Earnings Call Transcript - LIVE Q3 2021

Operator, Operator

Good day, everyone. And welcome to today's Live Ventures Incorporated Third Quarter Fiscal Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. It is now my pleasure to turn today’s program over to Virland Johnson, Chief Financial Officer.

Virland Johnson, CFO

Thank you, Amy. Good afternoon, everyone. Welcome to Live Ventures third quarter fiscal year 2021 earnings call. I'm joined by CEO, Jon Isaac. Note that 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. In the last few minutes, we filed our SEC Form 10-Q. I direct you to our website for a copy of this quarter's SEC Form 10-Q filing for Live Ventures and other historical SEC form filings. Overall, the company delivered a strong third quarter and nine months performance ended June 30, 2021. The company had revenues for the quarter of $69.1 million, compared to $42.5 million in the same period last fiscal year, a 63% increase. Revenue growth was driven by our Retail segment posting $21.7 million, a 52% gain for the same quarter last year due primarily to COVID and stimulus payments from the government in the second quarter of 2021. The Flooring segment increased revenue by 23%, reaching $34.2 million, as compared to $28.1 million, and our Steel segment recorded $13.0 million in revenue for the quarter. The company had revenues for nine months of $202.4 million, up from $130.9 million, or 55%. Revenue growth was led by our Flooring segment at $97.4 million, compared to $75.7 million, a 29% increase. Retail segment revenue grew 24%, recording $68.1 million, as compared to $54.7 million. The Steel segment recorded revenue of $36.5 million. Gross profit for the third quarter was $25.1 million, up from $16.7 million for the comparable period last year. The gross margin percentage for the company was down slightly to 36.3% from 39.4% for the same comparable period. Retail gross profit margin dipped to 53.9% from 58.0% due to various sales mix of revenue and labor pressures. Vintage is in the process of opening four to five new locations, with leases signed on two of those locations. Flooring gross profit also recorded a small dip in gross profit percentage to 28.8% from 30.6%, again due to a mix of products sold, carpet versus hardwood flooring, and the tightening of the labor market. Due to mainly inflationary price changes, the Steel segment reported a gross margin percentage of 26.2% or $3.4 million. Gross profit for the nine months was $73.8 million, up from $51.1 million for the comparable period last year. Gross margin percentage for the company was again down slightly to 36.5% from 39.0% for the same period last year. Retail gross profit margin dipped to 54.0% from 56.1% due to new versus used sales mix of revenue. Flooring gross profit for the nine months was slightly up in gross profit percentage to 28.9% from 28.1%. The Steel segment for the nine months had a gross margin of $8.6 million or 23.4% on revenue. General administrative expenses were slightly up at 20% of revenue for the third quarter, as compared to 19.4%. Sales and marketing expense has improved to 4.4% of revenue versus 5.9% of revenue for the third quarter in the same period last year. General administrative expenses for the nine months were down to 19.1% of revenue, as compared to the same period last year of 23.5% of revenue. Sales and marketing expenses were also down to 4.2% of revenue for the nine months when compared to the same period last year of 6% of revenue. Operating income was $8.2 million for the third quarter, an increase of $2.2 million or 37%. Operating income for the nine months ended June 30, 2021, was $26.6 million, as compared to $12.5 million for the same period last year, an increase of 112%. Other income included a gain on Payroll Protection Program loan forgiveness of $4.8 million for the third quarter and $6.2 million for the nine months ended June 30, 2021. Gains on debtor settlements related to the ApplianceSmart Chapter 11 proceeding in the third quarter were $650,000 and for the nine months $1.8 million. Net income for the third quarter was $9.9 million, as compared to $3.6 million for the third quarter last year, an increase of 177%. Net income for the nine months was $24.1 million, up from $6.5 million in the same period in our prior year, a 272% increase. Earnings per basic common share for the third quarter were $6.35, a 191% increase over this quarter last year of $2.18. Earnings per basic common share for the nine months were $15.41, as compared to $3.72 for the same period last fiscal year, or an increase of 314%. We ended the quarter with cash of $10.6 million and cash availability under our various lines of credit of $37.7 million for a combined total of $48.3 million. Cash generated by operations grew to $32.2 million for the nine months, up from $18.1 million for the same period last year. Through the nine months ended June 30, 2021, the company has continued to execute upon its strategy of both investing in the growth of its subsidiaries, as well as managing balance sheet risk and providing value to its shareholders through deleveraging. Net payments on revolving related party and notes payable were $18.3 million for the nine months, as compared to $20.3 million for the same period last year, and proceeds from the issuance of notes payable were $2.3 million and $9.8 million for the nine months this year and last year, respectively. Overall, the company reduced long-term debt by approximately $23.7 million year-to-date. Working capital for the company at the end of the third quarter was $36.8 million and the assets grew slightly to $198.7 million, up from $197.3 million as of September 30, 2020. For the nine months, the company invested $8.5 million in property and equipment, as compared to $2.4 million for the same period last year. During the three months ended June 30, 2021, the company also continued to execute on its acquisition-based growth strategy, making a minority interest investment in Salomon Whitney LLC, a broker dealer of securities for $6 million during the third quarter, and it’s currently pursuing FINRA approval to acquire the balance of the shares of the company. The company continues to invest in buying back its common stocks as opportunities in the market present themselves. As of June 30, 2021, the company has repurchased 533,011 shares of common stock, up from 499,805 shares as of our prior year end. Stockholders' equity is up applicable to live shareholders to $68 million from $43.9 million as of our prior year end, or 55%. With that, Jon and I will now take questions from those of you on the conference call.

Operator, Operator

Please note this call may be recorded. Let's take a call from Jeremy.

Unidentified Analyst, Analyst

I'm just curious about the acquisition of Salomon Whitney and I'm curious as to why you founded the Tyson acquisition, what metrics did you use? What's the most significant reason, if there is one, and just a little bit more about the acquisition there?

Jon Isaac, CEO

It's a variety of reasons. At a high level, we found this acquisition to be a good long-term investment for Live. As we stated in our press releases, we think there's potentially a roll-up opportunity. Right now we have a minority interest in Salomon until we obtain FINRA approval. We have looked at all sorts of considerations for acquisitions, such as the management team. We have an excellent and amazing management team running this, Larry and Tom. The historical revenues have been very stable and predictable, making it a worthwhile investment for Live in the long term. Thank you for your question. Let's move over to Joseph, please. Your question?

Unidentified Analyst, Analyst

Hi. Thank you very much. Inflation has been discussed in numerous contexts, and some people think it's transitory; some people think it's longer-term. What is your outlook on it, and how do you think it's going to affect the company?

Virland Johnson, CFO

Our feeling at the moment is that inflation is not going to be transitory. It is going to be somewhat longer-lasting, specifically in our Steel market. We also feel that it will affect our Flooring segment and Retail. Retail probably not as much, but definitely our Flooring segments and Steel segments will be impacted by it.

Unidentified Analyst, Analyst

In what way? I mean, how do you think it’s going to be affected?

Virland Johnson, CFO

A lot of it is pass-through. On the Flooring side, for example, we are a very big buyer of resin. Resin prices have changed, and the same with Steel. We are somewhat pleased with our acquisition of Precision Marshall; when we bought the company, commodity prices shot up, and we've made millions of dollars on paper just with the true value of Steel. Of course, we book according to GAAP, the lower of cost or market, so we are forced to book it as cost. But inflation has helped us in that regard. I can't tell you what percentage of it is also passed on to the customer. We've had numerous price increases at both companies that I just mentioned, Marquis and Precision. Hopefully, that answers your question.

Unidentified Analyst, Analyst

I guess what I'm asking is, how do you see the response from the market to any price increases that you might have to have? Is it elastic or inelastic? That's really where I was going with it.

Virland Johnson, CFO

We feel it is more elastic. We feel the market has already responded to higher prices in both segments, and we believe that if there is any continued inflation, it will also be met with elastic changes in our pricing structures.

Unidentified Analyst, Analyst

Okay. Thank you both.

Operator, Operator

And it appears we have no further questions as of now.

Virland Johnson, CFO

Let's take a question from Robert.

Unidentified Analyst, Analyst

Yes. I was just wondering if the SEC were to prevail in their complaint. What would the impact be on the company?

Virland Johnson, CFO

Robert, that's a good question. We've been instructed by counsel not to discuss the SEC matter. I will repeat that the company categorically denies all the charges, and we will vigorously defend ourselves. I will say again that we look forward to our day in court and our vindication at trial. So that's the only thing I can comment regarding that question, which also applies to anyone else who has a question about the SEC. We will categorically deny everything and we will be vigorously defending ourselves. I appreciate the question, though. Did you have others?

Unidentified Analyst, Analyst

No. That's really the main one. Everything else seems to be fine.

Virland Johnson, CFO

Thank you. Let’s take a question from Kumar.

Unidentified Analyst, Analyst

Hi. Hello. I'm calling from the U.K. here. So I guess we had a question about capital allocation. Can you hear me?

Virland Johnson, CFO

Yes. We can hear you. What is your question? Sorry. Can you repeat it?

Unidentified Analyst, Analyst

Okay. Yes. So my question was around capital allocation? How are you planning now going forward with share buybacks versus paying down some of the debt? Do you have any plans, given where the share price is now? Do you want to take advantage of the current market or what are you guys thinking?

Virland Johnson, CFO

That's a good question. Share buybacks or payment reductions for outstanding debt really varies on many circumstances. An obvious one is, what is our share price? Second, should we preserve cash to be ready for another acquisition? Or third, do we have debt that we should pay off, or do we have any debt that's outstanding that's coming due soon? It's a very fluid answer; it really depends on a week-by-week, month-by-month basis. I can tell you that since the beginning of our stock buyback program, the company has repurchased 533,000 shares since the beginning, which was February of 2018. So I think we've done well. The stock has spiked since then. In the quarter that you will notice in the 10-Q that we just filed, long-term debt decreased from $63 million to $45 million, which is a significant decrease since September 30th, since the beginning of our fiscal year. So these last couple of quarters, we've focused on repayment of debt and, in my opinion, have done extremely well operationally. We've generated $32 million in cash from operations. We are keeping a very close eye on the stock price, and if we feel that it is the best use of money for shareholders, we will focus on that. If we feel that we should preserve that for an acquisition or repayment of debt or whatever else it may be, it could also be opening a new plant or investing in new equipment. This is predominantly what we do. So think about those things. We appreciate your question. Let's move over to Marcel.

Unidentified Analyst, Analyst

Yeah. The simple question here, Jon, for you. Would you talk a little bit more about your acquisition criteria?

Jon Isaac, CEO

Acquisition criteria?

Unidentified Analyst, Analyst

Yeah. What do you look for in acquisition?

Virland Johnson, CFO

We look for many factors. If you look at our website, we have criteria for what we look for. But generally speaking, we look for companies that are, number one, profitable. Number two, we look for an amazing or stellar management team, and I think we have that at every one of our parent subsidiaries. The third factor is stability in earnings. We dislike volatility. We prefer companies that generated consistent returns over time. We look for what I like to call no-brainer type acquisitions—companies that we know for a fact, or to a high degree, that they will continue to generate the cash flow they have historically. We evaluate and look at numerous companies every year. We are very selective and typically make only one or two or maybe three acquisitions; many of them are bolt-on acquisitions. We make very few acquisitions a year and we're highly selective because we can afford to wait for the right acquisition.

Unidentified Analyst, Analyst

Sounds good. Now just a quick follow-up: how do you retain current management to work for Live?

Jon Isaac, CEO

Retain management? Generally speaking, in any acquisition we make, we like the founders or the sellers to remain on board because they have superior knowledge of the company compared to anyone else. We try to sign employment contracts with most of them, and we financially incentivize them to perform well. This is a high-level overview of what we do. We let our subsidiary CEOs do what they believe is best, and we give them autonomy. We believe they appreciate this approach and it has worked well over the years. We appreciate your question. Let's move over to Jeremy; he's been waiting.

Unidentified Analyst, Analyst

I am also curious, as you mentioned earlier, the roll-up strategy. I would like to hear more about what a roll-up strategy is and further details on that.

Virland Johnson, CFO

Without going into too much detail on how finance works, a roll-up is basically acquiring similar companies in similar industries that would, quote unquote, roll up to the existing company that we have today. In your initial question about Salomon, companies that are similar to what Salomon does—perhaps they are smaller, maybe the seller wants to retire—we can acquire them and potentially integrate them into Salomon, to use your example. But that's how roll-ups work.

Unidentified Analyst, Analyst

Okay.

Virland Johnson, CFO

Let's move over to Joseph; I think he had another question.

Unidentified Analyst, Analyst

Actually, I just neglected to say, well done, which I wanted to say. Thank you for all the hard work from the company. The question did come up to me; I was listening, and regarding roll-ups, are you also considering vertical integration? Is that similar? Is that something you're not thinking about? But the main reason I got back in the queue is really just to say thank you and well done.

Jon Isaac, CEO

We always look at vertical integration opportunities, and that would also work with our roll-up strategy concerning any of our existing portfolio holdings. So, yes, we do.

Unidentified Analyst, Analyst

Thank you.

Jon Isaac, CEO

Thank you for your positive feedback. We're looking at any and all opportunities. We are presented with opportunities on a weekly basis, and we evaluate the return and the risk involved and compare this against other opportunities we have ongoing. We aim to maximize shareholder value. Any other questions?

Virland Johnson, CFO

Our next question is from Robert.

Unidentified Analyst, Analyst

Yes. I was just wondering if there is a stock buyback authorization in place at the moment?

Virland Johnson, CFO

There is, yes. Back in May, on May 19th, we published a press release stating that the stock buyback program initiated in February 2018 was extended to June 1, 2024. So we have approximately three years left on it, and the original program was $10 million, with around $6.7 million remaining.

Unidentified Analyst, Analyst

I see. Yeah. This is an observation. It would seem like a wonderful time to exercise that authorization. I know you are not going to tell that…

Virland Johnson, CFO

Yes. I can tell you that since the beginning, we bought 533,000 shares, and I believe at a single-digit price, I think around $7 or $8. We've done very, very well, and as we continue to buy back shares or whenever we see opportunities in the market, we will act on those and report them to you in our disclosures.

Unidentified Analyst, Analyst

Okay. Thank you.

Virland Johnson, CFO

Thank you, John. Just curious about what efforts you are making to try and increase institutional ownership and get equity research?

Jon Isaac, CEO

Interesting. Right now, our stock float is somewhat low in terms of the actual shares that are floating in the market space. We do have plans to increase institutional ownership. Recent events have somewhat hampered those efforts, but we will continue to work on that as we progress.

Virland Johnson, CFO

And we already do have some institutional ownership; if you look at publicly available information, you'll see we have Renaissance Technologies that owns 5.3% of our company, and we have Vanguard, Geode Capital…

Unidentified Analyst, Analyst

You have sold that out. I was just wondering, you're personally in a lot of the shares of the stock, and I'm just curious on how you might be trying to think about broadening out the investor base?

Virland Johnson, CFO

Yes. We are getting there. We're reaching a size that is becoming more and more appealing to larger institutions. For a long time, we maintained a very small market cap, and our financials were much smaller than they are today. However, we are gaining awareness. It’s noticeable that we have people from potential institutions dialing in and listening. We believe that, in time, our mix will change.

Unidentified Analyst, Analyst

Thanks. Nice job on the quarter.

Virland Johnson, CFO

Thank you very much. With that, we will end the call. The next time we will speak will be during the 10-K filing at the end of the year. We've changed the format this time, so our next earnings call will be in mid-February when we announce or publish our first fiscal quarter. At that point, we will discuss the full year of 2021 as well as the first quarter. We will see everybody on the next call in mid-February. Thank you, everyone, for joining us. We look forward to hearing from you again on the next call.