Earnings Call Transcript - LIVE Q1 2023

Operator, Operator

Good day, everyone, and welcome to the First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later you will have an 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 Greg Powell, Director of Investor Relations. Please, go ahead.

Greg Powell, Director of Investor Relations

Thank you, Gretchen. Good afternoon, everyone, and welcome to the Live Ventures fiscal 2023 first quarter 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 a number of factors, including those outlined in our latest forms, 10-K and 10-Q, as 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 and 10-Q referenced on this call in the Investor Relations section of the Live Ventures website. I will direct you to our website www.liveventures.com or www.sec.gov for our historical SEC filings. I will now turn the call over to David to walk through our financial performance.

David Verret, CFO

Thank you, Greg, and good afternoon, everyone. Overall, the company delivered $69 million of revenue, $1.8 million in net income, and $7.5 million of adjusted EBITDA, in spite of a challenging economic environment. As evidenced by our acquisition of flooring liquidators, we continue to execute our multi-level buy-build-hold strategic plan to maximize stockholder value. In addition, we repurchased 24,710 shares of our common stock during the quarter. Before we jump into the numbers, let's briefly discuss the Flooring Liquidators acquisition that we announced in January. We are very excited about the Flooring Liquidators acquisition. Flooring Liquidators is a leading retailer and installer of floors, carpets, and countertops to consumers, builders, and contractors in California and Nevada. Over the years they have established a strong reputation for innovation, efficiency, and service in the home renovation and improvement market. The transaction valued at approximately $84 million was financed through a combination of cash, debt, and the issuance of 116,441 shares of our common stock, representing a 3.78% dilution of Live Ventures fully diluted common stock. Our expectation is that Flooring Liquidators will add a significant new revenue stream of approximately $125 million per year. We believe there are strong growth opportunities in all three of Flooring Liquidators' divisions: retail, builder, and franchise mobile store model. We look forward to sharing the results with you beginning with our next earnings reports. Now, I will discuss the financial results for our first quarter. Total revenue for the first quarter decreased to $69 million, down 8.2%, as compared to $75.2 million in the prior year period. The decrease in revenues is due to lower revenues in the flooring manufacturing, retail, and corporate and other segments. Flooring manufacturing revenues of $26.4 million decreased approximately $6.4 million or 19.6% as compared to the prior year period. The decrease is primarily due to reduced demand as a result of general economic conditions. Retail revenues of $23.3 million decreased approximately $2.9 million or 11.2% as compared to the prior year period. The decrease is primarily the result of reduced demand due to inflationary pressures, supply chain issues, and the overall product sales mix. Steel manufacturing revenues of $18 million increased approximately $5.6 million or 45.4% as compared to the prior year period, primarily due to the acquisition of Kinetic. Corporate and other segment revenues decreased approximately $2.4 million partly due to the decreased revenues at SW Financial. Gross profit for the quarter was $21.9 million, down from $27.6 million in the prior year period. The gross margin percentage for the company decreased to 31.8% from 36.7% in the prior year. This decrease is primarily due to the tightening margins in our flooring and steel segments. Flooring manufacturing segments gross profit margin decreased to 17.6% as compared to 27.5% in the prior year. This decrease was primarily due to increases in raw material cost and lower demand. Retail segments gross profit margin increased to 52.5% as compared to 51.1% in the prior year. The increase is primarily due to fluctuations in product mix. Steel manufacturing segments gross profit margin decreased to 24.4% as compared to 29.2% in the prior year period. The decrease in profit margins is primarily due to increases in raw material costs as well as the acquisition of Kinetic. General and administrative expense increased by 3.1% to approximately $14.6 million as compared to the prior year period. The increase is primarily due to the acquisition of Kinetic, partially offset by decreases in professional fees and other general and administrative expenses. Selling and marketing expense decreased by 9% to approximately $2.8 million as compared to the prior year period. The decrease is primarily due to a decrease in trade show and convention activity related to our flooring manufacturing segment. Operating income decreased to $4.6 million for the first quarter of 2023 as compared to $10.4 million in the prior year period. The decrease in operating income is primarily attributable to lower gross profits as a result of inflationary cost increases. First quarter interest expense increased approximately $1 million as compared to the prior year period. The increase is primarily due to increased debt balances as a result of the Kinetic acquisition and increased interest rates. Quarterly net income was $1.8 million as compared to net income of $6.5 million in the prior year period. Diluted EPS for the first quarter was $0.60 per share as compared to $2.04 per share in the prior year period, and adjusted EBITDA for the first quarter was $7.5 million, a decrease of approximately $4.6 million as compared to the prior year period. Turning to liquidity, we ended our first quarter with cash of $12.8 million and cash availability under our various lines of credit of $21.2 million for a combined total liquidity of $34 million. I would like to highlight our low level of leverage. As of the end of our first quarter, our net debt to last 12 months adjusted EBITDA ratio was 2.3 times. We maintained a low level of leverage while purchasing two new businesses in the last 12 months, repurchasing shares, and making significant capital investments in our businesses. We have working capital of approximately $78.1 million as of December 31, 2022, as compared to $78.4 million as of September 30, 2022. Total assets increased to $279.1 million as compared to $278.6 million as of September 30, 2022. In total, stockholders' equity increased $1.2 million to $98.4 million. 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 the first quarter, we repurchased 24,710 shares of common stock at an average price of approximately $25.16 per share. As of December 31, the company had approximately $3.4 million available for repurchases under this program. In conclusion, while we continue to face significant macroeconomic headwinds, we believe we are well positioned to continue to deploy our capital in a smart, focused, disciplined manner to create long-term stockholder value.

Operator, Operator

Now, we will take questions from those of you on the conference call. Operator, please open the line for questions.

Theodore O'Neill, Analyst

Hi.

Jon Isaac, CEO

Hello.

David Verret, CFO

Hi, Theodore.

Theodore O'Neill, Analyst

Sorry. Hi, guys. Yeah. Well congratulations on a good quarter despite the issues here. Last quarter, and this quarter both cited inflation as issues for the retail segments and the flooring segment, do you see any abatement of that now that we're here in February?

Jon Isaac, CEO

We are seeing some abatement in that, but we believe it's just going to take some time for it to really funnel through and be able to start driving up our margins.

Theodore O'Neill, Analyst

And I know you talked about the flooring acquisition in your prepared remarks at the beginning, is there any kind of guidance you can give us as to how the revenue might flow in over the subsequent quarters coming up?

Jon Isaac, CEO

We don't give guidance, but I mean, we have noted that we expect around $125 million per year, so I would just kind of prorate that. I think it's a great start.

Theodore O'Neill, Analyst

Okay. That's fine.

David Verret, CFO

None of the figures that you see in the queue here reflect anything from Flooring Liquidators, because it was purchased after the end of the quarter.

Theodore O'Neill, Analyst

Understood.

David Verret, CFO

So next quarter, you should see revenues flowing from Flooring Liquidators, and we included in our press release that we expect about $125 million here. It could be more or less, just a high-level number.

Theodore O'Neill, Analyst

Okay. Thanks, guys. In the steel manufacturing segment, is there any seasonality to that business that would make revenue maybe go up next quarter or few quarters here?

Jon Isaac, CEO

I don't think so. No, there's moderate seasonality but not significantly in the steel segment.

Theodore O'Neill, Analyst

Okay. Thanks very much.

David Verret, CFO

Thanks, Theodore.

Joseph Kowalsky, Analyst

Hi, gentlemen and thank you. Thank you for the hard work and good quarter. I have several questions. So just stop me if I'm taking up more than my fair share of time, if that's all right.

Jon Isaac, CEO

Go ahead.

Joseph Kowalsky, Analyst

First one. First one is I'm not an accountant. And I just want to understand the dilution compared to the increase in the asset value. I mean, we are getting a new asset for that dilution. So it sounds like some stockholders' equity is up. Does that mean that each share actually owns more even after the dilution, given the new asset that has become part of the portfolio?

Jon Isaac, CEO

That dilution is just representative of the number of shares that we issued in connection with the deal. So there's no – it's just strictly the number of shares that are outstanding. How many did we add and to what percentage is that I would say overall.

Joseph Kowalsky, Analyst

That I understand. What I'm asking you is that the actual assets that each share owns, did that go up, given the new...

Jon Isaac, CEO

Yes, yes. We'll have assets that will allocate that, you know, towards that. We've also noticed that we're valued at roughly $84 million, so we have $84 million of additional assets.

Joseph Kowalsky, Analyst

Got it? All right. My next question is...

David Verret, CFO

The word you're looking for is an accretive deal. It is...

Joseph Kowalsky, Analyst

Thank you, yes. That’s exactly what I was looking for...

David Verret, CFO

It's a deal for the shareholders because there's a very small share issuance valued at around $5 million for what we disclosed. So you will see equity, shareholders' equity rising, and then you will see in the future the future cash flows hitting. The return per share will hopefully be higher.

Joseph Kowalsky, Analyst

Thank you for pulling the word out that I was looking for. I appreciate it. That is what I was looking for. And I appreciate the elucidation. It's what I thought from when I first read it, but I just wanted to make sure that I was correct on that. Why do you use a fiscal year compared to a calendar year?

Jon Isaac, CEO

Gosh, we've always been on a September 30 year end for a while. So honestly...

Joseph Kowalsky, Analyst

I mean, is there a benefit to the company? Is there a detriment, or is it just, you know, because you have? I just don't know...

David Verret, CFO

There's a plethora of companies listed. Good question, Joe. There's lots and lots of companies that have fiscal year ends that are not December 31. Many of them. I think Apple is using June 30 or something.

Joseph Kowalsky, Analyst

I know.

David Verret, CFO

You know, I don't think that there's an actual reference. I mean, I think our auditors prefer that we're not December 31 because that's when they're super busy during their slower times, so there's no real good answer for that.

Joseph Kowalsky, Analyst

Okay. All right. That's fine. I just didn't know if there was a business benefit and that's why it was done or not. Okay, you mentioned macroeconomic headwinds. You both mentioned it and I just wondered if you expected that in all areas, in all of your subsidiaries or in more in particular areas than others?

Jon Isaac, CEO

Yeah, I believe that. I mean, the macroeconomic conditions really is going to impact everyone but to different levels. I think right now we're kind of seeing more of it on the manufacturing side, particularly with respect to flooring, which they've got issues just with the housing market and the increase in interest rates that will impact the demand for flooring.

Joseph Kowalsky, Analyst

Thank you. And then my last question, so I guess I made it through them all. Salomon Whitney, are you still planning to buy the remainder of the shares outstanding? Number one, I guess, actually, there are several questions relating to Salomon Whitney. What is their total assets under management? And what made you decide to go after them in the first place? I don't know, it seems to fit with the other purchases that you've made.

Jon Isaac, CEO

We are currently reviewing our strategic options and evaluating the best approach for the remaining ownership shares. Our initial interest in the acquisition was due to its potential for growth and the fact that it was beneficial for us financially. Although our historical focus has been on manufacturing and businesses that require significant assets, we appreciate the chance to establish new offices and expand through investment. We are always looking to further invest in our acquisitions with an aim for a strong return on investment, which we believe presents an appealing opportunity.

Joseph Kowalsky, Analyst

And as far as their total assets under management currently?

Jon Isaac, CEO

I don't know that I have that number off the top of my head. But it hasn't been disclosed. I can certainly try to look for the next quarterly earnings call.

Joseph Kowalsky, Analyst

I appreciate that. Regarding the last question about them, the last time I asked, you mentioned that there was a smaller focus on RIA compared to brokerage, and I'm curious if that has changed or if it's still the case.

Jon Isaac, CEO

No, I actually misspoke. It's fully concentrated on the broker-dealer and not on RIA. I appreciate you bringing that up, as that was an error in my statement.

Joseph Kowalsky, Analyst

I'm sorry, you're saying, it's entirely broker-dealer not RIA, did I hear correctly?

Jon Isaac, CEO

Correct. That is correct.

Joseph Kowalsky, Analyst

And is that intended to stay that way, considering RIA?

Jon Isaac, CEO

Again, continuing to look at all opportunities, but the current focus is entirely on the broker-dealer.

Joseph Kowalsky, Analyst

Okay. Thank you very much.

Operator, Operator

Appears we have no further questions at this time.

Greg Powell, Director of Investor Relations

Okay, great. Thanks for joining us on the call. We look forward to speaking to you later. Thanks.

Operator, Operator

And thank you, ladies and gentlemen, this does conclude today's conference. You may now disconnect.