Stran & Company, Inc. Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

Key Takeaways

  • Revenue increased ~29% to $15.8 M in Q1 2023, with organic growth of ~18% despite industry contraction.
  • Gross profit rose ~46.5% to $4.7 M and gross margin improved to 29.8% due to lower purchasing and freight costs and supply chain efficiencies.
  • The $0.7 M net loss was driven by one‐time integration, NetSuite ERP implementation, and lead generation investments that management expects will support a return to profitability.
  • With $20.9 M cash and no debt, the company is pursuing M&A, including the pending acquisition of TR Miller to expand fulfillment capabilities and integrate Premier NYC, Trend Brand Solutions, and Gap Promo.
  • Strand continues winning new business and scaling e-commerce, notably a multinational beauty client loyalty program for 4 M influencers and managing over 280 online customer stores.
AI Generated. May Contain Errors.
Earnings Conference Call
Stran & Company, Inc. Q1 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good morning, and welcome to the Strand and Company First Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Alexandra Schiltz. Alexandra, the floor is yours.

Speaker 1

Good morning, and thank you for joining Straumann and Company's 2023 First Quarter Financial Results and Business Update Conference Call. On the call with us today are Andy Shape, Chief Executive Officer and David Browder, Chief Financial Officer. The company issued a press release today, May 15, 2023 containing its 2023 Q1 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212 671-1020. The company's management will now provide prepared remarks reviewing the financial and operational results for the 3 months ended March 31, 2023.

Speaker 1

Before we get started, we would like to remind everyone that during this conference call, we may make Forward looking statements regarding timing and financial impact of Strong's ability to implement its business plan, expected revenues and future success. These statements involve a number of risks and uncertainties and are based on assumptions involving judgments with respect to future economic, Competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond Straumann's control. With that, we will now turn the call over to Andy Schaeff, Chief Executive Officer. Please go ahead, Andy.

Speaker 2

Thank you, Ali, and thanks everyone for joining us today as discussed the meaningful progress made during the Q1 of 2023. As a result of continually executing on our growth strategy, including organic growth and M and A, we reported an approximate 29% increase in revenue to $15,800,000 for the Q1 of 2023. Importantly, we also achieved organic growth of approximately 18% over the same period last year. This is notable because many other companies in our industry are contracting Given the current market environment and pressure on marketing budgets, we believe the fact we have maintained strong organic growth reflects our increasing market share and of our customer base across multiple industries including gaming and healthcare, which tend to be more steady regardless of the economic environment. I'd also like to note that historically the Q1 is our slowest quarter in the year given our customers business cycle and planning budgets are usually still being finalized.

Speaker 2

However, our increased year over year sales for the quarter reflects the increased spending for both existing and new customers. We also achieved 46.5 percent increase in gross profit to approximately $4,700,000 Gross margin increased from 26.3 percent of revenue in Q1 of 2022 to 29.8 this quarter, reflecting a reduction in our purchasing and freight costs as a percentage of sales. Improved margin can be attributed to greater buying power as we continue to gain scale as well as easing supply chains. We spent much of 2022 focusing on ways to improve our gross margins and believe we are beginning to experience the benefits of those efforts. Although we reported a loss for the quarter, this was due in part to temporary expenses related to the integration of our 3 recent acquisitions.

Speaker 2

We are also absorbing costs related to the implementation of Net our ERP system as well as expenses related to our lead generation program. However, we believe these investments will support our continued growth and will decrease over time. As we continue to grow revenue and leverage our fixed costs, we expect to return to profitability. At the same time, we've maintained a strong balance With over $20,000,000 of cash and investments allowing us to continue to execute our growth initiatives including M and A. We believe that our strong cash position combined with no debt will provide a competitive advantage as we continue to scale our business organically and through acquisitions.

Speaker 2

Towards this end, we announced signing a definitive agreement to acquire TR Miller in January, our largest acquisition to date. This is an important milestone as it Significantly enhances our operational fulfillment capabilities with their 20,000 square foot distribution and processing center. With their extensive experience standing over 47 years combined with the implementation of our technologies and marketing, we believe we can enhance our business while assisting in the overall growth of Strand. We expect to complete the acquisition during the Q2 and report details appropriately. While discussing M and A, I'm proud to report that we continue to effectively integrate our previous announced acquisitions of Premier NYC, Trend Brand Solutions, as well as Gap Promo, all of which we believe will provide important and unique advantages to Strong.

Speaker 2

In terms of future acquisitions, at the moment, we are focusing on closing and integrating Tierra Miller. However, given the lead time required to identify and complete due diligence on targets, we continue to actively explore potential M and A opportunities that can be complementary and accretive to our business. In addition, we continue to secure new customers as well as expand existing customer relationships. Specifically in February, we announced that we were contracted by a multinational direct selling beauty product company. This customer sought us out to provide effective incentive merchandise to assist in growing their North American loyalty program.

Speaker 2

We're in the process of launching their e commerce store Now so we can support over their 4,000,000 influencers with the expectation of bolstering their loyalty program. During the quarter, we also witnessed an increase in spending our existing customers as we continue to deliver on their needs as well as develop creative solutions to address their unique request of each customer. We also continue to launch new online stores for our customers and now are actively managing over 280 online customer stores. These provide long term value for our customers as well as easy and simple access to our products. Importantly, we are executing and pursuing growth initiatives that we believe will propel our business and lead to long term sustainable profitability.

Speaker 2

These include meeting revenue and profitability goals which are laid out each year, fully implementing NetSuite, Continuous training of new employees to enable consistency and setting and adhering to our annual budget. These are very important to the business and our core aspects to the future to further our growth. So to wrap up, we developed and executed a business growth strategy resulting in increased awareness a strong customer base and national footprint. We believe these activities we are undertaking will further solidify our leadership position With the promotional products industry, which is now valued at over $25,000,000,000 We also expect that these steps we are taking and Investments we are making will result long term profitability. We are extremely proud of our progress and look forward to our accomplishments in 2023.

Speaker 2

At this point, I'd like to turn the call over to our Chief Financial Officer, David Browner to go over the financials in detail. Please go ahead, David.

Speaker 3

Thank you, Andy. Revenue increased 28.7 percent to approximately $15,800,000 for the 3 months ended March 31, 2023, from approximately $12,300,000 for the 3 months ended March 31, 2022. The increase was primarily due to higher spending from existing clients as well as business from new customers. Additionally, we benefited from the acquisitions Of the Gap Promotions assets in January 2022, the Trend Brand Solutions assets in August of 2022 and the Premier NYC assets in December 2022. Gross profit increased 45.9 percent to approximately $4,700,000 or 29.8 percent of revenue for the 3 months ended March 31, 2023 from approximately 3 3% of revenue for the 3 months ended March 31, 2022.

Speaker 3

The increase in the dollar amount of the gross profit was due to increased sales, partially offset by an increase in purchasing costs. Net loss for the 3 months ended March 31, 2023 was approximately 700,000 compared to a net loss of approximately $500,000 for the 3 months ended March 31, 2022. The increase was primarily due to an increase Our increased expenses relating to an increase in the lead generation initiative, integration expenses related to the acquisition of the Gap Promotions assets, The Trend Brand Solutions assets, the Premier NYC assets due to our due diligence related to the asset purchase agreement, Acquisition of TR Miller's assets, the implementation of the ERP system on NetSuite's ERP platform, ongoing expenses related to being a public company and higher purchases in the 3 months ended March 31, 2023. This was partially offset by lower cost of purchases as a percentage of revenue in the 3 months ended March 31, 2023, and organic growth in our business. At March 31, 2023, the company had $20,900,000 of cash and investments in no long term debt.

Speaker 3

At this point, I'll turn the call back over to Andy.

Speaker 2

Thank you, David. To wrap up, we have successfully executed on our growth strategy, which has I'd like to thank you for joining the call today. At this point, we'd like to open up the call to questions. Operator?

Operator

Certainly, the floor is now open for questions. To provide optimal sound quality. And we have a question this morning coming from Edward Riley from EF Hutton. Edward, your line is live. Please go ahead.

Speaker 4

Hi, guys. Good morning. It looks like freight costs as a percentage of revenue have come down quite a bit and trending down over the last few quarters. Wondering if You can maybe talk about what's been driving this down?

Speaker 2

Sure. Thanks, Eddie. A couple of things have been driving it down. 1, The cost of freight, during the pandemic and shortly thereafter, freight costs went up quite a bit significantly, Importing goods from China as well as domestic freight went up, but those have normalized. I think the cost of a container at one point during the pandemic was Somewhere in the range of say $15,000 maybe even $20,000 has gone down to under $5,000 So we've seen a normalization of the freight cost.

Speaker 2

In addition to that, we're also being we're being very cognizant of trying to charge appropriately for freight. So that's one of our Goals of getting to profitability is being more aware of our freight, shipping with LTL carriers as opposed to UPS and using advantage of the U. S. Postal Service and just being more efficient in our freight. So it's a combination of a conscious effort that we're making on our end With rates also coming down.

Speaker 2

So it's a good combination.

Speaker 4

Okay, got you. And then I know you guys touched on operating expenses a little bit. It looked a little bit higher than I expected. I was wondering if you could maybe Quantify some of these non recurring costs for me, relating to various mergers?

Speaker 2

Yes. So one of the big there's a few different things that are driving it. One was The final stages of going live with NetSuite as our ERP is we put a lot of time and energy and focus into that since We launched that last month and had a lot going into that. So again, that's not something that's Going to completely go away because we have those seed licenses, we're NetSuite and we're always going to be continually trying to make improvements to that. But Leading up to the launch of that, really we put a lot of time and energy to go into that.

Speaker 2

So that's one. The second Parts of that was working through closing all the acquisitions and integrating them from a legal accounting And just operational perspective as well as getting closer for the TR Miller to close that doing the accounting work, the due diligence and the resources. So Those are a lot of different expenses that went in. And then the final one that we've talked about in the last few calls is the lead gen initiative that we're starting to see results from. It's just a long sales cycle because we're trying to attract enterprise customers that do long term contracts with us, not necessarily Single one time needs, but more long term needs.

Speaker 2

So all of those things combined are driving some of our SG and A Relative to gross profit, we're aware of it and looking at ways to ideally reduce our SG and A relative to our gross profit so that it's a much smaller expense and it can create even more profitability. So hopefully those things Kind of explain, Deeps, why the operating expenses may be a little higher in Q1 compared to what we historically have had relative to sales.

Speaker 4

Okay. And last one for me, on seasonality, wondering if you could maybe talk about the historical Trends by quarter, and then maybe if you see, the current environment Affecting historical seasonality trends this year?

Speaker 2

Yes. So a couple so historically, the Q1 Has typically been our smallest, our lowest quarter at about I think it's about 20% of revenue versus the 4th quarter, which is usually much higher. And then 2nd and 3rd typically are very similar. So for the past 27 years, we've almost always had our worst quarter in the Q1. So it's not something that is new to us and that's typically because at the end of the year people are using budgets or for the holidays at such a Finite period where people say these things need to be delivered before the end of the holidays or before the end of the year and our budgets need to be used by the end of the year and then the beginning of the year is spent planning and executing on those orders.

Speaker 2

So that's why it's happened. In terms of the general outlook in terms of business, As you can see with 28% growth, we haven't necessarily seen a significant slowdown In the orders, the dollar amount spent, we have seen not as many orders though. We have seen a smaller volume, which Over a long period of time, it's good for us because it theoretically should take less to process as many orders. But we have seen the average order size go up with Less volume. So we find that a trend of people spending a little bit more wisely and taking more of our Direction of what they should be spending and why they should and really having much more targeted campaigns rather than blanketed campaigns.

Speaker 2

So We've shifted some of our efforts, our sales and marketing efforts to be much more targeted opposed to blanketing. So, we haven't necessarily seen I said the anticipated slowdown. There is some sentiment of people being a little bit more conservative and nervous about the uncertainty of the future, but we haven't necessarily seen that reflected in our billings yet.

Speaker 4

Okay. And if I could sneak one more in, just on the average order size recently, is this a function of working with larger customers in general?

Speaker 2

I think it's a combination of us working with larger Customers as well as us making a conscious effort to focus our energies towards customers who Are more in line with how we can help them more effectively. So a smaller company who really doesn't see as much value in us because they want One single need completed for them, is it going to get as much value as a customer who has an online store with us with the fulfillment distribution and compliance Program set up for them that reports back to them exactly what we're doing in that ROI. So we're really making a conscious effort for that. So I do think that That could be a part of that as well. I would think that that's a big part of that.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. And there are no further questions in queue at this time. I would now like to turn the floor back to Andy Schapp for closing remarks.

Speaker 2

Thank you everybody for joining. We're excited about our progress for Strand in the Q1 and we're more excited about our position in the market right now For the rest of the year with interest rates rising, uncertainty in the economy, our balance sheet and our cash position, As well as our reputation and strength of our company, I think is a massive differentiator for Strong well into the future. I think right now is the time for us to capitalize and I'm excited about the next few months for Strand as well as well into the future. So thank you everyone for joining. We will keep everyone updated As recent developments occur and I appreciate everyone listening and your confidence in Strand as an organization.

Speaker 2

Thank you.

Operator

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Powered by Quartr