Stran & Company, Inc. Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen. And welcome to the Stran & Company Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode. And the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to the host, Ally Schultz, VP of Investor Relations.

Good morning. And thank you for joining Stran & Company's 2022 second quarter financial results 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, August 15, 2022 containing its second quarter financial results which is also posted on the company's website. If you have any additional 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 June 30, 2022. 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 Stran'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 Stran's control. With that, we will now turn the call over to Andy Shape, Chief Executive Officer. Please go ahead, Andy.

Thank you, Ally. And thanks to everyone for joining us today as we discuss our progress and financial results for the second quarter of 2022. I'm pleased to report that we maintained our growth trajectory during the second quarter illustrated by record revenue of $14.8 million, a 72.5% increase compared to the same period last year. Importantly, our year-over-year organic revenue increased 49.4% reinforcing our traction in the market. And we continue to maintain a solid balance sheet with over $28 million of cash and cash equivalents as of June 30, 2022 and no long-term debt. We're proud to have once again achieved record revenue numbers and believe this is a direct result of our business growth strategy through expansion of our geographic footprint, entering new verticals and opportunistic acquisitions that complement our existing platform. We believe these activities are key drivers for ongoing success and set us apart from others within this industry. As part of our growth strategy, we remain committed to identifying accretive acquisition targets. Toward this end, I'm pleased to report that we have fully integrated G.A.P. Promotions into our business operations, an acquisition completed in January. G.A.P. brought an impressive roster of top-tier beverage and consumer goods customers as well as expertise in point-of-sale display racks and more. We are already witnessing the operational synergies of this transaction and look forward to benefiting from additional growth opportunities based on our combined knowledge and capabilities. In addition, we recently announced entering a definitive agreement to acquire Trend Band Solutions, a leading global brand solutions company that is strategically located in Texas. In fact, the Houston area is home to two dozen Fortune 500 companies and ranks third among metro areas in terms of Fortune 500 headquarters location. Given the high-profile companies headquartered in this area, we believe expanding our presence within this key geography will provide significant opportunities to grow our operations and customer base. By executing on our M&A goals, we have increased our customer base and grown our capabilities within the beverage space, and with Trend, we look forward to expanding our geographic presence within the United States, especially within the Houston Texas area and the southern United States. Given the fragmented nature of this industry, we believe that our strategy of acquiring undervalued and accretive businesses will remain a key aspect of our continued growth, bringing together innovation, relationships, and top-tier talent. We continue to explore opportunities in the market and are in active acquisition discussions with companies we believe would add value to Stran, including expanding our geographic presence and enhancing our capabilities. We'll provide additional updates as those discussions progress. Since our inception, we have invested heavily in our infrastructure in order to provide a comprehensive offering with a unique value proposition which has resonated very well with customers and supported our revenue growth. Toward this end, we intend to build upon our success by expanding our sales and marketing initiatives. Specifically, we are establishing a new dedicated lead generation team for our sales force, which will be further enhanced through an integrated and aggressive digital marketing strategy. This expanded strategy is expected to open new doors and is designed to complement our existing sales and marketing initiatives. We believe this approach will create a steady and consistent pipeline of customer leads for our sales team, which could be a potential game changer for Stran. In fact, as a result of recently launched campaigns on Google Ads and LinkedIn, we're already averaging over 50 qualified leads per week and believe that more than 35% of these opportunities have the ability to close, while also having the potential to become repeat and annuity-type program customers. Through these and other initiatives, we believe we are well-positioned to rapidly grow our market position as a leader in the promotional products industry serving many of the top Fortune 500 companies in the country. In addition to our sales and marketing efforts combined with acquisition opportunities, we're making progress on implementing Oracle's NetSuite as our new ERP, in order to gain operational efficiencies, provide greater financial analysis, and prepare for additional scalability. We're on track to launch this in the third quarter, and our target is to be fully integrated into the platform by the end of the year. Looking ahead, we are seeing very strong bookings heading into the second half of the year with over $30 million in orders secured year-to-date. It's important to reiterate that these numbers are not reflected as billed revenue until the products are delivered over the next few months. However, it does reinforce our traction in the market as well as set the pace for the remainder of the year. Overall, we believe we have built a highly scalable business model and are witnessing continued revenue growth. Although we are now carrying public company expenses that we did not incur last year and added other fixed expenses to support our planned growth, we expect to resume and build upon our track record of profitability given the scalability of our operations. Additionally, we have maintained a solid balance sheet as I mentioned earlier. We ended the quarter with over $28 million in cash reserves and no long-term debt. As a result, we are well-capitalized to internally fund and execute on both organic growth and acquisition strategies, ultimately establishing Stran as a preeminent force in the promotional products industry with a market value of over $23 billion. One final note, we're putting our money where our mouth is to show our conviction in the outlook for the business. Since our last earnings call, the senior management team has purchased approximately $75,000 worth of common stock personally, and we plan to continue to take advantage of opportunities in the market. I'm also pleased to report that under our share repurchase program, we have repurchased approximately 1 million of our common shares at an average price of $1.96 per share. In summary, we are very proud of the progress made to date and plan to continue to execute on our growth strategy by growing our customer base, entering into new customer verticals, expanding geographically, and identifying accretive acquisition targets. At the same time, we are focused on increasing awareness of Stran 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 detail. Please go ahead, David.

Thank you, Andy. Revenues for the three months ended June 30, 2022 increased 72.5% to $14.8 million, compared to $8.6 million for the same period in 2021. The increase was primarily due to higher spending from existing clients as well as business from new customers. Additionally, we benefited from the acquisition of the G.A.P. Promotions assets in January of 2022. Gross profit increased 75.3% to $3.8 million, or 25.4% of sales for the three months ended June 30, 2022 compared to $2.1 million or 25% of revenue for the same period last year. The increase in gross profit was due to an increase in sales partially offset by an increase in purchasing costs. Importantly, we were able to increase gross margins despite our new healthcare client given the sheer size of the contract as well as the higher freight revenue, which comes with lower margins. Operating loss for the three months ended June 30, 2022 was $472,000 compared to the operating loss of $854,000 for the same period last year. We were able to decrease our operating losses despite higher general and administrative expenses, which was primarily due to additional expenses related to the acquisition of G.A.P. Promotions assets, the implementation of the new ERP system on Oracle's NetSuite platform, ongoing public company expenses, and the organic growth of our business. It's also important to note that our operating loss declined by over $350,000 compared to the first quarter of 2022. We believe this reflects the inherent scalability of our business and bodes well for profitability in the second half of 2022 as we continue to grow revenue. Operating expenses as a percentage of revenue were 28.6% in the second quarter of this year compared to 34.9% of the same period last year, a decrease of over 630 basis points as we continue to carefully manage our expenses. Net loss for the three months ended June 30, 2022, was approximately $447,000 compared to a net loss of approximately $169,000 for the same period last year. This increase was primarily due to the integration expenses related to the acquisition of G.A.P. Promotions assets, ongoing expenses related to being a public company, and higher costs of purchases. At June 30, 2022, the company had cash and cash equivalents of approximately $28.2 million and no long-term debt. Given the strength of our balance sheet as previously announced, we implemented a share repurchase program of up to $10 million. As of June 30, 2022, we have repurchased 1 million common shares at an average price of $1.96 for a total cost of approximately $2 million through the buyback program. At this point, I'll turn the call back over to Andy.

Great, thank you, David. To wrap up, we're experiencing strong organic revenue growth, we have a demonstrated track record of successful acquisitions, and we have a strong balance sheet to execute upon our business model. We're extremely well positioned to take advantage of the opportunities in front of us and are excited about the outlook for the remainder of 2022. I'd like to thank you for joining the call today. And we look forward to providing further updates as developments unfold. At this point, we'd like to open it up the call to questions, operator?

Ladies and gentlemen, the floor is now open for questions. Thank you. Our first question is coming from Edward Reilly with EF Hutton. Please go ahead.

Good morning, guys, I was wondering if you could touch on some of the synergies you've recognized from the G.A.P. Promo transaction that you mentioned earlier in the call?

Sure, first, some of the capabilities that they have for the Creative team, the Creative design and merchandising team, we've really been able to take advantage of not only continuing to offer those customers expanded services that we have, but also being able to use some of those services and expertise for our own customers. So that's the first thing is expanding the opportunity for new business and new product lines for our customer base. In addition to that, it's just integrating some of the systems that we have in terms of from an accounting perspective and personnel is really sharing job sharing and expanding our support network, whether it's accounting and marketing initiatives and really getting more from both of them. So being able to do more with the current staff that we had with the combined staff and we're having to build that between the two of them. So we've really seen a lot of those synergies both in customer opportunity as well as internal efficiencies.

Okay, great. And I was wondering if you could touch on the pipeline. How many companies are you talking to right now?

In terms of acquisition targets? Yes. So we're actively talking to dozens, but we're being patient, we want to find the right companies that are the right fit that not just give us revenue, but give us revenue as well as profitability that works with our business. We're not looking necessarily for turnarounds or something that's going to be completely different from our business model. So we are talking to dozens of them, but we're being very strategic about offering LOIs or really taking them to the next level of companies that culturally fit with us, companies that make a difference, and companies that really check the boxes of what we're looking for. And as we've mentioned, it's geographical additional capabilities, strong balance sheet, and strong profitability. So we are talking to dozens of them, and we're hoping to have some more in the very near future as well under our belt.

Okay, great. And then on the $30 million in bookings, I was wondering if you'd expect this to be fulfilled by the end of the year?

Yes, we believe that will be fulfilled by the end of the year. Historically, our Q4 is typically our strongest quarter in terms of revenue, and we expect to see that trend again this year. The $30 million is expected to be billed completely by year-end, with some of it already billed. Therefore, it is not incremental to current revenue; it reflects all bookings combined.

Got you. Do you guys have a current backlog estimate right now, or?

We don't have a backlog estimate in terms of adding what we have for billed plus what we have out there that we're publishing, but it is strong. We are still seeing fairly strong bookings. Typically, we do see somewhat of a small downturn in the summer, we haven't experienced anything out of the norm this year, just because people are on vacation. But typically, it ramps right back up at the end of Q3 and Q4.

Got you. And one more for me, just wondering with the expansion of the marketing team, how much hiring you're planning on doing by the end of the year and what this may do to impact G&A going forward?

Yes, so it is a fairly, the lead generation team that we hired is scant. It's not a very large team. It's only a handful of individuals that we've hired to execute on that, but they're very experienced and have a lot of knowledge in that space. So that's one thing that we're adding. It should not be a significant impact to the G&A. It will be an impact obviously, but we're looking to have revenue associated with that as well, as well as profit or at least profit going in there. So we're hoping that they offset one another. And by the end of the year, we should hopefully see them generating enough revenue to cover their expenses.

Good morning, guys. As you know, some companies operating in the digital marketing space have reported weakness in spending by their customers. What are you guys seeing amongst your customer base for spending on promotional products? Are you seeing any impact there as well?

We haven't observed a significant downturn yet. Customers seem to be shifting some of their digital advertising budgets toward physical advertising, like what we offer, due to its impact and effectiveness. The digital campaigns we are launching aim to increase awareness of Stran and to encourage more interest in how we can assist clients in utilizing physical promotional merchandise to foster loyalty among prospects, employees, and clients. Ultimately, our digital strategy is focused on enhancing Stran's visibility as a leader and demonstrating how we can support sales efforts. Our goal is to drive increased spending, not necessarily just digital revenue. Moreover, we have not experienced a major slowdown because events are returning, and people are getting back to the office and engaging with one another, which has kept demand strong. As mentioned, the purpose of our digital efforts is to spark greater interest in Stran.

Okay, great. And on the healthcare contract, is that any update there? Is that going on track as expected or?

Yes, that's on track as expected. We're expecting to do approximately $6 million as we had mentioned in revenue; it could increase from there. But that's what our forecasts were. And I think it is a three-year contract with two one-year extensions. So we're hoping that that will continue to expand and be an annuity for the very long term, but yes, that is going as planned. Great, thank you, everyone for joining today. We're excited about the future for Stran, we're well positioned with a strong balance sheet, and a very detailed plan of what we're planning on doing in the future. We're looking forward to continue to report our success well into the future. So thank you for joining and please keep an eye on Stran and we look forward to delivering for you. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.