Live Ventures Inc (LIVE) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to today's 2018 fiscal year-end call. (Operator Instructions) Please note that today's call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Virland Johnson. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the Live Ventures Incorporated fiscal year-end 2018 conference call. Today, the company filed its Form 10-K for its fiscal year ended September 30, 2018, with the SEC. This filing can be found on our website, www.live-ventures.com, in the Investor Relations section as well as on the SEC website at www.sec.gov.

My name is Virland Johnson, Chief Financial Officer of Live Ventures Incorporated. And joining me today are Jon Isaac, Chief Executive Officer, Live Ventures Incorporated; and Rodney Spriggs, Chief Executive Officer of Vintage Stock Inc.

Please note that some of the remarks you will hear today may contain forward-looking statements about the company's performance. As well, there may be forward-looking statements made during the Q&A session that follow our prepared remarks. These statements are neither promises nor guarantees, and there are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in these forward-looking statements is contained in our filing and periodic reports filed with the SEC, copies of which are available on our website or may be requested directly from the company. Forward-looking statements are made as of today's date, and we do not undertake any obligation to update any forward-looking statements made during today's call.

Thank you to everyone joining us today for our fiscal year-end 2018 call. I would also like to express my appreciation to our management and associates of Live Ventures and subsidiaries for another great year. During our call today, we will briefly cover our company's operating and financial results for the year and then answer your questions at the end of our comments.

Some operating results and highlights for the fiscal year 2018. The company reported record annual revenue of $199.6 million, representing an increase of 31.3% over last year and fiscal 2018 earnings per basic share of $3.01. Hard-surface products revenue, $17.9 million, continues to grow now at 49.5% year-over-year. Hard-surface products gross profits were up 50.9% year-over-year due to increased sales efforts.

For the year, gross profit was $74.2 million, which is up 18.6% from last year. In addition, our operating income was $10.8 million compared to last year of $18.1 million, and net income was $5.9 million compared to $6.5 million last year. For the year, our gross profit margin was down to 37.2% and operating income margin was down to 5.4%. This compares to the prior year when our gross profit margin was 41.1% and operating income margin was 11.9%.

Cost of new product, sales levels and mix of products negatively affected gross margins realized in the year for both Vintage and ApplianceSmart. The company finalized its purchase price allocation and fair value assessment regarding the ApplianceSmart acquisition and recognized the bargain purchase gain, net of deferred tax, of $7.2 million.

Subsequent to year-end, on December 21, 2018, Marquis Industries sold 2 synthetic turf extrusion lines for $4.75 million plus the book value of the raw material operating and packing inventories associated with the synthetic turf extrusion lines for a total purchase price of approximately $5.5 million, plus $0.10 per pound of nylon sold by the buyer during the 36 months' period after December 21, 2018.

Tax reform reduced the federal corporate income tax rate for the company from 35% to 21%. But for the 12 months ended September 30, 2018, we recorded an additional $3 million of tax expense due to deferred tax asset revaluation. As of September 30, 2018, the company reported approximately $2 million of cash on hand plus an additional $7.4 million of available credit under the company's revolving lines of credit.

Net cash provided from operating activities for the 12 months ended September 30, 2018, was $11.8 million, an increase of 50.2% or $3.9 million. Stockholders' equity increased approximately 17.5% to $39.4 million over our year ended September 30, 2017.

In June of 2018, the company successfully refinanced its Capitala term debt facility with a new term debt facility provided by Comvest at favorable interest rates. The company also negotiated a revised Texas Capital Bank revolving facility with an improved interest rate. In connection with the refinancing, the company charged off $742,000 in unamortized debt issuance cost as interest expense.

For additional financial information and details, I invite you to review our press release filed this morning and view our SEC filings on either our website or on the SEC's website. For all of those on the call, thank you very much for your participation on this call and your continued interest in Live Ventures Incorporated.

At this time, we will take comments and questions from those that are on the call. Jon and I will -- and Rodney will be standing by to answer them. Please use the system to announce if you have a question or not.

(Operator Instructions)

This is Jon. Question from [Joseph].

Quarter sounds -- the year sounds really good and continues to look good. The company continues to look good. I just wonder about -- apparently, people don't know about the company. And while I don't think it's your job necessarily to spread the word about it, how does that happen, so that eventually people do get interested in it? And by people, I mean, mutual funds, other -- the investing public.

That's heavily a function of investor relations, and that's something that we continue to improve. Over the last couple of years, we've been focused mostly on the operations and building our balance sheet and our P&L, but that's something that definitely we want to spend more effort and more resources and time in investing in this.

But as I said, I don't necessarily want to see the company spending a lot of time and effort in that area. I think you're right, I think focusing on the company itself is the key and that eventually people will learn about it. I just wondered in general how people find out because there are so many companies that are out there and -- but you pretty much answered that.

One of the other things to consider is that mutual funds and hedge funds that have hundreds of millions of dollars and billions of dollars also don't want to take huge stakes in companies that have a low valuation. So we're sort of in this land where we're not very valuable at this point. But I think, as you said, you're right, in time, as we get bigger and our story becomes -- people become more aware of our story, I think, that more mutual funds will take an interest. But I do believe that from the public filings that we do have Vanguard or a couple of other big names that have taken positions in our company, but I think some of them may be reluctant in taking a position that makes them a filer or greater than 4.9% or greater than 9.9% owners of the company.

(Operator Instructions)

It's been an exciting year. $200 million of revenue. I think a lot of investors, shareholders should realize that it was just a few years ago that our revenues was $3 million, $4 million, losing money, 11 employees. I think now we're at $200 million, profitable. We've been profitable for, I think, 7, 8 consecutive quarters. I think over 1,100 employees and counting. We're also -- for anyone that is on the call as well, we're always looking for acquisitions. If you have any -- we're looking at a couple as we speak. We think 2019 is going to be a good year. We're excited.

And we're going to be opening up some new stores.

Yes. Rodney, maybe you can give us a little bit about what you're seeing on your end because your division represents almost half of the company's revenues. Give us a snapshot of what you're seeing. Then we can take a question from [JT].

Well, so far, we've had a good year. One of the things we invested in that, I believe, was mentioned on last quarter's call was the text messaging system that we had built. That is so we have a better engagement with our customer base, we were still operating with e-mails. We are currently over 350,000 active text message customers. And again, people and their cellphone are one and the same anymore. So we're seeing great returns on that, and we're adding 10,000 plus per week. So that is still growing significantly. And some proof of that would have been the Labor Day sale that was the exact same sale we had in the previous year, which is the big buy 2 get 1 free of our used product lines. And that sale on Labor Day was up 14% year-over-year, same-store sales. The anniversary sale, the first week of November, was up over 11% on same-store sales. And while our store sales will be slightly down, slightly up week-to-week, we're getting these big pops, and it is directly tied to that text mail messaging. One of the other things is, we were -- Virland had mentioned about compressed margins a little bit. And a big part of that is the video game cyclical nature, and we have huge sales in the PS4, even with some supply issues that is plugging the whole industry of all retailers on with Sony's product, but that is starting to clear up. I think it is a chip issue. The Switch is very, very successful from Nintendo and is the #2 seller and is very close to PS4 sales. And Xbox One is still Microsoft, and Xbox, those sales are good, but there is not much margin in those items. You sell them systems for $300. You make about $3 or $4 each. It's about the long term, and it really hits a couple of years from now when we have a lot of used product that again the margins are more in that 60% to 80% on used games and our hardware. So we see a bright future. We like the way the direction is on the video game, which has been a little bit of a lag for us, but looks like it's going to be really good here in the next couple of years.

One of the biggest milestones for Vintage this year was the refinance of a term loan that was expensive and that we replaced with Comvest. So that was really good for Vintage. We also have a few store openings on the horizon. Rodney, I think in the next year, what do you think, maybe 4, maybe more potentially for 2019?

Which would not be a part of this reporting period, but we did open 2 locations: 1 in Columbia, Missouri, and 1 in Tyler, Texas, in November. So those are currently operating. Looks like they will be profitable from day 1. Good lease prices on those, and the sales came out of the gate really strong. Per our agreement with Comvest, we can do 3 stores between now and September, and then we can do 4 stores next year, but there is also the possibility that we could request to do additional stores if they keep performing like they are as we open them.

The Comvest loan has helped us save significant amounts in the interest expense. And in addition to that, we've been aggressively paying down that principal loan, I think, to the tune of about $3 million or so per year. And they also have cash sweep. So this holiday period, there might be some there. Let's take a question from [JT].

First, couple of questions, I guess, are for Virland. One, I haven't been able to look at the 10-K. But last quarter, it looked like there is maybe a charge-off or a write-down on the Vintage division. Is that right, maybe to the tune of about $2 million? Is that correct? Or is that product specific? Or walk me through that, if you don't mind.

I don't think we made any charge-offs in the Vintage division last quarter.

Okay. What were the financials on the Vintage division for the last quarter compared to this one then, I guess?

We don't necessarily report that specifically in Q4. Vintage's numbers are very comparable. The revenues are up year-over-year. Gross margin is, as Rodney indicated earlier, is down a little bit, mainly because of the margin on new product and has slipped a little bit. But again, the business is very healthy and doing well. So I would maybe have you look at revenues by product line and gross profits by product line, and that will give you a real feel for how Vintage is doing.

Okay. And then on the ApplianceSmart acquisition, again, it may be in this 10-K, but can you walk us through the terms of that acquisition?

Terms were originally a note to Appliance Recycling Centers of America, Inc. It was a Due To/Due From amount and then it converted to a note. And then, ApplianceSmart repaid or paid a little over $2.5 million on the principal between December 30 and Q3. And now that note is accruing interest and is currently not due for another couple of years.

Okay. And what is the total balance on the note?

It's about $3.8 million.

Okay, all right. And then my last question, and I'll hang up. And thank you, guys, for taking my questions. I guess the bargain basement for 2018 or for fiscal year, all-in, were there 2 bargain basements deployed through the income statement and what is the total amount of the bargain basement, I guess, upgrade, if you will, to the financials?

It was in 2 steps and then there was a brief adjustment in Q4 due to audits, but the total bargain purchase gain was $7.2 million and they're only applied -- only applied to ApplianceSmart. It didn't apply to any other entity.

Okay. So it's just ApplianceSmart. And is that fully reflected in the EPS number?

Yes.

We also took onetime noncash expenses, such as the deferred tax asset revaluation. There was a couple of positive hits and negative hits.

And what does that even out to, Jon?

Well, let's see, we took out a $3 million hit on income taxes due to reval of the deferred tax assets. At the beginning of the year, if everybody remembers this, we had a fairly substantial deferred tax assets due to NOLs that had been carried over. When tax -- the tax act came into being in December, we had to reval those. And the total revaluation effect for the year is right at $3 million. That hit is fully baked into our EPS numbers and the P&L. Offsetting that, we had about $7.2 million of pickup on bargain purchase. So we also had a lot of expenses related to ApplianceSmart that we've had to absorb in making the transition that has eaten into those numbers that are also fully baked in our P&L. So we don't really see one -- we see the gain there, but it's offset by some other things that are largely a wash for us.

But since we're on the topic of ApplianceSmart, I just want to mention something. I mean, the Marquis Industries is doing phenomenal. I think it's breaking records. Sometimes months, sometimes every month. Vintage is doing really good. The growth prospects on Vintage looks good. ApplianceSmart is not doing so good, but we are in the middle of fixing some issues related to high cost, high overhead, and we may close some stores that are just not -- that are contributing negatively to the bottom line. So right now, we are devoting a lot of time and attention on ApplianceSmart. But we think the turnaround will be good, no promises, but this is our main focus right now.

The other thing I think shareholders should be aware of is that the synthetic line for Marquis was the lowest margin producing line that we had at Marquis. And by selling that line off, it's going to even help Marquis' numbers even more.

(Operator Instructions)

I think it's important for shareholders to understand the synthetic turf sale that closed recently. So it didn't happen in the fiscal year. It happened as a subsequent event. We -- that was disclosed in the 10-K, but that synthetic turf line was sold to some other company for about, what, $5.5 million.

$5.5 million.

$5.5 million in cash, and that helped us pay off some term loans, but about half of that sale price went towards just cash and availability under our line of credit at Marquis. And in addition to that, there was a consulting agreement that was signed between Marquis and the buyer of this equipment. So from a bottom line perspective, I think it will be a neutral, but it does bring in some new cash flow we can redeploy. In the month of July, we also announced Mr. Wes Godfrey was appointed CEO at Marquis. We announced in February our new $10 million repurchase program that we've been excited about.

Any other questions?

And it doesn't look we have any further questions on the phone line at this time.

Maybe, Jon, give the investors some of your views for '19?

As I mentioned, we're very excited for '19. We're looking at the 2 potential prospects that I believe we may be able to -- there's a good chance that we may be able to make both acquisitions. Both of them would be sort of a bolt-on for our existing platform companies. So we're very excited about those. We're focused on addressing the concerns at ApplianceSmart and potentially 2 other acquisitions, but we also look at acquisitions on a weekly basis. They come across our desk, and we get them from all sorts of places, investment bankers. We get them from private sellers, people who want to sell to us directly. So we look at those, and we're very careful as to who we proceed with. And we have a certain criteria, and we adhere by it. So we may not have a year where we have a lot of acquisitions, but some other years, it may offset, but our goal is usually, one good acquisition, maybe two acquisitions per year, and we think it's long term that Live will be a very healthy company as it is now and as shown historically where we've taken the company in just the last few years.

(Operator Instructions)

Let's take a call from [Allen], a question from Allen .

This is [Mrs. Wind], actually. I was cut off for the first 5 minutes before the Q&A and missed your main presentation. Could you give me a 30-second summary of that first 5 minutes of your presentation?

Did you miss the presentation? Yes. At a high level, I'll just quote the -- maybe the bullet points from the press release. Our revenues were around $200 million. I'll have Virland.

The revenues are up about $200 million, 31.3%. Our gross profits at $74.2 million, up 18.6%. Our basic EPS is at $3.01. And our non-GAAP EBITDA is up to $25 million, up 7.8% year-over-year. Assets are at $141.5 million. It was a growth year for us, and we're looking to grow in '19. I would say the one thing that stands out the most is our operating cash flow that grew over 50% year-over-year.

We're almost up to, what, $12 million or something.

Okay. What else can we answer for you?

We'll end the call if there's no other questions. Give someone next 15 seconds.

We will be back to you in 45 days.

Yes, for the next -- for the first quarter.

For the Q1 call.

We do have another question from [Santiago]. [Santiago?]

Can you hear me?

Yes, we can hear you.

Yes. So my question was in regards to the valuation of the company. So my question was, have you considered increasing the share repurchases instead of acquisitions?

We had been active in acquiring back shares whenever we can. Remember that the company, just like us individually, we have blackout periods. And in addition to that, we cannot buy back stock if we're in possession of material nonpublic information. So we strictly adhere to, of course, these rules. But when we are able to, we do buy on the open market. I believe the figure that I looked at recently in the 10-K yesterday was we acquired -- we've repurchased 142,000 since the start of the repurchase program, 142,000 shares, which represents approximately maybe 5% of the company, just round figures. So yes, and now I believe we acquired stock at around -- last year at around $10 a share and now we're at 30% less despite the fact that we are stronger from a balance sheet perspective. Our cash flow has increased, and we have a lot more on the horizon. So yes, we do look at Live Ventures in and of itself as potential acquisition in terms of buying incremental amounts of it back. And we have been successful in the past.

On that note, actually, Virland, I get a lot of questions from investors who say how come you don't -- why is the stock down, why is the stock up. We really can't comment on why the market behaves the way it does. I mean, if you look at the market as a whole, 3 weeks ago, it was 30%, 40%, 50% more valuable. So it's -- the market as a whole has been down, but we take it a day at a time, and we're building the company for the long haul. And whenever the opportunity presents itself and our stock is sold at a rate that we believe is good, we take advantage of it, and we buy it back. So we made it very clear to the investment community that we are and we will be buying shares in our company as we see fit. And we've proven that. And I believe 2019, we will be probably aggressively doing that. So we'll see where we are in a few months from now.

Well, thank you. We look forward to talking with you again in about 45 days to talk to Q1. Thank you for your participation on the call, those of you that asked questions, and thank you to the investors that are listening to the call. We'll talk to you again soon.

Thank you.

Thank you.

That concludes today's program. Thank you for your participation. You may disconnect at any time.