PFSweb Inc. Q1 2023 Earnings Call

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Good afternoon, everyone and thank you for participating in today's conference call to discuss P. F. S. Web Q1, 20 twenty-three results.

Joining us today or P. F. S Web C E L. Mike will it be the C O O and president of P. F. S. Zac Zelman the company C F O Tom Madden and the companies outside Investor Relations adviser, Jackie Kashner with the gateway groups.

Following their remarks will open to call for your questions I would now like to turn the call over to Miss Kashner for some introductory comments.

Thank you before we go further I would like to make the following remarks concerning forward looking statements also.

All statements in this conference call other than historical facts are forward looking statements the.

The words anticipate believe estimate exact intent will guidance confidence target project and other similar expressions typically are used to identify forward looking statements.

The full disclaimer relating to forward looking statements as well as certain non-GAAP metrics using our filings in this presentation can be found in the company's 10-K and investors section of the P. M. S Web web site under Safe Harbor statement.

Webcast replay will also be available via the link provided in today's press release as long as available on the company's website at P. F. That's commerce Dot com.

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

Now I would like to turn the call over to the Chief Executive Officer, PFS Webb Mister Mike will will be <unk>.

Thank you Jackie and good afternoon, everyone.

Our first quarter performance maintained our momentum from the record your we had in 2022.

Rove, a 5% service fee growth and set a new all time to one fulfillment activity company record fueled by continued demand among premiere and luxury brands and our core verticals.

In addition, we delivered sequential and year over year service fee gross margin improvements.

Reflecting the benefit of the productivity improvements and pricing modifications, we implemented last year.

We believe this progress has put us on strong sweating for the year ahead.

Our core verticals have remains largely resilient.

Broader operating environment evolves and are multi node fulfillment network continues to expand.

Demand has stayed particularly strong for health and beauty, along with jewelry and collectibles.

This resiliency is evident within our current client portfolio and within our sales pipeline, which delivered a strong sales booking result for Q1 and the sales pipeline remains strong with encouraging sales booking results already early in Q2.

<unk> and just a few minutes have more comments on the resiliency of our core vertical markets and our sales performance and optimistic sales outlook for the rest of the year.

As a reminder, we enter 2023 with a restructuring work largely complete this.

This is positioned us to continue optimizing the business around our order fulfillment platform with the aim of driving greater cost savings further improving operational efficiency and supporting our growth as a standalone platform.

Our ongoing work to right size or a corporate costs and maintain a more traditional level of operating liquidity also enables us to provide a clearer more transparent picture of our financial performance.

While remaining open to additional strategic pathways toward creating shareholder value.

To this end, we announced our board of directors authorization of our share buyback program near the end of the first quarter.

The program has an up to two year duration and allows us to purchase up to an aggregate of 1 billion shares of our common stock.

With our corporate restructuring work and the payment of our special dividend largely complete complete.

And given our strong start to 20 twenty-three.

We believe the share repurchase program provides additional flexibility to support our growth and maximize shareholder value.

It also represents our confidence and our longterm opportunities and growth trajectory.

With our current confidence and based on the continued strength of the consumer fulfillment service and sales pipeline demand trends across our core verticals.

We are reiterating our previously disclosed 20th twenty-three guidance targets.

Which call for PFS annual service fee revenue growth in the range of at least 5% to 10%.

We remain optimistic that we can achieve service fee revenue growth at the upper end of this targeted range.

In addition, we continue to expect our 2023 total company consolidated adjusted EBITDA to be within the range of 6% to 8% of service fee revenue include.

Inclusive of our remaining public company cost.

Excluding the public company cost of approximately 2% of service fee revenue.

Targeting total company adjusted EBITDA as a percentage of service fee revenue terrain range between 8% to 10%.

In 2023.

We believe our focus on total company adjusted EBITDA as a primary financial metric. In addition to service fee revenue is appropriate for a restructured and optimize business in 2023.

We also believe our estimates a total company adjusted EBITDA, excluding the remaining estimated public company costs.

More aligned with the current size and focus of our business.

But they will still provide an appropriate comparison to the estimated pro forma PFS standalone adjusted EBITDA margin as a percentage of service fee equivalent revenue metric, we have been providing over the past two years.

Finally, we continue to target completing our current strategic alternatives review process with our financial advisor Raymond James before the end of this year.

Our strongest priority is maximizing value for our shareholders as we weigh potential pathways for our surging business amid a currently challenging M&A market.

Before we provide additional color on our progress in our strategic objectives in the year ahead, I'll turn the call over to Tom to discuss our first quarter financials in greater detail.

<unk>.

Thanks, Mike.

As you'll see in our Q1 2023 financial presentation. We are reporting service fee revenue is our principal tarpaulin metric.

Rather than the non-GAAP service fee equivalent revenue, we have historically used.

Remember, we discontinued our product revenue model with Rico.

After the distributor agreement with them was terminated last year.

This will allow product revenue to be eventually eliminated from our piano altogether going forward.

Taken in conjunction with eliminating the discontinued operations presentation of the divested library business.

This has allowed us to track towards discontinuing the term service fee equivalent revenue.

Make additional progress clarifying and streamlining our financial presentation.

With minimal expected impact on our consolidated adjusted EBITDA comparisons.

With that context in mind or Q1, 2023 service fee revenue increased 5% to $47.6 million compared to 45.5 million during the year ago period.

The increase was primarily driven by sustained growth across both new and existing coins.

<unk> 2023, Q1 gross profit margin increased by 450 basis points to over 24% of service fee revenue.

<unk> gross profit margin of approximately 20% in the year ago period.

This year over year, if sequential improvement reflects the benefit of increased productivity.

And the implementation of several pricey modifications last year.

Which began taking effect wait in Q2 2022 and into early 232022.

The growth was partially offset by reduced higher margin Nonfulfillment related service fee revenue, such as technology related services and project activity.

With more of our service mix comprising our core fulfillment activities. We believe our gross margin will continue to be within the typical range for these services.

Which is generally between 20% and 25 per cent.

In addition, we drove a year over year decrease in our SG&A as a result of reduced professional fees and other related expenses related to the prior Libreria business unit divestiture and a cost reduction and restructuring activity, we have had underway.

Since August 2021.

This process is designed to align our cost structure and more closely.

With our smaller fulfillment oriented business subsequent to that divestiture.

As we enter 2023 with our corporate restructuring work largely complete.

Ah remaining restructurings related costs.

Comprise incremental expenses related to the strategic alternatives process and professional tax fees.

Along with certain severance costs.

We will continue working to drive additional savings and implement further productivity improvements S.

<unk> and corporate overhead cost reductions where possible throughout the year.

Arkansas's related adjusted EBITDA in the first quarter of 2023.

Increased significantly to 3.0 million compared to an adjusted EBITDA of a negative four point or negative 0.4 million in the year ago period.

The increase reflects the continued benefit of our <unk>.

Our gross margin improvements and our ongoing cost reductions and restructuring initiatives.

R capital expenditures in Q1 for approximately 1.1 million.

As we further support new contracts and the growth of our fulfillment network. We continue to expect our total 20 twenty-three capital expenditures to range between $8 million to $10 million.

We expect our growth capex to be allocated towards the activation and ramp up of our newest facilities over the coming quarters, and Zach will share more about our footprint expansion shortly.

Our liquidity position as of March 31, 20, twenty-three includes approximately $39.7 billion in cash in less than $100000 in debt.

<unk> sequential increase in our cash balance relative to the end of 2022.

Primarily reflects the impact of converting some of the seasonally hi, working capital requirements. We had at the end of December to cash.

In addition, we received certain moneys related to tax refund from previous excess estimated tax payments made as a result of our gain on the library a transaction.

The increase was partially offset by our completion of one of $3.5 million in dividend equivalent payout during the first quarter.

The remaining 3.8 million dollar balance of our special dividend is carried as a declining dividend payable on our balance sheet related to various equity awards.

Having significantly completed our dividend issuance.

And with the authorization of our two year repurchase program on March 20th.

We remain focused on supporting the continued growth of our business by maintaining a reasonable level of operating cash.

Including evaluating the establishment of a traditional finance facility.

Pursuant to the share repurchase program, we put in place we purchased approximately 96000 shares for approximately zero point $4 million by the end of the first quarter.

And we purchase and incremental 100, <unk> 138000 shares for approximately zero point $6 million in April .

As we further established and retain a normalised level of operating cash we believe this.

Optimizes our position to complete our strategic review process this year and execute an additional growth opportunities for P. F S.

I will now turn the call over to Zac to review our queue, one operational progress in our 2023 objectives.

<unk>.

Thanks, Tom.

[noise] GFS would continue this momentum from a record order fulfillment and sales looking here in 2022.

The high fulfillment volumes, we experienced during the quarter, we set a new company record for first quarter order fulfillment activity.

We have also continue to support a strong sales pipeline.

According for bookings with an estimated $6.8 million in annual contract value.

Or a C V during Q1.

A number of comparable with R Q1, 2022, ACB value and the build up to a record bookings ear.

As consumer demands persist among the premium brands and our poor verticals.

Demand for our multi node fulfillment services as remained equally strong from current current clients seeking renewals and expansions to new clients, making renewed investments and their e-commerce capabilities.

We remain closely underway with converting client prospects in ourselves pipeline to launches and we continue to see promising indications for both pipeline conversions and new sales opportunities. This year, resulting in an increasing number of new client launches in queue to an early Q3.

For a platform as a whole we continued to achieve success on our three pronged growth strategy, which comprises of the following initiatives number one expanding our multi node fulfillment strategy to better serve our clients customers to converting our strong sales pipeline for continued growth and third drive.

<unk> fulfill that has a service product offering to allow for more dynamic and flexible fulfillment networks.

Starting with our multi no fulfillment expansion initiatives.

Made solid progress umbrella R domestic and international fulfillment footprint.

And the U S. We remain on track to open our previously announced second Dallas area fulfillment Center in early Q3.

This facility is designed to enhance our existing fulfillment capacity for clients in the southwestern region of the U S as well as offer greater flexibility for R. D. F. W. Based team members and for the types of customer service agent models, we offer.

Most recently.

Announced that we had entered into Elisa agreement for a new 70000 square foot fulfillment center and Farhan, England.

This new facility is located 10 miles from our existing Southampton fulfillment center with additional strategic proximity to the Southampton Airport and the ports of Southampton enforcement.

In addition to allowing for convenient transportation shipping options are farhan facilities location allows our leadership team to oversee both fulfillment centers more easily as well as provide cross training opportunities for employees to serve multiple clients.

We sought to open a second UK facility to serve a European clients and our original facility, who outgrew their current capacity as well as enhance our flexibility to surf respected European clients are seeking to mitigate some of the supply chain disruption that has resulted from breakfast.

We expect to design, the new Farhan facilities, specifically for health and beauty brands, while also implementing new sustainability initiatives.

We value this expanded opportunity to surf brands, and our largest product vertical while advancing our sustainability goals and we expect to launch our first client out of this new facility in the second quarter.

To elaborate on Mike's earlier comments many of our new sales opportunities are within health and beauty and we continue to see robust growth in both help them beauty and jewelry and collectibles, even relative to the grocery generated over the past several years.

March <unk> report found that prestige beauty sales revenue in unit sales growth outpaced mass beauty in 2022 and more recent point of sale data <unk> revealed that Q1, 2023 U S prestige, Judy and industry sales increased 16 person.

You are over a year to $16 billion.

Nearly a third of these T. One sales came from makeup which grew 24% year over year within prestige channels.

Some of the smallest distillation of luxury.

Outsize impacts on demand for these brands with sales of items like designer Lipstick. Many did he get set and fragrances continuing to grow rapidly.

These trends revealed that customers do these products is welcome trees, even amid macroeconomic pressures on their budgets.

This pattern is in line with Leonard ladders widely cited lipstick effect and the current demand and spending patterns. We've seen apply that does the fact remains very much in play.

Our existing sales pipeline opportunities and sales efforts I remain skewed towards fulfillment and transportation services.

Reflecting enduring demand for me to be and direct to consumer Malty note that's on the services.

Which we can send you to expect will grow at double digit rates.

This mix shifts.

And the demand that supports it had been underway since the height of the pandemic.

Taken in conjunction with our multi node <unk> and direct to consumer opportunities. These trends facilitated higher ACB per booking adding to the power and promise of our pipelines throughout the first half of this year.

For a contact center services, we continue to see these as a source of value both in our existing engagements and sales opportunities for potential upsells.

Those with our existing fulfillment offerings.

We expect to see these services represent a smaller percentage of our overall revenue as we continue to see higher growth rates in sales conversion in our pipeline for our customers and transportation services.

While our immediate pipeline and sales efforts are largely geared towards fulfillment opportunities. We continue to see opportunities for our contact centers contact center services with it with both new and existing customers and we will continue to optimize how we support and deploy our contact center services.

Monitoring trends towards lower cost near shore markets, and AI adoption and the subsequent effects. These have an existing client programs.

To further complement our fulfillment offerings and the strength of our multimedia platform. It also continue to support our fulfillment as a service products. These products enhance the agility of our platform, which allows us to quickly open multiple fulfillment centers and rapidly scaled new client engagements and enhance the innovation in our sales cycle.

This agility and flexibility of new and existing clients has continued to differentiate our services.

<unk> and allowing our client agile solutions.

Or pop up fulfillment centers retail fulfillment are rapidly scaling client solutions within our own centers.

Our first quarter results are testament to our strategic progress.

Give us a solid foundation to bring this momentum forward into Q3 Q2 <unk>.

In addition to reiterate in our full year 20 twenty-three outlook. We believe we have refined our operational foundation and our pipeline to facilitate.

<unk> double digit growth over the longer term.

With these prudent and ongoing cost cutting measures. We have implemented we expect a service fee gross margins to remain stable within the 20% to 25 per cent range consistent with our fulfillment oriented service mix.

With our ongoing work to address for a bus customer and fulfillment demand.

Ramp are multi note for stomach capabilities for growing client base and operate from a leaner and more streamlined foundation I believe we are well positioned to continue executing on our growth objectives, the balance of 2023 and beyond.

With that will now open up the call for Q&A.

Thank you.

At this time, we will conduct a question and answer session to ask a question you want me to <unk> one one on your telephone and wait for your name to be announced.

<unk>. Your question you will simply press Star one one again please.

Please stand by while we compile the Q and a roster.

Our first question comes from the line of George Sutton as Craig Harlem. Your line is now open.

Thank you this is Adam on for George Mike It sounds like to choose after a really good start in terms of the pipeline I was I was hoping you could provide a little more detail on that what exactly are you hearing from clients and why are you converting it et cetera, I right right at the moment given the the economic backdrop.

Well I'll, let zac give you most of that color I would say from my perspective.

We're benefiting from a strong reference ability in the industry, particularly in the health and beauty sector. I think we have the right to win every single time, we go to bat for health and beauty brand.

I think we're also benefiting from a few struggling competitors, we're not gonna name them, but they appear to be giving us.

The opportunity to have serious conversations with some of their clients.

Uhm.

I think we're benefiting from health and beauty brands really focusing their attention to other direct to consumer channel.

It's become their most important channel.

And because of that.

Change, we're seeing a higher level of investment in the bar to being raised around the experienced that consumer expects.

My Cat.

Echo that comment I'll go one step further just as it relates to relieve the direct to consumer focus I think goes back all the way to the pandemic forward and we're seeing a lot of momentum and the direct to consumer channels, specifically a lot of investment there.

Primarily because it's the most profitable channel for our customers and it should be and I'm looking for ways to differentiate that channel continue to grow that channel Mercy and that'd be the source of the lot of the investment that we're seeing in the channel were really well positioned to capture that also in the commentary we tried to have some comments as it relates to what we're seeing from health and beauty and.

Jewelry and collectibles as a whole with us really targeting Ah premium and luxury brands are proving to be quite resilient. They're proving the continued wanted best I'm gonna grow during this time and as such we're well positioned to capture that opportunity and mood board.

That's great and and it sounds like everything's going according to plan with with the two new facilities coming online I was I was hoping you could find a way to to help us better understand in terms of the potential revenue impact over time. When you have a new facility could you quantify you know how much more revenue capacity that.

They give you.

Oh I'm, sorry, we don't normally provide direct correlation how much revenue that is we do expect with those two facilities coming online really and and Q2 in early Q3 as we outline. The script is we'll start to see an elevation in terms of revenue that steers towards the guidance that we have for the full year that being said, we also expect that.

We'll continue to see you need an ear to continue to invest in more facilities and really what the demand we're seeing in the pipeline. That's that's gonna stop that will look at as we head into 24 for incremental opportunities as we we strive for double digit growth rates next year.

That's great and then.

One question for you Tom obviously, it was a great quarter from a free careful perspective granted you know, there's a big working capital benefit, but still two and a half million otherwise I'd I'd love to get your perspective, just done on how people should be thinking about you know the cash for dynamics going forward.

Yep, so as we as we take a look at the business this year with our forecasted.

Guidance that we've provided we do expect kind of free cash flow to be around breakeven recycled positive for the year.

And that is after considering the capital expenditure components.

Components that we have in place, including all the growth Capex that we talked about on the call. So we feel like we're strong from a financial foundation standpoint in order to be able to support the growth of the business will.

You need to look for opportunities of how we finance some of those capex as to whether or not we utilized cash or.

Other types of financial instruments to be put in place.

In order to properly support liquidity position in the business, both this year and long term.

Great Thanks for asking.

Okay.

Thank you.

At this time. This concludes our question and answer session I would now like to turn the call back over connector will it be for closing remarks.

Thank you Chrystal I'd like to thank everyone that attended the call. This afternoon, where hopefully as you can tell from my tone incredibly optimistic about the business bullish on the future look forward to future.

Time, so we can spend with you and as always we are available to our investors four calls and we look forward to seeing you get some conferences in the future as well. Thank you.

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

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