Educational Development (NASDAQ:EDUC) Q4 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 SEC for a more detailed discussion of the company's financial condition. With that, I'd like to turn the call over to Craig White, 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.

0:51 As we have signaled in all of our previous calls, we continue to look at our business as compared to pre-pandemic levels given that COVID created record demand and results for our company. I am pleased that we exceeded pre-pandemic 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.

1:37 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 Daniel 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 2022 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.

2:26 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 98 cents 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.

3:11 As you might have read in the 10K that was filed earlier today, in 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 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 three quarters. In addition to our working capital line, pausing the dividend, as Craig announced earlier, will increase our cash position by about a million dollars a quarter on a temporary basis. This concludes the financial report, and now I'll turn the call back over to Craig.

3:58 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 pre-tax profits remain strong, which reflects the overall strength of our business model. A model that generates profits, not only during periods of growth, but also periods of decline. Our fiscal 2022 results could not have happened without the hard work of our UM sales consultants and our publishing sales teams. Both groups continued their 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.

4:46 Thanks, Craig. During the fourth quarter, we continued to experience an increase in our publishing division sales and a decrease in sales from our UBAM 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 2015. 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 gain 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 anomaly that last year was with the pandemic.

5:46 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 had 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 pre-pandemic 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 retention.

6:36 During the fourth quarter, we rolled out our new online training platform. Some enhancements that we've made with this platform include several touch points with our field sales force. We have regularly scheduled new consultant meetings as well as new leader meetings, which allow us at home office to reach these leaders and these consultants in ways that we hadn'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 consultants to do business. as well as allow us to develop additional enhancements on that site to improve our host and customer experiences.

7:22 This concludes our sales update and I'll turn the 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. 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, expect to be back to a normalized working capital within the fiscal 2023. Now, you've heard me say this the last couple calls, but 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, and April of fiscal, the first quarter of fiscal 2022.

8:12 And so it's just coming in October, November, December, January, which means, you know, our inventory levels kind of peaked at the end of the fiscal year. And now 90 to 120 days later, those inventory purchases are 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 in our UBM division due to the impact of inflation. as fuel prices and food 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 consultant incentives to energize our UBAM sales force and give them tools to help generate sales in this challenging environment.

9:04 We're also excited to see rebounding sales from UBAM sales channels that were negatively impacted by the pandemic including school book fairs and booth and fair events. These two 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. Thank you, speakers. Participants, we will now begin the question and answer session. To ask a question over the phone, you may press the star key followed by the number one from your telephone keypads. To withdraw your request, you may press the pound key. Again, that's star one to ask a question over the phone or the pound key to withdraw your request.

9:52 Speakers, our first question is from the line of Walter Schenker. Your line is now open. 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 as easy to report today after the close and have the conference call at 4.30. This is especially true if you're going to report news which might be unsettling to the market.

10:37 So now that I've said that and gotten... Yes. That off my chest. Since we'd like to go back and compare to 2019, in 2019 inventory was about 30 odd, I think I have it in front of me, 30 some odd million dollars. 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 that to mean that we have $40 million roughly of excess inventory? Is that a way to 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 to 20 million excess inventory.

11:31 So that going forward, assuming sales are flat, I understand it would be nice for them to grow, are all going to free up $17.5 million of inventory and therefore in regard to cash flow and paying down debt, that will remain well above where it had been two years ago despite the earnings of the last couple of years if that's all you're going to free up. Okay, good point. We didn't specify that we're going to be flat, though. I mean, if we're flat, maybe we do. I'm sorry, go ahead. No, no, I understand that. I'm just making a generalized assumption. It's not your assumption. I use the thing.

12:26 And so the issue remains in the financial position and the elimination temporarily or longer of the dividends is a function of, again, inventories and debt levels. I realize this is being redundant, but that basically is it. You did earn a dollar 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.

13:14 I'm not running into a covenant issue in the near future either. I'm just saying that it was just a prudent decision. Okay. And lastly, since we both know, you and your father, who the largest shareholders are, I realize it's up to the board, Do you have a sense as to what financial condition the company relative to debt would need to be in for you to 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 dividend.

14:03 So we've missed the second quarter and be back in third quarter. Now, to give you specific details, we'd 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 and $15 million, then I would absolutely reinstate it. And maybe it doesn't have to get down that low, in my opinion. But down in the $10 to $15 range is where... Okay. And just lastly, since I had said flat and you didn't, and I know you're not going to forecast, but took some minor exception to my statement of flat, looking at the year, you would still hope, not forecast, but hope that earning revenues this year should exceed last year.

15:03 I guess that's close to a forecast. Yeah, that's close to a forecast. There's too many economic external pressures right now. I mean, let's face it, children's books are a discretionary purchase and until the economy and gas prices and food prices start to turn back down, I can't forecast or anything. We believe in our sales model. We believe in our sales division. So If all these economic external pressures were reduced, we would feel very good. Joel, I'll just add to Craig's comment there.

15:48 We've kind of put out some current figures of 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 protective as we can with our balance sheet. We're seeing headwinds against us with inflation and as consumers of or purchasers of children's books, these are typically young 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.

16:44 We don't know when, as Craig said, when the current environment is going to change, and so we just want to be conservative right now. Okay. Thank you. I'm done. Thank you, Walter. I'm sorry hello 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 you know ever since The company came about 2014 or started recording in 2014.

17:38 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 tell things as it is without pulling 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 a 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.

18:41 And what experts do you surround yourself with and take counsel from? And feel free to give specific examples, please. Sure. Well, obviously, I surround myself with two experts, our CFO, Dan, and then our Chief Sales and Marketing Officer, Heather. But what I've done, and I recognize that, that I've been a 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 him, and so when I've kind of taken over, I've instituted weekly and monthly calls with the next level down are directors because let's face it, they're doing the lion's share of the work in the company.

19:31 Our level of directors, there's nine 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 he's an 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've 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 members have been consistent throughout the transition. So I appreciate your sentiment, but I'm excited about the opportunity and I am absolutely driven to create my own success.

20:43 So I don't know if that answers your question, but That's a little bit about me. Thank you. That's helpful. And I also, I failed to mention that I've also been impressed by the changes that you have brought to the company, whether it's through software or through the production lines, not the production lines, but the pick and the pack lines and so forth and the adaptability there. You've certainly shown your proof, your mettle there. A follow-up question. I'm really hoping, can we expect to see a CEO letter from you soon? Yeah, absolutely. And the annual report is where we usually have one, so that'll be out in the next Thank you. That's all I have.

21:41 I appreciate it, Joel. Thank you. Speaker's next question is from the line of Joseph Fuller. Your line is now open. Hi. I had a question. 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 it 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 and 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?

22:27 Good question. So all of our inventory is, in fact, at lower cost. 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 meager pricing changes over the next year or two. But no wholesale changes, nothing like that. Yeah, I mean, Dan's reminding me that the prices are printed on the back of the book. So there are some challenges to raising prices. That's why we can't. And I think we've done a great job of keeping our prices low. We haven't, like I said, had any wholesale changes.

23:15 So a few price increases over the next year or two would probably be prudent. Understood. Thank you. Thank you. Again, participants, it's star one to ask a question over the phone or the pound key to withdraw your request. Next question is from the line of Randy Freeman. Your line is now open. Can you hear me? We can. Hi, okay, so I have three really quick questions. I'm looking at the earnings on the announcement, and it looks like... that share count went down by about 3% or 4%. Is that because you were buying back stock, or did that have something sort of more complicated?

24:02 There's a more complicated reason for that. Well, I wasn't aware of that. We've not had any significant share ownership changes. We haven't bought back any stock or issued any additional stock outside of some shares that were issued. last year, or 2021, associated with our long-term incentive plan. Yeah, so if anything, the number of outstanding went up a little bit, but they shouldn't have gone down. You know, when we're healthier and 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 was 8.352 million shares outstanding.

24:54 and for the 12 months it just ended, there was 8.039. So unless I'm missing something or the tables are off. Yeah, we're looking it up real quick. We want to make sure what you're looking at. Yeah, just one sec. Now the diluted was about the same, at least for the 12 months. but the basic went down and for the three months, the diluted also went down. Yeah, let me look at that and if we need to make a correction, 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 any shares this year and we haven't bought any back.

25:52 Okay. Yeah, so maybe there's just a mistake in that table. Okay, thanks. You can look that up if you want and correct that. Okay, so my second question is I'm looking at the net profit margin, and, I mean, 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 two or three quarters, like you said, through inventory that costs less, and what you're going to have to buy it for in the future. And when you look at the current quarter, your net earnings were around 1.5% plus or minus of net revenues. So are you able, you're probably not able to even 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.

26:49 It's possible you may not be profitable for a quarter or two or more. Is that sort of a fair statement, or are you able to comment on that at all? Yeah, so there's, Randy, there's 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 when you look at the four quarters of our fiscal year, our fourth quarter is typically usually the smallest quarter.

27:40 But as Heather's whispering to me here, she says that but of course we don't forecast so I'm giving you historical seasonality of our business by quarter. Okay, so we don't quite know what the next couple quarters are going to show. If you invent that crystal ball, I'll buy it from you. Got you. This is sort of a personal question I guess for Heather and Dan and maybe even Craig. Do you I know you really can't even tell me this, but there's a website you can look at to see if anybody's bought any stock or sold any stock, any insiders. Are there any plans for you three? I know Randall has enough already, but are there any plans for you three to maybe buy some stock at these levels?

28:29 I know you probably can't even tell me, but what do you think? We offer our stock through our 401K plan. And so I can tell you that the three of us continually buy stock through our 401k plan each quarter. We don't have to report that. And we have, if you go back, you'll see some Form 4 filings for us in the past that show that we've continually bought shares each year. Yeah, I saw that, yeah. So we continually invest. And then there are opportunities. We do buy shares outside of the plan, and we announce that when we do it. And certainly at today's prices, it's very attractive.

29:16 It's good buy. Yeah. OK. Okay, just the first gentleman made a statement about, you know, that you had the conversation called 24 hours after your earnings announcement. He didn't really ask you to address that, but what do you think? Is that something you may consider in the future? I personally don't. I don't think it's going to really matter. If you had your conference call right after you had your announcement, the market the next day is going to do what it's going to do anyway. What we try to do is we try to do the earnings announcement and the call within a 24-hour period.

30:04 We try to be consistent in what we're doing. We do have an investor relations firm, three-part advisors. We will take the comment that Walter made up with them. And if there's a better way of doing it that is more fair to everybody or is best practices, certainly we want to do that. So we will take his comment up with our investor relations group and see if we can make some improvements. I personally don'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 yesterday had their conference call this morning, just a little bit after the market opened.

30:51 So I don't think it really matters a lot. That's my own opinion. Okay. Thank you very much. Appreciate it, Randy. Thanks, Randy. Thank you. Thank you. Good afternoon. 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 purchase 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.

31:42 The contract is evergreen. We've gone through a new transition period where I'm the new CEO of our company, and Nicola is Peter Osborne's daughter, and she seems to be taking over more and more over there, so I have attempted to improve the relationship with her so that we can work well moving forward. Okay, so there are no current contracts that have a number of years to run or any specifics in terms of what your relationship with Usborne is? No, nothing, right, correct.

32:34 So, John, just to be clear, we have a contract with Usborne and we filed it as an attachment to our 10K 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 it's, as Craig said, it's less than a, less than $5 million, and we've been buying $50 million a year from them for the last couple of years, close to it. We'll certainly meet those minimum requirements. Okay, thank you. Thank you, John. Any other questions? No further questions. No further questions over the phone.

33:28 Okay, it looks like we had one more. Next question is from . Your line is now open. Okay. Good afternoon, and thank you for taking my questions. I have two quick questions. First, a detailed analysis of your online consultant database shows that a number of consultants have fallen another 40 to 50 percent from the end of February until today. Why haven't you been able to slow this decline? That's the first question. And secondly, consider the cash crunch that you're in. How much does this massive decline in consultants increase the company's insolvency rates? Thank you.

34:14 Well, the first question, I'm not sure how you got those statistics because it's 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 queries on our consultant searches and extrapolate numbers. That's not good science. So the numbers we told you are accurate. And then the second question, I don't even remember what it was because I was talking to somebody. 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 98 cents a share. We expect to be profitable this year.

35:06 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 every year. So we think for sure that we'll be profitable going forward, and we have no concerns about Solvency. Okay, thank you so much. Thank you so much. Thank you, Katie. Again, participants, star one to ask a question over the phone or the pound key to withdraw your request. Okay. Oh, he's here. Give it back to me, okay.

36:07 Thank you, participants. I'll now turn the call back over to Craig White for final remarks. Thank you, Jesse. 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 sugarcoat 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 a positive direction and get back to positive ways, but I'm a collaborator by nature. anything that we, any tough decisions that we have, I immediately pull Dan and Heather and I together and depending on the nature of the problem, Randall as well.

37:00 And then I have to move forward. I don't necessarily vacillate. 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 fired up right now, as evidenced by a couple 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 call. Thank you all for joining. You may now disconnect.