Stran & Company, Inc.

Good day, ladies and gentlemen, and welcome to the Strand & Company Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star 1 on your phone to enter the question queue at any time, 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, Allie Schilt, Vice President of Crescendo Communications. Ma'am, the floor is yours.

Thank you. Good morning and thank you for joining Strawn & Company's 2022 Third Quarter Financial Results and Business Update conference call. On the call with us today are Andy Shape, Chief Executive Officer, and David Browner, Interim Chief Financial Officer. The company issued a press release today, November 14, 2022, containing its third quarter 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 three months ended September 30th, 2022. Before we get started, we'd 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 judgment 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 Strong's control. With that, we will now turn the call over to Andy Shape, Chief Executive Officer. Please go ahead, Andy.

Thank you, Allie, and thanks to everyone for joining us today as we discuss our progress and financial results for the third quarter of 2022. We continue to witness steady growth in sales for the third quarter of 2022, as evidenced by our revenue of $13.6 million, a 24% increase compared to the same period last year. It's also worth noting that our third quarter of 2021 was the second best quarter in the company's history, notably received 50% increase in sales year over year. Additionally, we continue to carefully manage expenses, and even though we reported a slight loss for the quarter, this is part of our deliberate investment in infrastructure and capabilities to further accelerate our growth. While we have historically been profitable and will be profitable again in the near term, this market is ripe for consolidation. This time to strike is now. I'm also confident the investments we're making into organization will allow us to reap the rewards for years to come. At the same time, we have maintained a strong balance sheet with a combined $22 million of cash and cash equivalents in short-term investments as of September 30, 2022, and no long-term debt. We believe the activities we are undertaking, including mergers and acquisitions that complement our business operation, increasing STRON's recognition within the industry, and entering new geographies are the fundamental pillars for accelerated growth and ongoing success, while also serving as the key differentiating elements that will position STRON at the forefront of the industry. To execute on our growth strategy, we actively explore, identify, and research companies within the promotional products market that we believe have the potential to be synergistic and accretive to STRON. Towards this end, we completed the acquisition of TrendBrand Solutions in September as we have fully integrated the business within STRON. Trend has been established presence in the South, specifically in this Houston area. Expanding our geographic presence is key to our growth strategy, and Houston ranks third among metro areas and Fortune 500 headquarters locations and is home to two dozen Fortune 500 companies. With Trend's recognition in the Houston market and our comprehensive platform comprised of leading technologies and knowledgeable employees, we believe we have the ability to become a leading player in the Texas market. In connection with the acquisition, we welcome Michael Krauser, former CEO of Trend, as our new regional vice president of STRUN. Michael has assumed the responsibility to oversee our Texas region operations with the aim of further penetrating the southern market, and we look forward to his contributions. Not only are we executing on our M&A strategy, we're also continuing to secure significant multi-year contracts with high-profile clientele. This includes our contract with the leading North American infrastructure service company announced during the quarter. We've been contracted to provide promotional products and services, which we are currently delivering. The customer's goal is to increase our market awareness as well as our customer loyalty. This contract is projected to generate over $1 million in revenue annually, and I'd like to highlight that this contract came as a referral from an existing customer, which we believe further validates the quality of our products and services as well as our value proposition for our customers. We've effectively implemented a growth strategy that is allowing us to reach new records operationally, financially, and geographically. Furthermore, as I previously mentioned on the call, we have invested heavily and launched an expanded sales and marketing program with a dedicated lead and demand generation team comprised of experienced industry veterans. We believe these leads are resulting and resulting active discussions with potential customers and companies validates our ongoing efforts and demonstrates the vast opportunities within the industry which we intend to take advantage of. Through these and other initiatives, we are gaining significant traction in the market and believe we are firmly positioning ourselves as a leader in the promotional products industry. In addition to our sales and marketing efforts combined with acquisition opportunities, we have worked diligently to implement Oracle's NetSuite as our new ERP in order to gain operational efficiencies, provide greater financial analysis, and prepare for additional scalability. And we expect to be fully implemented by the end of 2022. Looking at the fourth quarter, we are seeing very strong bookings with over $48 million in orders secured year-to-date. It's important to reiterate that these numbers aren't reflected in build revenue until the products are delivered over the next few months, which includes the holiday season that is approaching. However, it does reinforce our traction in the market. Overall, we continue to build upon an already established and successful business model that we are actively scaling. We believe our activities have directly resulted in our record revenue numbers as well as assisted in the steady growth of the company. Lastly, we continue to carefully manage expenses and have maintained a strong balance sheet, as I mentioned earlier. We ended the quarter with $22 million of cash and cash equivalents in short-term investments and no long-term debt. As a result, we are well capitalized to internally fund and execute both organic growth and acquisition strategies, firmly establishing STRON as a leader in the promotional products industry, a market valued at over $23 billion. Furthermore, showing our confidence in the business, we have continued to execute our share repurchase program. Since we last reported the senior management team has purchased approximately $1.2 million worth of common stock, we've repurchased shares opportunistically and tend to continue to do so as appropriate. In summary, we are very proud of the ongoing efforts that allow us to further execute our growth strategy, has resulted in growing our customer base, expanding geographically, and identifying accretive acquisition targets. At the same time, we are focused on increasing awareness of STROM through investor and industry-related activities. Together, we believe these initiatives, along with continued execution, will drive long-term value for our shareholders. At this point, I'd like to turn the call over to our Interim Chief Financial Officer, David Browner, to go over the financials in more detail. Please go ahead, David.

Thank you, Andy. Revenue for the first three months ended September 30, 2022, increased 24% to $13.6 million, compared to $10.9 million for the same period in 2021. The increase was primarily due to a higher spending from existing clients as well as business from new customers. Additionally, we benefited from the acquisition of Gap Promotions Assets in January 2022 and Trend Brand Solutions Assets in August 2022. Gross profit increased 14% to 4.2 million or 31.3% of sales for the three months ended September 30th, 2022 compared to 3.7 million or 34% of revenue for the same period last year. The increase in gross profit was due to an increase in sale, partially offset by an increase in purchasing costs. Operating loss for the three months ended September 30th, 2022 was 649,000 compared to an operating income of 1 million for the same period last year. This decrease was primarily attributable to a higher general and administrative expenses which was primarily due to additional expenses related to the acquisition of the GAAP promo assets, the trend brand solution assets, the implementation of a new ERP system on Oracle's NetSuite platform, ongoing public company expenses, and the organic growth in our business. Operating expenses as a percentage of revenue were 36.1% in the third quarter of this year, compared to 24.6% for the same period last year. Net loss for the three months ended September 30th, 2022 was approximately 0.7 million compared to a net earnings of approximately 0.7 million for the same period last year. This decrease was primarily due to lead generation initiatives, integration expenses related to the acquisition of GAAP promotions and trend brand solutions assets, ongoing expenses relating to being a public company, and higher cost of purchases. At September 30, 2022, the company had $22 million of cash and cash equivalents in short-term investments and no long-term debt. Given the strength of our balance sheet, as previously announced, we implemented a share repurchase of up to $10 million. Since last reported, we have repurchased approximately $667,545 of common shares at an average price of $1.78 for a total cost of approximately $1.2 million through the buyback program. That brings our total share repurchase amount for 2022 to 1,667,545 shares at an average price of $1.85 for a total cost of $3,125,803. At this point, I'll turn the call back over to Andy.

Great. Thank you, David. To wrap up, we are experiencing strong revenue growth quarter to quarter and continue to successfully execute on a business strategy that has resulted in a robust roster of high-profile clientele, an expanded geographic footprint, and top-tier talent supporting operations. Additionally, we are firmly positioning ourselves as a leader within the promotional products industry and intend to take advantage of the vast opportunities we see within the market. I'd like to thank you for joining up the call today, and we look forward to providing further updates and developments as they unfold. At this point, we'd like to open up the call for questions. Operator?

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Edward Riley from EF Hutton. Your line is live. Good morning, gentlemen.

You mentioned you're going to reach profitability in the near term. I'm wondering if you could expand a little bit more on this and if you expect that to be driven more from an increase in revenue or decrease in G&A due to, you know, less acquisition costs and costs relating to the ERP system rollout?

Sure. Thanks, Eddie. Yes, so we're very aware of our expenses and are managing them. As we've mentioned in the past, our goal this year was to continue to build infrastructure for scale, getting to where we want to be. You know, we got to approximately $40 million last year. getting to scalability to be $100 million plus company, we need to invest in that infrastructure. So we've been consciously making an effort in that. But we have a very quantifiable, or we have very specific ways that 2023, looking at Q4 and into 2023 of making profitability, starting with increasing our gross margin, That's the first way to do it, creating more automation through implementation of NetSuite and a better documented and better visibility into our financials and managing that even better. Taking advantage of rebates, discounts, and prepayments with our vendors. Since we have cash and capital, we can use that to our advantage. Also looking at creating shipping as a revenue generator rather than just pass-through as much as possible. Adhering to a more structured budget. David Browner, our interim CFO, has done a fantastic job of developing a much more strict budget that we're adhering to and implementing for moving forward. Also adjusting our comp plans to give more incentive on quantifiable growth and profitability, not just on sales. Another thing that we're looking at is monitoring and forcing actions related to our sales expenses in relation to revenue and profitability. So really monitoring that and looking at how that looks. And then performing additional program analysis to execute steps that remove or restructure accounts that are not being profitable and replace them with more profitability. And then finally is potential reduction in staff as a result of automation efficiencies. And we're not looking at doing that through layoffs or letting people go. It's more in keeping our current staff in place. As we continue to add automation, we won't need to add more people, but as we increase revenue, we'll be able to increase without increasing our headcount and our staff, so that should become more creative with all those efforts. So we absolutely have a very clear path of getting to profitability. It's just a matter of scaling up to give us the ability to do that until then. So we don't have an exact date of when that's going to happen, but we're looking towards that in the very near future.

Okay, great. That was really helpful. And then I was wondering if you could maybe talk about the seasonality, if there is anything in the business as we approach the holiday season, what we should expect maybe in the fourth quarter.

Yeah, so typically the fourth quarter has typically been our strongest quarter, and we're most likely going to see that again this year is what we're forecasting. Historically, last year there was a pent-up demand, so last year was a very strong fourth quarter, and we intend to see that as well this year. The one thing that we've seen is supply chains are still very difficult to navigate through, so we're trying to push that a little bit more forward than we have in the past, so see the revenue come in in November and early December rather than the end of December. In terms of seasonality, fourth quarter is typically our highest sales, and we intend to see that this year as well.

Okay, gotcha. And then on gross margin, you mentioned various steps that you're taking to increase that, and notice that purchases over revenue compared to Q2 have decreased a little bit. Did you guys just implement the vendor prepayments policy and I'm wondering if you could unpack that a little bit for us.

Sure. So there's a few things that are driving the gross margin higher. And the first one is more awareness and education to our entire team. So as we're acquiring new companies and as we're growing and continue to grow, is making sure that we're aware that STRON does have a very valuable value proposition to our customers. And we don't need to give away revenue because we really deliver value to our customers and they're willing to pay you know, at market rate, not below. We don't need to go below market rate. So the first reason the way we are looking at that is awareness and education and reporting. So we've done a really good job of identifying areas where we should increase our gross profit margin, where we're also adding value to customers. You know, we want to be careful about not overcharging or losing business because of not being competitive. But that's the first way of doing it. In terms of the rebates, discounts, and prepayments. That has been implemented, but a lot of that may not be captured yet because we don't really necessarily report those until the end of the year after we've recognized our annual spend. So we are expecting to see more rebates hit our P&L in the fourth quarter. In addition to that, once we implement NetSuite, once we're fully live in NetSuite, which we're expecting at the end of this year, that'll give us even a greater ability to automate that process so that we make sure that we're not missing out on potential discounts when we do prepayments or pay if we get a discount to pay those or prepay them.

Okay, great.

That's it for me. Thanks. Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Please hold while we poll for questions. Thank you. That concludes our Q&A session. I will now hand the conference back to Andy Shape, Chief Executive Officer of Strawn & Company, for closing remarks. Please go ahead.

Thank you, everyone, for listening. I would just like to reiterate that we're proud of our strong revenue growth. That was one of our goals this year is to see significant revenue growth so that we can continue to see the company grow and fund our growth to scale. We're accomplishing what we went out to do, which was grow our business at a top-line level, look at accretive acquisitions. We're completing those. We're still looking at quite a bit of acquisitions within the market. We want to be patient with that. We're not rushing into anything, but we do have quite a bit of activity in the M&A space still, and we continue to look at that. So we're excited about the future of Stron and our position within the industry. We're in a unique position where we have a very strong balance sheet, and I think within the near future, We're going to see even more opportunity with other companies potentially struggling with the cost of interest rates going up and potentially not being able to afford their working capital. So we're looking forward to the future of STRON and look forward to filling everyone in on additional news in the future. Thank you for your time.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.