Educational Development Corp (EDUC) 2022 Q2 法說會逐字稿

Good day. Thank you for standing by. Welcome to the Educational Development Corporation's Second Quarter Fiscal Year 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Craig White, Chief Executive Officer and President. Please go ahead, sir.

Thank you, Norma. As Norma said, my name is Craig White. I'm President and CEO. And with me on the call today are Randall White, our Executive Chairman of the Board; Heather Cobb, our Chief Sales and Marketing Officer, and Dan O'Keefe, our Chief Financial Officer. At this time, I'd like to pass it over to Dan to announce our earnings results.

Thank you, Craig. Now we're going to announce the second quarter results. Net revenues for the second quarter of fiscal '22 were approximately $33 million, a decrease of $26.3 million or 44.4% from $59.3 million reported in the second quarter of fiscal 2021.

Pretax profits in the second quarter totaled $2.7 million, a decrease of $3.1 million from $5.8 million, representing a decrease of approximately 53.4%. Net earnings in the second quarter of fiscal 2022 totaled $1.9 million compared to $4.3 million, representing a decrease of $2.4 million or 55.8%. Earnings per share on a fully diluted basis for the quarter totaled $0.23 per share compared to $0.51 per share reported in the second quarter last year, a decrease of 54.9%.

This concludes the earnings results for the second quarter, and I will pass the call back over to Craig.

Thanks, Dan. Okay. So my personality is to tell you like it is. The COVID pandemic affected most businesses either hugely positive or a hugely negative last year, and our company was no exception. The second quarter last year was a monster quarter. Sales in the second quarter historically were not very strong. But last year, this quarter, we saw a strong increase in the demand for our products due to school closures and travel restrictions.

Our business model and our consultants capitalized on that opportunity. The results from this year's second quarter is more in line with pre-COVID quarters fiscal 2020, and that's why we presented a most current pre-COVID year comparison in the press release.

While our second -- while our quarter 2 revenues are down significantly from the second quarter last year, they are up over primarily due to our increased consultant count. We see our active consultants continue to drive both in fiscal 2022.

So what we're trying to say is fiscal 2021 was an unusual year. We think we are positioned and we took advantage of it. And it's a very difficult comparison, as we've been saying, but we still see continued growth. And I'm going to hand the call over to Heather to talk more about our sales opportunities.

Thanks, Craig. During the second quarter, we experienced an increase in our publishing division sales and a decrease in sales from our dealerships. Our publishing division has experienced a steady increase in sales as stores have begun reopening and restocking their shelves. We hit over $1 million in net sales each month from this division in fiscal 2022. And we see this growth trend continue in the fall and into the next fiscal year.

Our UBAM sales declined primarily due to the anomaly that last year was, especially in relation to the overwhelming demand for our products. Our average active consultant sales were unusually high during the second quarter last year, which is typically not a strong selling quarter for us.

During this year's second quarter, our sales per average active consultant was more in line with previous pre-pandemic years. During the second quarter, we saw a pullback in average number of active consulted. And while there's no magic formula to maintaining and growing active consultants, there are several things that we are doing to help them be more successful. And when existing sales consultants are successful, and in turn, they recruit more, and that success builds on itself.

One of the items that we are looking at rolling out is our new e-commerce platform. This new platform will be mobile, sleek and offer our consultant customers a better online shopping experience. With the rollout of this new platform, our IT team had additional bandwidth to work on several new projects that will also make our consultants' job much easier.

These projects are still in the development stage, but -- and will also provide a more streamlined consultant experience, leading to more success. And as I stated before, success builds more success.

With that, I'll turn the call back over to Craig.

Thanks, Heather. One other impact you see from the published financials is our increased working capital. We have increased inventory levels and increased working capital borrowings. These increased levels are temporary and will be down for the inventory in the past over the next few quarters.

As inventory turns to cash, we will pay down our borrowings and expect to be back to a more normalized working capital level within the next year. And while we are currently having on inventory, we expect this will be a good benefit for the next several quarters as several companies have already announced supply shortages that will impact through the holiday season. What we've been saying internally is our sales are full, and we're ready to sell.

One of the other highlights of our second quarter was our strong pretax profit levels. Our pretax profit as a percentage of net revenues totaled 5.8%. The pretax results are much lower revenue levels reflect the strength of our business model and our management's attention to cost containment.

As you can probably tell, we are very excited about our accomplishments and where we are headed into fiscal 2022. We are also excited to see the rebound in certain sales channels that were negatively impacted by the sales decrease including sales through school fares, booths and in-person events. These sales channels combined for about $30 million of business which we haven't fully realized yet. We're still in a strange year. The face-to-face events are coming back but they're not completely back. So that's still a potential that we could see coming out.

So those are our highlights. We've provided historical -- historical and current information, and I want to open it up to questions from our investors.

(Operator Instructions) Our first question comes from Tony Chiarenza with Key Equity Investors.

Congratulation on a good quarter, even though it's down, we still think it's still doing well. First question is on the average number of consultants, obviously, last quarter, it was like 55,000. So now it's down to 46,000 for the average for the quarter. Where do you expect that number to stabilize at some point? Obviously, it's coming down, obviously from the peak of the pandemic. Where do you see stability?

Well, I hope it's nearing the bottom now. That count comes from -- our active count is a -- the definition of our active count is if they sold something in the last 6 months. So our second quarter is always our softest quarter for headcount because some of our consultants maybe only sell in the fall and after Christmas and they don't sell again till the next fall. So a lot of those people have dropped off and we kind of hit the bottom about this time when you start to go back up as we go into the third quarter.

Okay. So you -- I don't want to put words in your mouth, is it 45,000, 46,000 somewhere that you would stabilize if you've kind of hit the bottom? I know that number is an average, so it doesn't reflect what it probably was at the end of the quarter.

Well, I wish I could tell you. COVID is still kind of a bit of a damper on not only customers, but people seeking extra income opportunities. It's hard to tell. Like I said, we like that we're picking back out to the third quarter, but I can't commit to a number.

Okay. I understand. Now you mentioned that the inventory levels are high. Now that is just something that developed. Was that intentional? Or sales came in lower than you expected? Can you just give us some more color about why the inventory has built up so much?

Absolutely. Thanks, Tony. I was going to get to it anyway. Okay. So in the fall of calendar 2020, last fall, our record-breaking sales were -- we had it despite that we were out of stock of 25% of our titles. So while we didn't see 80% growth this year, and we thought we'd see modest growth or maybe even be a little bit flat.

So we ordered inventory to prepare for this fall. As you probably know, we have to order that 6 to 8 months in advance. So we were planning for growth and didn't want to be out of stock of things in fall. And sales are down a little bit now. So that's why our inventory is a little bit high.

I will say we haven't purchased much inventory since April. So we saw kind of some trends and we kind of slowed down our purchasing. We have to buy new titles. New titles are the last blood of this business. So we will be purchasing new titles for those different seasons, but we're going to aggressively work through our industry levels over the next 6 months.

Okay. And you would expect it to slow down -- can we expect it to go down back to the $50 million level from the $65 million? Is that your objective or so?

Absolutely. Maybe even more.

Okay. Okay.

But like I said in our script, it puts in a great position for the fall. A lot of our competitors are -- have run out of stock and their sales will be empty. So we are poised to have a great fall.

No, everybody is out of inventory. I think that's the problem with supply chain is every company has a problem with getting inventory at this point. So I think you're absolutely right.

Now obviously, with the inventory has come a high on term debt and that's built up a little bit. How much liquidity do you have left at this point on your -- both on your revolver and your term debt?

I'll take that, Tony. This is Dan O'Keefe. So we've got our existing working capital loan of $20 million. But last year, we were aggressive in paying down our debt. We actually paid down -- a year ago in November, we had $30 million of cash, and we used some of that cash to pay down about $10 million of building debt.

So we still have a lot of gunpowder, so to speak, in the reservoir. If we need to go in and raise additional capital through additional bank borrowing there, so we expect there to be a lot of available capacity to do that.

Okay. But you don't anticipate needing it, given that you have the inventory that you need when you buy some new titles, but then you're trying to work it now. So you're not going to need additional liquidity at this point. Is that correct?

Well, it depends on, too, we're hitting our busiest months. So there's no crystal ball for what's going to happen over our next 90 days, which is where we typically will pass 40% to 50% of our business. So it all depends on how the next 90 days now and if we need to borrow a little more, keep to buy more. The point I was trying to make is we certainly have a strong net balance sheet that will allow us to borrow more with our existing lender.

And I will also add that I said we purchased in April. So all those titles are coming in now. So in the next 90 to 120 days, we'll have to pay for that inventory. So we're reserving the right to need more money so.

Yes, the good news is we aggressively paid down debt last year. We paid down about $10 million of our building debt last year. And did that -- and so that creates a lot of available assets to use working capital on with our inventory.

Right. Right. So you do have something that's in the neighborhood of $5 million to $10 million in additional availability. I'm just making a number up.

Yes. Least number.

That should give you a tremendous amount of flexibility that. That would sound then that kind of gets worked up. And after we go through the selling season, work down again as we go into January and February.

Exactly.

Okay. Great. Best of luck as you go through the Christmas season.

Thank you, Tom. I really appreciate it.

Our next question comes from Walter (inaudible) with (inaudible) Partners.

Can I take 2 questions. I think I have 2 questions. We wanted to come up from the last question and answer. If you have inventory in April, when does it show up? When the AV likes to take this is the movement of cash? And b, at what point does it drop on your balance sheet?

So if you order in April and you don't pay it till September and it's delivered till September, then it doesn't show up anywhere on your income or balance sheet statement, just to get into the balance sheet.

Walter, this is Dan again. So we buy -- it depends on the product that we're buying and where we're printing it. We print some in China, we print some in Arab Emirates and some in Malaysia. Typically, how it passes when we get control of it, either once it boards the boat or once it hits the U.S. or one of the two.

And at that point, we take control of it and we book the inventory in the payable. But it's interesting before, that can be 6 to 8 months or longer, sometimes depending on the complexity of the book that we're ordering. Some of our books have very long lead times because they take a lot of hand work to build them. So 6 to 8 months from the time we order it from the time we take control of it as some of its typical scenario.

Okay. Although from a cash generation standpoint, when your sales associates order, they pay. So as you get sales in the fall, they -- credit card, whatever, the cash comes in and then you ship it out, effectively. Correct?

Absolutely. So like you said, we're 120 days shipping, which means shipping times are delayed right now. So we may have it on the premises that within 60 to 90 days. So yes, we can start selling it some of it before we pay for it, that helps, but it doesn't cover it all.

Okay. Too much cash is not going to be a problem. Over the last few months, however you want to define a few months. The company repeatedly -- and those credit went out of its way to point out that you were beneficiary of COVID last year, that this was a very difficult comparison in the quarter you just reported. That's a fact you did it again and again.

No, we didn't do it again and again.

I saw you did it again and again. So I know you did it again and again. On this call, okay, we're going into the seasonally stronger period. You have not said -- and I know you're not going to make a forecast, last year, you're extraordinarily strong. It's going to be very difficult to do as well as we did last year.

And listening to this call, and you don't know the answer, but it would appear that you do not have the same concerns you had about the quarters you're spending. And in fact, it is possible without making a forecast that the next -- that the selling season this year could be comparable to the selling season last year or better. But you're not expecting to be down substantially?

No, we would not expect it to be down substantially. As example, second quarter last year was up a crazy amount, whereas the fall selling season was modest increases over fiscal 2020. So we hope we can be in line with last fall selling season.

And to help our pretax profits and whatnot, we're improving our margins. We're getting more efficient in the warehouse. Our new CapEx project for our facing warehouse has been running for about 2 months now, and we're seeing great results from that. We're gearing up, staffing to staff the 2 lines that we abandoned the last couple of months to be ready for the fall selling season. So everything we're seeing is positive.

Okay. And just last question, while the Federal Reserve may think inflation is transitory, it may or may not be, lots of things have gone up the lot. Your cost -- I realized you've worked a lot of stuff for a while. We're all when they're getting it. But are you seeing pressure from a core standpoint as you look going forward to ordering new titles and traditional inventory later this year into next year?

Yes. This is Dan, Walter. The key things that we saw, and we can go backwards in time over the last year. There were some paper challenges in the late winter and early spring. But most of those just because our volumes -- we're buying so much more, we had volume discounts that were offsetting a lot of the paper challenges and shortages of that period.

But really, what we saw is the shipping challenges that have started happening in the last 60 days.

Fortunately, for us, we had already ordered and received a majority of our big bulk purchases that happened last year in the fall and in the winter. So we missed a lot of the shipping craziness that's been happening over the last 30 to 45 days.

We still have a few products coming in. The shipping challenges have been just unusual. Now what we know is that the shipping challenges are supply and demand imbalance. And from what we understand from the big vessel carriers that handle the cargo ships and the containers that they see this demand imbalance continuing for the next 6 to 12 months until 2023 when new vessels come online.

Fortunately, for us, we've got a majority of our inventory, so we will be somewhat pushing from the problem of right now and hopefully, the vessels will come on board in the time frame that we can get back to normalized shipping times.

Okay. And again, just to repeat myself, to make you repeat yourself. The comparison to the next 6 months are more comparable last year to the year before, they were only up modestly. And with the sales pace and the inventory and the better economics, you are reasonably optimistic of the -- about the comparisons in next 6 months.

We're cautiously optimistic. We're seeing some exposures. We put out new titles Monday. We have a smaller release in October, and we've had incredible results this week. So that's all I'm going to say as far as the forecasting.

Our next question comes from Joseph Fuller, private investor.

I apologize I joined the call a little bit late talk so somebody who's already asked this. Capital expenditures, I know we're at a little bit of an elevated level. I remember something related to warehouse or extra line extension or something. How much longer would you expect that sort of higher level to remain to sort of get back to what was usually very low level of capital expenses?

Well, that was to increase capacity in our warehouse fulfillment. We don't anticipate needing any further CapEx for quite some time. We think with that addition, we could get to sales levels of $400 million to $450 million without further CapEx. Now obviously, we're getting paid on these projects for a little while, but no further large CapEx at this point.

I appreciate that. Can I ask one more question. And I appreciate all the discussion of the inventory because that was actually the big question I had also. So once the inventory is sold and pay down some of the debts on, presumably, again, this becomes a pretty high cash flow business.

And as I remember in the last conference call, there was some talk about the stock buyback or increase in dividend. And I assume that's on hold now temporarily because of the bill to the inventory. It has more softened given sort of to long term, how to use the extra cash?

Well, I've only been in my position for 2 months, give me a little time to think about it.

Sure.

Obviously, we're not increasing the dividend right now or buying back stock at more usual levels. But I'm talking to everybody. I'm kind of aggressive and everything is on the table. Everything is up for discussion but not right now.

Our next question comes from Adam (inaudible) from (inaudible).

He kind of just asked the question I was going to ask. I was going to ask why you guys choose to pay a $0.10 dividend instead of trying to chew up the flow with a share buyback? But you guys have a pretty low flow, I would think eating up that flow and then when the bank comes in, that would send the stock price up pretty well.

We don't disagree. I think this cash flow is a short-term problem. I think we see the dividend down sends a more negative message than working through our temporary problem. So we've certainly thought through it.

And I'll add to Craig's comment that we have the Board of Directors authorized us to buy 800,000 shares of company stock in the last -- 18 months ago, they did. So we have that availability to do it. It's just as Craig said, right now, we're investing in inventory because inventory is really the funnel for sales growth.

And so we're heavy in inventory right now. But as we work through the bolder inventory and become more working capital balanced, we have the ability to buy shares. And we will have the cash flow and availability to do it.

Next question comes from Marty Alexander, private, investor.

Yes, I had a question. From 2019, your average revenue per consultant, looking back to 2019, so pre-COVID, it looks like the revenue per consultant is up about 30%. Do you expect it to drop back down to 2019 levels? Or are you seeing some kind of traction that you should expect that the revenue per consultant is going to be going up?

And my second question would be -- do you -- are you finding that some of the folks that you have coming on that are being consumed are kind of looking maybe at this gig-worker type job versus traditional employment. Do you see that sticking? Do you see that as a go-forward opportunity? Or do you see COVID is more kind of a flash in the pan because even prior to COVID, your total consultant count was going up, and you had mentioned that I think COVID was a catalyst not the cause. So could get a little color to that?

Sure. Marty, this is Heather. And I just want to talk about revenue per consultant. I think that what we are seeing is that the average revenue per consultant during COVID was inflated a bit due to the overwhelming demand in the product. I think that while we still fully believe our sales consultants thrive generating those sales, they just -- they were on cruise control a bit more last year than they had been in pre COVID and than they are now, and it just didn't take quite as much energy or efforts.

So I think that what we are looking at is possibly landing somewhere closer to pre-COVID levels. It's always our hope that we can increase that. But at the end of the day, it's our bigger hope that we can increase the number of sales consultants, which kind of goes to your second question, which is where we think that's heading with supplemental income.

I'll refer a little bit to what Craig was saying earlier, which is still being in the midst of the pandemic, it's really hard to assess that entire situation. But having been a business that has been around in this industry for over 30 years, in an industry that's been around longer than that, they survived things different in the pandemic, but definitely recessions and various different things that have happened within the economy and within the country.

And I think it will still absolutely be a viable option for supplemental income. I think especially as what we've seen and what we believe is that we're getting back to the basics when it comes to having books in their homes with kids and different things like that, not only the business model that we have but the products that we sell are our 2 big things that we have going for us.

Adam, I might -- or I'm sorry, Marty, I might add. My first love is IT. I came from being over IT. So I hope that we could increase revenue per consultant with our new e-commerce rollout and some of the other IT projects that we're working on. So I just want to throw that in as well.

(Operator Instructions) Our next question comes from David Wright with (inaudible) Investment Trust.

I want to go back to Walter's last question, which he restated and I'll take a third crack at it. Your third quarter revenues last year were $66 million. Your commentary suggested it's not high in the sky outrageously impossible that your third quarter revenues this year could get close to that. Is that what you're saying?

I'm an eternal optimist. So I would like to think that's what I'm saying, but we just don't know yet. There's still too many unknowns. It's possible, but I'm not committing to that.

I think...

David, the opposite of that, I don't think we're going to see the disparity we saw in the second quarter between the second quarter of this year and the second quarter last year. I think that the 2 quarters have a more similar volume than what we saw. There was just a huge demand in the second quarter of this year, and that caused a big delta between the second quarter last year and the second quarter this year. And we don't see that delta being nearly as significant. Whether or not that delta is tiny or not tiny, we don't see it being nearly as significant as it does in the second quarter.

Dave, I'll just add 1 more thing to that. In terms of effect, we called last year as a whole an anomaly. And so it's hard to know if the increase in the third half and the third quarter can be attributed to COVID or can be attributed to it being a fall-selling season.

And so as Craig said, the reception that we've received to the seasonal releases that we made available this Monday make us really optimistic, but we also still feel like it's early -- really early to feel like our crystal ball is close enough to be able to answer your question, probably to the extent you want us to.

Well, I mean, I think what's significant is that pre COVID, you were -- the 3 years before-COVID, '17 to '20, your average revenues were around $112 million. And it's pretty clear that on the other side of the could be more than $120 million a year business. And ditto for the earnings per share that are going to come out higher parts. So -- It's a great story. You're doing a great job, and I like the dividend, by the way.

We appreciate you recognizing that we're not necessarily going back to pre-COVID or lower numbers. We know with pretty much certainty that, that's not the case. So yes, it's good to see that we're getting that story for us.

And I'm currently showing no first questions in the queue at this time. I'd like to hand the conference back over to Mr. Craig White for any closing comments.

All right. Thank you, Norma. Obviously, we want to be back in a high-growth mode. We feel like we're doing pretty well. Again, not to beat it to death, but we're trying to compare it to 2019, and we're up in the 35% to 40% range. So two, after that year, 20% growth is not bad, and that's where we want to get back to you. So thank you for being on the call. I appreciate it.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.