Earnings Call Transcript - LIVE Q4 2022

Operator, Operator

Good day, everyone, and welcome to today's Live Ventures Incorporated Earnings Call. At this time, all participants are in a listen-only mode. Please note, today’s call may be recorded and I will be standing by, should you need any assistance. It is now my pleasure to turn the conference over to the Director of Investor Relations, Greg Powell. Please go ahead.

Greg Powell, Director of Investor Relations

Thank you, Chloe. Good afternoon, everyone, and welcome to the Live Ventures fiscal fourth quarter and full year 2022 conference call. Joining us this afternoon for the call are Jon Isaac, our Chief Executive Officer and President; David Verret, our Chief Financial Officer; and Eric Althofer, our Chief Operating Officer. Some of the statements we are making today are forward-looking and are based on our best view of our businesses as we see them today. The actual results could differ materially due to the number of factors, including those outlined in our latest Forms, 10-K and 10-Q filed with the Securities and Exchange Commission. We have no obligation to publicly update any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions, or otherwise. You can find our press release referenced on this call in the Investor Relations section of the Live Ventures website. I direct you to our website www.liveventures.com or www.sec.gov for our historical SEC filings. And now I'll turn the call over to David to walk through our financial performance.

David Verret, Chief Financial Officer

Thank you, Greg, and good afternoon, everyone. Overall, the company delivered a solid fourth quarter and full year 2022 performance in spite of increasing economic headwinds. During our fiscal year 2022, we continued to execute on our multi-lever, buy-build-hold strategic plan to maximize stockholder value. On the buy side, we added Kinetic and Better Backers to our steel manufacturing and flooring manufacturing segments, respectively. On the build side, we made significant capital investments in new equipment in our flooring manufacturing business, Marquis Industries. In addition, we repurchased 86,451 shares of our common stock during the year. Before we jump into the numbers, let me discuss the acquisitions that we completed during the year. At the end of June, our steel manufacturing segment acquired The Kinetic Company Incorporated, a 74-year-old Wisconsin-based company. Kinetic is a highly recognized and regarded brand name in the production of industrial knives and hardened wear products for the tissue, metals, and wood industries, and is known as a one-stop shop for in-house grinding, machining, and heat treating. We believe that Kinetic is a great fit within our growing steel manufacturing segments. In July, we acquired certain assets of Better Backers Incorporated for approximately $3.2 million. Better Backers provides carpet-backing for its carpet manufacturing customers. For more than 40 years, Better Backers has taken great pride in its reputation for standing behind the quality of its products and providing its customers with the highest level of service. Better Backers is a nice addition to our flooring manufacturing segment. Now I'll briefly discuss the financial results for the fourth quarter and full fiscal year 2022. The revenue for the fourth quarter - our total revenue for the fourth quarter increased to $73.8 million, up 4.6% as compared to $70.5 million in the prior year period. The increase in revenue is primarily attributable to the acquisitions of Kinetic and Better Backers, partially offset by decreased revenue in our corporate and other segment. Gross profit for the fourth quarter was $22.9 million, down from $25.6 million in the prior year period. The gross margin percentage for the company decreased to 31.1% from 36.3% in the prior year period. The decrease in gross margin percentage is primarily due to increased raw material costs. Operating income decreased to $1.2 million in the fourth quarter of 2022 as compared to $9.1 million in the prior year period. The decrease in operating income is attributable to the SW Financial goodwill and other intangible assets impairment charge of $4.9 million and inflationary cost increases. For the three months ended September 30, 2022, net loss was $0.6 million as compared to net income of $7.1 million in the prior year period. The decrease in net income is attributable to the goodwill and other intangible assets impairment charge and lower operating income. Diluted net loss per share for the current quarter was $0.20 per share as compared to a diluted earnings per share of $2.23 in the prior year period. Adjusted EBITDA for the fourth quarter was $7.2 million, a decrease of approximately $4.3 million as compared to the prior year period. The decrease in EBITDA is primarily due to the increase in cost of revenues resulting from inflationary cost increases. I will now discuss the financial results of our fiscal year ended September 30, 2022. Fiscal year 2022 total revenues of $286.9 million increased approximately $13.9 million or 5.1% as compared to the prior year period. The increase in revenues is primarily due to the acquisitions of Kinetic and Better Backers, the inclusion of a full year's financial results for SW Financial and inflation-based sales price increases. Flooring Manufacturing segment revenues increased 0.5% to $130.9 million as compared to $130.2 million in the prior year. The increase is primarily due to increased sales prices as well as the acquisition of Better Backers. These increases were partially offset by lower sales volume stemming from decreased customer demand. The Retail segment revenues decreased 3% to $86.2 million as compared to $88.8 million in the prior year. The decrease was primarily due to inflationary pressures, supply chain issues, and overall product sales mix. In addition, prior year's sales were positively impacted by government stimulus payments that consumers received during fiscal year 2021. The decrease in revenue was partially offset by the addition of seven new vintage stock store openings in 2022. Steel Manufacturing segment revenues increased by approximately $11.3 million or 23% as compared to the prior year due to increased sales pricing as well as the acquisition of Kinetic in June 2022. Finally, approximately $4.7 million of the increase in corporate and other segment revenue was due to SW Financial becoming a consolidating variable interest entity in June of 2021. Gross profit for the full year 2022 was $97.8 million, down from $99.5 million in the prior year. The gross margin percentage for the company decreased to 34.1% from 36.4% in the prior year. The decrease is primarily due to tightened margins in our Flooring Manufacturing segment. The Flooring Manufacturing segment gross profit margin decreased to 24.4% as compared to 29.1% in the prior year. The decrease is primarily due to increases in raw material costs. Retail segment's gross profit margin decreased to 52.9% as compared to 54.1% in the prior year. The decrease is primarily due to the sales mix of new and pre-owned products. The Steel Manufacturing segment's gross profit margin increased to 27.8% as compared to 24.2% in the prior year period. The increase in gross profit margin is primarily due to sales price increases throughout 2022. Full year 2022 general and administrative expenses increased by approximately $2.3 million or 4.4% as compared to the prior year. The increase is primarily due to the acquisition of Kinetic in June of 2022, increases in employee compensation and related costs as a result of our Retail segment opening new locations and the consolidation of SW Financial in June 2021, partially offset by reductions in legal and other professional fees. General and administrative expenses as a percentage of revenues remained steady at approximately 19% as compared to the prior year. Selling and marketing expenses increased approximately $1 million for the full year 2022 as compared to the prior year, primarily due to increased convention and tradeshow activity, which was largely cancelled in fiscal year 2021 due to COVID. Sales and marketing expenses as a percentage of revenue were 4.3% as compared to 4.2% in the prior year. Full year 2022 operating income of $25.9 million decreased 27.6% as compared with the prior year. The decrease in operating income is attributable to the fourth quarter goodwill and other intangible assets impairment charge and lower profit margins. Net income for fiscal year 2022 was $24.7 million, a decrease of $6.5 million or 20.7% as compared with the prior year. The decrease is primarily attributable to lower operating income and one-time gains net of charges, partially offset by decreases in interest expense and income tax expense. Diluted EPS for the current year was $7.84, a decrease of 20% as compared to the prior year. Fiscal year 2022 net income of $24.7 million includes an $11.4 million gain related to the ApplianceSmart bankruptcy settlement, partially offset by the $4.9 million impairment charge and one-time acquisition-related charges of approximately $1.5 million. Fiscal year 2021 net income of $31.2 million includes $7.9 million in gains related to the extinguishment of PPP loans and the settlement of certain ApplianceSmart liabilities in connection with the bankruptcy. Adjusted EBITDA for fiscal 2022 decreased 13.8% to $38.4 million as compared to $44.5 million in the prior year. The decrease in EBITDA is primarily due to the decrease in profit margins. A reconciliation of adjusted EBITDA has been provided in our earnings release that we filed earlier today. Turning to liquidity, we ended the fourth quarter with cash of $4.6 million and cash availability under our various lines of credit of $26.4 million for a combined liquidity of $31 million. I would like to highlight our low level of leverage. As of fiscal year end, our net debt to adjusted EBITDA ratio was 2.1x. We maintained a low level of leverage while purchasing two new businesses this year, repurchasing shares and making significant capital investments at Marquis. Net cash provided by operations was approximately $14.6 million for the year ended September 30, 2022, as compared to net cash provided by operations of approximately $29.2 million for the year ended September 30, 2021. We had net working capital of approximately $78.4 million as of September 30, 2022, as compared to approximately $33.8 million as of September 30, 2021. The increase is primarily due to the net assets received from the acquisitions of Kinetic and Better Backers, increases in accounts receivable and inventories, partially offset by a decrease in debtor in possession liabilities. Total assets increased $66.9 million or 31.6% to $278.6 million as compared to $211.7 million as of September 30, 2021. Total stockholders' equity increased $22.1 million to $97.2 million. Cash flows provided by financing activities increased to approximately $25.4 million during the year ended September 30, 2022, primarily due to proceeds from borrowings under the revolver loans and issuance of notes payable, which is primarily associated with the acquisition of Kinetic. As part of our capital allocation strategy, we may make share repurchases from time to time. We believe our stock repurchases represent long-term value for our stockholders. As previously disclosed, the company announced a 10 million common stock repurchase plan in 2018. During fiscal year 2022, we repurchased 86,451 shares of common stock at an average price of approximately $31.18 per share. The company has repurchased 504,921 shares of its common stock for approximately $6 million under the plan to date. As of September 30, the company had approximately $4 million available for repurchases under this program. In conclusion, while the current business environment remains challenging, we remain optimistic about our ability to navigate the environment and drive long-term returns for our stockholders. We will now take questions from those of you on the conference call. Operator, please open the line for questions.

Operator, Operator

And we'll take our first question from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Theodore O'Neill, Analyst

Thank you very much. I have a couple of questions regarding the Retail segment. In your prepared remarks, you mentioned that sales mix is a concern. Could you clarify which has better margins, new products or pre-owned products?

David Verret, Chief Financial Officer

Used will typically have better margins. And on the new product, on average, has higher prices.

Theodore O'Neill, Analyst

In the Flooring segment, you mentioned inflationary issues. Given that we are now halfway through December, are you starting to see any stabilization of those inflationary pressures, or are they still persisting into this quarter?

David Verret, Chief Financial Officer

Yes, we are seeing some softening in some of the inflationary pressures that we've been having. So we're just continuing to maneuver through the economic environment as things progress, but we are seeing some softening. We're optimistic about it.

Theodore O'Neill, Analyst

Okay. Can you give us any more details on the $4.9 million impairment charge in SW Financial?

David Verret, Chief Financial Officer

Yes. So our annual goodwill impairment test is as of July 1 of every year, and over the course of going through that analysis, we're looking at SW Financial and they are a broker dealer. So they're in the business, they get commissions from trading stock. And given the market conditions, the trading has really dropped significantly, which has impacted their revenues compared to where they were about a year ago when we entered into that transaction with them. So largely driven by the current economic environment.

Theodore O'Neill, Analyst

My final question is about raw material inventory, which has increased significantly compared to a year ago and has remained at the same level as last quarter. Could you provide me with some information on that?

David Verret, Chief Financial Officer

Yes. So earlier in the year, I mean, as you know, there were supply chain issues that we were dealing with. And in order to combat some of that, and to make sure that we had product ready to sell, we did get a little bit more aggressive on getting more raw material inventory in given the lag times. And then also you got the inflation aspect on the inventory as well, the higher prices. So I think the combination of those two is really what contributed to the increase in inventory. It's something that we are focused on, especially as we kind of maneuver through this year. Does that answer your question?

Theodore O'Neill, Analyst

Yes, it does. Thank you very much.

Operator, Operator

We will move next to Joseph Kowalsky with Upstream Investment Partners. Please go ahead.

Joseph Kowalsky, Analyst

Hello, gentlemen. Thank you for taking the call and thanks for the interesting information.

David Verret, Chief Financial Officer

Thank you.

Jon Isaac, Chief Executive Officer

Hi, Joseph.

Joseph Kowalsky, Analyst

Hi, and thank you to the previous caller for addressing several of my questions. From what I can see, it appears that all segments reported earnings this quarter, except for corporate and other. It looks like SW Financial faced the challenges there. Can you confirm that the other segments were profitable for the quarter?

David Verret, Chief Financial Officer

Yes, for operating income, but on depreciation, everything is in the black except for corporate and other. It's important to remember that corporate includes SW Financial, which accounts for all the corporate costs.

Joseph Kowalsky, Analyst

Gotcha, right. Yes. So is SW Financial also an RIA, or it's just a broker?

David Verret, Chief Financial Officer

It's a broker dealer.

Joseph Kowalsky, Analyst

My broker dealer has both a registered investment advisor side and a broker dealer side. I'm not sure how SW Financial operates if you're familiar with the terminology.

Eric Althofer, Chief Operating Officer

Yes, this is Eric Althofer speaking. They have both designations, but their primary operations are under the broker dealer.

Joseph Kowalsky, Analyst

I hope they will expand the RIA, as it tends to be more profitable these days, and I would be excited to see them move further into that area. Do you know if they have any plans regarding that?

David Verret, Chief Financial Officer

It's certainly something which has been discussed. But again, we don't make our forward-looking statements. So it's certainly something that's been considered among other potential growth opportunities.

Joseph Kowalsky, Analyst

As far as Vintage Stock, I believe you mentioned that you've opened seven new stores. Are you noticing an increase in foot traffic compared to the COVID period? Do you think this trend will continue, given that there was a time when many assumed everything would transition to online shopping and there would be no physical stores? How does the outlook for foot traffic appear over the next five years, or without providing a specific projection, what general observations do you have in that area?

David Verret, Chief Financial Officer

Yes, if we look specifically at Vintage, their business model strongly emphasizes location. They are situated in areas that may lack fiber optics and have less streaming activity, yet they continue to attract traffic. During the COVID period, when many people were at home, they experienced a significant increase in business and had a record year last year. This positive trend is continuing.

Jon Isaac, Chief Executive Officer

This is Jon. At Vintage, we have a very, very unique experience when you walk through one of the stores. Where are you located, Joseph, by the way? I don't think I've ever asked you this.

Joseph Kowalsky, Analyst

Yes, I'm just outside of Detroit.

Jon Isaac, Chief Executive Officer

I encourage you to visit one of our stores if you're ever in the Midwest, as we have locations in 10 or 12 different states. We offer a unique product selection, especially now that other large retailers are discontinuing similar products, which has led to increased positive feedback from customers visiting our stores. Predicting foot traffic five years out is challenging, but we remain optimistic. We value the Vintage aspect of our business, which has historically outperformed. David mentioned the margins on used products, and we have built a strong inventory there. We are very positive about Vintage, and I suggest you check out one of our stores. You might discover items you never expected to find, like vinyl records, games, and movies from years past, and people truly enjoy that nostalgic shopping experience.

Joseph Kowalsky, Analyst

Yes, I know, vinyl has been becoming more and more prevalent. I think that's going to be around for quite a while to come, which is exciting. I would love to visit one of the stores if I get the chance. However, I have two other questions. You mentioned sales and marketing going to shows and similar events. Is that for a specific division, or...?

David Verret, Chief Financial Officer

Yes, that was primarily in our Flooring Manufacturing segment.

Joseph Kowalsky, Analyst

Got you. Regarding inflation, I appreciate your response. However, I want to ask about the pricing of the goods you sell. Are you managing to keep up with inflation in terms of your sales costs and the product costs of the goods you are selling, rather than just the cost of the goods you are purchasing?

David Verret, Chief Financial Officer

Yes, I think we've done a really good job in keeping up with that. If you look at Precision, you'll see an increase there. If you look at Vintage, it's very nominal, mostly just due to kind of the mix on the product, but over 50%. And so really, we're seeing that the pinching on the margins is coming from Marquis in the Carpet Manufacturing segment. We're working with them to try to get ahead, but they've been a step or two behind and trying to get those price increases, one through to keep up with it, the inflationary rate increases on their inventory.

Joseph Kowalsky, Analyst

Got you. And then last question I have is, with regard to the company as a whole, do you have an idea or a thought about the areas that you like to look to when you're looking for new companies? Or can it be pretty much anything?

Eric Althofer, Chief Operating Officer

Yes. And this is Eric Althofer again, since I oversee the M&A effort, I'll take that question. We are very opportunistic. And I think the two advantages we have are both patience and that we don't have a mandate to look at any specific industry or segment. So the direct answer to your question is we can look at any specific business, we are not constrained. We do tend to look for closely held family-held businesses with a strong culture and management team, and history of profitability. Historically, we've looked more in the manufacturing and heavy asset intensive businesses. But we can certainly look at any different segments. And we don't have a mandate to deploy capital at a given rate like a private equity firm. So we can be patient and employ all of the different levers to return stockholder value, whether it's investing in our subsidiaries, buying new companies, if the valuations make sense, or repurchasing shares and managing our balance sheet.

Joseph Kowalsky, Analyst

So you're basically not going to buy Berkshire Hathaway, but everything else is on the table.

Jon Isaac, Chief Executive Officer

As long as it makes money, as long as we like the management team, as long as there's predictable cash flows. And I think we've done a good job at finding those companies and negotiating them and making. There are many times where we bid on companies and we've been outbid by others, but the seller ends up selecting us as a buyer. And that's because of our philosophy and that is because we are not private equity and that's because we don't come in and destroy companies or chop them up and flip them. I'm very proud to say that we haven't sold a company that we've acquired. So, the legacy remains when with the company, the founders are happy to see their employees that have been there for 20, 30 years remain there. And as I stated in the press release, we buy-build-hold and that's really what we adhere to. So that resonates very, very well with many sellers. And we're happy to look at any opportunities that come across our way.

Joseph Kowalsky, Analyst

I'm impressed. And I appreciate that philosophy. And my clients and I tend also to be very patient, and long-term I don't take a client who wants to look at less than 5 years. And usually we're thinking between 5 and 20 years is really what we're looking for, to see some good results. So I appreciate very much that philosophy. Thank you so much. Thanks for your time. Thanks for answering questions.

Jon Isaac, Chief Executive Officer

Thank you.

David Verret, Chief Financial Officer

Thank you.

Operator, Operator

It seems there are no more questions at this time.

Greg Powell, Director of Investor Relations

Thank you everyone for joining the call and we look forward to having future calls. Thank you.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time. Have a wonderful evening.