Educational Development Corp (EDUC) 2022 Q4 法說會逐字稿

Thank you for joining the Educational Development Corporation's Third Quarter Earnings Call. Before beginning the call, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors.

We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition.

With that, I'd like to turn the call over to Craig Wright, the company's President and Chief Executive Officer. Sir, you may now begin.

Thank you, and welcome, everyone, to the call. With me today are Heather Cobb, our Chief Sales and Marketing Officer; and Dan O'Keefe, our Chief Financial Officer. As we have signaled in all of our previous calls, we continue to look at our business as compared to pre-pandemic levels given the COVID-created record demand and results from our company. I'm pleased that we exceeded prepandemic levels in our fiscal fourth quarter with increases in net revenues and average number of consultants resulting in continued profitability.

Now to address the elephant in the room, we have decided to temporarily suspend our dividend. The dividend has always been a priority for the company as part of our long-term capital allocation strategy to create shareholder return. This strategy remains unchanged, but given the strong positive COVID tailwind, our inventory levels are at record highs, and this decision is solely to protect our balance sheet. As our inventory levels normalize later this year, our plan is to reinstate our historical dividends, and this remains a priority.

With that, I will now turn the call over to Dan O'Keefe, our Chief Financial Officer, to provide a brief overview of the financials for our fiscal year 2022.

Thanks, Craig. So for some fiscal year 2022 highlights, our net revenues for fiscal year 2020 totaled $142.2 million, a decrease of $62.4 million or 30.5% compared to $204.6 million reported for fiscal 2021.

Earnings before income taxes for the fiscal year totaled $11.2 million, a decrease of $6 million or 34.9% compared to $17.2 million reported in fiscal 2021. Net earnings totaled $8.3 million compared to $12.6 million, a decrease of $4.3 million or 34.1% from last year.

And finally, earnings per share on a fully diluted basis totaled $0.98 compared to $1.50, down 34.7% on a fully diluted basis. And as Craig mentioned, to discuss some of the recent events that have happened with EDC. As you might have read in the 10-K that was filed earlier today and our subsequent event footnote, we increased our working capital line from $20 million to $25 million to strengthen our balance sheet during this quarter.

We ended the year of -- ended the fiscal year 2022 with approximately $73 million of inventory. We expect this to be our peak inventory level and see a significant amount of inventory turning into revenue and cash over the next 3 quarters. In addition to our working capital line, causing a dividend, as Craig announced earlier, will increase our cash position by about $1 million a quarter, on a temporary basis. This concludes the financial report. And now I'll turn the call back over to Craig.

Thanks, Dan. A couple of items I'd like to begin with. Our fiscal year 2022 was the second largest revenue and earnings per share in our company's history. And while we experienced a decline in revenues, our pretax profits remain strong, which reflects the overall strength of our business model, a model that generates profits, not only to increase of growth but also periods of decline. Our fiscal 2022 results could not have happened without the hard work for our UBAM sales consultants and our Publishing sales teams.

Both groups continued the sales efforts into fiscal 2023. It's still not a normal sales environment out there with pandemic and now world views, but let me hand this over to Heather to further talk about our sales opportunities.

Thanks, Greg. During the fourth quarter, we continued to experience an increase in our Publishing Division sales and a decrease in sales from our UBAN division when compared to last year. Our Publishing Division sales totaled $2.9 million in the fourth quarter and $13.3 million for the year. Our Publishing Division's fiscal year 2022 sales grew $4.6 million or 53.6% over fiscal '21 and represented a 15.6% growth over our largest Publishing sales year of $11.5 million in fiscal 2016.

While some of this growth came from the return of normal sales activities to stores that were temporarily closed during fiscal '21, our Publishing sales team was able to add several new customers and gained business with existing customers that resulted in these record sales.

Our UBAM sales declined 35% to $17.6 million in the fourth quarter of fiscal '22, primarily due to the anomalies of last year was with the pandemic. Throughout fiscal '22, we have seen our active consultant count decline due to consultants returning to full-time work as well and their children returning to school. Although our consultant counts have been declining, they still are above the pre-pandemic levels that we have experienced.

Our active consultant count averaged 37,500 in the fourth quarter, which was 19% higher than the fourth quarter of fiscal 2020 when our active consultant count averaged 31,400. This increased consultant count has driven our increase in revenues over prepandemic levels. In addition, we continue to introduce new technology-based tools to help our consultants be more successful in reaching new customers and expanding their recruiting efforts, which we anticipate will ultimately lead to overall sales consultant growth and re-consent.

During the fourth quarter, we rolled out our new online training platform. Some enhancements that we've made with this platform includes several touchpoints with our field sales force. We have regularly scheduled new consultant meetings as well as new leader for meetings, which allow us to come office to reach these leaders and these consultants in ways that we haven't done so in the past. We also plan to roll our new e-commerce website, which will add mobility and other additional features.

We're very excited about this new e-commerce website as it will allow us to bring additional features that will make it easier for our consultant to do business as well as allow us to develop additional enhancements on that site to improve our cost and customer experiences. This concludes our sales update, and I'll turn the back -- call back over to Craig.

Thanks, Heather. One other impact you will see from our recently published financials is our continued high levels of working capital. We have increased inventory levels and increased working capital borrowings. Need to increase levels are temporary and will rebalance or return inventory into cash over the next few quarters. As inventory turns to cash, we will pay down our borrowings and expect to be back to a normalized working capital within the fiscal 2023.

Now you've heard me say this in the last couple of calls that I just want to make sure everyone is clear and understands the inventory levels that we're seeing now was from inventory that was purchased in February, March to April of fiscal -- the first quarter of fiscal 2022. And so it's just coming in October, November, December, January, which means our inventory levels kind of peaked at the end of the fiscal year.

And now 90 to 120 days later, those inventory purchases were coming due. So that's why our working capital line needed to be increased. During this first quarter of fiscal 2023, we have experienced some headwinds against sales of our UBAN division due to the impact of inflation.

As fuel prices and steel prices have increased at record levels, our customers have been forced to slow down on spending in other areas. In an effort to spur revenues, we have recently introduced new online specials and additional consultants to energize our UBAN sales force and give them tools to help generate sales in this challenging environment.

We're also excited to see rebounding sales from UBAN sales channels that were negatively impacted by the pandemic, including school book fairs and boots and fair grants. These 2 channels have taken a positive turn back towards pre-pandemic levels. Now that we have provided historical and current information, I will open the call up to questions from our investors.

(Operator Instructions) Speakers, our first question is from the line of [Walter Schenker].

First, I will make a complaint, which has nothing to do with the earnings, but has to do with the fact that if you're going to report at the end of the day, the ensuing conference call should be either the end of that day or the beginning of the next day, it should not be 24 hours after you report, it would have been theoretically just for these report, today after the close and have the conference call at 4:30, this is especially so as you're going to report news which might be unsettling to the market. So now that I've said that, now I have gotten -- I got off my shares.

Since we'd like to go back and compare it to 2019, in 2019, inventory was about 30-odd, I think, I don't have it in front of me, $30-some-odd million. If we're going to compare the increase in sales, we'll bring that up 20% to $36 million relative to the sales we had in the last year. Should I take back to me that we have $40 million roughly of excess inventory? You got it how we look at it?

Well, I understand how you're looking at it. It's not exactly accurate. I would estimate that we have more like $15 million to $20 million excess inventory.

So that going forward, assuming sales are flat, I understand it would be nice for them to grow, but if sales are flat or we're going to free up is this, I call it $15 million to $17.5 million will split the difference of inventory. And therefore, in regard to cash flow and paying down debt, that will remain well above where it had been 3 years ago despite the earnings over the last couple of years, if that's what you're going to free up.

No. Okay. Good point. We didn't specify that we're going to be flat though. And if we're...

Not. I mean...

I'm sorry, go ahead.

No, no, I understand that. I'm just making a generalized assumptions. no assumption, I use the thing. And so the issue remains and the financial position and the elimination temporarily or longer of this dividend is a function of, again, inventories and debt levels. I realize this is being redundant, but that basically is as you did earn $1 last year, roughly.

Right. correct.

And was there a covenant issue that also caused you to cut -- I know you had to borrow more money, but did that run you into a covenant? Or you just thought it was prudent to do it on the dividend?

At this time, it was just what we felt was prudent. We did not run into a covenant issue at this time. I'm not going to have any issue in the near future there. I'm just saying that it was just a prudent decision.

Okay. And lastly, since we both know you and your father, the largest shareholders are, do you have -- I realize you talked to the Board, do you have a sense as to what financial condition the company relative to debt would need to be in to either reinstitute a dividend? Is there like a thought of we cut it? And if we can get here, we may reinstitute it.

I have something in mind. It's not necessarily based on the statistics, but it's likely to be third quarter. So we've missed the second quarter and be back in the third quarter. Now to give you specific details, we have to talk about it. But if we're turning inventory into cash and we're getting our working capital line from the neighborhood of $25 million down to between $10 million to $15 million, when I would absolutely reinstate it. And it didn't have to get down that level in my opinion, but down in the 10 to 50 ranges were projected.

Okay. And just lastly, since I had said (inaudible) and I know you're not going to forecast, but with some minor exception, my statement of fact looking at the year, you would still hope not forecast, but hope that earning revenues this year should exceed last year. I guess a point for forecast.

Yes, that's close to forecast. There's too many economic external pressures right now. I mean let's say if children's books are our discretionary purchase and until the economy and gas prices and food prices start to turn that down, I can't forecast or anything. We believe in our sales model, we believe in our sales position. So if all these economic pressures were reduced, we would feel very good.

Walter, I'd just add to Craig's comment there. We kind of put out some current, what's going on right now for the last couple of months, we've seen with the war in Ukraine and, of course, the following levels of inflation jump up, we've seen the immediate impact of that as a key indicator to our current environment right now. That's why we're being as protected as we can with our balance sheet.

It's -- we're seeing headwinds against this with inflation and as consumers of -- or purchases of children's books, these are typically on families with that have to distinguish between what are we buying fuel, food or children's books. And so we've seen some pressure, and we want to be prepared for this for a longer term. We don't know when -- as Craig said, when we -- the current environment is going to change. And so we just want to be conservative right now.

Speakers, next question is from the line of (inaudible).

So my question has to do with a very recent change that I've been concerned about for some time after researching the company. And I've been very impressed by the adaptability ever since the company came about 2014 or started before in 2014. But there's a lot of market uncertainty right now. And one of the things that has suddenly changed is the management.

And Craig, as you are a [straight shooter] and try to sell things that it is without palm punches, I kind of have a one-dimensional understanding of you having an IT background, having been around people that are of that type. Sometimes, they want to manage things as opposed to people.

And I think that the people relationships are very important, especially in the business like this. What I want to know, and I would appreciate specific examples is can you kind of round out how you have transitioned into the role of CEO from your IT background? And what experts do you surround yourself with and take counsel from and feel free to give specific examples, please?

Sure. Well, obviously, well, I straw myself with 2 experts, our CFO, Dan and our Chief Sales and Marketing Officer Heather. But what I've done, and I recognize that I've been more, maybe a quiet person, but you have to understand that Randall is a big personality, and there's not a whole lot of room behind them. And so we're not kind of taking over. I've instituted weekly and monthly calls at the next level down, our directors because let's face that they're doing the lion's share of the work in the company.

Our level of directors, there's 9 of them. It's the strongest it's ever been. So I feel like we're working very well on communication within the company. We're working on culture in the company. I'm not trying to say anything negative about Randall, but easing the older gentleman, and he comes from a different generation.

And so I'm trying to change the culture a bit and improve the communication. In my previous role, I managed relationships with UPS, software vendors, things like that. So I've had great relationships with all of those groups. I've been working under Randall's leadership for 30 years. So I kind of learned what I need to and some of those things. But the management team has basically been the same throughout the transition. The Board numbers have been consistent throughout the transition. So I appreciate your sentiment that I'm excited about the opportunity, and I am absolutely driven to create my own success. So I don't know if that answers your question, but, that's a little bit...

That's helpful. And I also -- I failed to mention that I've also been impressed by the changes that you have for the company, whether it's through software, through the production lines -- or not the production line, but the picking the pack lines and so forth and the adaptability there. Are you certainly showing your metal there? A follow-up question. I'm really hoping can we expect to see a CEO letter from you soon?

Yes. Yes, absolutely. An annual report is where we usually have one. So that will be out in the next 6, 8 weeks, right?

Speakers, next question from the line of Joseph Fuller.

So I had a question. So I appreciate you're talking about the effect of inflation on demand. I'm wondering because I know one of the advantages of having bought all this inventory is that you bought at a lower cost. Going forward, do you have sort of any view to -- as this inventory gets replenished over the next year as you go down have to do? How much additional that cost is? And then also on the other side, do you have any price increases planned before that? Are you going to sort of hold the line now? What's sort of the plan on that?

Good question. So all of our inventory is in fact, at lower costs. We've not raised prices across the board ever. We've only ever increased prices here and there where it was necessary. So I would anticipate that there might be some major pricing changes over the next year or 2, but no wholesale changes, nothing like that.

Yes. And Dan has reminded me that the prices are printed on the back of the book. So there are some challenges to raising prices, that's the key. And I think we've done a great job of keeping our prices low. We haven't, like I said, had any wholesale changes. So a few price increases over the next year or 2 would probably be prudent.

(Operator Instructions) Next question is from the line of (inaudible).

Can you hear me?

We can.

All right. Okay. So I have 3 really quick questions. Looking at the earnings on the announcement, and it looks like the share count went down by about 3% or 4%. Is that because you were buying back stock or do they have something sort of more complicated reason for that.

Well, I wasn't aware of that. We've not had any significant share now, ownership changes. We haven't bought back any stock or issued any additional stock outside of some shares that were issued last year 2021 associated with our long-term incentive plan.

Yes. So if anything, the members outstanding will act a little bit, but they shouldn't have gone down. When we're healthier in a better cash position, we'll look at buying back shares, but you know that we can't do that right now.

Okay. So I'm looking at the table in the announcement, it shows for the 12 months ended February of '21, there is 8.352 million shares outstanding. And for the 12 months, it just ended, there was 8.039. So unless I'm missing something, sorry, we don't have tables around.

Yes, we're looking at that real quick.

I want to make a little bit what you're looking at.

Now the diluted was about the same, at least for 12 months, but the basic went down and for the 3 months, the diluted also went down.

Yes, let me look at that, and we need to make a correction, and we will make a correction on that. But Randy, just to confirm, we really haven't. Other than the long-term incentive plan, we haven't had shares. And we have a...

Yes. Maybe then just a mistake in that table. It may even look better if you go ahead and correct that. Okay. So my second question is, is that it's a net profit margin. And one thing that I'm just thinking, I know you can't project the next fiscal year, the sales or the profitability, but if you're working right now for the next 2 to 3 quarters, like you said, through inventory, the cost less then what you're going to have to buy for in the future.

And when you look at the current quarter, your net earnings were around 1.5% plus or minus of next revenues. So are you able -- probably not able to say whether you think you're going to be, I know in the announcement, you said you're making some changes now, so you can try to preserve profitability. It's possible you may not be profitable for a quarter or 2? And where is that sort of a fair statement? Or are you able to comment on that at all?

Yes. So there's, Randy is a part of our business is affected by seasonality. So our third quarter is typically the most profitable quarter we have and it is usually about -- it's our largest revenue quarter. And then the third quarter is followed by the first quarter and then the second quarter and then last is the fourth quarter.

So typically, our fourth quarter has the least amount of profitability, but it's also because it's -- when you look at the 4 quarters, the 4 quarters of our fiscal year, our fourth quarter is typically usually the smallest quarter. But as Heather is listening to me here, she caught it, but of course, we don't forecast, I'm giving you historical seasonality of our business by quarter.

Okay. So quite, the next couple of quarters have been a...

We invent crystal ball, I'll buy some.

This is sort of a personal question, I guess, for Heather and Dan, you may even correct. Do you -- I know you really can't tell me this, but there's a website you can look at to see if anybody's bought your stock or sold any stock in the insider. Are there any plans for you, I know Randall has enough already, but are there any plans for 3 to maybe buy some stock at these levels? Or I know you probably can't even tell me, but what do you think?

We offer our stock through our 401(k) plan. And so I can tell you that the 3 of us continually buy stock through our 401(k) plan each quarter. We don't have to revisit that. And we have -- if you go back, you'll see some Form 4 filings for us in the past to show that we continually bought shares each year.

Yes. I saw that. Yes.

So we continually invest. And then there are opportunities. We buy -- we do buy shares outside of the plan and we announced that when we do it. And certainly at today's prices, it's very attractive. It's good to buy.

Okay. Just the first gentleman made a statement about that you had the comments and call it 24 hours after your earnings advancement. I didn't really consider to really ask you to address that, but what do you think. Is that something you may consider in the future? Or I personally don't care that much. I don't think it's a really matter like if you had your conference call right after you had your announcement, I mean the market the next day is going to do what it's going to do anyway.

Since we -- what we try to do is we try to do the earnings announcement in a call within a 24-hour period. And we try to be consistent in what we're doing. But we do have an Investor Relations from 3-part advisers. We will take the comment to automate up with them. And if there's a bit that is more fair to everybody and certainly or as best practices. Certainly, we want to do that. So we will take this comment up with our Investor Relations group and see if we can make some improvements.

Yes. I certainly wouldn't have any problem with what you're doing, a lot of companies do it that way. Another company that reported that I own after the market closed on yesterday, had they call this morning, just a little bit after the market open. So I don't think it really matters a lot.

Speakers, next question is from the line of Jon Jung.

Craig, I wonder if you could tell me something about the contract you have with Usborne, who provides most of the content of the books that you're selling. How long does your agreement with them last? And do you have any requirements in terms of how much you purchased from them each year?

No, we do not have any requirements for how much we purchase. Well, I say that the original agreement, I think, said $3.5 million, which is a very, very low number. So the contract is evergreen. So we're -- yes, we've gone through a new transition trade, where I'm the new CEO of our company, and Nicola is Peter Usborne's daughter, and she seems to be taking over more and more over there. So we've -- I have attempted to improve the relationship with her, and so that we can work well moving forward.

Okay. So there are no current contracts that help a number of years are gone or any specifics in terms of what your relationship with Usborne is?

No, nothing. Right. Correct.

So Jon, just to be clear, we have a contract with Usborne and we filed it as an attachment to our 10-K that dates back to 1988. That's the current agreement. As Craig outlined, it has some purchase requirements in it, but it's very, very small. I think, as Craig said, it's less than less than $5 million. And we've been buying $50 million a year from them for the last couple of years, close to it. So we're -- we certainly meet those minimum requirements. Any other questions?

No further questions. In fact, we have one more. Next question is from the line of (inaudible)

I have 2 questions. First, with a detailed analysis of your online consultant database, so is that a number of consultants have fallen another quarter to 50% from the end of February until today. Why haven't you been able to slow this decline? That's the first question. And secondly, I consider the cash cost that you're in, how much does this market decline in consultants increased the company's insolvency?

Well, the first question, I'm not sure how you got that, those statistics which is absolutely not correct. We've fallen from our peak in 2020, but the numbers we said earlier in the call are where we're at. I've heard of other people trying to do query on our consultant searches and extrapolate numbers. That's not a good science. So the numbers we've told you are accurate. So -- and then the second question, I don't even remember what it was.

Solvency.

Yes, solvency. So the key thing is last year, we were very profitable. We expect to be profitable going forward. I think last year, as we announced, we made $0.98 a share. We expect to be profitable this year. I think if you look at our historical financials going back into the late '80s, you will find that EDC has been a profitable company over the year. So we think, for sure, that we'll be profitable going forward and we have no concerns about solvency.

(Operator Instructions) Thank you for participating. I'll now turn the call back over to Craig White for final comments.

Thank you, Jeff. Just to address, I like the question asking about me personally, that not many people know me very well. One of my core values is that I am a [straight shooter]. I'm not going to (inaudible) it, spin it, all those things. Now that doesn't mean I'm a negative or a realist. I believe that we're going to be heading in positive direction and get back to positive ways. But I'm a collaborator by nature.

So -- anything that we -- any tough decisions that we have, I immediately told Dan and Heather and I together and depending on the nature of the problem range as well. And then I have to move forward. I don't (inaudible) way. I look at all the options for resolution to a problem and then we move on. We make a decision and we move on. We do the best we can every single day, and we're doing that right now to try to increase sales.

We have a lot of new incentives coming out. The field is absolutely hired up right now as evidenced by a couple of calls we had this week. So we're looking forward to getting back. So thank you, everyone, and we'll see you on the next call.

This concludes today's conference. I wanted to thank you all for joining the call. You may now disconnect.