which is the difference between the investment income yield and the weighted average cost of debt decreased by 50 basis points to 4.5%. Both LIBOR and SOFR base rates increased during the quarter, which increased interest expense but did not meaningfully increase interest income because most of our loans have a 1% base rate floors. Post quarter end, we continue to see increases in base rates which are expected to be additive to interest income and earnings in future periods, all else equal. With that, I'll hand the call over to Chris to continue the discussion of GBDC's quarterly results. Chris?

Thanks, Jon. Flipping to the next two slides, non-accrual investments as a percentage of total debt investments at cost and fair value increased to 1.5% and 1.1% respectively, as of March 31 due to the number of non-accrual investments increasing from five to seven investments. Overall, fundamental credit quality remains strong with over 90% of the investments in our portfolio having an internal performance rating of four or higher as of March 31. As a reminder, independent valuation firms value at least 25% of our investments each quarter. Slides 16 and 17 provide further details on our balance sheet and income statement as of and for the three months ended March 31, 2022. Turning to slide 18. The graph on the top summarizes our quarterly returns on equity over the past five years, and the graph on the bottom summarizes our regular quarterly distributions, as well as our special distributions over the same time frame. Turning to slide 19. This graph illustrates our long history of strong shareholder returns since our IPO. As illustrated, investors in GBDC's 2010 IPO have achieved a 10% IRR on NAV since inception. Slide 20 summarizes our liquidity and investment capacity as of March 31, which remains strong with over $950 million of capital available through cash, restricted cash and availability in our various credit facilities. Slide 21 summarizes the terms of our debt facilities as of March 31. Slide 22 summarizes our recent distributions to stockholders. Most recently, our Board declared a quarterly distribution of $0.30 per share payable on June 29, 2022 to stockholders of record as of June 3, 2022. And with that, I will turn it over to David for some closing remarks.

Thanks, Chris. To wrap up, GBDC had a strong quarter. Our portfolio companies continued to perform well; realized and unrealized gains were solid; and new commitments coupled with low repayments resulted in healthy net portfolio growth. Let me talk briefly about our outlook before I open the line for questions. I said in the last couple of quarters that we're cautiously optimistic about the prospects for Golub Capital and GBDC in the coming period. We still are, but I'd say the cautiously part is increasing. But before I talk about why we're cautious, I want to review and highlight four reasons for optimism. First, the strength of GBDC's portfolio. We've talked about it along this call. Despite the recent reported negative first quarter GDP, despite the downdraft in stock market prices, our portfolio companies continue to report strong year-over-year growth in both revenue and EBITDA. Do I expect it's going to slow down from the pace of 2021? Absolutely. But we're still seeing robust growth and we continue to have very few companies showing signs of credit stress. Second reason for optimism is the strength and flexibility of GBDC's balance sheet. With interest rates rising, we're well positioned with about half of GBDC's debt funding in the form of low-cost fixed-rate unsecured debt. We think GBDC will benefit as rates go above the LIBOR or SOFR floors on GBDC's assets. We've already started to see this happen as floors are typically 1%. The third reason for optimism is the momentum that we're seeing in the private equity ecosystem. Many are predicting that the overall size of the private equity ecosystem is going to double in the next three to five years. And this means a growing opportunity set for us and for other leading private debt players. Finally, there's a market share shift underway. Within the sponsor finance industry, there's a shift toward the market-leading players. We think the private equity winners are concentrating their business with lenders who have scale and product breadth and expertise, and we're more generally strategically valuable partners. If the story about four factors that are leading to optimism sounds familiar, it should. I discussed these trends for the last several quarters, but it's not all clear skies out there. So let's talk about how our optimism is tempered by three sources of uncertainty. Let's start with COVID. It's supposed to be over now, but it's not. In fact, top virologists are now saying that even though over 60% of Americans have had COVID, over 75% of youth, we're not only not at herd immunity, but we may never get to herd immunity. We're instead likely going to have to learn to live with COVID and it may not just be COVID. It may be global pandemics may be part of the new norm. Second is inflation and higher interest rates. This is good news here. The good news is that now everybody agrees that inflation is a problem. I think this is important because the first step in solving any problem is agreeing it's a problem. And for an extended period of time a lot of economists and members of the Fed thought that inflation was transitory and didn't need to be addressed. That's the good news. The bad news is that inflation is hard to cure. So while I think we all as investors need to plan for a lot of different scenarios, our base case is that inflation is going to be around for a while, that higher rates are going to be around for a while and that we're all going to need to adjust to both. The third source of uncertainty is Ukraine. Now we've all been reading about how this is a superpower standoff in the nuclear age and the threats of escalation. And all that's true. What I want to focus on here is the degree to which the war has led to a global reset of the international monetary and trading system. We've basically seen the West make moves in its restrictions on Russian foreign currency movements and tariffs on Russian goods that are fundamental changes to the post-World War II lively economic order in international monetary and trading norms. I think it's going to take some time for companies, for governments, for investors to understand and adjust to all the second and third order impacts of these new norms. And my own view is that investors would do well to prepare for a long stretch of greater market volatility as we all see how these second and third order impacts play out. The good news from the perspective of GBDC shareholders is that our niche in Sponsor Finance is reasonably well insulated from these three sources of uncertainty. We and our sponsors and our borrowers we were able to manage COVID risk. Our loans are floating rate and so they adjust to changes in interest rates. Our borrowers are primarily US companies selling to US customers. So the impacts on international trade system, international monetary system, volatile commodity markets, they matter less. So we're not immune to what's happening with COVID and interest rates and the war, but I do think we're well positioned for continued stable results. With that, operator please open the line for questions.

We will now take our first question from Finian O'Shea with Wells Fargo Securities. Your line is open.

Hey, everyone. Good afternoon. David, I wanted to ask a question on recurring revenue loans. You've been a leader in this space for years. And how – the companies to our understanding are – have less ongoing cash generation because they're spending that on marketing and research and so forth. But that would still intuitively leave them more prone to higher interest rates on their debt, right? They could cut costs but that wouldn't necessarily be good for them. So having exposure to this and experience over the years how well set up do you think this category is financially in its ability to withstand the base rates going up to 1%, 2%, maybe 3% over the near-term?

That's a great question. Let’s take a moment to ensure everyone understands the context of Fin’s inquiry about recurring revenue loans. These loans are primarily given to companies in the software sector that choose to incur high selling, administrative, or R&D expenses in relation to their revenues, in order to achieve rapid growth at the expense of immediate profitability. Typically, these loans come with a lower loan-to-value ratio. However, when analyzed through traditional credit metrics like debt-to-EBITDA, they don't appear favorable. We have been involved in the recurring revenue loan sector for about eight years, being one of the pioneers, and it has been a very positive experience with minimal loan losses, benefitting our investors significantly. Currently, though, larger companies in this space are less appealing to lenders than they once were. One reason, as you mentioned, Fin, is that with rising interest rates comes increased cash burn that these companies must address, which cannot solely rely on operating cash flow but must instead come from new inflows or existing balance sheet cash. Consequently, higher rates create tension for these businesses because the funds to cover interest payments have to be sourced from somewhere. Another factor contributing to the diminished attractiveness of these loans is increased competition. When we first entered this field, spreads were higher, leverage ratios based on recurring revenues were lower, and terms were stricter. As with any evolving sector, we’ve noticed all these aspects have become less favorable from a lending standpoint, particularly over the past year. In light of this, we are concentrating our efforts elsewhere. As Jon highlighted in our opening remarks, around 70% of our loan originations in the first quarter were for existing clients we already lend to. In this uncertain environment, we are focused on lending to companies that are well-equipped to deal with rising rates and inflation, specifically those in our existing portfolio that we are most familiar with.

That's helpful. Reflecting on your comments about competition and origination, I understand that the first quarter usually shows lower origination levels for you. How does the current situation look? With the market becoming more volatile, there might be decreased demand, yet there is still significant inflow into direct lending products. What are your expectations for top-line growth or origination? Is the pipeline developing as it typically does at this stage of the year?

So again I'm just going to go back, before going forward. If you look at Q1, quite as you say it Q1s tend to be seasonally low. And as Greg said in our prepared remarks, we expected Q1 to be unusually low because of pull forward into 2021. We thought that a substantial number of sellers took their company sales into 2021, in order to avoid the prospect of higher capital gains tax rates and that that would have an impact on the first quarter of 2022 maybe even later in 2022. We were partly right. But if you look at our overall platform-wide origination in Q1, we were about 30% up year-over-year. It did slant, as I mentioned, very significantly toward existing borrowers. But I'd say overall, we were pleasantly surprised by the attractiveness of the opportunities that we saw in Q1. In Q2, we're seeing some acceleration. Is it as fast a pace as 2021? No, I wouldn't expect it to be. 2021, I think will prove to be an outlier for a bit. There were some special factors that made 2021 as active as it was coming out of COVID and the pull-forward impact of expected tax law changes that I just mentioned. But I think Q2 will be a quite solid quarter for us from an origination standpoint. I do think we're starting to see some of the impacts that you'd expect, from the market downdraft. New deal activity is shifting to the right to a degree. And that's to be expected. That's normal, in this kind of environment. Despite that I think calendar Q2 is going to be a good origination quarter for us.

I'm sure. That's helpful. And, I guess, one more, if I may. Can you talk about credits and what the outlook would be as it relates to sort of the Fed going the other way, which is very opposite of what happened in the 2020 COVID era, where there was government monetary fiscal support all around, private equity support of the companies, because it was all supposed to be and ended up being temporary, although COVID is still a problem as you mentioned. But this time feels different, where the Fed is addressing inflation problems and appears very serious about it and financial conditions are therefore getting tighter. How do you look at the outlook for sponsor middle market credit and the overall asset class loss and default rate?

Credit is going to get tougher. I mean, if you look at, not just in sponsor finance, but in liquid credit markets generally, the S&P LCD index for the first four months of 2022 had zero defaults. You can't get better than zero, so it's going to get worse. What are the factors that are going to push things in the worst direction? Well, you mentioned one, which is higher interest rates. A second is, some companies are going to find themselves on the wrong end of the inflation curve and inflation is going to impact their cost, but they're not going to have the pricing power to raise prices enough. I think supply disruptions are a third issue that are going to impact some companies. What's going on right now in Shanghai is pretty scary for many companies that rely on tech inputs. So I think, we're going to see more credit stress across the system. I feel pretty good about our portfolio. As I mentioned in my opening remarks, we've been anticipating inflation for two years. We've been thinking about how to position the portfolio to be able to have real resiliency in the context of inflation and rising interest rates. We're not exposed to Russia and Ukraine. We have relatively little exposure to China. So I think we're in a good position, Fin, to continue our track record of meaningfully outperforming the market. But I think it's reasonable to expect that credit markets are going to get tougher in the coming period.

Very well. That’s all for me. Thanks so much.

Next we'll go to Ryan Lynch with KBW. Your line is open.

Hey, good afternoon. I wanted to talk about the Golub Middle Market capital report you guys put out. It's an incredibly helpful report, provides a lot of insights. As you stated on the call today, you're still seeing good revenue and earnings growth in the first two months of calendar Q1 of 2022. But when I look at the report, revenue growth in the overall portfolio of 18%, earnings growth of 9%, and maybe that shows pretty meaningful margin contraction in the overall portfolio. And then if you look at the individual subsectors there are outliers in there as well. When you look at industrial, up 12%, with a total revenue growth and earnings, a decline of almost 2%. So while I think things look pretty good today, I would love to hear you comment on what are you seeing from a margin standpoint in your portfolio? And what is the outlook for that going forward?

Happy to address that. However, before I proceed, I feel it’s important to respond to something you mentioned earlier. You suggested that we fell short on net interest income per share, and I respectfully disagree. It has been some time since we reflected a capital gain incentive fee accrual. I want to clarify how that operates, as it involves quite complex accounting. For example, if you’re like Golub Capital, a Business Development Company that has performed exceptionally well in terms of credit and possesses net realized and unrealized gains since inception, that scenario is quite rare. If you find yourself in that situation, the accounting practices require you to conduct an as-if liquidation at the end of the quarter. This means you assume all unrealized positions are realized, and then you compute what the capital gain incentive fee would be if that were true. This quarter, we had approximately $0.04 of capital gain incentive fee that affected our net interest income. However, this is not an actual cash expense. When assessing cash payable, a different calculation is applied where realized gains and realized and unrealized losses are considered. Therefore, not only is this a non-cash expense, but it is also offset by an income element recorded below the net interest income line. The only way to incur a capital gain incentive fee accrual is to have substantial net realized and unrealized gains, which we indeed achieved this quarter. I apologize for singling you out; that wasn’t my intention, but I must say that I disagree with that aspect of your assessment. I believe we had a strong quarter, and it is crucial to look beyond the capital gain incentive fee accrual when evaluating net interest income. The ideal scenario for shareholders would be for each quarter to feature a significant capital gain incentive fee accrual, as that would indicate that we have large net realized and unrealized gains supporting it.

I agree with everything you said. I agree with everything you said. Our estimate was $0.31, consensus was $0.31. Wasn't adjusted NII or adjusting for the capital gain incentive fee $0.30, which would be below $0.31 consensus, or that's what it shows on slide 4? Unless I'm missing something, it looked like a miss.

You're mentioning $0.31 compared to $0.30, which is essentially a rounding issue. There are additional factors to consider, including some PIK income from the preferred instruments we own, which we categorize below the line in realized and unrealized income, while other BDCs include it above the line. Personally, I believe EPS is a more reliable metric than NII, but we can discuss that separately. Now, regarding your question about company performance, you're absolutely correct that the latest Golub Capital Middle Market Index indicates a slowdown in growth compared to 2021. It contrasts with the consistent trend we observed in 2021 where profit growth surpassed revenue growth. In the most recent quarter, as you noted, revenue growth exceeded profit growth. However, I don't think one quarter is enough to draw definitive conclusions. If this trend persists over a longer duration, and if profit growth declines further to the point of being negative in real terms, then your concerns about potential challenges ahead would be more convincing. For now, I see strong and ongoing revenue growth along with solid profit growth. We've noted some quarter-to-quarter volatility across different industries, and considering the supply chain issues in Q1, it's not surprising that industrials faced tougher results. When I assess the portfolio through various metrics—not just the middle market index but also performance ratings with 94% in the top categories, the low non-accruals at 1.1% by fair value, and improvements in historically underperforming companies—my overall view of the portfolio performance is quite positive. However, it's important to recognize that this is all retrospective data; we're examining historical performance rather than making projections or analyzing forecasts. Therefore, we should balance this data with insights into what we anticipate on the horizon.

I completely agree. The past has been great, but there's concern about the future—not just for you, but for all private businesses. My other question is about your focus on the direct loan private credit markets, as well as your large broadly syndicated loan business, which has some overlap. I'm curious how the broadly syndicated loan market has been performing recently, since that affects the pipeline and the choice between private solutions and accessing those markets.

Sure. The broadly syndicated market has been pretty bumpy over the last month. I'd say a typical broadly syndicated loan is probably down about one point over that period. And if you amortize that over an expected life of three years that's an approximately 33 basis point spread widening. We've seen some similar indicators if you look at the new issue market, which hasn't been robust but there have been some. And if you look at new issues I'd say again there are signs in the new issue market that we've seen a modest degree of spread widening. Another thing we're seeing in the broadly syndicated market that I think is interesting and worth watching is we're seeing a slowdown in new CLO formation. And that's important because over 70% of the buyers of new broadly syndicated loans are typically CLOs. And so if you see a slowdown in new CLO formation that's taking some buyers out of the market. So I think we're likely to see some continued spread widening. I think we're seeing it in the high yield market. It's more marked in the high yield market. And I think the usual pattern Ryan is that these things happen first in liquid credit markets and then they migrate down to the private market over time. And that's my expectation this time as well.

That's helpful. Regarding the concerns I mentioned earlier, I want to clarify that these issues are affecting the entire private credit markets, not just GBDC. However, they are certainly impacting you. I would appreciate your insights, as you have a strong understanding of the market. When we consider the public equity markets, there has been a significant reset in valuations. Particularly, some strong cash flow positive businesses that are consistent growth leaders, like Dolby or Salesforce, are also affected. You have numerous investments in solid, secularly growing businesses that should perform well from an earnings and EBITDA perspective. However, with public market stocks declining by 20%, 30%, or even 40%, even these strong businesses could see their valuations reset in the private market. I assume that hasn't happened yet, and while it may not, I am curious about the implications if it does. Is there concern about a substantial decrease in valuations in the private market, not just a minor adjustment? What would that mean for your investments?

Let's break this down into a few parts, starting with the opportunity aspect. When there’s a significant pullback in the public market, we often see funds moving towards privatization. Private equity firms typically begin to examine public companies to identify those that are undervalued, aiming to bring them into the private equity sector. We have already observed this trend and have been involved in financing several such deals in recent months, which I view as a positive development. Our equity portfolio is not particularly large, comprising only a few percent of our total portfolio. In contrast, some other business development companies hold much larger equity portions, where fluctuations in equity market values could have a more pronounced effect on unrealized gains or losses. For us, this is not likely to be a significant concern. Additionally, if we face underperforming assets, your observation is correct; generally, these companies are doing well. If they do decline by 25% but are still performing adequately, it won't significantly affect us as the debt holder. However, if a company is underperforming, we may be losing some of the critical buffer that protects us against credit losses. This is a vital aspect of our business, and we must continuously monitor for underperformance while collaborating with our borrowers and sponsors to address any issues early, preventing potential credit losses down the road.

Got you. That's very helpful color on those dynamics. That's all I had today. I appreciate the time and the dialogue.

Thanks Ryan.

Next, we'll go to Robert Dodd with Raymond James. Your line is open.

Hi, guys. On – question about software as well, obviously, the portfolio at 25% software. I mean a couple of questions here. One, I mean, I'd be curious how much of that is recurring revenue versus cash flowing software businesses? But the bigger question really with software being such a large piece, I mean, software is quite an expansive term. Within your software exposure, is there any color on kind of – you’d give us about diversification in end markets? I mean, it's not all software for graphic design, right? I mean, it's different things. But how diversified is that? And are there any concentrations in particular subsectors that we should be aware of?

So, a couple of things I can say and a couple of things I think we're probably better to take away, and see if we can improve our transparency next quarter. What I can say is that, most of the software exposure is not recurring revenue loans. It's cash flow lending to very successful, very resilient mission-critical business to business software companies: SaaS model, very high recurring revenues, very high repeat customer counts, very low attrition of customers, very high free cash flow. So we like that profile. We have a lot of them. We're the earliest of the direct lenders to go into the technology lending space, and I think we still have the largest technology portfolio as a platform in the industry. I think this is one of our real areas of expertise and competitive advantages. If you look at end markets, they're very diversified. I'd like to take as a homework assignment, if you don't mind, figuring out a way to illustrate this in our next 10-Q, so that we can share the information with you. But I'm confident in the conclusion that, the conclusion will be that, we don't have meaningful concentrations by end market. And I think that's important because all software companies don't move together in the context of idiosyncratic changes in the economy. The better way to look at factor risks in software lending is based on end market.

I appreciate that. Thank you. I'm comfortable with work, as long as I'm the one assigning it and not doing it. So I appreciate that. Regarding healthcare, it's been an ongoing area of focus for you. Before COVID, there was a lot of what we could call discretionary healthcare. Naturally, COVID disrupted that because many of these services were shut down. We're now in a recovery phase, and the entire market saw improvements this quarter. Are there any concerns that the attitude of healthcare consumers has shifted moving forward, especially if we experience more inflation, an economic slowdown, or rising unemployment? Has COVID indicated to them that they can postpone these services for a while? And is there a higher risk of more deferrals if future economic challenges arise compared to when you assessed those businesses before COVID?

So it's an interesting question and the honest answer is we don't know yet, and we'll see over the course of coming quarters. As I think about your question and think about subspecialties, I think, the answer may be different by different subspecialties. So for example, we're very active in the vet space. I think Fido is going to continue to get what Fido needs. That's been the history of the vet space through prior downturns. And given the trends towards humanization of pets, I don't think that's likely to change. We operate in a number of other sub sectors: ophthalmology and eye care, dentistry, derm. I'm not seeing signs of what you're describing, at least not yet. But I think it's an interesting question. Look, the consumer is going to have to make some changes. Gas prices are up and food prices are up and there are lots of consumers who are, in the context of those two costs going up, are going to have to save money somewhere else.

Okay. I appreciate it. Thank you.

Mr. Golub, I'll turn it over to you for closing remarks.

Great. Thank you, David. I appreciate everyone taking the time today to share with us and your questions. As always if you have any other questions before we come back and talk to you next quarter, please feel free to reach out. Very much appreciate your partnership. Thank you.

This concludes today's conference call. You may now disconnect.