Newmark Group Inc

NASDAQ:NMRK

Earnings Call Transcript 2022-Q3

[Operator]

Greetings, and welcome to the Newmark Group Second Quarter 2022 Financial Results Call.

At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jason McGruder, Head of Investor Relations. Thank you, Jason. You may begin.

[Jason McGruder, Head, IR]

Thank you, operator, and good morning. Newmark issued its third quarter 2022 financial results press release and a presentation summarizing these results this morning. The results provided on today's call compare only to the three months ending September 30, 2022 with the year earlier period, unless otherwise stated.

We will be referring to our results on this call only on a non-GAAP basis, unless otherwise stated. These non-GAAP terms include adjusted earnings and adjusted EBITDA. Please see the section in today's press release for the complete and/or updated definitions of any non-GAAP terms, reconciliation of these items to the corresponding GAAP results and how, when and why management uses them. Additional information with respect to our GAAP and non-GAAP results is available on our website in today's press release, the supplemental Excel tables and the quarterly results presentation.

Any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities, excluding loan origination and sales, as well as the impact of the 2021 Equity Event. Cash from the business with the same cash flow metric by excluding employee loans for producers.

The outlook discussed on today's call assumes no material acquisitions share repurchases are meaningful changes in the company stock price. These expectations are subject to change based on various macroeconomic, social, political, and other factors. 2025 financial and operational targets do assume acquisitions. They are also subject to change for the same reason. None of our targets or goals through 2025 should considered formal guidance. I also remind you that the information on this call about our business that are non-historical facts, forward looking statements within the meaning of Section 27-A of Securities Act of 1933 as amended and Section 21-E of the Securities Exchange Act 1934 as amended. Such statements involve risks and uncertainties. Except as required by law, Newmark undertakes no obligation to update any forward-looking statements. For a complete discussion of additional risks and uncertainties which could cause actual results to differ from those contained in forward-looking statements, see Newmark's Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in the most recent 10-K, 10-Q or 8-K filings, which are incorporated by reference.

I'm now happy to turn the call over to our host, Barry Gosin, Chief Executive Officer of Newmark Group, Inc.

[Barry Gosin, CEO]

Good morning and thank you for joining us. With me today are Newmark's Chief Financial Officer, Mike Rispoli; our Chief Strategy Officer, Jeff Day; and our Chief Revenue Officer, Lou Alvarado.

The rapid rise of global interest rates has materially impacted transaction volumes. As a result, our total revenues declined by 16%. This environment has created confusion with respect to stellar and buyer expectations regarding market pricing. We expected decline in volumes to continue until interest rates and cap rates stabilize. We anticipate lower volumes well into next year while we continue to generate solid adjusted EBITDA and cash flow, due to our diversified revenue streams and variable cost structure.

Fee revenues for management services, servicing fees, and other increased by 11%, led by strong improvements in our servicing business as well as continued growth and flexible workspace and global corporate services. We expect these recurring revenue businesses to grow throughout the cycle. While we produce stronger leasing activity in industrial and retail during the quarter, this was offset by lower office volumes. Office leasing remains more active in the Sunbelt regions compared to the traditional core metro areas.

In nearly all markets Class A office space commands a growing premium to Class B and Class C. Our professionals are actively collaborating with clients, identifying opportunities to differentiate or repurpose underutilized properties and maximizing returns for our clients.

Revenues for commercial mortgage originations improved year-over-year for Fannie Mae and mortgage brokerage in office, industrial and lodging. However, they were offset by reduced activities in other areas. Investment sales volumes for all property types were down for the entire industry. Debt-driven transactions were particularly impacted with the office sector most affected.

Multifamily and retail were new markets strong performed comparatively better. With over $410 billion of global institutional real estate capital waiting to be deployed and $2.5 trillion of commercial and multifamily debt maturing over the next five years, we expect industry volumes to bounce back relatively quickly once US interest rates are no longer rising and have stabilized.

We have experienced generating cash flow under challenging market conditions and have a strong long term track record of growth and improving our fundamentals. Since our IPO in 2017, Newmark has doubled its revenues and more than doubled it adjusted EBITDA, while generating $1.4 billion of cash flow from operations and $1.5 billion from NASDAQ. We also returned nearly $1.3 billion of capital to shareholders, reduced our net leverage by nearly 90% and continue to invest in our business.

The company has steadily gained market share. We're now number three in the US investment sales compared with number four last year and number five in 2017. We have continuously added the most challenged professionals in the industry have grown their productivity, which has driven our market share gains. Our meaningful scale, low leverage and strong cash flow, together with our $600 million revolving credit facility, leaves us well positioned to invest in growth as we execute our 2025 plan.

We see great opportunities as the industry continues to consolidate around well capitalized full service providers like Newmark. Additional growth opportunities include expanding our international footprint, raising capital for our clients, expanding our servicing and asset management platform, and growing our management services.

With that, I'm happy to turn the call over to Mike.

[Mike Rispoli, CFO]

Thank you, Barry and good morning. Against the backdrop of lower industry-wide investment sales volumes and declining origination activity, our revenues were down 15.7% to $664.6 million compared with $788.1 million. Expenses decreased by $62.3 million or 10.6% as over 70% of our expenses are variable. We are targeting $50 million of fixed cost savings by the end of next year, of which we expect to realize $25 million in 2023.

Turning to earnings; adjusted EBITDA was $122.5 million versus $174.5 million. The decline was largely due to lower capital market's revenue. Our EPS was $0.35 compared with $0.50 last year. To put this in context, last year's third quarter earnings were the best ever for the company. This quarter's $0.35 was our second best third quarter ever, and $0.03 ahead of 2019.

During the quarter, we repurchased 10.1 million shares for $10.35 per share. This reduced our quarterly weighted average share count by 5.6% year on year.

Moving to the balance sheet, we ended the third quarter with $229.7 million of cash and cash equivalence. The change in cash and liquidity from year end 2021 reflects cash flows from operations of $209.4 million, offset by $281.2 million for share re purchases, the change in NASDAQ value from December, 2021 of $87.6 million, cash used for acquisitions of $64.2 million and normal changes in working capital. We remain in a very strong financial position with net leverage at 0.5 times.

Turning to full year 2022 guidance, compared with 2021, we are lowering guidance primarily due to the anticipated year-on-year decline in industry-wide capital markets transactions in the second half of 2022. We expect total revenues of between $2.7 billion and $2.8 billion compared with $2,906.4 billion. We anticipate adjusted EBITDA of between $500 million and $550 million versus $597.5 million.

We expect our adjusted earnings tax rate to be approximately 19%, compared with 18.9% and we anticipate weighted average share count declined by 6% to 7% compared with $264 million. Consistent with our net issuance, since the IPO, our target net share count issuance is expected to be an average of 2% a year or less.

We have included an illustrative model on Page 16 of our Investor Presentation that demonstrates the components of our diversified business that drive our earnings. We are providing this hypothetical model to help you understand that even in challenging market conditions, Newmark's business generates strong adjusted EBITDA. This model is not guidance and is shown for illustrative purposes only.

With that, I'd like to open the call for questions. Operator?

[Operator]

We will now be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question is from Chandni Luthra with Goldman Sachs. Please proceed with your question.

[Chandni Luthra, Goldman Sachs]

Hi, good morning team. Thank you for taking my question. So thank you for the slides. They're obviously very helpful and I see that you've highlighted that you're on track to meet your 2025 target, but help us understand, how do we kind of get there? Obviously initially you guys had laid out plans around organic growth and M&A with 13% revenue growth and EBITDA growth respectively. What segments do you play a bigger role now and do you see a bigger role of inorganic growth versus organic growth? And how should we think margins as you get there?

[Mike Rispoli, CFO]

Sure. thanks for the question. I think that certainly we still believe that our targets for 2025 are achievable and that those are our goals. We always believe that we can grow across every one of our businesses, and that growth included both organic and inorganic growth through acquisitions and we see opportunities in both in the US and internationally.

And so that -- all that continues and we see with $400 billion of capital to invest in commercial real estate, $2.5 trillion of debt maturities coming up over the next few years, while there may be a temporary pause or decline in activity once, as Barry said, there's some stabilization in interest rates and some understanding of where pricing is, we think the activity will start to pick back up.

[Barry Gosin, CEO]

Let me add to that. Without question, we are an intermediary. We are in a business when there's trading that's good for us. In a period of discovery and confusion, when interest rates are rising, spreads are not set, cap rates are not fully determined, the delta between aspirations of buyers and sellers is not stable and that always at some point during the market, when there's adjustment.

Once interest rates settle and once cap rates are determined, which is driven by interest rate transactions, people will start trading again. There's a lot of money out there. The banks are in good position to lend. They're just not lending because of the nature of the rising interest rates and the spreads and uncertainty in respect of certain categories of real estate, but this is not the first rodeo we've all attended and the question is exactly when that will settle down.

Having said that, with respect to our growth, we have a clean sheet in the international market, which we've acquired two companies in the UK. I spent several weeks in in Europe last month. And I will tell you that the reception for a firm like ours in those markets is enormously gratifying. So the opportunities in respect of a market where there's a little bit of adjustment is actually good for us. I think it will unleash -- it will be put many professionals in a position to want to change and to want to explore and we're seeing that as an opportunity in many respects.

[Chandni Luthra, Goldman Sachs]

That's super helpful. Barry, would you think that leverage -- increasing your leverage would be on the table in this market if an opportunistic deal were to present itself?

[Barry Gosin, CEO]

We've concentrated on mostly bolt-ons tuck-ins, large teams, talented people. The DNA of our company is about bringing in the best talent and if something presented in ourselves, obviously we'll look at anything that presents itself. Doing a major acquisition provides for an enormous amount of friction and conflict. So it's much more complicated for us.

We've had really good success with tuck ins, bolt-ons, large teams, talented people. Our objective is to bring the best talent, enable and empower them with infrastructure and information and help them join, what's the deepest bench, certainly capital markets in the US and the rest of the world.

So, to answer your question, we have $800 million of dry powder liquidity. We need more. It's easier, -- it’s easy to go back to the well, but we're a very careful and thoughtful in our purchases because at the end of the day, when you create and finish all the plumbing and the distribution around the globe, you want it to all work together and to be synergistic. And the machine works itself out when great people are working all together throughout the globe.

[Chandni Luthra, Goldman Sachs]

Got it. And for my second question as we think about leasing revenues down 5%, you talked about office leasing being a driver there. Could you perhaps give us more color on the current state of office leasing? You've mentioned in the past that there should be large office transactions potentially next year with a lot of debt maturity and renewals coming due. So how should we contextualize all that, especially in the reality of a recession next year?

[Barry Gosin, CEO]

Well, the debt maturity, the $2.5 trillion of debt maturity is with respect to capital markets. People have to refinance regardless of the state of their building. So that's -- that is without question the market that just will feed itself. With respect to office, companies have been gathering evidence on what the state of office should look like. Without question, it's going to be different than it was prior. But, there's very little concierge. People will be in the office. If it's not three days, it's four days a week, and people will still need office.

There will be conversions of some of the older B&C product that isn't suitable for repurposing or to renovate. And that will be good for the market. And one thing I could say in an inflationary market, it's not going to get any less expensive to build and then, as supply diminishes and demand increases, as populations grow in many markets, there's still going to be a tremendous demand. And the delta between B&C buildings will be large.

So it'll actually bring up the B&C buildings because to build a new building in some of these markets could cost between $2,000 and $3,000 a foot, and it's going to be very expensive to rent. So it's actually going to create less supply as demand comes back.

[Chandni Luthra, Goldman Sachs]

Thank you for that.

[Operator]

Thank you. Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

[Alexander Goldfarb, Piper Sandler & Co.]

Hey, good morning, morning down there. So just a few questions. First Barry, maybe just continuing on the leasing front with office, what are you guys seeing as far as leasing trends, meaning there's some chatter that certain functions like back office, like accounting or IT, even the top tier professional services or companies or having those people work from home.

So what are you seeing as your clients go for new space or assess their current needs? Are they all shrinking footprints? Are they growing? Are they trying to move more to different offices, more to the sunbelt? Just trying to get a sense for how people are assessing their needs. And I hear you on the flight to Class A, certainly we see people willing to pay a premium for new construction, but at the same time, does that mean all the older generic stock becomes Swiss cheese? So it's sort of a two parter there.

[Barry Gosin, CEO]

It depends on the older stock. There's certain types of buildings are suited. There could be converted to first class product. There are rental numbers in places like Soho and in markets where the cast iron buildings rent for $80, $90 over a $100 a square foot, and they're in demand and they're rented. So it really depends on the product and certain businesses, I think as if they were a recession, I think the equilibrium between CEOs and employees will change somewhat. CEOs want their people to come into the office.

There's so many advantages and the evidence is still in formation as to what the effect on productivity in not being in the office. But there are lots of young people who are going to come back to the office who want to see their fellow employees who are want to be part of a company, not in a total virtual environment.

There are people that have gone to work for some companies, they've never been in an office, never met anybody else in the office. I don't know how that works, but, I'm not a big believer that in the long term, that's going to be something that's sustainable. I think you're still going to need the socialization, the growth, the relationships that are built, and the nuances of how to learn a trade and everybody is in some form of trade to be in the office.

[Alexander Goldfarb, Piper Sandler & Co.]

But what about the functions? We've spoken to a number of companies, whether it's REITs or clients where, they're saying part of their accounting function is now working from home or IT. It does seem like there is some consolidation where front of office people, yes, you're right, Barry, are in the office, but it seems like companies are assessing. Do they need everyone back or they can have a certain segment of their employees work more from home? I'm just curious what you guys are seeing as you and Lou and others in the organization speak with your customers.

[Lou Alvarado, Chief Revenue Officer]

So Alex, this is Lou. Look, what we've seen some transactions, some recent renewals where they expanded, and we've seen some where they've shrunk. I think, as Barry said, it definitely leaves a chase for quality. And when we say quality, it's really amenitized space, right? So in order to get their employees back.

The other thing we've seen is since the end of summer, there's been an increasing occupancy in the buildings. We tend to track how many people are in the buildings. And we're now getting into the high 40s, low 50s percentage when before we were in the teens.

So definitely, there's a trend. It's going to be different, as Barry says, it's going to be -- if you look at today, when we track a lot of activity on Tuesday, Wednesday, Thursday is kind of quiet on Mondays and Fridays. But that doesn't mean they don't need the space. That just means they need it on Tuesday, Wednesday, Thursday.

So I think what we're seeing is a change in the space to much more collaborative areas meeting space, touch space. A change in the density, which is sometimes creating the ability not to shrink. But I think it's still a work in progress. I still think we're not in the final decision mode where people have said, but people that are renewed -- that have renewals are having to make decisions and the ones that we're working through right now.

[Alexander Goldfarb, Piper Sandler & Co.]

Okay. Next question is on the mortgage business. Clearly positive that it's primarily or maybe almost entirely multifamily, but at the same time, mortgage rates going up. I would assume, leads to less refinancing and certainly, if capital market activity is slowing, that's got to impact mortgage originations and LTV proceeds. So can you just give an update on how you see the mortgage business sort of over the next 6 to 12 months given obviously the pause that's gone on in the general capital markets business.

[Jeff Day, Chief Strategy Officer]

Sure. First, I would say that I wouldn't characterize our recent volume is almost exclusively multifamily. We do have a significant component in multifamily business, particularly at Fannie May, which is the higher-margin GSE business. But we've attracted and Barry talks about this a lot, and this is where the talent that we bring in really shines in a normal environment when there are 30, 40, 50 lenders that could potentially finance the deal, you're running more of a process.

And while creativity and strategy is important, less so than in a cycle like this, the people that we've attracted are really almost more like investment bankers than brokers, and they're creating transactions out of the stressed situations, 435 and other types of structures that perhaps the average mortgage banker or broker wouldn't be able to perform on.

So what I would say is that I would think that with interest rates where they are until they settle out, we're going to see a decrease in activity. But I also believe that we're going to get a disproportionate share of the activity that's out there because of the people that we have and because we have such a robust GSE business.

[Alexander Goldfarb, Piper Sandler & Co.]

Okay. The final question is, Barry, right now, we have negative cap rates still below financing costs. I think we're all aware that cap rates are a lot stickier than most people think. How long do you think buyers are willing to tolerate negative leverage? Meaning, is it as long as they underwrite maybe 2 years of negative leverage before their pro forma can go positive Or how do you view the sustainability of negative leverage?

[Barry Gosin, CEO]

It's going to require more cash in the -- there's a lot of loans out there that banks don't want to renew that with some more equity into the transactions, these lenders will extend loans. I think there'll be some of that. It will be more larger cash buyers. There will be some opportunity to revise clients on how to restructure their loans, buy down their loans, extend their loans.

That will be an opportunity for rescue capital, pref equity, other forms of replacement of equity, and that's an opportunity for the creative people. We're seeing that now, and we're involved in transactions that require a lot more thought and a lot more reach in respect of where the capital is. And then everything is a function of like a development deal. The owners are going to have an appetite based on their view of the long-term value of the market.

So if you develop a building, you don't get any cash flow you have to carry for years. And your point about how long will they take negative leverage, if they believe the asset is priced right and it's a long-term market where demand is going to increase, and there's an opportunity to get an asset because there's less competition, but they want to own that asset. It will adjust. We've lived in environments where 6% and 7% interest rates were around.

For the last 10 years, interest rates were abnormally low. I remember functioning in a market when interest rates are 18%. Once the market settled in and people know what they're buying, it will reset. There will be some price capitulation. There's some -- be some buyers who are loaded who believe in the long-term nature of real estate over time and will invest.

We're seeing people right now in this disconnect are -- they're willing to pay more, they're willing to accept more interest. And the question is, will the sellers be willing to reduce their price and there's a little bit of a delta, but it's closer than we think and it could turn the same way everything, everything turns and surprises us.

I look how we came out of the pandemic, people would have predicted it would have been way longer than it was. And the feeling was much worse that it ended up being -- I mean, we came out of the pandemic like a bat out of hell, we're going to come out of this like a bat out of the hell the same way we did in the pandemic because we've attracted talent, our people are creative.

We understand real estate from the inside out. We know what it means to be in a troubled environment, we've been to workout periods before. In some respects, if the spreads really widen and interest rates remain really high, there's some -- some people might say that over the long term year run, that could be a really good thing because a lot of the is created through cap rate compression. And the higher the cap rate, the higher the interest rate, the bigger the reset.

And once it starts trading, you'll get another 10-year run of activity on people buying stuff, catalyzing it, cap rates going down because of the availability of capital and the desire to invest. So we're here. We're an intermediary. We have very little risk. I think if you look at the model, focus on that model, the hypothetical model that we sell you, it looks at our business and what the risks are.

We are a solid cash flow company with a really very transparent look at the downside, with an incredible amount of talent in a business. We've grown on the upside. We -- our beta is higher as -- when it will settle, we will come back with, like I said, and our -- even in our hypothetical scenario, the cap rates in our hypothetical scenario are 5.7. So in the downside scenarios that we put in the release.

[Operator]

[Operator Instructions] Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

[Jade Rahmani, KBW]

Just wanted to confirm the liquidity goal. We should be taking the $230 million of cash and adding it to the undrawn revolver, right? So liquidity is $830 million.

[Mike Rispoli, CFO]

Yes, that's absolutely right, Jade. And we even have a slide in the slide deck where we show if you take our cash on hand plus the cash we'll generate from the business plus the undrawn revolver, we still believe we have $1 billion of capital to continue to invest in the business and return capital to shareholders.

[Jade Rahmani, KBW]

Okay. Great. Interesting to note that in your comments, you chose to say you expect an extended period of decline. What informs that expectation? And that's just with respect to capital markets volumes.

[Barry Gosin, CEO]

We couldn't predict the pandemic. We couldn't predict Ukraine. It's hard to determine exactly when something I mean if we -- Jade, people have said we were overzealous at times so we under guided. We want to say the right thing based on the knowledge we have at hand.

My personal belief is it's shorter, it will turn quicker. But you tell me the banks will decide when they start lending. And the Fed will decide when they stop raising interest rates. And I don't think anybody has the answer completely. I think it's subject to getting arms around inflation. We have an election coming up, which is driving that aggressive attack on inflation, just how aggressive it gets no one could determine. Interest rates drive transactional volume. That's just the nature of our business.

[Jade Rahmani, KBW]

Right. That makes sense, and I appreciate the conservative approach. noted that Americas business September was really when volumes began to decline, down 43% year-on-year. And did you see the same kind of a trend? Or did things begin to worsen before that?

[Mike Rispoli, CFO]

Yes, I'd say for us, Jade, we started to see it a little bit before September. So as we got into August, it started to slow the mid- to early part of August and certainly accelerated in December.

[Jade Rahmani, KBW]

And could you give any color as to how leasing is trending so far in the fourth quarter? What magnitude of decline is reasonable to expect? I know that the 2023 hypothetical scenario illustration shows 1/3 or less of the shortfall in capital markets to translate lower leasing. But are you seeing declines in leasing thus far in the quarter?

[Mike Rispoli, CFO]

Yes. I would say we would expect our leasing to be down somewhere in the neighborhood of where it was Q3 to maybe down a little bit more than that. And if you look at the hythetical model, we modeled down off of the trailing 12 months, I think, 10% to 15%, so somewhere in that neighborhood.

[Barry Gosin, CEO]

You should also note that we had 2 years of not a great office leasing market with the confusion about what the office market looks like. So we're working off of a different kind of bottom. There's going to be a point where CEOs and employees bridge the gap of what the office should look like and there's a complete understanding. I think that could get better. And we're seeing it get better.

We're seeing more people back in the office, as Lou said. We're seeing more CEOs get their arms around the impact on productivity. There was a certain amount of skepticism as to what people are really working at home. I mean, they're willing to go to restaurants, theater, Madison Square Garden, but they don't want to come into the office. Eventually, that's going to change.

When you see some job loss and some change in the economics that puts a little bit of fear in respect of, hey, I need to be in front of my boss. I need to be better at what I do. Being together with clients is a better way to conduct business. And some of that's going to be part of the evolution, but we're working off a base that has been taking a beating for 3 years.

[Jade Rahmani, KBW]

Just finally, a technical question. The tax rate -- adjusted tax rate at 19% now from '17 to '19 previously. Any changes to -- or what drove the share count or anything else there?

[Mike Rispoli, CFO]

We bought back more stock in the third quarter. We bought back a little over $100 million. I think it was around 10 million shares. So that obviously would drive down our expectations for the year. And what's interesting, I think Barry had mentioned even our new 2022 guidance, we're trading at above 5x adjusted EBITDA. And if you even look at the midpoint of our hypothetical model, it's still below 6x. I think it's about 5.7x. So we think the stock is still a great investment, and that's why you've seen us continue to buy back.

[Operator]

Our next question is from Patrick O'Shaughnessy with Raymond James. Please proceed with your question.

[Patrick O'Shaughnessy, Raymond James]

In the office sector, to what extent are buyers waiting to see how far rents and vacancy might fall before we're willing to step in? Or is it really just that they're weighing out the interest rate volatility that you've spoken to already in this call?

[Barry Gosin, CEO]

I think they're mostly waiting for the interest rate volatility. I think sellers are aware that the values have and want to sell. There's also a lot of funds around that we'll probably sell not as excited about the capture of their promotes and move on to their next funds to take advantage of the disruption in the industry better returns. So there's going to be some of that leaning out of the market that will create activity.

[Patrick O'Shaughnessy, Raymond James]

Got it. And then can we get a little bit more commentary on the industrial and warehouse sector Obviously, Amazon reported yesterday and it wasn't all that great. And kind of just hearing a slowdown in terms of imports and online commerce. So what are you seeing out there in the industrial warehouse space?

[Barry Gosin, CEO]

There is interesting -- So High Street retail is doing as well as I could remember in terms of their -- the high-end brands -- and then there is a formation of a lot of new brands around the globe for retail. And as different from the past, many of them are looking to create their own distribution entering into 3PLs on their own and subsequently buying their own supply chain and logistics capabilities so as to not be embedded in the system of another company like Amazon.

So I think you're seeing more formation of that kind of activity. You still have more near-shoring and a desire to manufacture things closer to home, the frictional cost of shipment is still an aspect of making those kind of decisions. There's probably not a lot of -- there's not a lot of product. Interest rates will affect the amount of things that get built, and there are fewer opportunities to develop industrial and some of the really loaded markets.

But Amazon has slowed down on some warehouse and logistics, but I think you'll see other people stepping in and picking up some of that demand. And a lot of it has to do with inventories and how inventories load up and sales, and we're seeing sales reflate.

[Patrick O'Shaughnessy, Raymond James]

Got it. I appreciate that color. And then last one for me. Curious if we can get your reaction to Class A shareholders voting against three of the four director nominees recently.

[Barry Gosin, CEO]

Yes. I think certainly, we had the Annual Shareholder Meeting and all the directors were renewed, and we think we have a strong board, and we'll look to continue to make it stronger over time.

[Operator]

There are no further questions at this time. I would now like to turn the floor over to Mr. Barry Gosin, CEO, for any closing comments.

[Barry Gosin, CEO]

I'd like to thank you all for joining us today, and we look forward to updating you on the business next quarter.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.