Stran & Company, Inc.

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. If you would like to join the queue at any time, you may press star 1 on your telephone keypad. If you wish to remove yourself from queue, you may press star 2. It is now my pleasure to turn the floor over to your host, Alexandra Schilt. Alexandra, the floor is yours.

Good morning, and thank you for joining Strawn & 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 Browner, Chief Financial Officer. The company issued a press release today, May 15, 2023, containing its 2023 First 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 March 31, 2023. 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 STRON'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 STRON'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 everyone for joining us today as we discuss the meaningful progress made during the first quarter of 2023. As a result of continually executing on our growth strategy, including organic growth and M&A, we reported an approximate 29% increase in revenue to $15.8 million for the first quarter 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 the diversification 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 first quarter is our slowest quarter in the year, given our customers' business cycle and planning budgets, are usually still being finalized. 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% increase in gross profit to approximately $4.7 million. Gross margin increased from 26.3% of revenue in the first quarter of 2022 to 29.8% this quarter, reflecting a reduction in our purchasing and freight costs as a percentage of sales. The 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 three recent acquisitions. We are also absorbing costs related to the implementation of NetSuite, 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 a return to profitability. At the same time, we have maintained a strong balance sheet with over $20 million of cash and investments, allowing us to continue to execute our growth initiatives, including M&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. Towards this end, we announced signing a definitive agreement to acquire T.R. 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 spanning over 47 years, combined with the implementation of our technologies and marketing, we believe we can enhance their business while assisting in the overall growth of STRON. We expect to complete the acquisition during the second quarter and report details appropriately. While discussing M&A, I'm proud to report that we continue to effectively integrate our previous announced acquisitions of Premier NYC, TrendBrand Solutions, as well as Gap Promo, all of which we believe will provide important and unique advantages to Strong. In terms of future acquisitions, at the moment we are focusing on closing and integrating TR Miller. However, given the lead time required to identify and complete due diligence on targets, We continue to actively explore potential M&A opportunities that can be complimentary and accretive to our business. In addition, we continue to secure new customers as well as expand existing customer relationships. Specifically, in February, 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. We're in the process of launching their e-commerce store now so we can support over their 4 million influencers with the expectation of bolstering their loyalty program. During the quarter, we also witnessed an increase in spending for our existing customers as we continue to deliver on their needs as well as develop creative solutions to address their unique requests 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 product. Importantly, we are executing and pursuing growth initiatives that we believe will propel our business and lead to long-term, sustainable profitability. 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 further our growth. So to wrap up, We developed and executed a business growth strategy resulting in increased awareness of STRON, 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 billion. We also expect that these steps we are taking and the investments we are making will result in long-term profitability. We're extremely proud of our progress and look forward to our accomplishments in 2023. 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.

Thank you, Andy. Revenue increased 28.7% to approximately $15.8 million for the three months ended March 31, 2023, from approximately $12.3 million for the three 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% to approximately $4.7 million or 29.8% of revenue for the three months ended March 31st, 2023 from approximately 3.2 million or 26.3% of revenue for the three months ended March 31st, 2022. 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 three months ended March 31st, 2023 was approximately 0.7 million compared to a net loss of approximately $0.5 million for the three months ended March 31, 2022. The increase was primarily due to increased expenses relating to an increase in the lead generation initiative, integration expenses related to the acquisition of the GAAP promotions assets, the Trend Brand Solutions assets, the Premier NYC assets, 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 three months ended March 31st, 2023. This was partially offset by lower cost of purchases as a percentage of revenue in the three months ended March 31st, 2023, and organic growth in our business. At March 31st, 2023, the company had 20.9 million of cash and investments in no long-term debt. At this point, I'll turn the call back over to Andy.

Thank you, David. To wrap up, we have successfully executed on our growth strategy, which has resulted in a growing national footprint, strong customer base, and increased revenue. We remain encouraged by the outlook of the business and look forward to reporting additional meaningful updates throughout the year. 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?

Certainly. The floor is now open for questions. If you would like to join the queue at this time, you may press star 1 on your telephone keypad. If you wish to remove yourself from queue, you may press star 2. We do ask if listening on speakerphone this morning that you please pick up your handset while asking your question to provide optimal sound quality. Once again, that will be star 1 at this time. to join Q. Please hold a moment while we poll for questions. And we have a question this morning coming from Edward Riley from EF Hutton. Edward, your line is live.

Please go ahead. 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. I'm wondering if you can maybe talk about what's been driving this down.

Sure. Thanks, Eddie. A couple things have been driving it down. One, 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. In addition to that, We're also 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 taking 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. So it's a good combination.

Okay, gotcha. And then I know you guys touched on operating expenses a little bit. It looks 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.

Yeah, so 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 the seat 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. So that's one. The second part 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 T.R. 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. So all of those things combined are driving some of our SG&A relative to gross profit. We're aware of it and looking at ways to ideally reduce our SG&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 to you why the operating expenses may be a little higher in Q1 compared to what we historically have had relative to sales.

Okay. And last one for me on seasonality. Wondering if you can maybe talk about the historical trends by quarter. And then maybe if you see the current environment affecting historical seasonality trends this year?

Yeah, so historically, the first quarter has typically been our smallest, our lowest quarter at about, I think it's about 20% of revenue versus the fourth quarter, which is usually much higher. And then second, third, typically are very similar. So for the past 27 years, we've almost always had our worst quarter in the first quarter. 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. It's 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. So that's why it's happened. In terms of the general outlook in terms of businesses, 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 is 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 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. We've shifted some of our sales and marketing efforts to be much more targeted opposed to blanketing. We haven't necessarily seen a significant slowdown. There is some sentiment of people being a the uncertainty of the future, but we haven't necessarily seen that reflected in our billings yet.

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

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 isn't 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, you know, we're really making a conscious effort for that, so I do think that that could be a part of that as well, or I would think that that's a big part of that.

Okay, great. Thank you. Thank you.

And as a reminder, the floor is open for questions. If you would like to join the queue at this time to ask a question, please press star 1 on your telephone keypad. Once again, that'll be star 1 if you would like to join the queue to ask a question. Please hold a moment again while we poll for questions. and there are no further questions in queue at this time. I would now like to turn the floor back to Andy Shape for closing remarks.

Thank you, everybody, for joining. We're excited about our progress for Strachan in the first quarter, 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 STRON 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 STRON 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 STRON as an organization. Thank you.

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.