Educational Development (NASDAQ:EDUC) Q2 2022 Earnings Call

0:00 Good day. Thank you for standing by. Welcome to the Educational Development Corporation's second quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. 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.

0:53 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 our second quarter results. Net revenues for the second quarter of fiscal 2022 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. Pre-tax 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%.

1:42 Earnings per share on a fully diluted basis for the quarter totaled 23 cents per share, compared to 51 cents 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 hugely negative last year, and our company was no exception. Our second quarter last year was a monster quarter. Sales in the second quarter are historically 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.

2:33 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 is why we presented a most current pre-COVID year comparison in the press release. While our quarter two revenues are down significantly from the second quarter last year, they are up over pre-COVID levels, primarily due to our increased consultant count. We see our active consultants continuing to drive sales in fiscal 2022. So what we're trying to say is fiscal, 2021 was an unusual year. We were poised and ready. We took advantage of it. And it's a very difficult comparison, as we've been saying.

3:23 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 UBAM division. Our publishing division has experienced a steady increase in sales as stores have begun reopening and restocking their shelves. We've hit over a million dollars in net sales each month from this division in fiscal 2022, and we see this growth trend continuing 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.

4:09 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 the average number of active consultants. 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 friendly and offer our consultants customers a better online shopping experience.

4:59 With the rollout of this new platform, our IT team will have additional bandwidth to work on several new projects that will also make our consultants jobs much easier. These projects are still in the development stage and will also provide a more streamlined consulting experience leading to more success. And as I've 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 our recently published financials is our increased working capital. We have increased inventory levels and increased working capital borrowings. These increased levels are temporary. and will rebalance as we turn 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 more normalized working capital level within the next year.

5:51 And while we are currently heavy 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 them through the holiday season. What we've been saying internally is our shelves are full and we're ready to have product to sell. One of the other highlights of our second quarter was our strong pre-tax profit levels. Our pre-tax profits as a percentage of net revenues totaled 5.8%. These pre-tax results on 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.

6:37 We are also excited to see the rebound from certain sales channels that were negatively impacted by the pandemic, including sales through school book fairs, booths, and in-person events. These two 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 up. So those are our highlights. We've provided historical and current information, and I want to open it up to questions from our investors. Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone.

7:27 To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Tony Chiarenza with Key Equity Investors. Your line is now open. Good afternoon. Congratulations on a good quarter even though it's down. I think you're still doing well. Our first question is, on the average number of consultants. Obviously, last quarter it was like 55,000 or 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.

8:12 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 that they've sold something in the last six 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 then they don't sell again until the next fall. So a lot of those people have dropped off and we kind of hit the bottom about this time and then we start going back up as we go into the third quarter. I don't know. I don't want to put words in your mouth. Is it $45,000 or $46,000 is somewhere that you would stabilize if you 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.

9:03 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 Thank you, Tony. Okay, so in the fall of calendar 2020 last fall, our record breaking sales were we had them despite that we are out of stock of 25% of our titles.

10:01 So while we didn't see 80% growth this year, 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 six to eight months in advance so we were planning for growth and we didn't want to be out of stock of things in the 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 lifeblood of this business so will be purchasing new titles for those different seasons, but we're going to aggressively work through our inventory levels over the next six months.

10:50 Okay, and you would expect it to go down, can we expect it to go down back to the $50 million level or so from the 65? Is that your objective or so? Absolutely, maybe even more. Okay, okay. But like I said in our script, it puts us in a great position for the fall. A lot of our competitors are going to run out of stock and their shelves will be empty. So we are poised and ready to have a great fall. Yeah, no, everybody's out of inventory now. I think that's the problem with supply chains. Every company that I'm involved with has trouble getting inventory at this point. So I think you're absolutely right. Now, obviously, with the inventory has come a higher long-term debt, and that's built up a little bit.

11:37 How much liquidity do you have left at this point, both on your revolver and your term debt? I'll take that, Tony. This is Daniel O'Keefe. We've got an 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 our reservoir. If we need to go in and raise additional capital through additional bank borrowing, we expect there to be a lot of available capacity to do that.

12:23 Okay. But you don't anticipate needing it, given that you have the inventory that you need. You buy some new titles, but you're trying to work it down. So I'm assuming you're You're not going to need additional liquidity at this point, is that correct? Well, it just depends on, too. We're hitting our busy selling season right now, so there's no crystal ball for what's going to happen over our next 90 days, which is what we typically will have 40% to 50% of our business. So it all depends on how these next 90 days come and if we'll need to borrow a little more. But if we need to borrow more, The point I was trying to make is we certainly have a strong enough balance sheet that will allow us to borrow more with our existing lender. I will also add to that. I said we purchased in April, so all those titles are coming in now. In the next 90 to 120 days, we're going to have to pay for that inventory.

13:19 We're reserving the right to need more money. The good news is we We aggressively paid down debt last year. We paid down about $10 million of our building debt last year and did that, you know, and so that creates a lot of available assets to, you know, use as working capital along with our inventory. Right, right. So you'd have something in the neighborhood of $5 to $10 million in additional availability? I'm just making a number up. At least $10 million. Thank you so much for answering the question and best of luck as you go through the Christmas season. Thank you, Tony. I really appreciate it. Thank you. Our next question comes from Walter Shanker with Moz Partners. Your line is now open.

14:25 Actually, I have two questions. I think I have two questions. One of which came up from the last question and answer. If you order inventory in April, when does it show up? When, A, do you actually pay for it? This is the movement of cash. And, B, at what point does it show up on your balance sheet? So if you order in April and you don't pay until September and it isn't delivered until September, then it doesn't show up anywhere on your income or balance sheet statements question. To get income, it's balance sheet. Walter, this is Dan again. So when we buy, it depends on the product that we're buying and where we're printing it.

15:14 We print some in China. We print some in Arab Emirates, some in Malaysia. typically title passes when we get control of it, either once it boards the boat or once it hits the US shore, one of the two. And at that point we take control of it and we book the inventory and the payable. But as Craig mentioned before, that can be six to eight months or longer sometimes depending on the complexity of the book that we're ordering. Some of our books have Craig White, Heather Cobb, Daniel O'Keefe credit card, whatever, the cash comes in even before you ship it out effectively, correct?

16:23 Absolutely. So like you said, we're 120 days from shipping, which means shipping times are delayed right now. So we may have it on the premises between 60 and 90 days. So yes, we can start selling some of it before we pay for it. So that helps, but it doesn't cover it all. Okay. Too much on cash, it's not going to be a problem. Over the last few months, however we wanted to define a few months, the company repeatedly, and to its credit, went out of its way to point out that you were a beneficiary of COVID last year, that this was a very difficult comparison in the quarter you just reported.

17:10 That's a fact and you did it. again and again. So there was no secret. We felt like we did it again and again. No, I heard you do 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 was so extraordinarily strong, you know, it's going to be very difficult to 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 quarter just ended. 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 would not expect it to be down substantially.

18:11 No, we would not expect it to be down substantially. As an example, second quarter last year was 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, you know, to help our pre-tax profits and whatnot. We're improving our margins. We're getting more efficient in the warehouse. Our new CapEx project for our expansion in the warehouse has been running for about two months now, and we're seeing great results from that. We're gearing up staffing to staff the two lines that we abandoned the last couple months to be ready for the fall selling season. So everything we're seeing is positive.

19:04 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 a lot. Your costs, I realize you've ordered a lot of stuff a while ago and you're getting it, but are you seeing pressure from a cost standpoint as you look going forward to ordering new titles and additional inventory later this year into next year? Yeah. 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 were 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 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.

20:18 So we missed a lot of this shipping craziness that's been happening over the last 30 to 45 days. We still have a few products coming in, but The shipping challenges have been just unusual. Now, what we know is that the shipping challenges are supply and demand imbalance. From what we understand from the big vessel carriers that handle the cargo ships and the containers is 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 the majority of our inventory, so we will be somewhat cushioned from the problem of right now, and hopefully the vessels will come on board in the timeframe that we can get back to normalized shipping costs.

21:11 Okay. And, again, just to repeat myself, to make you repeat yourself, the comparisons in the next six months are more comparable last year to the year before. They were only up modestly. and with the sales base and the inventory and the better economics, you are reasonably optimistic about the comparisons for the next six months. We're cautiously optimistic. We're seeing some short-term things. We put out new titles Monday. We have a smaller release in October and we've had incredible results this week. That's all I'm going to say as far as a forecast.

21:56 No, no, I understand. Okay, thank you very much. Sure, thank you, Walter. Bye. Thank you. Our next question comes from Joseph Fuller. I have an investor. Your line is open, sir. Hi. I apologize. I got on the call a little bit late, so I apologize if somebody has already asked this. The capital expenditures, I know, are at a little bit of an elevated level. If I remember, it was something related to a warehouse or an extra line extension or something. How much longer do you expect that sort of higher level to remain to sort of get back to what was usually very low-level capital expenditures? Well, that was to increase capacity in our warehouse, fulfillment, We don't anticipate needing any further CapEx for quite some time.

22:42 We think with that addition, we could get to sales levels of $400 to $450 million without further CapEx. Now, obviously, we're going to be paying down this project for a little while, but no further large CapEx at this point. I appreciate it. 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 an inventory is sold and pay down some of the debt and so on, presumably again this becomes a pretty high cash flow business. And I remember on the last conference call there was some talk about stock buyback or increasing dividend and I assume that's on hold now temporarily because of the buildup of the inventory. But has more thought been given sort of to long term How do you use the extra cash?

23:38 Well, I've only been in my position for two months. Give me a little time to think about it. Sure. Fair enough, fair enough. Obviously, we're not increasing the dividend right now or buying back stock because of our inventory levels, but I'm telling everybody I'm kind of aggressive and everything's on the table. Everything is up for discussion, but Not right now. Fair enough. Thank you. Thank you. Thank you. Our next question comes from Adam Kipling with Hollywood Fitness. Your line is open. Hello. Yeah, 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 float with a share buyback. Since you guys have a pretty low float, I would think that eating up that float and then when the demand comes in, That would send the stock price up pretty well.

24:38 We don't disagree. I think this cash flow is a short-term problem. I think changing the dividend down sends a more negative message than working through our temporary problem. So we've chosen to keep 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 Thank you, Adam. Thank you. Our next question comes from Marty Alexander, private investor.

25:27 Your line is open. Yeah, hi. I had a question. From 2019, your average revenue... are you finding that and some of these folks that you have coming on that are being consultants that are kind of looking at this maybe as a gig worker type job versus traditional employment.

26:29 Do you see that sticking? Do you see that as a go-forward opportunity or do you see COVID as more of 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 and not the cause. So could you add a little color to that? Thank you. 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 that our sales consultants drive generating those sales, they just They were on cruise control a bit more last year than they have been in pre-COVID years and then they are now. It just didn't take quite as much energy or effort.

27:22 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've survived things different than the pandemic, but definitely recessions and various different things that have happened within the economy and within the country.

28:20 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 people are 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 two big things that we have going for us. Hey, 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 can increase revenue per consultant with our new e-commerce rollout and some of the other IT projects that we're working on. So, you know, I just wanted to throw that in as well. Okay, thank you very much. Thank you.

29:08 Thank you. as a reminder to ask a question at Star 1. Our next question comes from David Wright with Henry Investment Trust. Your line is open. Hi. How are you all doing? Great. 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 suggests that it's not pie in the sky. Thank you. Thank you. David, to the opposite of that, I don't think we're going to see the disparity that we saw in the second quarter between the second quarter this year and the second quarter last year.

30:17 I think that the two quarters have a more similar volume than what we saw. There was just a huge demand in the second quarter last 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 the delta in the second quarter. David, I'll just add one more thing to that. It's hard to assess. We've called last year as a whole an anomaly. And so it's hard to know if the increase in the surge that happened in the third quarter can be attributed to COVID or can be attributed to it being the fall selling season.

31:05 And so As Craig said, the reception that we've received to the mid-season 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 that you want us to. Well, I mean, I think what's significant is that, you know, pre-COVID you were, you know, the three years before COVID, 17 through 19, Your average revenues were around $112 million. And it's pretty clear that on the other side of COVID, you're going to be more than $120 million a year business. And ditto for the earnings per share. You know, we're going to come out higher regardless.

31:51 So, you know, 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 yeah, it's good to see that we're getting that story across. Yeah, well, good luck going forward. Thanks, David. Thank you, David. Thank you. Okay. And I'm currently showing no further questions in the queue at this time. I'd like to hand the conference back over to Mr. Craig White for any closing comments. Thank you, Norma. Obviously, we want to be back in a high-growth mode. We feel like we're doing pretty well.

32:39 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 back-to-back years of 20% growth is not bad, and that's where we want to get back to. Thank you for being on the call. I appreciate it. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.