Educational Development (NASDAQ:EDUC) Q3 2022 Earnings Call

0:00 Thank you for joining the Educational Development Corporation's third quarter earnings call. Before beginning the call, we 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 would like to turn to go over to Craig White, the company's president and chief executive officer. Thank you and welcome everyone to the call.

0:46 With me today are Randall White, our executive chairman of the board, Heather Cobb, chief sales and marketing officer, and Daniel O'Keefe, our chief financial officer. Before I turn it over to Dan to go over the financial results, I'd like to recognize what a challenging year it's been, probably mostly from a staffing perspective. I'm so proud of the team that we have here at EDC as the team just continues to get better and better. We handled most of the staffing challenges very well, predominantly in the warehouse, and really didn't miss a beat with the challenging staffing environment out there. We didn't have any outbreaks in the office. have really had mostly a healthy and safe environment here at EDC.

1:33 So I want to recognize that first. Now I'd like to turn the call over to Daniel O'Keefe, our Chief Financial Officer, to provide a brief overview of the financials. Thank you, Craig. Now for a brief overview of our third quarter financials. Our net revenues for the third quarter sold $45.1 million. a decrease of $21.7 million or 32.5% compared to $66.8 million reported in the third quarter of last year. Earnings before income taxes for the third quarter totaled $3.6 million, a decrease of $2.2 million or 37.9% compared to $5.8 million reported in the third quarter of fiscal 2021. net earnings totaled 2.6 million compared to 4.3 million, a decrease of 1.7 million or 39.5% from the third quarter last year.

2:35 Earnings per share totaled 31 cents compared to 51 cents, down 39.2% on a fully diluted basis. That concludes the report for the third quarter financial results, and I'll now turn the call back over to Craig. Thanks, Dan. a couple of items I would like to begin with today that you may have heard from me in the last couple quarterly calls and at conferences and whatnot. The COVID pandemic affected most businesses in the world, either positive or negative last year, and our company was no different. Fiscal 2021 was an anomaly year for us. Along with the initial surge in sales from the pandemic last summer, we experienced an increased demand for Non-traditional income opportunities from parents that were looking to supplement or replace pre-COVID income streams.

3:28 These factors and other pandemic related issues drove our revenues to record levels last year. Our fiscal third quarter is typically our largest sales quarter of the year due to the seasonality of the business. This year's third quarter sales were more in line with pre-COVID years and that's why we've presented a most current pre-COVID year comparison in today's press release. While our third quarter revenues are down significantly from the third quarter last year, they are up over pre-COVID levels, primarily due to our increased publishing division sales and the impact of our UBM division's increased consultant count. We see both these contributors continuing to drive sales in fiscal 2022 and into fiscal 2023. So in the last couple quarterly calls, I said, you know, we had an incredible, unusual year. and while we're still facing unusual factors, the pandemic is not gone. We've kind of had this in and out of school, in and out of work and all those things.

4:33 It's just an incredibly challenging year to compare to. So let me next turn it over to Heather Cobb, our Chief Sales and Marketing Officer to discuss our sales. Thanks, Craig. During our third quarter, we continued to experience an increase in our publishing division sales and a decrease in sales from our UBIM division when compared to last year in the throes of the pandemic. Our publishing division sales increased 44% to $3.7 million in the third quarter due primarily to the return of business from customers that were temporarily closed last year due to the guidelines published by local authorities. In addition, our publishing division has added several new customers and experienced growth with existing customers that are driving this division's sales to record levels in fiscal 2022. Our UBAM sales declined 35% to $41.4 million in the third quarter of fiscal 22, primarily due to the anomaly that last year was. During last year, we experienced unusual growth in our active consultant count that began in the summer of 2020.

5:40 and peaked at around 60,000 in November last year. This growth in active consultants drove our revenues to record levels during fiscal 21. Throughout fiscal 22, we've seen our active consultant count decline due to consultants returning to full-time work, as well as the drain on parents' available time navigating the issues associated with the continued pandemic and their children's returning to school. the recurring obstacles of new strains of the pandemic continue to impact our consultants' available time to run their business. But while our consultant counts have declined, they are still considerably above the pre-pandemic levels that Craig mentioned, and our consultants are still having success generating sales, earning commissions, and building their business.

6:27 This was evidenced during this third quarter as our active consultants generated similar sales and commissions per consultant to the third quarter of last year and the pre-pandemic third quarter of fiscal 2020. These sales and commission results give us support that our existing consultants are experiencing a consistent level of success as they achieved without benefiting from the increased demand that occurred in the early days of the pandemic, most noticeably in that first and second quarter of fiscal 21. In addition, we continue to introduce new technology-based tools to help our consultants be more successful in reaching new customers and expand their recruiting and business building efforts. We believe that this will help retain the current consultants we have as well as recruit new people to the business.

7:17 Two upcoming enhancements that we expect to roll out in the next three months include upgrades to our training platform with additional features that will improve our new consultant experience as well as our new e-commerce platform. We delayed rolling out that e-commerce platform in the third quarter of this fiscal year because our internal team as well as our top-level leaders had valuable input to make that platform even better. These new technologies are expected to have a positive impact on both new consultant experience, customer experience, as well as the sales and commissions earned by those new consultants during their initial period with the company. 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 continued high levels of working capital. We have increased inventory levels and increased working capital borrowings.

8:10 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 borrowing to expect to be back to a more normalized working capital within the next year. and the good news is that the cost of carrying this inventory is less than the current replacement costs given the unusual ocean shipping challenges that are occurring. One of the other highlights for our third quarter was our strong pre-tax profit levels. Our pre-tax profits as a percentage of net revenues totaled 8%. These pre-tax results on lower revenue levels than the third quarter last year reflect the strength of our business model and the management's attention to cost containment. We are excited to see the rebound from certain sales channels that were negatively impacted by the pandemic, including sales through school book fairs.

9:01 While this started to return this year, the new versions of the COVID-19 virus have stalled the return of this income stream. The return of booths and fair events, which also continue to be impacted by the new COVID-19 variants. These two sales channels combined for about 30 million of the business that we expect will be returning to us in future quarters. We saw evidence that they were kind of starting to come back and then again with this new variant kind of shut those things back down a little bit. So I can expand on any of those points, but at this point we want to open it up to questions from our investors. As a reminder, to ask the question, you will need to press bar one on your telephone.

9:49 To withdraw your question, press the pound key. Again, if you would like to ask a question, press star then the number one on your telephone keypad. Please stand by while we compile the Q&A roster. Your first question comes from the line of David Wright from Henry Investment. Your line is open. Good afternoon. Hey, David. And New Year's greetings to everyone. Thank you. is your inventory higher than you'd like it to be right now? Absolutely. No question. I'm glad you asked. Well, do you have a follow-up question or can I answer that one? Oh, please do.

10:34 Okay. So I've been asked every phone call with investors, every investor conference, absolutely our inventory is a little bit high. While We didn't expect to increase sales 80% or 50% or maybe even 10 to 15% this year. Last third quarter was a disaster as far as inventory levels. So we ramped up our inventory levels, which we purchased in January, February, March, and we are just now receiving that in the September, October, November timeframe. We have not actively purchased any new backlist title inventory in six months. The only inventory purchases that we've made in the last six months are new title inventory, which as people know is the lifeblood of a sales organization.

11:28 So while there is some silver lining to that, as I mentioned in the script, we mostly, not completely, but we largely missed all the chaos that is the supply chain right now. We saw are container costs coming from China go from $5,000 to sometimes $35,000 a container. And so while we were over-inventoried, we largely missed all of that increase in cost and the delays coming from China. So, yeah, we're over-inventoried. It helped us get through a tough time, but none of it is obsolete. It will all sell. Over the next four or five months, we expect that to sell down, turn it into cash, and we'll be in great shape by next summer or third quarter.

12:21 Right. Just looking historically, your fourth and first quarters, well, your fourth quarter is typically your slowest quarter, and your first quarter is only a little better. Right. where would you like inventories to have been at November 30th based on current business conditions? Yeah, you know, for the current sales levels, you know, probably $45 to $50 million would have been a more appropriate level. I think we peaked at $70 or just slightly north of $70 million. So we have about $20 to $25 million too much inventory. But, again, again, were not actively purchasing except for new titles, and we'll sell that down over the next couple quarters.

13:08 Okay. And then the other thing that I wanted to ask here ties in with the cash flow. Cash flow from operations through the first six months was positive $12.4 million. It's now negative $7.4 million, which means it swung $19.8 million in the third quarter. What do you think the fourth quarter is going to generate positive cash flow from operations? Craig, do you want me to address that? Yeah, that would be great. Okay. Yeah, David, that's a good question. You know, as you mentioned, the fourth quarter is typically not our biggest quarter of the year as far as sales.

13:54 But we do – we're not going to be – When we look at cash flow from operations, there's really going to be two things, three things driving it. You're going to have your income from the business, which is going to be positive. And then you're going to have your change in inventory and your change in accounts payable, which are going to be the other two major drivers of that. And we don't see inventory increasing, so that shouldn't negatively impact our cash flow from operations. AP will be coming down a little bit, though, because we do have some payables coming due. So that would be the other element there that, you know, we're still in the fourth quarter and only in the first month of it. So I don't want to make a commitment that it's going to be cash flow positive. But, I mean, those are the only three elements that are really going to drive it. And as you said, kind of, David, when you started your question, our fourth quarter is typically not the biggest of the year. So it's not going to really see a lot of impact on inventory dropping.

14:56 We see that being bigger in the first quarter of next year, in March, April, May quarter, because that's when we have our second largest quarter of the year. That involves the Easter holiday, and we have a lot of school activities associated with that quarter of March, April, and May. So We expect to see a bigger dent in our inventory coming down in that first fiscal quarter and then also in the second fiscal quarter and third fiscal quarter, as Craig was saying. So as Craig mentioned earlier, we're, you know, 25 million more in inventory than we would normally be had it been a more predictable last 24 months.

15:47 But there's also some positive elements of being a little over-inventoried right now, and that's the fact that the replacement cost right now is much higher than our carrying cost of inventory. And so we feel like we're a little heavy on inventory in our working capital position, but it will be corrected here over the next three quarters. Okay, well, good luck there, and thanks for taking my questions. You bet, David. Thanks, Dan. It seems like an appropriate time also to mention that we have very solid relationship with our bank, and their involvement and support of our business is very strong, so that's a positive as well.

16:38 Again, if you would like to ask a question, press star, the number one on your telephone keypad. Your next question comes from the line of Randy Fred from RL Capital. Your line is open. Hello. I'm not sure who this question could be directed to, but it's probably either Craig or Dan. I'm looking at the table in the earnings announcement near the beginning where you talk about the average number of consultants and then the net revenue and the net earnings after tax profit percentage. Yes. And I'm trying to reconcile in my own mind some of the statements you made a little bit past that in the next paragraph or two and a couple of statements you made on this call where you said, that you're happy with the strong pre-tax profit levels and you're very happy with the cost containment.

17:40 So when I'm looking at this table here for the current quarter and I'm comparing it to the one from two years ago, I see after-tax profit margin of 5.9% versus years ago was 6.7%. And I see the net earnings down just very slightly compared Thank you for having me. The third quarter is typically our biggest quarter of the year and highest profit percentage of the year because you're spreading your fixed costs, obviously, over a bigger revenue base.

18:45 So the difference between pre-COVID, if you look at those profitability percentages now, is we're really dealing with a different freight cost on our outbound freight is the biggest impact. We have a contract with our small parcel carrier, and when COVID occurred last year, they started implementing two different layers of surcharges. One was a peak season surcharge, and the other one was just an unusual holiday season on top of the peak season surcharge. and so we've kind of had to bear some of those costs and they've hit our bottom line here in the third quarter of this year that weren't in place pre-COVID.

19:38 And so that's what you see. The other thing I would like to point out to you is that if you can look at the year-to-date numbers, you can see our year-to-date numbers for this current year after tax are 6.7% in the in the table there. And then the pre-COVID numbers are 5.5%. So while we've had some holiday season peak surcharges this year and even last year, overall the peak season surcharges haven't hurt us. And we've implemented some rate increases this year that have actually helped us generate the after-tax margin of 6.7 year-to-date.

20:30 Yeah, let me add to that as well. We kind of internally use pre-tax profit as a KPI. And so we had a very challenging September, actually. That seemed to be the most chaotic as it related to the pandemic as kids were kind of going back to school. We seem to be coming out of the pandemic with people going back to work. So there was a little bit of chaos. September was not good. And then we followed that up with October with our best pre-tax profit that I remember in years. And then November, we did a lot of promotions with some free shipping and some things, but it was still a very solid pre-tax profit. So like we're saying, the sales are way over third quarter. are not way over. They're over third quarter 2020 and considerably lower than last third quarter, but we're maintaining good pre-tax profit levels.

21:35 Okay. Thank you for that. Dan, also thank you for that. I did notice what you said, too, about the 6.7% versus the 5.5%, but that sort of brings me to the next question. If you look at the fiscal year to date for the sales from Thank you very much. That's not exactly accurate. 1.2% on the 5.5% is more like 23% or 24%. So it's not 10% or 11%. It's above 20%.

22:33 No, I was talking about the sales. I'm sorry, the net revenue is what I was talking about. I'm still on that same table. Okay, I thought you were talking about the after-tax profit. I'm sorry. No, that's fine. Let me just ask one last question. Thank you very much for all that. Sure. So you're talking about strong pre-tax profit levels, et cetera. And I know you really can't project this at all, but for the next fiscal year, which I guess we're talking about March 1st of this year for 12 months after that, I mean, you've talked a lot about efficiencies and things like that. Do you have any idea or do you think the pre-tax or the after-tax profit levels are going to be sort of consistent.

23:23 If you look at this whole table here, you can see no matter what you're talking about, they're pretty consistent, right? Between 5.5 at the worst and 6.7 at the best, just looking at this table, which I know there's different columns there, but do you sort of project that as being roughly the same, or do you think that potentially could increase in the future? Yeah, I think you probably recognize kind of our model. And we have 25% of our business. So, you know, we're hitting 8 to 10 and maybe a little bit north of 10 on a pre-tax profit. But the chances of getting much higher than that are challenging. I think it's going to be very consistent. What I will add is that we could have been more efficient this third quarter this year because the staffing challenges were crazy. We hired... Thank you for that.

24:47 and like you said with staffing and people not coming back and then what Dan already talked about with the freight costs and the peak season surcharges. So thank you for that information. Thank you all. That's all I have. Thank you. Any further questions at this time? Presenters, you may continue. Okay. Great. So while we're not ecstatic about What's been so far this year, we are encouraged and happy. We're considering ourselves still in a growth mode, as we're comparing to the last normal year. We've had two very unusual, non-normal years, but we're on a growth pattern of about 30% to 40% over the same time period in calendar 2019.

25:42 We have nothing but good forecasts. We're looking forward to this next year. While we're not ecstatic, we're still pleased with what we've accomplished. We appreciate you all joining us, and talk to you next time. Thank you. This concludes today's conference call. Thank you for participating. Human Now Disconnect.