Educational Development (NASDAQ:EDUC) Q2 2023 Earnings Call

0:00 Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal second quarter and fiscal 2023 year-to-date results. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Stephen Hoosier, Investor Relations. Please go ahead. Thank you, Michelle, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's second quarter and fiscal 2023 year-to-date earnings call. On the call with me today are Craig White, President and Chief Executive Officer, Heather Cobb, Chief Sales and Marketing Officer, and Dan O'Keefe, Chief Financial Officer.

0:48 We will also be joined by Randall White, Executive Chairman of the Board during the question and answer session. After the market closed this afternoon, the company issued a press release announcing its results for the second quarter and fiscal 2023 year to date. The release is available on the company's website at www.edcpub.com. Before turning to the prepared remarks, 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 conditions.

1:36 With that, I will now like to turn the call over to Craig White, the company's president and chief executive officer. Craig? Thank you, Stephen, and welcome everyone to the call. We have quite a few people here today. Looks good. I will start today's call with some general comments in regard to the quarter. I'll then pass the call off to Dan and Heather to run through the financials and provide an update on our sales and marketing. I'll then wrap up the call with some comments on product strategy and outlook. During the second quarter, we continued to feel the negative impacts of high inflation in the U.S. market. Soaring costs have reduced disposable income of families with young children, which is our target customer base.

2:21 While we hope to see these pressures subside, we are making strategic adjustments to address our own increased costs, including an increase to the amount we charge for freight on outbound shipments. We are using extreme caution with these price increases, working to balance our increased costs while being sensitive to the increased dollars to our customers. Additionally, during the first quarter earnings call, I discussed that we had entered a new distribution agreement with As One Publishing Limited are UK-based supplier of Usborne products. The new agreement continues to allow uninterrupted sales through the UVM division. However, there was some initial uncertainty from our consultant sales force about the ongoing relationship and how it might impact them.

3:07 This resulted in a reduction in new recruits by 38% from the second quarter of last year. While we continue to manage through the impacts and changes created, not just from the pandemic, but also all of the additional global related headwinds and other items within our business, I am proud to see the resiliency of our team. Profitability is the cornerstone of our business and although we have had some recent shortcomings while managing through the rapidly changing environment, we are working hard and remain laser focused on returning the company to its long-standing profitable state. Once we return to profitability, we will look to reinstate our historical practice of paying quarterly dividends. With that, I will now turn the call over to Daniel O'Keefe to provide a brief overview of the financials for our second quarter of fiscal 2023 highlights.

3:57 DANIEL O' Thank you, Craig. Turning to the second quarter, net revenues were $19.4 million, a decrease of $13.6 million, or 41.2%, as compared to $33 million in the second quarter of fiscal 2022. for a decrease of 16.4% as compared to 23.2 million during the first quarter. The decline in revenue was primarily due to the lower active consultant count of our UBAM division, coupled with rising inflation, which caused a reduction in disposable income for families within our target market. The average active UBAM sales consultants totaled 26,800 compared to 46,100 in the same period a year ago and 32,200 in the first quarter of this year.

4:56 Although consultant counts continue to trend down, we expect this to stabilize throughout the remainder of the year. Our loss before income taxes was $1.1 million, a decrease of $3.8 million, or 140.7%. compared to 2.7 million in the second quarter last year. Net loss totaled 0.8 million compared to 1.9 million, a decrease of 2.7 million, or 142.1%. Losses per share totaled 10 cents compared to 23 cents of earnings, down 143.5% on a fully diluted basis. Now turning to our year-to-date highlights. recorded net revenues of $42.6 million, a decrease of $31.2 million, or 42.3%, compared to $73.8 million during the same period last year.

5:59 Again, the decline was primarily due to the lower active consultant count coupled with rising inflation. Average active UBAM sales consultants totaled 29% for the first half of fiscal 2022. Keep in mind that the first half of last year was the strongest period in the company's history due to the major short-term benefits we experienced in relation to the pandemic. Our losses before income taxes for the six months was 0.8 million, a decrease of 8.1 million, or 111%, compared to earnings of 7.3 million during the same time in fiscal 2022. Net loss totaled 0.5 million compared to 5.3 million for the first half last year, a decrease of 5.8 million or 109.4%.

6:56 Losses per share totaled 7 cents compared to earnings of 63 cents from the first half of fiscal 2022 down 111.1% on a fully diluted basis. To update everyone on our inventory, we finished fiscal 2022 with approximately 74 million in inventory as of the end of February of this year. At the end of our second quarter of fiscal 2023, we've reduced our inventory to approximately 68 million. We expect to continue driving this inventory back down to historical levels throughout the remainder of the year and into calendar 2023. The major impacts of reducing our inventory will be to bring down our working capital borrowings.

7:49 Lastly, as Craig mentioned in his previous comments, the strategic decision we have made to temporarily postpone our quarterly dividend currently improves our quarterly cash flows by approximately $1 million per quarter. That now concludes the financial update, and I will turn the call over to Heather Cobb, our Chief Sales and Marketing Officer, to further talk about sales opportunities and the BAM Division in further detail. Thank you, Dan. As Craig mentioned previously, our business is continually facing headwinds or tailwinds, depending on both the change in discretionary cash flow of our customers and the change in unemployment or inflation impacting our consultant network.

8:40 Fortunately, we can capitalize on these tailwinds and adjust our promotions during these challenging periods like we are now when consumer discretionary spending has declined. We are not sitting idly by watching the impact of the market. We are constantly changing our marketing and sales strategies and maximize our opportunities while not straying from our overall long-term Strategy. We have run recent sales and marketing specials and will continue to do so. I'd like to highlight just a few of those. In May of this year, we started our trip earning period during May, which is a new timeframe for us. We traditionally start in June. And when we did that, that resulted in an uptick in May sales.

9:29 In May and June, we provided various discount promotional opportunities on our products. our consultants were able to then offer those to their customers which resulted in increased sales for them. July promotions included free shipping opportunities as well as the ever popular release of new titles. And we do have more promotions coming that will be announced later. A convention update I would like to give you because in June we host our annual UBAM National Convention. and for the first time ever this year, it was a hybrid in-person and virtual event. While our in-person convention attendance numbers were promising, net profits were down from the prior two years at the same event.

10:17 When our convention costs during those two years were minimal given that we were 100% virtual. Having an in-person convention though is still the most desirable event that we can possibly do as it is the lifeblood for retention and recruiting. We will adjust our strategy with budgeting and offerings in the future to ensure a more positive net impact for not only next year, but beyond. We have run several recruiting specials throughout the summer. During the second quarter, we added almost 6,000 new consultants and many of those can be attributed to the specials that we were offering. New consultant additions as high as are similar to the height of last year, but we are continuing some recruiting specials and additional options and offerings in the third quarter.

11:10 We continue to have strong leader levels within our UBAM division. Our leader levels remain above 10% of our total active consultants, which is the highest level in UBAM's history. The leaders tend to be our top recruiters and sales generators, and received bonus payments monthly based on the sales of not only their personal selling, but also their team. As these leader levels continue to remain strong, we continue to expect positive recruiting results. And then I would just like to remind that UBAM has been in the industry for over 30 years and high inflationary periods usually precede a growth and active consultants as more families are looking for supplemental income to offset the increased living costs. We are currently working to create and support opportunities that will enable that to happen again. This concludes the sales and marketing update. I'm going to turn the call back over to Craig White for closing remarks.

12:15 Thank you both, Heather and Dan. I would like to make a couple of additional comments to expand upon my earlier comments regarding our recent Usborne agreement. First and foremost, our new agreement does not change the 40-plus year relationship with Usborne Publishing. Secondly, since executing the new agreement, we have made concerted efforts to address the concerns from our consultants and new recruits regarding the ongoing relationship and the potential impacts to our consultant sales force. We have since made livestream presentations, recorded question and answer sessions, and involved our consultants in the changes outlined in the new distribution agreement. As such, we are confident in the changes we have made, and we expect our UBIM recruiting efforts and results will be more productive, and we should see stability in this division in the coming months. As a reminder, during inflationary times, we have historically grown our consultant count as more families look for nontraditional income to offset rising living costs. However, this is an extremely unique employment environment that we are all faced with.

13:21 As Heather mentioned, our sales and marketing team is making exciting changes. We are creating new ideas to promote our products and excite our sales force and to grow our active consultant count. We also expect to see continued strength from sales channels that are coming back online, such as school book fairs and booth events. Regarding the rising costs and actions we are taking, we believe the increased charges on outbound freight along with other changes we have made to our cost structure will offset the ongoing negative cost impact from our outbound sales orders. These strategic changes along with our overall reduced labor costs are expected to restore profitability even at lower sales volumes. As Dean mentioned, we have a strong balance sheet, inventory that will turn to cash, and we have made changes to our cost structure to drive profitability.

14:12 Our priority remains unchanged as we work to sustain profitability, pay down our working capital line, restore our dividend, and lastly, look for additional products or content to offer that we can acquire or create. Now that we have provided a summary of some of our recent activity, I will turn the call back over to the operator for question and answers. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question.

15:12 The first question comes from Edward Norrisia, private investor. Please go ahead. Can you hear me? We hear you. Okay. Craig, I'm a little confused about this Usborne contract with your publishing division. Can you tell me what effect the new contract has with your publishing division? Yes. Go ahead. Yeah, we didn't address the impact on our publishing division so far in this earnings call. We are just addressing our multiple marketing division. But as of November, they are taking over traditional publishing sales in the US. It's about a $7.5 million impact to our sales.

16:06 OK. And my follow-up question is, what What level of inventory do you feel is appropriate for the company with this reduced consultant level? Well, yeah. Sales are driven by consultants, so we don't necessarily think of inventory level by consultant. But, yeah, we are over-inventory. We're at about 67 million sales. The appropriate level for a company our size right now would probably be closer to 40 to 45 million. So we're not making any more purchases of our books right now. And we should just be turning that inventory into cash.

16:54 Nothing spoils or expires or goes obsolete. So we just got to work through the inventory and turn it into cash. And I'll add to that that, Ed, we're entering into typically in August is our highest normal cycle. August is the highest inventory we have during the normal year because that's when we're going into our busiest selling season, which is our third quarter. So we expect to have strong impact this quarter in our inventory turnover. Okay. Follow-up question. Do you have a certain amount of books or dollar amount you need to buy from Usborne to keep the agreement in force? for a year? Yeah, there was some minimum amounts that we kind of negotiated in the contract, and we were close to that.

17:49 We were just short of it, but I'm not going to buy inventory just to put our company in jeopardy. I'm going to keep it strong. The contract has kind of an ongoing... inventory volumes on a normal year, Ed. And so, you know, we've historically done well over that purchasing volume. You know, it's a little bit unique right now. As Craig said, we're working on, you know, working down excess, a little bit of excess inventory. But under normal circumstances, we shouldn't have a problem, you know, hitting that minimum inventory requirement or minimum purchase requirements outlined in our contract. Okay, thank you. Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. The next question comes from Nick DePostela of NR Management. Please go ahead.

18:49 Hi. Can you just give us some balance sheet figures, cash, inventory, debt, et cetera? I don't know. I didn't see them with the press release. Thank you. Yeah. Good, Nick. Just to clarify, we'll be filing our 10-Q later today, and it'll have all those figures. You know, our cash position is less than a million dollars because, you know, we sweep all of our cash to our working capital line. Our line of credit was around $13 million at the end of the quarter, and then inventory was right around $67 million at the end of the quarter. And again, we look to will be turning inventory into cash now during our busiest quarter of our fiscal year, which is between September and November.

19:38 So we look for inventory to continue to decline as well as working capital availability to increase this quarter. Okay, so at the end of the next quarter, what kind of forecast do you have for where inventory would be at? If you've got that ball, can you send it to us? Well, here's the key things for us, and this is really what Craig mentioned earlier, and I'm just going to kind of repeat what he was saying. We've made changes recently to our outbound freight and reduced our operating costs to make sure we can be profitable even on reduced revenues. And so if we're profitable and whatever sales we have this quarter are going to be turning inventory into cash, which will be used to free up availability on our working capital line.

20:44 I don't have the crystal ball to tell you how much it's going to drop our inventory from $67 million by the end of the quarter or by the end of the fiscal year, but it will be dropping. We're in a position where, and I will also say that where we have a lot of inventory is on our best-selling products. So when we were going through rapid growth during 2020 and 2021 with the pandemic, we were running out of about 25% of the titles that we offer. And so we had over 25% of our products that were out of stock for significant periods of times. And those are our are typically our top selling items.

21:30 And so when we were looking at reordering at those revenue levels, that's where we put in large orders for inventory replenishment. And so what we have a lot of is not our, it's our fastest moving titles. I understand. Okay. Do you have any issues with your lenders or is there any apprehension or concern at this point? Well, you know, we have a new relationship with our lender. We closed in August, and it's a very positive relationship. They understand our high inventory position. And because they understood it, they came to us and said, look, we're not going to put some unreasonable debt covenants on you this first year because we know you're working down inventory.

22:24 And so with our new agreement, we don't have a lot of traditional, which you would normally have as debt covenant requirements. We have basically one covenant that's really tied to the real estate and it's called a fixed charge ratio. It's more of a real estate debt covenant than a working capital covenant. They understood our inventory was high. They know we're going to be turning it into cash. You can go backwards. We were in this position back in 2017 when we had excess inventory and we worked through it. It'll take us a few quarters to do this, but we'll be back in a normal working capital position next year.

23:14 Okay. Thank you so much and best of luck. Thank you. Thank you. There are no further questions at this time. I would like to turn the call back over to Craig White for closing remarks. Thanks, everyone, for joining us on our call today. We appreciate your continued support and look forward to providing you an additional update when we report quarter three in January. Additionally, we will be presenting at the Southwest Ideas Investor Conference in Dallas on November 16th and 17th. For more information on this event, please contact three-part advisors. With that, thank you, everyone, and we'll talk to you next time. Thank you, everyone.

24:00 Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for participating and ask that you please disconnect your lines.