Q1 2022 PFSweb Inc Earnings Call

June 13, 2022

Ladies and gentlemen, thank you for standing by your comp costs will begin momentarily again. Thank you for standing by your conference call will begin momentarily. Thank you.

[music].

Good afternoon, everyone and thank you for participating in today's conference call to discuss P. F. F flat Q1 2020 results.

Joining us today S. P O S slab CEO , Mike Willoughby the C O O and president of TFS backfill in the company's CFO , Tom Madden and the company's outside Investor Relations adviser Jackie cash now look Gateway group.

Following their remarks, we'll open.

The call for your questions I would now like to turn the call over to MS. Casner, Fortunately that three comments.

Thank you.

Before we go further I would like to make the following remarks concerning forward looking statements. All statements in this conference call other than historical facts are forward looking statements.

The words anticipate believe estimate expect intend will.

All guidance confidence target project and other similar expressions typically are used to identify forward looking statements.

Disclaimer relating to forward looking statements as well as certain non-GAAP metrics used in our filings and this presentation can be found in the Companys 10-K in investors section of the PFS website under Safe Harbor statement.

I would like to remind everyone that this call will be available for replay through June 27, 2022, starting today at eight o'clock PM Eastern time.

Cast replay will also be available via the link provided in today's press release as well as available on the company's website at PFS Commerce Dot com.

Any redistribution retransmission or rebroadcast of this call in any way without the express written consent of PFS lab is strictly prohibited.

Now I would like to turn the call over to the Chief Executive Officer of PFS words, Mr. Mike Willoughby Mike.

Thank you Jackie and good afternoon, everyone.

Before discussing our financial and operational performance for the quarter I would like to note that the filing of our first quarter 2022, 10-Q today has allowed us to become current with our financial filings.

With today's report complete and filed we are in full compliance with NASDAQ listing rules.

Our SEC reporting obligations.

As we have previously disclosed recent financial results have been delayed by the complex tax implications and labor intensive closing process associated with the sale of our library global business to Merkel last year.

Our team has worked tirelessly to complete the reporting process and bringing our filings current within our anticipated timeline and we expect to remain compliant with NASDAQ and SEC reporting requirements going forward.

Forward.

Now turning to our first quarter highlights.

PFS operational performance maintained our momentum from 2021.

We drove solid year over year service fee equivalent revenue growth as we continue to meet robust fulfillment demand within our current client base.

And to ramp new client engagements.

While restructuring expenses related to our library of transaction and our strategic alternatives process impacted our bottom line for the quarter, we have otherwise made progress with optimizing our cost structure to better align with our current PFS operational framework.

Across our business, we remain committed to further enhancing our fulfillment capabilities, our operational efficiencies and the value we create for our growing client base.

As our business has become more fulfillment oriented we have continued to benefit from significant e-commerce tailwind and adapt to changing consumer shopping trends.

In March Adobe Digital economy Index reported that consumers are expected to spend a record $1 trillion online in 2022.

The recent Mckinsey on recall estimates that e-commerce penetration has grown by 30% relative to pre pandemic levels.

As consumer shopping behavior has evolved so have consumer preferences.

Mckinsey reports that over 90% of consumers now consider two to three day shipping as a baseline fulfillment expectation rather than a competitive advantage.

This environment requires fulfillment providers and the brands they serve to operate with increased efficiency agility and offer multi node fulfillment options.

These three qualities are at the core of our PFS operations.

Coming off a record fulfillment year in 2021, we have continued to leverage our multi node fulfillment strategy and highly branded operations to provide effective tailored services for our clients.

Quickly reached capacity in each of the three new fulfillment centers, we've opened over the past two years.

Demonstrating our ability to swiftly expand our global distribution network to support our clients.

We are on track to open our second Las Vegas fulfillment center in the third quarter of this year just over a year after opening and expanding our first Las Vegas fulfillment Center.

Zach will be on the call later to share additional details and operational highlights, but I am very proud of our team's strong execution with ramping our incremental capacity and continually strengthening our ecommerce fulfillment operations and support services.

As we keep pace with strong fulfillment demand trends, we have also taken steps to mitigate the impacts of the broader inflationary wage environment in.

In addition, Inc. In addition to leveraging our multi node strategy, which allows us to ship certain client programs to more favorable labor markets, we implemented additional contract pricing changes and productivity enhancements beginning late in the first quarter.

We will continue to put these changes in place through Q2.

We expect these to benefit our pricing and cost structure throughout the rest of the year.

This work is in line with our continued focus on the structural and operational optimization of our business.

To this end.

Remain underway with the disposition of our corporate headquarters, which we aim to complete as quickly as possible this year.

We have already transitioned most of our corporate office functions to be co located with our production operation centers or performed remotely and.

And we continue to pursue a sublease or arrangements with our landlord for the headquarters building itself.

In addition, as we discussed on our recent Q4 and full year 2021 call. We have concluded our obligations to merkle under a transition services agreement or TSA as of April .

With all TSA work related to the library transition complete we have made operational adjustments and significant corporate overhead reductions.

While supporting our core PFS business and improving our cost structure further.

With the sale of Liberia behind Us our core focus is to sustain the client growth and sales momentum in our fulfillment business and strengthen our positioning for the strategic alternatives process.

We continue to work with Raymond James on the review with a full range of strategic alternatives for PFS.

As we previously communicated we believe that completing a second transaction referenced represents the most efficient way to return to significant capital we hold to our shareholders.

While we do not have a specific completion timeline to disclose at this point, we believe our ongoing work to optimize and strengthen the PFS business as made it an attractive platform for potential strategic opportunities and completing this process remains our top priority.

And with that I'll turn it over to Tom to discuss our first quarter financials in further detail Tom.

Tom.

Thank you, Mike and good afternoon, everyone.

As Youll see in our non-GAAP PFS presentation from the press release, our Q1 2022 service fee equivalent revenue or <unk> revenue for the PFS operations business increased 7% to $45 8 million compared to 42.

$7 million during the year ago period.

As we have previously disclosed Q1 2022 marked our final quarter of product revenue contributions from our client arrangement with Rico.

Effective March 2022, as part of Ricoh's continued restructuring of its operations. The Rico distributor agreement was terminated and as a result, our product revenue model with Ricoh was discontinued.

This may lead to some confusion in our short term comparative financial analysis as we eliminate product revenue from our P&L and discontinue the use of the term service fee equivalent revenue in the future.

However, we believe this will ultimately benefit and clarify our financial presentations.

And most importantly, as a reminder, due to the significantly reduced size of this program over the past several years. This change will have a minimal impact on our comparative consolidated adjusted EBITDA results.

Our PFS operations 2022, Q1 gross profit margin.

It was approximately 20% of PFS service fee revenue compared.

Compared to a gross profit margin of approximately 25% in the year ago period.

Our decreased gross margin primarily reflects the ongoing impacts of industry wide wage pressures.

We've also continued to see our percentage of fulfillment and contact center revenues relative to 2019.

Shift.

And as a result, this will likely drive long term overall gross margins that are more in line with gross margins for these core services, which tend to range between 20% to 25%.

As Mike previewed earlier, we implemented pricing adjustments in new and existing client contracts in late Q1 and throughout Q2 to help offset wage inflation impacts throughout the remainder of the year.

Including both permanent price increases and additional or reinstitute instituted surcharges on selected client programs.

While most of these changes do not begin to impact revenue until Q2 or later this year.

We believe these price adjustments.

Cost controls and ongoing productivity enhancements will help us mitigate macroeconomic pressures and operate with greater profitability as we move through the year.

While we are seeing less wage volatility compared to Q1.

And our measures are having the desired positive effect.

We remain vigilant and we'll respond to any additional macro pressures with similar agility.

To this end, we remain committed to reducing our SG&A and aligning our overall cost structure more closely with our smaller fulfillment oriented business.

This includes our work to transition our corporate headquarters building by later this year and further reduce corporate overhead associated with our previous holding company organizational structure.

Our actual consolidated adjusted EBITDA from continuing operations in the first quarter of 2022 was a negative <unk> 4 million.

<unk> adjusted EBITDA contribution of 0.9 million in the year ago period.

The decrease primarily reflects the gross margin impact discussed earlier.

Partially offset by reduced ongoing and non restructuring related SG&A costs.

Our capital expenditures for PFS in Q1 exclusive of property and equipment acquired under debt and finance leases.

Approximately $1 7 million.

As we continue to support new facilities contracts and anticipated future growth opportunities.

We continue to expect our 2022 capital expenditures to range between 8 million to $10 million.

Our liquidity position as of March 31, 2022 includes over $154 million of cash.

And only approximately zero point $2 million of debt.

We remain very comfortable with our strong balance sheet as we seek to progress our growth initiatives throughout the year.

As we look to the remainder of the year, we continue to reiterate our previously stated 2022 financial targets, which.

We anticipate annual fee revenue growth in the 5% to 10% range.

We remain optimistic that we can achieve PFS operations SSP revenue growth at the upper end of this targeted range driven by our expected organic growth from existing clients straw.

Strong bookings and robust sales pipeline.

We also continue to target 2022 estimated PFS standalone adjusted EBITDA percentage of service fee revenue within the range of 8% to 10%.

As a reminder, this.

Pro forma standalone adjusted EBITDA metric refers to our estimated adjusted EBITDA profitability for the PFS business as if we were operating in a nonpublic environment without certain corporate overhead costs.

I will now turn the call over to Zach to review, our Q1 sales and operational highlights.

Thanks, Tom.

Consistent with our previous earning calls PFS continued its momentum and focus in Q1 on supporting our topline growth objectives through three key drivers.

One expanding our multi node fulfillment strategy to better serve our clients customers.

Two driving our fulfillment as a service product offerings to allow for more dynamic and flexible fulfillment networks.

Three converting our strong sales pipeline for continued growth.

During the first quarter of 2022, we continue to convert the sales pipeline that is at near record levels. As we reported seven new bookings were $6 $8 million in combined estimated annual contract value.

These bookings comprise a mix of net new fulfillment and contact center engagements as well as additional fulfillment service expansions within several existing client engagements.

Our bookings indicate continued strength among established and emerging brands alike across North America and Europe .

And they largely fall within our core industry verticals health and beauty apparel jewelry and CPG.

Within our robust pipeline, our current clients and prospects are increasingly seeking service bundles of both business to business and direct to consumer solutions.

As an example, the service we deployed for Blenders eyewear, one of our new clients launched in Q4 last year.

Ports, the brand's DTC e-commerce, and b to be wholesale channels.

Our warehouse management inventory control and order fulfillment services provide a differentiated e-commerce experience throughout the fulfillment process and the use of our lighted picking technology biopic.

Maximize the speed and efficiency of blenders quarter fulfillment.

To echo some of Mike's earlier comments, today's ecommerce demand tailwind and evolving customer expectations.

Made brands place a strong priority on providing swift tailored fulfillment experiences for their customers.

Our branded solutions make us a compelling partner in this environment, whether we're providing brand specific kitting and packaging services or leveraging our rapidly expanding distribution network, we stay closely attuned to our clients' needs and their distinct brand identities.

To speak briefly about our recent fulfillment performance.

Fulfilled in excess of 6 million orders in over 29 million units during the first quarter, reflecting incremental volume benefits from our new client engagements.

If present trends hold this performance puts us on pace to achieve record annual order fulfillment volume for the third straight year.

While our service fee gross margins remain impacted by the current inflationary wage environment as Tom just mentioned, we have implemented a number of operational productivity enhancements and other improvement initiatives alongside pricing and surcharges changes to mitigate these costs.

Our multi node strategy is one such strategy and has allowed us to shift certain client programs to more favorable labor markets expand existing clients into new geographies, and while also allowing us to ramp our capacity for new clients.

As Mike mentioned earlier, we are on pace to open our second fulfillment center in North Las Vegas, Nevada in Q3. This new center is nearing first Las Vegas facility, which we just opened and expanded last year.

And we plan to include contact center training environments within the second building to provide in person training for new employees.

With the new and existing clients looking to decentralize their fulfillment operations and expand capacity to accommodate increased e-commerce demand, adding another west coast noted strengthens our distribution network and capabilities we.

We will continue to evaluate additional opportunities to expand and optimize our capacity to best support our client base.

Within our pipeline, we expect to continue seeing higher ACB bookings for net new clients due to our operational success and our sales pipeline expansion initiatives, we remain committed to supporting our clients submit a dynamic and high demand operational environment.

I am proud of our strong growth trajectory and we look forward to making additional progress on our goals in the year ahead.

With that we'll now open the call up for Q&A.

Thank you Sir.

Ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again to ask a question. Please press Star then one one moment please.

And our first question comes from.

George Sutton of Craig Hallum. Please proceed sir.

Do you.

So your enthusiasm.

E Commerce enthusiasm I would say is a little bit in contrast to some of what we're starting to hear from the shopify as an Amazon.

And I am referring to your SFC at the upper end of the range and organic growth from your customers can you just give us a better sense of the enthusiasm.

Well I think a large part of that George comes from the nature of our client portfolio. Zach mentioned, so those core vertical markets of health and beauty.

Jewelry.

CPG.

Especially high end.

Luxury apparel.

And our experience so far this year has been that our clients continue to see strong demand for their product categories, I think largely because of the positioning of those brands kind of within overall retail.

Also our clients tend to have a preference for the E Commerce channel as opposed to multichannel retailers that have a large brick and mortar presence ours tend to be more dependent and more excited about and more invested in the ecommerce channel and so you tend to see investments marketing.

<unk> et cetera flowing to that ecommerce channel and I think the additional element is.

Client growth and that we continue to see organic growth with current clients because of that demand, but we also can see continue to see very strong sales pipeline.

Good conversion of that sales pipeline as evidenced by strong bookings in the first quarter and our expectation we'll continue to see the strong bookings continue throughout Q2, and Q3, which are really indicative of clients with these high end brands looking for our platform to service their needs.

I guess, if youre looking at a shopify or target or Walmart as a comp for us.

We would probably say that thats not the best comp if you look at somebody like a nordstrom or another high end Department store that has the same kind of product category luxury products, probably a better comp and I think Nordstrom announced.

Some pretty good results recently.

Reiterated or increase their guidance, so probably a little bit better comp and a general merchandise retailer like Walmart target or even a platform much upfront.

All good points Mike.

He was pleased to hear that a second transaction is still your top priority.

And I wanted to go back to the macro.

And for a long time, we've been talking about selling and e-commerce fulfillment business.

The sellers market.

<unk>.

With where we've been I'm curious if any of these iterations recently would change that sellers market dynamic in your opinion.

Not in my opinion, I think we've become an even more differentiated platform in the current market.

So I think as long as these trends that Zach mentioned continued to hold and that's our current expectation.

We continue to be a very desirable platform.

Perfect and then lastly can you just talk about because youre talking about a healthy pipeline of new opportunities at the same time you were talking about.

Having filled up many of your.

Fulfillment centers can you talk about how much excess capacity you have to sell into an and where you stand in terms of additional investment in the new.

Centers. Thanks.

Sure and thanks for the question I'll, let <unk> answer the question about capacity and kind of how we tend to think about responding to a pipeline, but I would like to point out before I turn the mic over to him.

One of the things that I think is the secret sauce of our PFS business is the agility with which we opened new facilities.

I kind of joke that we have just in time.

Facility plan, where we have the ability to within the normal sales cycle three to four months make a decision on whether to deploy a short term facility like we might do in the northeast for instance, if we have a single client we want to test the waters in the new geography done that several times where to open a brand new facility like we did here in Dallas.

So were in Las Vegas last year and go from signing a lease into full production in less than 90 days. So that gives us some comfort in knowing that we can respond to these opportunities as they come through our sales pipeline with agility.

I'll, let you comment on our current capacity sure. Thanks, Mike. So specifically if you look at the opening that we have in north Las Vegas that really points out the growth that we have planned for the current year and as you mentioned looking at growth past the year one of the things that we always challenge our team is keeping an eye towards the future. So we're already evaluating incremental opportunities.

For 2023 and beyond certainly make sure that we stay in front of the demand that we're seeing in the ecommerce space.

We're challenging our partners and broker partners look for real estate options and certainly.

During the appropriate site visits and planning right now that go into 2023 to make up the successful here and there.

Maybe the last thing can I just ask.

Sure Sorry, Mike go ahead.

I was just going to say that when the last thing is I would say is as we kind of.

Run this game of Tetris Zach runs as he is thinking about facilities, and where we want to be and respond to our client demand.

We also have the agility to make sure that the rate card that we use with our clients reflects the costs in a given region. So if we opened up a facility for instance in the northeast, which is kind of medium to long term plan. We realized the cost may be higher there just like we might have seen in Vegas. When we opened that facility and we have the ability to make sure that our rate card rift.

Actual costs reflected in each area, where we opened up a facility.

So I would proceed with your question.

But I hope Zach is a better tetra player than I ever was.

Right.

I'm curious you mentioned sales pipeline initiatives can you just give us a sense of what kinds of things you're doing on that side.

Sure so with the <unk>.

<unk> that we're seeing we're taking a really curated approach with the pipeline to make sure that we're selecting deals that best fit with our game of Tetris Skus that metaphor a little bit further so going through and doing some consultative sales approach on the front side also leveraging a lot of the product strategy that we have with fulfillment enablement to cobble together really.

Hence the solutions that allow us to deploy our infrastructure to help clients satisfy their own needs or work with different partners. So we really take a very strategic approach with our clients really find the best E Commerce solution as we build out the infrastructure to meet our growth objectives.

Hey, GA on the next call I look forward to maybe really a little bit more about this but we recently had a client that moved through our pipeline very quickly.

We won.

The retail connect solution was critical to their decision as we were deploying into our facilities, but also activating regional or metro fulfillment locations for them and there was a key part of their decision for choosing us so.

We continue to think our multi node strategy in that fulfillment enablement capability and the agility to gives us is super important and a differentiator for us.

Thanks, guys.

Thank you George.

Thank you.

At this time. This does conclude today's conference I could turn the call back over to Mr. Willoughby for any closing remarks.

Okay. Thank you Valerie and I'd like to thank everyone that attended the call. This afternoon.

Thank you ladies and gentlemen, this does conclude today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation.

Okay.

Yes.

Yeah.

[music].

Yes.

Thank you.

Okay.

[music].

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Good afternoon, everyone and thank you for participating in today's conference call to discuss P. F. F flat Q1, 2022 adult.

Yesterday F. P F F web CEO , Mike Willoughby the C O O and President PFS, Zach balance the company's CFO , Tom Madden and the company's outside Investor Relations adviser Jackie cash now.

Gateway group.

Following their remarks, we'll open.

The call for your questions I will now turn the call over to MS Casner fourth of industry comments.

Thank you Bill.

Before we go further I would like to make the following remarks concerning forward looking statements. All statements in this conference call other than historical fact are forward looking statements the words.

Anticipating believe estimate expect intend will guidance confidence target project and other similar expressions typically are used to identify forward looking statements.

I would like to remind everyone that this call will be available for replay through June 27th 2022, starting today at eight o'clock P M Eastern time.

A webcast replay will also be available via the link provided in today's press release as well as available on the Companys website at PFS Commerce Dot com.

Any redistribution retransmission or rebroadcast of this call in any way without the express written consent of PFS lab is strictly prohibited.

Now I would like to turn the call over to the Chief Executive Officer of PFS words, Mr. Mike Willoughby Mike.

Thank you Jackie and good afternoon, everyone.

With today's report complete and filed we are in full compliance with NASDAQ listing rules and our SEC reporting obligations.

Now turning to our first quarter highlights.

<unk> operational performance maintained our momentum from 2021.

We drove solid year over year service fee equivalent revenue growth as we continue to meet robust fulfillment demand within our current client base and to ramp new client engagements.

Across our business, we remain committed to further enhancing our fulfillment capabilities, our operational efficiencies and the value we create for our growing client base.

As our business has become more fulfillment oriented we have continued to benefit from significant e-commerce tailwind and adapt to changing consumer shopping trends.

In March Adobe Digital economy Index reported that consumers are expected to spend a record $1 trillion online in 2022 and the recent Mckinsey article estimates that E. Commerce penetration is growing by 30% relative to pre pandemic levels.

As consumer shopping behavior has evolved.

We have consumer preferences.

Mckinsey reports that over 90% of consumers now consider two to three day shipping as a baseline fulfillment expectation rather than a competitive advantage.

This environment requires fulfillment providers and the brands they serve to operate with increased efficiency agility and offer multi node fulfillment options.

These three qualities are at the core of our PFS operations.

You're coming off a record fulfillment year in 2021, we have continued to leverage our multi node fulfillment strategy and highly branded operations to provide effective tailored services for our clients.

We are quickly reached capacity in each of the three new fulfillment centers, we've opened over the past two years demonstrating.

Our ability to swiftly expand our global distribution network to support our clients.

In fact, we are on track to open our second Las Vegas fulfillment center in the third quarter of this year just over a year after opening and expanding our first Las Vegas fulfillment Center.

As we keep pace with strong fulfillment demand trends, we have also taken steps to mitigate the impact of the broader inflationary wage environment.

In addition, Inc. In addition to leveraging our multi node strategy, which allows us to shift certain client programs to more favorable labor markets, we implemented additional contract pricing changes and productivity enhancements beginning late in the first quarter.

We will continue to put these changes in place through Q2.

And we expect these to benefit our pricing and cost structure throughout the rest of the year.

This work is in line with our continued focus on the structural and operational optimization of our business.

To this end.

We remain underway with the disposition of our corporate headquarters, which we aim to complete as quickly as possible this year.

We have already transitioned most of our corporate office functions to be co located with our production operation centers or performed remotely and.

And we continue to pursue a sublease or arrangements with our landlord for the headquarters building itself.

In addition, as we discussed on our recent Q4 and full year 2021 call. We have concluded our obligations to merkle under a transition services agreement or TSA as of April .

With all TSA work related to the library transition complete we have made operational adjustments and significant corporate overhead reductions.

While supporting our core PFS business and improving our cost structure further.

With the sale of Liberia behind Us our core focus is to sustain the client growth and sales momentum in our fulfillment business and strengthen our positioning for the strategic alternatives process.

We continue to work with Raymond James on the review with a full range of strategic alternatives for PFS.

As we've previously communicated we believe that completing a second transaction reference represents the most efficient way to return to significant capital we hold to our shareholders.

And with that I'll turn it over to Tom to discuss our first quarter financials in further detail Tom.

Tom.

Thank you, Mike and good afternoon, everyone.

$7 million during the year ago period.

As we have previously disclosed Q1 2022 marked our final quarter of product revenue contributions from our client arrangement with Rico.

However, we believe this will ultimately benefit and clarify our financial presentations.

Our PFS operations 2022, Q1 gross profit margin.

It was approximately 20% of PFS service fee revenue compared to a gross profit margin of approximately 25% in the year ago period.

Our decreased gross margin primarily reflects the ongoing impacts of industry wide wage pressures.

We've also continued to see our percentage of fulfillment and contact center revenues relative to 2019.

Shift and as a result, this will likely drive long term overall gross margins that are more in line with gross margins for these core services, which tend to range between 20% to 25%.

Including both permanent price increases and additional or reinstitute instituted surcharges on selected client programs.

While most of these changes do not begin to impact revenue until Q2 or later this year. We believe these price adjustments cost controls and ongoing productivity enhancements will help us mitigate macroeconomic pressures and operate with greater profitability as we move through the year.

While we are seeing less wage volatility compared to Q1.

Our measures are having the desired positive effect.

We remain vigilant and we'll respond to any additional macro pressures with similar agility.

To this end, we remain committed to reducing our SG&A and aligning our overall cost structure more closely with our smaller fulfillment oriented business.

Our actual consolidated adjusted EBITDA from continuing operations in the first quarter of 2022 was a negative <unk> 4 million compared to an adjusted EBITDA contribution of 0.9 million in the year ago period.

The decrease primarily reflects the gross margin impact discussed earlier.

Partially offset by reduced ongoing and non restructuring related SG&A costs.

Our capital expenditures for PFS in Q1 exclusive of property and equipment acquired under debt and finance leases were approximately $1 $7 million.

As we continue to support new facilities contracts and anticipated future growth opportunities.

Continue to expect our 2022 capital expenditures to range between 8 million to $10 million.

Our liquidity position as of March 31, 2022 includes over $154 million of cash and only approximately zero point $2 million of debt.

We remain very comfortable with our strong balance sheet as we.

We seek to progress our growth initiatives throughout the year.

As we look to the remainder of the year, we continue to reiterate our previously stated 2022 financial targets.

Which anticipate annual fee revenue growth in the 5% to 10% range.

We remain optimistic that we can achieve PFS operations SSP revenue growth at the upper end of this targeted range.

Driven by our expected organic growth from existing clients.

Strong bookings and robust sales pipeline.

We also continue to target 2022 estimated PFS standalone adjusted EBITDA percentage of service fee revenue within the range of 8% to 10%.

As a reminder, this PFS pro forma Standalone adjusted EBITDA metric refers to our estimated adjusted EBITDA profitability for the PFS business as if we were operating in a nonpublic environment without certain corporate overhead costs.

I will now turn the call over to Zach to review, our Q1 sales and operational highlights.

Thanks, Tom.

Consistent with our previous earning calls PFS continued its momentum and focus in Q1 on supporting our topline growth objectives through three key drivers.

One expanding our multi node fulfillment strategy to better serve our clients customers.

Two driving our fulfillment as a service product offerings to allow for a more dynamic and flexible fulfillment networks.

And three converting our strong sales pipeline for continued growth.

During the first quarter of 2022, we continue to convert the sales pipeline that is at near record levels. As we reported seven new bookings were at $6 $8 million in combined estimated annual contract value.

These bookings comprise a mix of net new fulfillment and contact center engagements as well as additional fulfillment service expansions within several existing client engagements.

Our bookings indicate continued strength among established and emerging brands alike across North America and Europe .

And they largely fall within our core industry verticals health and beauty apparel jewelry and CPG.

Within our robust pipeline, our current clients and prospects are increasingly seeking service bundles of both business to business and direct to consumer solutions.

As an example, the service we've deployed for Blenders eyewear, one of our new clients launched in Q4 last year supports the brand's DTC e-commerce and <unk> wholesale channels.

To echo some of Mike's earlier comments, today's ecommerce demand tailwind and evolving customer expectations.

Brands placed a strong priority on providing swift tailored fulfillment experiences for their customers.

Our branded solutions make us a compelling partner in this environment.

Whether we're providing brand specific kitting and packaging services or leveraging our rapidly expanding distribution network, we stay closely attuned to our clients' needs and their distinct brand identity.

To speak briefly about our recent fulfillment performance, we fulfilled in excess of 6 million orders in over 29 million units during the first quarter.

The incremental volume benefits from our new client engagements.

If present trends hold this performance puts us on pace to achieve record annual order fulfillment volume for the third straight year.

While our service fee gross margins remain impacted by the current inflationary wage environment as Tom just mentioned, we have implemented a number of operational productivity enhancements and other improvement initiatives alongside select pricing and surcharges changes to mitigate these costs.

Our multi node strategy is one such strategy and has allowed us to shift certain client programs to more favorable labor market.

Expand existing clients into new geographies, and while also allowing us to ramp our capacity for new clients.

As Mike mentioned earlier, we are on pace to open our second fulfillment center in North Las Vegas, Nevada in Q3. This new center is near our first Las Vegas facility, which we just opened and expanded last year.

And we plan to include the contact center training environments within the second building to provide in person training for new employees.

We will continue to evaluate additional opportunities to expand and optimize our capacity to best support our client base.

I am proud of our strong growth trajectory and we look forward to making additional progress on our goals in the year ahead.

With that we'll now open the call up for Q&A.

Okay.

Thank you Sir.

Ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again to ask a question. Please press Star then one one moment please.

And our first question comes from.

George Sutton of Craig Hallum. Please proceed sir.

Do you.

So your enthusiasm.

E Commerce enthusiasm I would say is a little bit in contrast to some of what we're starting to hear from the shopify is in Amazon's.

And I am referring to your <unk> at the upper end of the range and organic growth from your customers can you just give us a better sense of the enthusiasm.

Well I think a large part of that George comes from the nature of our client portfolio. Zach mentioned, so those core vertical markets of health and beauty.

<unk>.

Jewelry.

CPG.

Especially high end.

<unk> apparel.

<unk> for the E Commerce channel as opposed to multichannel retailers that have a large brick and mortar presence are tend to be more dependent and more excited about and more invested in the E. Commerce channel and so you tend to see investments marketing expenditures et cetera flowing to that ecommerce channel and I think the additional element is.

<unk>.

<unk> growth and that we continue to see organic growth with current clients because of that demand, but we also can see continue to see very strong sales pipeline. Good conversion of that sales pipeline as evidenced by strong bookings in the first quarter and our expectation we'll continue to see the strong bookings continue throughout Q2 and Q3.

Which are really indicative of clients with these high end brands looking for our platform to service their needs.

So I guess, if youre looking at a shopify or target or Walmart as a comp for us we.

We would probably say that that's not the best comp. If you look at somebody like a nordstrom or another high end Department store that has the same kind of product category luxury products, probably a better comp and I think nordstrom.

Now some pretty good results recently.

Reiterated or increase their guidance, so probably a little bit better comp general merchandise retailer like Walmart target or even a platform much upfront.

All good points Mike.

I was pleased to hear that a second transaction is still your top priority.

And I wanted to go back to the macro.

And for a long time, we've been talking about selling and e-commerce fulfillment business.

A seller's market.

<unk>.

With where we've been I'm curious if any of these iterations recently would change that sellers market dynamic in your opinion.

Not in my opinion, I think we've become an even more differentiated platform in the current market.

So I think as long as these trends Zach mentioned continued to hold and that's our current expectation.

We continue to be a very desirable platform.

Perfect and then lastly can you just talk about because you are talking about a healthy pipeline of new opportunities at the same time you are talking about.

Having filled up many of your.

Fulfillment centers can you talk about how much excess capacity you have to sell into an and where you stand in terms of additional investment in the new.

The centers thanks.

Sure. Thanks for the question I'll, let <unk> answer the question about capacity and kind of how we tend to think about responding to our pipeline, but I would like to point out before I turn the mic over to him.

One of the things that I think is the secret sauce of our PFS business is the agility with which we opened new facilities.

I kind of joke that we have a just in time.

I'll, let you comment on our current capacity sure. Thanks, Mike. So specifically if you look at the opening that we have in north Las Vegas really points out the growth that we have planned for the current year and as you mentioned looking at growth past the year one of the things that we always challenge our team is keeping an eye towards the future. So we're already evaluating incremental opportunities.

For 2023 and beyond certainly make sure that we stay in front of the demand that we're seeing in the ecommerce space.

We're challenging our partners and broker partners, who look for real estate options and certainly.

During the appropriate site visits and planning right now that go into 2023 to make up the successful year there.

Maybe the last thing can I just ask.

Sure Sorry, Mike go ahead.

I was just going to say that when the last thing is I would say is as we kind of.

Run this game of Tetris Zach runs as he is thinking about facilities, and where we want to be and respond to our client demand.

We also have the agility to make sure that the rate card that we use with our clients reflects the costs in a given region. So if we opened up a facility for instance in the northeast, which is kind of medium to long term plan. We realize the cost may be higher there just like we might have seen in Vegas. When we opened that facility and we have the ability to make sure that our rate card <unk>.

Actual costs reflected in each area, where we opened up a facility.

So going to proceed with your question.

Yes.

I hope Zach is a better petrus player than I ever was.

All right.

I'm curious you mentioned sales pipeline initiatives can you just give us a sense of what kinds of things you're doing on that side.

Sure so with the <unk>.

Pipeline that we're seeing we're taking a really curated approach with the pipeline to make sure that we're selecting deals that fit with our game of Tetris skus that metaphor a little bit further.

Through and doing some consultative sales approach on the front side also leveraging a lot of the product strategy that we have with fulfillment enablement to cobble together really comprehensive solutions that allow us to deploy our infrastructure to help clients satisfy their own needs or work with different partners. So we really take a very strategic approach with our clients really find the best E.

Commerce solution as we build out the infrastructure to meet our to our growth objectives.

In Georgia on the next call I look forward to maybe revealing a little bit more about this but we recently had a client that moved through our pipeline very quickly.

That we won and the retail connect solution was critical to their decision as we were deploying into our facilities, but also activating regional or metro fulfillment locations for them and there was a key part of their decision for choosing us so.

We continue to think our multi node strategy in that fulfillment enablement capability and the agility to gives us is super important and a differentiator for us.

Thanks, guys.

Thank you George.

Thank you.

At this time. This does conclude today's conference I could turn the call back over to Mr. Willoughby for any closing remarks.

Okay. Thank you Valerie and I'd like to thank everyone that attended the call. This afternoon.

Thank you ladies and gentlemen, this does conclude today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation.

Q1 2022 PFSweb Inc Earnings Call

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